賽富時 (CRM) 2010 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the salesforce.com Q4 fiscal 2010 financial results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions).

I will now turn the call over to David Havlek, Vice President of Investor Relations.

Mr.

Havlek, you may begin your conference.

Thanks, Marcelo; and welcome, everyone, to salesforce.com's fourth quarter fiscal year 2010 earnings conference call.

Joining me as always to discuss our outstanding quarter are Marc Benioff, CEO; and Graham Smith, CFO.

Following Marc and Graham's prepared remarks, we will things up to your questions.

A complete disclosure of our fourth-quarter results can be found in the press release issued about one hour ago as well as our Form 8-K filed with the SEC.

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

A webcast of today's call is available on our website for 90 days and a dial-in replay will be available through March 19.

Our fourth-quarter commentary today will be in GAAP terms unless otherwise stated.

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.

Looking forward to FY 11, I am happy to make you aware of an important addition to our financial reporting.

Beginning with our first-quarter results, the Company will be reporting its operating metrics and results in both GAAP and non-GAAP formats.

Our outlook today reflects this additional disclosure.

Grahame will discuss the details during his prepared remarks and a full reconciliation of our GAAP and non-GAAP outlook can be found in our earnings press release.

With that said, let me make today's call official by reminding you that the primary purpose of today's call is to provide you with information regarding our fourth-quarter fiscal year 2010 performance.

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 incorrect, actual Company results could differ materially from these forward-looking statements.

All 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 recently reported Form 10-Q particularly under the heading Risk Factors.

To access our Q4 release, the additional financial detail, the webcast 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.

Finally, please also be advised that any unreleased 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 decisions based upon features that are currently available.

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

Thanks very much, David.

Our fourth quarter caps off the biggest year in salesforce.com's history and I'm delighted to be able to share with you today our outstanding results.

While most software companies are still trying to forget the past year, our fiscal 2010 was perhaps our most memorable and exciting year ever.

And some of the highlights from our full year include $1.3 billion in revenue, the first enterprise cloud computing company ever to reach this scale; revenue growth of more than 20%, the fastest growth of any comparably sized offer software company in the world.

While most software companies went backwards last year, salesforce.com went forward in a dramatic way.

And more than $750 million in operating cash flow and a balance sheet with more than $1.7 billion in cash and equivalents and than 72,000 customers globally, including an amazing 17,000 net new customers joining our ranks in the fiscal year; this represents a 31% year-over-year increase in our customer base.

More than two million subscribers, including more than 500,000 net additions during the year, an increase of roughly 35% year over year.

And we closed the year by hosting the biggest cloud computing event ever, Dreamforce 2009, in December.

It was simply an amazing year.

And we closed the year by delivering the biggest financial quarter in our history.

Fourth-quarter revenue rose 22% to $354 million.

At this level, we've broken through yet another huge milestone, the $1.4 billion annual revenue run rate.

Fourth-quarter growth of 22% was our best performance in more than a year.

GAAP EPS of $0.16 increased from $0.11 a year ago.

That's an increase of more than 40% and more EPS in a single quarter than we achieved in all of fiscal year 2008.

Cash from operations increased 21% to $92 million.

And finally, deferred revenue broke through that $700 million threshold for the first time ever to finish at $704 million, an increase of 19%.

That was our best growth performance of the year.

By virtually every financial measure, our fourth quarter was amazing.

Equally important, we saw continued improvement in our business for the second quarter in a row.

That's why we are stepping it up and hiring heavily into next year.

After a year of reduced investment levels, the time is now right to invest in our continued growth and leadership of the cloud computing market.

Graham will have more to say about our outlook in a moment.

Our amazing fourth-quarter numbers were powered by another quarter of fantastic wins against our competitors.

We had another huge quarter and a huge series of wins against Oracle, including the Huntington National Bank, GE, Pfizer, KCI, Autodesk, BT and Aramark.

And we won impressive business against Microsoft during the quarter with many companies including Univision, Aspen Pharmaceutical, Cross National Bank, Cuna, Ingenix and [Sagecom].

And finally, we beat SAP at Schneider Electric, SAS, Noble Biocare Services AG, Kimberly-Clark, Bridgestone Golf and Walters Kluwer.

These customers are coming to us because they want the most innovative products and services in the enterprise today, not just the best products in the cloud, but the best products available period.

And they're coming in in ever increasing numbers.

In the fourth quarter alone, we added roughly 4600 net new customers to bring our full-year customer community roughly to 72,500, an increase of 31% in our customers.

In fact, for the full year, we added more than 17,000 net new customers.

That's more customer additions then we recorded in our first six full years of being in business.

Wow, that's amazing.

All three of our primary services -- Sales Cloud 2, Service Cloud 2, and Custom Cloud 2 -- reported record quarters in the fourth quarter.

The multi-product success is key to our growth strategy.

Five years ago, our growth was entirely driven by our flagship namesake sales force automation Sales Cloud service.

But today, we have three pillars of growth with the Sales Cloud, the service cloud and the custom cloud powered by our Force.com platform.

We believe the growth opportunity for each of these businesses is massive over the next decade and the Gartner Group agrees.

Gartner estimates the CRM market including sales and service to be roughly $16 billion and the custom application of open market at more than $50 billion.

And our launch of Chatter, the collaboration cloud which is expected later this year, further expands our market opportunity by creating a fourth leg of growth.

Essentially every business of every size and every industry with access to the Internet through any device is now a prospect for our sales force.

Our growth opportunity has never been more exciting at salesforce.com and in Cloud Computing.

As evidence of our multi-product success, we delivered our most diverse quarter of new business ever with more than 30% of our new business coming from non-Sales Force Automation services compared to 25% a year ago.

