賽富時 (CRM) 2010 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

My name is Sarah and I will be your conference operator today.

At this time I would like to welcome everyone to the salesforce.com Q3 fiscal 2010 financial results conference call.

(Operator Instructions).

Thank you.

Mr.

David Havlek, Vice President of Investor Relations, you may begin your conference.

Thanks, Sarah.

I would like to personally welcome everyone to salesforce.com's third-quarter financial results call.

After a few opening comments to make today's call official, I will turn things over to our Chairman and Chief Executive, Marc Benioff, to review the highlights of the quarter.

Graham Smith, our Chief Financial Officer, will then provide some greater details on the financial performance of the quarter before we open things up to your questions.

Since tomorrow is the kick off of Dreamforce, our biggest user conference of the year, we will try to keep our call a bit more brief than past calls.

In that context, if we are unable to get to your question today, please be advised that both Marc and Graham will be hosting an in-person analyst and media Q&A session at one o'clock Pacific time tomorrow.

If you are unable to attend that session in person, it will be webcast.

With that, let me quickly remind you that a full disclosure of our third-quarter results can be found in a press release issued about an hour ago, as well as in our Form 8-K filed with the SEC.

Additional financial information, including historical financial details beyond what is provided in the press release, will also be made available on our website.

Today's call is being live webcast.

The dial-in replay will be available shortly following the conclusion of the call until December 8.

And a webcast replay will be made available for approximately 90 days.

To access the press release, the additional financial detail, the webcast replay or any of our SEC disclosures or simply to learn more about salesforce.com, I encourage you to visit our Investor Relations website at salesforce.com/investor.

All of our financial commentary today will be in GAAP terms, unless otherwise stated.

In addition at times in our prepared comments, or in response to your questions, we may offer certain additional metrics to provide a greater understanding of our business or our quarterly results.

Please be advised that we may or may not update these additional metrics on future calls.

The primary purpose of today's call is to provide you with information regarding our fiscal third-quarter.

However, some of our discussion or responses to your questions may contain forward-looking statements.

These statements are subject to risks, uncertainties and assumptions.

Should any of these risks or uncertainties materialize, or should our assumptions prove to be incorrect, actual Company results could differ materially from those forward-looking statements.

All of these risks, uncertainties and assumptions, as well as other information on potential factors that could affect our financial results, are included in our reports filed with the SEC, including our most recent report on Form 10-Q, particularly under the heading, Risk Factors.

Please also be advised that any (inaudible) services or features referenced in today's discussion, or in other public statements, are not currently available and may not be delivered on time or at all.

Customers who purchase our services should make the purchase decision based upon features that are currently available.

With that, let me turn the call over to Marc.

Thank you, David.

And welcome everyone to our call.

We are very excited to share results on the fiscal third-quarter.

And let me just begin with some of these exciting financial highlights.

Revenue grew 20% from a year ago to approximately $331 million.

And this was well above our outlook entering the quarter, primarily because of improvements in new business demand and lower attrition.

At this level our annual revenue run rate is now more than $1.3 billion.

And we continue to be the fastest growing software company of our size in the world today.

GAAP EPS of $0.16 was double that $0.08 we recorded a year ago.

And operating cash flow of $36 million was over 100% -- actually it was 107% from a year ago.

And we now have nearly $1.1 billion in cash and marketable securities on our balance sheet.

By virtually every financial metric Q3 was an amazing quarter.

And Graham will have more to say about all of these financial details in just a moment.

Now while our financial results were outstanding, perhaps the most exciting part of our quarter was the improvement we saw in some of the key growth drivers of our business.

On our second quarter call in August we discussed seeing signs of stabilization in our business, if you remember the call.

However, based on our third-quarter performance we now believe we are seeing some early signs of improvement in some very key areas.

And that is really causing us to enter a growth stance in our Company.

First, on a year-over-year basis new business performance was up in the third quarter, and was our best growth quarter of the year.

As a result, we now expect new business for the full year to be flat to slightly up.

Now this is a big change from the first and second quarter when we thought new business for the full year would be flat to slightly down.

Next, and just as important, after seeing increases in attrition over the past several quarters, well, we saw a lower dollar attrition in the third quarter.

And finally customer demand for our services has never been greater.

During the third quarter we added a record 4,700 net new customers.

That is 500 more than we have ever added in a single quarter.

In all our global customer community is now more than 68,000 customers.

Despite this challenging economic environment we are up about 30% from a year ago.

In light of our solid second-quarter results and in the improvement -- and the ones I just described in the third quarter, we began to increase investments in key growth areas during the third quarter or enter, as I commented, this growth stance.

This included more hiring in demand generation activities in preparation for next year.

Now let me take a moment to review some of the key wins in the third quarter.

Our two marquee transactions this quarter were both in Japan, where we continued to see just remarkable momentum.

First, I'm thrilled to announce that AIG Edison signed an ELA with salesforce.com during the third quarter.

In addition to the roughly 5,000 salespeople who will be using the Sales Cloud that we offer, AIG is also using the Service Cloud to build a customer portal that is expected to serve more than 1 million users.

AIG Edison also plans to use the Force.com development platform to build applications to manage new contracts and insurance payments.

All of these applications, as well as their data, will be available in real-time to employees via their smartphones in Japan.

AIG Edison is an excellent example of how our multi-cloud strategy, the Sales Cloud, the Service Cloud, the Custom Cloud is allowing us to grow beyond sales.

