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Salesforce.com (NYSE:CRM)

Q1 2012 Earnings Call

May 19, 2011 5:00 pm ET

Executives

Graham Smith - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Marc Benioff - Co-Founder, Chairman and Chief Executive Officer

David Havlek -

Analysts

Brendan Barnicle - Pacific Crest Securities, Inc.

Stan Zlotsky - Deutsche Bank AG

Laura Lederman - William Blair & Company L.L.C.

Brent Thill - UBS Investment Bank

Ross MacMillan - Jefferies & Company, Inc.

Brad Zelnick - Macquarie Research

Unknown Analyst -

Robert Breza - RBC Capital Markets, LLC

Mark Murphy - Piper Jaffray Companies

Kash Rangan - BofA Merrill Lynch

Operator

Good afternoon. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to the Salesforce.com Q1 Fiscal Results Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. David Havlek, Vice President of Investor Relations. Sir, you may begin your conference.

David Havlek

Thanks, David. I'd like to welcome everyone to Salesforce.com's first quarter fiscal year 2012 results call. Joining me to discuss our results today as always are: Marc Benioff, Chairman and CEO; and Graham Smith, our CFO. Following our prepared remarks, we'll open things up for your questions. As always I ask as a courtesy to your peers, please limit yourself to one question today.

A complete disclosure of our first quarter results can be found in a press release issued about an hour ago, as well as in our Form 8-K filed with the SEC. Additional financial information, including detailed historical financial statements and facts, is available on our website.

Our commentary today will primarily be in non-GAAP terms. Reconciliations between GAAP and non-GAAP metrics for both our reported results and our forward guidance can be found in our press release.

At times in our prepared comments today or in responses to your questions, we may offer incremental metrics to provide a greater understanding of our business or our quarterly results. Please be advised that some of these disclosures are one time in nature and we may or cannot update those metrics in the future.

Also of importance, beginning in the third quarter, we will no longer be reporting our customer count metric on a quarterly basis. We said we plan to update that metrics when we receive notable milestones. We're making this change because recent acquisitions, primarily Heroku and Manymoon, have added a large number of users. Linking those users to specific customer organizations can be extremely challenging and in some cases impossible. As result, we believe our traditional customer metric will become less meaningful overtime. We plan to report the customer metric using our traditional measure one last time in Q2.

With that, let me make this call official with a brief Safe Harbor. The primary purpose of today's call is to provide you with information regarding our fiscal first quarter 2012 performance. Some of our discussion and responses to your questions may contain forward-looking statements. These statements are subject to risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements.

All of these risks, uncertainties and assumptions, as well as other information on potential factors that could affect our financial results are included in our reports filed with the SEC, including our most recent report on Form 10-K, particularly under the heading Risk Factors.

To access our first quarter press release, including the GAAP to non-GAAP affiliations or rhetorical results, any of our SEC disclosures or simply to learn more about Salesforce.com, I encourage you to visit our Investor Relations website.

In addition, a webcast of today's call will be available for 90 days, and a dial-in replay will be available through June 16.

Finally, before I turn the call over to Marc, please be advised that we may reference certain unreleased services or features that are not currently available in today's discussion. We can't guarantee that future timing of or availability of these services or features and, as such, customers who purchase our services should make their purchase decisions based on services and features that are currently available.

With that, let me turn the call over to Marc to discuss our excellent first quarter results. Marc?

Marc Benioff

Thanks, David. Our first quarter was indeed a fantastic kickoff to fiscal year 2012, continuing the momentum we experienced in fiscal year 2011. And I'm thrilled to report that just one quarter into our fiscal year, we have crossed the threshold of the $2 billion annual revenue run rate. As you can see from the revenue, we are absolutely delighted now to be at a new level of performance of our company, and our revenue growth rate is accelerating.

Let me begin by briefly reviewing some of our financial highlights of the quarter. Revenue of $504 million was 34% from the year-ago quarter. Deferred revenue also accelerated to $915 million, a 38% year-over-year increase. Incredible. And we also delivered $140 million of operating cash flow. And over the past 12 months, we've generated roughly $460 million in operating cash, an increase of more than 40% from a year-ago period.

Finally, David, we are pleased to be able to raise revenue guidance to $2.15 billion to $2.17 billion, a significant increase once again to our revenue guidance for fiscal year 2012, and our second increase this year, the first one after we acquired Radian6.

Now I'd like to say a few words about Japan and the Japan disaster before we begin. First of all, let me personally and on behalf of Salesforce.com and our employees and our shareholders, send our condolences to the victims of the Japan disaster. Our sadness is overwhelming, and we are deeply with you, and we send our wishes for a quick recovery.

Now like many companies, of course, our business is also affected by the earthquake in Japan. However, the diligence of our Japan team ended the quarter closer to their original plan than we could really have ever expected.

In fact, one of our 10 largest transactions for the quarter was from Japan. It's also important to note that none of our Japanese customers, including our largest customer, the Japanese government, suffered any service interruptions because of the disaster. Salesforce.com delivered 100% reliability and availability during the disaster.

This is truly a testament to the power of our cloud computing model, which we think will play a key role in Japan's building efforts and rebuilding efforts, and we'll be talking more about that next week. I'll be in Tokyo, and I will be making several announcements about our commitment to Japan, the opening of our new Japan data center and new strategic agreements that we're reaching with customers in Japan.

We are truly doubling down on our commitment to Japan. We've raised more than $1 million for the victims of the disaster, and in my discussions next week, we'll be having several strategic announcements that we hope will inspire Japan's innovators, Japan's customers, as well as our global shareholders. And I look forward to speaking to all of you from our headquarters in Tokyo next week.

Our financial momentum in the quarter was powered by our strategic decision to bring social, mobile and open cloud technologies, or what we have been calling for over a year Cloud 2, to the enterprise. And third parties agree that these trends are really the future of our industry.

