賽富時 (CRM) 2014 Q2 法說會逐字稿

Good afternoon.

My name is Sarah and I'll be your conference operator today.

At this time, I would like to welcome everyone to the Salesforce.com fiscal quarter second quarter 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.

Mr. John Cummings, Director of Investor Relations, you may begin your conference.

Thank you, Sarah, and good afternoon, everyone.

Thank you for joining us today to discuss our fiscal second quarter 2014 results.

Our second quarter results press release, SEC filings and a webcast replay of today's call can be found on our Investor Relations website at www.salesforce.com/investor.

We'll also be posting highlights of today's call on Twitter at the handle @salesforce_IR.

With me today are Marc Benioff, Chief Executive Officer, and Graham Smith, Chief Financial Officer.

Marc and Graham will share a few prepared remarks about our second quarter results and then we'll open the call for questions.

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

Reconciliations between our GAAP and non-GAAP results and forward guidance can be found in our earnings press release issued about an hour ago.

During the call we may offer incremental metrics to provide additional insight into our business or quarterly results.

Please be advised that this detail may be one time in nature and may or may not be provided in the future.

It's also possible we may reference certain unreleased services or features not yet available.

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 currently available.

The purpose of today's call is to provide you with information regarding our fiscal second quarter 2014 results.

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

With that I'll turn the call over to Marc.

Marc?

Thank you so much, John.

I've really never been so excited about Salesforce.com and everything that's going on with the Company and that's why I'm why I'm so delighted to get on the call with everyone today.

We are having an outstanding year of growth and I'm absolutely delighted to share our second quarter results right now.

Revenue for the second quarter rose 31% from a year ago to $957 million and in constant currency, revenue grew even faster at 32%.

No other software company, that is no other enterprise software company of our size, is growing faster.

And deferred revenue rose by more than 30% year over year, finishing the quarter at nearly $1.8 billion, just outstanding.

Operating cash flow exceeded $180 million for the quarter, an increase of more than 30% year over year and the dollar value of booked business on and off the balance sheet now tops $5.6 billion, also up more than 30% year over year.

Based on these fantastic results I'm thrilled to announce that just four years after delivering our first $1 billion year, we expect a breakthrough to our first ever $1 billion quarter in the third quarter of fiscal 2014, our next quarter, an amazing milestone for Salesforce.com and for the entire cloud computing industry.

In addition we are once again raising our full fiscal year 2014 revenue guidance.

The high end of our guidance puts us on pace to deliver fiscal year 2014 revenue of $4.025 billion with a full-year growth rate of 32%, just spectacular growth.

Salesforce has always been a catalyst and evangelist for innovation in enterprise software.

We pioneered the shift to the cloud, to social, to mobile, and we've been recognized for innovation by Forbes Magazine, who just ranked Salesforce.com as the most innovative company in the world for a third year in a row.

Congratulations to the entire team at Salesforce.com for this incredible achievement.

Now more than ever companies are turning to Salesforce.com as their platform for innovation.

With our social and mobile and cloud technologies our customers are connecting with their customers in entirely new ways and they're becoming customer companies.

Customer companies have a deeper connection with their customers.

They can market on any channel, sell as a team, service customers everywhere and with a next-generation customer platform, customer companies can connect everything on the Internet of Things.

With our four product line -- Sales Cloud, Service Cloud, Marketing Cloud and the Salesforce Platform--our customers have the tools to become customer companies, unlock greater levels of growth, innovation and success.

They can go faster.

That's why our customers have made Salesforce.com the world's number one CRM platform and the clear leader in each of our core four markets.

Our flagship Sales Cloud is now the number one app in the world for sales and is helping customers drive phenomenal sales performance and top-line growth.

That's why Gartner once again named us as the undisputed leader in its Magic Quadrant for salesforce automation for the seventh year in a row.

In addition to the incredible capabilities from work.com and data.com, the Sales Cloud now delivers a complete lead-to-close solution with Pardot fully integrated into the Sales Cloud giving our customers one of the leading apps in B2B marketing automation and a unique asset from our acquisition of ExactTarget.

We couldn't be more thrilled with Pardot and how it brings a full range of marketing, campaign management and solutions deeply embedded into our Sales Cloud.

The Service Cloud is not the world's number one app for customer service and support and the only platform that ties customer service with sales and social and that's why Gartner ranks Salesforce.com as the clear leader in both vision and execution in its most recent Magic Quadrant for customer service, making us again the number one solution for customer service.

And I'm excited to announce that we doubled down on the Marketing Cloud this quarter with the acquisition of ExactTarget, the largest acquisition in our history.

