賽富時 (CRM) 2011 Q2 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the salesforce.com Q2 2011 fiscal 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 would now it's like to turn the call over to David Havlek, Vice President of Investor Relations.

Good afternoon and welcome everyone to salesforce.com's fiscal year '11 second-quarter earnings conference call.

Joining me from our San Francisco headquarters today to discuss our outstanding second-quarter results are Marc Benioff, Chairman and CEO, and Graham Smith, Chief Financial Officer.

Following our prepared remarks today, we will open things up to your questions.

With the sell-side coverage list that now numbers nearly 40, I ask that you respectfully limit yourself to a single question today so we can get to as many of you as possible.

Complete disclosure of our second-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 information, including historical financial detail beyond what is provided in the press release, will also be available on our website.

In addition, a webcast of today's call is available on our website for 90 days and a dial-in replay will be made available through September 10.

Our commentary today will include both GAAP and non-GAAP measures.

Reconciliations between GAAP and non-GAAP metrics for both our reported results and our forward guidance can be found in our earnings press release available on our website.

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.

With that, let me make this call official with a brief Safe Harbor.

The primary purpose of today's call is to provide you with information regarding our fiscal second-quarter 2011 performance.

Some of our discussion and 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 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 recent report on Form 10-Q, particularly under the heading Risk Factors.

To access our Q2 press release, including the GAAP to non-GAAP reconciliations, the report detailing our historical financials, 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.

Finally, before I turn the call over to Marc, please be advised that unreleased services or features referenced in today's discussion or other public statements are not currently available and thus may not be delivered on time or at all.

Customers who purchase our services should make their purchase decisions based on services and features that are currently available.

With that, let me turn the call over to Marc to discuss our second-quarter results.

I am delighted today to share the results of our second-quarter.

An improving demand environment, together with the continued shift to enterprise cloud computing allowed us to post another great financial quarter.

Second-quarter revenue of $394 million rose 25% year-over-year.

Even with an annual revenue run rate approaching $1.6 billion, our revenue growth is accelerating.

At 25%, second-quarter revenue rose at its fastest rate in six quarters, and it represents the third quarter in a row in which our growth rate has now increased.

Non-GAAP EPS of $0.29 was well above our outlook entering the quarter.

GAAP EPS was $0.11.

We also delivered roughly $76 million in operating cash flow, an increase of more than 66% from a year ago.

Over the past 12 months, our business has generated more than $340 million of operating cash and we exited the quarter with roughly $1.9 billion of cash, cash equivalents and marketable securities.

Finally, I am pleased today to announce that we are raising the high end of our full-year fiscal year '11 revenue guidance to $1.6 billion.

This is a huge new milestone for salesforce.com.

While our second-quarter financial performance speaks for itself, the big news this quarter was the release of Chatter in June.

Just as Amazon did a decade ago, Facebook and Twitter are now showing us the future of the Internet, this time in the area of collaboration.

According to Nielsen, use of social networking apps was up 43% as a percentage of time spent on the web between June 2009 and June 2010.

Leveraging the social features popularized by the consumer web like profiles, status updates, real-time feeds and mobile apps, salesforce Chatter helps companies increase employee productivity by empowering employees with a new level of collaboration.

Customer response to salesforce Chatter has been nothing short of amazing.

Within a week of the release, more than 10,000 customers had turned on salesforce Chatter.

Today, less than two months later, that number has now grown to nearly 20,000 customers or roughly 1/4 of our total customer base.

We believe this is the most successful new software release ever.

Not only does Chatter make our sales and Service Cloud apps better, but when our customers talk about it, they are using words like amazing, exciting, fun, revolutionary, not words typically used to describe enterprise software.

That's why we believe salesforce Chatter is the next killer app from salesforce.com.

While we launched the product just eight weeks ago, we are already seeing some incredible traction across our customer base.

Some of our largest customers are deploying Chatter to very large user communities, among them Dell, Sprint, Tyco, Avis, Budget, Mysis, McAfee, PerkinElmer, and Dow Jones.

Not only are some of our largest customers deploying Chatter at scale, but we are seeing a growing number of customers expand their deployments beyond sales and customer service departments by purchasing additional subscriptions for other departmental employees, and some of those expanding customers including Hitachi and Softbank, Reed Exhibitions, Mitsubishi, Nokia and Abbott Medical.

Chatter is an important part of our growth strategy for two primary reasons.

First, customers that have deployed Chatter have high login and usage rates, indicating they are seeing increased value in our products.

Not only does Chatter further differentiate our already award-winning apps, but we believe the higher levels of customer success translate into greater customer retention.

Longer-term, Chatter represents our first enterprisewide app.

extending our value beyond our core sales and customer service base.

That's why we are so excited to see this early momentum around salesforce Chatter.

This significantly increases our addressable market in cloud computing, one of the fastest growing segments in technology today.

The customer excitement around Chatter helped drive another amazing quarter for salesforce.com in Q2.

During the quarter, we added roughly 4600 net new customers organically and roughly 500 unique customers through the addition of Jigsaw.

Together, these 5100 net new customers bring our total customer community to approximately 82,400, an increase of more than 19,000 from Q2 a year ago.

We saw strength in all of our primary cloud businesses, as well as in our three major geographies.

In fact, one of our three largest transactions this quarter, one was in the Sales Cloud, one was in Service Cloud and one was Force.com.

Those three deals were also spread across the globe with one coming in in each of the three regions of the world.

That's the kind of distribution of our portfolio that we like at salesforce.com.

