賽富時 (CRM) 2013 Q2 法說會逐字稿

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  • Operator

  • 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 Q2 2013 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 conference over to Mr. David Havlek, Head of Investor Relations.

  • Sir, you may begin.

  • - VP of IR

  • Thank you, Jamaria.

  • Good afternoon to everyone joining us today to discuss Salesforce.com's second quarter Fiscal Year 2013 results.

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

  • In addition, I'm thrilled to announced today that we'll be tweeting the highlights of our call on Twitter for the first time ever.

  • This is an exciting addition to our call and it making our broadcast even more accessible.

  • To join us on Twitter you can follow us at the handle @Salesforce_IR.

  • Here to discuss our second quarter performance today are Marc Benioff, Chairman and CEO, who is in a very good mood today, as well as Graham Smith, our Chief Financial Officer.

  • Mark and Graham will be making a few comments then we'll open things up to your questions.

  • As always, I ask you to limit your questions to one so that we can get to as many of you as possible.

  • During our discussion today, either in 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 the additional detail maybe one-time in nature and may or may not be provided in the future.

  • In addition, please also note that our commentary will primarily be in non-GAAP terms.

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

  • It's also possible we may reference certain unreleased services or features not yet currently available in our discussion today.

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

  • With let, that 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 2013 performance.

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

  • These 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, of course, as well as other information on potential risk factors that could affect our financial results are included in our forms filed with the SEC, including our most recent report on Form 10-Q particularly under the heading Risk Factors.

  • Access to press release, or historical results, or 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 at Salesforce.com/investors.

  • All right, let's go ahead and get this thing started, let me turn the call over to Marc.

  • - Chairman and CEO

  • Hello, thanks, David, for the world's largest IR introduction.

  • We're having an outstanding year of growth and I'm absolutely delighted to share our second quarter results with all of you today.

  • Revenue for the second quarter rose 34% from a year ago to $732 million.

  • In constant currency revenue grew even faster at 37%.

  • Just one year after surpassing a $2 billion annual revenue run rate, we now expect to break through that $3 billion annual revenue run rate threshold next quarter, pretty awesome.

  • It was only a couple years ago that I was -- remember I was on the phone with all of you talking about a $1 billion revenue run rate, and now we're at $3 billion.

  • Operating cash flow exceeded $130 million, an increase of more than 60% year-over-year.

  • Operating cash flow is one of the very best measurements of success at Salesforce.com and I'm delighted to see this great result.

  • Deferred revenue was more than $1.3 billion, which is up more than 40% year-over-year.

  • And, the dollar value of booked business on and off the balance sheet now tops $4.1 billion, up more than 50% year-over-year.

  • Given our strong financial results and pipeline of new business, we're thrilled to announce that we're once again raising our full Fiscal Year 2013 revenue guidance.

  • The high end of our guidance puts us on pace to deliver a full year revenue growth rate of 34%, awesome.

  • Since we first gave guidance in November last year, we have now raised our forecast for the year by more than $100 million.

  • This is evidence of continued growth and execution at Salesforce.com and the industry's move to social enterprise.

  • Salesforce.com is leading customers in their transformation to become social enterprises.

  • Social enterprises are able to connect with customers, partners, and employees in entirely new ways.

  • And, with our six product lines, the Sales Cloud, the Service Cloud, the Marketing Cloud, Salesforce Chatter, Work.com, and Salesforce Platform, our customers have the tools to create a true social front office.

  • And, are revolutionizing the way they sell, service, market, collaborate, work, and innovate.

  • You'll be hearing a lot about that at Dreamforce on September 18 to 21, but more on that later.

  • Salesforce.com is the clear leader in sales, service, marketing, and cloud platforms.

  • Our flagship Sales Cloud is once again the undisputed leader in Gartner's Magic Quadrant for Salesforce automation this year in cloud or on premise.

  • The Service Cloud is also the undisputed leader in Gartner's Magic Quadrant for customer service and support in cloud or on premise.

  • And, I'm thrilled to announce that the Service Cloud has broken through the $500 million annual revenue run rate milestone and is well on its way to go to $1 billion.

  • Congratulations to our Service Cloud team for their outstanding execution.

  • And, you will see at Dreamforce the Salesforce Marketing Cloud, the next $1 billion product line in the making.

  • Gartner predicts that CMOs will soon outspend CIOs over the next five years as the social revolution sparks the biggest transformation that the marketing industry has seen since the birth of television nearly 60 years ago.

  • With the acquisitions of the two number one social media marketing companies, Buddy Media and Radian6, Salesforce.com is now the clear choice for brands to elicit, engage, advertise, and then measure their social marketing programs in a whole new way.

  • And, Salesforce's Marketing Cloud already manages more than 10% of Facebook's ad spend.

  • The Salesforce Platform has been our fastest growing product line over the past year, and will be our fourth $1 billion opportunity.

  • It is the only solution rated by Forrester as a leader in every single platform as a service category for coders and for business experts, for ISVs, and for service providers.

  • That's why developers today have coded more than 300,000 applications on our force.com service and more than 2 million Apps on Heroku making the Salesforce Platform the number one platform for business applications.