A recent independent survey by McKinsey & Company reported that companies that are using what we call Cloud 2, or social networking technologies within the enterprise that are more flexible, collaborate better, achieve greater market share and have higher margins.

It's just a very exciting shift for companies all over the world who are able to bring in the power of mobility, the power of social and the power of open, coupled with the cloud computing model that we've been talking about now for over a decade. And in the February report, Morgan Stanley confirmed that enterprises are embracing mobile devices. 51% of the CIOs they surveyed expected to buy tablets for employees this year, and another 16% will allow employees to use their own devices to access corporate data.

Now I can tell you that personally in the quarter, I met with over 170 customers, many of them in small lunches and dinners, as well as in one-on-one meetings throughout the quarter. I spent an extensive amount of time in the field and around the world with our customers. And the reason why is because this shift is so big, so broad and so unique that I really felt I personally had to get out and really talk to customers about what they're going through. And what amazed me was I would say approximately, or more than half, certainly more than half of all of the attendees, brought their iPads in to meetings with me. That really blew me away.

Now of course, while I'm in these meetings with them I have an iPad as well and I'm showing them Salesforce Chatter on the iPad. And that's important because as you know, Chatter is the foundation of our Cloud 2 mission. As a stand-alone product, Chatter opens doors for us with these C level executives, and they can see the benefits of open, transparent workplaces and moving into this new social enterprise model.

But more important, the private and secure social network has supercharged all of our offerings in sales with the Sales Cloud, in service with The Service Cloud, and data with Jigsaw in our Force.com platform with Heroku, and of course with our new offerings with Radian6.

And now, all of our customers have immediate access to a social layer, where regardless of whether they're using Salesforce or more than the 220,000 custom apps built on Force.com. And the response from our customers, as I've traveled around, and feedback from all of our executives to this vision of Cloud 2 is really amazing.

In Q1, we added 5,400 net new customers, taking the global community of our core apps and platform to more than 97,700 paying customers, a 26% year-over-year increase in customers. And of course, that does not include Heroku, that does not include Manymoon, that does not include Radian6. That's 97,700 core-paying customers.

We obviously have many more paying customers, and of course our foundation has free customers as well which are the nonprofits and the NGOs that we offer our products for free to. And we're also offering our products for free to many companies affected in the Japan disaster, and we'll be talking about that in Tokyo next week.

Today, we see customers buying more. There is definitely a higher buying environment going on and more kinds of our products. In fact, 1/3 of new business in the first quarter came from non-Sales Cloud services. A couple of great examples are two of our marquee transactions in the quarter, which are Groupon, which is the nouveau-riche company in Chicago, and Bank of America.

Groupon is the world's fastest-growing company, offering daily deals on events and food and services in 44 countries, and while they initially talked us about The Sales Cloud, which has been the heart of their growth of their sales and marketing efforts, we showed them how the platform, Force.com and a full range of services, could supercharge their business and deliver the quality and scale they need to maintain their phenomenal growth rate.

And now the Force.com platform will touch nearly every aspect of Groupon's business, whether it's their management of merchants, the core of their business, their city planning and merchandising efforts, their customer service and consumer support, whether it's the development of their coupons, Force.com will help them to re-architect their company for the future.

And Bank of America has entrusted us to help out thousands of Service Cloud seats, enabling its home loan service reps to quickly and accurately solve problems across all of their support channels and customer touch points.

And we're also delivering tremendous success and seeing momentums in companies like General Electric, where we're helping major divisions, including GE Capital, and GE Energy, GE Transportation, GE Healthcare, find new unique ways to use our apps and platforms to form deeper relationships with their customers.

Our flagship, Sales Cloud, continued to crush the competition in the quarter. Microsoft's desperate strategy of underfunding, pricing with undifferentiated and highly proprietary products basically has had the same impact on our business as the Windows tablet and Zune did against the iPad and iPod. We call Microsoft's strategy, "the Zune strategy".

It's the concept that they can take a proprietary, undifferentiated offering at a lower price and somehow make an impact on a high-value, highly differentiated product that's loved by customers. Microsoft has not changed our exceptional win rates or affected our average selling price with this Zune strategy.

Customers continue to want visionary products that give them a competitive advantage, not the me-too Zune-type products locking them into these old, proprietary, desktop-driven platforms that are dying off.

Against Microsoft, we won significant new or add-on business at companies like Eli Lilly, Cargill, Honeywell, Ingram Micro, Changi Airport in Singapore, Bombardier, Bank of Espirito Santo, Biotec, Digia Finland, Greenway Medical, LQ Management, LXE, Misys, Monumental Sports & Entertainment, and the New Zealand Defence Force.

These wins against Microsoft were new wins, but we also signed companies that had bought the Microsoft Zune CRM, tried it and threw it out, and customers included the Advantage Brokerage Support Services, Angie's List, CHC Helicopter, the Nemetschek Allplan and the O.C. Tanner.

Against Oracle, which is trying to convince customers to low proprietary software onto proprietary mainframes, a strategy made popular by IBM in the '60s, we won significant new or add-on business with customers such as Bridgestone, Office Depot, Sony, and Suntech, and believe there's still plenty of opportunity ahead with millions of businesses around the world who are looking to leave these proprietary models.

The combination of Chatter, the seamless integration of Jigsaw data and mobility, sets The Sales Cloud apart. It's a unique offering. It's highly differentiated. It's innovative. It's creative. And it's one of the most highly rated CRM services in the world today. Certainly, it's the most loved.

We also saw customer velocity in our Service Cloud, our fastest growing business in the first quarter. Today, approximately 16,000 companies are using The Service Cloud to connect with customers across both traditional and new service channels, including e-mail, telephone, social media and the Web.

