salesforce.com, inc. (CRM) Marc Russell Benioff on Q2 2016 Results - Earnings Call Transcript

Aug.20.15 | About: Salesforce.com, Inc. (CRM)

salesforce.com, inc. (NYSE:CRM)

Q2 2016 Earnings Call

August 20, 2015 5:00 pm ET

Executives

John Cummings - Director-Investor Relations

Marc Russell Benioff - Chairman & Chief Executive Officer

Keith G. Block - Vice Chairman & President

Mark J. Hawkins - Chief Financial Officer & Executive Vice President

Burke F. Norton - Secretary & Chief Legal Officer

Analysts

Brent John Thill - UBS Securities LLC

Keith Eric Weiss - Morgan Stanley & Co. LLC

Mark R. Murphy - JPMorgan Securities LLC

Richard Hugh Davis - Canaccord Genuity, Inc.

Tom M. Roderick - Stifel, Nicolaus & Co., Inc.

Kasthuri Gopalan Rangan - Bank of America Merrill Lynch

Heather Anne Bellini - Goldman Sachs & Co.

Alex J. Zukin - Stephens, Inc.

Karl E. Keirstead - Deutsche Bank Securities, Inc.

Brendan John Barnicle - Pacific Crest Securities, Inc.

Stewart Kirk Materne III - Evercore ISI

Philip A. Winslow - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Operator

Good afternoon. My name is Jennifer and I will be your conference operator today. At this time I would like to welcome everyone to the CRM Second Quarter Fiscal Year 2016 Earnings 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. Thank you.

And I would like to turn the conference over to Mr. John Cummings, Vice President of Investor Relations. Sir, you may begin.

John Cummings - Director-Investor Relations

Thanks so much, Jennifer, and good afternoon, everyone, and thanks for joining us for our fiscal second quarter 2016 results conference call. Our second quarter results press release, SEC filings and a replay of today's call can be found on our IR website at www.salesforce.com/investor. We'll also post the highlights of today's call on Twitter at the handle, @salesforce_ir.

With me today is Marc Benioff, Chief Executive Officer; Keith Block, President and Vice Chairman; and Mark Hawkins, Chief Financial Officer. Marc, Keith and Mark will share a few prepared remarks and we'll open the call for questions.

As a reminder, our commentary today will primarily be in non-GAAP terms. Reconciliations between our GAAP and non-GAAP results and guidance can be found in our earnings press release. During our call we may offer additional metrics to provide further insights 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 and we cannot guarantee the timing or availability of these services or features, so recommend that customers listening today make purchase decisions based on services or features currently available.

Some of our comments today may also contain forward-looking statements which are subject to risks, uncertainties, and assumptions. Should any these materialize or should our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements. A description of our 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.

So with that, let me turn the call over to Marc.

Marc Russell Benioff - Chairman & Chief Executive Officer

Well, hey. Thanks so much, John, and thanks, everyone, for being on the call today. I'll tell you, this second quarter, well this was just the best quarter we have ever had at salesforce.com, and just one quarter after crossing the $6 billion annual revenue run rate milestone, we have now surpassed a $6.5 billion revenue run rate. That's faster than any enterprise software company in history, and we anticipate we're going to reach a $7 billion run rate by the end of this year and we are now well on our way. I mean, we have a clear trajectory to accomplishing our goal of being the fastest ever to reach $10 billion in revenue, so exciting. And no one in our industry is producing this kind of results of our size and scale.

And also in this quarter we became a Fortune 500 company. That's really exciting for Salesforce, one of the 500 largest companies in the world, a huge milestone. Congratulations to all of our customers, our partners and employees in this incredible job. We continue to be the fastest-growing top 10 enterprise software company that many of you projected. We're going to go from being the sixth-largest software company in the world to the fourth-largest next year. That's awesome. That is next year, only Microsoft, Oracle and SAP are bigger than Salesforce. That is incredible. And then, of course, we're going to go on to our next goal which is to become the third-largest software company in the world, first by market and then by revenue. Then only Microsoft and Oracle are going to be larger than Salesforce. It's just amazing.

Well, I want to thank all of our customers and partners for their inspiration, and all of our Salesforce employees for this unwavering focus on customer success because this is what is driving Salesforce forward quarter after quarter. It just delights us to see our customers so successful with our products.

And now, I'd like to share the highlights for the quarter. While revenue for the quarter rose to $1.63 billion, that is up 28% in constant currency and that's just beyond our expectations. Deferred revenue grew to more than $3 billion, up 33% in constant currency, and the dollar value of booked business on and off the balance sheet is $9.2 billion. It's a great indicator of the strength of our future revenues, and we are just really excited to see such strength in our deferred revenue.

Even as we delivered this outstanding pace of top line growth, we also improved non-GAAP operating margin by 170 basis points year-over-year, and we are committed, very deeply committed to improving profitability quarter-over-quarter, year-over-year as we also grow this business at record levels. All of this translated into another outstanding quarter in operating cash. We delivered more than $300 million in operating cash flow, which is up 24% year-over-year. That brings us to more than $1 billion in operating cash flow for the first half of the year, $1 billion in the first half of the year, and that really demonstrates the cash model built into cloud computing. This is an incredible achievement and demonstrates the power of our model.

Given these outstanding second quarter results, I'm thrilled to announce that we are raising our full year guidance for both our top and bottom lines. The high end of our revenue guidance puts us on track to finish the year at $6.625 billion and we're increasing our non-GAAP EPS by a $0.01 to $0.72 at the high end of our range.

As you can see from our strong results along with the incredible momentum we're having with our Customer Success Platform and our sales and service and marketing, community, analytics apps, we're on a trajectory to deliver $10 billion in revenue faster than any other enterprise software company in history. Did I mention that? It's been a phenomenal first half of the year.

