賽富時 (CRM) 2013 Q1 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the salesforce.com Q1 2013 results conference call.

(Operator Instructions).

Thank you.

I would now like to turn the conference over to Mr. David Havlek of Investor Relations.

Sir, you may begin your conference.

Thanks and good afternoon to everyone joining us today to discuss salesforce.com's first-quarter fiscal year 2013 results.

The details of our results can be found in a press release issued about an hour ago or in our Form 8-K filed with the SEC.

Joining me today as always to discuss our first-quarter performance, Marc Benioff, Chairman and CEO, as well as Graham Smith, our Chief Financial Officer.

In response to your feedback, we have tried to shorten our prepared comments today leaving more time for your questions.

However, because we want to get to as many of you as possible, callers will be limited to one question, and we will be muting lines after questions.

During today's discussion, either in our prepared remarks or in response to your questions, we may offer incremental metrics to provide greater insight into the dynamics 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 provide or update these metrics in the future.

In addition, please note that 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.

And, finally, it is possible that we may reference certain unreleased services or features not yet currently available on our discussion today.

Because we cannot guarantee the future timing or availability of these services or features, we recommend customers make their purchase decisions based on services and features that are currently available.

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 the information regarding our fiscal first-quarter 2013 performance.

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

These statements are subject to risks, uncertainties and assumptions.

Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, actual Company results could differ materially from 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 form on Form 10-K, particularly under the heading Risk Factors.

To access our press release, our historical results, any of our SEC filings, a webcast replay of today's call or simply to learn more about salesforce, I encourage you to visit our Investor Relations website.

And with that, let me go ahead and turn the call over to Marc.

Thanks, David.

salesforce.com's first-quarter was a great start to our our fiscal year, absolutely spectacular, and let me just go through some of these highlights of the quarter.

It is just awesome.

Revenue for the first quarter was up 38% from a year ago to $695 million.

We just could not have asked for anything more, and we now have an annual revenue run-rate of nearly $2.8 billion.

Operating cash flow exceeded $210 million, an increase of more than 50% year over year, and that absolutely is our strongest Q1 cash flow ever, 50% year-over-year growth.

Deferred revenue, more than $1.3 billion, which is up 46% year over year, only better by the dollar value of book business, which now on and off the balance sheet now tops $4 billion.

Now that is an increase of more than $400 million from the fourth quarter.

Now given our strong financial results and the pipeline of new business, we are thrilled to announce today that we are raising our full fiscal 2013 revenue guidance again.

And after becoming the first enterprise software company to achieve the $1 billion run-rate, the $2 billion run-rate, now we are guiding to $3 billion for the year in fiscal year 2013.

That is an amazing new milestone for our industry.

The high end of our guidance keeps us on track to finish the year with a full-year revenue growth rate of 32%, and I am sure everyone recognizes there are not too many enterprise software companies delivering that to the market for this year.

salesforce.com is the fastest growing software company of its size.

salesforce has always been a catalyst and evangelist for change in enterprise software.

It has been a promoter of cloud, it has been a promoter of social, it has been a promoter of mobile, and those three actives really have defined who we are today.

Now in the first decade of our business, we pioneered the shift to cloud.

Today we are redefining what it means to be the social enterprise.

Social enterprises are looking for a deeper connection with customers, employees.

They are looking to delight their customers in a whole new way.

They are building social profiles that deliver on more a complete picture of customers employee social networks to rapidly collaborate, motivate, align their workforces, and building customer social networks to better market, sell and service their customers, and they are building product social networks to help integrate their products and bring those back into the social enterprise as well.

Our social enterprise vision has opened a door for thousands of companies and empowered and revolutionized how they engage with their customers and their employees.

And since sharing our vision for the social interface -- enterprise, a dream for us last year, we have gone around the world now to more than 200,000 people face-to-face joining our events to learn how they can use these social, mobile and cloud computing technologies to drive their businesses to a whole new level.

Now with the Sales Cloud, with our Service Cloud, with our Marketing Cloud, the heart of our CRM strategy built on our social enterprise platform, the core of our business at salesforce, our customers have the tools to create a true social front office.

And salesforce is recognized as the leader in each of these four critical categories, and let's just review that briefly.

According to Gartner, salesforce.com has surpassed Oracle last year and now has the number two market share position in the overall CRM market, which includes both the cloud and on-premise CRM.

Now, of course, we are already number one far and away in cloud CRM, and now we are number two overall, which includes cloud and on-prem.

Two, the Service Cloud and the Sales Cloud are now both the absolute market leaders in customer service and sales force automation in Gartner's Magic quadrant.

So, if you look at Gartner's Magic quadrant for a sales cloud, we are number one in SFA, on-premise or cloud.

salesforce.com is number one in salesforce automation.

And if you look at the just published customer service Magic Quadrant, salesforce.com's Service Cloud is the number one whether it is on-premise or in the cloud, number one in customer service.

Now the Marketing Cloud based on our Radian6 technology providing the foundation of our Marketing Cloud and also including our Data.com capabilities is rated by Forrester as a leader and visionary in enterprise marketing platforms.

And Forrester also named our social enterprise platform, which includes Force.com and Heroku, as the leading social enterprise platform for coders and business developers.

The combination of our social enterprise vision and our clear leadership in each of these core markets is what is driving our success with customers today.

A great example is the largest transaction in our history, which we closed at the start of this quarter with an insurance company, they are building a customer social network to connect hundreds of thousands of employees with millions of customers, prospects and even Facebook fans.