We believe that ExactTarget Marketing Cloud will define the future of marketing.

It is a powerful one-to-one customer platform that makes it possible for companies to bring in customer data from any source and deliver highly personalized digital marketing to any customer across any channel.

With the combination of ExactTarget, Radian6, Buddy Media and social.com we have the platform of choice for CMOs with powerful and powerhouse in marketing across e-mail, social, web and mobile.

And the Salesforce Platform is the world's number one platform for developing enterprise cloud apps and the only platform with built-in social and mobile capabilities right at the core.

Companies want to build the next generation of apps that work instantly on any mobile device.

That's why we doubled the number of developer mobile packs this quarter, giving them more freedom to choose the tools and frameworks they need to build apps fast.

And the Salesforce Platform continues to be our fastest growing product line and it's the only solution rated by Forester as the leader in every single public cloud platform category.

The combination of our customer company vision and our clear leadership in each of these core markets is what's driving our success with customers today and that's why we continue to close some of the most exciting and strategic transactions in the industry, and let me just touch on a few of them right now.

We had an amazing win in the quarter with Sysco.

Not Cisco but Sysco, one of the world's largest food service distributors.

And over the last few years, Sysco has been standardizing on salesforce as its CRM platform across sales, service and marketing wrapping its SAP implementation, an incredible relationship where Salesforce is the front end and SAP is the back end.

I'm delighted to announce that in the quarter Sysco decided to bring the Salesforce Platform into the core of its company-wide Sysco 360 initiative and we're looking forward to helping Sysco deliver on its vision of enriching their customers' experience and driving growth.

Sysco is one of the most exciting companies in the world in its -- of its industry and we are delighted to be partnered with Sysco and delighted to be partnered with SAP in delivering this incredible capability.

This is a great undertaking from Sysco and one of the largest platform transactions in our history.

I want to congratulate our entire team on the incredible success with Sysco.

We closed an exciting transaction in luxury retail this quarter with one of the world's most iconic brands, Louis Vuitton.

Retail is going through an incredible transformation, with every major retailer having to decide how they will connect to customers in a whole new way.

Louis Vuitton is revolutionizing their experience for customers in more than 460 stores around the world with a new mobile client telling app powered by our Sales, Service and Platform Clouds.

More than 3,000 sales associates will soon have relevant customer insights right at their fingertips allowing them to deliver personalized experience with the high standard of luxury and innovation that Louis Vuitton is known for.

Louis Vuitton is a fantastic company with an amazing product line and incredible distribution strategy and we are delighted to be powering Louis Vuitton.

And Pearson, the world leading learning company, has selected the Sales Cloud, the Service Cloud and the Salesforce Platform to completely change the way they sell, service and market to students and educators online, in the classroom and on their mobile devices.

And we continue to see amazing momentum in Europe with the Financial Conduct Authority, which regulates the entire financial services industry in the United Kingdom, selected Salesforce in the quarter to develop an agile platform that will enable them to quickly respond to changing requirements and managing their interactions with more than 27,000 financial services firms in the United Kingdom.

In every one of these examples, and there are thousands more, companies are transforming their business with Salesforce.com's social and mobile cloud technologies.

Our ability to deeply integrate our next-generation customer platform with legacy back-office systems, like I mentioned with SAP or Microsoft or even Oracle, is helping many of our customers transform into customer companies.

And other new or add-on transactions in the second quarter included incredible new relationships with AIG, Bristol-Myers, Fiat, Hitachi, Home Depot, Johnson & Johnson, Juniper, Mercedes-Benz, National Australia Bank, Novartis, Pernod Ricard, Pfizer, Procter & Gamble, Sompo Japan, Sony, Western Union and Yahoo!.

The pace at which these technologies are being consumed and the pace at which these companies are embracing our social and mobile and cloud technologies is phenomenal.

Our service continues to support and deliver transactions for customers at an unprecedented scale as these companies transform to these new paradigms.

And I'm thrilled to announce that we delivered 86 billion transactions in the quarter, up 46% from a year ago.

86 billion customer transactions in the quarter.

Just compare that with any other enterprise software company or any other enterprise cloud company.

Salesforce.com is once again leading the industry with this incredible breakthrough number of 86 billion completed transactions in the quarter.

That's an average of more than 1.3 billion customer transactions each and every business day with the security, reliability and availability that Salesforce.com has been known for.

Nothing speaks more to the value of Salesforce than the usage of our products.

