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salesforce.com, inc. (NYSE:CRM)

Raymond James Institutional Investors Conference

March 5, 2013 11:35 ET

Executives

Graham Smith - Chief Financial Officer

Analysts

Terry Tillman - Raymond James

Terry Tillman - Raymond James

Okay. Why don’t we get going? I am Terry Tillman with Raymond James covering application software. And I’m really pleased to have Salesforce.com join us again; they were here last year and they are here again. I’m very pleased to have Graham Smith, who is the Chief Financial Officer and John Cummings is Director of Investor Relations here with us. I think probably a lot of you all have at least some exposure to Salesforce, so with that in mind we’re going to do a fireside chat, I’ll probably go about 20 minutes and then open it up to the audience for some questions as well. The first couple of questions though are going to be a little bit more general for some of the folks that may not actually have any knowledge or little knowledge of the story. So, with that in mind and again Graham, thanks for doing this.

Graham Smith - Chief Financial Officer

Sure.

Terry Tillman - Raymond James

One of the first questions I wanted to ask over time as you all evolve the product story and continue to progress the market. We’ve been hearing this idea of the front-office dominating the front-office. Can you give us an update on what that means in terms of Salesforce dominating the front-office?

Graham Smith - Chief Financial Officer

Sure. So, Salesforce initially were 14 years old actually this week which is a milestone for us and we started off with this idea of really just as our name describes being an application that Salesforce people used, a Salesforce of using a company to keep track of leads and pipeline and opportunities and management could look into that see what was - what business was getting closed. We’ve come a long way over the last 14 years, so today we are really what we’re trying to focus on is this idea of a customer platform, that’s really a technology platform, a software platform, that customers can use ultimately to provide capabilities in all the areas of customer-facing activities, so whether its sales than or service providing customer service to customers.

We’ve recently moved into marketing so much more on the - this sort of idea of generating leads which then clearly go into the - into the sales system, but ultimately we are trying to build this capability for customers to use for all of their what we call front-office. So, front office is anything this customer-facing clearly one of the big benefits you get from Salesforce is ultimately all of your customer-facing groups sharing all of the customer data in all the activities that they are doing.

Terry Tillman - Raymond James

Yeah, yeah. One of the statistics that you had offered up at the Analyst Day last year was that I think the large enterprise exposure for you all is about 40% or 45% around which is profound considering how much revenue you are generating now that you are still only at that level.

Graham Smith - Chief Financial Officer

Yeah.

Terry Tillman - Raymond James

Could you maybe give us an update on where large enterprise exposure is now, I know you had some acquisitions and you continue to progress since last year. So, how much of the business is large enterprise and going forward where do you see that trending maybe over the next couple of years?

Graham Smith - Chief Financial Officer

Yeah. So, Salesforce grew up really in the SMB space, so the first let’s say five years of the company’s existence Salesforce was very much focused on the small business mid-market and really its only been in the last seven, eight years that the company is focused more and more on enterprise customers. So, we’ve - traditionally when I go to the company five years ago we talked about our businesses broadly being the third in small business, third mid-market and a third from enterprise and our categories were if it was small business you are less than 200 employees and what we called enterprise was selling to customers of more than - with more than $1 billion of revenue.

What we said last year was that enterprise was a little more than a third, it - have gone to roughly 40%, we actually haven’t given a recent update that was only in September I think so it wasn’t that long ago. And I think the important thing to remember about our business model is that any changes because of our subscription model are very gradual, the percentages say we get from products or the percentage we get from certain market segments, all of those changes if they happen they happen quite gradually. So, I wouldn’t imagine its very different to 40% a few months later. And I also want to stress the people that, it’s not is if Salesforce is really all about the enterprise right now. We have a commercial sales group remember it’s still managing more than 50% of our business in total right it’s managing small and mid size customers and they did a fantastic job executing last year as well. So I’m very happy with that balance. We are not trying to force that percentage to any particular number it’s just national I think that over time because we started an SMB that enterprise will sort of grow because there is just a lot more in the end more on capped opportunities there I think in the large enterprise.