That's a pretty amazing achievement when you consider that our core Sales Force Automation Sales Cloud business continues to grow at a strong double-digit clip.

In our flagship Sales Cloud 2, we knocked some big wins this quarter; included Nippon Express in Japan, G-Energy, Avia, Cisco, Amex, Manpower and First Tennessee Bank National Association as well as Beckman Coulter.

And just a year after its launch, the Service Cloud is on fire and this killer app is clearly our next lever of growth.

New business volume for the service cloud more than doubled from the year ago quarter as did the volume of Service Cloud transactions.

Customers need the next generation of customer service and support, customer portals and call center solutions and salesforce.com is ready to deliver this with Service Cloud 2.

Customers realize that the call center of the 90s won't work in the age of social computing and it is abundantly clear that our competitors in this space just can't keep up.

Traditional customer service vendors still regard the Web itself as foreign territory.

And the Service Cloud 2 features the world's first real-time knowledge base in the cloud, built on our multi-tenant platform, Force.com, the world's first integration with social networks like Facebook and Twitter; the world's first, most customizable service applications available; and the world's best, most efficient agent console in the Cloud as a service; all running on top of Force.com, the world's most trusted, reliable, secure and transparent Cloud computing platform today.

This is what makes Service Cloud 2 the spectacular success for the quarter and why we believe that as we enter fiscal year 2011, we are entering the year of the Service Cloud.

That adds up to an unbeatable value proposition for the Service Cloud, the technology vision for tomorrow's contact centers and customer service organizations backed by the scale and efficiency that only cloud computing and salesforce.com can offer.

Our huge list of service cloud wins in the fourth quarter include the Huntington National Bank, Dun & Bradstreet, Bausch & Lomb, Wyndham Hotel Group, Wells Fargo Bank, FBL Financial, (inaudible) and Chronopost.

Look, while companies are poised to build for the future, they're not going to double down on the software mistakes of the past using old technology like Microsoft.net.

That's why the Force.com custom cloud is showing such fantastic results.

Developing custom apps on Force.com is five times faster and half the cost of traditional programs like Dot Net and Java, according to a recent study completed by IDC and available on our website.

The value proposition was behind several key custom cloud wins for the fourth quarter including Fast Retailing Company of Japan, Pfizer, Sepracor, the Japan Research Institute, Avon, McGraw-Hill and Fairchild Semis.

(inaudible) Genentech and Honda all now are Force.com customers building the next generation of applications of cloud computing, their custom apps, their private cloud apps on Force.com and we are just getting started.

During the quarter, we also announced a key addition to our platform with the addition of Force.com Visual Process Manager which allows corporate IT to focus on innovation, not infrastructure, with point-and-click, very easy to use process design instead of low-level coding.

Some of our key platform milestones in the fourth quarter included more than 19 million customizations now made by our customers that we're holding in our multi-tenant database.

That's up more than 40% from a year ago.

Nearly 150,000 custom applications, up from roughly 100,000 last year all on Force.com; more than 275 million lines of Force.com [towed] up tenfold year over year.

That is amazing considering we were one of the very first multi-tenant virtual machines for hosting our customers' code.

We've also added more than 100,000 developers to our growing global development community, a community that boasts more than 230,000 members and our core transactions, the actual transactions that our customers are completing whether it's the Sales Cloud, the Service Cloud, the Custom Cloud and soon with Chatter; well those total transactions grew to $19 billion for the quarter.

That's up more than 46% versus a year ago.

You know what?

That growth in usage of our platform underscores a key important point.

We have built a service that customers just don't subscribe to, they use.

With transactions growing even faster than subscriptions, it's clear that more customers are finding more ways of integrating us into their core operations on a daily basis.

Our Sales Cloud, Service Cloud and Custom Clouds have been propelled by the widespread recognition that cloud computing is easy to use, has lower costs and produces faster results than traditional enterprise software.

The reality is that's the very premise that we started salesforce.com on.

It was just about 11 years ago when we asked ourselves the question, why is all enterprise software not as easy to use as Amazon.com?

No software to buy, no hardware to buy, nothing to install or upgrade or maintain.

You know, when companies like Microsoft now 10 years later which have the most to lose from the decline of software finally embrace cloud computing, you know there's no doubt in customer mind about where the future is headed.

It's headed towards cloud computing.

But you know what?

The game is evolving again and we believe the stakes are even higher this time; much, much higher.

Back in 1999, we asked that simple question about Amazon.com.

But today, the question has changed.

The question is why is all enterprise software not like Facebook?

You know, on Facebook you don't waste time searching for the right data, going from app to app.

The data finds you in real time.

That's what customers are getting, not from outdated collaboration applications like Microsoft SharePoint and Lotus Notes.

SharePoint is owned by a lot of businesses, used by far fewer and enjoyed practically by none.

When was the last time everyone said they really loved using Microsoft SharePoint or Lotus Notes?

The reality is customers want to track their coworkers who matter to them, the most critical conversations, the apps they depend on, the content they create and share, all using the new mobile devices that they're carrying around in their hand.

And they want to collaborate without the cost, complexity and flexibility and overall enterprise dead weight of enterprise software, hardware and data centers.

Look, that's the idea behind Salesforce Chatter, our first enterprise-wide application and I'm excited to report that the next generation of enterprise collaboration has begun.

Last week we announced a private (inaudible) of 100 customers who were the first to get their hands on this game changing technology.

Reaction has been incredible.

In fact, we encourage you to search Twitter for the hash tag 'salesforce' to get a sense of it.

We believe that enterprises are more ready to cut their losses on sales collaboration apps like Lotus Notes and Microsoft SharePoint and join the conversation using cloud computing and Salesforce Chatter.