With the speed, reliability and trust that we're known for, we work hard to get our customers' success, we work hard for our customers' trust and we work hard for our customers' adoption each and every day.

Now before I close I'd like to remind you that we're just two weeks away from one of the most exciting marketing events of the year, ExactTarget Connections.

And I'll be meeting with all of you in Indianapolis where we expect that more than 6,000 customers to experience the future of marketing.

It's taking place from September 17 to the 19 and I'll be there to help kick things off and I hope to see you there as well.

It's going to be a phenomenal, phenomenal event on the future of marketing.

And then in just a few months, we will be at Dreamforce, the largest technology event in the world.

Over 120,000 customers will join us at Dreamforce and Dreamforce will take place right here in San Francisco from November 18 through 21.

Get it on your schedule because advanced registration has already far exceeded our expectations.

And we are now expecting to have more than 120,000 customers registered to attend.

It will be the industry's largest gathering with more than 350 next-generation technology companies and salesforce partners in one of the world's largest cloud and mobile and social expos ever.

And over 1,100 breakout sessions helping our customers to become educated on the future of our industry.

I'm thrilled to have a number of very special guests joining us including Sheryl Sandberg the Chief Operating Officer of Facebook, who will be one of the keynotes of Dreamforce; Marissa Mayer, the CEO of Yahoo!, also one of the keynotes at Dreamforce; as well as personal development specialists Deepak Chopra and Wayne Dyer also joining us as keynotes at Dreamforce.

And I'm delighted to announce the musical entertainment and their first ever corporate presentation, the incredible group, Green Day.

So please register now while there's still availability.

Go to Dreamforce.com.

Now with that I want to hand it over to Graham Smith to touch on the incredible financial results of Salesforce.com's second quarter.

Graham?

All right.

Thanks, Marc.

We delivered another strong quarter in Q2 driven by solid business fundamentals and we showed great results across key financial metrics including revenue, deferred revenue and operating cash flow.

In fact, we exceeded the high end of our revenue guidance even when we exclude the revenue contribution from ExactTarget.

Let me provide you with the detail on our second quarter results starting with revenue.

Second quarter revenue was $957 million, up 31% over Q2 last year.

Excluding an approximate $7 million FX headwind, second quarter revenue was up 32% year over year.

ExactTarget contributed $16 million to revenue in the second quarter which was higher than we had forecast as a result of the transaction closing earlier than we had anticipated.

Looking at year-over-year growth on a regional basis, revenue in the Americas grew 34% to $679 million, revenue in Europe grew 39% in dollars and 34% in constant currency to $174 million and revenue in Asia increased 6% in dollars and 19% in constant currency to $105 million.

That's a slight improvement for the region.

Dollar attrition continued its slow and steady decline in the second quarter, marking the 16th consecutive quarter of sequential decline and remains very solidly in the low double-digit percentage range.

Turning to margins, our Q2 non-GAAP gross margin was 80.7%.

That's about 60 basis points lower than Q2 last year.

Our second quarter non-GAAP operating margin was 10.2% or about 240 basis points lower than last year.

The decline in both the gross and operating margin was due to the acquisition of ExactTarget as well as increased costs related to the agreement we signed with Oracle during Q2.

While the two transactions are impacting near-term profitability, we are working hard to find synergies and cost savings which will mitigate the impact this year and into the future.

From a headcount perspective we added more than 2,200 new employees in the second quarter including approximately 1,900 from ExactTarget, bringing our total headcount to more than 12,500.

That's up 43% over Q2 last year and double where we were in Q2 of fiscal 2012.

Turning to EPS, second quarter GAAP EPS was $0.12.

Our Q2 GAAP EPS reflects a non-cash benefit of approximately $129 million related to a partial release of the tax valuation allowance we established in Q3 last year.

Our consolidated deferred tax balances changed primarily due to the acquisition of ExactTarget's intangible assets.

These acquired intangibles result in future book amortization expense but no equivalent tax deduction which gives rise to future tax liabilities.

We were able to reverse the valuation allowance to the extent that our deferred tax assets will be offset by the ExactTarget deferred tax liabilities.

On a non-GAAP basis second quarter EPS was $0.09.

Non-GAAP EPS was better than we expected due to the higher than anticipated ExactTarget revenue and a slightly lower share count than forecast, offset by a higher non-GAAP tax rate.

Turning to cash flow, second quarter operating cash flow was $183 million, up 34% over Q2 last year.

Operating cash flow in the second quarter benefited from higher than anticipated collections offset by about $30 million in transaction fees and other acquisition costs.

CapEx in the second quarter was $102 million, up from approximately $30 million in Q2 last year.