Our success at companies of all sizes also continues to be a central part of our growth story.

That's why CRM Magazine just named salesforce.com apps the best enterprise CRM suite, the best midmarket CRM suite, and the best small business CRM suite.

It was a clean sweep for the second year in a row.

This year, for good measure, they named our flagship Sales Cloud service best salesforce automation.

While our Sales Cloud still represents roughly 2/3 of our new business, the mix of non-Sales Cloud business continues to grow, finishing Q2 at its highest level ever.

The emergence of multiple growth levers is an important part of our overall revenue growth in recent quarters and why we remain so optimistic about our revenue growth going forward.

Now, let me quickly review our success in each of our three core businesses.

In the Sales Cloud, new business signings were strong in the second quarter.

Large Sales Cloud transactions included Kimberly-Clark, Sears, Amdocs, American Family Life, 3M, American Express, Commercial Metals, Tyco and others.

I'm also pleased to report that our integration of Jigsaw into the Sales Cloud is on track.

With a community of more than 22 million contacts at 4 million companies and more than 1 million contributors, Jigsaw immediately makes our Sales Cloud offering more attractive to new customers and more sticky with existing ones by providing customer data right inside their apps.

That's an exciting new shift to CRM.

Our Service Cloud business was also very strong in the second quarter, growing faster than our other cloud businesses.

With fewer than 10,000 of our existing 82,000 customers using the Service Cloud a day, we believe we are just beginning to scratch the surface of a major future opportunity.

Service Cloud highlights this quarter included transactions at Schneider, Zimmer, GENBAND, PTC, Paychex, Google and Honeywell.

Finally our Force.com business had another very strong quarter.

Headlining our Force.com platform success was a great win in Japan at Japan Post, Alico, and Daiwa.

Outside of Japan, Force.com also delivered another solid quarter of new business, including transactions in Nokia, RehabCare, Watson Pharmaceuticals, CIGNA, and IG Group.

The future looks bright for the Force.com.

As I mentioned ago, Chatter has the potential to take us enterprisewide and (inaudible) [positive] implications to our platform opportunity as well.

A larger and more diverse community of users makes the Force.com platform more attractive to both CIOs, our core customers, and ISVs as the best place to build their next-generation enterprise cloud ops natively right on our Force.com platform.

Our recently announced partnerships with VMware is also being enthusiastically received by our customers and the industry.

With the VMforce, developers will essentially be able to run their job apps on the Force.com platform natively, rather than running it on a traditional database and software stack in their own data centers.

Not only will the VMforce allow customers to leverage their existing job development skills and reduce the perceived risk of platform lock-in, but every job approximately build on the Force.com platform will immediately inherit its incredible benefit to the multi-tenant platform.

A developer preview of VMforce is expected later this year.

While VMforce and Chatter position us for future platform business growth, the Force.com platform infrastructure is already delivering some pretty impressive results today.

I know a lot of you are monitoring it minute by minute at trust.salesforce.com.

Well, let's take a look.

During the second quarter, Force.com delivered 21 billion transactions -- incredible -- an increase of 44% year-over-year.

Remarkably, we are delivering this scale using fewer than 3000 production servers, including backups and disaster recovery, a level of efficiency that could only be delivered by a true multitenant cloud computing company and what we believe is one of the lowest CO2 per transaction ratings in the industry today.

Don't forget, we're doing it all with sub-300 ms response, 99.98% planned availability, and best-in-class security and transparency.

In addition to our tremendous transaction volume, our customers have now created more than 23 million database customizations, an increase of roughly 40% year-over-year.

Finally, in addition to customizing our sales and service apps, customers are increasingly using the Force.com platform to build their own apps.

Today, our developer community of more than 280,000 developers has created more than 600 million lines of Force.com code, up more than 7X from a year ago and more than 1.6 million custom visual Force pages, up more than 5X from a year ago and more than 170,000 custom apps, up roughly 50,000 from a year ago.

You know, we believe there's no better cloud platform to build and run cloud apps than Force.com.

According to IDC, the cloud market is estimated to grow by more than 40 billion by 2014.

That's why leadership and growth remain our absolute top priorities.

Given higher demand for our services and the continued shift to cloud computing, we believe the time to invest growth in leadership is now.

That's why we are accelerating some of our growth investments in the second half.

First and most importantly, we are stepping up our hiring, particularly in key sales and engineering functions.

Continued innovation and expanded sales capacity are essential to maintaining our cloud leadership and to fueling growth.

Next, we're proceeding with the buildout of three new data centers.

In the US, we expect to bring new data centers online in the Midwest and East Coast this year, and then we plan to open up our Japan, Tokyo data center next year.

Finally, we are expanding the number and scale of our customer events as there is no better way to demonstrate the power of cloud computing than to show it live.

In September, we will be hosting Cloudforce events in London, Denver, Toronto, and then in October Cloudforce events will include Tokyo, Rotterdam and Munich.

I will personally -- I will be personally delivering the keynotes in London on September 7 and in Tokyo on October 5 and I hope to see you there.

Then we will close the year with our biggest customer event ever, Dreamforce 2010, right here in San Francisco from December 6 through December 9.

In addition to our biggest product announcements of the year, which will be happening at Dreamforce, Dreamforce 2010 highlights will include a keynote by President Bill Clinton and entertainment by legend Stevie wonder.

Dreamforce is not to be missed, so mark your calendars now.

You can find additional details about Dreamforce at www.dreamforce.com.

With that, let me turn the call over to Graham to provide more detail on our excellent second-quarter financial performance as well as our outlook for the remainder of the year.