It is just not about sales anymore, because the Force.com platform is allowing us to create success in other great new areas like contact management, or in the case of AIG Edison, we are able to expand our footprint inside of our customers themselves.

As a result every employee at every business of every size is seriously a prospect for salesforce.com.

Also in Japan the flagship implementation with Japan Post continues to grow very nicely.

In order to expand their use of the Force.com platform, Japan Post decided to upgrade to Unlimited Edition.

In addition to the applications they have already built for areas like product sales reporting on the platform, and ad space management on the platform, and audit management, and claims and accident management on the platform, they are now expanding to build new things like sales information and commission management, IT asset management, and a post office master application.

Japan Post is one of the most impressive customers we deal with, managing over 100 million savings accounts in Japan, working with over 400,000 employees, 25,000 locations, and managing 6.8 billion transactions a year.

They have a lot of data to manage, and more of that data than ever before is moving to Force.com.

In addition to these great new wins, we also won other major transactions at a long list of new and existing customers, including Akamai, ING Australia, Net1 Systems, the U.S.

Census Bureau, Avaya and EMC.

Now according to AMR Research the growth of Cloud Computing is expected to outpace the growth of on-premise by double-digit percentages over the next five years.

Now nothing speaks more to this shift than our list of wins against the big on-premise companies.

And let's start with Oracle.

Against Oracle we won deals at ING, American Express, Centex, PRNewswire, Phonographic Performance.

And even more exciting, another one of Oracle CRM OnDemand very top and premier customers in the technology industry has made the decision to convert to salesforce.com.

Now through that customers' request, we are not giving their name.

But they are one of a growing list of former Oracle CRM OnDemand customers who have made the decision to convert to salesforce.com, including SuccessFactors, Motorola and Axion.

Although we are competitors, I do want to offer my very personal thanks and my kind regards to Oracle for graciously including us in their Oracle OpenWorld conferences this year.

On a serious note, this meant a great deal to us, and we commend Oracle for their openness in the environment and their ability for customers to see solutions of all types.

Certainly when I was at Oracle this was part of our value system, and I am delighted to see that continue.

We had an outstanding experience at Oracle OpenWorld.

And I couldn't be more grateful to the Oracle executives who allowed us to attend the conference.

We are very honored.

Roughly 5,000 Oracle OpenWorld attendees visited our booth during the event.

We believe that that was the number one of who's visited during the conference.

And more than 750 people braved the weather to join us for a full presentation at Yerba Buena Center on our presentation on Service Cloud 2.

It was a fabulous event, and evidence that even the most diehard on-premise software companies, like Oracle, are looking for ways to integrate cloud computing into their IT environments.

And I just want to again take my hats off to the executives at Oracle Corporation for including us in the event.

We also had success against Microsoft in the third quarter at MCSI, Needham & Company, Den-Mat, Vital Images, [Alpha College] in Nevada.

And finally while I would like to be able to report a long list of wins against SAP, once again, as I mentioned in last quarter's script, I don't know whether it is through their own operational performance or their position to not participate in the salesforce automation or customer service markets, they remain marginally invisible in our market space.

However, we are pleased to see on our largest SAP installed base accounts add to their salesforce deployments, including companies like Thomas Cook, Lenovo, Kellogg and Swann.

Add-on and upgrade activity at industry-leading companies like these and others, it is another key of our growth formula.

In addition to our competitive wins, I am also pleased to report that we're seeing continued diversification in our business.

And that really includes our Sales Cloud, our Service Cloud and our platform cloud, our Custom Cloud, if you will.

And our service and Custom Cloud businesses both recorded record sales quarters in the third quarter.

Both grew more than twice the rate of our overall Sales Cloud, really speaking to our customers' adoption of these exciting new technologies, as well as us entering new markets.

Together our non-Sales Cloud businesses were responsible for roughly 25% to 30% of new orders in the third quarter.

And when we talk about our new business being now flat to slightly up for the year, you can really look to the exciting growth in these new products as a key reason why we are growing new business, while those traditional enterprise software companies continue to see dramatic double-digit declines.

Now our Service Cloud 2 is really connecting with customers.

Customers love our vision for customer service call centers and self-service portals.

In the age of the Internet in Q3 we made several key announcements and the launch of Service Cloud 2.

Many of you participated in those worldwide events that happened in Japan and San Francisco, New York, London and other places, including Salesforce Knowledge, the world's first multitenant, multichannel knowledge as a service.

[We are] the first to deliver, just bam, you can have knowledge as a service.

Knowledge is a huge market.

Knowledge management is a huge market, and critical in the customer service market.

It is 100% Force.com product written natively in our platform.

Leveraging all of our security, reliability, scalability and powerful customization technology as well, like Visualforce and Apex.

And if you have attended any of those demos, I'm sure that you have seen that.

And if you didn't attend those demos, you should go onto YouTube and type, Service Cloud 2 or Service Cloud Knowledge, and you will see me or others giving these demonstrations of these new technologies.

YouTube is a tremendous vehicle for you to see all of Salesforce's technologies as we put more and more of our presentations and demonstrations on YouTube.

Salesforce Knowledge is available for contact centers, customer portals and sites.

Also, as released as part of Service Cloud 2 is Salesforce Answers.

And if you have used it that answer type functionality in kind of consumer services, you know the power of our customers now being able to deploy answers for their own capability, our solution for crowd source community knowledge that allows customers to tap into the wisdom of the cloud.