The year-over-year increase in CapEx was principally related to new office build outs and the IP licensing agreement that we discussed on our call last quarter.

As a result CapEx as a percentage of revenue in the second quarter was 11%.

That's up from just 4% in Q2 last year.

For the full year though we expect CapEx as a percent of revenues to be around 8%, slightly higher than in previous years.

Free cash flow, which we define as operating cash flow less CapEx, was $81 million in the second quarter.

That's down from $107 million in Q2 last year.

Turning to the balance sheet, we ended the quarter with approximately $930 million in cash and marketable securities including proceeds from a $300 million term loan utilized in connection with the ExactTarget acquisition.

Accounts receivable was up 34% over last year to just around $600 million.

Deferred revenue in the second quarter was $1.79 billion, up 34% over Q2 last year.

Deferred revenue in the second quarter benefited from approximately $44 million related to our acquisition of ExactTarget and from a year-over-year FX tailwind of approximately $1 million.

On a sequential quarter basis, deferred revenue benefited from an FX tailwind to the tune of about $4 million.

Deferred revenue also continued to benefit from the residual effects of multi-year invoices and from the continued shift toward annual billings.

The combined benefit for deferred revenue in Q2 was approximately $85 million, down from approximately $100 million sequentially and from $120 million in Q2 last year.

ExactTarget will undoubtedly add an even greater level of complexity to our billing frequency metrics as we seek to move ExactTarget's customers to annual billing over time.

Excluding ExactTarget approximately 70% of all Salesforce invoices were issued with annual terms in Q2 compared with approximately 65% in invoices in Q2 last year.

This five-point improvement to annual invoicing in the second quarter compares with an eight-point improvement in Q2 last year and that's a headwind to year-over-year deferred revenue growth.

Unbilled deferred revenue, or revenue that is contracted but not yet invoiced and is off the balance sheet, was approximately $3.8 billion in Q2.

That's an increase of 36% over last year.

This unbilled deferred revenue balance excludes the fair value of ExactTarget unbilled deferred revenue which totals approximately $137 million.

Even though this amount is unbilled, because of purchase accounting rules, it has to be recorded on our balance sheet under accounts payable, accrued expenses and other liabilities as both current and noncurrent customer liability.

When invoices related to this balance are issued, amounts will roll into our regular deferred revenue balance.

Before I turn to guidance I want to give you a brief update on ExactTarget.

Combining ExactTarget with our existing Marketing Cloud is providing greater levels of synergies and as a result we are reducing our total headcount by approximately 200 people.

We anticipate that the cost of this reduction will reduce fiscal 2014 non-GAAP EPS by about $0.01.

Scott Dorsey, ExactTarget's CEO, will lead the newly combined organization.

Turning to guidance we are pleased to be raising our full-year 2014 revenue outlook range to $4 billion to $4.025 billion, as Marc mentioned for year-over-year growth of 31% to 32%.

This guidance includes approximately $140 million to $145 million revenue contribution from ExactTarget and that's up from prior guidance of $120 million to $125 million as a result of the $16 million revenue contribution we got in Q2.

In Q3 we anticipate revenue in the range of $1.05 billion to $1.055 billion inclusive of ExactTarget.

That represents year-over-year growth of approximately 33% to 34%.

We are raising our full-year non-GAAP EPS estimate to $0.32 to $0.34 and we expect Q3 non-GAAP EPS in the range of $0.08 to $0.09.

As a reminder, our biggest Dreamforce ever that Marc just talked about will be held in our fiscal fourth quarter which has a significant impact on our Q4 EPS and is reflected in our guidance.

These EPS ranges imply a full-year non-GAAP tax rate of 38% and a Q3 non-GAAP tax rate of 39% and higher net interest expense, which we anticipate will trend at similar levels to the second quarter throughout the second half of the year.

We continue to expect FY 2014 operating cash flow to grow in the low teens percentage range year over year as we discussed when we announced the ExactTarget target in June.

For Q3 we also expect year-over-year deferred revenue growth in the high 20%s range excluding ExactTarget.

At our forecast exchange rates, we will also face a roughly two percentage point FX headwind in year-over-year deferred revenue growth.

We anticipate the deferred revenue from Exact Target in the third quarter will flat to slightly up from the [future] number of $44 million.

As a reminder, all of the underlying assumptions for our GAAP and non-GAAP guidance and a complete GAAP to non-GAAP reconciliation can be found in our earnings press release issued today.

To conclude Q2 was a very exciting and transformational quarter for Salesforce.