In March, we unveiled Service Cloud 3, which let companies directly engage with their customers over Facebook, Twitter, and a broad range of social communities and leveraging new mobile capabilities, like Apple's Face Time. Essentially, Service Cloud 3 lets customers go where their customers are, in the Cloud, provide them with the customer service, the call center, the contact center, the portal, the technology they need to provide that customer service capability.

Salesforce Service Cloud 3 is a uniquely differentiated and highly successful product. And just last month, The Service Cloud was positioned in the leaders' quadrant of Gartner's Magic Quadrant for CRM customer service and contact centers. Pretty incredible considering this is a relatively new entrant from Salesforce.com to see Service Cloud so highly rated by Gartner in the Magic Quadrant.

Major wins or expansions of The Service Cloud during the quarter included: Bank of America, and Nissan North America, Paychex, Phoenix Mining, RBS, Scripps, Sony. And finally, the Force.com platform continues to be the only proven enterprise-class platform as a service on the market today, delivering the highest levels of reliability, scalability and performance, delivering our customers with the tools they need to build their own cloud applications, to help integrate their products into the cloud, and to help them rapidly deploy new technologies using Force.com. And because Chatter is integrated into Force.com, the platform gives developers and customers instant access to these next-generation social capabilities.

But more than that, the platform also provides the foundation for apps that are mobile and open. Last quarter, we introduced Database.com, the first enterprise database built for the cloud, which includes developers to be able to write apps in any language, on any platform, on any device, and do it all in the cloud.

We also acquired Heroku, the leading platform as a service for writing apps in Ruby On Rails. And Heroku was designed from the start to support multiple languages, and we hope to be soon be talking about our strategy in offering many, many languages in the cloud using the Heroku capability.

We believe Force.com and Heroku will attract a diverse community of developers and partners who want to create Cloud 2 apps, and it's already happening. Over the last 12 months, we added more than 130,000 developers, creating a global community of more than 380,000. Our open strategy will push that even further as more developers write enterprise cloud apps, whether it's using Ruby on Heroku, whether it's Java on VMforce, or whether it's APEX on Force.com. And we're now managing more than 1 billion lines of code, using these technologies from our customers on our cloud. 1 billion lines of code.

Customers now building on the Force.com platform or that have extended their deployment include: Genentech; Hitachi; Medtronic; METI, the Ministry of Economy, Trade and Industry in Japan; and the UnitedHealthcare Services. And our customers and partners continue to increase their usage of our platforms.

During the quarter, Force.com delivered 31 billion transactions, that is 31 billion complex database transactions for our customers, up more than 60% from a year ago. And that's almost 2.5x Twitter's 13 billion tweets in the same period.

Last year, Salesforce.com educated the market on the benefits of social collaboration in the enterprise. We've shown how Chatter is transforming the way companies work and how their employees do their jobs, improving productivity, sharing insights, connecting with experts and making better decisions, all in realtime.

And new Chatter deployments in the first quarter included: Akamai, CIGNA, L'Oreal, Seagate, Tata, VMware and Vodafone. And as companies discover the breakthroughs in communication and collaboration that Chatter provides, they're taking it across the enterprise. Chatter is also helping Salesforce.com reach entirely new customers, giving us a pipeline for selling other products and new services.

Customers expanding their deployments of Chatter in the first quarter included: GlaxoSmithKline, O2, Savvis, Sony, and Starwood Hotels, all deploying Chatter in the first quarter. In addition, our largest Chatter deployment [indiscernible] and SunGard, new enterprise-wide deployments now include: Avaya and Bausch & Lomb, VMC, Juniper, Kelly, Symantec and many, many others.

By leveraging our Cloud 2 strategy, we're becoming a more strategic partner to our customers, and now when I meet with CEOs and CIOs of the world's biggest companies, they want to hear how we help them use these social, mobile and open cloud computing to partner and become more innovative and responsive so they can serve your own customers and become social enterprises. That's why we're investing so aggressively for growth in people and technology and in partnerships. First with people over the last 12 months, we added 1,400 employees, which will help us to sell even more into the future.

And second, with technology, earlier this month, we completed our purchase of Radian6, the leading platform for monitoring, engaging the millions of conversations happening every day on Facebook, on Twitter, on social communities, on websites. Soon, customers will be able to monitor and join in these public conversations from within our products, including Chatter.

And if you haven't had the opportunity to see Radian6 -- and it's a spectacular product and one of the most exciting technologies I've ever had the opportunity to work with -- you can check it out yourself at radian6.com, and monitor how your brands, how your employees, how your companies and your competitors are interacting throughout the Internet. It's a realtime view into the Internet that makes all of our customers more competitive.

We believe this is a massive opportunity to redefine cloud computing. It's giving customers the social intelligence they want with the business context they need. And it opens the opportunity for us to sell more strategically in the marketing departments. It further differentiates The Sales Cloud, The Service Cloud. It further differentiates the platform and Chatter.

And then finally, with partnerships in the first quarter, we announced the strategic alliance with Intuit, which will integrate Salesforce CRM in their QuickBooks, financial applications, and we sell it to the Intuit space of 4 million QuickBook customers. This alliance dramatically extends their reach into a small business, with a partner that's the gold standard for small business computing.

And as we look for future small business initiatives, like our recent acquisition of ManyMoon, we see that as a growing and strategic part of our business as well. Today, customers, developers and ISVs, like BMC and Computer Associates, view us as the strategic partner, who could help them understand and profit from social computing. It's been an exciting time for us to build these strategic relations with ISVs. And you'll see many more relationships as we head towards Dreamforce.

So now before I close, I want to invite you to join me in San Francisco on August 30 through September 2 for the world's largest cloud computing event, Dreamforce 2011. We'll have a lot of exciting announcements between now and Dreamforce. And Dreamforce will be the culmination and discussion and revelation of what is the social enterprise for our customers.

