賽富時 (CRM) 2012 Q2 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the salesforce.com Q2 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).

Thank you.

I would now like to turn the call over to Mr.

David Havlek, Senior Vice President of Investor Relations.

Sir, you may begin your conference.

Thanks, David.

I'd like to welcome everyone to salesforce.com's second-quarter fiscal year 2012 results call.

Here today to discuss our strong quarterly performance are Marc Benioff, Chairman and CEO, as well as Graham Smith, our CFO.

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

We now have 43 analysts covering the Company, and because we want to get to as many of you as possible, we will be limiting each of you to one question today.

A 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 financial information, including detailed historical financial statements and facts, is available on our website.

Our commentary today will primarily be in non-GAAP terms.

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

At times in our prepared comments or in responses to your questions, we may offer incremental metrics to provide a greater understanding of our business or our quarterly results.

Please be advised that this additional detail may be one-time in nature, and we may or may not update them in the future.

In addition, I remind you that this quarter is the last quarter in which the customer count metric will be provided as a regular part of our Quarterly Report.

In the future, we expect to offer this metric periodically on a milestone basis.

We're making this change because several of our recent acquisitions have added a large number of users, where linking those users to specific customer organizations can be extremely challenging and, in some cases, impossible.

As a result, we believe our traditional customer metric will be less meaningful over time.

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 performance.

Some of our discussions or responses to your questions may contain forward-looking statements.

These statements are subject to risks, uncertainties, and assumptions.

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

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

To access our Q2 release, including the GAAP to non-GAAP recons or historical results, any of our SEC disclosures, a webcast replay of today's call, or simply to learn more about salesforce, I encourage you to visit the Investor Relations website at salesforce.com/investor.

Finally, before I turn the call over to Marc, please be advised that we may reference certain unreleased services or features that are not yet available in today's discussion.

We can't guarantee the future timing or availability of these services or features.

As such, 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 excellent second quarter.

Marc?

Thanks, David.

I am absolutely delighted to discuss these strong second-quarter results.

Just two quarters now into our fiscal year and we will soon exceed a $2.2 billion annual revenue run rate, validating both our growth strategy and our ability to execute on the incredible opportunity.

I'll begin by reviewing some of these financial highlights.

Number one, revenue of $546 million rose by 38%.

And we haven't seen revenue grow that fast in almost 3 years, and that was when we were less than half our current size.

Non-GAAP EPS of $0.30 was at the high end of our guided range, and we delivered that result even as our headcount has grown by more than 800 during the quarter.

Deferred revenue increased by 37% to finish the quarter at $935 million, and operating cash flow rose by 9% to $83 million in the quarter.

And we exited the quarter with nearly $1.3 billion of cash and equivalents on our balance sheets.

Our financial success was powered by another quarter of tremendous customer success.

And during the quarter, we added roughly 6,300 net new customers -- that's a Company record -- smashing past the 100,000 customer milestone.

And let me just say that while we ended the quarter with 104,000 customers using our core salesforce services, that number does not include the thousands more who are using Heroku and Radian6, with which are two of our most recent acquisitions.

We also saw continued strength in big deals during the second quarter.

In all, we signed more than 60 -- we signed more than 60 seven-figure transactions, a 40% increase compared with last year.

And we signed three -- three eight-figure mega-deals.

In addition, I'm thrilled to tell you we closed an additional eight-figure mega-deal just after the quarter ended, with a large telecommunications company that we will be announcing at Dreamforce.

Given this strong financial and customer momentum, we're again raising our full-year fiscal year '12 revenue guidance, which we now project at $2.22 billion to $2.23 billion.

Over the quarter, I had the opportunity to travel around the world, discussing the power of cloud computing with customers, prospects, partners.

And I started the quarter with an exciting trip to Japan, where I announced our Toyota Friend vision with Toyota CEO, [Toyotasan] in Tokyo.

The idea of Toyota Friend is simple.

If I have friends on Facebook, why is my car not one of those friends?

With Toyota Friend, Toyota is building a product social network where its employees, customers, dealers and its products -- the cars themselves -- are all collaborating through a private and secure enterprise social network.

The car is talking to me, telling me when it needs to be charged; where the service station is; or important updates from dealers or the factory.

It's a vision of a social enterprise that has awakened us to the opportunity of showing our customers a new way of delighting their customers.

I then traveled to Washington, D.C.

to present at a sold-out Cloudforce of over 1,400 registered attendees, where I announced that salesforce.com has received a US General Services Administration moderate level of Authority to Operate.

We had exciting presentations in D.C.

from a variety of salesforce customers, including the Department of Commerce, the Department of State, the GSA, and the Department of Health and Human Services.

Now I'm able to announce that one of the eight-digit deals in the quarter was with the GSA, which has signed an enterprise license agreement for 12,000 users.

When we went on to Boston, again, we were greeted by a sold-out crowd of over 1,700 attendees.

There, we further articulated the power of cloud computing, and showed how the power of cloud, combined with social and mobile, fundamentally changes how companies, their employees, partners, and customers collaborate, share, and manage information.

This time, it was [Enteris's] networks who showed not only an employee social network and a customer social network, but also a product social network, based on their new Chatter-enabled switch.

This vision of a next generation social enterprise inspired us further that customers are looking for exciting new ways to transform their business using the cloud.

And finally, we went to Minneapolis -- not exactly a city known for large crowds showing up for technology events, but we were greeted by a record of 1,000 registered attendees.

And we refined our social enterprise messaging based on our experiences in Tokyo and D.C.

and Boston.

And we showed the amazing social experience in the next generation of apps for Disney's theme parks.

Built on our Heroku platform, the Disney apps are tightly integrated with Facebook and can be seen at www.Facebook.com/Disneyland -- take a look and try out those amazing Heroku apps.

They showed attendees how one of the world's most important brands has refined interactivity with its customers and developed a customer social network.

And by the time we get to Dreamforce, just a few days from today, where we expect over 40,000 people to register to attend, we will be showing a further refined story of this next gen of computing.