You'll hear more from Keith in a moment about how we've become a catalyst for business transformation and growth and how we're delivering new levels of customer success in every industry in every region every day. And this is especially true in Europe, where I spend a majority of the quarter, and where we're seeing tremendous growth. Our tours in Paris and Munich drew nearly 10,000 raving customers and I've had the opportunity to talk to dozens of CEOs in the region whether it was at AXA or Barclays or BMW or Deutsche Telekom, Eurostar, LOUIS VUITTON, Schneider, Unilever; all of these folks have become very significant customers in the last year with Salesforce and I am even heading back to Europe again next week because we are seeing incredible momentum in our European business.

Right now every company in the world is looking to strengthen how they connect with their customers. This is a massive customer relationship management opportunity. Perhaps it is the largest opportunity in the software industry. Every company is looking to connect with their customer in a whole new way. Every company is looking for a whole new type of customer success and no company is better positioned to deliver this to our customers than Salesforce. There has never been a company of our size and scale focused so exclusively on this customer relationship management opportunity. No other customer relationship management company has 17,000 people, every single employee completely focused on the customer and that's why there's no other enterprise software company selling billions of dollars of CRM and still growing at nearly 30% in constant currency.

Look, Microsoft, Oracle, SAP they're selling millions of dollars of CRM, that's with an M. We are selling billions of dollars of CRM that's with a B and that is the difference between us and the competition. No other enterprise cloud can match the breadth and depth of our trusted cloud platform and complete customer relationship management solutions, whether it's sales or service, marketing, community analytics apps within the Internet of Things and no one can match the strength of the Salesforce ecosystem, our platforms, which is accelerating our growth with SIs and ISVs creating solutions that address any kind of business process.

In addition, the AppExchange, which is now the number one business app marketplace, continues to set us apart from all others. I'll tell you, that AppExchange, our partners, our platform strategy over the last 10 years this is really separated us from the competition. We're not an app; we're a platform and we're not an app, we're an ecosystem, and we're not an app, we're all about customer success and it's our partners that help us to create that.

We're seeing tremendous growth in the adoption and usage of our core platform. We delivered 234 billion transactions for our customers in the quarter, up 79% from year ago. That's an average of nearly 3.7 billion transactions every single business day.

We're also gaining traction as we better integrate acquisitions and invest in deep, organic innovation. Well, those results are just phenomenal. You're going to see more innovation than ever at Dreamforce this year. You're going to see new products and new clouds and we're going to be showcasing incredible new services. I mean, we're going to be breaking through with a whole new level of customer success. We're even going to be announcing this incredible new cloud.

Well, in addition, our strategic partnerships are paying off. There's no better example of this than our relationship with Microsoft and at Dreamforce you're going to hear about how we're making our joint customers, the customers of Salesforce and Microsoft – well, we're working more closely together than ever before and we're working on making those customers even more successful, delivering deep integration with Office and Outlook and Azure and I'm thrilled that Microsoft's CEO, Satya Nadella is going to be speaking at Dreamforce this year with his own keynote and that Microsoft Chairman, John Thompson will be part of my keynotes.

Well, I have to tell you, but as all of you already know Salesforce just isn't about doing well, we're also about doing good. Giving back has been an integral part of our company culture from the beginning with our 1-1-1 philanthropic model. Salesforce technology now powers more than 26,000 non-profit and higher education institutions and the Salesforce Foundation has provided more than $96 million in grants. That's in addition to the almost $250 million of in-kind services that we've provided to these other non-profits over our life and this quarter we surpassed another huge milestone. Our employees have given more than 1.1 million hours of community service.

Well, that's just extraordinary. It's created an amazing culture at Salesforce. It's an amazing place to work and I think it is one of the reasons that our attrition has remained so low at a time of increased talent wars in Silicon Valley and even in San Francisco, there's no other technology company like Salesforce.

Look, as I mentioned, Dreamforce is on the horizon, it's just 26 days away. It's going to be our biggest and most exciting Dreamforce ever and we expect more than 150,000 people to register for the event in San Francisco and 10 million to join us online. They're going to come from 75 countries.

Dreamforce has become so big, we're bringing in a cruise ship, because we've run out of hotel rooms so we're calling up the Dreamboat and to provide extra accommodations for all of our attendees. We've even partnered with Airbnb to radically expand the number of people that we can house in San Francisco. We've partnered with Uber to make sure that there's more drivers available than ever before. We're even going to have four airstreams in the Dreampark for special events and we even have a few people staying there for additional accommodations because we're completely out of rooms.

Look, you're going to see the future of Salesforce in my keynote with relationship, intelligence, next generation of clouds, the Internet of Things. You're going to see a whole new standard for an industry. We have 1,500 customer-driven breakout sessions at Dreamforce, the world's biggest cloud ecosystem coming together in one place, thousands of solutions from more than 400 companies in our Cloud Expo. Isn't that amazing? And I didn't even mention the huge Foo Fighters concert that's going to be happening on Thursday night and our special event for our very top customers with John Legend the night before that.

We've also gathered an amazing group of global thought leaders. In addition to Satya, we've got an incredible lineup of innovation speakers including, the CEO of Uber, Travis Kalanick; Skoll Foundation's, Larry Brilliant; John Collison of Stripe; William Marshall of Planet Labs, who just launched more of his Doves into the atmosphere; Hampton Creek's Josh Tetrick. George Zimmer is launching his new company zTailors and zTux at Dreamforce. We even have best-selling authors Tom Davenport, Andrew McAfee, Dov Seidman and many, many, many, many others all speaking at Dreamforce.

And we're all going to be talking about the future of business, the future technology, the future of the cloud, social, mobile, the future of data science, Internet of Things, and the future of social responsibility as well and the importance of business to give back and to manage their stakeholders not just their shareholders.

A new Dreamforce Women's Leadership Summit features actress and entrepreneur, Jessica Alba; YouTube's CEO and Salesforce's board member, Susan Wojcicki; and Oscar winner, Patricia Arquette. Incredible focus on the empowerment of women at Dreamforce.