Dreamforce will have the biggest selection of cloud computing products ever under one roof, and the largest gathering of cloud experts. More than 450 sessions on cloud computing. It is the place to learn about the next generation of cloud and to collaborate with others in the industry. And I will look forward to seeing all of you there.

And with that, I'll hand it over to Graham.

Graham Smith

Thanks, Marc. Q1 was an exciting start to fiscal 2012. Revenues of $504 million rose 34% year-over-year, well above our outlook entering the quarter. This significant overachievement was a result of three factors. First, the strong new business performance that Marc described earlier; second, there was significant strengthening in the euro and the yen; and then finally, continued reduction in our attrition rate.

On the attrition front, our dollar attrition when compared to year ago, continued its steady decline from its peak back in the second quarter of fiscal 2010. But remains in the mid-teens percentage. Obviously in improving global economy, it's helping customer retention rates but given its importance, we're continuing to invest in areas critical to customer success, such as customer onboarding, enhanced training and usage analysis and predictive monitoring. Because the cost to renew and grow existing customers is much lower than the cost of acquiring new ones, these efforts are an extremely important part of our long-term growth strategy.

Turning next to geographic performance, we saw strength in all three major geographies. In Q1, Americas revenue rose 31% year-over-year to approximately $340 million. International revenue rose 40% in dollars, and 53% in constant currency versus the year-ago quarter, and now represents roughly 33% of total company revenue. That's up from 31% a year ago.

The stronger euro and yen contributed roughly 2 points of FX benefit to our reported company revenue growth in Q1. Looking at some regional details, in EMEA, revenues of $94 million rose 41% in dollars, and 36% in constant currency. And in Asia, revenue increased by 38% in dollars and 29% in constant currency to roughly $70 million.

Marc already mentioned our Japan business and looking ahead, it's difficult to predict the extent or duration of the current slowdown. Our revenue growth in Asia was affected in Q1, and we've tried to factor in a realistic forecast for Japan for the remainder of the year. Fortunately, the strength of our other businesses in the Americas and EMEA has resulted in us still being able to raise revenue guidance overall.

Looking on to the income statement, our first quarter non-GAAP gross margin of 82% remained essentially flat, both sequentially and year-over-year. There are a couple of points to highlight in Q1. First, due to our strong production growth trend, we continue to make investments in our service delivery infrastructure.

Q1, we had the full expense impact of our third and fourth U.S. data centers as well as some early costs associated with the build out of our Japan data center. The net effect of these investments was to reduce year-over-year non-GAAP gross margin for our Subscription business by roughly two points.

Offsetting the impact of these investments was the continuing revenue mix shift away from our lower margin Professional Services business as our partners take an ever-increasing share of the implementation service.

Our first quarter non-GAAP operating margin of approximately 11% was unchanged from Q4 but down 5 points from a year ago. Three primary factors are driving the year-over-year increase in operating expenses. First, we have acquired seven companies since Q1 last year. While Jigsaw is on track to get to non-GAAP break even in the 6 to 8 quarter timeframe we discussed last year, all of the remaining acquisitions are dilutive to operating margins. Nevertheless, we believe these acquisitions are important to extend our Cloud 2 vision around social, mobile and open, and the strength of our Q1 performance reflects this belief.

Second, as we indicated in Q4, accelerated hiring in the second half of last year is helping new business momentum but increasing expenses. Q1, we really felt the full effect of the roughly 850 employees we added in Q3 and Q4.

In addition, we added approximately 200 people in the first quarter, taking our employee population to just over 5,500. Because growth is our top priority, and because our people fuel that growth, you should expect us to continue to hire aggressively for the remainder of fiscal 2012.

And finally, in Q1, we spent significantly on marketing programs. Our first ever Superbowl ad, our Wall Street Journal, Chatter ad campaign, and the large Cloudforce events in New York and Paris were among the many investments we made in our brand-building awareness of our industry-leading products.

Our effective non-GAAP tax rate for Q1 was 35%. As a result of the Radian6 acquisition, we expect to incur a slightly lower overall tax rate for fiscal 2012. We now estimate our non-GAAP tax rate will be approximately 30% in Q2, and 33% in Q3 and Q4 for a full-year estimated non-GAAP rate of 33%. This decrease in our estimated 2012 tax rate will add $0.02 to EPS in Q2, and $0.01 to EPS in each of Q3 and Q4 for a total net benefit of $0.04 for the year, which I'll cover in my guidance comments later. We delivered a non-GAAP EPS of $0.28 in Q1, but $0.01 higher -- $0.01 above the high end of our guidance range, but it was down 7% from the $0.30 we recorded in Q1 last year.

I'd like to just spend a minute on discussing our operating principles as we head into fiscal 2012. We're clearly managing the business to maximize revenue growth as our #1 priority. We've just passed the $2 billion revenue run rate, and are focused on getting to $3 billion as rapidly as possible. We want to invest in distribution capacity, product development, service delivery to provide our customers and prospects with strategic partnership they need as they transform their businesses with the cloud model. We believe that our accelerating growth rate reflects our customers' desire for transformation and the market shift to cloud computing.

Historically, we've discussed 100 to 300 basis points of operating margin improvement each year as one of our financial goal. We achieved that goal consistently in fiscal years 2008, 2009 and 2010. However, during those years, our only significant acquisition was InStranet.

Over the past four quarters, as I mentioned earlier, we've completed seven acquisitions, including Jigsaw, Heroku and now Radian6. So while we're always focused on increasing operational efficiency, our efforts are not necessarily visible in our reported operating margin, while we're adding strategic, fast-growing but nevertheless dilutive acquisitions to expand our Cloud 2 vision.

So our approach for fiscal 2012, is to provide quarterly and full-year revenue and earnings guidance and to deliver on that guidance. To the extent they have upside on revenue in any particular quarter, we look to invest that upside in accelerating our growth through hiring, marketing programs and data center capacity. If we execute well, we will have higher revenue growth and slightly lower operating margins, but still hit our earnings goals. Fundamentally, we believe that investing in growth is the best way to create long-term shareholder value.