We'll demonstrate how companies, their employees, their customers, their products, use the cloud social mobile technologies to create the social enterprise.

We have seen the power of this transformation in small, medium, and large customers around the world, and we believe we are witnessing a transformation of our industry, based on this social revolution -- a revolution that has shown our customers how to delight their customers in a whole new way.

This revolution is only possible through the power of the cloud.

With the cloud, we are able to deliver what every company is asking for -- a solution that is fast to get going, easy to use, and opens all the major industry standards.

And the social revolution is also changing the relationship we have with our customers.

We are now engaging at a higher, more strategic level than ever before.

That's certainly evidenced by the number of large transactions that we closed during the quarter.

And customers are buying a broad selection of our services, as you can see, by the growth across all of our clouds.

Sales Cloud.

Hey, I'd like to start with our flagship Sales Cloud, where our social enterprise message gives us a solution that is highly differentiated, enabling customers to sell with greater collaboration, mobility, productivity, than ever before.

A great example is Chartis Property and Casualty, which selected salesforce for 10,000 seats of the Sales Cloud and 40,000 Chatter seats.

Chartis's vision for the social enterprise is an employee social network that fuels a new level of collaboration between their salespeople and other global employees across 117 countries.

The Chartis social enterprise will allow sales team to engage customers in a whole new way and proactively reach out to customers before policies expire.

Other new or add-on deals for the Sales Cloud this quarter included Continental Casualty and ING, LivingSocial, Penske, and [Reco].

And, as I mentioned, the social enterprise message makes the Sales Cloud highly differentiated, allowing us to crush the competition against Microsoft.

We won new or add-on business at companies like Cisco, Dex One, First National Bank of Omaha, George P.

Johnson, [Mutual General] in France, Transamerica Life, and VHA.

And against Oracle, we won deals including the Bank of New Zealand, Continental Casualty, JBWare, Integra Telecom, and K-12.

Against SAP, we won deals at Ashland, Dolby, Fujitsu, and P&H Mining.

Exciting as our Sales Cloud momentum is, making it the number one sales application in the world, perhaps nowhere is the social enterprise messaging as critical as customer service.

Companies realize they need to meet customers where they are today -- on social networks like Facebook and Twitter.

That's why we saw a continued strong growth in the Service Cloud, as customers look for a new generation of technology, designed from the ground up for a cloud, social, and mobile world.

An amazing example of this is our largest Service Cloud transaction in the quarter, Tyco ADT, the leading home security company.

ADT will be taking the social enterprise directly to the customer by arming its 4,000 field reps with iPads.

These iPads will be loaded with mobile apps that allow ADT to deliver a much more powerful service than ever before.

And to think that at the beginning of last year, iPad didn't even exist.

The pace at which these companies are embracing social enterprise is amazing.

Other new or significant add-on deals in the Service Cloud include G-Energy, Honeywell, and Todo.

And today, I'm thrilled to tell you that more than 100,000 companies are now actively using Chatter, making it our most successful product introduction ever.

We believe Chatter is the largest, most actively used social network in the world.

These aren't 100,000 trials -- these are 100,000 active social networks.

Chatter lies at the heart of the social enterprise, giving companies a new level of collaboration, transparency, and speed.

And in addition to elevating our conversation with customers into the C Suite, Chatter is also taking our deployments enterprise-wide.

New enterprise-wide deployments this quarter include Chartis Property and Casualty, which I mentioned as deploying Chatter to more than 40,000 users; ADP, which is deploying Chatter to 42,000 users; and CA, which extended Chatter to 14,000 users.

They join a growing list of enterprises taking Chatter wall-to-wall, including Dell and SunGard.

Of course, the social enterprise needs a social enterprise platform.

We've built force.com and Heroku from the ground up to be social, mobile and open, and that strategy has propelled us to an incredible level of momentum.

The market for cloud platforms is growing faster than ever, and we're thrilled that the salesforce platform was selected by Forrester as the leading cloud platform for developers, companies, and ISVs.

And this quarter, Force.com was our fastest-growing business, outpacing even the Service Cloud, which continues to exceed overall Company growth.

This quarter, one of the world's great luxury brands, Burberry, selected Force.com to create a social enterprise for its employees, partners, suppliers, and customers.

You will meet Burberry at Dreamforce, and you'll find out how they plan to create an employee social network tailored to Burberry's exacting brand standards that will allow its associates, creative team, partners, and vendors to collaborate like never before.

And Burberry will also be delivering next-generation social apps that let customers experience the Burberry brand and culture anywhere, on any device.

It's an amazing vision that's only possible to social enterprise platforms.

Other new or add-on Force.com customers this quarter included the GSA, F.

Hoffmann-La Roche, and Information Service International-Dentsu.

This quarter, we are seeing great traction with developers and partners building their own social enterprise apps.

Force.Com boasts now more than 400,000 developers and 240,000 custom apps.

And Heroku has dramatically expanded its developer community, now supporting over 170,000 social and mobile apps written in Ruby on Rails.

That's more than three times last year's number, and you can expect some exciting announcements about Heroku at Dreamforce.

Of course, products are only great if people use them.

And that's why adoption is such an important indicator of customer success.

During the second quarter, the force.com platform delivered a record of 36 billion transactions.

That's more than 500 million transactions from Force.com every business day.

Look it -- companies realize that cloud social and mobile are the future.

Forrester predicts that the public cloud will grow from 25 billion this year to nearly 160 billion in 2020.

And we expect our strategy of transforming companies in the social enterprise will help us take even bigger share of that market than we already have.

We see tremendous growth opportunities ahead, and you're going to see us invest in growth through hiring, through product development, through events, and more.

And finally, I want to remind you that we're only eight business days away from the world's largest cloud computing event, and soon the industry's largest enterprise software conference, Dreamforce, which runs August 30 to September 2, right here in San Francisco.

Dreamforce is the place to hear how customers use the cloud's social, mobile technologies, to create a next generation of social enterprise.

