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salesforce.com, inc. (NYSE:CRM)

Citi Global Technology Conference

September 4, 2013 04:35 PM ET

Executives

Graham Smith - EVP and CFO

Analysts

Walter Pritchard - Citigroup

Walter Pritchard - Citigroup

We are going to take you to the finish line here on the center stage with salesforce.com. I’m Walter Pritchard, the software analyst at Citi and we’re happy to have with us Graham Smith, who is the Chief Financial Officer of salesforce. I’m going to run through some questions, that I had for Graham and then we will have some time towards the end for everybody that would like to ask a question to get their question in.

Graham Smith

Thanks again.

Walter Pritchard - Citigroup

Thanks again for joining us. I guess, I want to start out, you reported Q2 results less than a week ago, Thursday of last week and maybe you can just give the group what your key takeaways were from the quarter, we don’t need to run through the numbers, but sitting in the Chair, the Executive Team what did Q2 look like to you and what’s rest of the year look like?

Graham Smith

Yes, I think we had a strong quarter. I think certainly the receptivity or receptions of the results seem to be a lot better than the first quarter. I would say that the term of business generally was strong, maybe marginally better than Q1, but definitely we felt like a solid quarter on all fronts, revenue, cash flow and EPS. So that was encouraging. Generally, I think good execution geographically -- interestingly Americas and Europe growing up almost exactly the same constant currency rate about 34% year-on-year. Asia-Pac at the moment is for us a little bit of anchor growing 19% constant currency and I think only 6% in reported. So obviously we are working on improving that, big quarter for us in terms of transactions.

Obviously, we acquired by far the largest company ExactTarget, which I’m sure we will talk about shortly. And then we also -- we are able to secure an agreement with Oracle database we -- our services relies on the Oracle database has done since the company started 14 years ago. And we put in place a much, much longer agreement. We’ve had a three year kind of rolling ULA with them and we were able to basically secure a six year agreement with two, three year options. So we’ve basically 12-year visibility now into Oracle technology license, which is great place for us to be.

Walter Pritchard - Citigroup

Got it. Great. So I guess, I want to start out and just talk a bit about your core business, the company was founded as salesforce.com and still the SSA business we gather is the biggest part of the business. Could you talk about sort of where you’re seeing the incremental demand coming in that market? Product has been around now for a number of years and you’re now, I guess, in the market, the number one player in the market I think you talked about in enterprise you’re not number one, but in the markets you’re number one. So just talk a bit about where the incremental demand is coming in that area?

Graham Smith

Yes, I mean, I think Sales Cloud is still putting up strong growth numbers really across the board and I think there is a couple of factors I think I have been on record saying that I felt like the market numbers will continually underestimated by sort of the Gartner’s and ADC’s of the world and I think that’s been born out recently. Gartner just revised all of their overall addressable market sizes up quite significantly. And their forecast encouragingly for us is that SFA as a market is going to continue to grow at a sort of mid teens CAGR for the next few years. So I think although we’ve healthy share, clearly it’s our flagship product. More than 15% of our revenues come from Sales Cloud. Still feels like there is plenty of runway both at the low end where people are maybe starting to use an SFA product that they perhaps didn’t use at all before. But even at the high end, we’re still winning large accounts, new business.

I think geographically we’ve been I think quite focused on our top seven market. Again, we’ve -- we see strong growth. We’ve relatively low penetration in most markets outside, the U.S., and U.K. are relatively high, but again, you look outside in Australia and Canada, France, Germany, Japan and so on it’s much, much lower. And you will start to see its ad I think more -- couple more territories next year’s key markets for us. Brazil is a very interesting market. We largely attacked Brazil through indirect channels in the past and ExactTarget has a big presence in Brazil. So we’re kind of piggyback off that. But we still -- I mean, it’s still multiple industries and multiple geographies driving SFA growth. There is no particular pattern to the consistent performance of that.