Now onto cash flow and balance sheet. First quarter operating cash generation was $140 million, down just slightly from last year's number of $143 billion. As I discussed on our last call, higher sales commission and bonus payouts from our strong fiscal 2011 finish, together with the increased hiring I mentioned a while back, affected our first quarter cash flow.

Capital spending was $27 million in Q1, primarily result of leasehold improvements in 3 different office locations and investments in our service delivery infrastructure.

Free cash flow defined as operating cash flow less CapEx was $112 million in the quarter, that's down 15% from last year. Our definition of CapEx for this purpose excludes cash outflows relating to land activity and campus building improvements, which was just $1 million in the first quarter.

As we look through the remainder of the year, our strong first quarter operating cash flow invoicing gives me confidence to raise our operating cash flow estimates. We now expect full year operating cash flow to grow at a mid- to high-teens percentage rate, up from our prior guidance of low- to mid-teens percentage rate. Given our business model, we believe operating cash flow continues to be an important measure of our success.

Turning to the balance sheet, total cash and equivalents, including short- and long-term marketable securities, finished the quarter at roughly $1.5 billion. That's up about $115 million from Q4 but down approximately $379 million from Q1 last year, primarily as a result of our acquisition activity in the past four quarters.

Please remember that we already paid approximately $285 million in early May as part of the Radian6 purchase consideration.

Our $575 million of convertible notes are significantly in the money, and it's important to understand that the note conversion feature increased our fully-diluted share count this quarter by approximately 3 million shares.

However, please remember that the hedge we executed at the same time as these notes will eliminate all but roughly 500,000 shares of this dilution when the notes reach maturity in January 2015.

Also, please note that because the conversion trigger provision was met at the end of Q4 and at the end of Q1, the convertible notes are now shown under current liabilities.

Deferred revenue finished the quarter at roughly $915 million, that's an increase of 38% from the year-ago quarter, our largest increase since the fourth quarter of fiscal 2009. Sequentially, deferred revenue declined by $20 million, a result that included approximately $15 million of sequential FX benefit and about $21 million of FX benefit versus Q1 last year.

Historically, deferred revenue tends to be roughly flat from Q1 to Q2. This year, given our strong Q1 results and some significant currency benefit in our first quarter number, we expect deferred revenue to be flat-to-down slightly through at end of Q2.

And finally, strong invoicing pushed Q1 receivables up 47% year-over-year to approximately $271 million. The result was a fourth-day year-over-year increase in DSO to 48 days. This increase was purely a function of the strength of our business in Q1, our first quarter collections were great, and our receivables aging is in good shape.

Let me close with our outlook. I'm very pleased to be able to raise the high-end of our full year revenue outlook by $17 million to a range of $2.15 billion to $2.17 billion. The high end of the revenue range represents the year-over-year revenue growth rate of both 30%.

Please remember that this range includes approximately $20 million of benefit from the adoption of the new revenue accounting standard, 08-01. The incremental revenue recognized under this new accounting standard in Q1 was approximately $1.5 million, but we do expect its effect to ramp up across the quarters this year. We now predict non-GAAP EPS of approximately $1.30 to $1.32. This range reflects the $0.11 dilutive impact to the Radian6 acquisition, offset by the $0.01 overachievement that we just reported in Q1, and the $0.04 improvement in earnings from our lower estimated effective tax rate that I discussed earlier.

Although we are raising our overall EPS outlook for the year, I would like to remind you that Dreamforce will have a significant impact, we estimate at least $0.06 of EPS, on our Q3 results.

Second quarter revenue is projected to be in the range of $526 million to $528 million. This estimate includes approximately $5 million relating to revenue recognized on a cash basis for Radian6. I just want to point out that we have no prior experience at managing Radian6's receivables. We expect non-GAAP EPS of approximately $0.29 to $0.30 in the second quarter.

Before I close, I remind that all of the underlying assumptions listed in our Q2 and full year revenue and non-GAAP EPS guidance, as well as our GAAP guidance and assumptions can be found in our earnings press release. Please note that because we've not yet completed the purchase price [indiscernible] Radian6, our GAAP EPS forecast contains estimates of the Radian6 acquisition accounting.

So with that, I'd like to thank you all for joining us today and open the call up for your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Laura Lederman of William Blair.

Laura Lederman - William Blair & Company L.L.C.

A few quick questions. One is, I remember when I first started looking at you guys, what was it, like 9 years ago now, a big deal was like 1,000 seats and not much revenue, and then a big deal became $3 million and 100,000 seats. I'm just trying to get a sense of how big a big deal is these days, any way that you want to quantify them, just to give us color on big, and then I'll follow up with one other.

Marc Benioff

Well, there's basically 2 types of deals here at Salesforce. There's extraordinary deals which are eight-digit deals, and there's big deals that are seven-digit deals. And that's -- we're regularly seeing now eight-digit deals, and that's very exciting for us. Thanks for the question.

Laura Lederman - William Blair & Company L.L.C.

And real quickly, can you talk a little bit about what you do with Radian6 in terms of taking it down market, and then maybe also building a broader marketing cloud?