  • With cloud, mobile, and social built into the heart of Salesforce.com's social enterprise architecture, the possibilities for innovation are really endless.

  • Now, let me share with you a few examples of new social enterprise wins from the quarter.

  • Allergan, a growing multi-specialty healthcare company is transforming the physician experience with the Sales Cloud, Service Cloud, and Salesforce Platform.

  • They're building a private social network that are going to give sales and service reps a 360-degree view of the physicians they support.

  • And, by moving a number of its Apps on to the Salesforce Platform, Allergan is now delivering a unified brand experience to its global community of physicians on any browser, on any mobile device across any network.

  • And, Virgin America is one of the fastest growing airlines in the country, is consistently voted number one for its customer experience.

  • Virgin is a highly distributed workforce where more than half of its teammates such as pilots and flight attendants are constantly on the move.

  • With Salesforce Chatter and Work.com, Virgin is creating a wall-to-wall employee social network to align, motivate, and drive teammate performance across its entire workforce.

  • And, I'm looking forward to welcome their Chairman, Richard Branson to Salesforce's Dreamforce on September 19.

  • Nestle is the world's leading nutrition, health, and wellness company.

  • They chose Salesforce.com to connect more than 300,000 employees in what will be the largest Salesforce Chatter deployment ever.

  • With Chatter, Nestle plans to drive a whole new level of employee collaboration from inside the office or any mobile device.

  • And, AEON is Asia's largest retailer with thousands of supermarkets, drug stores, and other shopping outlets.

  • They're transforming the supply chain experience by connecting thousands of suppliers, distributors, employees in a partner social network with the Salesforce Platform and the Sales Cloud.

  • In addition, Burberry expanded its relationship with Salesforce.com in the quarter with a new social enterprise license agreement.

  • Burberry plans to transform the retail store experience for customers by standardizing its entire Army of service professionals on the Service Cloud and extending it into the stores with its client-telling App.

  • Burberry also plans to use Salesforce Radian6 to listen and engage with customers right where they are in social networks, and will be using site.com to allow teams to build web pages on the fly.

  • This complements Burberry's worldwide social enterprise network built on Chatter that's already been deployed to all of their employees.

  • Other new or add-on transactions in the second quarter included Axiom, Ashland, Cigna, KDDI, Levi's, Merrill Lynch, Office Depot, Vonage, and much, much more.

  • In every one of these transactions companies are becoming social enterprises by using our social and mobile cloud platforms to redefine their front office and to reposition their old enterprise software as their back office solutions.

  • Look, there's no better barometer for customer usage than its success in delivering the number of transactions that Salesforce is doing each and every day.

  • Our service continues to support and deliver transactions for customers at an unprecedented scale.

  • To date, our customers have created 1 million work flow rules which is an increase of 50% year-over-year, 2 million custom objects which is up nearly 60% year-over-year, and nearly 3 billion lines of Apex code which is twice the number from a year ago.

  • And, I'm delighted to announce that we delivered nearly 60 billion transactions in the quarter, up 66% from a year ago.

  • That's about 900 million transactions every business day.

  • Salesforce.com is now waiting with anticipation for its first 1 billion transaction day.

  • That will be a huge milestone in enterprise cloud computing when Salesforce delivers 1 billion transactions in a single business day.

  • And, it's coming very, very soon.

  • In three weeks, Salesforce.com will host Dreamforce 2012.

  • It will be the largest event in the history of enterprise software.

  • If you thought last year was unbelievable, wait and see what we have in store this year.

  • We're expecting to reach over 100,000 total attendees, 70,000 registered on premise attendees and over 30,000 attending online.

  • Dreamforce takes place from September 18 to 21 right here in San Francisco.

  • It will be the industries largest vendor-lead gathering for social enterprises and we'll have more than 350 partners in the expo and 750 break out sessions.

  • And, we will be inspired by some of the world's fastest growing companies like Virgin and Burberry, Facebook, Charles Schwab, Activision, General Electric, Coca Cola, Toyota, and so many more who will share their vision and all the exciting ways that are transforming their social enterprises.

  • They will bringing their global CIOs and Chief Executive Officers as well to talk about how they've achieved Next Generation of revenue growth.

  • And, just as we heard on Kimberly Clark's earnings call, how Salesforce.com was paramount in helping them to achieve Next Generation revenue growth, we continue to see Salesforce.com's customers grow at a much higher level than any other customer of any other software company.

  • In fact Salesforce.com's customers say that their revenue growth is on average 47% higher than their next stage peers.

  • Join me on stage with a number of special guests talking about growth, innovation, and execution at Dreamforce which will include Richard Branson, Jeff Immelt, Angela Ahrendts, General Colin Powell as well as a special appearance by motivational Guru Tony Robbins who will run an entire day focused on how to transform yourself into the Next Generation social enterprise.

  • And, our musical guest, the Red Hot Chili Peppers.

  • We'll also be hosting the 3rd annual benefit concert for the UCSF Benioff Children's Hospital on Thursday, September 20, which will feature seven time Grammy Award winning musical group Lady Antebellum and comedian Dana Carvey.