Take a look at www.salesforce.com/chatter or go to YouTube and see the demonstrations of Salesforce Chatter.

Just type Salesforce Chatter in the YouTube search box and you will see a demonstration of this exciting technology right now.

So please join us as we take Chatter on the road in the coming months.

We will be in New York City for a major event on April 8.

With that, let me hand the call over to Graham to discuss our amazing fourth-quarter financial results.

Thank you, Marc.

Our fourth quarter was a great finish to a fiscal year that started with some uncertainty but that ended with superb execution in terms of new business, revenue and cash flow.

The last 12 to 18 months tested many companies' business models and yet salesforce.com was able to deliver another outstanding year with record revenues, operating income and cash flow.

Our cloud computing model was tested and we passed we believe with flying colors.

So fourth-quarter revenue rose 22% from a year ago to roughly $354 million.

Strong new business along with good in-quarter linearity and lower attrition rates helped to drive this result.

Our business continues to show strength across the board with Europe and Asia slightly outpacing growth in the Americas.

As a result, international revenues reached 31% of our total revenue.

That's the highest level in our history.

Let me briefly review revenue performance by region.

In the Americas, Q4 revenue growth was 17% year over year.

With roughly $244 million of revenue in the Americas this quarter, we are fast approaching an annual revenue run rate of more than $1 billion in that region alone.

In Europe, fourth-quarter revenue rose 33% from a year ago to $64 million.

While a weaker dollar added 13 percentage points to this growth rate, constant currency growth was still a very solid 20%.

And finally, Asia continues to be really strong.

The big deal activity we've been discussing in Japan throughout the past year contributed to Q4 revenue in Asia of $46 million.

That's an increase of 42% from the year ago quarter.

In constant currency terms, that the growth was 40%.

Our Asian business alone now has an annual revenue run rate of almost $200 million.

In total, foreign currency boosted our Q4 revenue growth rate by 2 percentage points.

Turning next to gross margin.

We set a new high watermark in the fourth quarter at almost 81%.

Our mix of business continues to shift toward higher-margin subscription business and away from professional services which represented just 7.5% of revenue in Q4.

That's down from 8.1% a year ago.

For the full year, GAAP gross margin was 80.2%.

that's an improvement of roughly 70 basis points from a year ago.

Operating expenses in the fourth quarter as a percentage of revenue were roughly 74%, essentially flat from a year ago.

For the full year, OpEx declined from roughly 74% of revenue to roughly 71%, reflecting the impact of our relatively slow hiring during the year.

Hiring in the fourth quarter was essentially the same as in Q3 with approximately 160 net new hires.

After adding roughly 90 people in the first half of last year, we added more than 300 in the second half across all areas of the business.

We exit the year with just under 4000 employees.

Given the huge long-term opportunity we see for cloud computing, the improving IT spending environment and our strong execution, we plan to invest aggressively in fiscal 2011 with particular emphasis on sales hiring.

This will have ramifications for our operating margin growth and operating cash flow which I will discuss in due course.

GAAP operating margin for the quarter was 7.2%.

That was down from Q3 but it's up 260 basis points from a year ago.

Similar to last year, the sequential decline was in part a consequence of our Dreamforce event and also seasonally higher Q4 sales incentive payments.

For the full year, our GAAP operating margin of 8.8% was up roughly 290 basis points from last year.

This was the third year in a row that we have been able to grow operating margin by roughly 300 basis points.

At the same time, as we are leveraging our operating model, revenue has grown with a CAGR of 38% over the same three-year period from just under $500 million to more than $1.3 billion.

Growth continues to be our number one priority but we are also committed to continued margin expansion.

Stock-based compensation amounted to approximately 7% of revenue for both Q4 and full year.

Our GAAP tax rate of 35% in Q4 was a bit lower than we expected entering the quarter.

This was the result of a number of factors including additional R&D tax credits associated with the exercise of stock options.

The net effect of the lower Q4 rate was to reduce our full-year FY 10 GAAP tax rate to approximately 40%.

Marc has already covered our EPS performance on that move on to cash.

Q4 operating cash flow at approximately $92 million was an increase of 21% year over year.

Capital spending was a bit lower in Q4 than in past quarters at roughly $7 million.

That's primarily due to a decline in leasehold improvement spending.

For the full fiscal year, operating cash flow increased 18% to approximately $271 million and include proximately $19 million of increased tax payments as we transitioned to being a cash taxpayer.

This equated to just over $2.10 per share of operating cash flow.

Capital spending decreased 12% for the full year to approximately $54 million and then free cash flow, which we define as operating cash flow less CapEx, was approximately $217 million.

That's an increase of 29% and that equated to almost $1.70 per share of free cash flow.

We ended the year with total cash and marketable securities in excess of $1.7 billion.

Excluding the proceeds from our January debt offering, our net cash is now in excess of $1.25 billion or nearly $10 per share.

Moving to the balance sheet.

Similar to previous years, accounts receivable increased significantly in Q4 as we invoiced a large proportion of our renewals as well as a lot of new business and ended the year at just under $321 million with a DSO of 82 days which is a two-day improvement over last year's number of 84 days.

Deferred revenue finished the year at $704 million.

And in spite of a strengthening dollar, the fourth-quarter sequential increase of almost $160 million was our biggest ever and deferred revenue was up 19% from a year ago.

Off-balance-sheet (inaudible) or business that is contracted but not yet invoiced finished the year at more than $1 billion.

The combined total of this backlog and the on-balance-sheet deferred revenue now totals more than $1.7 billion.

On the new business front, we had our strongest growth quarter in two years for several reasons.

First, add-on and upgrade business improved both sequentially and year over year.