Walter Pritchard - Citigroup

Got it. And its – I think it looks like -- we look at your hiring pretty closely and look at where you’re bringing in people. You’ve also brought in some high profile sales leadership that has extensive enterprise background from Oracle. Could you talk about the enterprise market? You’ve quantified for yourself, that you’re number three in the SFA market in the enterprise. Sort of how should we expect that the second half you’re unfold and how should we expect that, your penetration in the enterprise increases with moves that you’ve made over the last few months.

Graham Smith

I think we -- our sales organization and our go to market is largely organized between two different groups, what we call commercial, which is mid market and small business and enterprise, which obviously is the large enterprise account. So I think our commercial business that sort of where we confirm so to speak and when the company was founded it was largely focused on small and mid market companies. That business is just continuing to be a great growth driver, the leaders of that business, the management team has been a very, very tenured team and they’ve just done a great job.

On enterprise I think we’ve done a good job over the last several years of really expanding our enterprise presence, but I think ultimately -- felt we could take it up another level with hiring, key folks from Oracle and subsequently Tony Fernicola, who ran a large part of that business. And so they bring a number of things. Obviously, they bring relationships with customers, they bring a strong team hopefully that worked with and we’re certainly hiring a lot of senior Execs out of Oracle that want to continue to work for Keith and Tony.

And I think -- we’ve done some very large transactions in the past, but I think we want to really, we want to get that cadence of large transactions to a better place than its been in the last few quarters. Again, we’ve had strong performance, but I feel like we could really -- we should be with a product positioning we have in our leadership in the market, we can take it up a notch and that’s -- I know that’s -- that sort of marks the thinking behind the hires in the last quarter.

Walter Pritchard - Citigroup

Got it. And I guess on one hand you’ve been building the enterprise pipeline now for quite a while the hiring even before the high profile hires you mentioned has been pretty strong in enterprise. On the other hand, there is potentially some changes coming in enterprise how do we handicap sort of the potential risk of the changes with these sales leadership and the pipeline that you build in terms of – the second half of the year as you time when enterprise sales cycles come to conclusion and if the deal is going to happen, it happens then.

Graham Smith

I mean I don’t think we should be expecting wholesale changes at this point. I think we board in two very senior leaders and I think they will look at the team they have and the go to market, especially they have pipeline activities and early on I think Keith who want to put a lot more emphasis on industry marketing than we’ve done today within largely, very much account focused, geography focused. I think there is a need to improve and increase our industry focused activities.

I think we will probably look at the balance of product specialists versus again sort of our standard account executives. But I – if you look one level down in enterprise, all the people that’s regionally is in the U.S. and Europe and some that we haven’t changed any of those people and they’re totally managing all those transactions, they’re managing the pipeline on a day to day basis. So I don’t think we -- I certainly wouldn’t want people to think there is going to be a ton of changes in the enterprise business this year.

I think it will – Tony and Keith will take the time and figure out that they need to make changes. But I think -- we’re happy with the team. I think it’s more very much about those other things I talked about how do we improve our industry communications and strategy and how do we think about the balance between, products, specialist and account executives.

Walter Pritchard - Citigroup

Got it. And then your service cloud business I think given the last update there from qualifying that business was -- it was greater than $500 million. Maybe you can give another update on that to reinforce. But as we look at that business I think one thing that we still haven’t seen on regular basis is the larger B2C call center type deals and I think you’ve done great on the B2B side where the headcount, the seat numbers tend to be a bit smaller. Can you update us on the B2C side and do we need to see B2C type deals, larger deals there to really make that business – that the type of business you want to see at long-term?

Graham Smith

Yes. We want to win those and I think some of that is what I talked about. I think we need to probably accelerate some of the hiring on the product specialist side, because those large opportunities really demand the level of specialization and customer knowledge, industry knowledge that we need. And then I think secondly, there is certainly some product functionality we need to add. So, we’ve typically if we take our system down for maintenance for half an hour in the weekend, that’s then fine for B2B customers. Sometimes it’s not necessary (indiscernible) B2C customers. And so -- things like that, I think there are certain areas of functionality like detailed core scripting and so on that, that are very important to the really large B2C centers. So we’re investing in and we’re absolutely we want to be able o win those really large transactions.