  • If you're interested in a sponsorship or a ticket for the UCSF Benioff Children's Hospital benefit, please go to theconcertforucsfbch.com or go to benioffchildrenshospital/concert.

  • To register for Dreamforce, you can go to dreamforce.com and talk to David.

  • And, also please catch me on Mad Money tonight with Jim Kramer in about an hour.

  • I'll look forward to seeing you there.

  • And, with that, let me turn this call over to Graham to discuss the financial details of our second quarter.

  • - EVP and CFO

  • Thank you, Marc.

  • Well, we delivered another quarter of great operating results in Q2.

  • In the face of significant FX headwinds we posted strong year-over-year revenue growth, balanced with more than 200 basis points of operating margin improvement.

  • We also delivered outstanding operating and free cash flow in Q2.

  • In fact, this was our best ever second quarter cash flow result.

  • So, let me take you through the financial highlights starting with revenue.

  • Second quarter revenue was $732 million, that was up over 34% over last year and our sixth consecutive quarter of year-over-year revenue growth in the mid-30% range.

  • Excluding a foreign exchange headwind of $17 million, revenue grew 37% over Q2 last year.

  • There's no other enterprise software company of our scale growing at this rate.

  • From a geographic perspective, we continue to deliver strong year-over-year revenue growth in each of our major regions.

  • Revenue in the Americas grew 38% to $508 million.

  • Revenue in Europe grew 40% on a constant currency basis and 22% in dollars to $125 million.

  • And, finally revenue in Asia increased 28% in constant currency and 29% in dollars to just under $100 million.

  • So, with our Q2 results we achieved a number of regional milestones.

  • We now have a $2 billion annual revenue run rate in the Americas.

  • We have a $500 million annual revenue run rate in Europe, and a $400 million annual revenue run rate in Asia.

  • In addition to solid new business growth, second quarter revenue was also assisted by our efforts to reduce attrition.

  • Attrition continued its slow but steady decline in dollar terms and remains in the low teens on a percentage basis.

  • Moving to the income statement, non-GAAP operating profit was up 60% over Q2 last year.

  • This translated to improving non-GAAP operating margins by just over 200 basis points year-over-year driven principally by improvements in G&A but also through better execution in sales and marketing.

  • It's worth noting that second quarter year-over-year operating margin comparison is apples-to-apples, since the first anniversary of the Radian6 acquisition was at the beginning of Q2.

  • We continued to grow headcount in the second quarter adding 430 net new employees to bring our total employee population to more than 8,700.

  • That's up 38% from the second quarter last year.

  • And, as we look to Q3 we expect continued year-over-year headcount growth as a result of organic hiring and from our acquisition of Buddy Media which will add about 300 new employees to total headcount in the third quarter.

  • Turning to earnings, non-GAAP EPS was $0.42 in the second quarter or $0.03 above the high end of our guidance range.

  • While approximately half of our over achievement was driven by the improvement in our operating margin, EPS also benefited from a lower than projected share count.

  • Turning to cash flow, second quarter operating cash flow was $136 million, that's up 64% over the last year.

  • An increase in accounts payable, partially offset by an increase in prepaid expenses and other current assets, contributed approximately $15 million of benefit to operating cash flow in the second quarter.

  • Even excluding this amount, it was still a strong cash quarter.

  • For the third quarter we expect operating cash flow to be lower sequentially and year-over-year for several reasons.

  • First, we expect the approximately $15 million benefit I just described will reverse next quarter creating a roughly equivalent headwind in Q3.

  • Second, we will pay approximately $10 million as the final settlement for the California State wage and hour lawsuit we discussed during the second quarter of last year.

  • And then, third we expect the acquisition of Buddy Media to reduce operating cash flow by approximately $5 million.

  • Nevertheless, with our strong Q2 and first half cash flow, we still expect full year operating cash flow growth in the low 20% range.

  • Cash and equivalents increased by more than $550 million in Q2 driven primarily by a shift from marketable securities as we prepared for the acquisition of Buddy Media.

  • Accounts receivable, which was up 30% over Q2 last year, continues to be well managed with DSO at 55 days, that's down from 58 days in Q2 last year.

  • And, CapEx in the second quarter was approximately $29 million down, that was down 35% over Q2 last year.

  • The year-over-year decline in CapEx is really the result of the exceptionally high level of data center investments we made in Q2 last year.

  • For the second half of the year we expect CapEx to increase meaningfully on a year-over-year basis driven by new office buildouts and other lease hold improvements.

  • These will be primarily related to our new space in San Francisco at 50 Fremont Street and new offices we've opened in Chicago.

  • Free cash flow, which we define as operating cash flow less CapEx was $107 million in Q2, that's up 182% over the second quarter last year.

  • For the first half of Fiscal 2013, free cash flow was up 83%.

  • Turning to the balance sheet, deferred revenue in the second quarter was approximately $1.3 billion, that's up 43% over Q2 last year.

  • And, excluding a year-over-year foreign exchange headwind of approximately $26 million, deferred revenue actually increased 46% over the second quarter last year.

  • And, on a sequential quarter basis, in other words going from Q1 to Q2, deferred revenue was impacted by foreign exchange headwinds of approximately $14 million.