Add on/upgrade represented more than half of all new business orders during the quarter.

Second, our Service Cloud business had yet another record quarter and continued to gain traction in the marketplace.

Together with our Custom Cloud business as Marc mentioned, our non-Sales Cloud businesses represents more than 30% of total new business to the fourth quarter.

And then finally, although our average deal size was down slightly versus a year ago, we closed a lot more transactions in the quarter than we did a year ago.

Turning to attrition, our dollar attrition rate remained in the high teens but we were encouraged to see the rate decline slightly for the second quarter in a row.

Next I would like to discuss two important items that will affect next fiscal year or fiscal 2011.

First as you know, we closed a $575 million convertible debt issuance in January.

The notes which were issued at par are due in 2015.

Interest is payable at a coupon rate of 0.75% annually and the initial conversion rate is at a 25% premium which equates to a stock price of approximately $85 per share.

In connection with the issuance of the debt, the Company entered into convertible note hedge transactions that cover the number of shares of our common stock that are underlying the notes.

Hedge transactions are designed but not guaranteed to reduce or eliminate the potential dilution arising upon conversion.

At the same time, the Company also entered into a transaction with a hedge (inaudible) involved in the sale of warrants.

The strike price of the warrant transactions is just under $120 per share, effectively raising the conversion price from $85 to this new level.

The net proceeds from all of these transactions were approximately $500 million.

In accounting for the debt in our fourth-quarter results, the $575 million par value of the notes was allocated on our balance sheet to two places, liabilities and equity.

The portion allocated to liabilities was based on an imputed market sort of non-convertible debt interest rate of approximately 5.9% and the portion allocated to equity represents the value of the conversion feature of the debt.

So this allocation created a debt discount of approximately $125 million and that is the difference you will see between the $575 million par value and the $450 million liability on our balance sheet.

And that debt discount of approximately $125 million is being amortized to interest expense over the five-year term of the notes.

Our GAAP operating results will reflect the 5.9% imputed market interest rate for debt which includes the coupon rate of 0.75%.

That brings me to the second item which David mentioned in his opening remarks.

Beginning in Q1, we will report our operating results in both GAAP and non-GAAP formats.

We decided to provide this additional disclosure for two primary reasons.

First, we believe that supplemental information will prove useful to investors who wish to consider the impact of certain non-cash items on the Company's operating performance.

And second, the great majority of our industry peers report non-GAAP operating results and we believe this additional disclosure will enable a better comparison of our relative performance.

Consequently we plan to provide non-GAAP operating results beginning when we report first-quarter results and they will exclude the effects of the following items.

Stock-based compensation, amortization of purchased intangibles and the amortization of the convertible debt discount which I just discussed and that's also referred to often as non-cash interest expense.

We will of course also exclude the tax consequences these three items.

And reconciliations of the non-GAAP financial measures provided in this call to their GAAP counterparts are available in earnings release which we issued earlier this afternoon.

So before I discuss specific guidance for fiscal 2011, I do want to provide some context.

Fiscal 2010 was a year of two halves.

In the first half we responded to an uncertain IT spending environment by slowing our rate of investment which we believe was quite the prudent thing to do.

In the second half, the combination of improving IT spending patterns (technical difficulty) better execution on our part for attrition decline and new business returns to a strong growth trajectory.

Given these improving trends, we will continue to invest for growth in FY 11 particularly in sales.

These investments will have an effect on our operating margin expansion and cash flow growth in the near term.

We believe this trade-off is essential for us to extend our leadership position and is in the best long-term interest of our customers and our shareholders.

The other significant factors affecting our fiscal 2011 guidance are interest income expense, foreign exchange rates and the non-controlling interest charge, sometimes referred to as minority interest.

I'm just going to go through each of those one by one.

First, as I mentioned a few moments ago, GAAP accounting rules require that we expense interest for our convertible debt liability at a market rate of approximately 5.9% instead of the 0.75% coupon rate.

The resulting interest expense of approximately $27 million or roughly $0.12 of EPS will be a GAAP interest expense in FY 11 and the next four years after that.

Second, while we have more cash to invest, we believe our portfolio will yield approximately $6 million or roughly $0.03 EPS less interest income in fiscal 11 as interest rates have generally contracted and a number of our higher-yielding, longer-term investments have matured.

Third, the dollar has strengthened by about 9% since we had our last conference call which has a significant impact on our revenue and operating income.

And then finally because our Japanese subsidiary has been so successful in fiscal 2010, its profitability in fiscal 11 will drive approximately a $9 million after-tax non-controlling interest charge.

That's certainly higher than we thought it would be last year.

Let me now offer our specific outlook, starting with full fiscal year 2011.

Given our strong fourth quarter finish, we are very pleased to be able to raise our full fiscal year 2011 revenue guidance to a range of 16% to 17% growth over our 2010 result in spite of the stronger dollar.

Given the aggressive investment I mentioned earlier, we are planning for operating margin expansion of roughly 125 to 150 basis points and Marc and I certainly talked about that on our last call, the fact that we felt certainly margin expansion this year would be a little less than previous years.

And we think GAAP EPS for the full year will be in the range of $0.58 to $0.60 at this point.

Non-GAAP EPS we believe it will be in the range of $1.25 to $1.27.

The details for reconciling our GAAP and non-GAAP EPS estimates can be found in our earnings press release issued earlier this afternoon.

Given our investment profile in FY 11, we expect operating cash flow to grow at a slightly lower pace than revenue.

Turning to Q1, we are initiating the following guidance.

Revenue is expected to be in the range of 365 to $367 million.

GAAP EPS we expect in the range of $0.12 to $0.13 and non-GAAP EPS we expect to be in approximately $0.29 to $0.30.

