salesforce.com, inc. (NYSE:CRM)
Q2 2014 Earnings Conference Call
August 21, 2014 05:00 PM ET
John Cummings - Head, IR
Marc Benioff - CEO
Keith Block - President
Graham Smith - EVP
Mark Hawkins - CFO
Heather Bellini - Goldman Sachs
Matt Hedberg - RBC Capital Markets
Karl Keirstead - Deutsche Bank
Jason Maynard - Wells Fargo
Brent Thill - UBS
Ed Maguire - CLSA
Kirk Materne - Evercore
Good evening. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to the Salesforce Fiscal Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.
I would now like to turn the call over to John Cummings, Head of Investor Relations. Sir, you may begin your conference.
Thanks so much, Jason and good afternoon everyone and thanks for joining us for our fiscal second quarter 2015 results conference call. Our second quarter results press release, SEC filings and a replay of today's call can be found on our new IR website, www.salesforce.com/investor. We’ll also post the highlights of today's call on Twitter at the handle @salesforce_IR.
With me on the call today, are Marc Benioff, Chief Executive Officer, Keith Block, President and Vice Chairman, Graham Smith, Executive Vice President and Mark Hawkins, Chief Financial Officer. The team will share a few prepared remarks and then we’ll turn the call over for questions. As a reminder our commentary today will primarily be in the non-GAAP terms. Reconciliations between our GAAP and non-GAAP results and guidance can be found in our earnings release issued about an hour ago.
During today’s call, we may offer additional metrics to provide further insight into our business or results. This detail may or may not be provided in the future. We may also reference certain unreleased services or features not yet available. We cannot guarantee the timing or availability of these services or features. So we recommend customers listening today make purchase decisions based on services and features currently available.
The purpose of the call is to provide you with information regarding our fiscal second quarter results. Some of our comments may contain forward-looking statements, which are subject to risks, uncertainties and assumptions and 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.
A description of risks, uncertainties, and assumptions and other factors that could affect our financial results are included in our SEC filings, including our most recent report on Form 10-Q, particularly under the heading, Risk Factors.
So with that, let me turn the call over to Marc.
Okay, hey thanks so much John, I really appreciate it. And first, let me tell you I am so pleased to welcome Mark Hawkins, our new CFO to our team and he is on the call with us today. And once again, our enduring thanks to Graham Smith for a phenomenal six years as CFO and as you know Graham is still with us as a full time advisor to me and Mark and he is doing that until the end of March and Graham is also participating on the call today; as well as Keith Block our Vice Chairman and President and we’re really excited to tell you all the amazing things going on at salesforce.com.
First I want to tell you. I spent almost a third of the quarter living in Europe and it was an amazing experience. I know many of you followed my trails on social media. I was -- we did very, very large customer programs in Paris, thousands of our customers there, as well as in Munich. We opened our new Paris Headquarters. We opened our new Salesforce tower in London and it was just an incredible time. We profiled our work with amazing companies in Europe, including a huge deal that we launch with Philips, where they are becoming a software company and building their next generation health applications right on the Salesforce platform and I was thrilled to have an incredible press conference with the Philips CEO while I was in Paris. And then we profiled some amazing work that we're doing for Louis Vuitton where we’ve rolled out a global clienteling app really profiling one of France’s most important companies, LVMH, and our incredible work for them.
And then moved on to Germany and we did the same thing. It was an incredible announcement and launch of what we’re doing with Roche and you may have seen some incredible demonstrations of technology at Roche’s next generation equipment built right onto our Service Cloud. It was just awesome. And again a multi thousand person program that we executed in Munich as well. It was really incredible.
Look first of all let me just thank all of our European customers and partners and employees that gave me unbelievable support while I was there and I really want to thank everybody for that. And now I just want to let you know that Salesforce has become the absolute number one CRM platform in the Europe and of course worldwide and also the fastest growing top 10 software company in the world. As you saw, we’ve got accelerating revenue growth to 38% growth in the quarter.
We’ve exceeded the $5 billion revenue run rate, the first enterprise cloud company to do that. Pretty incredible and I don’t think there’s ever been -- I don’t think there’s ever been a software company that has grown at 38% at the $5 billion revenue line and we are thrilled to be that company and we’ve got a huge top line strategy. We also had just phenomenal execution of our ExactTarget acquisition. You probably saw that we bought ExactTarget a year ago. We’ve deeply integrated that into our enterprise and it is just incredible what has happened with them.
We're also honored that Forbes yesterday named Salesforce the world’s most innovative company for the fourth year in row and that is just a testament to our relentless focus on customer success, delivering a truly innovative customer platform and honestly we’re just in shock on that recognition. We couldn’t believe it when we were the Forbes most innovative company in the world and now we're the fourth. We've done it four years in a row. That’s just awesome and of course that Fortune has named us one of best places to work, top 10 recognition and we're going for number one on that as well.