  • Deferred revenue in Q2 continued to benefit from the shift toward annual billing that we've discussed on the last two calls as well as some of the large multi-year invoice we discussed in Q4.

  • The benefit in Q2 was approximately $120 million, that's compared with a benefit of approximately $145 million in Q1 and approximately $155 million in Q4.

  • We expect this sequential decline in dollar benefit to continue in Q3.

  • Excluding these invoicing benefits, second quarter deferred revenue grew by approximately 30% year-over-year just as it did in Q1.

  • And, we expect a similar organic growth rate for deferred revenue in the third quarter.

  • Looking ahead, given the effects I've already described, we now expect reported deferred revenue to grow slightly slower than the 43% growth rate we just reported in Q2.

  • Off balance sheet backlog, or unbilled business that is booked under contract but not yet invoiced, was approximately $2.8 billion in Q2, that's an increase of more than 50% over Q2 last year.

  • Deferred revenue plus this unbilled backlog now exceeds $4.1 billion.

  • Before I talk through our Q3 and Fiscal 2013 guidance, I just want to highlight the impact that the weakening euro is having on our financial results.

  • The change in the euro/dollar rate from just three months ago has decreased our second half revenue outlook by approximately $10 million.

  • As Marc mentioned earlier, we've increased the high end of our Fiscal 2013 guidance range by $115 million since our Q3 call last year, including Buddy Media while the euro/dollar rate change since November has reduced our full year revenue forecast by approximately $30 million.

  • In the context of these FX headwinds, we're delighted to be raising our full year revenue outlook to $3.025 billion to $3.035 billion which represents growth of 33% to 34% over Fiscal 2012.

  • And, obviously includes approximately $25 million from Buddy Media.

  • And, we now estimate full year non-GAAP EPS in the range of $1.48 to $1.51.

  • This reflects our stronger second quarter results as well as the previously announced dilution in the second half from our acquisition of Buddy Media.

  • For Q3, we anticipate revenue in the range of $773 million to $777 million for year-over-year growth of approximately 32% to 33%.

  • And, we expect Q3 non-GAAP EPS in the range of $0.31 to $0.32.

  • All of 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.

  • So, to wrap up, we had another great quarter with strong revenue and deferred revenue growth despite considerable foreign exchange headwinds.

  • At the same time, we demonstrated the strength of our operating model by delivering significant operating margin improvement and cash flow growth.

  • This momentum positions us well for a strong second half.

  • Before I turn the call over to the operator for Q&A, I want to encourage you all to register for Dreamforce where we will be holding our annual investment community forum.

  • Contact David Havlek or the rest of the Investor Relations team for registration details.

  • With that, I'll turn the call over to the operator for questions.

  • Operator

  • (Operator Instructions)

  • Rick Sherlund, Nomura.

  • - Analyst

  • Marc, I'm curious at Dreamforce if we'll hear a lot more about Ripple and your plans in the HR market?

  • And, I wonder if you could address whether it would be logical for us to assume that you're ultimately going to address the broader HR market in financials as well if that's a logical extension of your business?

  • - Chairman and CEO

  • At Dreamforce, we're going to be announcing Work.com which is our rebranding and redevelopment of Ripple, you'll be seeing the new version of that and our direction there.

  • We'll also have with us Aneel Bhusri, the CEO of Workday.

  • And, you'll see how we are working hard to integrate with them to deliver a full HR suite to our customers between a Salesforce.com's work.com system and Workday.

  • And, you'll also see Workday's integration with Chatter as well.

  • We're very excited about our initial focus here into HR.

  • Operator

  • Adam Holt, Morgan Stanley.

  • - Analyst

  • Marc, could you talk about what you saw from a large deal perspective in the quarter?

  • And, maybe give us an update on how some of the especially large transactions that you did in the fourth quarter and first quarter are ramping in terms of getting up and running?

  • - Chairman and CEO

  • The first thing that I'll say is of course Salesforce.com is not dependent on any one type of transaction to make its quarter happen.

  • We have a rich and full portfolio across small, medium, and large business, as well as small, medium, and large transactions.

  • Salesforce.com had an outstanding quarter in large transactions.

  • We profiled some of those including Allergan and Virgin and Nestle and others.

  • And, we also closed a very large transaction, in fact one of our very largest transactions ever, with a large networking technology company which consisted of both a very important renewal plus an extremely large additional ACV, or what we call first-year contract component.

  • And so, it was really a great quarter for large transactions.

  • Operator

  • Brad Zelnick, Macquarie.

  • - Analyst

  • Can you give us insight into how signings performed from small business, medium business, and large enterprise?

  • And, of the three whichever performed least favorably, is there anything you could have done better there?

  • Thank you.

  • - Chairman and CEO

  • We saw really excellent performance across enterprise and medium business through all geographic regions.

  • And, we saw some softened sales in very, very small businesses in the US that we think are related to the economy.

  • But, as you can see it didn't affect our total performance as an organization.

  • Operator

  • Walter Pritchard, Citigroup.

  • - Analyst

  • You mentioned that 10% of Facebook advertising is going through your recently acquired Buddy Media asset.