Terry Tillman - Raymond James

In terms of the financial ramifications though over time there is the enterprise.

Graham Smith - Chief Financial Officer

Apologize.

Terry Tillman - Raymond James

Take any question from the audience.

Graham Smith - Chief Financial Officer

My wife.

Terry Tillman - Raymond James

You can pick it up if you want.

Graham Smith - Chief Financial Officer

No, I’m sorry.

Terry Tillman - Raymond James

But over time now is there is more exposure to large enterprises I mean in terms of financial model implications I mean the attrition rate. I want to pin you down in terms of just like that really start coming in towards that 10% or how do you think about that as a into our cropping success?

Graham Smith - Chief Financial Officer

Yeah I think, we’ve clearly small business has very different attrition characteristics just through the natural sort of formation and lifecycle of small business to large enterprise.

When we started initially years ago we used to measure subscriber attrition that didn’t seem very useful to the financial community. So when I go to the company we started measuring dollar attrition and we do that in a very I think very straight forward way we basically take if you had a $100 of contract value a year ago how much of that do we renew one year later.

And we measure that in dollars and coming out of the recession three years ago I think our attrition peaked in the high teen. So that was sort of the worst whole worlds we had the whole small business cycle going on a lot of companies going at a business and then enterprise is certainly when they were renewing because of the economic conditions were sometimes renewing for less users anyway so 19% less or to 18% high teens that’s kind of off peak.

We’ve seen 14 quarters of declining attrition. Now clearly increasing exposure to enterprise helps with that because there is no question but when we win enterprise business we don’t lose enterprise accounts. The any time we have a really lose enterprise accounts is when they get bored by someone whose standardized on a competitors technology.

So our attrition rates in enterprise are extremely low and Terry’s point is that over time if that 40% gradually becomes 45% or 50% then we just get this really favorable impact on our overall attrition rates because of the mix shift that’s going on. So I think that’s a trend we that we see that over time could play out I think we described attrition recently is being in the low teens then in the last quarter we said we’ve had another quarter reduction.

So I think we are sort of below that low teens now and we are sort of thinking okay the next natural milestone for us would be could we get, could we get a overall attrition to 10% or some number like that. And I think the things to remember is this is a trend it’s very gradual it’s a number that’s come down as I said over 14 quarters from high to low teens.

And so I think we’ve got a lot of the different things beyond just that mix shift going on. We’ve got early warning system set up so that we can sort of see how customers are using our software and can we help them use it better or if they are struggling with the particular feature. We’ve got a whole set of people in the company focused on customer success. We’ve got longer contracts we’re signing customers up generally for longer contracts which I think also helps over time you’ve got less renewal activity going on each year.

So you can really focus on the customers every two or three years as oppose to every years. So you can do think of better job when renewals. So we’ve got lots of different initiatives focused on this. I don’t want predict it went or if we get to that 10% number but I just obviously every percentage point we can pull that number down for a company of our scale giving hopefully close to the high three point whatever billion dollars this year that’s a lot of extra money for the company.

Terry Tillman - Raymond James

Yeah. Graham, I’m a good listener and you told us not to worry about big deals and you don’t go after them but what was it a 157 and eight-figure transactions?

Graham Smith - Chief Financial Officer

Yeah.

Terry Tillman - Raymond James

So, again I know, you don’t want me to talk about big deals but that’s a whole lot?

Graham Smith - Chief Financial Officer

Yeah.

Terry Tillman - Raymond James

So, I’m just curious, what was going on at the end of your fiscal year in terms of was it a lot of structural things go into your Salesforce to really get them targeting the social enterprise license agreements or was it actually just a lot of opportunistic situations with an aggressive Salesforce and you’re not really not driving that in a big way at this point yet in terms of those large transactions?