Look, our exceptional second record financial results just speak for themselves. Revenue growth accelerated 38% from a year ago to more than 1.3 billion. Less than a year after we surpassed our $4 billion revenue run rate, we’re now more than $5 billion. Deferred revenue grew by 31%. That really exceeded what we thought we could do and we’ve got dollar value of booked business on and off the balance sheet, grew 32% from last year at $7.4 billion, awesome. And now you can really see that clear trajectory, the $10 billion in revenue which has been our dream and when we start to get a look at our revenue, as well as our deferred business, you can start to connect the dots and see exactly how we’re going to get there and the speed and rate and growth and we’re super excited about our next big goal now after $5 billion which is going to be get to $10 billion.
Operating cash flow rose to $246 million, an increase of 34% year-over-year. That cash flow has been awesome this year, more than $719 million for the year so far and we are now guiding to more than 1.1 billion in operating cash flow for this year, which is really an incredible achievement for our Company and really I think speaks to the power and quality of the business model that we have put together. Not only we’ve got this awesome top line growth but we have phenomenal cash flow as well.
And while we delivered world class growth, we also our grew our operating margin, something we’re deeply committed to and we’re able to deliver non-GAAP EPS of $0.13, which also exceeded our guidance and we’re going to continue to grow and exceed and deliver these awesome EPS results as we head towards that $10 billion number.
Given our strong financial results and pipeline in new business, we're raising our full fiscal 2015 guidance by $30 million and we’re also quite committed to delivering 125 to 150 basis points of operating margin improvement this year as well. I think these two things just demonstrate Salesforce has never been stronger, has never grown faster and it’s just getting to an unbelievably new level.
And since we initiated fiscal year ’15 guidance November last year, we’ve now raised our guidance by $170 million, which is roughly the same amount of revenue that we delivered in our first year as a publically traded company a decade ago. Of course I think we’ve now delivered more than 1700% return for our investors since we went public and we now are one of the top 10 best performing equities over the last decade.
We had $176 million in revenue in 2005 and we thought that was absolutely great as I mentioned, but it turned out we underestimated what we could do. We underestimated what we could do in a decade and that always seems to be how it is in our industry. We're always over estimating what we can do in the year and underestimating we can do in a decade and here it is, Salesforce did that itself.
Well, it’s amazing. I couldn’t be more proud of our team has accomplished and we’re continuing our growth trajectory, connecting our customers with their customers in new ways and you can see Salesforce just continuing to execute in its sales and service and marketing and platform businesses and now for the eighth year in row the Sales Cloud was just announced as the leader in Gartner’s Magic Quadrant for Salesforce automation.
Last month IDC named Service Cloud the number one in customer service and support and in April we announced Service Cloud SOS which delivers instant and personalized customer service within any mobile app. And so every company, every app, every customer can have their own mayday button right to their customer service and support center. Amazon has shown us an incredible vision of customer service. Every customer wants to do that and we’re making that possible with our Service Cloud, now with the mayday button, so every customer can have that incredible capability in their own apps.
Exact Salesforce marketing cloud was just rated as the top digit marketing solution by Sera magazine and last month we launched a major update to Salesforce Journey Builder, which allows the planning and personalizing or optimizing the one-to-one customer interactions across multiple channels and you’re going to see an unbelievable overview of the new version of Journey Builder, which is coming up at our connections conference and if you don’t know about connections let me tell you, you’re not going to want to miss that. It’s in Indianapolis. It’s going to be happening September 23rd to the 25th and we've got a phenomenal group of people coming in, incredible CMOs, like Beth Comstock of General Electric and we even have Will-I-Am coming in to do some incredible entertainment for us and we’re going to be showing the future of marketing September 23rd and 25th in Indianapolis with Connections.
Look, at the core of clouds and customer platform is Salesforce1, something we announced last year at Dreamforce and it's the world’s number one platform for developing these mobile apps. I mean we’re just seeing incredible growth in our customer base with our ISVs. You can build and deploy an app on Android, on iPhone, on iPad, on any tablet. It’s just awesome and companies are running their entire business right from their phone. I saw that everywhere I was in Europe and Salesforce1 is really the only solution that I’ve seen that can deliver this world-class enterprise capability in the mobile environment and our customers just love it.
We have the largest enterprise cloud ecosystem, more than 1.7 million developers using our leading edge development tools and they are moving to mobile, using Salesforce1, these new open APIs, this incredible infrastructure that we’ve delivered. And also I want to let you know that that app exchange that I just mentioned now has more than 2,000 apps available. A lot of them already moved over to Salesforce1 and both apps have been now installed more than 2.5 million times by our Enterprise customers, which is unprecedented in the Enterprise software market.
We announced a strategic platform and partnership with Microsoft this quarter. As you know we have an incredible situation with Microsoft, who has become I believe our largest customer of our marketing cloud. They've built an incredible new product that they have, called Office 365 right onto the marketing cloud. They use Journey Builder to guide their customers through their journeys and it’s brought Microsoft and Salesforce closer together. We’ve got more involved with Sequel Server than ever before and we’re looking to unite our products more closely than ever before and you’re going to see some incredible things at Dreamforce with Salesforce and Microsoft Office and the new version of Salesforce1, which is coming to Dreamforce and I’ll tell you, it’s a great partnership for our customers. They could not be more excited.