We also teamed up with Cisco to offer a complete cloud contact center solution.

That is just really cool.

Basically not only can you get all of the CRM services from Service Cloud 2 from us directly as a service right over the net, but all of that kind of IP and telephony and CTI infrastructure, also delivered directly as a service from Cisco.

I am really, really impressed with Cisco's commitment to the services world, to cloud computing.

By making their CTI as a service is evidence of that.

I think last week's announcement with Tony Bates going through things like WebEx Mail and all of their exciting movement to cloud computing, was just a home run for Cisco.

And I would just like to congratulate them on their continued investment in cloud computing.

Finally there is Salesforce for Twitter, which allows customers to monitor and track conversations on Twitter from within Service Cloud 2.

And you're going to see a lot more of that tomorrow at Dreamforce.

Now not only did we enhance our customer service offerings in the service -- in the third quarter with Service Cloud 2, we also announced an exciting new technology enablement as well in the form of the five minute upgrade.

Very simply, we already run replicated data centers, and now the ability is that while we are doing upgrades, we keep our backup data center live with our customers' data, giving them the ability to read that information.

And then when we finish our upgrade, all of the read/write capabilities are restored.

But in no case is the customer's data unavailable or at a maximum of five minutes.

This is a breakthrough in cloud computing, and it really is evidence of the power of having a multi-data center architecture.

We have three major data centers now that production in Singapore and the West Coast.

The East Coast of the United States, the net work -- the meshing of these data centers has become a huge competitive weapon when we look at our -- many of our competitors who only have one data center, which is extremely unusual.

Now new Service Cloud customers in the third quarter included AIG Edison, Google, McKesson, Fujitsu Learning, Mitchell, [Quentessili] and ACI Worldwide.

In all there is more than 8,000 companies around the globe experiencing success with Service Cloud 2.

Our Custom Cloud is also showing very strong momentum.

Not only are we posting record sales results, but transactional activity on the Force.com platform continues to grow at an outstanding rate.

Just listen to some of these numbers.

Now you know a few months ago we turned our ability for any Force.com app, bam, instantly becomes a website.

Now our customers have already built 10,000 websites with 170 million page views coming out of Force.com sites.

They bought no hardware, they bought no servers.

They didn't have to set up systems with Akamai or Limelight or any of those things.

We do all of that power for them.

10,000 websites, 170 million page views.

More than 135,000 custom apps built on Force.com platforms.

For those of you who are attending Dreamforce tomorrow, we are going to make some big announcements around that.

But you will be able to to talk to many of those customers who have done this tremendous work.

And more than 200,000 developers in our developer program now today.

More than 500,000 custom Visualforce pages have been created.

You probably remember it was two years ago Dreamforce that we announced that.

Now our customers have built 0.5 million custom user interfaces live in our system.

Just making it incredibly deeply integrated into their business processes.

And more than 188 million lines of Force.com code.

That is the stored procedures, the triggers, the code you want to run on our servers.

That is more than 12 times the 15 million lines of code that we had written just a year ago.

And if you remember, I believe that Apex announcement was three Dreamforces ago.

Now we are at 188 million lines of code.

And after our offer began in June, more than 15,000 companies have already signed up for our new Force.com Free Edition, spurring on application development and deployment, as we look to remove the boundaries so that software developers understand on how to use this great new technology against .NET and Java.

And the reason why.

According to IDC, building apps on Force.com is five times faster and half the cost of .NET or Java.

That is a great message for times like these.

And of course, there is a lot of other critical benefits to cloud computing.

The appeal of our cloud platform, cloud infrastructure, cloud apps has grown as we have expanded the possibilities of enterprise cloud computing.

You are going to find out, as I have already alluded to a couple of times, we are going to seriously, seriously and comprehensively rewrite the rules again.

Tomorrow we are going to kick off our biggest and baddest, most impressive Dreamforce ever.

We already have about 18,000 people registered for this event.

That is amazing for us.

It is significantly up from last year, as you know, where we were in the, I think, about 10,000.

So a big, big, big increase for us.

We expect it to be a full house tomorrow.

You better come early if you want to be in the main keynote room, otherwise we will have an overflow room available as well.

But you're going to see our vision for the future of cloud computing, and not just at the enterprise software industry.

We are going to bring together some tremendous concepts.

I am not going to go into details on the call.

I'm going to save it for tomorrow.

But believe me that by the time I get to the investor lunch we are going to have plenty to talk about how we have fundamentally changed what is CRM, what is custom application development and deployment, what are enterprise apps, what do customers want to be doing.

Let me tell you that you know that we have three clouds, our Sales Cloud, our Service Cloud and our Custom Cloud.

We will have a fourth cloud tomorrow.

And we will begin a Cloudforce 2 celebration tour to introduce our almost 70,000 customers around the world to this fourth cloud, which we believe they are going to love it.

I am willing to put my reputation on the line here on this call to say that by the end of the keynote tomorrow, if these customers aren't shooting out of their seats, I have done something really wrong over the past year, creating this product.

Finally you want to save Thursday for some huge ISV announcements.

We are going to have some of the biggest CEOs in software there.

Top 10 independent software companies' CEOs, who we have not yet announced, will be coming to talk about their technology being written natively on Force.com.

And you will be very surprised, when you see who the first person on the stage is on Thursday, and who follows that individual.