Their vision is to empower their entire customer-facing team, including their salesforces, their customer service organizations, their marketing organizations, their claims agents with a single view of customers across any of their channels.

Customers can start a conversation in the call center, finish an application on the website, ask a question on Facebook, get a response on Twitter.

They are pulling customers together and putting them in the driver's seat and at the heart of their social enterprise.

The world's largest food distributor, Sysco, spelled Sysco, not Cisco, is swapping out SAP and deploying the Sales Cloud and Chatter, and Sysco's social enterprise will be able to create an interactive community with hundreds of thousands of restaurants, educational facilities, hotels, venues that they serve.

In addition to that insurance company and Sysco, another great win in the quarter is direct from Japan, the Nippon Life Insurance Company, Japan's largest life insurance provider.

They leveraged Force.com to deploy an insurance policy management application to thousands of users in less than 30 days, and that is the speed of cloud, mobile and social at which our customers want to transform their businesses today versus the traditional months or years it takes with the traditional legacy enterprise software companies.

The post office in the UK is taking its 400 crown branches digital by creating a social enterprise for its entire team of financial service advisors, and citizens of the UK will soon be able to book appointments and engage with advisors online.

And another great win in the quarter, the makers of Chivas and Absolut, Pernod Ricard, is one of the world's leading beverage brands and selected Chatter and Force.com to create a social enterprise for employees, customers and distributors.

We use their products extensively here at salesforce and during this analyst call.

Pernod plans to create a wall-to-wall employee social network to boost innovation, extended strong culture of entrepreneurship, and by linking Force.com with on-premise back office systems and applications, Pernod will be able to power its entire workforce with next-generation social, mobile and cloud apps.

Vodafone is swapping out Oracle and puts salesforce.com at the heart of its social enterprise transformation in Germany.

Their vision is to build a customer and employee social network that will integrate their back office, Amdocs and their Oracle financial systems empower a new level of customer insight for their management and sales teams.

And Meritage Homes, builds homes across the US, is rolling out an amazing configuration app on Force.com that is going to allow its agents to modify home options on the fly.

And with Force.com, our Sales Cloud and Chatter, Meritage is bringing together its front and back office systems, linking people with the documents they need to close deals faster.

Another great innovation by our customers.

And one last customer I wanted to mention on the call today, Morningstar is a great win against Microsoft.

They are bringing together sales and service teams across hundreds of product lines, including the Sales Cloud and Chatter.

Morningstar's social enterprise will allow sales teams to collaborate on deals from the road, deliver a consistent brand experience to customers wherever they are.

Other new or add-on transactions in the first quarter include, Abbott and Allergan, Allstate and Amazon, Barclays and Chanel, Citrix, Fuji Xerox, Honda, Nestle, Office Depot, [Arastan] which is the Amazon.com of Japan, and Tokyo Marine and thousands of others.

The pace at which these companies are embracing the social enterprise is amazing, and it is driving outstanding levels of usage.

We now have nearly 2 million apps built on our Force.com and Heroku platforms.

Our ability to deeply integrate our social front office solutions with back-office systems like SAP and Oracle, the core back-office systems of our customers combined with our social front office systems is helping many of our customers like Activision, Burberry and Kimberly-Clark transform with the speed of social.

And I am delighted to announce that we delivered 54 billion transactions for the quarter, an increase of 72% from a year ago.

54 billion transactions.

That is more than 800 million transactions every business day, and to put that into context, that is more than double the number of posts on Twitter every day that to salesforce.com delivers as core transactions in its service.

In closing, I want to remind everyone about the next stop on our Cloudforce roadshow, Cloudforce London, our largest European event, with 14,000 people registered to attend will be happening in London next week, May 22 at the ExCel Centre.

It is going to be a phenomenal, phenomenal event.

I also want to remind everyone to save the date for Dreamforce.

It is coming up, it is September 18-22 right here in San Francisco, and it is going to be featuring some spectacular speakers, including Jeff Immelt, our great customer at General Electric.

The CEO of GE will be speaking on GE becoming a social enterprise.

You will also be hearing from General Colin Powell, as well as an entire day of motivation, energy and excitement featuring world-class motivational guru, Tony Robbins, and a great musical performance by the Red Hot Chili Peppers.

It is going to be an awesome Dreamforce, and now is the time to sign up by going to www.dreamforce.com.

And, with that, I'm going to turn the call over to Graham Smith, our Chief Financial Officer, to discuss the financial details of our first quarter.

Graham?

Thank you, Marc.

We are off to an excellent start in fiscal 2013.

First-quarter results were better than we had expected with strong execution and continued reduction in our attrition rate.

With the goal this year of delivering robust topline revenue growth and improving profitability, we were also pleased to post EPS above our prior guidance.

We delivered strong operating cash flow, as Marc mentioned, with first-quarter cash flow exceeding $210 million.

That is our best Q1 on record, and our pipeline of new business continues to grow as does deferred revenue and booked business on and off the balance sheet.

Given our strong start, we are very pleased to be raising our full-year revenue guidance by $50 million with the high end of our predicted range now at $3 billion.

I will talk more about guidance in a minute, but let me start by highlighting some of the key financial metrics from the quarter.

Q1 revenue of $695 million was up 38% over last year.

Q1 revenue was actually up 39% year over year, excluding the effect of $6 million of FX headwind, and this was our strongest constant currency revenue growth in more than three years.