We also launched our new Salesforce Wear initiative, because customers are buying wearables at rates like we have never seen and they want to those wearables deeply integrated with our enterprise infrastructures and we are giving that to them and we are the enterprise leader right now in the wearables market place. Earlier this month, we also completed our acquisition of RelateIQ, an incredible company, which is going to greatly accelerate bringing advanced machine intelligent and data science right into our core platforms, as well as trading an incredible new application as part our family of products, and for those you who haven’t tried RelateIQ, I use it on regular basis, I'd recommend you take a look RelateIQ, you’ll be blown away that the levels of productivity that it brings every user.
And of course nothing is more indicative of the value of Salesforce than the level of customer usage on our platforms and I'm thrilled to announce that last month we delivered our first $2 billion transaction day, an incredible milestone for the entire cloud computing industry. More exciting, our service delivered more than 130 billion transaction this quarter, up 52% for a year ago and you saw exact target delivery and even more transactions on top of that.
It’s been a remarkable quarter for Salesforce. But before I close, I want to remind you that we’re just one month away from the marketing event of the year, Connections and September 23rd to 25th in Indianapolis, I mentioned that, it’s just going to be awesome. You’re not going to want to miss it. I'm going to be there doing the keynote and you’re going to see the future of marketing itself unfold in Indianapolis.
And then I’ll tell you, we’re not that far away. So get ready for the biggest technology event in the history of technology and that is Dreamforce October 13th to the 16th in San Francisco. You’re going to see the future of cloud, social, mobile, the future of the connected world. You’re going to see businesses running -- you’re going to see businesses running their entire business right from their phone. You’re going to see people creating these amazing customer journeys like Microsoft is doing with Office 365 and you’re going to see incredible new capabilities from Salesforce and we’re going be also launching a major new product line there, as we like to call it a new cloud. So we’re going to have the biggest and most exciting and most thrilling Dreamforce ever.
You’re going to hear from global thought leaders. Klaus Schwab, the Head of the World Economic Forum has agreed to come and we’re going to be profiling our work with the World Economic Forum and how they use Salesforce to run their operations. Former Secretary of State, Hillary Clinton has agreed to come and she is going to -- she is also going to be in conversation at Dreamforce with Klaus Schwab. Former Vice President, Al Gore, is going to be there talking about the environment. We’ve got Reid Hoffman coming and whole of PayPal Mafia actually, which is Reid Hoffman, and Jeremy Stoppelman and Max Levchin, all coming to do in innovation panels and discussions on how to create startups and create more value in our industry market and Dreve Send [ph], of course an incredible venture capitalist and a pundit in our industry going to be there to talk about his work and where he feels the world going. Steve Case one the original pioneers in the entire tech industry is going to be there talking about his work and start ups and then you’re going to have motivational speakers like Tony Robbins is going to be there running a huge program for people, showing them how to take their own capabilities and skills to new levels.
Neil Young, rock and roll legend is going to be there, launching a major new product, Pono; and neuroscience Adam Gazzaley is going to be there as well talking about his amazing work with Oculus Rift and how he has created systems that let us fly through our own brains. It's going to be awesome and perhaps I'm most excited about that my old friend Tony Prop from HP, an amazing Microsoft Executive and I will be in conversation on the future of Microsoft Office and how Salesforce and Microsoft are more tightly integrated than ever before. Of course we can’t wait for the talented Bruno Mars, who headlined in Super Bowl, who is going to be headlining a huge outdoor concert at Civic Center. And you’re not going to believe everything that’s going on.
But let me just tell you one thing, if you plan to come to Dreamforce, you also better plan to bring a can of food with you as well, because we’re going to run the world's largest food drive of all time and no one is coming to Dreamforce if they're not bringing food with them and things to help others and we’re going to run the biggest food drive, we’re going to raise huge millions of dollars for philanthropy and we’re going to not only create the future, but we’re also going to create a better future for all of us. I'm looking forward to seeing all of these, Connections and Dreamforce. It’s going to be amazing.
And now I will the hand the call over to our Vice Chairman and President, Keith Block. Keith.
Thanks, Mark. Q2 was absolutely an outstanding quarter. And we continue to acquire and expand meaningful strategic relationships with enterprises of all sizes, in every region across every segment and major industry. That being said, we had significant double digit growth and a number of large deals in the quarter, which was terrific and a lot of them were net new logos, which is really an indication of the type of success we’re seeing in our enterprise growth strategy.
I am incredible proud of the entire distribution team and what we’ve achieved together in a very short period of time. And it’s pretty clear that customers are choosing Salesforce as the trusted advisor for the customer platform. We’re having a huge impact on the marketplace delivering solutions and driving customer success. So we’re very, very excited.
I’d like to tell you about one of our larger transactions in the quarter, which is 3M, a leading manufacturer with a long history of global innovation. This is a great transaction and really is an example of the energy and the success that our team have been delivering in the marketplace.
Salesforce will now be powering 3M global transformation with Sales Cloud and Service Cloud as their global customer platform across 27,000 employees. Salesforce will be the social and mobile front end to 3M's SAP back office and it will provide their sales, service and marketing teams with a 360 degree view of the customers. We’re very, very excited about this. This is a terrific example of one of many eight figure transactions in the quarter and a great example of how customers are returning to Salesforce to unlock the value from their legacy systems.