Because these are perhaps the very top CEOs in the software industry and enterprise software, saying that they have chosen Force.com as their are software service cloud computing standard platform, taking some of their mainstream products and moving them onto Force.com.

We think this is a key catalyst for our customers to have the confidence and the motivation to go even further with Force.com.

Then we will move into a tremendous keynote with one of the great speakers in the world, Colin Powell.

And again we are just expecting our best Dreamforce ever.

I am looking forward to seeing all of you there.

I'm looking forward to talking to you and taking questions at the lunch.

And to review all the announcements that are going to happen tomorrow -- and also again, there is going to be some great announcements on Thursday, some tremendous announcements at the platform day as well.

And with that, let me turn it over to our Chief Financial Officer, Graham Smith, for a detailed review of our excellent third-quarter financial results.

Well, thank you, Marc.

Solid execution and an improved demand environment enabled us to, once again, record excellent financial results for our fiscal third quarter.

We saw continued strong revenue growth, while earnings and cash flow both doubled from a year ago.

So let me begin with a brief review of the P&L.

As Marc indicated, revenue for the third quarter was approximately $331 million.

That is an increase of 20% from the year ago quarter, and well above our previous outlook.

Three factors contributed to this performance.

First, as Marc mentioned, our new business growth rate in the third quarter was our best this year.

Add on an upgrade business, which is an important component of overall new business, saw significant improvement too, particularly in our SMB business.

However, although demand environment felt better in Q3 than it in Q2, it is important to understand we are still managing in a generally tough environment with longer sales cycles and smaller average deal sizes.

Second, although our dollar attrition rate remains in the high teens, it did decline for the first time in several quarters.

Third, a weaker dollar clearly helped the top line.

Excluding the effects of roughly $4 million year-over-year currency benefit, revenue growth in constant currency was 18%, or 2 points less than our recorded growth rate of 20%.

International revenues grew more rapidly than in North America.

International reached 30% of total revenues for the first time in salesforce.com's history.

Americas revenue was approximately $233 million, a year-over-year increase of 16%.

Europe revenue was approximately $61 million.

That is a year-over-year increase of 26% in dollars and 24% in local currency.

In Asia revenue was approximately $37 million, representing dollar growth of 31% and local currency growth of 21%.

GAAP gross margin for the quarter was approximately 80.2%.

That is up roughly 60 basis points from a year ago.

Our gross margin improvement in Q3 was a result of a mix shift between revenue lines.

High-margin subscription revenues, replacing more of our total revenue -- representing, I should say, more of our total revenues than low-margin professional services.

Average selling price per subscriber for each service addition continued to be stable.

Turning to our operating performance, GAAP operating margin for the third quarter was roughly 9.1%.

That is up 330 basis points from last year.

For the three quarters of this fiscal year our operating margin is 9.4%, which is also up 330 basis points versus the same three-quarter period a year ago.

We are pleased with our progress against the 250 basis point target we set for the beginning of the year.

We achieved these margins while absorbing stock-based compensation expense of approximately $20 million in Q3 and $63 million for the year to date.

Excluding those expenses, our operating margin would have been roughly 15% for the third quarter and roughly 16% for the full year to date.

We finished the quarter with roughly 3,800 employees.

That is an increase of approximately 160 from last quarter.

As Marc mentioned earlier, we made the decision to significantly increase our hiring in Q3 as a result of a stabilization in new business we have seen in the second quarter.

Based on our Q3 results, we believe this was definitely the right decision.

While we have increased our rate of hiring, and once again focusing on distribution capacity to position us for growth, we don't anticipate returning quite to the hiring levels we saw last fiscal year.

Certainly until we see a few more quarters of growth in new business.

In the meantime, we expect our rate of hiring in Q4 to be similar to Q3.

Moving on to cash flows.

Operating cash for the third quarter was approximately $36 million.

That is an increase, as Marc mentioned, just over 100% compared with Q3 last year.

On a trailing four-quarter basis we generated nearly $255 million of operating cash flow, or just over $2 a share.

We expect Q4 operating cash flow to be slightly higher than what we generated in Q4 last year.

Free cash flow, which we define as operating cash flow, less capital expenditures, was roughly $21 million for Q3.

Over the past four quarters free cash flow of $196 million translates into roughly $1.50 a share.

Moving on to the balance sheet.

Strong cash generation over the past year has created a cash and cash equivalents balance of $1.070 billion approximately at the end of Q3.

That is an increase of almost just around $265 million from a year ago.

This total cash balance equates to about $8.50 a share.

Deferred revenue rose 16% from Q3 a year ago, but declined $4 million from last quarter to $545 million.

In constant currency terms, the sequential decline was close to the $10 million, after taking into account the roughly $6 million currency benefit we experienced in the quarter from the weakening dollar.

Invoice durations, which can have an impact on deferred revenue, did not change meaningfully during the quarter.

We expect deferred revenue to increase significantly in Q4.

Our best estimate is by a similar amount to last year.

But as we have described on prior calls, there are many factors that can impact deferred revenue, including average invoice duration, invoicing linearity in the quarter, foreign currency movement, early renewal and so on.

In this context it is important to understand that it is difficult for us to predict movements in deferred revenue with a great deal of precision.

So let me close with our outlook.

We are encouraged by stronger new business, lower attrition, and our biggest customer addition quarter ever.

In that context we now expect Q4 revenue to be in the range of $340 million to $342 million.

This has the effect of raising our full-year guidance to approximately $1.29 billion.