In addition to solid financial results we closed the largest acquisition in our history and added proven leaders to Salesforce, including Keith Block to lead Salesforce's Global Sales Services Alliance Organization and Scott Dorsey of course to lead the Marketing Cloud.

We have never been better positioned to capture new markets and penetrate deeper into the enterprise than we are today.

We look forward to seeing many of you during our analyst session at the ExactTarget Connection Conference in Indianapolis on September 17.

And with that we'll open the call up for questions.

(Operator Instructions)

Kash Rangan, Bank of America Merrill Lynch.

Thanks for taking my question.

One question for you, Marc, as you have begun to integrate ExactTarget you've also brought on board two high-profile executives from Oracle, Keith Block and Tony Fernicola.

I guess my question is, what are the changes that you foresee in the field organization go to market as a result of a lot of important developments that have happened this quarter?

And a question for you, Graham, the ExactTarget programming contribution is a lot higher than we would have expected.

Just wondering if the invoicing terms are also changing for the [back] side of the business and how you foresee that impacting in [dulouse].

Thank you very much.

That's it for me.

Thanks so much for that question, Kash.

I want to tell you that as the CEO of Salesforce I have really got three priorities that are extremely important to me.

The first is the continued development of our flagship products, Salesforce.com, our sales service platform and all I'm focused on right now is delivering incredible an new version of Salesforce.com at Dreamforce, an incredible new version and that is anchored to the cloud, to mobile and social capabilities.

Number two, I'm extremely focused on the success of ExactTarget.

I couldn't be more excited about this acquisition, about Scott Dorsey, about the leadership team in Indianapolis and also the speed at which the acquisition and the integration is going and how it's going to impact our Company and provide our customers the ability to connect with their customers in a whole new way.

And number three, I'm extremely excited about to Keith Block that we were able to bring in a fantastic new executive to help lead our global customer-facing operations.

Keith as you know runs all sales and service and vertical solutions.

Anything that we're going to market with, Keith is responsible for.

He's done a phenomenal job.

And he is completely rebuilding his management team.

As you've already seen, he's brought in perhaps the most successful sales executive from Oracle of all time, Tony Fernicola, somebody who we've had a relationship with since we started the Company but never had the motivation to join the Company before Keith came in.

And we're so excited that we're able to say that we are taking what was a world-class sales and service organization and taking it to a whole new level under the leadership of Keith.

And he has put in an incredible new management team.

So those are the three things that I'm really excited about and I'll turn it over for -- to Graham for the second part of the question.

Yes, Kash.

So obviously there's a [head cut] on deferred revenue that I think calculates out at around 30%.

We haven't yet -- I think Scott and the team at ExactTarget are really just at the beginning of implementing some of our annual billing policy.

So right now there's clearly no effect from that.

It's very difficult for me to estimate at this point, just over a month into this, how quickly that will go.

We'll give you an update on that as things progress.

Brent Thill, UBS.

Just a quick follow-up on the go to market.

You've unveiled numerous offerings and just curious if you could give us your view of how you're simplifying the packaging in that go to market whether through the use of social ELAs or it looks like you've unveiled a new performance edition coming in November.

That package is more for higher price.

Can you give us a sense of how you're thinking strategically about that?

Thanks.

Sure.

That's a great question, Brent.

I really appreciate it.

Number one, we've simplified our product line into really four critical products, which is our Sales Cloud and it's a highly differentiated offering that gives the competition especially with our human performance capabilities with work.com, with our integrated data capabilities with data.com and with the integrated campaign and marketing capabilities of Pardot.

And of course it is uniquely positioned as being mobile, social and cloud.

Number two, we have really redacted that to not just the Sales Cloud but also the Service Cloud, the Marketing Cloud and the Platform.

And those four core offerings give us the ability to then package those in a variety of editions ranging from products that are uniquely created for small businesses all the way up to the enterprise.

And as we tune those packages we've found opportunities to bundle in a lot of these new features and functions that we have built but perhaps have not been able to sell or fully deliver to our customers either because they didn't know about it or it wasn't something that was available at their time of purchase.

So we have a tremendous upgrade opportunity and that's how we look at the Performance Edition.

It's a phenomenal product, it's an incredible new capability for our existing customers to take their capabilities to a new level, and it's a tremendous level of optimization on our existing pricing structure.

Karl Keirstead, BMO Capital.

Okay.

A quick question for Graham.

Graham, you mentioned that the ExactTarget revenue contribution full year would be $140 million to $145 million.

At the time of the deal you mentioned $120 million to $125 million.