And we have a Startup Summit to inspire the next-generation of entrepreneurs with keynotes from actor and entrepreneur, Adrian Grenier, I'm sure you all loved the movie Entourage; Box CEO Aaron Levie; Pro Football Hall of Famer Steve Young. And we have a Mindfulness Day because we're all going to need to kick back, relax and clearer minds after that Dreamforce and we have one of the world's top meditation teachers, Jack Kornfield, as well as actress Goldie Hawn and fashion icon, Donna Karan, all talking about the importance of taking care of ourselves while we're taking care of the world. And world champion San Francisco Giants' CEO, Larry Baer; the Golden State Warriors President and COO, Rick Welts are going to share the secrets for success in professional sports.

Throughout Dreamforce, we'll have many ways in which attendees can give back. Each day at Dreamforce, there's a focus on an important cause in our world. One day will be dedicated to our veterans; one day dedicated to our K through 12 schools; one day dedicated to women in technology; and one day dedicated to the environment and our oceans. And we're holding a fantastic benefit concert as I mentioned with Foo Fighters and other incredible bands that you're going to love to support children's health and our children's hospitals. Bring all your friends. You're not going to want to miss it. If you buy a sponsorship for the concert, we're going to make sure you get unbelievable seats and recognition.

And we're going to have the world's largest book drive of all time. So if you want to come to Dreamforce, you'd better bring a book for kids, because we're going to be collecting books and putting them in libraries all over the country, collecting more than a million books to support schools and students. So don't forget your books. Don't forget bringing food, because we're running a huge food drive. And I look forward to see you all at Dreamforce and don't forget, it's going to be the biggest, most exciting Dreamforce of all time.

Now over to Keith.

Keith G. Block - Vice Chairman & President

Thanks, Marc. As you said, Q2 was really an outstanding quarter. We are executing like never before and we are seeing exceptional performance across the board in every geography, in every industry and certainly in every cloud.

We saw an amazing number of big deals this quarter. Really, for example, the Marketing Cloud doubled its number of large deals year-over-year, which was terrific to see. And more importantly, the value of our large deals across all the clouds has increased significantly. That is proof positive of the level and depth of relationships that we're certainly driving with customers.

As Marc said, we're now part of the Fortune 500 and that is a great indicator of how Salesforce is delivering customer success and scale. It's pretty clear that Salesforce is taking share from our competitors and we're growing at every segment, in every industry, and in every region as software center of gravity continues its shift from on-premise to the cloud.

In the past year, we have had countless conversations with CEOs of world-class companies. Marc mentioned his trip to Europe around innovation and taking their companies into the future. They are looking to us to help transform their business models to drive growth and to become their trusted advisor.

Every CEO's agenda is about growth and they're looking for Salesforce to be that growth engine. They're looking to us and it all starts with our Customer Success Platform. These are conversations that are driving more meaningful and long-term relationships, quite frankly with some of the greatest companies on earth. And I'm going to give you some examples starting with Enel.

Enel is Europe's largest power company with 61 million customers. This deal was significant in terms of expansion of an important relationship where the CEO was personally involved. We are now Enel's strategic partner for the complete transformation of their customer engagement platform, leveraging sales and service and communities, analytics and platform. But that doesn't stop there.

In addition, we're building an agility layer around their legacy on-premise SAP system and we're helping them extract information from complex order management and inventory and billing systems. They're having trouble getting meaningful and timely information out of SAP and Salesforce is bringing all this data together, so Enel's teams can get a 360 degrees view of their customers. And with Wave Analytics, they can drill down into their customer data right from the mobile phone in seconds. Enel absolutely has a tremendous vision for the future and we at Salesforce are helping them make it a reality.

We also signed a significant deal this quarter with a huge global systems integrator and just as they advised their clients, they themselves are making a major shift to the cloud and decided to replace their aging on-premise software with our Sales Cloud, with our Marketing Cloud and with our platform. I'm also pleased to tell you their doubling down on a dedicated Salesforce practice and we're very, very excited about that. So with this win, with this very large integrator, virtually every global systems integrator globally is running their business on Salesforce.

In fact, the number of Salesforce certified consultants across the globe grew 44% year-over-year, it's pretty staggering. This is a great indication of the type of growth and success that we're seeing in our partner ecosystem which is one of our growth strategies and our partner strategy overall. We're very, very pleased with this.

The U.S. Department of Agriculture is another exciting win for us in Q2. In one of their largest agencies, they standardized on the Salesforce platform to build and deploy mobile applications. In addition their Farm Service Agency is also using our Service Cloud to connect citizens to critical resources.

Our public sector business is just growing off the charts and I'm really proud of the team for their outstanding performance. And just a year after being FedRAMP certified, we're building huge momentum with federal, state, and local governments. In fact, 15 out of 15 federal cabinet agencies now use Salesforce as well as 45 of 50 state governments and we're just getting started in this space.

We also signed an exciting new relationship in the quarter with one of the largest hospitality vendors in the world. Now, they have an incredible vision to bring all of their customer service together under a single platform to deliver a very personalized experience at scale to millions of their guests. The Service Cloud will now be the social mobile front office to the Oracle back-office and allow their hotel associates to better engage and service guests no matter where they are anywhere in the globe. It was a great win over Oracle and they chose Salesforce for our ability to deliver customer service on a flexible platform that would allow them to innovate with scale and speed.

AXA has significantly expanded their seven-year relationship with us and in the quarter they've decided to consolidate 18 systems together onto our Service Cloud to run their entire global front office with more than 26,000 users. They're taking sales and customer service to a whole new level by modernizing their agent engagement platform with Salesforce.

Now, we've also signed new or expanded relationships in the quarter with Barclays and BBC, Comcast, Commerzbank, Cox, Ford, Genomic Health, GlaxoSmithKline, Honda, Honeywell, Renault, listen, this list just goes on and on. It's pretty clear that we're driving success in every major industry and as all of you know, industries have been one of our critical strategies.