Marc Benioff

I think that Radian6 is a super-exciting product. I think we are extremely fortunate to be able to acquire this company. It's on a revenue tear, as you know. It's probably the fastest-growing of all the cloud computing companies that I've ever seen. The management team is spectacular. I think that probably one of the best parts of the acquisition was the CEO. Marcel is just a tremendous executive and a great new addition to Salesforce.com's management team. Each of their executives that I've met and their individual employees just have a very unique view and a very powerful view of the future of our industry. It certainly does set the foundation, for a marketing cloud, for Salesforce. It's the right place to start a marketing cloud when you look at today's world that's being driven by social networks. The most important thing in marketing is what's going on in these communities, and your brand has become a realtime conversation. It's not about advertising anymore. It's not about campaigns. It's not about events. It's all about the conversation on the Internet. And Radian6 is the leader in monitoring and managing that conversation for more than half of the Fortune 100. And they're really just getting going. It's a great team, great product, great technology. And if you haven't seen it, Laura, you get an account at radian6.com and you can sign up with the keywords that manage to you -- that are key to you, like all of the accounts that you follow, all the executives you follow, the products you follow, the competitors you follow. You put all that in, and Radian6 is going to give you the information you need to make better decisions. So it really is the beginning of the marketing cloud.

Operator

And your next question comes from the line of Mark Murphy of Piper Jaffray.

Mark Murphy - Piper Jaffray Companies

Marc, this level of growth is very rare for a multibillion-dollar company. And so I'm just wondering to what extent should we attribute this growth rate to the effect of some of your newer, viral or premium products like Chatter.com, Database.com and Heroku, just in terms of their ability to expand your addressable customer base and maybe trigger a different perception in the developer community?

Marc Benioff

Well, what I really think is we are seeing an extraordinary growth rate, and we were meeting yesterday, reviewing the top 10 software companies in the world and their size and our ranking in them, and then we really look at how long is it going to take us to get into the top 5, which we really think is the really -- the doable next step for Salesforce.com. Of course, we're going to be the biggest cloud player, but we want to be one of the top five software companies in the world. That's our next goal. You've seen us pass $2 billion, you're going to see us pass $3 billion. I think that, that is just -- you can see it in our run rate, you can see it in our deferred, you can see the momentum that we have around the world. No success is linear, that's something that Mike Odel always tells me and I believe that. But I also look at 9 quarters now accelerating revenue run rate. Pretty awesome. And we see a big buying environment out there. And as I said, I met with 170 customers this quarter. They're all buying. And they're all looking to rebuild their enterprises. And we have to execute against that opportunity. Sales execution is a difficult thing, as you know. We did make a major investment last year. We've talked extensively with you about a 40% increase in our distribution. Organization, the vast majority of that is really probably yet to come online. And that's, as I've said publicly before, the upside. We have great products, The Sales Cloud, we've got The Service Cloud, we've got Jigsaw, we've got Radian6, we've got the Force.com platform, we've got Chatter. We've got plenty to sell. Customers want this next generation of technology. They want to build these social enterprises. You're going to see me next week in Japan with a major auto manufacturer talking about how we're bringing their products into the social networks. And how cars are becoming your friends in social networks, not just people. And that's true for all of our customers. They're looking at products in terms of how are their products integrated with our technology. We see our customers wanting to become cloud providers. Not just Groupon, but a lot of our customers who are maybe traditional products manufacturers, whether it's consumer product goods or traditional manufacturing. They want to build products that are operating in the cloud. And the reason why? Their customers are in the cloud, they need to get in the cloud to build their customers. We're that avenue, we're the bridge. How are you going to do that with SAP? How are you going to do that with Microsoft server? How are you going to do that with an Oracle Exadata mainframe? You just can't do it. And that's where we're getting the action. Because customers realize they're going to build new apps with our platform. They're going to deploy new types of social sales, new kind of social service, social marketing with Radian6. They see our social data collection and reporting through Jigsaw. It's a great opportunity. And it's really our sales challenge to get out there and to continue to close the deals, to do like what Laura was saying, to create the extraordinary transactions. And that's our opportunity and that's also our challenge.

Operator

Your next question comes from the line of Kash Rangan of Merrill Lynch.

Kash Rangan - BofA Merrill Lynch

Marc, when I look at the business, I mean there's probably several things that are driving this acceleration, not the least of which is distribution, new seats, your retention is improving, you're upselling to the platform addition, you've got more seats at existing customers, and you've got new products. I know that's a laundry list, but if you think about each of these things, if you can, which of these is likely to be an endearing source of growth for the company, as you look at the next step, at the remainder of this fiscal year? And also, I don't know if you can comment at all, security in the cloud is taking a bit of an issue, our focus shall we say, following the Sony, Amazon developments. I'm just curious, if you can give us an update on how you're securing The Salesforce Cloud. Thank you very much.

Marc Benioff

Sure, I'll take that first. I mean, I think that, as I've said publicly, and if you go to my Wikipedia page, you can see a report that I wrote in 2005 to the President of the United States on the cyber security as a crisis, a prioritization for the government and for a lot of companies. And I think that cyber security is tough. There's no finish line when it comes to cyber security. Everybody's got problems. Everybody will have problems. Computers are not perfect. And you've got to double-down on cyber security if you're in our business, and honestly if you're in any business. I really think that this is one of the reasons that we are more successful, is because our customers cannot do this. It's tough. And there's no finish line when it comes the security. And there is no perfection when it comes to security. So we have to work harder and we have to be a surrogate for a lot of our customers in providing that capability. I think one area that we have a unique model that we've benefited from, is I think every day, maybe 2 or 3 of our customers show up and do security reviews with us. They're reviewing our data centers. They're reviewing our code. They're reviewing our networks. In many cases, those customers are only doing a couple of security reviews themselves a year. They've got an out-vendor, I don't know how many vendors Sony has, for example. We're obviously a vendor to Sony, but in terms of cyber security to Sony, how many vendors do they have checking their technology on a regular basis. Most companies have a couple, they check it a couple of times a year. We're fortunate, we've got people checking us every day. Is that the panacea? Is that going to be -- is that the be-all end-all? No, it's not. And so we have to -- we have to double-down, everybody does. And if it's, as I said at the Gartner symposium last year, if security is not your number one issue for your company, it should be. In regards to kind of reliability issues, with Amazon, they obviously had a problem. They got through it. They're obviously stronger for it, it's one of the benefits of the model. We've had our own reliability issues along the way, I'm sure you remember, and no computer is perfect. But if you look at, for example, our operating history now, over 12 years of operating in our service, I think we're about better than any of our customers. I don't know a customer that's had better reliability in operating history than Salesforce.com over the last decade. So I think cloud computing is the right model. Will there be issues? Of course. And we've got, or you've got to deal with those issues head-on and move on. And that's the reality of our industry.