I'm just wondering what the cause of that delta is.

Was it out-performance, anything else?

Thanks for any color.

Sure, Karl.

It was the $16 million that we recognized in Q2 that related to ExactTarget.

When we had built the deal models there was -- it was tough to know exactly which day the transaction would close on and so we clearly planned conservatively.

And we got the transaction closed much earlier than we anticipated and so we picked up about $16 million in Q2.

So you add that to the $120 million and $125 million and a little extra and you get to the $140 million to the $145 million.

Mark Murphy, Piper Jaffray.

Yes.

Thank you very much.

Marc, regarding Keith Block and the concept of trying to take enterprise sales to the next level, it seems to be challenging to name an enterprise software company that's been more successful than Salesforce.com with enterprise sales because in the last 18 months you have closed several transactions worth roughly $100 million each.

And they've been transformational and Fortune 100 companies and on a scale that seems to be unparalleled in this industry.

So just wondering how can it be the case that something can be improved there?

And also do you think that Keith Block's impact on ELAs and other large transactions would be positive or neutral or negative in the second half of the fiscal year or will the changes happen more in Q1?

Well, thanks for that set of complements.

I really appreciate it and Salesforce.com has done incredibly well and one of the ways that Salesforce.com has done so well is that we have a full portfolio of transactions for small, medium and large business.

But one thing Salesforce.com has never fully optimized for is enterprise distribution and the ability to reach the largest customers in the world with highly customized solutions for their industries and their verticals.

And to do that we have to bring in a team and a leader who's able to speak to the executives of the largest and most important companies in the world to show them that it's not just a one-off solution in this industry or with this company but they can do it for their whole industry and for all the companies in that industry.

And you saw how Keith executed that strategy extremely well at Oracle over the last 26 years and we look forward to seeing him execute a very similar strategy enhanced for Salesforce and our unique capabilities.

And we've already seen him make major changes and we're very excited about his strategy.

Of course, we were -- this is a time of extreme growth for Salesforce while he's doing it which has been so exciting.

Here is a quarter, 31% growth quarter, and at the same time we're bringing in phenomenal new distribution leaders to take the Company to a whole new level.

And not just at Keith's level or at his direct reports level but in every layer of our distribution team, we have found opportunities for optimization, for change, for growth, for evolution to bring in real enterprise leadership to make this a world-class effort.

And Keith has all of my support.

We've also added him to our Board of Directors as -- and given him the title of Vice Chairman to make it crystal clear to our organization that he is the leader of our distribution organization going forward and is responsible for all customer-facing operations and is helping us to lead this incredible transformation that's been unbelievably positive so far.

We couldn't be more thrilled with having him on board.

Kirk Materne, Evercore.

Congratulations on the quarter.

Marc, I was just wondering if you could comment really quickly on what we're seeing more broadly around the Marketing Cloud with the Omnicom and Publicist deal earlier this quarter.

What does that say about some of the trends we're seeing in terms of bigger organizations trying to shift to this customer company paradigm.

And how should we view these bigger advertising agencies in relation to CRM in terms of partnering and/or potentially competing over time?

Thanks.

Well, those are two great organizations and you look at them, these leading marketing agencies, and both of the leaders in those field -- and I have relationships with both of those CEOs -- are phenomenal executives, phenomenal companies.

And they have a phenomenal presence with these very large customers helping to articulate their strategy.

And they have grown really dramatically through acquisition.

It's a strategy that both companies very much have deployed and I think they're probably at the end of that at this point.

I don't know what other companies are going to get combined into those organizations.

And what our hope is is that we're going to be able to partner with these marketing agencies to provide them with the technology necessary to enable their customers to connect with their customers in a whole new way.

It doesn't take a very big leap to see that these agencies are phenomenal in so many areas, and coupled with our capabilities of delivering world-class cloud, social and mobile solutions, we can really take their customers' capabilities to a new level.

And I view marketing as a huge growth area for Salesforce.

By 2017 Gartner says CMOs will spend more than CIOs on technology.

That's one of the reasons we bought ExactTarget and many other companies as we position to be the number one player in marketing and you'll continue to see us to focus on that effort.

And as I said one of my top three priorities is making ExactTarget a major success for Salesforce.com.

Rick Sherlund, Nomura.

Thanks.

First, congratulations on Keith and Tony.

And, Marc, your comments on SAP seemed a little more muted this quarter.

You mentioned partnership with the Sysco.

I'm wondering if perhaps there's an opportunity for you to do greater product integration with SAP as we just heard about from Oracle.

And for Graham, you mentioned the billing terms for ExactTarget being different.