That is up from our prior estimate of $1.27 billion to $1.28 billion.

Because the demand environment improved in Q3, and because growth remains our top priority, as I mentioned earlier, we are expecting to continue hiring into Q4 at roughly the same pace as we did in Q3.

We have expanded the scope of Dreamforce to accommodate an even larger audience.

We estimate that Dreamforce's net cost will reduce Q4 EPS by roughly $0.04 versus roughly $0.02 a year ago.

With that context, we expect fourth-quarter GAAP EPS to be in the range of approximately $0.14 to $0.15.

This has the effect of raising our full-year guidance to approximately $0.62 to $0.63.

And this EPS estimate includes the following approximations for Q4 -- $26 million of stock-based compensation, $2.6 million in amortization of purchased intangibles related to previously announced acquisitions, a noncontrolling interest charge of $1.5 million, a GAAP tax rate of 40%, and an average fully diluted share count of approximately 132 million shares.

Over the past three years we have grown revenue from just under $500 million to almost $1.3 billion.

And at the same time improved our operating margin from breakeven to just below 10%.

Of course, that is a GAAP operating margin.

While we remain committed to improving margins, our primary focus continues to be growth.

We currently expect revenues for fiscal 2011 to grow by approximately 15% to 16% over fiscal 2010.

It is difficult to be more precise at this point, because we have Q4, our largest new business and renewal quarter, ahead of us.

As far as profitability is concerned next year, although we haven't finished our detailed planning, we are not necessarily expecting our operating margin to grow at quite the same pace as it has for the last three years.

We will provide more details when we announce our fourth-quarter results.

So to close, we are very pleased with our Q3 performance, and believe we are well-positioned to finish the year with a strong Q4.

I look forward to seeing many of you at Dreamforce tomorrow.

And for those who can't make it, I look forward to discussing our fourth-quarter result in February.

With that, I would like to open the call up for your questions.

Operator.

(Operator Instructions).

Just quickly while Sarah is queuing your calls, let me quickly provide some detail on some of the planned activities we have tomorrow at Dreamforce for the analyst community.

First, as a member of the financial community, you are a VIP attendee.

Upon arrival please proceed to VIP check-in, and get your badge and information.

As Marc noted, you are entitled to special VIP seating at a keynote at 9 AM tomorrow morning.

So look for the VIP signs at the front of the main stage.

And please plan to get there early, because we are expecting a packed house.

After the keynote you are invited to a special VIP luncheon with company execs, customers and partners.

That lunches is in [Mostonian] North, room 135.

And then there will be a Q&A session with Marc and Graham at one o'clock following the lunch.

All these sessions are being webcast.

For those of you who preregistered, we have pre-populated your calendars with meeting statistics.

So check your berries or iPhones for details.

You should have also received an e-mail, where you can contact any of your IR folks here at salesforce.

So if you haven't registered, it's not too late.

Walk-ups are welcome.

I look forward to seeing you tomorrow.

And with that, --

Let me just add one thing to that, which is that I think it is extremely important for the analysts and the financial analysts, the technology analysts, and the press that are attending tomorrow, who are listening to this call, and others who are not, that unlike a lot of other vendors who tend to herd the analysts or control the analysts into certain rooms and certain programs, ask them only to attend a certain things or create a controlled environment for them, that is not our position in our Company.

You are free to attend every keynote.

You are free to attend every breakout session.

And there is a huge tradeshow floor of several hundred ISVs who are building on our platform, where you can assess the quality of their applications and their momentum in the market.

As well as, as we have mentioned, over 18,000, maybe 20,000 attendees there tomorrow.

We want you with them.

We want you talking to them.

You are free to attend the lunch.

No hard feelings if you don't want to, because we really want to emphasize that you're free to do whatever you want.

It is a key part of who we are as a Company.

We know other companies are not like that, so we just want to reinforce to you that it is not a controlled environment for financial or industry analysts, for press or bloggers.

You have free reign of the conference.

And we will make all things available to you, including the Black Crowes concert tomorrow night.

Great.

Thanks, Marc.

Sarah, let's go ahead and take our first question.

Mark Murphy, Piper Jaffray.

Yes, thank you, Marc.

We are occasionally running into customers that are indicating salesforce.com has become a top three or a top five line item in their IT budgets.

In many cases they say they are not scrutinizing it, because of the value that it has created.

I am just wondering if you can comment on the role that Force.com is playing in terms of driving customers to purchase those kinds of VOAs, or in creating other kinds of stickiness within the customer base?

You're really touching on really our fundamental core product strategy, which is to cement ourselves as a position, as a standard in the enterprise of our customers.

Of course, in many cases we have started a smaller implementation or what we refer to as seed.

We then talk about how we want to grow those implementations.

And then we try to take those implementations and turn them into what we call, ELAs, or enterprisewide agreement.

The technology that you will see released tomorrow and announced tomorrow -- it is not released tomorrow, but announced tomorrow, and released in the first part of next year.

That -- you will see when we announce it, when we release it, I will just give you a little preview into the strategy behind it is an expansion strategy.

It is all about we have looked at the category that we think will accelerate users into the enterprise.

How do we go from, if you will, a Trojan horse strategy, where we've gotten through the doors.

And the forces there in the middle of the city, but we want lots and lots of guys to come out of the horse.

To do that, of course we have the Sales Cloud, we have the Service Cloud, we have a lot of custom applications.