Graham Smith

And Kash also asked about enduring growth levers.

Marc Benioff

When I look at growth and the importance of what we do for our customers, I would say the most important thing that we do is that we're a database. And the way to look at us, what we're doing, these hundreds of millions of database transactions every single day for our customers and it's growing, it grew to 60% year-over-year, that's my number one metric. I don't really look that much at the sales numbers. I don't really look that much at the revenue numbers. I'm mostly looking at the transaction numbers. I want to know, are customers using this product? Are they managing and storing their data in the system? Are we providing value to these customers? And that's why for years now, we've provided the transparency to you, our investors, so that you can also watch these numbers. We're unique in that. Microsoft has no such thing. There is no trust.microsoft.com, it's an oxymoron. There's no trust.oracle.com. There is no trust.SAP.com. The very thought of it makes them cringe in horror. But for us and for you, we need to see trust.salesforce.com to see the level of performance, growth, to see when things are going well, to see where things are not going well, to make sure that we're improving, and to make sure we have our -- keep our eye on the ball. There's nothing more important to our company than the trusted success of our customers. And that's why we have trust.salesforce.com. And I believe also, as we've seen with important and critical announcements that have been made by regulators around the world, transparency, like we're talking about, is going to be critical to cloud computing. The trust and transparency will be the hallmark of the services that we provide to our customers around the world.

Operator

And your next question comes from the line of Brent Thill of UBS.

Brent Thill - UBS Investment Bank

Graham, just 2 quick questions. Deferred was obviously less than seasonal and a lot better than any of us had modeled. Other than FX, was there any header impact that impacted DR this quarter? And then just second, if you could just follow up and remind us, what was your lowest attrition level? And it seems like now you're in the mid-teens, that feels like it can still go down to the low-teens?

Graham Smith

Sure. Now there was, in terms of deferred revenue, Brent, there was nothing unusual in terms of a shift in our billing mix or anything like that. We had very, very consistent receivables kind of profile in the first quarter. We just had a really, really strong invoicing quarter. And obviously, that's why we feel better about our cash flow forecast for the remainder of the year as well. So no unusual things in deferred revenue number other than currency, as you mentioned. In terms of attrition, my recollection was when we first started reporting a dollar attrition number, it was sort of in the mid-teens, and I think it went up into the high-teens, and now it's obviously come back down into the mid-teens. So I don't have data that sort of dates back 3, 4, 5 years, even before I was at the company. So it would be pretty difficult I think to go back and reconstruct that. So I've always said, I think, publicly, that we feel with the right set of circumstances, with the right economic backdrop, with the right programs in place internally, we could get attrition, hopefully, into the low-teens. But as you can tell, even though we're putting a lot into this, and the economy is definitely improving, it's a slow decline. So we just want to keep that steady decline each quarter going.

Operator

And your next question is from the line of Ross MacMillan of Jefferies & Company.

Ross MacMillan - Jefferies & Company, Inc.

Marc, I wondered if you could just talk a little bit about the platform. And what should we be looking at this year in terms of development that you'll bring? And how we should be thinking about its evolution and contribution to billings or to sales?

Marc Benioff

Well, the platform is, by far, our most important product. It's our differentiator. It's our third most used feature by all of our customers. It's really the heart and soul of the company. And kind of just taking on the comments on the database, we don't really make a CRM app. We have a core through The Sales Cloud and The Service Cloud, and when we demo that and show it, it looks like an app, but really it's a platform. It really is about our customers' ability to get in there to customize the tabs, the fields, the screen layouts, to write the triggers, the stored procedures, the remote procedure calls, to add in the social networking, to integrate it with the services that they use, to tie in to our APIs. That's why we bought a company last year, Sitemaster, because websites have become so important to our customers as an integrated part of their CRM experience. And that's why we bought Heroku. And we look at the platform as a critical part of what we do for our customers and certainly when we talk about these extraordinary transactions that we have. Like the ones that we're talking about on the call today, these are platform-driven opportunities. When we're in there, we're winning these deals because when you use our platform, it's just not like anything else that's out there. It's not a fixed app. It's not a fixed app in your e-mail. It's not a fixed app running on your PC. It's a database that lets you manage and share your information at a much lower cost, to integrate it deeply into the social networks and run it on your mobile devices. And this is really what customers want. And they integrate it into your websites. And they integrate it into your Internet sites. And they build custom apps, and on and on and on. And as we look at the heat maps for our customers, we look at how far is the platform driving into their enterprises. We had a customer speaker at our management meeting a couple of weeks ago, and they've put up a heat map of how far we've gotten into their enterprises. There were 15 apps that they had built, all in the platform. And that's very much our strategy in our customers.

Operator

And your next question comes from the line of Tom Ernst of Deutsche Bank.

Stan Zlotsky - Deutsche Bank AG

It's actually Stan Zlotsky sitting in for Tom. Very quick ones. Europe continues to be strong for you. Anything in there that's really driving that growth? I mean, even in constant currency, it still continues to be strong. And second, have you seen any lengthening of sales cycles in Japan due to the disaster there?