Graham?

By almost every financial measure, our second quarter was outstanding.

Revenue rose 25% year-over-year to just over $394 million.

This strong performance was well above our outlook primarily as a result of three factors.

First, as Marc discussed, we are seeing strong demand for all of our products, especially for the Service Cloud.

Second, our dollar attrition rate continued to decline in Q2.

While the percentage rate remains in the high teens, this was the fourth consecutive quarter of improvement.

We're working hard on areas within our control that we hope can positively influence customer retention and keep this metric on a downward path.

Finally, the FX environment is more favorable today than when we offered guidance at the end of the first quarter.

Our second-quarter revenue result included approximately $5 million of currency headwind versus a year ago.

Adjusting for FX rates, constant currency growth would have been 1 point higher at 26%.

Looking at the regions, our Americas business rose 22% to just under $275 million.

Revenue in Europe faced a significant currency headwind versus a year ago as the dollar strengthened almost $0.15 against the euro.

As a result, revenue of approximately $66 million was up 17% in dollars but up 30% in local currency.

The stronger yen created an opposite effect in Asia, and that region continued to deliver very strong results.

Revenue in Asia rose 59% in dollars and 53% in local currency to finish the quarter at approximately $54 million.

Given the current economic environment, we expect FX volatility to continue to have an effect on our financial results, both positive and negative, for the foreseeable future.

As a general perspective, we saw good performance across all geographies with Europe in particular posting a very strong new business quarter.

Second quarter non-GAAP gross margin improved about 30 basis points from the year-ago quarter and remained at about 82%, due primarily to a change in business mix as subscription and support gross margin was essentially flat year-on-year, a good result given the huge transactional growth Marc discussed earlier.

Professional Services gross margins were negative this quarter and declined sequentially.

While we aim to manage that business to at least break even gross margins, a more important objective is customer success.

Given the project-based nature of consulting and the revenue effects of EITF 00-21, I expect gross margins for our Professional Services business to be lumpy for the remainder of the year.

Next year, we plan to implement EITF 08-01 but it is still too early to know exactly how that will impact our results.

On the pricing front, we continue to see no material changes when we compare average price per seat across additions, geographies or customer segments.

We've done a great job of innovating and creating customer success with new services like Chatter, which we think enables us to focus on selling value.

Non-GAAP operating expenses as a percentage of revenue was 67%, about 150 basis points from last year.

Our fastest-growing expense category is R&D which now stands at roughly 11% of revenue.

Given the importance for continued technology leadership in sales and Service Clouds as well as working on new products like Jigsaw, Chatter and VMforce, we think this increased level of investment is very appropriate.

Sales and marketing expenses were 43% of revenue; that's flat with last year.

Finally, G&A was a little higher than last year, 14% of revenue.

Our overall full-time employee count rose by approximately 340 people in Q2 to finish at just under 4450 people worldwide.

Remember, this increase includes approximately 150 people from the acquisition of Jigsaw.

We plan to accelerate organic hiring in the second half of the year to support our long-term growth objectives, which will obviously have an impact on second-half expense levels.

Non-GAAP operating margin in the second quarter was approximately 16% versus roughly 17% a year ago.

The decrease was primarily the result of the Jigsaw acquisition.

It's also worth noting that our final valuation of the purchased intangibles related to the Jigsaw acquisition was considerably less than our original estimation back in April.

As a result, the related amortization in fiscal 2011 is approximately $7 million less than the amount we included in the FY '11 GAAP EPS guidance we provided with our first-quarter results.

This change will have the effect of reducing the GAAP dilution from Jigsaw by roughly $0.03 per share for FY '11, $0.01 of which came through in our Q2 results with a further $0.01 benefit expected in each of Q3 and Q4.

As Marc mentioned, both Jigsaw's business performance and its integration are going very well, and we expect Jigsaw's business to be close to breakeven on a non-GAAP basis by the end of next year.

We remain committed to delivering operating margin expansion each year in our core business, but clearly the effect of acquisitions can have a short-term effect on that goal, as Jigsaw has done this year.

Our Q2 GAAP tax rate for the quarter rose to 44% as a result of certain acquisition and investment related nondeductible expenses and the decrease in pretax GAAP income.

Our Q2 non-GAAP tax rate was 39%.

For the full year, we expect our GAAP tax rate to be approximately 41% and our non-GAAP rate to be about 38%.

Second-quarter operating cash flow was outstanding at approximately $76 million.

That's an increase of 66% year-over-year.

Over the past 12 months, we have generated more than $346 million of operating cash.

That's an increase of 46% over the previous 12 months.

CapEx in the quarter was approximately $28 million.

The increase this quarter was primarily the result of leasehold improvements in the office space and equipment purchases related to the buildout of the data centers Marc mentioned.

Our first-half CapEx is up 23% year-over-year.

That's slightly less than our revenue growth rate.

Second quarter free cash flow, which we define as operating cash flow less CapEx, was approximately $48 million.

That's an increase of 77% from last year.

Year-to-date, our free cash flow has increased 61%.

Please remember that, because our invoicing is seasonal, our quarterly cash flow profile is also seasonal and is typically stronger in the first quarter and fourth quarter.

Although Q3 cash flow is projected to be sequentially lower than Q2 but higher than Q3 a year ago, we now believe our operating cash flow for the full fiscal year will grow at a rate slightly higher than our revenue growth rate.

Total cash, cash equivalents and marketable securities on the balance sheet finished the quarter at approximately $1.9 billion.