Graham Smith - Chief Financial Officer

So, I think the important thing to remember is for us, when we talk about large deals I think, we do it for a couple of reasons. One is the general acceptance of Salesforce as an enterprise across software vendor is really important to us. And then, we would like to actually in some cases, we’ll showcase specific large deals because I think they kind of speak to all of the value and the capabilities we bring to a customer.

But I’ll go back to what I said earlier, which is, we still have well over 15% of our revenue today coming from commercial, which is small and medium size accounts. So, I don’t want people to think that Salesforce is becoming defined by large deals and how many large deals that we do and if somehow we trip on that in a particular period that, that would - that’s all we’re focused on. We’re absolutely we want to be super successful enterprise but equally the commercial segment is important to us.

So, so I feel like well with the 150 versus what we did last year, which was just over 100 that sort of is, in line if you like with kind of our overall growth rate over the last couple of years so it’s kind of what we expected. I think unfortunately enterprise customers particularly have been trained to holdout till fourth quarter as always and it doesn’t actually affect our revenues going for the fourth quarter because of our subscription model. But I just think again as enterprise continues to grow with us, we’re inevitably just going to have that large deal concentration in the fourth quarter that we’re seeing now for the sort of two years in a row.

Terry Tillman - Raymond James

Yeah. Thank you. One question just related to the beginning of a new fiscal year typically there is some tweaks to the sales model or?

Graham Smith - Chief Financial Officer

Yeah.

Terry Tillman - Raymond James

And I think, if I’m not mistaken, you had talked a little bit here kind of four-one that there will be some modest changes maybe not as radical as the times passed maybe there was going to be more of a product focused sales teams or could you help me exactly what are some of the changes this year and how that could optimize sales?

Graham Smith - Chief Financial Officer

Yeah. Last year, we made a few more. I mean, clearly if you just step back and say okay they are adding new sales capacity every year but anywhere from one year to another 25% to 30% to 35% sometimes even 40% growth in sales people. And so by definition, you’ve got a bunch of account transitions going on in any year right because you are re-carving the territories that those sales people cover.

What we did last year was a little more than that because we moved enterprise from being basically a determined by the number of employees or the companies. So, the sort of bar for enterprise was I think roughly 2000 employees. And what we did last year is, we actually just moved from that to a named account so there is I don’t know a few 1000 accounts in enterprise. They have all of those accounts across the world and then anything else it moves into our commercial group. So, there is a little more account transition that went on last year that obviously isn’t repeating this year. So, I think, we’ve got have little proportionately less change versus last year.

And I think from a product point of view, the change we’ve made this year is again relatively minor. Last year, we had a separate Salesforce selling data, which was originally Jigsaw the company we bought a few years back. We’re moving data into the broad sales team this year. So, there is no specialized Salesforce selling data and that would be our goal over time with every – with every acquisition I think, you want to – you want to move it a pace to move it into the core sales team so they can ultimately, they will sell marketing.

Today, we still have a separate Salesforce selling the marketing cloud. Again over time, I think, you want to leverage that, that large core sales team that’s controlling most of the business and all the accounts. So, I don’t think we want to move to a model where we’ve got lots of different parallel sales team selling different products. I think over time you want to have that single account measure and our customers tell us they like that, they like one point of contact for driving the sales strategy in each account.

Terry Tillman - Raymond James

Okay. One last quarter and a lot of people were intrigued with the comments from your CEO in terms of talking about Marketing Cloud.

Graham Smith - Chief Financial Officer

Yeah.

Terry Tillman - Raymond James

Your fore-eye there was on the social site with listening and then engagement platform. But and quarters past when we asked the obligatory what are you going to buy next question email or whatever there wasn’t a real focus that seemed to be down played at, it seemed like the tone was different this time on the call, and I’m just curious what has changed in terms of your observation for a marketing software, has anything changed or is it more expensive than before, because it sounds like it’s a lot of it’s going to be driven through M&A if I wasn’t mistaken?