We're incredibly excited about our industry momentum. It continues to gain mind share with our customers and our partners. In fact, we will be launching our first industry products at the end of this month. Some of the most influential industry-leading companies are serving as our design partners in the development of these industry clouds. The early feedback has absolutely been incredibly positive and you're going to see these products in action at Dreamforce.

And speaking of Dreamforce, we've tailored the experience for customers with a special industry showcase in the Dreamforce Expo as well as industry keynotes and special sessions. It's going to be four incredible days for banks, for retailers, for manufacturers, telecommunication companies, government entities, healthcare providers. And I really hope that you check it out.

So I want to close by congratulating everyone at Salesforce for their tremendous performance this quarter and, of course, just incredible execution. I also want to thank our customers for their continued commitment and inspiration, and our partners for their ongoing investment in our customer success. With our Customer Success Platform, our six world-class clouds, our industry innovation, our partner ecosystem, our international strategy, we are at the innovation engine and trusted advisor for companies looking to redefine their customer strategies and take their businesses into the future.

And with that, I'll turn it over to Mark.

Mark J. Hawkins - Chief Financial Officer & Executive Vice President

Thanks, Keith. As you've heard, we delivered another great quarter. From a top line perspective, we delivered revenue of $1.63 billion, up 24% in dollars and 28% in constant currency. Foreign exchange continue to impact revenue with year-over-year headwinds of approximately $50 million and a sequential tailwind of $4 million.

Our revenue was strong across the board, becoming more diversified across each geography, all of our clouds, and all of our business units. For example, our geographies continued to deliver great year-over-year growth in constant currency basis as Americas grew 28%, EMEA grew 29%, and Asia-Pac grew 25%. We also delivered incredible year-over-year growth in all of our clouds on a dollar basis as Sales Cloud grew 10%, Service Cloud grew 40%, Platform and others grew 36%, and Marketing Cloud grew 29%. Dollar attrition for the second quarter excluding Marketing Cloud was approximately 9%.

And not only did we continue to grow our top line, we also improved our bottom line, expanding our non-GAAP operating margin by 170 basis points year-over-year, and this is our fifth consecutive quarter of year-over-year improvement. We've been able to deliver this improvement by driving efficiencies across all our operating expense categories.

As we remain committed to improving our non-GAAP operating margins year-over-year going forward, this is consistent with our operating margin framework we've discussed previously. Our great top line performance along with continued spending discipline allowed us to deliver non-GAAP EPS of $0.19, up 46% over last year.

Turning to cash flow. We delivered another strong quarter with operating cash flow of $304 million, up 24% over last year, and we've already delivered more than $1 billion in operating cash flow this year, up 44% for the first half of the year. Second quarter free cash flow defined as operating cash flow less CapEx was up 37% over last year to $240 million.

Looking at billed deferred revenue, we delivered growth of 29% year-over-year. Excluding an FX headwind of $72 million, deferred revenue grew 33% over last year. On a sequential basis, deferred revenue was impacted by an FX headwind of roughly $12 million.

In the quarter, 74% of the value of all subscriptions and support-related invoices were issued with annual terms, and this is compared with 71% last year. This increase is primarily due to our annual invoicing policy for new contracts and to a lesser extent shifting current customers to annual terms upon renewal. In Q2, this benefited year-over-year deferred revenue by approximately one percentage point.

Moving on to guidance. With our strong performance in the second quarter, we are raising our full year revenue guidance by $75 million. We now anticipate to be $6.6 billion to $6.625 billion, or 23% growth. This guidance includes an FX headwind of approximately $175 million, which is a bit less than previously expected.

Given the spending discipline, I've discussed and slightly lower impact from FX in the second half, we now expect to deliver approximately 150 basis points of year-over-year non-GAAP operating margin improvement. This is the high end of our previous guidance. In that context, we're also raising our full year non-GAAP EPS to $0.70 to $0.72.

Now let's turn to cash flow. We continue to anticipate full year operating cash flow growth of 24% to 25%. For Q3, we anticipate revenues of $1.69 billion to $1.70 billion, non-GAAP EPS of $0.18 to $0.19, and deferred revenue growth in the mid-20% range.

To close, we are very pleased with our second quarter results. We saw strong growth across all of our products and regions and are well-positioned to move into the second half. I'd like to thank the entire Salesforce team for delivering another great quarter. I look forward to seeing all of you at our annual Investor Day at Dreamforce on September 15.

And with that, I'd like to open the call to questions. Operator?

Question-and-Answer Session

Operator

And our first question comes from the line of Brent Thill with UBS.

Brent John Thill - UBS Securities LLC

Good afternoon. A question for Mark Hawkins. On the Service Cloud, the growth rate really stood out, accelerating to 40%, up from what you saw in Q1. Just curious if you could give everyone just a little more color on what you're seeing in the Service Cloud and what you see in the pipeline going forward?

Mark J. Hawkins - Chief Financial Officer & Executive Vice President

Sure. I'll start out on this, and then will just turn it over, Brent, to Keith, as well here. But we saw just a tremendous amount of traction in the Service Cloud. I think part of the issue when we see deal after deal coming forward is the ROI. It's just so strong. People are able to help their customer raise their customer satisfaction and also have a really strong ROI from that standpoint. So I saw it coming through in a lot of big deals, and that's probably a good segue for Keith.

Keith G. Block - Vice Chairman & President

Yeah, just a couple comments on that. Obviously, this is proof positive that we're not just a Salesforce automation company, and that we have a very diversified, very, very strong portfolio across the Customer Success Platform.

Specifically around service, as you know, many companies differentiate themselves because of service and the way that they deliver service, so many companies are looking for innovation around how they engage with their customers. And over 70% of all sales, quite frankly, come from great service. So we're seeing this play out in the marketplace. Customers talk to us about how they can transform their business, and our Service Cloud product is best-in-class, so that certainly is what we're seeing going on in the marketplace right now.