That is what you're seeing with these customers who have built these custom applications, so that we are beyond sales and service users and into other things like recruiting and project management or order management and so forth.

We have built an application that we believe will take us much, much, much further.

And as we have detailed conversations about this, which I'm looking forward to tomorrow at lunch, you'll see and keep in mind during my keynote that the whole fundamental strategy -- the product strategy, the packaging strategy, the pricing strategy, the features strategy, the branding strategy is to move our approximately 70,000 customers to the enterprisewide with us.

We think the biggest expansion opportunities for growth, and in our growth stance, is with in many cases, of course, within our own customers.

Although we added a record number of customers this quarter at 4,700, we continue to make this a major theme of the Company.

It is how we compensate our salespeople.

It is the work we do in these kind of cloud forces, where we schlep around the world to keep reiterating our conversations.

Because reality is, customers are looking for new ways to manage and share information.

And they are tired of getting the answer from Microsoft, buy more SQL servers, buy more Visual Studio, buy more Oracle databases.

They are looking for new ways to do that.

One of my big revelations when I went to Oracle OpenWorld was spectacular conference.

And it usually used hugely accelerated from when I was last there, which was actually in '99.

But I was shocked that as I went up and down all the little escalators, that as I got to the bottom of a lot of the escalators, I was greeted by an Oracle Exadata computer.

And while I understand Exadata computer is great for Oracle strategy.

And I am sure it is a higher margin product.

And I'm sure it is high quality and well-made.

And the point, of course, for every Oracle customer as they came down the elevator to look at the Exadata computer -- and it had flashing lights on it and all these things -- is buy one.

That is when I said, wow, this is a clear differentiation of strategy.

Where certain vendors, their strategy is to sell you more hardware and more software, and continue to enrich their cash cows.

Our strategy is no software or hardware at all.

I think that customers will need -- want that message.

And I think in this environment need that message.

And I think that has really helped us.

And I think that you'll see from this quarter's results that we have that, but keep this in mind, this point tomorrow, that this is our key strategy is that we want to be enterprisewide.

When we go to our customers and they are -- I was going to customer this week.

I won't tell you who it is.

They've got a few hundred thousand employees.

We only have -- we are in the tens of thousands of employees with them.

I am like, how do we get the other 270,000.

I have in the back of my mind -- I think that this service that we are going to be releasing in the first part of next year, that we are going to announce tomorrow, is going to be a key way to do it.

I am very motivated and excited and pumped up about it.

It is hard for me not to even give you any clues, but I really believe -- I really believe, and I agree with you that our opportunity is enterprisewide.

And that is where I have the mindset of our management team.

Sarah Friar, Goldman Sachs.

Thanks so much for taking my question guys.

I wanted to ask about the forward guide for fiscal year '11.

I appreciate you putting a stake in the ground.

But if I look at it, it suggests that bookings and probably revenue growth are going to decelerate a little from where we are this year, which has been a much tougher year.

So giving your commentary that you think we are shifting back to better growth, why aren't we seeing that more in the revenue guide for next year?

This is Graham.

I think really just comes down to Q4.

We've got -- Q4, as you know, is our biggest quarter ahead of us, and it is also our biggest renewal quarter ahead of us.

So I think we feel good about giving the guidance in the range we have.

I think before we can give any more precision around next year's topline growth rate, we need to see if we've got the sustained improvement that we saw the beginnings of hopefully in Q3.

Then we also need to -- we have seen good signs on the attrition front.

But as you know, that is a big variable in our topline equation as well.

So I want to get through Q4 and then assess where we are.

Okay.

I would have really like to just add to that, if it would be all right with you.

Sure, please.

You know we are in the third quarter, right?

We just finished the third quarter.

If you look back a year ago, finishing up the third quarter was not necessarily as much clarity, not just for us but for all companies over the next six months, right, in terms of what was about to happen to the world.

I think because of that we are just being mindful, and I think appropriately so, in giving you a preview of where we are thinking we are going to be next year.

That is really very much how we view this.

We think that that -- we think it is important to give you these numbers.

We are giving you these numbers.

But we are being mindful, and we are being appropriate, I think, because we still are in a very volatile world, and while we certainly felt like in the second quarter we got our sea legs, and in the third quarter we resumed a growth stance, and as in the fourth quarter we are getting our excitement back.

We are really in a position now where while we want to give you numbers, because we have always given you numbers in the third quarter, we recognize that the last time that we did that that in the fourth quarter for the entire planet the world changed.

And we moved into one of the most unusual economic situations in the world.

All of us have lived through that.

Then we had to start to make changes for our business, like many companies did.

So because we are still basically several months away from finishing our fourth quarter, which is our biggest quarter of the year, we are not yet through Dreamforce.

We haven't made this product announcement.

We are just giving you numbers that we feel that are appropriate.

I hope that that is important and that you can understand our mindfulness around that.

Heather Bellini, ISI Group.

This is (inaudible) for Heather.

A question, Marc, on FinancialForce.

What is your strategy there, and how is it different from say next week [Charter] has not been able to gain much traction in this space?

Thank you very much for that question.

FinancialForce is not part of salesforce.com.

It is a company that is an independent company, that was started by a company in Europe, called Unit 4 Agresso.

And Unit 4 Agresso and one of their subsidiaries, CODA, is one of the largest ERP providers in the European area.

I think they are the second largest behind SAP.

Unit 4 Agresso took a product that they were working on inside CODA called CODA to Go, which was a native general ledger payables/receivables, and has ported it onto Force.com.