Revenue in the first quarter benefited from a continued decline in dollar attrition, which fell for the 11th straight quarter, and is now in the low teens on a percentage basis.

Dollar attrition is now at its lowest level since we started reporting the number back in the first quarter of fiscal 2010.

On a geographic basis, we posted strong year-over-year revenue growth in each of our major regions.

Revenue in the Americas grew 43% to $485 million.

Revenue in Europe was $118 million.

That is up 25% in dollars and 33% in constant currency, and revenue in Asia was $92 million, an increase of 32% in dollars and 30% in constant currency.

Our business mix continues to become more diverse with more than 40% of new business in the quarter coming from non-Sales Cloud contracts.

Turning to the income statement, operating profit grew faster than revenue in Q1 with operating profit up 45% over last year.

This enabled us to grow operating margins by nearly 60 basis points year over year, driven principally by improvements in G&A even as we executed on key growth initiatives.

First, we continue to hire aggressively in Q1, adding more than 500 new employees with, of course, the emphasis on sales and engineering roles.

Our total employee population is now more than 8300.

That is up 51% from the first quarter last year.

Second, we continued our investment in corporate and product marketing in Q1, including staging some of the largest Cloudforce events ever in cities like Chicago, Washington DC and San Francisco.

Higher operating margins, along with the lower than anticipated tax rate, enabled us to translate over-achievement on the top line to the bottom line with non-GAAP EPS coming in at $0.37, and that was $0.03 above the high end of guidance.

The lower tax rate contributed about $0.02 of that EPS over-achievement, while the other $0.01 was due to better operating leverage.

Our tax rate in the first quarter was lower than expected as a result of our finalizing the tax accounting related to our acquisition of Radian6.

Operating cash flow in Q1 was $213 million.

That is up 53% over last year -- a great result.

Cash flow in the quarter benefited in part from the two invoicing affects that contributed to our strong cash flow in the fourth quarter, including longer invoice durations.

This quarter we also collected the last tranche of the large multiyear invoice we discussed in the fourth quarter.

However, this amount was more or less offset by the one-time tax payment of $40 million related to our acquisition of Radian6, which we have highlighted on earlier calls.

Free cash flow, which we define as operating cash flow less CapEx, was $168 million in Q1.

That is up 50% over the first quarter last year.

Free cash flow yield or cash flow as a percentage of revenue was 24% in the first quarter, again up from 22% in Q1 last year.

CapEx was approximately $45 million in the first quarter, up 64% over Q1 last year.

New office buildups and equipment related to headcount growth continue to be the largest driver of CapEx spending.

Deferred revenue in Q1 was approximately $1.3 billion, up 46% over the first quarter last year.

Excluding an FX headwind of approximately $18 million, deferred revenue on a constant currency basis increased 48% over Q1 last year.

On a sequential basis, currency had no material impact on deferred revenue.

In Q4 we discussed how increased discipline around annual invoicing contributed to the improvement in current deferred revenue and how multiyear invoice contributed to the increase in long-term deferred revenue.

In Q1 deferred revenue benefited from the same two invoicing effects.

Excluding these effects, first-quarter deferred revenue grew approximately 30% year over year or 32% in constant currency.

This was consistent with fourth-quarter deferred constant currency revenue growth of 31%, excluding same two effects.

As a point of reference, about two-thirds of total invoicing dollars in Q1 were from annual invoices, a significant improvement over last year.

Off-balance sheet backlog, which is unbilled business that is booked but not yet invoiced, was $2.7 billion in the first quarter.

That is an increase of more than 20% from Q4 and approximately 60% over up Q4 -- sorry, Q1 last year.

Our average contract length remains between 12 and 24 months.

Taken together, deferred revenue plus backlog now exceeds $4 billion.

As we have said in the past, our deferred revenue balance has a lot of moving parts, and our focus on the annual invoicing has added another variable.

While deferred revenue overall is clearly benefiting from longer invoice durations, it is very difficult to predict net sequential changes in deferred revenue.

In addition, it is important to understand that the deferred revenue benefits from longer average invoice durations in prior quarters actually serve to create a sequential headwind to deferred revenue in subsequent quarters as the deferred revenue amortizes from the balance sheet to the P&L.

As a result, we expect a lower dollar benefit from invoice changes in Q2 than in Q1, just as we saw a decline in the dollar benefit from invoice changes from Q4 to Q1.

And we expect this effect will continue through the end of the year.

In that context, our best estimate is for second-quarter deferred revenue to be approximately flat sequentially and on an adjusted basis, excluding the effects of the invoicing changes to be up slightly, consistent with our historical trend.

Let me close with guidance.

For the full year, we are raising our revenue outlook by $50 million to $2.97 billion to $3 billion, which represents growth of 31% to 32% over fiscal 2012.

We now estimate full year non-GAAP EPS in the range of $1.60 to $1.63.

This is $0.01 higher than our prior guidance.

While we received a $0.02 tax benefit in Q1, we now expect a higher share count to reduce full-year non-GAAP EPS by roughly that same amount of $0.02.

Our non-GAAP EPS estimates reflect a slightly lower tax rate of 37% for the full year.

This takes into account the lower tax rate in Q1 we discussed, along with an anticipated quarterly tax rate of about 38% for Q2 through the remainder of the year.

In Q2 we anticipate revenue in the range of $724 million to $728 million for year-over-year growth of approximately 33%.

We expect Q2 non-GAAP EPS in the range of $0.38 to $0.39.