In addition to hosting the biggest selection of cloud products under one roof, with nearly 300 partners in the Expo -- which is going to be amazing -- we will have a number of special guests this year, including Neelie Kroes, European Commissioner for Digital Agenda; Vivek Kundra, the former CIO of the US federal government; Google chairman, Eric Schmidt; Metallica; and Will.I.Am.

Also performing, Neil Young, Alanis Morissette; and Jay Leno in our UCSF Children's Hospital fundraiser, which will be happening the night of September 1.

Tickets for that event are still available, and you can get further information by contacting my office.

Also, we'd love to see you at Dreamforce -- just register -- go to www.Dreamforce.com.

And whether we see you at Dreamforce, at one of our key notes, at Metallica, or at our UCSF Benefit on September 1, we look forward to seeing you all in San Francisco.

And with that, I'll turn the call over to Graham for the final financial details of our second quarter.

Thanks, Marc.

Q2 was another exceptionally strong quarter.

Our business results reflect both great execution and continued healthy business demand.

Second-quarter revenue of $546 million rose 38% from the year-ago quarter.

The main drivers of the topline growth were, first, new business, which Marc has already discussed.

And not only did we add a record 6,300 net new customers in the quarter, but we also saw strong add-on and upgrade business in our customer base.

In fact, more than half of new business sales in the quarter were into that customer base.

As you know, many of our most successful customers start small and grow over time.

With over 100,000 accounts now and an expanding portfolio of products, our customer base represents a huge growth opportunity.

Second, a continued reduction in our attrition rate.

Dollar attrition fell for the eighth consecutive quarter, and continues to be in the mid-teens percentage range when compared to the year-ago quarter.

As we said in the past, minimizing attrition is an important foundation for growth, especially as our business scales over time.

And lastly, a weaker dollar.

Excluding a year-over-year effect tailwind of approximately $18 million, constant currency revenue growth was 34%.

We didn't see any changes in pricing, based on our rolling eight-quarter trends for both regions and additions.

On a regional basis, revenue in the Americas grew 34% from a year ago to $367 million.

European revenue of $102 million rose 56% year-over-year in dollars and 36% in constant currency.

Within the region, the UK had a particularly strong year-over-year new business quarter.

And finally, Asia revenue of roughly $77 million increased 42% in dollars and 33% in constant currency versus Q2 a year ago.

While second-quarter new business in Japan was down slightly versus year-ago, the demand environment improved significantly from Q1.

So we're incrementally more optimistic for Japan in the second half of the year.

Our revenue mix was 93% subscription and support, and 7% professional services.

On a year-over-year basis, the 1-point increase in the consulting proportion was primarily the result of implementing the EITF 0801 accounting standard that we discussed at the start of the year.

Our vision of the social enterprise that Marc described earlier will likely require that we build a small team of architecture and user interface specialists, to spearhead some of the implementation teams.

We've kept our billable consulting headcount more or less flat for the last two years.

So the combination of building this team, together with a more favorable accounting treatment for consulting revenue, will likely result in this small mix shift back to professional services for the remainder of fiscal 2012.

Moving on to the rest of the income statement, non-GAAP gross margin remained unchanged from Q1 and the year-ago quarter of approximately 82%.

While non-GAAP gross margin for our subscription and support business was flat sequentially at 86%, it was down a bit from last year, primarily as a result of some of our acquired businesses, like Heroku and Radian6, as well as the buildout of our Japan data center, which we expect to become operational by the end of fiscal '12.

Similar to the first quarter, year-over-year non-GAAP gross margin for our professional services business went from a negative to a positive in Q2, improving to 18%.

This margin improvement in the first half is the result of two factors -- first, at the beginning of fiscal 2012, we reduced some of the headcount in non-billing roles in professional services; and second, accounting standard EITF 0801 has had the effect of bringing forward certain project-related revenues that were previously deferred.

Now onto expenses.

Total non-GAAP operating expenses were roughly 71% of revenues for Q2.

That's unchanged from Q1, but up 5 percentage points from the year-ago quarter.

The year-over-year increase was primarily the result of our accelerated M&A activity over the past year, as well as our continued aggressive hiring.

During the quarter, we added more than 800 people; that includes more than 300 from the acquisition of Radian6.

Our total employee population is now more than 6,300 -- that's an increase of more than 1,900, or about 40% from a year ago.

As in the past, our hiring focus continues to be in the area of sales and engineering capacity, and acquisitions are obviously also fueling our employee growth.

At this point, we expect aggressive hiring to continue through the second half of fiscal 2012.

R&D was our fastest-growing expense category in Q2, up 60% year-over-year to 11% of revenue.

Given the importance of product innovation, we'll continue to invest in hiring and retaining the best software engineers in the world.

Sales and marketing expenses were up 50% year-over-year at 46% of revenue.

In addition to hiring, our sales and marketing expense reflects a very active event campaign through the second quarter, including Cloudforce events in Washington, New York, Boston, and Minneapolis.

As you know, we view these events as important not just for near-term revenue growth through pipeline generation, but also to building awareness of salesforce.com.

Q2 sales and marketing expenses also included the approximately $0.04 per share cost of the one-time charge related to the settlement for a California state wage-an-hour lawsuit, which was disclosed mid-quarter in an 8-K filing.

Finally, G&A costs rose by 33% from a year ago and was 13% of revenue.

While G&A costs can be somewhat lumpy, as we scale for growth and integrate acquisitions, we remain fully committed to our long-term goal of reducing G&A as a percentage of revenue.

Our non-GAAP operating margin was flat from Q1 at 11%, but down roughly 5 points from last year.

The biggest driver, of course, is the fact that we've acquired nine companies over the past 15 months, all of which were either technology purchases, such as Dimdim and Heroku, or fast-growing businesses such as Jigsaw and Radian6, which have yet to achieve P&L breakeven.

While we exclude the amortization of purchased intangibles in our non-GAAP results, it's important to remember the impact these acquired companies are having on our fiscal 2012 GAAP offering results.

Our effective non-GAAP tax rate for Q2 was roughly 26%.

This was a bit lower than our guided rate of 30%, primarily due to a larger-than-expected tax benefit relating to the acquisition of Radian6, and as well, as to bigger-than-anticipated federal R&D tax credits benefit.