We have had them on stage a few times profiling it.

Mostly so other software developers could get excited about building similar things.

And they have had some very exciting customer attraction, which is not appropriate for me to speak for their Company.

But hopefully that when you go by their booth tomorrow at Dreamforce, they can tell you what the customer numbers are.

And you can look at their demonstration and analyze their growth rate and their competitiveness.

And we are so excited about this new company, FinancialForce.com, we invested a relatively small amount of money, very small, to pick up a very small position, because we view the company as doing things that we want to encourage, which is native Force.com development.

But it is not part of us.

I can't speak for them.

I actually have no details.

And that is all I can -- that is really all I can say.

But you should go by their booth tomorrow and see them.

Thank you for -- thanks for your question.

Adam Holt, Morgan Stanley.

My question is about sales capacity and investments on a going forward basis.

You all were pretty aggressive over the last call, 12 to 18 months in hiring sales capacity.

I wanted to maybe get an update as to where you think you are in bringing that capacity to be productive?

And if anything, do you feel like you have some excess capacity as you start to get into an economic recovery?

Then secondarily, how should we think about the balance between billings growth going forward and expense growth going forward?

I think this year has clearly been a tough year for -- from a sales capacity point of view.

We did add a lot of sales headcount last year, as you point out.

We have been -- much lower additions in the first half, but certainly we are looking to pick that up in the second half.

I think the way to think about this is we are still committed to improving margins.

That it is an important thing for the Company.

But where on the other hand we feel there is lots of regions in the US, and certainly key markets internationally, where we are very under penetrated.

So I think we will look to continue to expand our distribution capacity as much as we can, because that is clearly the key growth driver for the Company.

I would just add to that that we internally -- we still see ourself very much as a distribution constrained organization.

That is, we would like to have more sales people on the street around the world at every major geography, in every major region.

What is unique about salesforce.com is we are appropriate for a 100 employee company, a 1,000 employee company, a 10,000 employee company, a 100,000 employee company, a 400,000 employee company.

And we just don't have as many people as we would like on hand to be able to appropriately cover, communicate and build relationships with that market.

Of course, we have segmented our salesforce.

We manage it extremely well.

We have some of the top sales managers in the world.

We continue to acquire new ones.

But we want more.

When you compare us against the much, much larger enterprise software companies, our salesforces are still between 1/10 and 1/20 their size at the largest players.

We think that our products are far more competitive, far more exciting, far more important, and we need more people to get out there and explain it to them.

We want to -- when it is appropriate, and when it is appropriate to take on a growth stance, which is as we are doing now, work to onboard them as much as we can.

which is why you saw us increase headcount in the third quarter after holding it basically back in the first and second quarter.

We want to do that again in the fourth quarter, and actually going into the year.

At the same time we want to continue to do a great job with our margins.

Of course, over the last few years we have done, I think, a spectacular job with our margins.

I think on a fully annualized basis every year over last three years we guided have added 300 or more basis points per year.

I don't think there is too many enterprise software companies, other than salesforce.com, to over last three or four years have added 300 to 400 basis points a year.

Every time we do that, we look at we are balancing giving our investors more profitability, which we are committed to, against are we expanding our distribution capacity fast enough.

Of course, if we didn't expand our profitability, if we had held our margin at zero, let's say, and not had brought it up to over -- now it is over I think -- operating margin is every 9%, right?

(inaudible).

What is that?

Between 9% and 10%.

Between 9% and 10%, which is where we have gotten to, we would have been able to do more on account executive and distribution capacity.

But we find a healthy balance.

And then we want to be able to take that healthy balance and deliver bookings and grow the Company.

Now through all that, we are still the fastest growing enterprise software company of our size.

We have certainly grown our margin faster, we think, on a GAAP basis than any other enterprise software company, as I mentioned, 300 to 400 basis points per year over the last three or four years.

And we have grown our revenue, as you can see this year, approximately 20%.

And now as we move into next year, again, it is balance.

It is give the investors what they want for more margin.

We are committed to that.

The question becomes how much more?

Hire more distribution, because we've got some great new products coming.

So we want to bring that to all these customers out there that are being held back by the tyranny of enterprise software.

And we want to continue to feed our cash flow and grow our Company and do all the right things, fundamentally for our investors.

That is how we think about it.

I hope that answers -- puts the color around Graham's specific numbers.

Laura Lederman, William Blair.

I am just wondering -- this one is for both Marc and Graham, and that is you have built up a ton of cash.

Can you talk about whether you're going to let it sit on the balance sheet, or whether acquisitions become more interesting, buybacks, just give us a little bit of sense of that?

Also following up on the last question, obviously delivering 300 basis points of margin improvement year after year, you can't obviously keep that up.

But kind of ballpark would you expect to maybe deliver half of that?

I realize it is tied to revenue growth, but if you could even give us some sort of band that would be helpful.

Thanks.

I think that we are very happy with our cash balance.

Clearly you know we focus a lot on cash generation.

We think that is a good proxy for the progress of the Company.

I think we don't comment on M&A activity.

Clearly we have done acquisitions in the past -- small ones.

We continue to look at things, but there is no specific news or forward thoughts there.

I think in terms of the second question about how margins are going to move next year, I think really, I did say ultimately we've got to complete our planning process.

As Marc just spent a minute or two talking about, that balance that we try and strike between growth and profitability.