Marc Russell Benioff - Chairman & Chief Executive Officer

I'd also like to add, with the Service Cloud, we've talked a lot about the success of many of our customers, including Home Depot, we've even pointed you to our really cool Home Depot Community site: community.homedepot.com.

If you want to see the Service Cloud in action yourself, you just have to go to support.us.playstation.com. That's Sony's website for supporting the Sony PlayStation. It runs entirely on Salesforce's Service Cloud. It's had over 16 million page views so far and we're doing our Service Cloud, our console, case management, live agent knowledge, and social service with Sony. It's completely cool and it's another great example the success our customers are having with Service Cloud.

Operator

And your next question comes from Keith Weiss with Morgan Stanley.

Keith Eric Weiss - Morgan Stanley & Co. LLC

Excellent. Thank you. Thanks, for taking the question, and very nice quarter. A question for Keith, perhaps. In talking about the vertical solutions that you guys are – or the industry solutions that you're looking to roll out, the actual product you guys are looking to roll out, can you help us think about two aspects of it? One, how do you think about that expanding the potential market opportunity for salesforce.com? I'm assuming that it's going to let you guys go deeper into existing customers as well as address new customers, but I'd like to get your perspective on that. As well as from a distribution perspective, anything you guys need to change around or expand out to be able to – a distributor will sell those industry solutions?

Keith G. Block - Vice Chairman & President

Yeah. Listen, thank you very much for the question. So as we continue to fuel our industry strategy, it really starts in a number of ways. Number one is that we want to make sure that we have the right industry messaging, the right content around our Customer Success Platform specific to a particular industry.

Secondly, industries just deepen the relationship with a customer. Marc and I both talked about the level of engagement that we're seeing from CEOs. A lot of that dialog is around specific industry and vertical content. So as we continue to think about our product portfolio and we extend our Customer Success Platform, which is an incredible platform, it's not just things that we extend ourselves. Our customers extend it. We have an incredible ecosystem that extends the capability of the platform. There is a natural play to deepen the relationships, drive more strategic relationships with more industry-focus product.

Specific to your question around how we organize in the field, over the last few years, we have been very carefully and very slowly moving to more and more of a vertical orientation. For example, we have a huge focus on our public sector. We are taking a look at expanding how we go after financial services markets and healthcare and life sciences markets. So we've done this very carefully and very thoughtfully, and it's really paying out in our results.

Operator

Your next question comes from Mark Murphy with JPMorgan.

Mark R. Murphy - JPMorgan Securities LLC

Yes. Thank you. Question for Marc Benioff. It seems like a fascinating time in the history of the software industry. You have Sage re-architecting under the force.com platform, the big three traditional software companies are trying to deal with the cloud a bit more actively, and for a couple of them their product revenues are actually declining for the first time ever outside of recession. And then their margins are under pressure while yours are increasing. So I'm wondering as they talk up their own cloud products, to what extent do think the bigger traditional software companies can retain some of their customers versus to what extent – it feels like they're leaky buckets and they might inadvertently drive more customers to reassess and perhaps move in your direction?

Marc Russell Benioff - Chairman & Chief Executive Officer

Well, I think the way to understand the future is to look at the past, and you can look at IBM with the Mainframe business. I think we all know IBM still sells a lot of Mainframes. That doesn't mean that IBM is innovating, that doesn't mean that IBM is creating value for customers or helping them to transform customers' businesses or align them with modern trends. It just means they're selling them old technology and upgrading it. And that's what you see with companies like Oracle and SAP. These are old technology bases that are kind of meandering along like Mainframes. And I think that is reflected exactly as you said in their license revenue growth, which has been poor, and then their movement to the cloud has been stunted because they don't want to shift those customers into new models. Exactly why IBM lost the PC business because they were too afraid to let go of the Mainframe. It's the past replaying itself. But instead of IBM, you've got Oracle and SAP basically running the same playbook.

We all know that the world has changed, it's moved to the cloud, it's multitenant architectures, it's about meta-database application development and deployment, it's about social user interfaces, it's about mobility, and it's about data science, and it's about the Internet of Things and the integration of everything. And companies who have built platforms, like Salesforce who has done that, deliver world-class growth like we're doing in this quarter. And if you haven't done that, well, then you end up with a quarter like Oracle or SAP had. I think you've seen in the last four or six or eight quarters, they've missed almost all of them. And that's because their technology bases are degrading the way Mainframes have. But they can hang in there with their revenue, and it's meander along like big dinosaurs moving down the desert for a while.

But nothing can stop the movement of new technologies and the key to being successful in the technology industry is to kind of transform that innovator's dilemma, to kind of constantly rethink and re-conceptualize yourself, to have a beginner's mind. And if you can do that, you can create something amazingly new. And you're going to see at Dreamforce more examples of Salesforce doing that. I've never been more excited about our technology base and what we're delivering to our customers, but ultimately, I've never been more excited that customers just love using our solutions, love working with us, and you feel that when you're at Dreamforce, and you're going to feel that in a bigger way than ever before.

Operator

And our next question comes from Richard Davis with Canaccord.

Richard Hugh Davis - Canaccord Genuity, Inc.

Hi. Thanks very much. So in my opinion, you guys have really improved and frankly continue to improve on force.com. And so my question is, by running a platform operation, you've seen successes like Veeva emerge, which is kind of win-win, but you also get to see kind of emerging promising companies. Could you either – you may not be able to name the firms, but at least – by name, but at least by segment what do you see kind of emerging? Because you guys get a free look at some of the interesting things that are out there that are pretty exciting. Thanks.

Marc Russell Benioff - Chairman & Chief Executive Officer

Well, one of the things that we've done is not only become an amazing platform company, which has spawned incredible companies like you've seen like Veeva, which has become one of our largest customers, or even FinancialForce which has become one of our largest customers. We've also had the chance to help our customers build and create their own applications using our platform, and I think that's been actually by far the most exciting thing for us, because it's taking us from just having a static application to something that customers mold and shape like they would with Play-Doh or Lego and they can create everything they want.