This was down about $50 million from Q1 primarily due to acquisition related disbursements of $150 million, offset by stock option exercises and operating cash flow.

Receivables continue to be well managed.

Our DSO of 53 days rose slightly from 49 days a year ago but our collections and aging remain strong and our DSOs (inaudible) on a historical range.

Deferred revenue rose $18 million sequentially and $134 million year-over-year to finish the quarter at $683 million.

That's a 24% year-over-year growth and reflected both strong new business signings as well as improving renewal rates.

Our Q2 deferred revenue balance included a roughly $3 million sequential currency benefit, primarily the result of the stronger yen.

As we have discussed on prior calls, Q2 and Q3 are seasonally lower invoicing quarters.

That has the obvious effect of dampening deferred revenue I remind you that last year our deferred revenue balance declined $4 million sequentially from Q2 to Q3, despite a roughly $6 million currency benefit.

In that context, we expect our third-quarter deferred revenue balance to be roughly flat with Q2, excluding any significant currency effects.

Let me close with our outlook.

As in Q1, our earnings guidance comments today will only be in non-GAAP terms.

The details for both our GAAP and non-GAAP items and related reconciliations can be found in our earnings press release issued today as well as on our website.

Let me begin with our full-year guidance.

Given our strong new business performance in the second quarter, the continued shift to cloud computing, declining attrition rates, and more favorable currency rates for the euro and the yen, we are very pleased to be able to raise our revenue guidance for fiscal year 2011 to a range of $1.595 billion to $1.6 billion.

As we indicated in our commentary, we believe that growth and leadership are the best ways to create long-term shareholder value in that context, where we plan to invest much of the revenue (technical difficulty) growth.

I'm also pleased to be able to raise our full fiscal year 2011 non-GAAP EPS projection to between $1.15 and $1.17.

As in past quarters, this excludes stock-based compensation, amortization of purchased intangibles, and amortization of the debt discount on our convertible debt.

For the third quarter, we are projecting revenue in the range of $408 million to $410 million, and non-GAAP EPS, excluding the same items I just mentioned in our full-year outlook, is now projected in the range of $0.30 to $0.31.

Our Q3 EPS guidance implies more profit in Q3 and less in Q4 than many of you have modeled.

The reasons are pretty straightforward.

First, we will be hosting our biggest Dreamforce event ever in December, as Marc just mentioned.

Because this event is so critical to our customers' success and to fueling our growth, we are determined to make this year our most amazing event ever.

We expect that the net cost of this event alone will be roughly $0.05 of EPS in the fourth quarter.

Second, Q4 is typically our largest quarter for new business, and also when our sales force hits their commission accelerators.

Since we don't capitalize commissions that are paid to sales consultants or sales management, sales expenses can rise steeply in the fourth quarter.

As you model Q3 and Q4, please factor in these two expected seasonal business impacts.

To close, we were very pleased with our second-quarter results.

Revenue grew 25%, our global community of customers grew more than 30%, and the number of transactions executed on our service grew more than 40%.

These results position us well for future growth and we're investing in the necessary hiring and infrastructure to address the large and growing cloud computing market opportunity.

We look forward to updating you on our progress when we announce our third-quarter results in November.

Let's go ahead and open the call up for questions.

Operator?

(Operator Instructions).

Kash Rangan, Merrill Lynch.

Thank you very much.

Nice to see good results in revenue and bookings acceleration.

Mark, I'm just curious to get your overall take on the environment.

There has been some cross currents of economic data, and also one of your mentors, John Chambers, talked about some questionable business conditions.

I'm curious to get your color.

What are you seeing with your customers, especially since you have a unique view into 80,000-plus customers?

I'd assume your business is a good barometer of broader IT spending, or business confidence in general.

So if you (inaudible) that first question, that's it for me.

Thank you very much.

I am very bullish on cloud computing and real cloud computing, which is the kind of very efficient model that salesforce.com has been able to deliver.

As I mentioned in my script, we have about 3000 servers, and that includes 1500 there just standing by in case there is a disaster.

You have to kind of ask yourself, if salesforce.com did not exist for the 82,000 customers that we have.

The couple hundred thousand apps that they are running on our servers, how many servers would they need?

You could quickly determine that we are operating at a level of efficiency that's probably a few percentage points of what they would've had to buy.

That's why I think cloud computing is so exciting to customers because, certainly for our customers, it is a CapEx free environment.

They are not buying hardware; they are not buying the kind of traditional capital expenditures necessary and taking on the risk to deliver automation into their companies.

I think that's a big juxtaposition against kind of my bullishness.

I love John Chambers.

I think he is probably one of the really greatest CEOs in our industry.

But his company is all about CapEx.

At the end of the day, Cisco is very different than salesforce because Cisco is all about routers and hubs and switches and phones and set-top boxes and telepresence devices.

All of those things are -- they are all made out of plastic, and they've got wires and they've got to ship them and build them and factories and all.

We don't have any factories.

We've got our software engineers, and we've got a few thousand PCs that we are deploying those -- deploying that software onto.

Then it's able to be consumed over the Internet.

The way customers consume Facebook or Twitter, they are able to consume enterprise software.

That's a very different model, and it's a model that gives customers success, a much higher level of success than they have ever seen in enterprise software before.

I think the reason why is for all the reasons that I said -- no upgrades, it's no updates.

I think best of all, when you look at a release like we had this quarter of Chatter, almost a quarter of our customers are now on Chatter.