Walter Pritchard - Citigroup

Got it. And then just want to move on to the third product area, which is probably the area of most controversy recently given the acquisition of ExactTarget in the marketing space. Can you -- just for everybody here just -- the company is kind of adopted this customer company [mantra] as the tag line as opposed to the social enterprise and I think with that has come a certain expectation around direct to consumer strategy. Could you help us understand where ExactTarget fits within that strategy?

Graham Smith

Yes. So ultimately we need to dominate in both B2B with typically within with SSA for running the large direct sales forces and B2C. And I think ExactTarget has a completely aligned vision around with the customer company and I mean, the idea behind B2C marketing or B2C CRM is that companies – consumer companies are certainly looking to establish much high fidelity relationships with the customers than perhaps they’ve been to do with the tools available today. And so ExactTarget its all about having the right communication at the right time with the right kind of cadence on the right device, the right channel, and they built -- basically building a marketing suite that will give them a lot more and they have a lot more than just marketing ultimately they’re trying to build a B2C CRM, which is going to give some intelligence about the buying habits, the behaviors of their customers and a build per product then scale to 10s of millions of records, which clearly if you’re in a B2C company. You’re not talking about 100s or 1000s, you’re talking about million. So they need to – they can offer that scale, they can offer that level of detailed understanding of consumers and I think that again sort of alliance with our customer company vision, be it whether that consumers or other businesses. So we’ve moved Radian6 and Buddy Media into Scott Dorsey’s organization. So that all of that now will be consolidated and ultimately integrated the ExactTarget brand and organization and then there was a little piece of ExactTarget called Pardot that was really B2B that we’ve moved the other way into the Sales Cloud, that’s part -- that’s of lead nurturing in the traditional B2B space and that’s the great compliment for the Sales Cloud. It was functionality we were missing, so that was sort of a bonus part of the acquisition for us.

Walter Pritchard -Citigroup

Got it. And as we look at that acquisition specifically, are there any milestones that you think are fair for investors to be watching, I know you’ve been disclosing or at least for the July quarter you gave us a revenue contribution, a fair amount of financial detail around the contribution of ExactTarget and I assume we’ll get, I think you talked about probably giving that through the end of the year. But in terms of milestones this year and then into next year, what sort of things should we do watching to gauge whether or not you’re on track with what you’re trying to accomplish there with ExactTarget?

Graham Smith

Yeah, and certainly through the end of this year you’ll get sort of revenues, contributions. So there will be complete visibility transparency around all that numbers this year. I think next year ultimately I think the top three things I know that Marc and Scott have talked about is, number one; increase ExactTarget distribution capacity. I think they have been spending a lot on building out their product suite and certainly if you’re able to come to connections in Indianapolis in September you’ll see a very, very impressive set of technologies that they’ve built. I think conversely they’ve perhaps under invested a little bit on the distribution side.

So we’re very focused on helping them build out their account executives and follow kind of our method there of high growth. I think the second thing again we’ll certainly give a sense through this year through the financials. And I think we’ve typically given percentage type contributions of acquisitions going forward from that. Second thing is bill frequency. They have more than 50% of their customers are billed monthly. I think that’s important to us that we start to move their customer base to annual billing. And then I think the third thing will be product integration. I think that obviously that’s early days.

We planned for an extensive period of product integration initially for the marketing suite which is the ExactTarget, Radian6 and Buddy and then of course we’ll want to take it further than that which will be, trying to figure out how we integrate the ExactTarget with the Service Cloud because clearly there’s strong overlap today between marketing and service for example. So, I think those are three areas that we will give you updates around as we work together with that target.