And adding distribution capacity remains the number one priority for the Company.

We just have to get that balance right.

So it would just be premature for me to try and give you a read on that.

Q4, as we have also said, is such a huge quarter for us, that will have an impact on our ability to deliver different margins next year.

Kash Rangan, Merrill Lynch.

A clarification for you, Graham, and question for you, Marc.

Clarification, Graham, you said similar growth in deferred revenue to last year.

I guess you were referencing the percentage growth Q3 to Q4, right?

No, I said -- actually my words were quite specifically chosen.

We expect deferred revenue to grow by roughly the same amount, the dollar amount.

And I stressed the word roughly.

Because as I gave you some reasons, you know it is a tough number for us to estimate with a great deal of accuracy.

We are just trying to give you a ballpark number of what we are expecting.

And that is the same dollar kind of increase we saw in Q4 last year.

If I apply that same kind of dollar amount, I respect the fact that you're trying to be conservative, but it signifies deceleration in bookings growth to about 12%, 13%.

So I was trying to be sure that I was not wrongheaded in the way I interpreted your comments.

That is why I asked that question.

First, actually I am not trying to be conservative.

I'm just trying to give you a read on how I see the numbers, best as they are.

I think it is what we think there is clearly -- and just remember in that bookings number that you all calculate, it is a combination of a couple of things.

It is the new business that we sign in the quarter.

It is also based around the billings of renewals.

So there is two factors that go in there.

That is our best read on it at the moment.

That is where we think we are.

A tough number for us to calculate or estimate.

Okay.

Question for you, Marc.

But adding the fourth pillar, which you're going to be announcing tomorrow, how are you thinking about segmenting the salesforce to get the best part productivity within the account?

Any changes to management you're likely going to be making, adding new people or creating new business unit structures?

Anything at all that you can help us get comfortable with as you scale this Company?

What are you going to be doing differently, as you add on more products?

That is it for me.

Thanks.

We have made a lot of those changes already.

We have been driving those changes forward.

We think we are currently appropriately structured.

We will continue, of course, to enhance our structure as the business changes.

But you won't see us announce any major change with regards to the product, organization tomorrow.

But we are going to be listening very, very closely to our customers as we announce this product.

And based on what they say, we of course make changes at that point.

Michael Nemeroff, Wedbush.

This is David for Michael.

Can you guys just go over the Q4 cash flow again, and your expectations for CapEx and cash flows in 2011 please?

Well, we said that we expect Q4 operating cash flow to be slightly above the level of Q4 operating cash flows last fiscal year.

We did not give any forward guidance on cash flow or CapEx.

I will say that on CapEx, if you look at our CapEx additions over the last few quarters, they run along at a pretty -- a relatively steady run rate.

So I think that is pretty clear what the trend is on CapEx.

But we didn't give any specific forward guidance around those numbers.

Brent Thill, UBS.

Marc, the improvement you mentioned you saw in the quarter, did you see that evenly across the small and mid, large segments or was one category potentially stronger than some other categories?

We saw it across many of our categories.

Of the eight major categories that I measure, five -- more than five of them, I think it was five or six, improved.

So we are very positive about that.

By the way, those categories included the -- specific to your question -- the small and medium business had a spectacular quarter actually.

They have just -- we don't normally call them out, but they just completely blew us away.

Operator, we are going to go ahead and take one more question.

And again for those of you who we didn't get to -- I see lots of names in the queue -- we look forward to seeing you tomorrow at Dreamforce, and also at the Q&A session with Marc and Graham.

So let's go ahead and take our last question of the day.

Robert Breza, RBC Capital Markets.

Just quickly, Graham, if you could talk a little bit about -- you talked about adding sales capacity.

Can you talk about maybe where you are making other additional investment or where you might be making investments, whether that be R&D, and specific geographies?

Anything would be helpful.

Thanks.

Sure.

We have certainly -- the headcount we have added to date this year is certainly -- a lot of it has been focused on development.

You're going to see the fruits of that at Dreamforce tomorrow, hopefully.

And you will be as excited as we are.

I think going forward we will switch that emphasis to much more on distribution capacity for the fourth quarter and next year, because, as I mentioned earlier, we have definitely held that back a bit until we saw clearer signs of an improving execution and demand environment.

So I don't think we want to be more specific than that.

But I think certainly we'd be looking to focus most of it on distribution capacity and not -- and in the US and internationally across our top markets.

I would just add to that.

I think after an unusual year, a year of some downs and some ups, that as we finish up the fourth quarter by the end of January, and as we get ready to talk to you again in a formal basis in February, we are going to have a lot more clarity about the kind of investments that we are making, the level of growth that we are able to take on, the confidence we have in the business.

We wanted to give you these early indicators because we think it is appropriate.

But we are being mindful and we are being thoughtful about what the numbers are that we should be giving you, a lot based on the global environment that we are all existing in.

And although salesforce.com has had a, I think, spectacular year, certainly against any of our peers or competitors, that could be said.

We have made -- had that great year because of this thoughtful process that we undertake.

It is a great note to end on.

And we want to thank everybody for joining us today.

We will look forward to seeing you at Dreamforce.

If you still want to get in on the festivities tomorrow, please contact me directly, David Havlek, DHavlek@salesforce.com, or contact Ingrid Ebeling or [Susan Filbert] on my team.

Thanks for joining us.

And have a good day.

Thank you.

This concludes today's conference call.

You may now disconnect.