Because of the lower Q2 tax rate, we now estimate our full-year 2012 tax rate to be approximately 32%.

That's 1 point better than our last estimate.

Looking ahead to fiscal 2013, we do expect our tax rate to increase probably to a level somewhere between fiscal 2010 and 2011 levels, due to the scheduled expiration of the federal R&D tax credits, and also because the Radian6 acquisition will cause a slight drag on our tax rate next year, versus actually being a benefit this year.

Non-GAAP EPS was $0.30 for the quarter, the high end of our guidance range entering the quarter.

While we did benefit by roughly $0.02 from the lower tax rate I just mentioned, we were also able to absorb the approximately $0.04 charge from the legal settlement that I discussed earlier.

Strong execution and above-plan growth enabled us to overcome that net $0.02 deficit and deliver on our EPS guidance.

Moving on to the cash flow and the balance sheet.

Operating cash flow increased by 9% from a year ago to just under $83 million in Q2.

However, it's important to note that we pre-paid just over $13 million of Dreamforce expenses in Q2 compared with $0 in the comparable quarter last year.

We still expect full-year operating cash flow to grow by the mid to high teens percentage rate that I highlighted on our last call.

We project Q3 operating cash flow growth well above the Q2 level.

And without Dreamforce in the fourth quarter numbers, we should see a record cash flow quarter to end the year.

CapEx finished the quarter at around $45 million.

This was a little higher than we've recently, so let me take a moment just to drill into that detail.

The biggest driver of capital spending continues to be employee growth, both in the form of leasehold improvements and computer equipment for employees.

Fiscal '12, we expect about half of all CapEx to be employee growth-related.

The second-largest category is data centers, primarily the data center buildout and core components, which includes cages, power, and network infrastructure.

This category is by nature a little lumpy, and in Q2, was higher than normal because of the Japan data center buildout.

And just to remind everybody, we do lease most of the service and storage equipment that goes into the data center, so those items are not included in CapEx.

The third-largest category is capitalized internal software costs for our service delivery and for large IT projects.

And finally, we also spent $6.5 million purchasing domain names (technical difficulty) -- we don't expect to be a regular item.

Year-to-date, CapEx is up 83%.

For the full year, we would expect it to increase by approximately 50%, based on anticipated hiring and the completion of the Japan data center.

We expect Q3 CapEx to be down from Q2.

With that background, Q2 free cash flow, defined as operating cash flow less reported CapEx, was approximately $38 million.

And that's down 22% compared to a year ago.

However, given my operating cash flow commentary above, we are projecting free cash flow growth in Q3 and Q4.

Cash and equivalents, including short and long-term marketable securities, finished the quarter just under $1.3 billion.

This was down approximately $200 million from Q1, primarily a result of our acquisition of Radian6 earlier in the quarter.

Deferred revenue finished the quarter at $935 million.

That's an increase of 37% from the year-ago quarter.

Our deferred revenue results included about $2 million of sequential FX headwind and approximately $18 million of tailwind from the year-ago quarter.

Adjusting for FX year-over-year constant currency growth for deferred revenue was 34%.

Receivables were once again well-managed during the quarter.

DSO at 58 days was up slightly over the prior year number of 53 days, but well within the range we would expect for a business with an accelerating topline.

Our receivables aging remains excellent.

Obviously, our acquisition of Radian6 affected several balance sheet accounts, most notably, goodwill moved higher by $265 million.

In addition, capitalized software increased by $70 million, almost all of which was the result of the acquired Radian6 technology.

And Radian6 was also the primary driver of changes to prepaid income taxes and income taxes payable.

And finally, we're executing well on Radian6 cash collections.

The cash basis for revenue recognition that I discussed when we announced the deal, is expected to cause a small revenue spike in Q4.

Two quarters out, it's difficult to predict the Q4 to Q1 revenue transition with a lot of precision, but it's possible that Radian6 revenue may actually decline slightly in Q1, as we complete the transition from cash to invoice-based revenue recognition.

As we look to the remainder of the year, our strong first-half performance and pipeline of business are encouraging.

While we are mindful of the macro environment and will be watching for any changes to our strong business trends, growth continues to be our top priority.

With that backdrop, we are projecting third-quarter revenue of approximately $568 million to $570 million, and non-GAAP EPS in the range of (technical difficulty) [$0.30 to $0.31] per share.

For the full year, we now expect revenue in the range of $2.22 billion to $2.23 billion.

This represents an increase of $65 million from the midpoint of prior guidance [to] a new midpoint, and implies full-year revenue growth of approximately 34%.

We plan to invest this revenue upside back into the business, particularly in distribution capacity.

In that context, we are leaving our full-year non-GAAP EPS estimate unchanged at $1.30 to $1.32.

Before I close, I'd like to personally invite all of you to Dreamforce 2011.

As Marc indicated, we are expecting our biggest and most amazing Dreamforce ever.

In addition to the customer and partner events that you should plan to attend on the first two days, Dave and I will be hosting an Analyst Summit on the Wednesday from 2 o'clock till 3.30.

We really look forward to seeing you all there.

So with that, let me turn the call back to the Operator so we can take your questions.

(Operator Instructions).

Adam Holt, Morgan Stanley.

Terrific, thanks for taking my question.

I had -- I'll start with a macro questions, since you're one of the first companies to report since we've really seen the pullback in the marketplace.

Did you see any change in the demand environment through the quarter or even in the beginning of the subsequent quarter?

And did you change the way that you're thinking about conservativism for the third quarter to maybe bake in a softening environment?

We haven't seen a softening environment.

We saw strong quarter.

Each month was very strong.

We had a strong finish to the quarter.

It would have been a blowout quarter except for that fourth eight-digit transaction that I mentioned came in the week after the quarter, which was set up -- this quarter was a strong start.

I was out in the market very aggressively during the quarter, as I mentioned, in Japan and D.C., Boston, Minneapolis.

And I just want to tell you that when I show up in Minneapolis, I expect a crowd of 200 to 300 people, not 1,000.