Walter Pritchard -Citigroup

And I think we noted from attending a number of your events during course in particular that you had strong partnerships with other companies, you released maybe not at the executive level but at the go to market level with companies like Marketo and Eloqua before it was bought by Oracle. You have a piece of technology now yourselves with Pardot that has the same sort of the same role as many of those products Marketo and Eloqua that are out there. How well do you think you can attach Pardot into the Sales Cloud sales, it does seem like in the market anyway there was a lot of Marketo with Salesforce going into accounts maybe not the same time, but a lot of sort of sequential deployments and integrations and in some of those other marketing products?

Graham Smith

Yeah, I think I mean obviously the average change will continue to offer different products in that space, but I think over time but also I should just point out and Pardot initially is quite a -- it's sort of a small company mid market product. It's certainly not a large enterprise product today. There’ll be a lot of work on building that functionality out over the next year and I think the advantage ultimately will be that we can integrate and provide object level integration with Pardot that other products – other competitors essentially won't be able to offer. So, I think you’ll see that change over time, initially we’re just, we’re going to clearly to focus the Pardot today will be a commercial small business, small and mid market, but as we go forward we’ll look to move that market with Pardot as I am saying we’ll offer a layer a level of integration in that product with SFA that will be unmatched among other companies.

Walter Pritchard -Citigroup

Got it. And now turning a bit to talk about the go-to-market, and we’ll talk about some product things left if there’s no audience questions, but on the go-to-market side you mentioned you’re in seven international -- you’re in seven markets today, six outside the U.S. or …

Graham Smith

Maybe I should, I mean because we -- when we talk about that so U.S, Canada, U.K, France, Germany, Japan, Australia; if you take -- if you look at the market sizes those are by far the most significant BOM markets in the world. And by the time you get to number 10 that’s significantly small. By the time you get to number 20 they’re dramatically smaller. And so we’re in Norway, we’re in Sweden; we’ve got some people in Denmark, the Netherlands, Switzerland, Spain, Portugal, Italy, New Zealand, Hong Kong. I mean we’re in probably at least a dozen of other countries, but we’ve not focused on building out a lot of capacity in those, certainly we have not grown them faster than we’ve grown those core seven markets, because when you look at the dollar as long as we can continue to sustain the kind of growth rates we’re seeing from those core seven markets I mean it just doesn’t lead to the economic sense to go chasing after a much smaller market. I mean ultimately I see we’ll focus on all of them in time, but I think that’s the strategy that has it's time and I don’t think it's time as now when we’re still rolling along with the kind of growth rates we are with our top seven or top eight. I am sure we’ll expand our presence significantly in Brazil next year. But we tend to think of it as lets establish a big footprint with that critical math, lets be able to run a big a Cloud Force well now a customer company tour event a big -- we want to have a big presence in a market with that at least kind of move the needle as opposed to just go into 20 or 30 different countries and not having to focus.

Walter Pritchard -Citigroup

Now let’s say, you pretty much answered the question that I was going to ask.

Graham Smith

Okay.

Walter Pritchard -Citigroup

(Indiscernible) they’re asking, all right that works. So another question on the go-to-market side, you’ve at times especially coming out of the downturn you hired really the tour pace and added many, many people in a quarter. The hiring’s maybe slowed down a bit and we’re trying to get a sense of your sales hiring or is that still the great limiting step in your business in terms of growth or have you reached the point where things are a little more filled out in terms of the go-to-market organization you don’t need to hire at the pace of your.

Graham Smith

I still think overall it's super important for us to keep growing our, expanding our account executives. I mentioned earlier obviously maybe we taper that back a little bit, focused a little more for this year and maybe next year on filling out product specialists. So they’re all going to be quarter baring sales positions. And I ultimately, I think we also feel we can -- it's still ultimately the limits to our growth. So, I don’t -- I don’t want to predict obviously exactly where our account exec hiring will be, but certainly last few years that we have hired at a pretty healthy CAGR over the last two to three years. And I just, I think that’s been part of the magic of the growth of the company that we’ve continued to kind of push on that lever and we haven't backed off.