We also closed another deal with Safeway. They selected the Salesforce1 platform to build next generation applications that will drive greater productivity across their store operations. Store managers and associates will be able to complete all their tasks right from their mobile phones, very, very exciting and leveraging Salesforce communities, Safeway will bring all their stores and associates into a single communications platform, again a very, very powerful story that we’re very, very excited about.
Another large deal that we closed in the quarter is with Fastweb, which is the leading Telco provider in Italy and also a subsidiary of Swisscom. Fastweb selected the Sales Cloud and the Service Cloud to get a holistic view of their subscribers, whether they’re in the store, online or over the phone or with an agent. In the Salesforce community Fastweb partners will soon be able to connect directly with agents to drive a whole new level of customer service. This is really a great example of helping the customer to transform the business model and this what we’re all about, transforming our customers business models.
We're also very pleased to have closed the landmark transaction with a large global manufacturer based in Europe and one of SAPs largest customers, where we will replacing tens of thousands of Microsoft users. We also signed on newer expanded relationships in the second quarter with some great brands, Etna, AIG, Burner, Caterpillar, Cathay Pacific, General Motors, Konica Minolta, [indiscernible] Bank, PG&E, Procter & Gamble, Roche, Singapore Airlines, USAA and Yahoo! and many, many more. These are all excellent, excellent global brands in a variety of different industries and each one of this companies are looking for us to provide them with deep industry expertise.
So whether it’s communications or financial services or healthcare or manufacturing, retail or the public sector, we are delivering the next generation customer platform and help our customer transform their business models for the future. And as you can see from these incredible global brands, we’re seeing tremendous levels of success internationally, as Europe and Asia Pac both deliver strong growth in the second quarter.
We’re just beginning to scratch the surface on our international growth potential. That’s why we’re aggressively investing in our international market by increasing our distribution capacity, building new datacenters that we have announced and expanding our very important partner ecosystem.
And speaking of partners we continue to see tremendous energy and enthusiasm in the ecosystem. The number of ISVs continue to scale. Our systems integrators continue to expand their Salesforce practices and all of this is accelerating our momentum, our reach and clearly our success in the marketplace. So I want to thank the entire organization for their outstanding execution in the second quarter.
And with that I’ll turn the call over to Graham.
Okay. Thanks Keith. As you've just heard, we have a really strong second quarter. It’s great to be handing the CFO role over to Mark with the company performing at such a high level. As many of you already know, Mark is an exceptional finance executive and I am fortunate to be transitioning the role to somebody who I’ve known personally for several years, who I admire, and who is really going to be a great fit with Salesforce.
Mark understands the challenges of growing an organization at scale. He was with HP on its journey from $3 billion in revenue to more than 50 billion and took Dell [ph] from $25 billion to more than $55 billion. I'm confident Mark will be instrumental in helping the Company scale to $10 billion and beyond. As you know, I’ll be here until March as an advisor to assure a seamless transition. I'll be on hand to answer any questions this afternoon. Before I turn the call over to our new CFO, I’d like to thank all of you on the phone for your support during my time at Salesforce.
And with that, let me pass it to Mark, who will take you through the financial details for the quarter.
Thanks Graham. I’m excited to be here and build upon the foundation of innovation and customer success that has made Salesforce one of the truly great software companies. I've been in the industry for three decades and in the last 15 years I've watched Salesforce lead the movement to cloud social mobile and when I think about Salesforce, I think about an absolute leader and pioneer and I am delighted to be here and to help guide the Company through our next phase of growth.
As CFO, I’m going to be focused on three things, driving our strong top line growth while delivering on our commitment to improving operating margins. Number two is ensuring the Company’s infrastructure and operations continue to scale as we grow. And number three is working closely with Graham to insure a smooth transition for the entire Salesforce team.
With that, let me take you through the financial highlights of our second quarter. We ended the quarter with revenue, deferred revenue, cash flow and non-GAAP EPS, all growing above 30% year-over-year. During the quarter we also announced the acquisition of RelateIQ, we reached a one year anniversary of the acquisition of ExactTarget and showed improvement in our non-GAAP operating margins year-over-year. In terms of Q2, revenue was $1.3 billion up 38% over the last year. Now excluding an FX benefit of approximately $9 million, revenue was up 37% and the non-GAAP EPS for the quarter was $0.13.
On a regional basis, Americas grew 39%. EMEA grew 42% in dollars and 36% in constant currency, sustaining a long trend of constant currency growth above 30% and Asia-Pacific grew 25% in dollars and 27% in constant currency continuing the acceleration that we’ve seen over the last few quarters. Looking at the second quarter revenue by cloud, Sales Cloud were $610 million, Service Cloud was $319 million, Salesforce1 platform and other was $181 million and ExactTarget marketing cloud was $122 million. Now second quarter dollar attrition, excluding ExactTarget remains 97%.
And with that now let's turn to margins. Our Q2 gross margin was 79.3%. That was down 140 basis points from last year. The decrease in our gross margin is principally related to our acquisition of ExactTarget late in Q2 of last year, which by the way, prior to acquisition had a gross margin in the mid-60% range. Now going forward, we will continue to seek operational efficiencies from the integration to positively impact our margins. Some of the ideas we’re working on include driving benefits from centralizing procurement, leveraging share infrastructure and increasing the share of projects done by our professional services partners.