Graham Smith - Chief Financial Officer

I, I think certainly if we’re, there are half a dozen different categories at least within marketing as an application area which is a little different to sales and service, sales is clearly everybody kind of knows what FFA is, it’s a relatively monolithic application and service has some nuances around the edge but again Service Cloud, single app, marketing has got lots of different areas, it has got social, it has got email, got web analytics, it’s got (PR). There is any number of different sort of areas of marketing that a CMO is interested ultimately in automating and getting value from. And I think the difference maybe certainly is, as time goes on Mark, needs more and more CMOs interacts with more and more customers in the context of marketing. And so I think in his mind he is getting a better sense of here where those CMOs are really going to see value from Salesforce.

And today as you say we’re really very much our (eggs are all) in that social basket and we can go in and talk to the CMOs and some of the biggest companies in the world Unilever or example Nestle and so on that are super-exciting but we’re still very narrow in that, in what we can offer them. And so I think in Mark’s mind he is thinking okay, either what’s, how do I expand a footprint of the application to capture the most value in a most relevancy with the CMOs that I’ve been meeting with. And so he is, he spends a lot of time out in the field with customers. So I think every quarter you’re going to he’ll have to learn more and have more interactions so he can kind of have a different set of evolved idea in his mind about where he thinks that applications needs to go.

So, I think it’s just realistic for us to say look, the chances are we’re going to, we’ve done a bunch of small acquisitions each year, we’ve done one for the mid-size acquisition. So I just think it’s, it makes sense for us to foreshadow hey that, we’re kind of expecting that pace to continue at least.

Terry Tillman - Raymond James

In the past there in terms of the M&A strategy the preponderance of the deals though had been you’re buying people with smart ideas and some technology but not necessarily bigger, sizeable companies I mean the Work.com an example there.

Graham Smith - Chief Financial Officer

Yeah.

Terry Tillman - Raymond James

And there has been a lot of other small technology buyers, would that still be the, were you kind of, I don’t know your reaction there was maybe I’ve got it wrong but, typically though they had been small transactions that were more of a technology buyers is that still a focus, a primary focus for your M&A and then yeah, maybe there was a super-sized transaction versus the rest, but typically going to be technology buyers?

Graham Smith - Chief Financial Officer

I think it’s, I think anyone who is the student of this industry and is looking at CRM as a category they, you know the players that are out there I mean, I think, I don’t think it’s clearly in all good sense for us to get too detailed around what we might look at, what we might think it about acquiring it if we think about acquiring it.

Management teams are super-important to us, we’ve taken a lot of pride I think in the fact that if you look across all the acquisitions that we’ve done over the last three years there is only been one Senior Executive but she leaves Salesforce every other CEO and sort of COO or Head of Sales I mean they’re still with the company which I think is sort of a testimony to the integration that we’ve done.

So management teams are important, technology is important how well and how quickly can we get it integrated with our platform, because there is huge value to the Sales Cloud of having a fully integrated marketing product on our platform and how quickly can we get there organizational, how the people going to organizationally fit in with Salesforce. So I just think it’s a multi-dimensional kind of challenge to sort of think through these and I don’t see a lot of value in getting too precise about where we might go with this.

Terry Tillman - Raymond James

Okay. I’ll leave that alone and now, so we have about 10 minutes left, I like to actually open it up to some questions from the audience. Go ahead.

Question-and-Answer Session

Unidentified Analyst

(Question Inaudible)

Graham Smith

Yeah.

Unidentified Analyst

(Question Inaudible)

Graham Smith

Yeah.

Unidentified Analyst

What is the?

Graham Smith

What’s driving that?

Terry Tillman - Raymond James

I’ll repeat the question. So, yeah, the question on the delta between GAAP earnings and non-GAAP earnings, yeah.