Walter Pritchard -Citigroup

Got it. And so the inverse of that has been margins, which haven't gone up too much in fact, you had in a couple of acquisitions that (indiscernible) and back down and the lowest levels we’ve seen in quite a few years right now. So two questions there, I guess I’ll ask the first one which is, the company has talked about a framework in which they could grow up to the 30% range and not still show margin expansion, and I am wondering as -- and then you’ve made another comment after the ExactTarget acquisition talking about you weren’t going to do any larger deals for, I think you said 18 months, it was 18-24, (indiscernible) something like that. So as we put those two together it would seem like with the margin guidance of growing semi margins 50 to 100 basis points I think this was in that range with the caveat of acquisitions potentially interrupting that in new acquisitions, shouldn’t we now see margin expansion from here. Is there any reason that wouldn’t happen?

Graham Smith

Yeah, I mean I think we would, I think I’ve said before we start every year with a plan to expand margins, and obviously typically by more than we would guide to because we want to make sure that we can deliver on that. But each year if you kind of look sequentially every year over the last three years there’s been an acquisition that’s come along we just prevented that happening and certainly to your point with the latest one we’ve seen the margin degradation. If you look at our core business if you sort of strip out the Data.com’s and the Radian6’s and Buddy Media’s we’ve actually improved slightly over that period and as I said when we, if you look at our framework we’d say we’re growing more than 30%, I don’t expect a lot of leverage but a little bit. And I think we’ve forced out that.

Obviously I can’t, I don’t have a basis to report that in our financial filings. So I think there’s going to be a period here where obviously this second half we’ve got dilution on the operating margin line from ExactTarget. It will be Q3 next year before we have sort of a relatively clean compare from a margin point of view. But I think realistically the exact target is a big acquisition, we need to absolutely focus on it. Make Scott and his team super successful, make their customers -- continue to make them successful and I just don’t see us doing anything significant. So I think, other things being cool. We haven't in guidance the next year anything like that, but on our – my assumption we always saw the year with a plan to improve margins. Yeah, hopefully we will see that equally. Yeah, I don’t want to be more specific than that. I just -- that’s how I think we view next year as being a focused consolidation that really show some strong, not just growth execution but also some margin execution.

Walter Pritchard -Citigroup

Got it. And not to put you in the hot seat here and ask you to comment on sort of your bosses view, Marc Benioff's view on this, but I think there is some investors skepticism around the enthusiasm we hear from him around growth. And then we’ve also heard some anecdotes around the business, him believing that if the business gets as big as this has gotten that at some point you do have to drive the process. And I am wondering the discussion that you have at that level sort of the cultural view of bringing profit into the picture and then the interest in always adding something else that will make either the growth rate faster or make the company more strategically important. How do those things weigh off against each other?

Graham Smith

I mean I think if you look at the enterprise software market we are by some distance the fastest growing company now. And we had some people who were growing at roughly the same rate and they’ve -- we’re now quite in a group of one by ourselves and that’s great. I think we have always and continue to believe that there’s a sort of evangelist role. We have big events that have sort of helped us drive not just our business but the move to cloud computing more generally across the enterprise. Having said that I think there -- we're trying to be disciplined about expenses.

I’m sure many of you heard unfortunately we took the decision last week to reduce headcount in the marketing cloud organization by roughly 200 people and I think that’s a sign of our intent if you like to make sure that we’re not just all focused on growth, but we’re taking the tougher decisions as well. We will be, we’re also looking internally at the stance of control and levels and how do we leverage management more efficiently.

So I -- Marc absolutely is focused on growth and I think the results speak for themselves. We’ve got a great story, but I don’t think it's right to characterize in those not being focused on the other things, there absolutely – yeah he doesn’t necessarily chose to talk about them but we are focused on as I say the core businesses performing nicely. I think we’re just -- we’ve done a series of acquisitions that have impacted that visibility into our core model.