Our second quarter non-GAAP operating margin was 11%, up 79 basis points from Q2 last year and up 126 basis points sequentially. From a headcount perspective we had another great quarter of organic hiring in Q2 adding more than 900 employees, bringing our total headcount to more than 15,000. Turning to cash flow, we delivered a strong operating cash flow of $246 million, up 34% over the last year and we now expect our full year operating cash flow growth of 26% to 27%.
CapEx was $72 million in the second quarter, down 30% over last year. CapEx as a percent of revenue was approximately 5%, down from 11% in Q2 of last year. For the full year we continue to expect CapEx as a percent of revenue to be in the range of 5% to 7%. Free cash flow which we define as operating cash flow less CapEx was approximately $174 million up, 116% from last year.
A couple of notes on the balance sheet. We ended the quarter with approximately $1.7 billion in cash and marketable securities. Deferred revenue ended the quarter approximately $2.4 billion, up 31% over the last year. We faced a slight FX headwind to deferred revenue in the second quarter of approximately $1 million on a year-over-year basis and a headwind of approximately $14 million sequentially. In the second quarter 71% of the value of all subscriptions and support related invoices, including ExactTarget were issued with annual terms. This compares to approximately 67% in Q2 of last year. Unbilled deferred revenue or revenue that is contracted but not yet invoiced and is off the balance sheet ended quarter at approximately $5 billion, an increase of 32% over the last year.
Turning to guidance, as Mark mentioned, we’re once again raising our full year 2015 revenue guidance by $30 million at the high end of the range to $5.34 billion to $5.37 billion, for a year-over-year growth of 31% to 32%. Since we first established our fiscal 2015 revenue guidance nine months ago, we raised our full year outlook by $170 million.
We’re also raising our full year non-GAAP EPS guidance by $0.01 to $0.50 to $0.52 and we remain on track to increase our full year, our non-GAAP operating margin by 125 to 150 basis points. For the third quarter we anticipate revenue in the range of $1.365 billion to $1.37 billion, representing year-over-year growth of approximately 27%, as we pass the first anniversary of the ExactTarget acquisition. We expect non-GAAP EPS in a range of $0.12 to $0.13, which includes the cost of Dreamforce and we expect billed deferred revenue in the third quarter to increase approximately 30% year-over-year. All the underlying assumptions of our GAAP and non-GAAP guidance and a complete GAAP to non-GAAP reconciliation can be found in our earnings press release issued today.
At the close, I would like personally thank all of our 1,500 employees for their hard work and dedication in achieving these absolutely terrific results. I'm excited to be the part of the Company’s journey to $10 billion in revenue and well beyond and I look forward to working with all of you and seeing you at one of our upcoming events, including Connections and Dreamforce.
And with that, I would like to open the call for questions. Operator?
(Operator Instructions) You first question comes from Heather Bellini of Goldman Sachs.
Heather Bellini - Goldman Sachs
Look I was wondering the movements in wearables and given the recent partnerships with some of medical device companies that were highlighted throughout the last couple of months, can you share with us how you see Salesforce participating in the trend of Internet of Things?
Well, thanks so much Heather. I really appreciate that question, and I’ll tell you, it really took me aback honestly. I was in our Paris Cloudforce program. I think we’ve had 3,000 to 5,000 people there with me. You can watch a video of that on YouTube and you’ll see that we get to the wearables section of event and right then, during the wearables section of the event something amazing happened and what happens is you hear just an audible gasp from the crowd when they see the Salesforce information appearing on the wearable and it took me aback, it’s taken me aback since we launched the product as well that customers really can’t see this happening very, very quickly and usually a lot of them already wearing wearables on a regular basis. I know that I am. I bet a lot of people on this are and these wearables are becoming a lot more sophisticated. They’re becoming tethered to our phones. They’re also becoming their phones. And they need to have access to both, not only the consumer cloud but to the enterprise information as well that we’re really pioneering with our wearables as software development kits and applications that we’re building. You’re going to see a lot of that at Dreamforce as well. And when you start to combine it into the different verticals that we are looking at, we can really start to do demonstrations with our customers of what their future looks like, not only in their own productivity but also in how their customers will be automated as well. And you’re going to see this become a huge part of the future.
I'm confident we’re going to see wearables from major providers like Apple and others this year. You’ve already seen wearables emerge from huge companies like Samsung and it’s going to be a huge part of all of our lives and Salesforce has to be deeply integrated as part of that, which is why we launched this Salesforce Wear program. And also I guess I should mention since the CFO’s name is Mark and CEO’s name is Marc, we’ll have to come up with some clever way to figure out who the question is for. I just assumed that question was for me.
Your next question comes from Matt Hedberg of RBC Capital Markets.
Matt Hedberg - RBC Capital Markets
I was wondering, can you give us a sneak peak at maybe how RelateIQ might hone the basis for your analytics cloud, perhaps what else is needed for that particular product and then maybe if you could help us out with the dilution from that acquisition, that would be great? Thanks.