And in each of these environments, I'm seeing two to three times what I would normally expect in terms of physical turnout.

And when we look at already the registrations that are done for Dreamforce, and the ones that are easiest for us to spot are the paid registrations, our numbers are up, I think, 30% to 40% year-over-year.

So we don't see a softening environment.

We see, for our business, a very strong and accelerating environment.

And that's why we're raising guidance.

If the environment was to change, we would -- of course, we would let you know.

And we think we're really well-positioned for the future.

We certainly are -- we certainly saw also in the quarter, with the number of very large transactions that were happening, just a robust acceleration of our existing customers of going deeper with us.

And I think that that's going to be very, very powerful.

I also want to say, attrition was really low during the quarter, which was amazing.

We saw attrition drop.

And so attrition is really, really down from where we saw it peak out in 2009.

And that's, of course, helping the quarter as well.

Heather Bellini, Goldman Sachs.

I had two quick questions, Marc.

I guess, can you talk a little bit about your hiring plans in the back half of the year?

Because there were some concern today that the Company was actually putting in place a hiring freeze.

And then the second question would be, Graham, if you could talk a little bit about what you're doing -- if you're doing anything differently in relation to churn to help drive it down?

And how much room for improvement -- if you just kept the macro environment status quo, how much room for improvement is there, based on some of these initiatives you might be employing?

In regards to hiring, you saw us.

We've onboarded a huge number of employees already this year.

And we plan to onboard a huge number of employees in the next two quarters as well.

Our hiring plans are very aggressive this year.

We are onboarding another 30% increase in distribution capacity this year.

You'll remember that last year, we onboarded approximately 40% distribution capacity increase.

And I think that you're seeing that pay out when you see 38% year-over-year growth and 37% growth in deferred.

We find a lot of that coming from this distribution capacity that we added last year that's still coming online.

So our gut reaction is adding more distribution capacity, because the more distribution capacity we add, and the more sales and more market share we get.

And we're still very small in our distribution organization in terms of size, compared to a Microsoft, Oracle, or SAP, which are really our targets, and so we want to grow aggressively.

And I think that if there's anything you're going to see us do -- we are going to invest; we're going to grow and we are going to hire, because we want to take advantage of this opportunity.

And if you look back at things -- you know, different times of turbulence in the last 10 years that I've been CEO of salesforce, the biggest mistake I ever made in any one particular time was when I did not hire aggressively.

Hiring has always paid out for this Company.

And the market is so enormous and so exciting on a global basis.

And right now, the products in such a mature and exciting [plane], be able to handle very large companies or very small companies, we want to be able to satisfy that demand through our distribution organization.

And I believe we're still a distribution-constrained organization.

So we're hiring.

And if you heard of a hiring freeze, that may be at one of our competitors, but that's not at salesforce.com.

And Heather, on the (multiple speakers) --

And by the way, we recently onboarded a former financial analyst, very successful.

We are hiring.

We're taking all resumes.

So email your resume.

Sales, obviously, is primary, but Graham is hiring, too.

So keep us in mind.

All right.

And Heather, on the churn front, I don't think we're doing anything differently other than just staying really focused on it.

We continue to refine our customers' success model.

We've really brought in some very strong management talent under Maria Martinez, who, as you know, joined us over a year ago from Microsoft.

We've got our early warning system statistics that we -- enables us to pick up on trends earlier than maybe a few years back.

Where -- as you know, when we give guidance, we generally assume attrition is flat.

I don't really know exactly where it's going to go.

Potentially, the best case maybe is low teens, but it's -- clearly, the macro environment does affect that.

Jason Maynard, Wells Fargo.

First, congratulations on scoring Metallica.

And I have a question about Radian6 and what you're seeing in the social space.

And I'm curious just on two fronts.

One, what are you seeing in terms of adoption now that that product is more distributed to salesforce?

And two, how is it playing into some of your Service Cloud and sales engagements?

Well, you know, I think that -- usually, we'll buy a company.

We've bought a lot of companies.

And what's exciting about a new company coming onboard is the new people, is always exciting.

And the new customers.

That's always very exciting.

And the new brand, that's very exciting.

But really, Radian6 is the first company that we've bought where we really feel like it's transforming the Company.

And that's really what Radian6 has done.

I mean, when we bought Radian6, we talked about, well, it's the beginning of the marketing cloud, which it certainly is.

And it's about social listing, which it certainly is.

But what Radian6 did was it opened our eyes to the opportunities in the social enterprise.

And you know, if you go to YouTube and you type Gatorade social media monitoring, or you type Dell social media command center or others, you're going to find these social media command centers that Radian6 is building all over the world, to help companies monitor and manage what's going on in the social enterprise.

And that really woke us up to what are all the other things that we should be doing in regards to social monitoring and social enterprise?

And we were already in employee -- in social what we call kind of employee social networks.

That was Chatter, right?

And then we're like, well, we're thinking about moving into customer social networks, and you're going to see some exciting technology at Dreamforce around new types of customer social networks.

And we're excited about that new products coming.

And then we saw the product social networks, with the Toyota examples and other examples.

But it is with Radian6 that we have been inspired to do all of this.

And when we're out there demoing this -- their technology, it really shows how all of this can work together.

And we have not yet even done the total deep technical integration because we haven't had the property that long.

So we're growing them.

We're expanding their sales organization.

We're hiring in Halifax, if you're interested, Jason.

We've got some great opportunities up there in Fredericton, Nova Scotia.

It's beautiful this time of year.

And this is just huge.

And how do we play that out?

Well, you're going to find out at Dreamforce.

Tom Ernst, Deutsche Bank.

Thanks for taking my question.

So, Marc, I'm one of those Minnesotans that will always come see the show when you come up here.

There's plenty of us.

(laughter)

Questions for you.

You talk a little bit about -- already about the traction at the high-end and about customers standardizing more and more strategic purchases.

You clearly have a lot more to sell.

The platform technology -- a lot of usage comes free at the high-end of the market.

The question is, are you beginning to see that drive some monetization at the high-end of the market?