We expect operating cash flow in Q2 to grow slightly faster year over year than our revenue growth rate as we continue to migrate customers to annual billing.

All the underlying assumptions for our non-GAAP guidance, as well as our GAAP guidance and a complete GAAP to non-GAAP reconciliation, can be found in our earnings press release issued today.

Just to conclude, we had a great Q1 with topline revenue and bottom-line EPS that exceeded guidance.

We continue to deliver outstanding cash flow from operations, and our backlog of business on and off the balance sheet is now more than $4 billion.

We look forward to updating you on our progress in Q2, and now we hope to see many of you in Cloudforce London next week.

With that, we will open the call for questions.

(Operator Instructions).

Tom Ernst, Deutsche Bank.

Marc, I would like to ask you a question that is in the thread of common questions I get from investors about the balance between the hype in cloud and social versus is it real?

So the question I have got for you is, if we look at the downfall of some of the last generation technology like Siebel, it was almost that they were too successful selling and never got the usage and adoption.

As your business is kind of continuously evolving here from a viral adoption to a more strategic purchase, how are you changing the organization to make sure that you are connecting with the customer, driving success, and are you actually measuring that success staying high and sustainable?

Well, I think the most exciting thing that is happening this week certainly is the Facebook IPO tomorrow.

There's is a couple of exciting things about Facebook.

Number one is that we have just never seen an application, a complex application of this size, of this scale with 1 billion registered users, half of them who log in every day, and you just have to take a step back and just say wow in terms of adoption.

And the new user interface models that have been created there like the feed, the status update, profiles, groups -- I mean we have been talking about this now for some time in our various forums.

I'm, number one, just in awe of that.

Number two, you just see the level of interactivity between users as really just awe-inspiring.

And we have really adopted as fast as we can those user interface models into our own business and then brought them, of course, to the mobile platforms, brought them into the social platforms with salesforce Chatter, and into our core business, which, as you know, our Sales Cloud, our Service Cloud, our Marketing Cloud and our social enterprise platform built on Chatter.

And you have seen if you go to trust.salesforce.com, our transaction volumes have just been really awesome.

I mean we are just anticipating the first billion transaction day at salesforce.com.

You can see days this week where we have hit 800 million transactions.

I mean that is just awesome.

And the question will be, when are we going to have 1 billion transactions a day?

And I think you probably can see that those are happening faster than ever before between 210 milliseconds and 240 milliseconds per transaction.

That is usage; that is growth; that is adoption.

And that is what we are focused on.

And the only reason we are successful at salesforce is because our customers are successful, and that is what we focus on everyday is, is the customer successful?

That is our number one value in our Company, the trust that we have with our customer and making them success.

And then after that, it is really all about creating that customer for life experience where they are bringing their data, their business process into our services.

And then, of course, it is the day in and day out execution of our business that you have seen now as we have delivered.

Next month we will be, I think, our eight years as a public company since we went public in, I think, it was June 2004.

So it has been consistent levels of execution, and those are really the things that we focus on.

And I think we will continue to focus on those things, and that will create the success to companies maybe who have come before us and have not been as successful as we have been, I think it is mainly that just were not focused on the customer success at the end of the day.

And I know that seems quite basic, but there is different ways to running a company and different motives and that is ours.

Adam Holt, Morgan Stanley.

Congrats on a great start to the year.

My question is about the off-balance sheet number.

That is an eye-popping number, and obviously there is a big client that is contributing to that.

But could you walk through some of the elements behind that quarter-on-quarter increase in the off-balance sheet number, and how should we be thinking about the seasonality of that number through the duration of the year?

Yes, of course, the large customer we signed, the largest in our history, the nine-figure deal will certainly help that backlog number significantly.

But we also had some big renewals in the quarter.

And clearly we have large customers with large annual order values renewing for multiple years, that is very encouraging to us and really helps add to that backlog number.

So we did a great job on renewals this quarter.

As you heard, we finally got to the low teens attrition rate, which is great.

And I do point out we still see our average contract length between 12 and 24 months.

It is not like this number is getting moved or getting skewed or anything like that.

So we are still in that 12- to 24-month average contract length, but we are just renewing, we are renewing well, we are renewing often, and we are renewing for longer contract periods, and that has just really helped loose that overall backlog number.

Heather Bellini, Goldman Sachs.

This question is for Marc.

Marc, I was wondering if you could talk to us a little bit -- I mean you got the Magic Quadrant for Gartner this quarter for Service Cloud.

I'm wondering if you could share with us where you think that market is in terms of tipping into the SaaS favor?

When are we going to start to see those big rip and replaces from the legacy on-premise deals that were signed over a decade ago?

And if you could also just frame for us how big of an opportunity if you had to characterize that opportunity versus Sales Cloud, if you could give us an idea of how you think -- how attractive that market is for you?

Well, I think we have been talking about this now for a few years in terms of how excited we are about Service Cloud and how much we have invested.

And it has turned into a massive business for us and far exceeded all of our expectations.

I think the exciting part about Service Cloud has been the growth and the huge transactions that we have signed.

We also have created our Service Cloud for small business now that we have delivered with Desk.com, and I'm sure you have seen that as well.

So we are really not only focused on the very high end of the market but the low end as well.

And I think when you look at Service Cloud, when you look at Sales Cloud, Sales Cloud, of course, is just a much, much bigger business today, but Service Cloud is growing at a faster rate.