Just remind you, details of our GAAP -- already said that.

I'll move on.

One final point on Q1.

As we have discussed in the past, our recurring revenue business model combined with a seasonally strong fourth quarter each year leads to a spike in accounts receivable and deferred revenue each year end.

Similar to past experience, we expect Q1 deferred revenue to decline from Q4 and probably by more in dollar terms than it did a year ago.

We also expect strong Q1 cash flow to be partially offset by higher investment levels in Q1, the net effect being an operating cash results that is slightly up year over year.

So to close, Q4 was an amazing finish to fiscal 2010.

We're executing well and we enter FY 11 with incredibly strong product offerings.

There has never been a better time to be in cloud computing and we believe no company is better positioned for growth in this market than salesforce.com.

I look forward to describing our progress when we release our Q1 results in may.

With that, let me turn the call back to the operator so we can take your questions.

(Operator Instructions) Brent Thill, UBS.

Graham, on your 16 to 17% guidance for the year, does that include anything from Chatter?

As we understand it, that's coming in the second half.

And then if you could just also address on the operating margin side, you mentioned a hiring on the sales side.

Is that a pure reason for the operating margin to be more restrained this year or are there other areas that you're going to invest as well?

We haven't announced final pricing yet on Chatter.

So I think at this point, that growth range is based on the products that we are selling today.

So that will be used for the future I guess as we actually launch Chatter for general availability.

In terms of the operating margin expansion, I think we feel with the growth in our products, with Chatter launch, we see that as a huge paradigm shift in collaboration in the enterprise.

We just want to be in a position this year to have the flexibility to invest in sales, marketing and so on.

So I just think it makes sense for us heading into this year with a great Q4 performance behind us to give ourselves a little bit more flexibility around the operating margin percentage improvement.

Yes, I would just add to that obviously we've had a great ending to the fiscal year.

We are starting this new fiscal year in a growth stance and we are preparing to grow.

And as part of that, we want to be able to invest more heavily, specifically in our distribution organization, to take advantage of the weakness of our competitors in cloud computing and to take advantage of our strength.

And as you mentioned with Chatter, we have some great new capabilities coming as well that not only further differentiate the products that we already have because Chatter is deeply integrated into the Sales Cloud, Service Cloud and Custom Cloud as well as being its own collaboration cloud, but we really want to be able to have the distribution capacity to be able to fully execute and realize our potential.

Heather Bellini, ISI Group.

I had two questions, just a follow-up on Brent about the hiring.

The pace of the hiring, what is the trajectory that we should expect?

Is it going to be more front end loaded than back end loaded?

And then my follow-up would be, Marc, is there anything that you could share with us -- I know you talked about how the non-sales bookings or the non-sales applications you have are about 30% of new bookings.

Anything you can tell us or share with us specifically about how fast the Service Cloud piece is growing?

Well the Service Cloud is doing amazing and basically we haven't given the actual bookings rate year over year, have we?

But it is our fastest growing product line.

This is a market that used to be filled with lots of very competitive companies who were offering incredible solutions.

But unfortunately as the move to cloud computing has happened, we're really left as the only ones who have a solution that is multi-tenant, shared, fast, easy to get going that has the multi-tenant knowledge management system, agent consoles, customer portals, deep integration with all of our CRM and Custom Cloud capabilities, mobility.

And that has really propelled that offering this year which was accelerated by that [instranet] acquisition that we did now about 18 months ago.

And it far exceeded really I think our expectations.

It's led by a spectacular executive inside the Company and we have more to announce on April 8 in New York around the Service Cloud and I'll invite you to that presentation now, Heather.

Marc, can I just ask a follow-up on Service Cloud then?

How would you compare its trajectory of growth versus -- given how long the product has been on the market versus where you were during -- if you go back to where the business was when you just had the Sales Cloud?

It's far exceeded my personal expectation because our salesforce really has now an aptitude for being able to sell it.

They are not just able to sell Salesforce Automation, but they recognize the potential for Service Cloud and they understand the differentiation that Custom Cloud brings.

I don't know if you saw on YouTube last week, we put kind of a preview of what's coming April 8 with the next version of Service Cloud integrated with Chatter.

But that is up on YouTube and I think that when you see that you realize we are really on our way to a huge breakthrough in terms of what we can do for customers in terms of productivity.

So I'm very excited about that opportunity and then we want to couple that with the distribution, expansion and we want to higher as many sales people as we can to get out and reach customers all over the world; small, medium and large sized customers in the US and Asia and Europe.

Still relative against our main competitors in the enterprise; Oracle, SAP and Microsoft; our salesforce is extremely small and when we get in there, we're more likely to win because their technology is so dated.

So we are trying to expand distribution while at the same time being mindful that our investors want us to have operating margin expansion.

Certainly this year we delivered operating margin expansion.

As Graham said, we're going for another 125 to 150 basis points of operating margin while also continuing to grow the top line.

And you know, we're very focused on that $2 billion revenue number.

We're really going gee, when are we going to get into that zone?

It was only a year or two ago we were talking about $1 billion.

Internally all of our planning is around getting to that $2 billion number as fast as possible and that's all about distribution.

And, Heather, just to be specific on hiring, in FY 09 we hired net about 950 during the year.

In the FY 10 year we just finished, we hired around 400.

I don't want to be too specific because I think it is, as Marc said, we're certainly going to be trying to get a fast start with all the sales hiring.

I'd expect our full-year hiring to be somewhere between those numbers and that's probably as much as we want to say right now.

Adam Holt, Morgan Stanley.

If I heard you correctly, it sounds like the add-on and upgrade business was very strong in the quarter.