Is it something you feel like you've got the power, the demand pull now to be able to charge in a material basis for Force.com?

And how quickly do you pull that lever as you look forward here in this early adoption phase?

Well, we're looking at new ways to more deeply monetize Force.com.

You know, I think that the way we charge for Force.com is it's on a per-user basis.

And then you can get all the apps you can need.

And I think that we would really like to move more to a per-app model on Force.com.

I think that that was certainly a great way to get going with the product, but wow, we have seen companies, so many companies, build so many apps on Force.com that I think we're ready to start talking about per-app pricing, not just per-user pricing.

And that's an evolution.

I think another major evolution is enterprise license agreements.

We've seen salesforce deliver enterprise license agreements, but it just has not been a big focus for us.

As we've moved to the social enterprise, our customers are saying, what about social enterprise license agreements?

And when we look at these SCLAs, we're like, wow, how do we deliver to this customer a full social enterprise license?

I was in plenty of customers this quarter where they were like, well, I don't know about this per-user pricing over here.

And I don't know about the Force.com pricing over there are.

And what about Radian6 over here?

And what about the jigsaw pricing over there?

And blah blah blah.

And we're like, we've got to take this off the table and give these customers the ability to step way up with SCLAs.

And I think that's another huge opportunity that we just have not played out yet.

So you're touching in and you're stepping in, I think, one of the really great areas for us to optimize, which is pricing, which we just have not touched in a long time.

And we can offer customers much better deals.

Kash Rangan, Bank of America.

I'm not going to ask about the hiring question, Marc.

But I wanted to ask you about the eight-figure or seven-figure transaction.

Certainly, we've not heard you describe the metrics in that fashion before.

I'm just curious if you can give us a bit of a perspective as to what these customers are deploying salesforce for.

And if really you're seeing broader adoption of Force.com, what kinds of custom applications are being replaced with Force?

And maybe if I can entertain you to giving us some idea -- are we at the tipping point of Force becoming really something mainstream?

Because it does sound like there's a lot going on at Force.

Certainly, these big figure transactions can't be happening unless you're selling a broader suite of products.

So if you could just elaborate on that, that will be great.

Thank you.

Well, you want to build a next-generation application in your enterprise, what are you going to do?

Buy more Oracle?

Are you going to blow it up on one of these big Oracle Exadata machines?

That's just not realistic for a lot of our customers.

And what are you going to buy -- more SQL Server?

Are you buying more BA?

Are you buying NetWeaver?

These are last-generation technologies -- Lotus Notes, SharePoint.

I mean, these are -- this is more servers and more software and not more solutions.

And I think customers have seen with Force.com they can basically build it five times faster at half the cost.

That's proven over and over again by every major independent analyst firm that's out there.

And they can do it whether they want to do it with clicks or code.

And now we've extended it with Heroku, giving them another tremendous option in terms of opening the platform with Ruby on Rails.

And you're going to see the platform open up much further with exciting new languages that we have been foreshadowing at Dreamforce.

And we're high on Platform-as-a-Service.

And at the heart of these social enterprise agreements, we talk about, you've got to build your employee social network, which is getting your collaboration in place with Chatter, and your salespeople in place with our Sales Cloud and the service organization.

And then we get right into it, okay, let's build some custom applications, and automate and extend what you're doing.

And Force.com plays right into that.

Then we start to talk about -- like what Tom mentioned on the call here, like with Disneyland, let's build some sites for public consumption, like we've done at Facebook.com/Disneyland.

And then let's move into the partner social networks and the product social networks, and the listening through Radian6.

It's a big indicator to customers that they need to move to Force.com and to Heroku to maximize their investments with salesforce, and thousands and thousands have.

And it's really because those old software companies have not stepped up with new tools and new solutions.

They look a little bit long in the tooth.

It's a little bit too much of your grandfather's enterprise software and it's not enough about cloud mobile and social.

And that's, I think, the opportunity for salesforce.

And when you get to Dreamforce, you're going to see that play out even further.

Laura Lederman, William Blair.

-- my question.

Can you similarly talk about monetization of Chatter?

Is it mainly a platform that customers are building applications on?

Or what about if there is a site license for Chatter, what are customers paying for that?

Because free versus not-free Chatter, I guess is what I'm trying to understand.

And separately on the potential change in how do you price things, have you test-floated that with customers?

What's their feedback?

Would you roll it out on one product slowly and then on others over time?

Just sort of how you would, over time, address changing pricing.

Thanks.

Well, I think different products have different levels of value to the customer based on, honestly, where previous competitors have priced those products.

And that's really why we've always talked about Chatter as an entry point to us, and in many cases, a Trojan horse for us.

And in many ways, it's really establishing our position wall-to-wall for the first time inside of a customer.

And the Chatter price point are -- have been, I would say, very exciting, but not as exciting as the very rich price points of traditional CRM systems or data management systems, or even application development and deployment systems.

And that's been 100% our expectation all along.

There is no sexier demo and no more exciting place to enter a company than with Chatter.

If you've been watching, every Monday in the Wall Street Journal, we have a different customer being featured.

And we've had CEO after CEO after CEO in those ads.

And there's a line of them still coming.

We did not have a product that CEOs were using before.

And when you see those CEOs using that product on their iPads, that is the kind of positioning we want -- that we want to be able to go into the C-Suite with a strong, clear message of how do you increase your productivity, get your company going faster, and get greater alignment and collaboration?

That's what Chatter is all about.

But in terms of building a social enterprise, well, it's much more than just Chatter.

It's about the Sales Cloud, the Service Cloud, and Force.com, Heroku, Radian6, and all of the other technology that we have.

And when you put all that together, that is exactly, as you said, the opportunity for the social enterprise license agreement.

And those with those large customers that are all over the country that we've been building up over time, more and more we hear -- we want a one price for the next three years and the true-up opportunity, so that we can really double-down on your technology.

And we're really working on understanding how to do that.

And I think by Dreamforce, we'll have the first introduction of that capability.

Brent Thill, UBS.

A question for Graham.

I think the last downturn, Graham, the churn had ticked up at the low end.