So you are just going to see this just incredible tear of that business, and we are investing more in Service Cloud than ever.

And then we have got our Marketing Cloud right behind it that we are very excited.

And as I said, it is really that Sales Cloud, the Service Cloud and the Marketing Cloud built on our social enterprise platform that is just awesome.

And we are very happy with our strategy, and we really do focus like you mentioned -- you know, the Sales Cloud the absolute leader in the Magic Quadrant, Service Cloud is the absolute leader, Marketing Cloud platform, all these things are they competitive, are they winning deals, are they at the top of their game?

And in our area in cloud and in many cases not just in cloud, but as I said it is number one in cloud or on-prem.

So I'm very excited about service, and I think it will continue to perform this year at an extraordinary rate.

Brent Thill, UBS.

Marc, there was some concern going into the quarter about some of the sales changes that went on in Q1.

I was wondering if you could maybe articulate the changes that were made.

And obviously it did not seem to have any impact on the current quarter, and I had a quick follow-up for Graham.

Well, you know, we are a fast growing company.

We are the fastest-growing, and that means that our organizational models that we are competitive at $1 billion are not the right organizational models at $3 billion.

And so we make slight adjustments every year, and those slight adjustments generally take place in the first quarter.

This year was no exception.

But at the end of the day, it just sets us up to continue the growth and execution of our business.

We don't go into the nitty-gritty because it would be kind of pathetic I think at some level to try to tell you how our sales force is organized.

But at the end of the day, we are very excited.

I mean we have a tremendous focus on the enterprise led by Blair Crump, who is a former executive at Verizon running their enterprise business.

And we have got an incredible business, small and medium business being run by Hilarie Koplow.

She is doing a fantastic job, and it is these kind of -- these two businesses together that work so unbelievably well.

And it's under the auspices of our Vice Chairman, Frank van Veenendaal, who kind of ensures that our core distribution strategy is propelling salesforce.com in the future.

And that is how we look at it.

It is very, very -- it has been -- it is a great organization.

I could not be prouder of them and their success.

Kash Rangan, Merrill Lynch.

Marc, I am just wondering if you could comment on how trends for new business signings worked out during the month of April?

There has been quite a bit of debate, one famous technology company in the Valley talked about how their business, not that is a proxy for your business, but their business progressively weakened as the quarter came to a close.

I'm wondering if you can share with us how your pace of new business held up in the month of April?

Well, February, March and April were all very strong months, and we have -- that only offset in that -- in March as we had previously discussed with you, we closed our largest business deal, the largest business deal of all time, which was this massive transaction.

But then through the quarter, we saw some great transactions emerge in Europe.

We saw some great transactions emerge in Japan and our US business is also outstanding.

So I felt very good about business during the whole quarter, and I think we are, as you can see from these numbers, well set up to deliver an outstanding year, which is why we are raising our guidance now to $3 billion for the year.

Nathan Schneiderman, ROTH Capital Partners.

Marc, in past quarters, you have given us metrics on the number of seven-figure deals and the number of eight-figure deals.

I am sure we would all love to hear that if you would be willing to share it this quarter.

We have talked about that, and we do that on a periodic basis but not on a regular basis because we just don't want to set the expectation up that on this call we are going to discuss the specifics of our bookings during the quarter and/or the specifics of the deals.

But it's certainly our attention that on a semi regular basis to tell you exactly how many seven- and eight-digit deals we do.

And if you go look back the last three or four years, I think we probably do that every three or four quarters, we show that to you.

But we don't plan to do that on a regular and consistent basis.

I don't think that is an appropriate estimation of our business anyway, and I will tell you why.

We are not a company that is based on big deals.

We have actually close big deals.

Big deals are exciting.

We do a nine-figure deal, an eight-figure deal, a seven-figure deal.

But the reality is that we do a lot of deals during the quarter, and we do a lot of business during the quarter.

And this Company has never been able to make its quarter on a big deal, and it makes its business happen on a solid book of business that is highly distributed between, as I mentioned, small and medium business product line and an enterprise product line, and both of those product lines are delivering consistently and effectively across the seven or eight countries that we do business in across the world.

And that is how we really make our business, and I think that if we emphasized the seven- or eight-digit deals to you -- and, as I said, we will do it on a regular basis -- we -- it does not characterize the true nature of our business, which is many, many transactions happening over the quarter delivering a strengthened portfolio of customers in all markets.

Pat Walravens, JMP Securities.

Marc, do you think the window is closing on the on-premise license model faster than the Oracles and SAPs of the world expected, and is it happening faster than you expected?

Well, I think that you can look at their license revenue growth over the past couple of quarters both Oracle and SAP, and I don't think it is anything to write home about.

And I think that if you compare that to our growth rate or the growth rate of companies like us in our category, cloud companies or even private companies who are in the cloud, companies that have our model, the multitenant shared model, you just can see where the future is.

And if you are going to start a software company today, you are not going to start it as an on-premise company.

It just would be unheard of.

I think that really speaks to it.

I don't know any venture capitalist that is starting a software company today.

So it is not the future, and I think that what is the future is cloud, it is social, it is mobile, and I'm a huge fan of our peers in the public markets and in the private markets as well who have pioneered these models, and I think they represent what the future of our industry looks like.

And, as you can see with our numbers in this quarter, you can do it at scale that this is what Oracle used to look like.

Mark Murphy, Piper Jaffray.