I was wondering, are you starting to see an acceleration of cross sales into the bse or are you actually starting to see people start to re-expand seats?

And then secondly, I guess my follow-up would be, to the extent that billings growth over the last couple of quarters has been very strong even ahead of what you guided to for revenue next year, do you think billings growth should continue to outpace revenue as we get into the recovery a little bit?

On your first question around add-on/upgrade, it was strong in the fourth quarter.

I think if you remember, we've talked in the past about a lot of our businesses in field sales and the enterprise happening in the fourth quarter.

So we tend to get a natural little boost in add-on/upgrade in the fourth quarter.

So I wouldn't characterize it as unusual for the fourth quarter.

But it was very heartening to see a return to that level whereas if you remember earlier in the year, there was not -- certainly that number was down pretty significantly.

So I think all the things that Marc talked about with the Service Cloud, we are seeing a lot of follow-on business there in existing accounts that's definitely helping.

I think that's probably as much as we would want to say in terms of detail around that.

On billings growth or the billings growth number that you guys calculate, you know we don't provide guidance around that.

I've given you obviously revenue estimates for Q1 and I've given you what our at least directional belief is in terms of deferred revenue for Q1 and I think obviously you can do the math from there.

Laura Lederman, William Blair.

Thank you for taking my questions and great quarter; I appreciate it.

Can you talk a little bit about the quarter enterprise versus middle market versus small business [was such a] strong across the board?

Also if you would share your churn assumptions for '11, how much do you expect that to come down?

And then I have one final question.

Thanks a lot.

Well I just think that we saw a strong execution across the board in all segments in all geographies and I think that there were a general rebound of the technology market at least for us or I would say at least with the cloud computing market.

And we saw that in small, medium and large.

We certainly saw that in the US and Europe and Japan.

Great, and then churn, sort of assumptions of what you are thinking of for 2011?

So, Laura, we haven't talked specifically about that in the past.

I think we've got what we consider to be an appropriate assumption for attrition.

We have seen a couple of quarters of slight improvement.

I think I've said in the past that the number went up very slowly and we kind of think it will go down very slowly.

And so we think we have made sort of appropriate assumptions around churn for this fiscal year.

And I think that the way we look at that is we just went through one of the most horrific times of all time for technology spending, one of the most difficult times for a lot of companies and certainly difficult times for our peers and yet salesforce.com kind of sailed through it really well.

There were times of course where we had a slight downtick in bookings and we had a slight uptick in attrition, but at the end of the day, we came through this stronger and better, more differentiated and ready to compete in this market than ever before.

And in terms of a shift that went through a difficult storm, we came out the other side with no damage.

So I'm extremely optimistic about that because if anything was going to injure us, it was kind of what we would have just gone through.

And because we didn't see that, we feel good.

Of course you never know what the future holds.

There's always issues.

This is a complex industry.

It involves complex technology but, boy, after making it through so successfully the past 18 months; we're feeling pretty good here in San Francisco.

Sarah Friar, Goldman Sachs.

This is [Stephanie Withers] on for Sarah.

You noted strong growth in operating expenses across the board this quarter specifically though in G&A and R&D.

Can you comment a little bit on what drove that and then also should we expect that growth to continue through fiscal 2011?

Stephanie, there were a lot of different factors that affected those.

Obviously we will go through that list.

There was no single items that caused this changes in the fourth quarter.

Certainly you've seen a trend for us investing more in R&D and that's clearly to fund the development of all the great products where we are producing in the market.

G&A tends to be driven by more short-term charges here and there.

So we will certainly go through that list in our filings.

Kash Rangan, Merrill Lynch.

Marc, one for you.

If you look at customer support, Siebel when they sold the company to Oracle, roughly they had about 4 plus million units in production and they said that more than half of that was in customer support.

And it looks like Siebel's business peaked in the early 2010 timeframe.

Just curious, what kind of legacy replacement cycle are you seeing for the heavy-duty big iron, big volume Siebel implementations?

And more generally, maybe just broader legacy customer support systems and how big of an option do you think this could be for fiscal 2011?

And also while you're at it, how should we think about the core Salesforce Automation market?

Is it anywhere close to maturity or are you in the first, second, third, fourth, fifth innings of Salesforce Automation?

That's it for me, thanks.

I would say that it's hard to make comparisons between Siebel and salesforce.com and the reason why is that Siebel was mostly a customer service and call center company.

They didn't really have a successful SFA business and they certainly didn't have a platform business.

They had an ERM business, so employee relationship management business which mostly failed and the UAN business which mostly failed.

We haven't entered any new businesses that have failed.

Because we have one integrated offering, our sales, service and platform are all integrated services as well as the collaboration.

They all kind of are meshed together and make synergistically make a better technology overall.

I think you'll find that when I do my demonstration tomorrow at the Goldman Sachs conference in the morning, and the Pacific Crest keynote at lunch tomorrow on Thursday, you'll be seeing me demonstrate some new technologies that emphasize the enhanced competitiveness of both the sales technology, the Sales Cloud, the customer service call center, customer portal technology, the Service Cloud when it's enhanced with Chatter and how those services are deeply integrated.

We still see strong growth, obviously you can see by these numbers in Salesforce Automation, in customer service and support and also the platform and we're also entering the collaboration cloud.

I have said this before and I still believe it that this is mostly a distribution constrained organization and that we have the market opportunity and the products and the technology and we do we need to expand our distribution rapidly to take advantage of the kind of very weak and poor execution by our competitors.

And especially when you look at companies like SAP who kind of tried to hold the cloud computing industry back, you know they provide all this kind of fear, uncertainty and doubt, lack of vision.

It's one of the key reasons I think that they've had such a big shakeup there.