Walter Pritchard -Citigroup

Got it. I’m going to ask one more question and then we’ll bring the microphone around for those in the audience; so just think of your questions there. You mentioned the Oracle deal, and I guess there is that conference call which was Larry and Marc together kind of an interesting call. So when we sort of boil down, it looks like you’ve extended your license on the Oracle database, you’ve committed to using some Oracle technology in other areas. Oracle has talked about using some Salesforce technology in certain areas. When you boil it down what does it really mean for the company for Salesforce (indiscernible).

Graham Smith

I think the most important thing for us was to get a long sort of a long list agreement that would secure the technology sort of the, that underpins our service. And it's not like we didn’t have other choices but certainly the idea of moving to another database is clearly not something you would undertake lightly and it would be expensive. So I think we had -- we wanted to have a win-win with them where they got obviously the revenue from the agreement we had that line of sight visibility and the long life of the agreement.

I think beyond that I think some of this is I think more up to Oracle than us to be honest, I think they want to be seen, to be partnering with us – and I think we’ve obviously made a lot of inroads into their CRM what was previously their install base of CRM customers, I think they’ve seen us grow dramatically off that over the last few years. And I think at some level they realized that sort of pretending we’re not there and not working with us has probably not been advantageous to them.

So I don’t necessarily look at this, and then we’ve bought some extra data boxes which we’ll look at sort of as part of our database layer in the application. They may turn out to be a great solution for that layer because they’re good boxes and they may actually provide good returns as the database layer and not the app server layer, but the database layer. So that’s more of a, I think we have to prove that out obviously that’s a technology shift for us and we’ll take our time. I think beyond that, I think it's more up to them. The level of integration between the two products and those kind of things; I think the ball is really more in their court than ours.

We have more than enough things to focus on. So I wouldn’t necessarily think beyond the license potentially some good results in the Exadata machines that we bought. It's that target by the way that they can issue the Exadata machines. They’ll be using them for some of their analytic application. I wouldn’t want to speculate on any more than that right now.

Walter Pritchard -Citigroup

Okay. That sounds like we should wait to see if [Benioff] has a keynote at open world and if he does then things are going well. Maybe, and that was a joke. But, all right we’ll go ahead and respond, if anybody has questions go ahead and raise your hand. There’s one up in the front here we can bring a microphone.

Unidentified Analyst

Thank you, Walter. Graham, as you said Gartner is estimating that the Salesforce automation market will grow at a mid teens rate for the next few years. How fast has your core business been growing and considering that market outlook, what is your outlook goring forward for that core business?

Graham Smith

So, by core if you mean SFA and Service Cloud and Platform, I think if you strip out, we’ve given that each year as to the percentage of revenue contribution from all of our the acquisitions we’ve sort of done up to that point and I think if – prior to obviously announcing the ExactTarget, we still have given guidance for back at after Q1 for us sort of meet high 20s growth. So I feel that obviously included acquisitions, some of them are growing rapidly, some of them are growing roughly the rate as the core. So, I think yeah we’ve been solidly in the mid-to-high 20s on the core business, and when you’re taking share, Platform has been growing rapidly, Service Cloud, SFA still we think has a lot of legs in it, and having the SFA market still growing in the mid teens is super exciting for us because even though we’ve got relatively higher market share in that versus the other products, it still means we can continue to grow that business with a nice cloud. So, I think each year we’ll try and give you a sense of the overall contribution from the acquired businesses so you can get a sense of the kind of organic growth rate.

Walter Pritchard -Citigroup

Any other question?

Unidentified Analyst

So Graham you mentioned that the Force.com platform which I wanted to dive into a little bit and talk about. I think there’s a few companies that have platforms that – in the SaaS world that are sort of adding that on or selling that as sort of a more generic version at their technology into customers to enable them to do things on a custom basis. Can you talk about and I think many of us were trying to figure out exactly how to size that market and could you help us understand in terms of your larger transactions where I think of that platform product generally comes to bear more, what sort of attached rates on a dollar basis or just anecdotally what sort of attached seats or dollars do you generally see with platform in those – from those larger deals?