When you consider the deal pipeline for the second half of the fiscal year, are you sensing a turning point in your ability to engage specifically at the CIO level in larger and more expansive deployments that are absorbing more of your products upfront as a result of this social enterprise positioning?

Well, I think that we have a strong portfolio and a strong pipeline ahead.

We are very excited about the pipeline and the opportunities for the fiscal year.

And when I look out at those, it is a pretty big mix of customers who have not used us before, but we have a lot of customers that we have relationships with that are expanding, growing and adding what we call adding on, and there is a good balance to that.

Graham, do you want to comment on that?

Yes, I think that is right.

You have already talked about the portfolio of different businesses, and certainly we have some customers where we start with a complete set of solutions and all the different products.

But others, for example, some of the transactions in Q4 we saw were just around one product, and then we will look to expand from there.

So I don't think you can really typify it, but certainly overall our pipeline growth has been good.

Jason Maynard, Wells Fargo.

Marc, I have a question for you on the competitive positioning.

SAP this week at Sapphire was talking about no big upgrade to their core apps for, I guess, seven or eight years.

And post-SuccessFactors, they are going all-in on, I guess, non-integrated best-of-breed apps in the cloud.

I'm curious to see if you think this will impact customer buying decisions and, frankly, your sales strategy into their installed base?

Well, we are in some of their largest and most important customers in the world, and we are in dialogue with those customers on a regular basis.

Some of those customers become some of our largest and most important customers.

And I think SAP does a great job with the back office.

They do a great general ledger.

And it is on-premise and it works, the point of sale system, whatever it is for our customers.

But in terms of that broad-based social front office that vision that we have articulated that you have seen now at so many Cloudforces and Dreamforce and you see the the fever with customers and prospects that they want to become social enterprises, and if you watch the Sapphire videos, which I did, I just -- it could have happened last year, it could have happened two years ago, it could have happened three years ago.

I did not understand what was new and exciting.

And if the new and most newest and exciting thing at SAP is the acquisition of SuccessFactors, well, then god help SAP because there just is not that exciting.

I mean that was a sub $1 billion company that makes a human performance management software that you log into once a year.

So where is the action and the vision?

I think that they are a great company with a great product line that customers use in their back office, but I think that they have not shown us the future of the company and the industry, and I think it is well represented by what we saw last week.

And for us we are trying to do our best to demonstrate the future of our industry, and that is why major customers like, well, I guess Kimberly-Clark is a great example who was at Cloudforce in San Francisco, have shown how you can have a great salesforce.com social front office combined with that back office.

And if you go to YouTube and you type Kimberly-Clark social enterprise, you will see the video of their global CIO, Ramon Baez, who is probably the most respected CIO in the SAP ecosystem -- he used to be the CIO at Honeywell -- talking about how this is the perfect fit.

It is the best of both worlds.

He has had his SAP backoffice now for a couple of decades, the SAP mainframe that is in the closet, and then they have got all their next-generation applications and systems being in salesforce.

That sounds great to me.

Tom Roderick, Stifel Nicolaus.

Graham, I wanted to try on this deferred revenue issue just to make sure I get a little bit more clarity here and also thinking about the pace of deferred as we go through the year.

But can you just clarify what the total impact from the invoicing changes and the longer-term changes were to Q4 and then into Q1?

I am just trying to get an apples-to-apples compare on that and then how we think about Q2.

And then I understand where you are guiding to thinking about deferred revenue in Q2.

As we think about the rest of the year, Q3 was down sequentially.

Is that the right pattern to think about as we model out the rest of the year and then the big ramp into Q4?

So this is, as I say, there is a lot of moving parts in this number.

If you remember when we talked about Q4, we had overall coming out of Q4 net benefit on DR of just around $150 million to total deferred, and that was led roughly between two items.

One was the change in annual invoicing discipline, and the second was the multiyear invoice that you can see also showing up in long-term deferred.

So if you roll that forward to Q1, the net benefit actually is slightly less because, as I mentioned earlier, what we do when we accelerate the invoicing to annual is you actually create a headwind for DR the next quarter.

So roughly $150 million benefit at the end of Q4, roughly $140 million net benefit at the end of Q1.

So that is why when we talk about the guide for Q2, we say that the actual total that we will report will be roughly flat.

But if you -- we expect when you back out the net cumulative benefit on DR of these changes, it will actually be slightly up, and that is the trend we have seen over the last couple of years with DR moving from Q1 to Q2.

Rick Sherlund, Nomura Securities.

Graham, I am struggling as well with the adjustments for the effect of the changing terms.

If I adjust last quarter and this quarter, do I end up with actually faster or, let's call, it organic growth after the adjustments?

I think I'm coming up with about 36% growth in billings as adjusted versus the 34% reported number, but I am still playing with the math.

Am I doing it the right way?

Yes, I think you are thinking -- I mean obviously we don't talk about billings because for all the reasons we have said in the past.

We don't get a particularly accurate representation of what has happened in the quarter.

If you want to do that calculation basically, yes, it adds a little to the 34%, I think, that you would calculate normally on the balance sheet accounts.

It adds a couple, 1 or 2 points to that number for that calculation.

That is terrific.

I was braced for a lower number, but when I realized I have got to adjust last quarter as well, I realized, well, actually your quarter, looking at it from last quarter, actually I think it helps you a little bit.

All right, so that is a relief.

Marc, I was -- I think I might have missed a little bit on your response to the earlier question about Cisco comments.

There was an awful lot of speculation about your enterprise business being slower, and then Chambers made his comments, and you guys obviously had a terrific quarter.