And when you get to Dreamforce, you're going to see the next iteration of our Lightning Platform that we released last year and you're going to see a level of application, the creation capabilities that's never been before possible in our industry, and the ability to execute that on everything from an Apple Watch to a phone, to a desktop or a tablet.

And that idea that we do have that super dynamic app/dev environment and that's how we built all of our applications means that we can help execute that vertical vision or that line of business vision or the vision for any specific customer so much more rapidly. I think it's also one of the reasons we've been able to create this incredible venture fund, I think you've seen we've been able to deliver amazing returns with our venture fund because we do see everything and we've been able to have incredible relationships with all of these new companies and get them to integrate and work with our platform and you're going to see that show up at the show as well. Burke Norton is actually sitting at the table who runs our venture fund and sees a lot of these new companies. Burke, would you like to add anything about that?

Burke F. Norton - Secretary & Chief Legal Officer

Sure. I think that the amazing thing is that just over the last year alone, we've really massively increased the level of investment in the investment program. We don't reveal these numbers, but it's several orders of magnitude larger than how much we've invested previously. So we're really excited about what the returns we're going to be seeing in the coming years. And we couldn't be happier about the opportunity we have to see these companies in their very earlier stages.

Richard Hugh Davis - Canaccord Genuity, Inc.

Great. Thank you very much.

Operator

Your next question comes from Tom Roderick with Stifel.

Tom M. Roderick - Stifel, Nicolaus & Co., Inc.

Good afternoon. So a question here about RelateIQ. Going on a little over a year since you made the acquisition, been seeing more in the way of marketing, advertising, just more socialization of what RelateIQ is and what customers are using it for. Can you talk a little bit more about what the plans are for that technology? How you think about maybe potentially integrating it with other clouds outside of the Sales Cloud? And just anything else you sort of have planned for RelateIQ as it pertains to integrating it with the broad organization? Thanks.

Marc Russell Benioff - Chairman & Chief Executive Officer

I think you're going to have to come to Dreamforce because it's going to be one of the most exciting announcements that we have at the show.

Operator

Your next question comes from Kash Rangan with Merrill Lynch.

Kasthuri Gopalan Rangan - Bank of America Merrill Lynch

Hi, guys. Thank you very much. By my calculations, it looks like billings grew 30% – almost 30% on a year-over-year basis. Pretty spectacular if I take into account the year-over-year changes in deferred revenue or impact of deferred revenue and revenue. So Marc Benioff, question for you. Oracle Executive Chairman said sometime back that in their next fiscal year that they will add more cloud subscription revenue than salesforce.com. Just wondering what you think of that.

And also secondly, look at some of your businesses, your platform business, congratulations, almost $1 billion business today. Service Cloud almost $2 billion. As you march up and try to be the next $20 billion revenue company or whatever, what are the products that are going to look like the big successes tomorrow? Is it going to be Wave, or is it going to be platform, or is it going to be marketing? Which is going to be the next Sales Cloud? Which is going to be the next Service Cloud? I'm trying to get your view for the future. Thank you.

Marc Russell Benioff - Chairman & Chief Executive Officer

Well, Kash, I think we've mostly seen Oracle actually fail in the cloud market, I mean, for a long time, Larry said that the cloud was ridiculous and then he started taking it more seriously, but I just haven't seen any competitive cloud solutions from Oracle. And I think that's the shame. And I do view Larry as one of the most capable leaders in our industry. He's amazing. Of course, he's one of my mentors. But in this area of the cloud, Oracle has not delivered. And I think a great example of that is in the CRM marketplace. Here you can see Salesforce is selling billions of dollars of CRM in the cloud this year. Oracle is selling millions of dollars. And I think if you are selling millions and you have a competitor who is a relatively new entrant selling billions, well, then I would chalk that up as a failure in the cloud.

Operator

Your next question comes from Heather Bellini with Goldman Sachs.

Heather Anne Bellini - Goldman Sachs & Co.

Hi. Just had a sort of follow-up to what Kash was asking, but specifically wanted to focus on Wave and talk a little bit about how you've seen adoption since you launched it at Dreamforce a year ago and kind of what typical rollout pattern looks like from customers, from the ones who've become big adopters, kind of how does their footprint evolve? And also, what are you hearing from the field – maybe Keith Block, as to what the next level or next stage of innovation that customers are looking for on the analytics side? Thank you.

Keith G. Block - Vice Chairman & President

Okay. Hi, Heather. Thanks for the question. So, as you know, we are very excited about announcing Wave at last Dreamforce and very quickly, we were able to sign up some large, very strategic deals. In fact, if I go through the roster of customers that I just mentioned in the earnings call, many of them were existing analytics customers or had signed up net new as analytics customers and part of the solution that they're looking for to transform their businesses.

So we have gotten some tremendous feedback about the capabilities of that particular cloud, and how it fits relative to the customer engagement and driving customer success and how it does against the competition. I'll tell you, it will be the fastest launch of any product line that we've ever had here at Salesforce. So, there's a lot of enthusiasm, there's a lot of innovation, there's quite a bit of traction with the product. We're getting some great feedback from our customers. We're getting great feedback from our partners and I think that – it is very differentiated in the way that it drives insights to actions and that's not something that you see from the legacy BI product lines that have been entrenched for 20 or 30 years. So customers think of it as innovative and game-breaking and we're starting to see the results.

Operator

Your next question is from Alex Zukin with Stephens.

Alex J. Zukin - Stephens, Inc.

Hey, guys. Thanks for taking my question. Maybe Keith, you mentioned the growth of Salesforce consultants worldwide at 44% and I'm wondering how has your messaging changed to the SI community or what has changed about their practices that they're making these types of investments today.