You look at any other enterprise software company who puts out a major new functionality release, a new product, a quarter of their customers don't uptake the product.

You usually wait to hear about that over a period of years.

So I don't think it's fair to contrast us against the Cisco environment.

We have to really look at cloud computing is where the action is in our industry, and companies that are delivering true cloud computing, which are the very, very high levels of efficiency, very, very low levels of cost, through the multitenant architectures that we have pioneered.

I think you're going to continue to see strong growth, which is why we are delivering such a huge increase of our guidance in today's call.

Laura Lederman, William Blair.

Thank you so much for taking my question.

I wanted to talk a little bit about sort of the point of Chatter leading to whole companies adapting it.

Are you seeing a lot of or a number of ELAs in the pipeline sort of proving out that moving salesforce -- excuse me, I'm losing my voice throughout -- the organization.

Thank you.

Well, yes, I'll tell you, I see it.

I see -- I absolutely see that.

I'll tell you why I see it.

Right here at salesforce, I can tell you that our own use of salesforce.com is up dramatically throughout our whole company.

In addition to that, all of the apps that we use, usage is way up.

Something else that is really amazing about Chatter -- you have all these employees using the product, and for someone like myself, I'm a CEO of a company, and we've got -- we'll soon have 5000 employees at salesforce.

It's hard to know what everyone is doing, what's going on and who is really great, who is adding value.

But Chatter makes it all very visible.

It becomes a meritocracy.

We really see the employees who are making a difference.

When it goes enterprisewide, you get that value in an incredible way.

That's why I am definitely so bullish about social networking, I am so bullish on cloud, I'm so bullish on mobile.

One of our very largest customers, I've been talking to their CEO about it, and he has been using the product very extensively himself.

I expect them to do a major enterprisewide deployment of the product.

The reason why is because neither one of us has ever seen a tool that's given us this transparency into the organization, and that's what was needed.

E-mail does not give you transparency.

When you're in Outlook, you really don't know what's going on in the Company.

You're just seeing these e-mail messages flying by.

But with Chatter, you do.

You are able to really see what's happening, and you can make better decisions.

The CEO that I mentioned, he was -- he had a major deal that [he] was working on in a telecommunications company that he didn't know about.

He was able to see it with Chatter going through all the posts and seeing all of his employees, what they are doing, how watching their collaboration, going through all the slides, and then all of a sudden he saw that they were having a hard time working with the manufacturing department of his company.

So he called the manufacturing department and said "You need to help these guys who are working (inaudible) into this telecom company." He said that was the greatest thing for him that he could relieve the organizational friction using Chatter.

So that's what we need to run better companies today and to be more effective, to be more efficient, to be more successful.

When you couple it with the world-class sales automation technology we have, customer service automation technology or building any app, you get a whole new level of capabilities.

So I'm very excited about it, and I think we're going to see a lot of enterprisewide transactions with Chatter.

Heather Bellini, ISI Group.

Good afternoon everybody.

Marc or Graham, I was wondering.

You mentioned that Sales Cloud is roughly 2/3 of new business and continues to grow.

I was wondering if you could give us an idea on the type of growth you're seeing in the non-Sales Cloud part of your business.

And also if you could give us a sense of the impact, if any, that Jigsaw had on your deferred growth this quarter.

Thanks.

I'll tell you that all of our clouds are growing, and it's tough to be a cloud at salesforce because all of them are just moving so fast.

I think we had really strong, surprisingly strong growth in Sales Cloud this quarter.

We were kind of shocked, actually, but a lot of it enabled by Chatter, all of it enabled by, as you mentioned, Jigsaw.

It was such a strong differentiation and a strong technology.

I'm sure you saw PC -- you saw CRM Magazine gave it Best SFA, and then we got the small, medium and enterprise clean sweep at -- CRM award.

And then PC Magazine gave it I think 4.5 stars and Editor's Choice.

So a very strong product.

But also, coming up I have to say and growing of course faster is Service Cloud.

We are really excited about Service Cloud.

This is the year of the Service Cloud at salesforce.com.

We're doing a lot of very large Service Cloud transactions.

The Service Cloud technology has never looked better.

We have really built some spectacular capabilities, as you know, in knowledge management, integrating with public social networks.

Then again, the integration of Chatter as well as a lot of other new capabilities with the new version of Service Cloud, it is just a great offering.

Then we have the platform, which is also growing and had a great quarter.

We are seeing a lot of ISV interest customers building.

You saw -- you heard the numbers in the [amount] lines of code being written on the platform, the Visualforce pages being written on the platform, and then you've got Chatter.

So those are our four clouds -- sales, service, collaboration and platform.

Then we have the kind of the emergence of Jigsaw.

Jigsaw is super-exciting for our company because it's all about data and getting data into these very high-value apps to make them even more valuable -- cleaning up our customers' data, just giving them access to the data they need to make decisions, being able to really transform the apps into instant value.

I don't know if you've been to Jigsaw.com lately, but if you haven't, you really should check it out.

It's just awesome, and it's why we bought the company.

We are really doing our deep integration work.

By the time we get to Dreamforce, I think you will see some really great and exciting announcements in terms of where we are going with Jigsaw.

So those are our five directions right now.

But at the end of the day, it is a unified offering.

It's all built on one platform.

It's integrated and customers can consume these services as they need them.

So it's been very, very good.

I'll have Graham put some of the numbers around that for you.

Yes.

Certainly, the order of the growth rates remain the same as it was in the first quarter, which is Service Cloud, our highest growth product, followed by Force.com.