Have you noticed any change in your enterprise?

Was the mix different in the quarter?

Was enterprise slower, any indication you can read across to what is happening in the broader economies?

For us I think that we at a fundamental level believe that we are still very much a distribution-constrained organization, and we are just trying to hire as many salespeople that we can around the world and get them properly organized and in their seats and trained and able to deliver on the opportunity.

It is not that the overall economy cannot affect us.

We saw when the whole world imploded, it did slightly impact us, but probably not as much as everybody else.

Because when you have this level of growth and differentiation from the competitors, our greatest challenge is just the ability to close the business.

And that is honestly what we are focused on.

When we look at these pipelines, obviously by the nature of our business when we look at the second-quarter pipeline, it is unlike anything we have ever seen in size and scale.

And then the challenge is, how are we going to close it and wrap it up because there is only so many of us?

And that is kind of how we look at the business, and we don't really take into consideration these kind of things that we are hearing about.

And I have got the highest, highest respect for John Chambers and Cisco, but their business in pushing out switches is not directly related to our ability to close Sales Cloud, Service Cloud, Marketing Cloud and platform transactions and help our customers define their social enterprise.

Our customers are trying to grow their toplines, and that is what we are.

We are a topline company.

We are a Company that helps our customers close more business, and that is all we are focused on every day is our customer's success and closing those deals.

And that pipeline is rich and deep, and we want to just mine it.

And that is all about getting those salespeople in their chairs and out there and closing.

And we have done a good job of that.

That is why you can see the $3 billion guide for this year.

That is why you see these implied billings numbers that you are talking about are doing just fine.

And at salesforce, it is never good enough.

And we work -- and we think we have to work harder, and that we can even do better, and that is our goal is to do better and to deliver -- and I have talked about this a few times, but it has been on my mind more this quarter than ever is that $10 billion a year and how do we deliver that $10 billion a year, and how do we get that Sales Cloud to the level where it needs to be for the $10 billion a year and the Service Cloud and the Marketing Cloud and the platform, and those are our four core businesses.

And they need to all come in for that $10 billion a year to manifest, and that is what Graham and I spend the time on.

We have got revenue goals for each of those buckets and we are working hard to deliver them, and that is where we are.

Richard Davis, Canaccord Genuity.

Marc, how do you think about making your franchise in the developer world, specifically Force, as good as you have at the application layer?

And I realize the two are interlinked, but do you think of those separately, or how do you get people really playing on the (inaudible) side of that equation?

I think it is a multidimensional problem, and for us we have got developers who are inside our existing customers, and those are core developers and they love things like Force.com.

You have got ISVs who are building applications on Force.com like companies that you have maybe read about in the Wall Street Journal, [CanAnde], which is building manufacturing on Force.com or FinancialForce that is building the ERP solution, or BMC Software building Remedyforce and others.

And then you have got, in addition to those ISVs, you have got independent developers who are building on Force, but they are also building on our Heroku platform.

And Facebook developers, of course, can access that Heroku platform right from inside Facebook, which is awesome, and has created a lot of growth in the application number.

And then you have developers who are building applications for websites and for interactive capabilities also on Heroku.

So it is not one developer, it is many different developers, and our developer numbers are at record levels.

And we are speaking, I think, with a competitive product for developers in a way that we have never been able to before.

We have just really been able to beef it up since our acquisition of Heroku.

It is really -- that really changed the tone in our ability.

And you saw that in our Cloudstock program at Cloudforce where we had a whole developer of Pavilion.

So we are very focused on the developer, but we are focused on the developer as part of our overall strategy, and it is one of four critical legs of our stool to make that happen, which is the social enterprise platform this quarter, but so is sales, service and marketing as well.

Phil Winslow, Credit Suisse.

Thanks for the great quarter.

One of the things you were talking about earlier obviously was the Marketing Cloud.

Marc, I'm just wondering as you envision the future how you see the Marketing Cloud evolving both from a B2B and a B2C perspective?

Well, I have spent a lot of my time thinking about that question this quarter because I am sure like you have, I have been reading a lot of stories about Chief Marketing Officers who are spending more on technology than ever before.

That is a common story today, and I think an increasingly common story is that the CMO is going to spend more on technology in a company than the CIO.

And that has not happened yet in most companies, but I believe that it will.

And that is a whole new opportunity emerging, and we need to double and triple down internally at salesforce on creating that Marketing Cloud.

We are very fortunate about a year ago to buy the number one marketing company with Radian6 doing social listening, and we are really looking at what are all the things that we need to develop to deliver that Marketing Cloud.

And I am really excited about the Marketing Cloud.

I really think it is a multibillion-dollar opportunity just as we have seen the Sales Cloud is and the Service Cloud is and the platform is.

So I'm trying to get my thinking around that, and by the time we get to Dreamforce I think we are going to have a lot to talk about in regards to the Marketing Cloud.

We can already see a couple of strong tenants of that, and I will just mention a few of those to you.

We have got, of course, Radian6, which is doing amazing.

We have got Heroku, which lets you build interactive applications for Facebook or for the Web.

We have got Site.com that we introduced at Cloudforce San Francisco, which is -- lets you deliver your website.

And we have also have Data.com, which is the critical data that marketers need to be able to figure out who their customers are and get key marketing materials and information to them.

So that is the core of the Marketing Cloud today.

You know, Radian6, Heroku, Site.com and Data.com, and then the question is for us, how do we build a full marketing suite?