Well, sure. I’ll let Mark and Graham handle the dilution question and let me take the top line and the strategy question. As part of my job as the CEO of Salesforce, I am constantly meeting with and looking at and reviewing startups and new technology and new companies, new entrepreneurs and meeting with visionaries and begin to -- I had an amazing experience. I have dinner that I attend every month with 15 CEOs of mostly very strong and emerging companies, a lot of them who now have become huge companies. And two of them looked me in the eye and this has never happened before and they go, you really need to buy RelateIQ. And I said why do I need to buy RelateIQ and they said, we use Salesforce but we use RelateIQ also and it’s an incredible complement to your product line and it can be a huge part of your future and I started, I knew about RelateIQ, I've used it. I started to spend a lot more time with it and I saw directly what they were talking about. It's really a vision of how the power of data science and the power of relationship intelligence can be applied to very large datasets.
And what we see happening with RelateIQ is unbelievably complementary right now to Salesforce, but we see it just getting Salesforce on steroids. We actually have a huge vision of RelateIQ. We’re currently working closely with the management team and executing that and I expect in about six months we’ll have some very exciting new products and new capabilities to offer our customers based on the RelateIQ acquisition and we are very fortunate as we were with ExactTarget to be able to acquire this company, these entrepreneurs and they just have some of the most incredible visionaries and technologists in the company including the person who invented the very term data science and this is just a huge win -- success for Salesforce.
So let me turn it over to Mark and Graham on the question of dilution.
Let me take that Marc. Hey, Matt. In terms of the dilution, there’s no affect at all on the non-GAAP basis. So you can say -- obviously, we’re committed to the 125 to 150 basis points of operating margin through the Q1. And on a GAAP basis, keep in mind that this is just closed and we’ll have that calculated GAAP affect by the end of Q3, but on a non-GAAP basis no effect.
Your next question comes from Karl Keirstead of Deutsche Bank.
Karl Keirstead - Deutsche Bank
My question is for Mark Hawkins. I just wanted to talk a little bit about the up 30% DR guide for the third quarter, I think that implies about 25% billings growth. I had two questions for you. I just wanted to confirm, given that we've lapped ExactTarget, is that a 100% or near 100% organic DR increase? And then secondly, what key assumptions or drivers are you assuming for that October DR guide in terms of large deals or do you have deal strength, any color? Thank you.
Sure Karl. First of all, let me just say a couple of things here. One is that we focus on -- our revenue obviously -- our deferred revenue [indiscernible] and I know billings is a number that you look at. That’s not something that we focus on in the Company. Let me just talk you in a broader sense that you’re asking about, which is when we look at going forward, our guide represents -- our revenue level represents 31% to 32% revenue guide for the entire year, which gives you a sense of velocity. One of things you touched on is, the ET effectively and we did last the ET in this quarter and so when you look at Q3 for example, you can see we basically do that. And I think that’s -- everybody is factoring that in. So, I think the long and the short is you’re absolutely right. We left ET. I think you have a good understanding when you look at our revenue growth at 31% to 32% and Graham I don’t know, if you have any other color to that.
Yes. I think we haven’t, in terms of specifically forecasting deferred revenue, obviously we try and give you a guide on that, just because we know it’s an important number for you. I would say methodology of how we actually project that this quarter doesn’t change. We have a big complicated model for that, that we use and it's been usually reliable but there’s been no -- it’s not working at the deal level. It’s basically working at overall macro levels, new business, attrition, build frequently, all those kind of things go into that mix.
The next question comes from Jason Maynard of Wells Fargo.
Jason Maynard - Wells Fargo
I got a question for Marc B and Keith B. Can you just talk a little bit about Europe and Asia, and Marc you spent a lot of time over there in Europe, and I'm curious to get your take, and maybe Keith, you can weigh in on this, where do you think we’re at in terms of the European countries starting to make the move to cloud adoption? Because if we look historically, a company of your size, international would be much bigger if we’re making comparison back to the old days of Oracle and early Europeans have been slow to move to cloud relative to the U.S. So I'm curious, where do you think we’re at in that journey and how do you think about growth rates in each of those regions going forward? Thanks.
Yes. I really appreciate that Jason and I’ll tell you that number one, and we’ve talked about this before. It has been a long concerted focus on Europe and obviously this is not my first trip to Europe that I just completed. I have been to Europe with Salesforce many, many, many, many times. And Europe tends to be a laggard when it comes to implementing new technology. And that has not escaped our cloud companies, as well as you can see across the board with all of the cloud companies.
That said, the reason why you see accelerated growth rates in Europe for our business and why we have just seen remarkable deal growth and sales in Europe over the last several years now is because what you said is true. It is a huge, huge part of our information technology market and it’s a huge part of our CRM market and they are now deeply committed and I believe earnestly adopting cloud in a whole new level.
There’s no doubt that we are adopting our model to be more successful in Europe. You probably know we now have a U.K. datacenter and while I was in Europe, we also announced a French and German datacenter that will extremely important for each of these countries to have their own "clouds". Germany wants the German Cloud, France wants the France Cloud and U.K. wants the U.K. Cloud and as you know our infrastructure investments and ability to deliver infrastructure, the costs for us were extremely minimal. And it’s very easy for us to deliver that model to those countries. We’ve already done that for example in the U.S., our dominant market but we have also already done that in Japan where we have a Japan cloud. And I believe we’ll have a U.S. Cloud, a Japan Cloud, a U.K. Cloud, a France Cloud and a German Cloud and that in all major markets and you know that we really do business in earnest in about seven countries, we will see a more -- an increasing [indiscernible] of those countries and this is really I think indication that the cloud computing model is going mainstream.