I'm wondering if you could share with us what those are?

Rick, I really appreciate that and I'll tell you that I think that companies like Oracle and SAP who have not been able to bring their product lines to the cloud, have not been able to make the movement to social, have not been able to make the movement to mobile can benefit from alliances with Salesforce.com with our [brand lesser], with our innovation.

And we -- you heard in the quarter a phenomenal call between myself and Larry Ellison where Oracle has announced that they're going to be using Salesforce.com as their CRM.

That was incredible to hear Larry talk about that.

And certainly it's my hope and I believe that we will be able to develop and create a similar alliance with SAP.

I believe it's in the interest of their customers and our customers that Salesforce works well with Oracle, works well with SAP and even works well with Microsoft because our customers have these existing investments that we want to leverage.

And that SAP relationship is a great relationship with as I mentioned this quarter the huge success with Sysco where we're able to take their huge investment in SAP back office and put on a customer-facing capability that they badly needed but SAP was not able to deliver for them.

And I believe there's a lot of SAP customers that are in a similar position who can use highly customized applications, maybe with our force.com platform or even with our primary capabilities of our Sales and Service Cloud.

And we'll have the ability to bolt those on to these existing SAP infrastructures or even put those on top of these emerging HANA implementations where we can really bring more value and applications to these data stores.

I was just going to answer Rick's question on the billing terms typical for ExactTarget.

At the moment a little over half of their billings are done monthly.

Then there's around about a quarter of their billings are done quarterly, and then the rest is done annually.

So it looks very different to Salesforce and clearly as I mentioned earlier, Scott and his team will be working on transitioning their customers towards annual over time.

They have a slightly different revenue makeup.

They obviously have more services than we do, for example, and services is typically always billed monthly.

So I'm not sure we'd get to exactly the same ratio as that Salesforce has but clearly big opportunity over the next few years to generate strong cash flow and reduce administration costs by moving them more to annual billing.

Terry Tillman, Raymond James.

Yes, good afternoon.

Thanks for taking my question.

Marc, the question is for you in terms of post closing the ExactTarget transaction, will your salesforce have free rein to sell ET products?

And when do we think about maybe potentially starting to see some revenue synergies from such activity?

Thanks.

Well, that's just a fabulous question and I'll tell you it's something that we already are seeing, revenue synergies.

It is something that we're already focused on and our core salesforce, which is as you know, a multi-thousand person sales organization, something that ExactTarget did not have, is getting the key aspects of having that relationship where we are getting our core salesforce the ability to have a sale with ExactTarget is like a sale of our any other of our other clouds.

I believe that's extremely important for us to be able to truly get the value out of ExactTarget, that there is no different between selling the Salesforce ExactTarget Marketing Cloud, the Sales Cloud, the Service Cloud or the Platform if you're a core Salesforce.com sales professional.

And to that extent, we're partnering them very closely with the existing ExactTarget sales organization.

We are also working very hard to expand the existing ExactTarget sales organization which is something that's been rather boutique and I believe has the opportunity to be expanded as well and give us the ability to have that tremendous core competence.

And we're doing that by combining our existing Marketing Cloud sales team with the ExactTarget sales team and having one unified Marketing Cloud sales team.

Now, that process will take a period of time to come to complete fruition where we have total synergy but we've made tremendous gains in the short period of time.

And as I said it's one of the most important things that I work on every day.

And I expect us to make continued gains this quarter and the following quarter and to be able to give you some very good updates on that as we start our next fiscal year.

Certainly ExactTarget is a critical part of Salesforce.com's growth engine.

It's something that every Salesforce.com customer wants to know about and we have a huge vision for ExactTarget where we can really show our customers how they're able to connect with customers not just through their salesforce, not just through their customer service organization but through e-mail, but through text, through social, through all these other customer touch points that are so critical to them.

And ExactTarget is a critical part of that and a huge part of our message and we'll be tightening that message.

And by the time we get to Dreamforce, you'll see it fully delivered, you'll also see the beginning of that message at the Connections Conference in September with ExactTarget in Indianapolis.

Jobin Matthew, Deutsche Bank.

Hi, this is actually Jobin sitting in on behalf of Nandan Amladi.

Two questions.

You mentioned ExactTarget's billings comes from -- there's a part of it which comes from services.

So what portion of ExactTarget's billings comes from services?

It's about 20%, Jobin, just over 20%.

And I'll obviously just to compare with that, it is less than 10%.

So that's why I pointed it out.

Nathan Schneiderman, ROTH Capital.