As Marc mentioned Sales Cloud surprisingly strong, and that certainly helped lift our guidance range for the year.

In terms of Jigsaw, deferred revenue, as you might expect because of acquisition accounting in terms of -- we wrote off 75% to 80% of the DR when we acquired the company.

There's a few million dollars in that deferred revenue balance at the end of Q2 that relates obviously to a combination of what was left from the acquisition plus the new business that they signed during the quarter.

Brent Thill, UBS.

Thanks.

Just a quick follow-up.

On the bookings growth, which is reaccelerating now for the past couple of quarters, is this fairly broad-based in terms of the customer (inaudible), the geodes, or are there any specific areas that you saw particular strength in Q2?

Certainly there's been some concern over the high-end enterprise but it doesn't sound like you saw any slowdown there.

We really had strong growth in all markets, and we have been seeing that.

We're fortunate because we do have a very distributed portfolio; we can sell to small, medium, or large businesses.

I had dinner last night with a bunch of startup CEOs, and a bunch of those guys are using us.

But some of the very largest companies in the world are using us and they are on the same servers, they are on the same capability.

So our market is all businesses in the world.

That's a great position to be in.

Then in addition to that, we are in these very hot app segments in sales and service and the other areas that I have gone through.

In all of these things, we see growth.

Fundamentally, this company is just distributional-constrained.

If we were bigger and we had more capability, we would be selling more.

That's why we talk a lot in our script about we want to grow.

We want you to understand that we want to grow because we see so much demand overall.

Graham, do you want to put any numbers around that?

We don't clearly give bookings numbers during the quarter.

The number you referred to as bookings is really a billings growth number; it's an overall conglomeration of both new business and renewals.

Yes, I agree with Marc.

If you look at our business, we have very, very stable ratios in terms of the segments, enterprise, midmarket and small business and geographic strength this quarter.

So I think we're very happy with the way things are trending this year.

Sarah Friar, Goldman Sachs.

Thanks so much.

Marc, last quarter, I think you were asked about where you felt most incremental growth would come from.

I think you said the Service Cloud.

But now that Chatter is out and you can see the uptake, is there any sense that Chatter could become that bigger engine of growth over the next 12 months?

When do you think you might start to give us some metrics on Chatter revenue?

And then, to date, have customers mostly bought into the fully featured product, or are they mostly demo-ing Chatter [life]?

Thank you.

Chatter is exciting.

Let me try to put that into context for you from a revenue perspective.

Chatter is deeply integrated into the Sales Cloud.

If you've been to one of our Cloudforce programs, you've seen that.

It's also deeply integrated into our Service Cloud; it is deeply integrated into our platform, and it's deeply integrated into Jigsaw.

You cannot extract Chatter from our core clouds.

It's one of the catalysts of why our clouds are growing.

While Chatter is beginning to be its own revenue line, unfortunately for Chatter, the other revenue lines are so big and growing so fast, it's going to probably take it a little while to be able to catch up because you've got some hot products.

I guess I would put my money again, like I did last quarter as say I'm a big believer this year in Service Cloud.

We call this the year of the Service Cloud.

Sales Cloud had a great quarter, a lot of growth, but Service Cloud's growth numbers are just awesome.

I am very excited about the Service Cloud.

I think that Chatter has made it better, more competitive, more exciting.

The demos are more exciting.

If you haven't seen the demos that we've done at Cloudforce -- of the Service Cloud, they are all on YouTube.

I'm sure you would agree that Chatter makes everything better.

So I'd hope that helps to answer your question.

Mark Murphy, Piper Jaffray.

Thank you.

Marc, I believe you're using a very conservative definition when you talk about non-SFA bookings mix, because you are really not counting the platform usage underneath the sales and service apps.

So I guess I'm curious.

If you kind of stepped away from the bookings definition there and you thought more about the customer usage or the value that is being provided, is it possible that 33% would start to look more like a 40% or a 50% number?

Or kind of, in other words, is it really more of a platform company than it appears on the basis of that number?

Well, that's my bias.

I would say yes.

That's how we built the product.

The way we built the product is we built a platform, and then on that platform we built a number of apps, and then we gave customers and ISVs ability for them to build their own apps, so that when you get one of our apps you can rip it apart because it's built with the platform and put it back together exactly for your business, and your business process, your workflow, your user interface, your website on and on.

But it's all coming out of one consistent platform.

We don't have multiple versions; we don't have multiple products.

It's really one integrated product.

When we kind of call it Sales Cloud, Service Cloud, Chatter, that's mostly to help our customers understand what we can do for them.

The technical answer is it's actually all fairly integrated as one service.

Then, as a customer, you can consume these different services, including the customization services and integration services and scalability and reliability, security of the platform.

So yes.

I would agree with you that the numbers are probably -- would be higher if we were to somehow break it apart.

But you really can't because if you read that PC Magazine review of the Sales Cloud, what that reviewer loved was the platform is so deeply integrated into the Sales Cloud.

It is the Sales Cloud.

It's a CRM platform is another way to think about it in that case.

Are we a CRM platform company instead of a CRM applications company?

Yes, I think so.

But there's also a lot of other apps that are non-CRM apps that are on the platform as well.

You see a lot of those on the AppExchange when you visit our customers; you see a lot of those as well.

And so are we a platform company?

Absolutely.

Are we a cloud, platform and apps company?

Absolutely.

Our long-term vision for our company is that we are really the leaders in this cloud platform, in cloud apps and in cloud data.

And that's very much the direction that we continue to move.