And I'm curious if you think that anything is different this cycle?

Assuming that you did see a slowdown, I know your results and forecasts don't suggest that, but is there something that insulates you more this cycle than perhaps the last cycle?

First of all, I want to reiterate -- clearly, if we've seen anything in any of these trends, we have commented on it.

So you're right, in the last downturn, we did see at first in small business.

That moved up quicker and actually churn came down quicker in small business.

So that's just one of the things that we'll just continue to watch and be mindful of as we head into Q3.

I think all the things that Maria (multiple speakers) --

Brent, we haven't seen anything so far of anything like that, you know --?

We haven't seen (multiple speakers) --

Except for on this call, we're hearing, you know (laughter).

Yes.

So I think all the other things that I talked about earlier, that Maria's team has done will help us, but it's difficult to know, clearly, if we're heading -- even heading into that kind of an environment.

So I don't really want to try and speculate on what we might or might not see.

John DiFucci, JPMorgan.

Marc and Graham, this is just a follow-up to Brent's question.

It's obvious from your results and also from your guidance that strong new business momentum continues here.

Marc, you were very clear that you're going to be hiring, even if the macro backdrop seems a little bit funky.

And by the way, there are others that are showing this macro backdrop slowdown.

And that's why the concern is on the call, which you obviously understand.

But it seems to me that some of the things that people are concerned about -- you're actually better positioned than others.

And I just wanted to know if you could share with us a little bit more.

I know for EMEA exposure, you're somewhere around 20%, maybe even a little bit less than that, which by the way, is an opportunity.

You started here and you're a relatively young company, it makes sense that you have less exposure than the average software company.

But what about public sector and financial services exposure?

Can you tell us a little bit about how much of your revenue or bookings or even generally comes from those two verticals?

Well, I would say number one is, when we look out at what are the opportunities and what is the quote/unquote exposure for us, we have a very balanced portfolio across the world of small and medium companies and enterprises.

We're probably very unique as a software company, number one, in that we have such a huge stratification of enterprises that we work with in size from the very smallest to the very large.

So if it's all about SMB, maybe it's just up to the enterprise.

If it's all about the enterprise, maybe it's just down to the SMB.

And then, we are again diversified our portfolio across the eight main countries that we do business in.

And then, we have a number of industries that we have strengthened, but no one industry and no one markets, and no one geography, except for maybe the United States, really is -- are we that dependent on, I would say.

And public sector is not something that we have really ever been able to turn in -- we've never focused on it, honestly.

It's probably a mistake that I've made.

I probably should be focusing more in the last 13 years on public sector.

I just haven't really gotten around to it because we've had so many other exciting opportunities.

Some of our competitors have been able to move into public sector because we haven't.

And that hasn't been a big focus.

They've come more to us.

You saw that transaction with the GSA this quarter.

We see more opportunity in the federal government, obviously, in the future.

We've had great success in Japan.

And obviously, Japan has not been the best environment in the last couple of quarters, because of the disaster that's happened there, but we continue to have a robust business there.

So, I have really focused on building this Company to be having a very diverse portfolio of business.

And I think that is why, when you look at the last recession in 2008 and 2009 -- and I don't think we are going into another recession, by the way; that's my -- I'm not an economist, but that's my off-the-hand comment.

I think that we can see that this Company came out of it roaring.

And the reason why is because we maintain our customers and we mitigate their risk.

And they want to double down with us because they don't want to buy more software and hardware.

There's nothing riskier in the technology industry than loading up with another Exadata mainframe or another huge piece of enterprise software where you're not going to see a return for two to three years.

The way to get value and the way to get innovation in your company and the way to get your company right-sized and growing, is get them on the cloud and get them on the public cloud.

Not this kind of false cloud called -- which is the virtualization train.

So I say, here's another great opportunity.

Every time I see these somewhat volatile markets where companies are working to mitigate their risks, I'm like, here we go, let's just ramp up sales, because this is the opportunity to take advantage of a customer's desire to innovate in an ever-changing environment, but to do it without burdening themselves, without all that traditional horrible technology.

Mark Murphy, Piper Jaffray.

Yes, thank you, Marc.

I have a question on your social enterprise messaging.

It's really become a huge and hot topic.

No other company is pursuing it in this way, but it seems to resonate with certain companies, whereas other companies don't yet have an executive-level mandate to pursue this kind of social strategy.

And so I'm wondering what inning do you think we're in?

And overall, is it reminiscent of how customers responded to the idea of the Sales Cloud, say, six or seven years ago before it was really mainstream?

Right.

Well, I think that where we are is certainly in the first inning.

When you look at it, we've been talking a lot for the last couple of years now about something called Cloud Two, which is we've moved from the first generation of cloud, which is where we started, which was people still have their notebooks and their laptops, which they have less and less every day of.

And they have this more stable browser environment.

They had HTML and we were able to deliver them enterprise-class services right into the browser, customized exactly for them.

That was really Cloud One.

Cloud Two was, we saw this huge shift from into social networks, with Facebook, with Twitter, with Google Plus, with the mobile environment, with the iPhone and the iPad, and the Android accelerations.

And then it's the continued amplification of the cloud itself being more robust and more scalable and more secure than ever before.

And then customers would say, what is Cloud Three?

And when we saw Cloud Three, we were like, well, we're not sure when we're going to have Cloud Three.

What is Cloud Three?

And then all of a sudden, something amazing happened to me personally last December, which was the CEO of Toyota came over to my house, and he said, What am I supposed to do with my company?

And I kind of was, well, I'm not exactly sure.

And I looked down and I grabbed my hat and I pulled a rabbit out of it.

And I said, you need a friend.

And your friend should be your car.

And the way you have a Toyota Corolla and a Toyota Tacoma, you should have -- and you have a Prius, you should have a Toyota Friend.

And the Toyota Friend should be a car on the social network that is talking to you.

And then, as we started to build it out for him, I started to lay out all the things that he should do for Toyota -- build the Toyota Friend, put in Chatter and build his employee social network, get his salesforce aligned, build in -- build his customer service, get his dealers onboard, get him to rebuild, these kind of legacy factory applications, and build this integrated environment.