Hi, Marc and Graham.

Thanks in advance for taking my question.

Marc, it seems like Facebook is enjoying accelerating momentum as an advertising platform.

And that would seem to be positive for your Buddy Media business.

I was curious what metrics you're tracking for Buddy that you can share with us to help us understand the progress with that business line?

Well, we continue to focus on with Buddy Media and also another really exciting offering that we have which I'm sure you've seen which is social.com where you can actually buy Facebook ads directly online and help us to deliver that distribution capacity is part of and becoming part of what I call our complete Salesforce.com ExactTarget Marketing Cloud.

The Salesforce.com ExactTarget Marketing Cloud has to include not all of the -- not just all of the capabilities of ExactTarget which so many folks have become known for, their tremendous capabilities with e -mail, their tremendous capabilities with mobile, their tremendous capabilities in social, but also with our Radian6 asset, with our Buddy Media asset and also with our social.com asset.

And what you'll see emerge is a comprehensive application that allows our customers to manage all aspects of those customer touch points.

And that is going to continue to expand our work with Facebook and you didn't mention it but Twitter is extremely important to us and other social graphs that are providing advertising support, we want our customers to be able to connect with all of these and have a comprehensive solution that manages all of their customer capability.

Ross MacMillan, Jefferies.

Thanks a lot for taking my question.

Marc, just curious about timing as you bring ET into the fold.

You've obviously had success with Pardot on the Sales Cloud.

Is it premature to assume that you would have ET fully integrated into the product lineup by the time of Dreamforce or should we be really thinking about it being integrated for next fiscal year?

Any color on that would be great.

Thanks.

Well, there's different levels of integration and I think you've got to look at integration as a spectrum.

Because today of course, we have app exchange integration where we've already done some integration with these products but we can do more.

And because we own these assets now we can do native integration.

And the first area where we're doing tremendous work and really want to have a deeply integrated native capability, and this is one that is certainly by Dreamforce, we want to be able to show our customers how Pardot is deeply integrated into our Sales Cloud not just at a user interface level but deeply integrated into our core as well.

And our chief technology officer, this is a major goal for him through this quarter is to make sure that Pardot is well integrated into our Sales Cloud and that our Sales Cloud customers have the ability to start using that capability as fast as possible and with outstanding integration.

And number two, with ExactTarget this very much is something that not only we see ExactTarget integrated into our core clouds but we will integrate our core clouds in reverse into ExactTarget.

If you've seen ExactTarget's capabilities with its [fuel] user interface we have the opportunity to bring in our services from our core clouds into ExactTarget.

A great area where today they don't do a lot of work, for example, might be in customer service or maybe in another core area.

We're able to start to leverage our core services back to ExactTarget and that's something that we're going to want to do over time as well.

Phil Winslow, Credit Suisse.

Mr. Winslow?

We'll take the next question, operator, please.

Steve Ashley, Robert W. Baird.

The Marketing Cloud, in terms of capability to support corporate website, website marketing, I know they recently -- ET have recently acquired [IKO] Digital, giving them some capability there.

Is that a capability that you would look or want to build out further in the future?

Well, there's no doubt that mobile is a critical part of what we're doing and whether it's IKO Digital or some of the other capabilities in those areas as well as our investments in some of these great MDM companies, we're going to find some really great leverage and the ability to deliver a world-class offering through ExactTarget.

I think a lot of folks didn't really understand ExactTarget's capabilities.

Their technology in this area is probably as deep as anyone that I -- anything I've ever seen.

And what we really need to do now is we need to help them to communicate the tremendous asset that they have and we need to do that through product marketing as well as the development of a world-class sales organization.

David Hilal, FBR.

Marc, regarding the upcoming release of [Winter] 14, are there a few new features functionality that you think are more than incremental that will help maybe catalyze prospective customers who are on the fence to get on the right side of the fence.

And I'm open to anything you might offer up but maybe I have a little more interest on with that platform.

Thank you.

Well, I think that there's more than a few but you're going to have to wait till June 4 for us to articulate the full value proposition of what we're doing and our exciting new vision for the future and the changes that we've made to our core platform that's going to enable a whole new generation of capabilities in sales and service and marketing and in building custom mobile applications as well.

Thanks so much.

It's been a great quarter at Salesforce.

We couldn't be more excited about everything that's going on.

We're looking forward to seeing you at Connections, we're looking forward to seeing you at Dreamforce.

So I'll be on Mad Money tonight with Jim Cramer and I'll look forward to seeing you all in Indianapolis.

This concludes today's conference call.

You may now disconnect.