Cloud is going mainstream and these countries want to make sure that these clouds are part of their national infrastructure and are part of their national assets. We saw that first in Japan and we delivered that and we’ll now deliver that in our major markets and that’s going to be very, very exciting for our customers and it has given our distribution organization, the ability to talk about this incredible commitment to our local markets. That’s also why you saw us also double down on our key market headquarters, such as in the UK and France this quarter, as well we have our new Salesforce Tower in Downtown London, which I encourage all of you to visit and is an incredible and very important part of our ability to do business in the United Kingdom, coupled with our UK datacenter.
We also have our new French headquarters directly next the Eiffel Tower, the former headquarters of the French Navy and we have under development and soon to be open our new French datacenter. Again we have so many exciting customers in France that I met with, whether it’s companies like I mentioned like LVMH, or AXA or Renault or so many others who have made massive commitments to us and then we move on to Germany and again we’re executing the same strategy and Japan where the Japanese government now has asked us to move into one of their brand new building which is JP Tower and in Downtown Tokyo in the Maruchi [ph] district and also we’ve coupled with NTT with our Japanese datacenter and I think you’re going to see this as a successful winning combination for delivering our cloud, Salesforce’s cloud in these local markets and accelerating our growth and if you look at how -- as we've implemented that strategy over the last several years, you can see how our international numbers have improved. And now let me turn it over to Keith, who will give you the on the ground assessment.
Yes, thanks Marc. So, I would echo many of the things that Marc just said. When I come onboard just over 12 months ago, one of the things that was obvious to me was just a tremendous opportunity in international, both in EMEA and Japan and Asia-Pac and we have accelerated our investment in those theaters across the board, whether it’s people and headcount, whether it’s improving our relationship with partners, the key influences in those markets as well as the IFDs. Marc also mentioned datacenters. I think that’s a demonstration of clear commitment to those countries that we’re very curious about the cloud computing business in their theatre. So you wrap up all of those investments going with our general theme of going to market by industry and selling solutions and you can see the response in the numbers that our customers internationally, not just domestically anymore but internationally absolutely wanted to embrace our vision for them around a customer platform. So, we’re very, very excited about the acceleration in the results and you’re going to continue to see that happen.
Your next question comes from Brent Thill of UBS.
Brent Thill - UBS
Thanks, question for Mark Hawkins and Graham on the approach to your hiring in the back half of the year. About a third of your workforce has been added just in the past year and half and I think there has been some questions around are you going to continue at the pace you've been going or is there room for pause as you digest those additions that you made?
Let me start and maybe Graham can jump in as well here. As you saw last quarter, we did add 900 people. We were glad to do that. We feel like that helps position us as our Company is growing rapidly. We continue to hire. If you look at our Web site, we’ve got lots of stuff out there for [indiscernible] I will even add that obviously we’re having good success in hiring, I think in large part with things like being a great destination to be in terms of a best place to work and such. I think the long and the short of it is Brent, that we continue to hire, we’re going to continue to do that within the envelope of delivering our top line growth that we talked to you about with the 31% to 32% and also with the operating margin, 125 to 150 basis point improvement non-GAAP. Graham?
Yes, I would just add I think, we have somewhere over 900 open positions on our Web site. I think [indiscernible] back end loaded hiring in our year. This year we actually got after a really fast start. Employee attrition has been actually very favorable for us too. We ended the first half ahead of our headcount plan, which I don’t think we’ve had in my six years with the company. So we had a really, really strong organic [indiscernible]. So we feel great heading into the back half from a hiring point of view.
Your next question comes from Ed Maguire of CLSA.
Ed Maguire - CLSA
A couple of quick questions. One is on -- thank you for providing some of the granularity around the cloud. If you could provide any relative strength across the cloud, that would be great. And also turning to the industrial side of Internet of Things, you guys have been doing a lot of interesting work with ThingWorx and Etherios and some of those partners, and I’m curious to what extent you expect Service Cloud and platform to really lead adoption here? What are going to be the obstacles to adoption and what are the biggest vectors you see driving growth for connected products? Thanks.
Well, the thing I would say is that we’re very lucky to have a full portfolio of product and of course we’ve got our mainstream Sales Cloud product and that product continues to do incredibly well and beyond our expectations and that’s one of the key reasons we bought RelateIQ. It really makes the Sales Cloud so much better and we couldn’t imagine something that could boost us so much, so fast. But RelateIQ did that and so we had no choice but to acquire the company and make that happen.
Then when we look into the service cloud world, well, this is our fastest growing cloud ever and you can just see the revenue numbers are just awesome and it’s unusual for a software company to have $1 billion product line and multibillion dollar product line. We have that with Sales Cloud and now you see it’s happening again with the Service Cloud, we have a second multibillion dollar product line and that product as you know whether -- it doesn’t matter what rating agency is rating it, it says it’s absolutely the best customer service product out there and then we made it so much better with all these new capabilities. And when you see what we come out with at Dreamforce again, you’ll be just in shock at the level of quality and capability of the Service Cloud.