Marc Benioff

Well, I think that all territories continue to be strong. And Europe is strong, the U.S. is strong and Asia is strong. And Japan, relative to what is going on there, is strong. And I'm making my first visit there since the disaster next week. And as I said in the script, we are surprised at how close that the numbers are for Japan and our Japan pipelines, and so forth. I'll assess in detail next week. But our brand and our commitment to Japan, I think, has never been stronger. And we will double-down on our commitments to Japan. And we hope to be able to show customers through our outstanding reliability, scalability and availability during the disaster, that we are absolutely the right thing for Japan. Our data center in Tokyo is running well in test mode. It had no interruptions during this disaster. And we will turn it on to production shortly as well, which will be great for Japanese customers. And we continue to expect a very strong Japanese business.

Operator

And your next question comes from the line of Robert Breza of RBC Capital Markets.

Robert Breza - RBC Capital Markets, LLC

Marc, I'm wondering if you can talk a little bit about your comments. You said customers are buying more. I mean, how are you seeing that, or can you help us just characterize it? Is that more seats, additional new products or longer-term contract? Just like to drill into that a little bit more.

Marc Benioff

Well, I'll tell you that what I see in the enterprise buying environment is that the recession is behind these customers and that we're in the recovery. It may not be as big as everybody hopes it to be, but the reality is we are in recovery. And in addition to that, that customers want to buy new technology. And they want to buy new solutions. They recognize they need to upgrade and enhance what they have, that we're moving into this new world and they need to move their systems into that world. And that the traditional approach is not the right approach for them and that they're looking to new vendors, which are us and other cloud vendors, to make the transformation.

Operator

And your next question is from Walter Pritchard of Citigroup.

Unknown Analyst -

This is Robert for Walter. Just a question on -- a question on some of the larger deals. I think last question you guys talked about a pretty good diversity in the mix of large deals across product lines. And I'm just wondering if you're sort of seeing the same pattern here where you're getting a lot of traction outside of Sales and Service Cloud?

Marc Benioff

I think we're -- yes, Graham, do you want to answer that?

Graham Smith

Sure. Yes, we had a -- I mean, you could tell obviously we had a very strong new business quarter, and I think we continue to see the same nice mix of products, nice mix of geographies, and we had a really good slate of large transactions as well in the first quarter, which has not always been the case here, particularly in the tougher economy a couple of years back. So it's a really excellent quarter all-around.

Operator

Your next question comes from Brad Zelnick from Macquarie.

Brad Zelnick - Macquarie Research

Marc, I'm curious if there are any updates that you can give us on VMForce. And I was also hoping with cloud foundry being introduced in the quarter, I wanted to get your thoughts on the model that they proposed? And just can you remind us, to what extent are the concepts of cloud and virtualization overlapping? How do you see this playing out in the world?

Marc Benioff

Well, I think the first and most important thing about virtualization is, you have to remember that the vast majority of sales of virtualization software to enterprises to create what has been called the private clouds are exactly that, it's software. It's a software product that you buy, install, upgrade and maintain to virtualize your servers, to make them more efficient. It's definitely a innovative step in the history of our industry where you can load software onto a server that may have not had the level of efficiency that you want as a large corporate customer, and you make that server be able to run multiple applications and multiple databases and multiple operating systems through this virtualization software. And that is virtualization. But that's not cloud computing, right? I mean that's not the public cloud. That's not the low-cost, efficient, shared model. That's not the 100,000 customers that we have running on 2,500 shared PCs. That's not kind of our cloud brethren, right, which are the very fast-growing companies who are delivering services. These are companies who are more running multi-tenant architectures, that are shared systems, that are delivering these applications directly over the Internet to millions of customers around the world. And that is the difference between kind of, what I would say our cloud computing model and the false cloud. And the false cloud, I think, is a cloud in name only, but I think when our industry shakes out, you'll see that this new model of public cloud computing will be the dominant model that enterprises will have automated themselves with just as it is, the dominant model that consumers automate themselves with.

Operator

The final question comes from Brendan Barnicle of Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities, Inc.

Marc, I was wondering what additional functionality that you either want to add to or build for as you think about the marketing cloud?

Marc Benioff

Well, I think we're really at the beginning of the marketing cloud story. We're just starting in marketing. We're not -- I think that we just took delivery of Radian6 a couple of weeks ago. We're just starting to really understand what customers want. There's obviously a broad range of areas that we can move into in regard to marketing. Honestly, the problem is we're in a lot of things already that are hot. So I mean we're in collaboration that's hot. We're in sales that's hot. We're in service that's hot. We're in platform that's very hot. We're in data that's very hot. And now we're touching marketing. But before we, like, rush ahead and do building out the marketing cloud, which we obviously could easily do, because there's a lot of exciting assets there, there's a lot of exciting companies there. But we're very cautious about doing that because if we go ahead and build that out right now, what will suffer? What will we have our eye off the ball in one of these other critical areas? And that -- so I would say we're at the beginning of that, and certainly we've got a tremendous, tremendous position with a tremendous company with Radian6. And from there, we will, I'm sure, build a complete and full product line, but it's not an urgent item on my agenda.

David Havlek

Before we wrap up, I just want to remind everyone here quickly of a couple of events that Salesforce.com executives will be attending in the next few weeks. On June 6, in New York City, we'll be at the BofA Merrill Lynch Conference, Graham Smith will be our presenting executive. And on June 15 in Chicago, the William Blair Conference, George Hu, our Executive Vice President of Platform and Marketing will be our presenting executive. We look forward to seeing you all.

Marc Benioff

Also just in case anybody cares, on June 2 in Washington DC, I'll be at our Cloudforce program -- oh, sorry, June 1, I'll be doing Cloudforce in Washington DC, where we'll be preventing a number of new technologies, including Radian6. And also, I'll be in Boston on June 16, presenting our corporate overview, strategy and, again, giving new technologies. Thanks, David, for letting me interrupt back there.

David Havlek

We may as well remind everybody to register here now early in Austin for Dreamforce. We look forward to seeing you there as well. So thank you for joining us today. Give us a shout here at Investor Relations if you have any follow-ups. Have a great day.

Operator

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect.

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