I mean they've really become the anti-cloud in so many ways.

So that's why I think customers are hungry for new technology, new solutions, lower costs, easier to use.

Of course they want social, they want mobile, they want real time.

And that I think is a huge refresh cycle on sales, service, on all applications and especially collaboration.

Especially when you look at Chatter against these really legacy products like SharePoint and Lotus Notes, Lotus Notes was conceived before Marc Zuckerberg was.

I mean, come on.

I was just going to mention, Kash, that don't forget; if you look at the 4 million subscribers for Siebel, they didn't have a significant SMB presence.

So a lot of our 2 million subscribers that we have are in that market that Siebel never got to.

So we definitely view that as being a huge long-term opportunity ahead of us, Kash.

Thomas Ernst, Deutsche Bank.

With a growing experience base you've got behind Service Cloud 2 now, what is your experience on the profitability of this business?

Is there any difference in this business model versus the SFA business model from a pricing or the amount of sales and marketing spend necessary or perhaps gross margin?

Thank you.

As far as we can see, it's very comparable.

If you look at all the major sort of variables, pricing looks very much in line with SFA opportunities.

And in fact, one of the things we've been delighted about is certainly that our sales cycle now is very comparable to SFA sales cycles.

So certainly at this point, we don't consider there's going to be any sort of dramatic change or difference here in the economics between the Service Cloud and Sales Cloud.

I would also just add that we get tremendous economies of scale.

When you look at the global data centers, marketplace and how companies run and execute their products; we have almost 75,000 companies using salesforce.com now.

I asked Craig Mundie at the World Economic Forum, I was sitting next to him.

I said, you know, if salesforce.com did not exist; how many servers would have had -- and SQL servers and application servers and software and hardware and data centers would have to been bought and installed?

How much energy would have had to have been consumed as a direct comparison to what we're doing?

And he said, well you know, probably more than 100,000 servers would have had to be bought and consumed and all the energy, all the waste that goes with that.

I mean, we have only a couple thousand servers in our whole company and they're PCs and those are shared by those 75,000 customers.

That's an incredible economy of scale.

Then you take our software which is kind of the integration of the sales, service platform and collaboration.

It's kind of one piece of software.

It gets integrated into that, into those couple thousand PCs and then we get just tremendous economies of scale and efficiency and then you add onto that some of this great new technology.

We have had tremendous success with Dell's new Nehalem technology.

We had tried it at several of our servers over the weekend and we saw massive, massive capability that we didn't not see before and through a hardware change.

It just was awesome what is happening on the hardware side.

It really emphasizes what a scam traditional enterprise software and hardware is and also what a huge hog it is on kind of a world that is constrained by energy, having to install more of these servers in data centers.

This is a time we need to break out.

So I just think when you look at the Service Cloud, we have a salesforce who understands how to sell it, we the data centers in place, we have the software ready to go.

We just need the enlightenment from the customers that -- I will give you an example.

We have a customer that we recently sold and they are a UK customer and they have two data centers.

For 500 call center agents, they had 500 servers in two data centers backed up doing DR against each other on the Thames, running technology that they bought in 1995, that's right.

So you look at that and you go, this is just an opportunity for great efficiency, great enhancement.

And the way to our Company is set up, we can deliver economies of scale because we essentially have one offering and yet we have different names for that offering and it can morph and it can change for each customer.

But the Service Cloud 3, we're really ready to go.

I guess I just tipped off the announcement for April 8.

Well, anyway, you get the idea that we're moving this product forward very, very rapidly.

Brendan Barnicle, Pacific Crest Securities.

Marc, with four major product lines now and a bunch of new sales hiring going on, is there going to be any kind of major restructuring or change to sales comp plans or go to market strategy as you bring on these new hires and really go aggressively after these new product lines?

Well certainly from a sales comp plan point of view, we have made some minor changes this year but nothing of any real significance, more what I would call fine tuning.

Certainly in some of the larger accounts, we're paying some element of compensation on renewals.

But clearly the focus is still on driving new business units in as many accounts as possible.

And I think certainly from an organizational point of view, no, there's not been any changes.

We don't plant any significant changes on the sales side.

As you know, as Marc mentioned, all of our sales people sell all of the products.

And I think the big difference I think in terms of our execution or one of the big factors in FY 10 that just finished was I think our salespeople really got comfortable selling Service Cloud products and we have seen that in the acceleration of the growth rates there.

So we're very happy with the way we are set up right now.

We just finished our sales kickoff in Las Vegas last week and we had our entire sales organization there.

I would just say that for them, there's never been a better time to be in sales and in cloud computing and in salesforce.com and we have a fantastic product line.

We understand the compensation formulas to create their success.

We understand the formulas to create the customer success.

We are just distribution constrained.

We're just not in enough deals.

We need to reach this total market and we need to continue to grow.

We need to continue to visualize ourselves beyond that $2 billion dollar revenue number with that fully diversified product line.

That's where we're moving at salesforce.

Richard Baldry, CanaccordAdams.

Maybe talk about post deal having now the cash horde up to $1.7 billion, whether you think that will have a meaningful impact on your acquisition pace.

Maybe describe what those strategies might be more along the lines of whether you see technology as you have seen in the past being key, if there are any ways to maybe use acquisitions to accelerate your distribution which seems to be the core focus now.

And then maybe you'll talk about whether you think that you see the scale of acquisitions you'd would go after sort of changing, noting the successes maybe that you have had in the past with things like in the service cloud accelerating via any acquisition you had done.

Thanks.

Yes, we completed a very successful convertible that Graham articulated.

I mean, the numbers just made a huge amount of sense for the Company and I just want to congratulate from my finance organization of pulling off what I thought was just a spectacular transaction for the Company to help us, fundamentally give us flexibility to make investments and to maintain leadership and to grow and to advance.