Graham Smith

That’s– that’s a tough thing to really generalize about. A platform product is consistently over the last 8 to 12 quarters been the highest growth product. When we look at the market overall, the (indiscernible) is a massive market like a $150 billion, $200 billion, I think if you, when we look at realistically I think what we can address of that, we think maybe it’s a 10th of that or maybe a $20 billion market over the next few years. I think there is huge opportunity if you look at particularly as you go back to think about industry solutions and I’m not suggesting we’re about to dive into sort of literally building out industry products, but if you think about our standard products and then think about how the platform fills out, if you like the gaps between those products.

If you think about mobile, I mean we’ve -- we will have some super exciting stuff to show in a couple of months at Dreamforce on just how far the platform has come with mobility and I think everybody ultimately wants to be able to do everything on their mobile device and more specifically in many cases on their phone. And if you think about that form factors taken us quite a while to figure out the development work needed to be able to really deliver that and you were going to -- you will see that at Dreamforce site.

We don’t tend to sort of think of it in terms of attach rate, because at some level everybody uses the platform. When you buy enterprise edition or limited edition, you get a whole bunch of custom objects. We give you those stats, right? I mean there are millions of custom objects that have been built. So it’s kind of hard to say okay with this customer she paid extra for these platform seats, but we in essence always really under report the financial impacts of the platform because when you upgrade from enterprise to limited, you’re really spending a lot more money on the platform functionality versus the app. So that’s – obviously you have a pricing model at some level, but I think platform is important to us.

Walter Pritchard - Citigroup

Got it. Any other questions out there in the audience? None? You made an acquisition it’s a small part of your business, but you made an acquisition of a company in the HR space called Rypple, and I think there was some speculation at the time that you might be moving into the broader HR market. It doesn’t look like you’ve done that in force, although the technology has been sort of sprinkled into some of the other products. Can you talk about the role that product plays and are there grand plans for Rypple or is this a – I think you call it the Work.com?

Graham Smith

Work.com, yes. I think we concluded obviously the HR space is interesting, there are systems of record like payroll and benefit, but I think we don’t really have designs on pursuing. I think they’re all the companies that have a much better position in DNA if you like to pursue those kind systems. Our goal was really to focus on more of the front office part of HR and then particular performance management and I think – I don’t know about people in the audience, but I know ultimately what’s most useful if you’re looking at performance management is that you can do it as part of your overall application that you use sort of all the time, which for us and certainly for our customers, its Salesforce.

So the idea is ultimately you can give performance feedback, coaching, training suggestion, build out a whole of talent management application, but within sales or service. So ultimately, the goal there is to build out that performance management as native within sales or service. I don’t know, we haven’t yet talked about whether it will be in marketing or not, but certainly for sales and service, performance management as part of the -- part of chatter, just all (indiscernible), which makes I think that kind of application much, much more usable than if its in some separate system, we have to go and log in and look at something in a sort of a vacuum, in a void, some goal setting objectives all those sort of things that will be there needed in sales and service.

Walter Pritchard - Citigroup

Got it. Any of the audience questions? Quite quiet this afternoon. So on the M&A side, we talked a lot about the dilution and what you’re trying to accomplish with ExactTarget and so forth. One thing we haven’t talked about is in buying all these companies you’ve acquired a lot of backend technology and they’re on different source of systems and not on the line of business apps, but more on the platform that’s running ExactTarget, and platform that’s running Heroku for example. What sort of efforts are there? Is it necessary at all to sort of homogenize and bring all that together and what’s on the roadmap in that regard?

Graham Smith

I mean I think at some level there is always it would be nice to get everything on force, because force is a super efficient platform. I’ve yet to look at any company in all of our acquisitions or due diligence on company’s that we have on board where the gross margin is as good as on force. I think we’ve one of the highest gross margins in the SaaS world. So it would be nice, if we could move more on to force, but I think there is sort of a trade offs. Now if you look at Pardot, there is probably a good chance we will look to sort of actually rewrite that on to force because if you think about object level integration I’m just having a completely seamless integration probably make sense given the footprint of that product have it be part of it, let’s say.