Graham Smith

Sure. So like most tech companies certainly the great majority of software companies we report both the GAAP number which is obviously all inclusive and a non-GAAP numbers which excludes. Primarily two things for us which is stock-based compensation and amortization of intangibles from acquisitions whether both be a non cash charges. Celcom clearly at some level were a victim of our success, Celcom is driven by the stock price and we’ve also had got a volatile stock price so you sort of factor those two things in our stock-based compensation is a big expense and actually as a number of units issued we’ve actually been very consistent at around 3% or 4% of our share base each year, remember we’re in San Francisco we’re competing with a lot of public and private software companies the talent and that’s particularly on the Development Engineering side that’s a big driver of that stock comp number and the amortization clearly as grown because of the acquisitions we’ve done really over the last three years since April of 2010.

Unidentified Analyst

How much you would exactly the outstanding stock comps and so…

Graham Smith

Stock-based comp I think this year will be around about 500, is that right.

Unidentified Analyst

Yeah.

Graham Smith

I think that’s about the number it’s about 12%, 13% of revenue.

Unidentified Analyst

$500 million is the number.

Graham Smith

Yeah.

Unidentified Analyst

(Question Inaudible).

Graham Smith

I mean that’s in our financial statements, I cannot remember the deep precise overhang numbers but it’s all in our financial statements.

Unidentified Analyst

But you wanted to generate cash.

Graham Smith

Operating cash flow last year we generated over $700 million.

Unidentified Analyst

Okay.

Graham Smith

Of operating cash flow, yeah.

Terry Tillman - Raymond James

Any other questions?

Unidentified Analyst

Can you wrap these different modules under the pulling construction? You mentioned that in your conference call that you’re looking at some big pattern initiatives also. Can you talk to that on how you pick that and would fall into it if I’m correct?

Graham Smith

Yeah. So I think if you look at sort of the market we’re in which we’ve said is CRM. So anything to do with the front office customers. Ultimately what customers want as well as the ability to actually transact business if you think about our businesses today we’re about sort of from regeneration all the way through to closing business. And so our applications in one way or another enable you to execute better from that in that whole workflow but we also want is analytics around how to optimize all of that much better. And so we have traditionally provided dashboards as part of our standard product so you could see almost any object on data base you can run a dashboard on whether it’s how many lease did I close.

What’s my, how many sales people it could have whatever the operational thing is you can run a dashboard in Salesforce. But I think what customers want is much beyond that is bringing in other kinds of structured and unstructured data and seeing what that data tells them about their customers, about their products, about the markers they’re in, how potential customers are thinking about their buying decisions any number of questions. We don’t have a really we don’t have any product or strategies statements around analytics today. And I think what Marc was really talking about on the call last week was by the end of this year his personal goal would be that we would have a defined strategy in analytics. So, I don’t think, I don’t want people to get too far ahead here, I think we are talking about athletic capabilities that we want to have, but obviously it’s a big market, it is a complicated market-to-market, its actually moved a long way in a short period of time from the (Cognosis) and the Business Objects of sort of the last few years to suddenly Hadoop and a whole set of new technologies that come to us are really just trying now.

So, I think integration is a big part of analytics because clearly if you’re going to bring in data from other sources how do you get that data into a system, how do you get it into the cloud, there is a bunch of technical challenges as well as obviously just sort of product questions. So, I think really Marc’s statement was more a statement of intent if you like rather than specific of hey we’re going to have this product by this time. We just - we know we’ve got a - we know we need an answer for our customers, our customers are asking us for it.

Terry Tillman - Raymond James

Go ahead.

Unidentified Analyst

How about your improvement in the last five year experience setting more to the existing base?

Graham Smith

Yeah. So, we traditionally I’d say when I got to the company that debt balance each quarter if you looked at new business so new contracts come in each quarter was roughly 50:50, which was a nice balance. So, we don’t differentiate for our sales teams, they are indifferent whether they sell a new contract to an existing customer versus a new contract to a new customer. Debt balance was shifted slightly over the last few years, so I think today its more like 60% of existing customers, 40% new customers each quarter. To some extent that to be expected - we are a much bigger company than we were, we were four times a size versus where when I joined. So, but a healthy balance, so a long way that obviously continue winning new, winning new customers is still very important to us.