That said, our strategy is fundamentally unchanged.

We want the flexibility, we want the cash in hand to be able to move if there is a deal to be done.

But we're really focused on our three clouds and now the fourth cloud with Chatter.

We have our hands full of technology and products and innovation and we are going to continue to focus on our fundamental core, I would call it organic growth.

This is a Company that is just growing organically.

Only if we saw some technology that could really make one of those clouds that we're in better, more differentiated, grow faster, expand our distribution would we start to look at something.

At the same time, we're going to be very, very conservative in doing that because everything is working so well here.

That's why what you've seen is do is a lot of very, very small deals.

Our most recent one was with this company called Group Swim which was this kind of intelligence on -- it's future version of Chatter that is coming farther down the road that will be smarter about how you get your feeds and become really intelligent.

We are using Chatter now internally at salesforce and it's amazing.

I mean it's I think fundamentally changing our work.

If you're with a salesforce.com employee, have them show you what it looks like in production.

It's really spectacular.

I'll be showing it off tomorrow at the two conferences that I will be speaking at.

So when we go to look at M&A -- look, we're really going to mostly just focus on the strategy that we have and that's working because that seems like our best opportunity.

We want to be opportunistic but the reality is at the same time, we don't want to feel rushed to do anything.

But, boy, it's great to have $1.7 billion in cash so if there ever was a situation, we could act if we had to.

Karl Keirstead, Kaufman Brothers.

Graham, question on the margin guidance for fiscal 2011.

Certain of the other SaaS firms have had more muted margin guidance and have cited the fact that the recent bookings surge in the last couple of quarters creates natural accounting driven margin pressure.

Going forward as you need to expense a number of costs and obviously defer revenue recognition, I'm curious does salesforce.com have to absorb that and is that baked into your operating margin guidance?

Thanks.

Clearly, we amortize the commissions that relate to sales over the life of the contract along with the revenue.

Clearly when we have a huge fourth quarter like we just had, we end up paying generally higher commissions because salespeople hit their accelerators.

But I don't think -- that's only part of the equation.

I think what I said earlier about the margin expansion, we have done three years, we've successfully come close and demonstrated 300 basis points per year.

I think this year, we signaled early that we would probably not be expecting to quite be at that rate and that's because I think this year we feel we're back in high-growth mode.

We've got huge opportunity and we want to be at a higher sales peak.

You know there's obviously a delay between you hire a sales person, it takes them a while to be productive, then they get bookings, then finally that turns into revenues.

So there's that sort of lag in the expense versus the revenue.

And then because of Chatter and all these new products we're coming out with, we've just got a lot of opportunity I think to really build market presence.

So I think as I said, we want to be able to have the flexibility to invest in all those things this year.

Our dominant cost remains distribution.

This isn't a company that is structured kind of like [Omniture] or some of these other on-demand companies where like a quarter of our revenues get shot into CapEx or something like that.

We have tremendous economies of scale and efficiency in our data center architecture and then the fundamental way that over the last 11 years, we've architected our software to be really efficient in managing these 75,000 customers and millions of users.

And our cost structure and our investments going forward are really about how fast do we want to grow distribution.

If we had our way, we would just double, triple, quadruple distribution because we see that kind of opportunity out there.

But the reality is we're also very sensitive to our investors and while we want to grow the top line which we're doing, we also want to expand the margin and that's why this year, we are committed to another 125 to 150 basis points while also having delivered really terrific operating margin growth over the last several years.

If you look at the numbers over the last several years, they're really spectacular while heading towards this $2 billion number.

So we are just continuing to execute our winning formula.

Operator, unfortunately we only have time for one more call.

I want to apologize to all those in the queue.

We still have a double digits number of folks in the queue.

It's a quality problem to have but unfortunately we only have time for one more call, so -- or one more question.

So with that, we will take our last question.

Ross Macmillan, Jefferies.

Just a couple of recaps really.

I think as you thought about business in fiscal 2010, you had a turnaround in the third quarter where you said new business was likely to be flat to up.

Could you qualitatively kind of describe how that ended up in terms of new business for the full year?

Ross, we gave I think a lot more commentary around bookings this last year because we felt there was a change in trend that was important to point out for our analyst, investor community.

I think suffice it to say, I think you can look at the deferred revenue number and probably come up with a pretty good proxy for just how strong our fourth quarter was.

But I think when we're back in growth mode, we're not going to be giving a lot of sort of color on numbers or anything like that around new business growth.

And I would just add, I think that when were working on writing the press release over the last week; we're just very, very grateful for all the support we have gotten from over the past year.

It's been a difficult year for a lot of companies.

We have obviously had a great year.

We're really delighted.

We want to thank all of you for supporting us this year.

We want to thank our customers, we want to thank our employees and we're looking forward to having another great year in fiscal year 2011 and looking forward to speaking with all of you over the next couple days at the conferences coming up and again seeing you for several major product announcements on April 8 in New York City.

Thank you so much.

It's probably a good way to end our call today.

So I want to thank everybody for joining us.

Also I want to remind everybody that Marc will be appearing at the Goldman Sachs Technology Conference tomorrow morning at 9 AM Pacific.

He will also be (multiple speakers)

That doesn't sound very fun.

9 AM.

And he'll be at the Pacific Crest Conference tomorrow during a lunchtime keynote at 12 noon.

We look forward (multiple speakers)

(multiple speakers) I'll be more awake.

Right, we'll look forward to talking with everybody in the coming days and over the coming months.

Thanks and have a good day.

Ladies and gentlemen, this does conclude today's conference call.

You may now disconnect.