How do we become the marketing desktop?

How do we have the marketing front office?

And we are looking at that, and I think that is a very, very exciting opportunity.

And just like Heather was talking about how exciting Service Cloud is, she is absolutely right.

It is stellar.

And, of course, I have been talking about Sales Cloud for 13 years, and you are going to hear me talk a lot about the Marketing Cloud I think over the next decade.

All right.

We are down to the final stretch here.

Maybe one or two more questions.

Derrick Wood, Susquehanna International.

Graham, I was wondering the $140 million number you gave, does that include the impact from the nine-figure deal, and if not, could you give us what came on the balance sheet from that?

And then I guess for Marc, back to kind of the macro question, if you were to see some budgets come under pressure, are there proof points that you could look at past deal flow that has helped that accelerate -- has helped accelerate decision-making to move off of on-premise and over to cloud given the ROI?

So the $150 million and the $140 million numbers for Q4 and Q1 do not include the invoicing impact of the nine-figure deal because that is a normal deal.

Those two numbers we have given for Q4 and Q1 are changes that we want to call out either because it is a multiyear invoice or because it is a change in invoicing from quarterly or semiannual to annual.

So the nine-figure deal was just a normal annual deal, and so it is not included in those numbers.

Yes, you know, I will tell you that in today's world and the world has changed and we are going to see that tomorrow at the Facebook IPO, that it is a social world and it is a mobile world and it is a cloud world.

And social, mobile and cloud have really been defined by Facebook.

That is what Facebook is today, and that is what we are trying to be at salesforce, but we are trying to deliver it through our Sales Cloud, Service Cloud and Marketing Cloud and platform.

If you have not redefined your Company at this point around those pieces, you are probably grasping for straws in your strategy.

You saw that yesterday at Sapphire, and we have seen that with other competitors as well where they are just trying to sell the path to the future.

And the path does not equal the future, and by the time we get to Dreamforce and you see the power of our customer base, the 100,000 attendees attending Dreamforce this year in September, when you see major CEOs show up and say they are using salesforce.com like Jeff Immelt at General Electric and you hear the incredible stories of success of these customers, you are going to see the world has changed, and this is not just about cloud.

This has been a fundamental transformation of our customers themselves and users, and I'm sure everyone on this call is looking at their iPhone or their iPad or their Android device or some other mobile technology, and maybe they have got Twitter or Facebook in front of them.

We just did not have that four or five years ago.

And yesterday I re-watched Steve Jobs rolling out the iPhone in 2007, and it just inspired me that the world can change so fast, that so many exciting things are happening.

And now you do have these great new prophets emerging like Mark Zuckerberg and Jack Dorsey, and our job is just to listen and follow them because I think the enterprise is going to get pulled into the future through these consumer services.

And that is what salesforce.com is going to help our customers do.

All right.

I am getting some tired stares here, so we are going to take one last question.

Let's bring it home strong.

Steve Ashley, Robert W. Baird.

Wow, I'm under a lot of pressure.

Actually you pointed out that large deals are not your whole business.

You make a lot of (inaudible).

And I just want to talk about maybe the small and midsize business.

How do you continue to see that represent the same kind of percentage of your business?

And then also Desk.com, Concur for some of the initiatives you have talked about in the fast past of bringing to that market, are you having any success selling into that small and midsize market with those products?

Well, Desk.com and Do.com are phenomenons, and with Do.com we have now more than 100,000 customers on there who have created more than 1 million tasks, which is amazing.

We just never seen any kind of growth like that before, and that is very much a future for salesforce.

It is not where our revenue is today, but we look at that almost like our skunk works, our R&D center.

And these new companies that we have bought that we are nurturing along and that we honor and respect because, hey, we respect the future at salesforce, and what we see in companies like that is what we have to become in the mainstream.

And we look at those as beacons of the future, and if you are not using Do.com, you should be.

I mean it is something I use every day.

It is phenomenal.

And for small and medium business, Desk.com is awesome.

And we have also talked about all the other great services of salesforce, even great capabilities like we have like our Database.com service for letting customers roll out their databases, our Site.com for websites, and of course, salesforce Chatter.

And you can see that at Chatter.com you can sign up and just get going.

And we have seen so many customers there, and we have these massive customer implementations now with Chatter.

We did not have time to talk about that in deep depth on the call, but I was just reviewing that with the head of our Chatter unit.

And the size and scale of the Chatter deployments are as large as they have ever been.

So a lot of exciting oars in the water and working to get to that $10 billion business in the era of Facebook and Twitter that we are paying attention to these next-generation companies, and we are working hard to build those concepts into who we are as a company so we can deliver that in the mainstream of the enterprise.

All right.

I think that wraps things up.

Before we sign off here, I want to encourage everyone to attend our upcoming Cloudforce London event.

As Marc indicated, that is next Tuesday, May 22 at the ExCel Centre in London.

The event is going to be hosted by co-Founder Parker Harris, as well as our Chief Operating Officer, George Hu, and this is an event you absolutely will not want to miss.

We already have more than 12,000 customers registered.

You can go ahead and register, as Marc said, at Dreamforce.com, or you can go ahead and just send me an e-mail.

We will make sure to get you in.

We look forward to seeing everybody there.

Thank you for joining us today, and we will look forward to catching up with you soon.

Bye-bye now.

Ladies and gentlemen, thank you for your participation in today's conference call.

You may now disconnect.