  • And, I'm wondering, as you think about your long-term role in the world, is that a role you wish to play, an intermediary?

  • And, I'm just curious how you're thinking about your need to build out more assets in the social space.

  • It seems like it's the wild, wild west at this point and you've got a pretty good collection.

  • There's others that are out there.

  • Just curious how complete you view that solution at this point.

  • - Chairman and CEO

  • I'm really focused on how do we get the Marketing Cloud to $1 billion in revenue.

  • And, our strategy is really first and foremost to pick up the number one asset in the social media marketing which was Radian6, which we did a year ago.

  • I think when we did that, that made it really clear to everyone that we were going to be a player in marketing for the first time.

  • That was driven primarily by our customers.

  • You probably saw Dell and Gatorade and even the American Red Cross all had built these social media command centers and started to promote them on YouTube and other vehicles.

  • And came to us and said that this is a company you should be paying attention to.

  • We acquired the company for over $300 million.

  • As part of that transaction, we really started to look at what was happening in the total marketing space.

  • After successfully integrating them a year later, we saw that there was going to be a consolidation in social media management, and our strategy was very simple.

  • We had to once again acquire the number one player and leave the number two and three and the number four player to others.

  • We did that with Buddy Media.

  • By putting those two number one players together and two outstanding leaders with Michael Lazerow and Marcel Lebrun, we were able to reconceptualize what those two products now have created which is really a one plus one equals three.

  • We'll demonstrate that for the first time at Dreamforce.

  • You probably know just before we acquired Buddy Media, they had acquired Brighter Option which is a major visionary in terms of how ads will be acquired and placed in social media.

  • You'll see that as a strategic part of our Marketing Cloud.

  • Now, in terms of that as part of the Marketing Cloud, we believe that CMOs are going to want their own cockpit to fly their own fighter jets.

  • Because, honestly, CMOs are going to start spending much more than CIOs in technology.

  • IBM has said that, a lot of companies have said that.

  • We agree with that and we want to invest so that we can take advantage of that spend.

  • What no one has delivered yet is really that cockpit for the CMO and for all of those marketers integrated with the sales and service solutions so that companies can have a total 360-degree view of their customer from advertising to close.

  • We're going to offer that solution at Salesforce.com.

  • We're already number one in sales; we're already number one in service.

  • It's very clear to everyone we're going to be number one in marketing.

  • And, of course we're number one in business platform.

  • These are really our four major strategic growth levers for the company.

  • And then, it's complemented by our support of Chatter and collaboration and our entry into Work.

  • Operator

  • Heather Bellini, Goldman Sachs.

  • - Analyst

  • You said you're focused on getting the Marketing Cloud to $1 billion.

  • I was wondering if you could share with us how much evangelism do you think it takes to get to that $1 billion level?

  • Do you think that partly when you put the collection of assets together including Buddy Media, including Radiant6, is that the type of evangelism that you need is showing what the full suite could look like?

  • Whereas that wasn't a possibility in the past for one person to offer everything?

  • - Chairman and CEO

  • If you go to our website you'll see yesterday we started to rollout the next generation of our homepage which is the next generation of our positioning.

  • And, you'll see how sales, service, and marketing are at the core of how Salesforce.com positions itself.

  • First and foremost, Heather, you know that we've made a dramatic investment over the last decade in building out the single most productive sales force in enterprise cloud computing.

  • And, that sales force is able to sell a lot of different types of solutions.

  • We've demonstrated its ability to sell sales solutions, we've demonstrated its ability to sell service solutions, and we believe this year we have already started to demonstrate its ability to sell marketing solutions.

  • We have to be able to sell to that Chief Sales or Chief Revenue Officer.

  • We have to be able to sell to the Chief Service Officer.

  • We have to be able to sell to the Chief Marketing Officer and we have to be able to sell to the Chief Information Officer.

  • And, when you get to Dreamforce you'll be surprised to see how many Chief Executive Officers are there.

  • In fact, many Chief Executive Officers of our customers are already signed up to come to Dreamforce.

  • Including, as I mentioned, Richard Branson and even Jeffrey Immelt is coming in a non-paid capacity to talk about the transformation that GE is making into social enterprise.

  • We will demonstrate, for the first time, how General Electric's aircraft engines are integrated into Salesforce's Service Cloud and Sales Cloud to offer a complete picture to their sales professionals and service professionals on how their technology is operating.

  • They're going to talk about how that's made them more efficient, or what they say, how it lets them start to speak machine for the first time.

  • We think that this is the transformation that all companies are going to have to go through and we're leading that.

  • I don't think we can make that transformation without marketing.

  • That's why we've made the investment in marketing, we've made the bets, and we are now executing.

  • It's not going to happen overnight, but it's also not going to take that long, honestly.

  • And, I fully expect that just as today we announced that we're over $500 million annual revenue run rate on service and well on our way to $1 billion in the Service Cloud, very shortly we'll be talking about the same numbers with the Marketing Cloud.

  • Operator

  • Brent Thill, UBS.

  • - Analyst

  • On Europe, you've showed the third quarter of accelerating constant currency growth.

  • If you could give us a sense of what you're seeing from a bookings perspective?