Joel Fishbein, Lazard.

Great numbers.

I just wanted to follow up on Chatter quickly because I think there's a lot of chatter, so to speak, about pricing and are you actually getting paid for the product.

Marc, any color around that would be really helpful in terms of how customers are actually paying for the product as opposed to getting it as part of the Sales Cloud.

So we have, first and foremost, as you know, we've rewritten our Sales Cloud and Service Cloud and platform and Jigsaw to fully include Chatter.

As I said, you can see those demonstrations.

So we believe a lot of the price premiums that we get in the market are based on that competitive differentiation and others.

So right there is extremely important.

Second, we have a Chatter product that you can buy Chatter, and many customers did come even though it's been available for a few weeks, as a standalone SKU, and we are in negotiation with a lot of our customers in expanding with Chatter.

We also have free Chatter licenses as well, because we really think we want this to be our Trojan horse for enterprisewide use.

So we have many horses going down the track in terms of monetization of Chatter, but I believe that, while that's going to be very exciting, and like I was saying before, I think the real monetization wins are going to be in increased revenues on the sales and Service Clouds.

Adam Holt, Morgan Stanley.

Thank you.

I had a couple follow-up questions on the strength in the services business.

Do you get the sense that you're actually starting to see an acceleration in new projects around services that are driving that business, or is it really an extension of existing projects?

What's the mix there between new and existing customers?

I guess the last question would be do you have any sense for whether you're replacing older stuff, or whether these are kind of net new implementations?

Thank you.

Do you mean in the Service Cloud?

Is that what you're referring to?

Okay, well, I'll just assume that it is.

So in the Service Cloud, where we really see the growth is you've got a lot of customers out there on old products, including looking at really old technology like Siebel that they are being forced into upgrade situations, which are massive IT projects.

Companies do not have the money; they don't have the IT budgets or people; they don't have the people because they are not hiring to do these new deployments of Siebel upgrades, upgrade your call center, upgrade your contact center, upgrade your customer portal.

That's just not going to happen.

So they are being forced into making a decision which is what do they do next?

The easy thing, easy decision is go with the salesforce.com Service Cloud, because we can move you from your Siebel call center or contact center into a cloud computing modern approach.

As I said before, you are not going to have to buy any plastic to do it.

So that's a big shift, I think, for customers, and they want it.

We've already seen that in sales cloud for a decade, of course.

But now in the last couple of years, really the catalyst was our InStranet acquisition, and the leader of this whole effort for us, our Executive Vice President, Alexander Dayon, who runs this initiative for us, has just done a brilliant job.

We are very, very excited about where we are.

I'm sure you also know the Service Cloud was just ranked by Gartner Group as one of the leaders in the magic quadrant, and we just introduced the product.

So it's an exciting product, and it's an exciting opportunity.

I do believe it will be our very fastest growing and most material product of the year.

Operator, how about a blast from the past with our next question?

Jason Maynard, Wells Fargo Securities.

Good afternoon fellas.

I have a quantitative question.

Welcome back, Maynard.

I have a quantitative question, no qualitative commentary.

But just can you help me understand what percentage of Service Cloud's bookings went to new customers versus existing customers?

I didn't catch the attrition commentary, I apologize.

I missed that at the start.

We don't give new versus add-on upgrade stats by cloud.

I would tell you that, overall, our general new business tone each quarter is roughly split 50-50 between new accounts and existing accounts and on this quarter was not materially different from that.

So I think, when you've got a product growing as fast as Service Cloud, there's got to be a little more emphasis clearly on the new logos, but equally we've got a pretty big set of accounts, 80,000-plus accounts, to go after.

In terms of the commentary on attrition, we just said basically there was a further downtick the fourth consecutive quarter of reduction in our attrition rates, still in the high teens but definitely heading in the right direction.

We think obviously we're working on that.

No doubt we are getting some help from the economy as well, but we are pleased with that trend.

Hopefully, it's going to be back to its historical levels at some point not too far away.

Brendan Barnicle, Pacific.

Thanks so much.

I wanted to follow up on Chatter again, too.

So we're seeing a lot of different social media products that have been introduced by [particular] different on-demand companies.

Marc, do you think, as you talk to CEOs, that they're going to end up standardizing on one, or will they use a couple of different products depending on the applications?

I think we're pretty early days to be able to kind of make -- most CIOs don't even know what social networking is yet, so they are really at the beginning of this.

They are learning I think from us, from their users, but we are -- this is a brand-new market.

Now, that said, I really believe that there's three things that will dominate enterprise software for the next decade.

That will be that enterprise software will increasingly move into the cloud and become multi-tenant shared services.

Enterprise software will become increasingly social, like Chatter.

What I mean by that specifically is kind of the key things that you see in things like Facebook and Twitter, like the profiles, like seeds, like status updates -- that will become an integrated part of all apps, that all enterprise apps are going to look exactly like Facebook.

I am really convinced of that.

I believe that it's a great new model and metaphor for all apps, that all apps will move in that direction.

We are the first, but I assure you that everyone will move there.

Three, enterprise applications will increasingly become mobile, that they will move onto your BlackBerry and your iPhone and your iPad and your Android device and your tablet du jour, etc.

Those three trends can guide us over the next decade into what we call Cloud Two.

We were really in Cloud One.

When I started salesforce.com, I asked myself the question, why is all enterprise software not like Amazon.com?

Because the model that Amazon.com pioneered was so awesome with the tab-based interface, and you could basically pull information easily out of the system and you use clicking with your mouse, and you're using it over the Internet.