Terry Tillman - Raymond James

Go ahead.

Unidentified Analyst

Coming on Chatter (indiscernible).

Graham Smith

Yeah I mean I think ultimately Chatter, the important thing about Chatter is adoption and how many users do you have, I think we’ve been - certainly I’ve been very consistent over the years since this was introduced in saying don’t think this is when Marc talks about I can build a billion dollar marketing cloud and a billion dollar service cloud, we’ve never positioned Chatter as a billion dollar product. Its raised revenue, it can certainly be a few hundred million over time but its not, its not going to be at the same size from a monetary point of view. But its important ultimately because if you think about what our view of where applications going is that ultimately is a feed interface is going to be pervasive across all of CRM applications because CRM applications generally whether its sales service marketing they’re collaborative applications, right.

If you’re already using an accounting application it isn’t quite so important but you either you go like a news feed and you kind of collaborating with lots of different people you tend to be much more task-focused, inevitably focused, but when you are dealing with customers you want to be able to collaborate around an opportunity, around a service issue. So, we view Chatter is essentially that the de facto of user interface of the future. And so ultimately I think during the course of this year we’ll start - we always like, we like giving numbers if they are informative. We think we have by far the most users in terms of that style of application versus some of the other collaborative products that are out there in the market.

But ultimately its about for us how many users do we have on Chatter and I think we are sitting at millions but we’ve got well over 100,000 customers, but I think you will start to see us giving some more stats around Chatter this year. We are very happy with how its progressing, the newest version of Chatter on the iPhone is fantastic I mean really you can download Chatter and use it from the app stores really becoming a great product not just for collaborating in terms of workflow approvals, we obviously announced ChatterBox which is essentially a secure version for us of dropbox that interacts with all your Salesforce files I mean the innovation is going on there and they kind of added our capabilities into Chatter are huge this year..

Terry Tillman - Raymond James

We don’t have much time left but maybe I could just flip in one last one.

Graham Smith

Sure.

Terry Tillman - Raymond James

You told that’s a straight question on Chatter and you said maybe over time it could actually be couple of hundred million of revenue or something, but Force.com as we do our research I mean you actually have some ISVs that are becoming material revenue companies.

Graham Smith

Yeah.

Terry Tillman - Raymond James

And I’m assuming you don’t give that away for free.

Graham Smith

No.

Terry Tillman - Raymond James

You get some monetization from that.

Graham Smith

Yeah.

Terry Tillman - Raymond James

So where is Force.com going forward maybe in the analogy to the lot of the Chatter question if this so lot more monetizable over the opportunity.

Graham Smith

Yeah, yeah very much, so I think Force.com for those of you are not familiar with sort of our platform products. It’s a platform as a service, so typically customers start using it as they want to extend functionality and do customizations to sales or service. And then over time many of them actually build standalone applications on Force.com. And we charge I think depending on we have different price points you see the $15, $50 or $75 a month per user per month that’s list price that revenue has been off typically our fastest growing source of revenue each quarter, it’s still our third largest service sales biggest than service then platform. But that to me is over time definitely if we execute well could be a $1 billion product for sure I mean we are the- I think clearly the leader in sort of enterprise past and there is a recent study actually held by IDC that has this very clearly leading in that market.

Terry Tillman - Raymond James

Yeah. Thanks a lot Graham. I really appreciate it.

Graham Smith - Chief Financial Officer

Okay. Thank you, Terry.

Unidentified Analyst

Do we have a breakout?

Terry Tillman - Raymond James

Okay. So (Cordoba) 5 is the breakout. Thank you.

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Source: salesforce.com's Management Presents at Raymond James Institutional Investors Conference (Transcript)

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