  • And, the dynamics helping shape the great performance in Europe?

  • - Chairman and CEO

  • One year ago we made a dramatic management shift in Europe where we brought in the number two from Oracle and Miguel Milano to be our President of Salesforce Europe.

  • He's done a phenomenal job.

  • We are extremely excited about the performance of our European organization.

  • We really expect continued delivery in Europe through the year.

  • Our pipeline in Europe has never been more exciting.

  • Our ability to talk to and work with the largest European organizations has really never been as confident as it is today.

  • And, we're continuing to invest.

  • In countries that we have not had a presence that are significant IT-oriented countries, we've talked about this in the last 36 months, we have invested not only in the UK, which has been an anchor for Salesforce in Europe, but we've also made major investments in France and Germany.

  • Those are paying off and that is the acceleration that you're seeing today.

  • We, as you know, have shied away from countries like Spain and Italy.

  • We're really focused on the UK, France, Germany, and the Netherlands as the heart of our first stage of Salesforce's growth in Europe.

  • We're really getting ready for that second stage of growth.

  • As we prepare to add more countries into Europe we will bring you online and explain that strategy to you.

  • Operator

  • Jason Maynard, Wells Fargo.

  • - Analyst

  • I just have one question about your shift into being a multi-product company now, especially with Service Cloud and its ramp.

  • How has that impacted your go to market?

  • And, how are you dealing with partners when they've been working with some of the largest system integrators today versus say a year or so ago?

  • Thanks.

  • - Chairman and CEO

  • I don't see this as a shift, honestly.

  • The way I see Salesforce.com is we're a company that helps our customers connect with their customers, employees, and partners in a whole new way.

  • Many of our customers view us as the customer company.

  • When they want to connect with their customers they come to Salesforce.com.

  • And, what I can tell you is that means that we have to deliver sales, service, and marketing as a complete solution to those customers so they can connect with their customers.

  • And, of course, our platform is primarily used for those types of applications Whether it's Heroku, which I know you're very familiar with, our force.com platform or our site.com platform, in all examples customers use those platforms as customer connect.

  • They are working to connect with their customers in a whole new way.

  • Their customers are in new places.

  • They are on Facebook, they're on Twitter.

  • Or in the case of Kimberly-Clark like they talked about on their earnings call, their salespeople need to go with iPads into their customer premises to sell them their products.

  • In all cases, we're prepared to support our customers.

  • When we get to Dreamforce, we'll be showing you the next version of Salesforce's platform which is the Salesforce Touch platform.

  • In the Salesforce Touch platform, you'll see at Dreamforce, we're going to go into general availability pilot on our core Salesforce automation application running in HTML5 on multiple devices.

  • And, you're also going to see that we are delivering a full set of services for our customers to build their own services in HTML5 so they can have heterogeneous device delivery.

  • Now, when you look at our competitors, whether it's competitors that deliver their own operating systems or whether it's competitors who are just specific to enterprise Apps, none of them have done this platform transformation.

  • That is, not only have we delivered the first platform success.

  • But, we have now delivered our second major technology platform which is our HTML5 platform.

  • And you're going to see that delivered in our core Apps as well as right out of our force.com, Heroku, and site.com services as well.

  • Operator

  • Kash Rangan, Merrill Lynch.

  • - Analyst

  • Marc, good growth rate in revenue.

  • I was just wondering how we should be thinking about the relationship between billings growth rate and revenue growth rate?

  • Typically, over the last several quarters, most of your quarters, your billings growth rate has been faster than revenue growth rate.

  • I'm wondering if there's any cross current, maybe economic cross currents, larger deals being cut smaller?

  • Or maybe not and maybe there's a shift to the marketing side of the business where the billings happens in a different way than regular annual multi-year contracts.

  • Just wondering how we should think about the relationship between these two.

  • - Chairman and CEO

  • You probably know we don't give billings guidance and I wouldn't know how to answer that question specifically to you.

  • What I can tell you is we're working hard to deliver a full range of transactions.

  • But, there's no transaction that has changed Salesforce.com more than a transaction we introduced at our last Dreamforce conference, which is our social enterprise license agreement.

  • That really redefined for our customer that they could sign an SCLA with us and acquire all of our products in one concept.

  • Sales, service, marketing platform all as one unit and without a focus on per user pricing.

  • We'll reveal at Dreamforce how many of these SCLAs that we have signed.

  • I think everyone will be impressed to see so many customers and so many customers in the room who have signed SCLAs with us.

  • I think that's one of the core drivers of our growth.

  • We had a great quarter, 37% on a constant currency, I don't think we could expect more than that.

  • I think we've got a killer strategy going forward as the customer company delivering sales, service, marketing, platform, collaboration, and work to reconceptualize how our customers connect with their customers.

  • Operator

  • Brendan Barnicle, Pacific Crest Securities.

  • - Analyst

  • Marc, it's great you guys have partnered around the lead generation piece on the marketing side.

  • Would you continue with that as you build out this cockpit or is that something you feel like you need to have internal?

  • - Chairman and CEO

  • Well, that's a great question.