Keith G. Block - Vice Chairman & President

So there's several things going on. First of all, I think everybody knows that one of our growth strategies was to really expand our ecosystem and that takes a couple of flavors. We talked a little bit on this call, couple questions ago around our platform and our ISVs focus, but another very important piece of that, obviously, is the systems integrators globally and the regional boutiques who have influence in the boardroom, who have industry expertise and deep content and are at the forefront of helping our joint customers transform their businesses.

Really what's happening is that we're moving away from the legacy world of on-premise into the cloud and the integrators and influencers in the world, they see it, they want to be part of it, they see new business opportunities, they want to drive unprecedented levels of customer success, and we're the only company that can bring that solution to bear with our Customer Success Platform at scale.

And that's why these integrators and influencers are really latching onto us and partnering with us and locking arms and they are making the investments in their Salesforce practices and cannibalizing their legacy SAP and Oracle practices. And that's exactly what's happening. They see this huge shift in the marketplace and they want to be able to respond to it with us.

Marc Russell Benioff - Chairman & Chief Executive Officer

Yeah, I think they also – just to add on to Keith's point – they clearly see that the world is going to the cloud and they want to be part of it, no doubt.

Operator

Your next question comes from Karl Keirstead.

Karl E. Keirstead - Deutsche Bank Securities, Inc.

Thank you. A question for Mark Hawkins. Mark, congrats on the margin and cash flow performance during the quarter. I actually wanted to ask you a question about your guidance on both margins and cash flow. You've guided to non-GAAP operating margin improvement of plus 150 basis points. I think in the first half you were plus 180 basis points so the guide implies a little bit of a slower rate of improvement in the second half and it's not obvious why that would be.

And then on the cash flow side to get to your 24%, 25% growth given your great first half performance, operating cash flow in the second half would actually have to be negative year-over-year and we haven't really seen that since the recession. So, my take is that you're appropriately keeping expectations low and there's some conservatism built into both margin and cash flow guide, but I wanted to give you an opportunity to flag anything that might be informing your guidance on those two metrics in the second half? Thank you.

Mark J. Hawkins - Chief Financial Officer & Executive Vice President

Sure. No, I appreciate the question, actually. Let's just break it down one question at a time. Let's start with the operating margin. We're super-pleased with the operating margin. As you've heard we've expanded the operating margin for five quarters in a row year-on-year. Moreover you've heard from Marc and I, just absolute unequivocal commitment to the revenue operating margin framework that we talk about in terms of the rate of growth and the rate of operating margin expansion. That's really clear, and you're seeing period after period after period of demonstrating that with action and results. And we're committed to the increase, obviously. And so, at the same time, it's obviously our priority as a company to be a growth company and to take full advantage of investing to go tackle this amazing TAM that's out there, that's north of $50 billion today. It's a double-digit growing TAM, a huge opportunity.

And so, clearly what we're doing is we're growing rapidly, fastest-growing top 10 software company in the world, and we're expanding operating margin just exactly as we said we would do, just exactly consistent with the framework, so obviously, making sure that we're investing in growth as well.

So I think that's a key point there. We feel great about the guide. We've raised the guide. Effectively, it was 125 basis points to 150 basis points, as you've said. Now we've taken it up to 150 basis points approximately, and we feel good and confident about that. So we'll get a chance to revisit that as we go, but that's where we're at. Point one.

Point two is on the operating cash flow. One of the things that is pronounced, not only in operating cash flow, but in a number of the metrics of the company, we've talked for, actually, quite some time around the compounding effect of more and more of our invoicing showing up in Q4. And as we know, one of the effects of that shows makes our cash flow growth more by bimodal, it (48:12) shows up more in Q1 and then it shows up more in terms of Q4, and that's no shock.

And one of the things that we want to make sure, we think we have a very solid operating cash flow guide – by the way, that's exactly consistent with the revenue operating margin framework that we put out, right now the exact framework that we added.

And at the end of the day, when we see – when we have – we're closer to Q4 and we have more visibility around Q4, we'll revisit that and we'll have a better sense of, is there anything we want to change there? But we think it's an appropriate guide. So hopefully that's helped on both sides.

Operator

Your next question is from Brendan Barnicle with Pacific Crest Securities.

Brendan John Barnicle - Pacific Crest Securities, Inc.

Thanks so much. Keith, I had two quick follow-ups for you. One on Wave, when might you take that more down market? We've heard about a lot of success at the high-end of the market. And then second on the Marketing Cloud, obviously, great momentum there. Is there a point at which you need to have an ecommerce engine that you partner with or build? Increasingly we're hearing that about something that CMOs are looking for in their marketing applications. Thanks.

Keith G. Block - Vice Chairman & President

Yeah, so thanks for the question. Just a couple of comments. I mentioned earlier on Wave how excited we were at Dreamforce and demonstrated some proof points very quickly and we continue to gain momentum in that marketplace. I think one of the things that the Wave team has done just an outstanding job of is to get feedback and that's what great companies do, they listen to their customers and their customers inspire them. And that's what Salesforce is all about.

And so, we have gotten some great feedback on analytics. We are well-positioned in the marketplace. We've got a great ecosystem associated with analytics. We've got more than 80 partners. We've done some great things with Merck and Barclays and Genomic Health, and we'll continue to evolve and augment and enhance the product so that it is far-reaching. So we're excited about the future of Wave and we think it's going to be an incredible product. It's already had a great first year, almost first year, I should say.

We're very proud of our Marketing Cloud performance in the quarter. That cloud is gaining momentum. It has really been an incredible part of our Customer Success Platform. It completes our solution for our customers to transform their businesses as far as how they define their digital strategies and their customer strategies. And so we will continue to see, again, as all innovative companies do, but none like Salesforce, we will continue to innovate our product line and enhance our product line, and there are natural adjacencies that you look to and we'll continue to innovate. That is the DNA and heart and soul of this company. We are all about innovation. So, you'll continue to see great offerings coming out of this place.

Operator

Your next question comes from Kirk Materne with Evercore ISI.