But now, all I do is ask myself the question why isn't all enterprise software like Facebook?

That's a very different model, where information is being pushed at you, and where the users have personalities and the system through these profiles, and that things are happening in real time, and it's mobile.

You're touching your computer.

You're not using your mouse as much.

So that's a whole different model.

That's where I think things are really going.

And so when I talk to CIOs, they kind of redact all of that to say, well, this is the consumerization of IT.

And they'll say but we're also really focused on virtualization.

I think they're really focused on virtualization because it's a cost reduction metaphor, but virtualization is not cloud computing, and virtualization is just more efficient servers, but it's not order of the magnitude efficiency like we're seeing with salesforce.com and our cloud computing peers.

That's the excitement, and that is power of cloud computing.

As we move now from Cloud One end and into Cloud Two, and while you see in these audiences that we demonstrate this technology to kind of the fever that they get when they see how easy it becomes when you make it like Facebook, I think that we are maybe -- we're probably the first to do it, but I assure you we will not be the last in the way that we won't be the last to deliver cloud or mobile -- that it's these three things moving forward, and we want it to be the largest and most important player in this industry but we won't be the only ones.

Brad Zelnick, Macquarie.

Nice job guys.

Marc, I just wanted to touch on your go-to-market model a little bit.

You said earlier that you're constrained by distribution at this time.

Naturally, the best sales talent in the industry has flocked to salesforce.

But I'm wondering.

Have you reached a point where you're getting to a certain size, where you're starting to see the same normal distribution of talent that others see in the industry?

How do you think about solving for this?

Do the Bluewolfs and the Aperios of the world start to help to generate demand?

How do you overcome this constraint?

Well, those guys are just basically doing implementations.

We are not trying to build out a professional services organization here at salesforce, as you know.

We have a very tight, relatively small group of kind of ninja-type architects who help those guys do implementations, the Bluewolfs, the Aperios, the Accentures, the Deloittes.

They are doing the implementations.

But in terms of creating the demand and fulfilling the demand and signing the contracts with the customers, we're primarily a direct distribution organization.

If you look at salesforce.com's distribution organization, which you can approximate by the amount of money that we spend as approximately -- call it 50% of our employees, you just have to say, wow, Oracle and SAP -- this is -- they are still an order of magnitude larger than us in distribution capacity.

So we've got a long way to go to fill in that distribution capacity.

That's why growth is so important, because we are not getting to all of those customers.

There are still a lot of people out there ignorantly buying enterprise software when they shouldn't be, only because they don't know and we can't bring them the good news and the enlightenment that the world has changed, and that they can have a better thing.

That's why there is still a lot of plastic being sold and shipped, because the reality is we are still a relatively small part of this total enterprise software industry.

So we have to grow.

Of course, this has been our mantra for more than a decade, more than 11 years, coming up on 12 years.

We've got to grow because we need to let the customers know -- millions of potential customers out there -- that they don't need to buy software anymore, that you can consume it directly over the Internet.

We only have 80,000 customers.

I was recently with one of my customers, Michael Dell at Dell, and he was telling me he's got 10 million customers.

I'm like, how are we going to get to 10 million customers?

We've got to grow to get out there.

He's got the benefit of being in business for multiple decades.

We were only in the business for one decade.

So that's why we're trying to grow as fast as we can to fulfill demand.

As you can see by the numbers, the demand is there.

Salesforce.com just needs to continue to execute.

We have time for one more question.

Steve Ashley, Robert W.

Baird.

(inaudible) I'm just going to follow up on something that Brendan had talked about earlier.

That is you guys were talking about mobile computing.

Are you seeing, in terms of your platform business Force.com, are you seeing people use that to build mobile apps that go out to the iPhone and the iPad?

Is it starting to become an incremental driver for business out there?

Thanks.

Well, I don't think it's an incremental driver for business, per se, because we really include it with a lot of our offerings.

But we see an increased level of usage and interest in it like never before.

To circle back to Chatter, I think Chatter really changes the game for us on mobile, because if you use Facebook on a mobile device like the iPhone, you know how compelling it is to be able to basically be able to easily scroll through your status updates and changes.

Well, our customers are doing that with their iPhones; I'm doing it with my iPhone.

I see what's changing in my business, what my employees are thinking, deals that are closing, deals that are getting renewed, customers that are coming to my website, business processes that are happening.

That is very, very powerful in a mobile environment.

Before Chatter, the mobile environment was mostly about search, go find a contact.

I was mostly pulling the information, looking for things.

Now, with mobile and push, it's very exciting because I can quickly, in like a matter of seconds, get a complete refresh on what's happening on the business.

I think our customers see that opportunity as well.

I know we have one very large customer, an important customer, who is in consumer optical goods.

They have deployed salesforce on iPhones, and it is incredible.

Now, they are starting to do it on iPads.

You know what?

That's the future for that customer.

Now, I don't know if it's for all customers, but I think, as their users shift to these new platforms, these new mobile platforms like phones and tablets, I see that's where all the apps will eventually end up.

That concludes our call today.

We hope to see some of you at some of the Cloudforce events that Marc mentioned.

I also want to remind you of a couple of appearances here.

Graham Smith will be appearing on September 8 at the Citigroup Technology Conference in New York City.

Marc will be keynoting the Deutsche Conference here in San Francisco on September 15.

So thank you for joining us.

Have a good day.

We hope to see you soon.

Bye-bye now.

This concludes today's salesforce.com Q2 2011 fiscal results conference call.

You may now disconnect.