  • When we look at a lot of the traditional marketing vehicles like the lead generation vehicles or the e-mail marketing vehicles, those are areas that we did not jump into because we just didn't see the same rate of growth that we saw in social media marketing.

  • To that extent, we've mostly seen those companies be flat to modest growth and, in some cases, down.

  • And, we believe that fundamentally companies are moving away from e-mail as their marketing vehicle and lead nurturing away from -- lead nurturing as their marketing vehicles and towards social media management.

  • And, that's why we're excited.

  • Now, I'm not saying that we won't include at some point e-mail and lead nurturing into our Marketing Cloud.

  • If that's what our customers want make no two ways about it, we'll deliver it to them.

  • But, right now it's through partnerships and one of the great things that Salesforce has developed is the AppExchange.

  • If you go to the AppExchange you're going to see thousands of pre-integrated applications into these services.

  • All of our services, sales, service, marketing, platform the AppExchange has a full range of those capabilities.

  • And, you're going to see an awesome, awesome range.

  • There's been over 1.4 million installations of applications from the AppExchange.

  • And, its been a heart of how we deliver value to our customers.

  • And, that's a way right there that we're already delivering that to lead capability.

  • Operator

  • Karl Kiersted, BMO Capital Markets.

  • - Analyst

  • Graham, I'm wondering if you could update us on the invoicing duration shift at Salesforce.com.

  • I think you mentioned in the last couple quarters that the percentage of new billings build on a 12-month cash pre-pay basis might be about two-thirds.

  • Did it inch up again in the July quarter?

  • Has it peaked?

  • And, have you seen any pushback on the full annual pre-pay given the weaker economy?

  • Thank you.

  • - EVP and CFO

  • No it's actually really gone very well.

  • We've seen very broad acceptance from our customers.

  • And, clearly there are always a small number of exception cases that I get involved with.

  • And, remember I have to approve all of the exceptions to this personally.

  • So, I'm able to get a sense of how this is going directly.

  • We've seen a consistent shift, actually, over the last few quarters.

  • Looking at whether we look at Q4 or Q1 or Q2, the overall shift has been around 5 percentage points, 2 percentage points annual away from semiannual quarterly, monthly.

  • So, that's the shift.

  • And, certainly, as you say, we're right around two-third annual in most quarters.

  • As you know, that goes a little above two-thirds in Q4 because we have more large annual contracts typically in the fourth quarter.

  • But, roughly a five-point shift for the last few quarters since we've initiated the program.

  • Operator

  • Terry Tellman, Raymond James.

  • - Analyst

  • Graham, also had a question for you in terms of this unbilled deferred revenue number.

  • I'm assuming -- it looked good, extremely well, actually, year-over-year up 50%.

  • You added $100 million sequentially in unbilled deferred revenue.

  • That is down from the $500 million you added last quarter.

  • Maybe you could reconcile that.

  • And then, as we go forward with these social enterprise license agreements is this actually a metric that's going to jump around quite a bit and be volatile?

  • - EVP and CFO

  • In terms of the off balance sheet backlog, that number is going to -- the sequential change is up and down.

  • So, for example, in Q1 we had our largest transaction ever.

  • And, at that point we renewed our largest customer ever for multiple years.

  • And so, some quarters will have a very large replenishment into that backlog and then some quarters we won't get quite as much.

  • We disclose that as an approximate number just to give people a sense for what we have contracted.

  • It's not meant to be a super precise number.

  • And then, the second question you had was around SCLAs and are we going to see volatility.

  • I'm not sure if you mean the number of SCLAs we're signing.

  • I think, obviously, we've been, as Marc outlined earlier, we're very pleased with our large transactions each quarter.

  • This quarter was a great quarter and we outlined some of those on the call.

  • And, in terms of pricing we've seen very, very consistent pricing over the last eight quarters, that's the window I look at for all of our major additions.

  • And, geographies and sales segments we see very consistent pricing levels.

  • So, we don't see volatility there at all.

  • Operator

  • Tom Ernst, Deutsche Bank.

  • - Analyst

  • You took us through the 300-basis-point hit essentially due to foreign exchange -- excuse me, 300-basis-point hit due to the change in billing terms on a sequential basis to a billings calculation.

  • How much would it have been for just the foreign exchange?

  • I think you only gave us the year-on-year change.

  • - EVP and CFO

  • No, we gave you two numbers.

  • We gave you the sequential change which was $17 million.

  • That was the headwind sequentially on deferred revenue -- sorry $14 million, I beg your pardon.

  • And then, year-over-year is $26 million.

  • So, we gave you both those numbers, the foreign exchange impact on deferred revenue.

  • Operator

  • Robert Breza, RBC Capital Markets.

  • - Analyst

  • As you think about foreign currency going forward here, obviously it was a major headwind here.

  • How should we think about it going into the second half of the calendar year?

  • And, how you guys are looking to offset that?

  • - EVP and CFO

  • As I've mentioned earlier, we've essentially absorbed a roughly $10 million headwind in the new guidance range that we put out today.

  • We've tried to incorporate what we see as the likely FX environment for the second half.

  • And, we obviously, each quarter when we give guidance, we take a small hedge against where the rates are.