But I think if you look at Radian6 with a product that’s just designed to do a completely different types of things, Radian6 isn’t really a business process application, it’s a listening product that stores a ton of data in real time and then splits out sort of analysis around that. I don’t know what – I don’t even know if it could be integrated little on whether it would be financially or technically desirable. So I think when we do due diligence, we conclude okay, this is something we’re going to move to force, is this something that or something we’re going to leave on the existing platform.

Heroku is kind of a little different, because Heroku is language as a service, if you like. It’s not really products on application which is typically what we sold and we just hired a new leader for the Heroku organization, a guy called Tod Nielsen, he used to work at VMWare and you probably know that. So, that’s really exciting. I think we’ve sort of really still focus on how do we ultimately -- can we get to that place where people can write directly to force with a whole set of different languages which should be – which I think will be very exciting and open up for the developer community on force in a whole different way.

Walter Pritchard -Citigroup

Got it. I will let the audience -- last question opportunity for the audience, otherwise I’ll ask my last – there’s a question there in the back.

Unidentified Analyst

Just got a quick question, there’s been some investor skepticism about potentially declining yields on sales and marketing expense and we’ve seen there’s pretty good possibility that’s being outweighed by the lower attrition as you penetrate the enterprise customer base and we’ve kind of seen your attrition rates blend down over the time. I guess I am wondering if you could give us a sense for what the attrition rates are on sort of the marginal customer that you’re winning at this point, just so we have a sense of what the incremental customer wins are kind of contributing to your overall attrition rates versus your existing base?

Graham Smith

I am not sure I know precisely how to answer that question but I think if I -- maybe I’ll try answer it a different way. I think if you look at I mean ultimately if you’re in a subscription business you have to stay focused on your lifetime value of customers right in your customer acquisition cost, attrition, cost of service were the key metrics that any subscription business needs to focus on. I think if I look at our core business, I don’t see degradation in that model right and that’s, in fact obviously attrition is gradually been improving, we’re into our 16th quarter of reported improvement in attrition. Obviously costs per dollar or booking dollar of acquisition costs vary from year to year depending on commission plans, what kind of deals we do, what's the mix between enterprise commercial and so on. But again I think it stayed in a relatively narrow range and obviously cost of service we’re talking about obviously service delivery, R&D, G&A again they stayed relatively stable. I would look clearly, my goal was over time bring G&A down. I think on the gross margin line with the Oracle acquisition I think there’s a little bit of a step up in the expense for the next 18 months as we grow into that Oracle thing but yeah I think we can certainly keep gross margins stable. So I think our lifetime value model is still absolutely sound and anyway I don’t know if that answered your question, if you want to ask me another one go ahead, I don’t know (indiscernible).

Unidentified Analyst

That is what I was giving you, just sort of a notion of whether your LTV’s are sort of creeping up or down, just trying to pick apart the impact of higher CAC versus lower churn?

Graham Smith

Yeah, I think if you look at sales and marketing, I think it's just important to look at sort of what's been our core business and then we’ve acquired a lot of businesses and those businesses innately are less mature and obviously in some cases they haven't been quite as successful as we had hoped when we acquired them and so I think I go back to the core and I see real solid fundamentals around that and I think if there’s a perception of sales and marketing that’s growing faster than they should, I think ultimately you can tie that back to our desire to grow those acquired businesses faster. So I don’t think there isn’t some big looking issue there. And certainly as you said attrition helps us there, the declining attrition definitely helps that LTV equation.

Walter Pritchard -Citigroup

Great. Well with that last question Graham I want to thank you for making this (indiscernible). Thanks for ending up the conference and thank you all for your attendance at the conference this year.

Graham Smith

Thanks.

Question-and-Answer Session

[No formal Q&A for this event]

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