And then at the end of it, I'm like, wow, what is this?

And after we looked at it, and we obviously positioned it to him, and he's become a huge fan of this and others, we're like, well, are we building a customer cloud?

Is that what it is?

And we're like, well, that's not exactly it.

And then we're like, this is really the social enterprise.

This is the next step in business.

And as we've defined that and been able to articulate it into very large crowds, customers have really absorbed it and looked at it as a way where they can really understand and accept our product strategy and how they can action it.

And that actionable aspect of it is very powerful for the Company.

And now what we've done is we've taken our management team and we've pushed them back out to our top 1,000 customers, and said, go out and define -- here's the Toyota example -- and there's other examples I won't tell you which ones they are, but we talked about some of them previously in the last call.

Groupon was another one that came out of this exercise.

And now for our top 1,000 customers, we're defining for them at the C level what the social enterprise is.

Every executive -- Graham has one, I have -- every executive has multiple customers.

And we're all out there positioning what is the social enterprise.

And we have really found a way to help companies go to the next level.

They've worked a lot on their back offices -- their ledgers, their payables, their receivables; they've got their Oracle, their SAP, all this horrible stuff in there.

But in their front office, they just have not really evolved in a long time.

And it's not just about SFA or call center, it's about re-thinking their customer experience.

And that is the company we want to be.

We want to be a company that defines what you do with your customers.

And the way you're going to interact with your customers and be more successful than ever before is by becoming a social enterprise.

And that's what salesforce.com has articulated and that's what you will see further articulated at Dreamforce.

And it's a solution-sell; it's not a product sell; it's an advisory role.

And customers are really loving it and looking at us in a whole new way.

And that's why I think you're going to see the deals get bigger.

All right, Operator, we're going to take a couple more questions and then we'll wrap things up.

Mark Moerdler, Sanford C.

Bernstein.

A question on the full-year GAAP guidance.

You've given it now at a loss per share of $0.09 to $0.11.

And prior, it was $0.01 to $0.03.

Obviously, $0.04 of that is the one-time tax.

Can you give a little more clarity on what the rest of it might be?

Well, the big thing (technical difficulty) follow through is, we're buying a lot of companies; we're making a lot of investments.

And as we buy these companies, really for the first time in the last 12 months that we bought three big companies with Jigsaw, Heroku and Radian6, it's really impacted that GAAP number.

And as CEO, my job and how I look at it at this point in this Company's history, is not to focus on that GAAP profit number.

I think I've said that a number of times, that we are really focused on that top line in the market share opportunity.

And if we were focused on the GAAP number, we would not be buying anybody, number one.

And we would be probably running a much leaner machine and we would not be as excited on market share gains.

And so what I really instructed the Company to do is to blow it out on the top line.

And that's why there aren't too many enterprise software companies at the $2 billion-plus level delivering a 38% topline growth this quarter.

And you can forecast that out through next year as well.

And the cost of that comes in the GAAP line, of course -- in the GAAP profit line.

I'm sure there will be a day in the future where we'll say, well, we're not going to buy any more companies and we're really satisfied where we are, and now we're going to maximize GAAP profit.

And we've shown how we can do that by slowing hiring or whatever, and that's not where this Company is.

This is a growth Company.

This is a growth story.

This is about the next generation.

And you aren't going to build a great company if you focus only on GAAP profit.

And that's why the non-GAAP number is very important.

But the ultimate number and the most important number is the top line.

And Graham, do you want to add to that?

Sure, just to give you the details on that, Mark.

So our estimate on stock comp charges was up a little.

I think it was up about $3 million for the full year.

Amortization of intangibles again was up a little bit, a couple of million.

And then actually the biggest factor in the move on the GAAP guide was, last quarter, we estimated the blended effective tax rate was 38% on those reconciling items.

This quarter, we think the blended rate is about 35%.

So if you take all of those, it basically moves that GAAP guide range.

And that's a great example, where I'm like, are we supposed to be really focused on the stock comp number as part of the GAAP guidance?

Is that the key to growing this Company?

I don't think that's the right place for us to focus.

All right, Operator, we've got time for one more question.

Marc has got energy for one more, so let's go ahead and do one last question.

And your final question of the evening comes from Brad Whitt of Gleacher.

Thanks for taking my questions.

I was curious, as someone had mentioned earlier, you haven't given the big deal metric before.

How do you categorize big deals?

Do those include upgrades from existing customers?

Or is that just [60] new customers at $1 million-plus?

Thank you.

It's a -- that's a combination.

And it's new customers and existing customers.

And we actually have given these numbers before in terms of eight-digit deals and seven-digit deals that we've done.

But I thought it was appropriate to roll that out in this quarter, because it is a focus of our Company strategically, and because we're able to deliver these three solid eight-digit transactions this quarter, and the fourth transaction that rolls into the first day of this current quarter.

So I would like to continue to focus on big deals, that's the SCLA focus.

That's getting our own salesforce to think more about us being more strategic, being less of a product sale, being more of a solution sale, being more about the social enterprise.

And we're rolling that out testing it, and we'll see at Dreamforce what the customer reaction is.

Before we end, I also want to encourage you to see me tonight on Cramer with "Mad Money," where I'll make further commentary on that.

All right.

I want to apologize to all of you still in the queue.

We got to actually less than half of you today, despite the number of questions.

The good news is, Dreamforce is just around the corner.

So you'll have plenty of Q&A time with Marc, Graham, George Hu, Alex Dayon, Byron Sebastian -- the list goes on and on.

The two key dates for analysts are August 31 and September 1, in addition to keynotes each day from Marc and other senior executives.

Graham and I will be hosting an analyst session on the afternoon of the 31st.

So I encourage all of you to register, if you haven't already done so.

You can go to our main website, click on Dreamforce Registration, and then click the Financial Analysts button.

That closes our call today.

We look forward to seeing you in two weeks at Dreamforce.

And I'll see you in 25 minutes on Cramer.

Bye bye, now.

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

Thank you for your participation.

You may now disconnect.