  • Clearly this quarter rates moved a lot.

  • We try and build in a reasonable assumption around FX rates for the second half when we give guidance.

  • We obviously just try and do the best job we can in this very, very volatile environment.

  • Operator

  • Tom Roderick, Stifel Nicolaus.

  • - Analyst

  • I wanted to follow-up on Karl's question earlier around this deferred billings adjustment.

  • Realize we're getting into the weeds here just a little bit.

  • But, I wanted to understand just your perspective on how this plays out for the rest of the year.

  • Because it does look like it was about just under a 400-basis-point impact the calculated billings number this quarter.

  • It looks like next quarter it moves down a little bit again.

  • But, as you lap the annual effect of beginning this adjustment, or this move to collect annually in Q4, is there any reason to think that goes off a cliff?

  • Or conversely, is there any reason to think that the annual renewal cycle moves that number in the opposite direction, meaning that it could go back up?

  • - EVP and CFO

  • So, I don't want to, obviously, as you say, get too far down in the weeds.

  • I think when this anniversaries in the fourth quarter we would certainly expect the magnitude of the reconciling items we've been talking about to diminish.

  • However, I think we're going to continue to see a shift toward annual billings for at least the next 18 to 24 months from now.

  • We still have plenty of customers, as I mentioned, where we've got roughly two-thirds paying us annually.

  • And, the other one-third are paying us either semiannually or quarterly, and then a small number monthly.

  • We've still got all of those customers at some point to renew.

  • And, we will obviously be encouraging them to move to an annual bill frequency too.

  • I think this will play out positively over the next 18 to 24 months.

  • But, clearly, as you say, when it anniversaries in the fourth quarter, the magnitude of those reconciling items is going to decrease.

  • Operator

  • Raimo Lenschow, Barclays.

  • - Analyst

  • Just a quick one on the competitive landscape.

  • Obviously, your big push is coming on the Service Cloud at the moment and that's where we are hearing from the field there's a lot of positive dynamic there.

  • How is it RightNow doing now that it's part of Oracle?

  • And, part of the reason for the purchase is obviously to stem that outflow of [CEBA] customers towards you.

  • Do you see any change there already?

  • - Chairman and CEO

  • We haven't seen any change so far in the dynamics with our Service Cloud besides its outstanding performance for the year.

  • The number one change that's happened in customer service and support for the year is that Salesforce.com moved into the position of absolute leader with Gartner.

  • That was incredible for us, but its been reflected as well in the market.

  • Customers call Gartner and ask them which products they should buy.

  • They review the strengths and weaknesses of each product with them starting with Salesforce.com as absolutely the best product in customer service and support whether it's in the cloud or on premise.

  • We have seen so many exciting customers now deploy that product.

  • I was recently on a Procter & Gamble website myself getting some technical information about one of their products that I use.

  • In fact, up came our Service Cloud, and I was really proud of our entire team.

  • But, not as proud as I was to see them go by the $500 million revenue run rate which was larger than perhaps any other customer service and support solution in the market today.

  • And, I know they are well on their way to $1 billion in revenue.

  • The growth rate has just been outstanding.

  • The technology is outstanding.

  • And, whether it's sales where we're number one, service where we're number one, marketing where we're number one, and/or on our business platform, Salesforce.com dominates the cloud.

  • And, we have a great strategy to make sure that our customers have all the tools that they need to connect with their customers and drive top-line growth.

  • In every discussion that I have with a Chief Executive Officer, that's their number one goal, to have a customer obsession and to grow their companies.

  • And, Salesforce.com is doing that.

  • That's why I am so excited coming into Dreamforce where we're really coming in hot based on all these great technologies that we have.

  • And, clarity on our strategy and alignment with customer demand.

  • So, we're going to look forward to seeing you there.

  • On September 19 will be my keynote at 9.00 AM.

  • And, we've got a great concert that night with the Red Hot Chili Peppers.

  • The next day we'll be doing some incredible technology programs.

  • Also, on September 20 we're going to be doing our Analyst Day, as David said, I hope I'll see all of you there.

  • That night we've got our Children's Hospital benefit concert with Lady Antebellum.

  • And then, Friday is Tony Robbins Day at Dreamforce.

  • And, if you want to be motivated and excited at a level that you've never been before, we're going to see you on Friday September 21 for Tony Robbins Day.

  • It's going to be like nothing you've ever seen in the technology event.

  • All right, and back to David.

  • - VP of IR

  • All right, well, great.

  • Sounds like Marc has given the final Dreamforce advertisement.

  • I expect to see everybody there and I will be taking names for those of you who aren't there.

  • Just a couple other events you should be aware of where Salesforce will be appearing.

  • Graham Smith will be presenting at the Citi Technology Conference in New York on September 4.

  • Marc will be keynoting at Deutsche Access Conference in Las Vegas on September 13.

  • And, for those of you who can't make Dreamforce, I encourage you to come to Cloudforce New York on October 19 at the Javits Center.

  • We look forward to seeing you at one of those events soon.

  • This concludes our call.

  • Thanks again for joining us, have a great day, so long for now.

  • Operator

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

  • You may now disconnect.