The Marketing Cloud is a product that very much we have built through acquisition. And we of course acquired an incredible company called Radian6. We bought an incredible company called BuddyMedia. But all of that was minimized when we bought this unbelievable company last year called ExactTarget. And that company, as you can see has dramatically accelerated our Marketing Cloud and has given that a very strong trajectory.
And when you get to the Connections conference and you see things like Journey Builder, when you see what Microsoft has built on top of our marketing cloud and with Journey Builder and how they’ve been able to get such incredible success with Office 365 by building customer journeys and how we can deliver this deep customer workflow for any app builder, not just Microsoft but any one building apps or anybody who is trying to deliver customer journeys and communicate with those customers on a regular basis through email and SMS and on mobile phones and In-App, you will see why these companies like Microsoft and Sony and so many others have made such huge investments in our Marketing Cloud.
And then getting to your IoT question, our platform, you can’t do any of this unless you can build your own apps and you've got to be able to build mobile apps, you've got be able to build on an API. You have enterprise quality. You have to be able to have it in country. It’s not like the consumer cloud. We don’t own our customers' data. We’re not like Facebook and Google or Yahoo! We don’t own the data. The data is our customers' and we are just stewards. We provide the applications. We provide the equipment but the use of clouds are very much owned by the customers and the customers are in the data centers and auditing the data centers and reviewing the security and knee deep in all the capabilities.
And the core of that, that’s the platform that is -- the infrastructure is the platform, the APIs are the platform, and then it's a fundamental software that lets them build these incredible next-generation applications like what we see coming out of Salesforce1 with these unbelievable mobile apps and if you go to our AppExchange.com and you look at the Salesforce1 category, you look at some of the demonstrations of that or just talk to any of our customers and have them show you what they’re doing on Salesforce1, we are rapidly moving our user base to mobile and it’s super important for us and it’s our platform, and here it is again, another aspect of our business that has an incredible trajectory.
And then finally and as part of that, we have to mention Heroku. Heroku is the absolute standard in building apps on Amazon Web services. It’s an acquisition that we did now I think about three years ago. It’s become an unbelievable success story. It’s the standard in the industry and if you want to build a standard app that's customer facing on AWS, you’re going to do it on our Heroku platform and you saw incredible integration between Heroku and Salesforce with the introduction of Heroku Connect and that is super-exciting that we’re able to offer our customers the ability to build on the Journey Builder platform for those marketing applications. They can build on the force platform for their employee applications. And here they can build on Heroku for their consumer facing applications and our customers look at that as a complete suite, not just for B2B applications and sales and service and marketing and managing their internal apps, but they also are able to do it on B2C; that is we have a full B2C offering with ExactTarget and Journey Builder, with Heroku and of course you’ve seen what we’ve done with communities where we’re just delivering unbelievable community support and if you go to community.homedepot.com, you look at what Home Depot has done with deep social network that connects their community, one of the largest retailers in the world with all of their employees around the world, it’s an example of what we’re all going to able to do with communities.
So we look at this as -- we look at an unbelievable capability with sales -- the Sales Cloud, the Service Cloud, the Marketing Cloud. We see an unbelievable strength with the platform, with Heroku and then communities and to kind of get your last piece, you’re going to see us move into an exciting new area at Dreamforce and I’m not going to tip my hat to what that is. It's not RelateIQ. It’s nothing that have seen yet from Salesforce and we are going to be introducing a major new product line and category at Dreamforce. So be there during our keynote on the 14th, on Tuesday in San Francisco at 01:30 p.m. because we will show you really the fifth leg of the stool and how all these things come together to create an incredible customer facing environment, whether you are a B2B company, B2B2C company or B2C company, Salesforce has an incredible suite of products that will make you more successful than ever before and also connect with your customers in a whole new way.
And your final question of the call comes from Kirk Materne of Evercore.
Kirk Materne - Evercore
My question for Keith. Keith can you maybe provide a bit of an update on the industry strategy, how that’s playing out in terms of some of the larger deals you guys have signed this quarter? I'm interested if there’s any industries in particular you’re seeing some accelerating traction, whether it's through your own efforts or through your ISP partners efforts? Thanks.
Yes. Our industry strategy continues to gain traction. In fact if you look at the roster of customers we've identified in the beginning in the opening comments of the call, they fairly represent all the industries that we’re pretty much focusing on. So we continue to get traction. Our customers love the story about our point of view around the industry. They love the solutions that we’re bringing to market. They are enjoying what our partners are collaborating with us on and able to help them drive a transmission of their business models in their particular industries. So it’s early days and early months but we continue to see traction. Not only are we seeing this in larger deals and volume with larger deals, but just bringing in more meaningful dialogue across the board. So I think the prognosis is good. The early results are good. And we will continue to focus on.
So that concludes our call today everyone. Thank you so much for joining. We appreciate it. We'll look forward to updating you on our third quarter results in November. And if you have any questions, please, you can reach out to us at email@example.com.
That concludes today’s Salesforce fiscal second quarter results conference call. You may now disconnect.
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