Stewart Kirk Materne III - Evercore ISI

Thanks very much, and congratulations on the quarter. Marc and Keith, I was curious about your comments about Europe. Obviously, you're starting to see some really nice momentum in that region. I assume a lot of that has to (51:25) investments on the data center side. I was curious about sort of your thoughts on is the market over there getting better or are you guys taking share? And I guess in particular around your cloud offerings, are there any solutions in particular that are resonating with customers over there, whether it's the Service Cloud or Marketing Cloud, that's really helping you guys gain some momentum? Thanks.

Marc Russell Benioff - Chairman & Chief Executive Officer

I think the most important thing that we did in Europe, we did quite a few years ago, which was decide that Europe was extremely important to Salesforce. And we refined our distribution strategy really being focused on seven core countries which we've really just expanded to nine core countries. The idea that we were going to be super-focused in Europe and the UK, France and Germany was a huge reset for us, because ultimately what we're doing is building the UK cloud, the French cloud, the German cloud, and we're paying more attention to these customers inside these countries than ever before. Of course that doesn't mean that we don't do business in other countries, or don't have customers in other countries, but this extraordinary focus in these core countries where the buyers are has paid off in spades for us and it's allowed us to scale distribution, scale service, scale marketing and make sure our products are right for those products in those core mega-markets. That has resulted in numbers in Europe and growth in this company. We haven't seen numbers like this growing like this in Europe in other software companies. That's the power of what's going on.

So I only see more of that. I'm heading back to Europe next week because I am so excited about the European opportunity, and the customers that I met with and spent time in Europe, well, that has escalated. I mean, I'm really not meeting with the CIOs anymore, or the Chief Revenue Officers or Chief Service Officers. When I get over there were meeting mostly with the Chief Executive Officers because they're more committed to delivering their customer capabilities than ever before. Keith, do want to add to that?

Keith G. Block - Vice Chairman & President

Yeah. I would echo what Marc said. We made a conscious decision, as a company, to focus on international growth. We saw Europe as a huge opportunity. The European market has been shackled by legacy technology for decades, quite frankly, and they are screaming for innovation. The CEO dialogue, the agenda of the CEO, is growth. Our message is all about growth and customer success. So there's an alignment here that is fantastic and we're seeing it play out in the marketplace. We have made significant investments and those bets are paying off internationally in all the areas that Marc has mentioned.

So international is a strength area for us for sure. EMEA, in particular, is a great story. We have a great team and all of our senior executives spend plenty of time talking to senior executives in our customer base in Europe.

Stewart Kirk Materne III - Evercore ISI

Okay. Investments on the data center piece (54:38)?

Marc Russell Benioff - Chairman & Chief Executive Officer

I'd just like to add that, if you go to my Facebook feed or my Twitter feed you'll see I posted a video that summarizes our Q2 results. And I spent the majority of the quarter in Europe. I lived over there. It's the third year in a row that I've done that, and the video covers some of our activities in Europe for the year and the quarter, as well.

Mark J. Hawkins - Chief Financial Officer & Executive Vice President

Just to chip in one last point. Kirk, you'd asked about market share specifically, I just want to add – since you asked it, address it directly, we're globally taking market share. It's been a persistent trend in CRM. And Gartner's report just show we took another 200 basis points of market share, so that's exciting and I just wanted to get that out since you asked about it.

Operator

And our final question comes from Philip Winslow with Credit Suisse.

Philip A. Winslow - Credit Suisse Securities (USA) LLC (Broker)

Thanks, guys. Obviously you guys have had a great quarter of billings growth but also balanced that with margin expansion and cash flow. The question here is to Mark and then to Keith, as well. I mean, obviously there's lots of areas that Salesforce can continue to expand and you definitely have a broad vision here. And then if you look at where some of the leverage is coming from it's definitely the sales and marketing line. Sort of how you're balancing for this broad vision and kind of continued growth aspirations with the margin expansion? (56:02) I have one quick-follow to that.

Marc Russell Benioff - Chairman & Chief Executive Officer

Go ahead (56:08).

Mark J. Hawkins - Chief Financial Officer & Executive Vice President

(56:11) just initially, and then perhaps Marc Benioff will chip in as well. But I would say, the way we're balancing that, Phil, is that, clearly we have a huge opportunity as articulated by Marc Benioff. It's an amazing market space and the way we balance it in terms of our different offerings in our company in total is we're a growth company, number one, and we have the revenue margin framework that we look at to try to make sure we're fully taking advantage of really helping our customers in these markets, and helping them be successful. And at the end of the day, we want to also expanded our operating margins in a framework consistent with our revenue growth. And so we try to balance that at the highest level and then obviously it goes down to each of the different clouds. A lot of companies have one single product that they're driving. It's unprecedented to have the number of clouds that we have that are huge, either a billion, multi-billion, so on and so forth and there's a portfolio that people look at. But Marc and Keith, do you want to add more?

Keith G. Block - Vice Chairman & President

Yeah, I think I'll would just follow that up. This is an incredibly successful company that it's just an execution machine with great products and great customers and great innovation and great partners. And as part of being a growth company, we invest in our customers, we invest in innovation, we invest in our employees, and we invest in our partners. And when you are the leader and viewed as the trusted advisors to the most significant and important companies in the world, that's what you do, that's where you place your bets and that's where you innovate and invest in and that's what this company is all about. It's innovation and growth and customer success.

Operator

We have reached our allotted time for questions. I'd like to turn the conference back over to our presenters.

John Cummings - Director-Investor Relations

Well, thank you very much. Thanks for everyone for joining us today. We appreciate it. We look forward to updating you on our Q3 results in November. We look forward to seeing you at Dreamforce and particularly our Investor Day on September 15. In the meantime, if you have any follow-up questions, you can email us at investor@salesforce.com. Thanks so much.

Operator

Thank you for your participation. This does conclude today's conference call and you may now disconnect.

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