salesforce.com, inc. (NYSE:CRM)
Q3 2016 Earnings Conference Call
November 18, 2015, 05:00 PM ET
John Cummings - Vice President, Investor Relations
Marc Benioff - Chairman and Chief Executive Officer
Keith Block - President and Vice Chairman
Mark Hawkins - Chief Financial Officer and Executive Vice President
Phil Winslow - Credit Suisse
Keith Weiss - Morgan Stanley
Brent Thill - UBS
Kash Rangan - Merrill Lynch
Mark Murphy - JPMorgan
Karl Keirstead - Deutsche Bank
Good afternoon. My name is Ashley, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Salesforce fiscal third quarter 2016 earnings conference call. [Operator Instructions] I would now like to turn the call over to our host, Mr. John Cummings, Vice President of Investor Relations. Sir, you may begin your conference.
Thanks so much, Ashley. Good afternoon, everyone, and thanks for joining us for our fiscal third quarter 2016 results conference call. Our third quarter results press release, SEC filings and a replay of today's call can be found on our Investor Relations website at www.salesforce.com/investor, and 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 then 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. We may also reference certain unreleased services or features not yet available. We cannot guarantee the timing or availability of these services or features, so recommend that customers listening today make purchase decisions based on services and features currently available.
Some of our comments today may also contain forward-looking statements which are subject to risks, uncertainties and assumptions. Should any of these materialize or should our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements. A description with 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.
And with that, let me turn the call over to Marc.
Well, thank you, John. And before we start and go into the call, which of course would go through our results, we want to let everybody know that our thoughts and prayers are with everyone in Paris, with all of our employees and all of our customers that have been going through such a horrible situation. And we've also been just especially shaken by our customers, who have lost employees in this horrible tragedy. So we're so sorry, and our thoughts and prayers are with everybody in Paris.
Now, I want to go through our third quarter results and give you an update on how we're doing. Also, joining me on the call is Keith Block, who is in New York City, who just finished the world tour there, and we watched him this morning with his team. Keith, are you there? Can you hear us?
I am absolutely here Marc.
Fantastic. All right. Well, Mark Hawkins is also with us, our Chief Financial Officer, and the three of us really feel the duty today to talk about another outstanding growth quarter for Salesforce.
Now, you can see from these results, we are on pace to deliver well over $6.6 billion this year, which is faster than any other enterprise software company in history. And I am thrilled to share with you that we are expecting to deliver more than $8 billion in revenues or $8.1 billion revenue at the high-end of our range for next year. So that is amazing.
And we could not be more excited about the results of the third quarter, we could not be more excited about coming into the fourth quarter and we could not be more excited about the potential for next year. And you can see that we have something in sight, which we have been talking about now for several years, which is our $10 billion a year.
And of course, Salesforce, as you can see will be the fourth largest software company in the world next year, but you can see that we'll be one of the only software companies ever to reach $10 billion in revenue. And as we become number four, we have number three in our sight, and we certainly [technical difficulty] goal as well quite wholeheartedly.
Now, as many of you are predicting, Salesforce will be indeed the fourth largest enterprise software company in the world next year, behind only Microsoft, Oracle and SAP. And we are really making a difference for our customers and the industry, and it's attributed to our employees, almost 20,000 of these employees, who are similarly focused on one thing, our customer success.
I'd like to kind of give you some specific from the results for the third quarter. Revenue for the third quarter rose to more than $1.7 billion, which was up 27% in constant currency from a year ago. That is absolutely I think the best performance that I've seen in the top 10 enterprise software companies. And Salesforce continues to be the fastest growing of the top 10 enterprise software companies, and we are really excited with our 27% number.
Deferred revenue grew to more than $2.8 billion or up 30% in constant currency from a year ago, pretty incredible at our size and scale to see that achievement. And the dollar value of booked business on and off the balance sheet is now more than $9.5 billion. So that, again, is the setting us up very well for next year and the future.
As we delivered on this outstanding topline growth, we also delivered 221 basis points of year-over-year non-GAAP operating margin improvement. And as you know, while we are absolutely committed to be the fastest growing enterprise software company and delivering these phenomenal topline numbers, we are also deeply committed to continuing to increase our profitability, and the results this year are evidence of that.
So let's be clear, Salesforce is the only software company selling billions of dollars at CRM, and we are at the center of what every company is going through is digital transformation, it's what every company wants to be in the 21 century.
So now, during the quarter, I want to tell you, I met with hundreds of CEOs around the world. And I'll tell you, when we're meeting with CEOs, they are not that interested in talking about honestly about the cloud or about social or mobile. They want to talk about their customers and they want to talk about their topline, they want to talk about how they're going to grow that topline, and this is the really, really exciting thing that's going on, which is this customer revolution.
We're really talking about connecting with -- talking about talking with our customers about a connect with their customers in a whole new way, accelerate their growth, creating this one-to-one customer journeys, running their businesses from their phone and making smarter, more predictive decisions. And I'll tell you, one of those customers is us.
And at the end of this quarter it just kind of blew me away. I was using Salesforce One, which has I think almost I think 1 million active users on it now. And my IT department here at Salesforce have built several new apps, which got automatically installed on my phone, because I'm using Salesforce One.
And I'm using this incredible Sales Forecasting app, where I'm just physically touching on the photograph of all of our sales leaders around the world, kind of navigating through our pipelines and through our forecast, and it was amazing just to feel to run my business from my phone, and have that kind of connectivity with my customers. And I think that today more than ever connecting with customers like that is absolutely essential, because as a CEO I can tell you, it puts you on the pulse of your business and what's really going on.
Well, I think that that was definitely evident for everyone who attended Dreamforce. And if you came to Dreamforce, you saw the biggest software conference ever and you also saw not just a huge amount of customers. But we really rolled out incredible new innovations, which is enabling my own personal experience with Salesforce product, but for a hundreds and thousands of Salesforce customers who are using these incredible new product like our new Lightning platform, which is amazing.
You have the ability to build an application and run it on any device on a phone, on a tablet, on a PC, it transcends operating systems, it transcends devices and we have rebuilt our sales and service and our core community products and all of our core platforms on this amazing new Lightening platform. And when it shows up, it's done nothing, like I've ever seen, which gives you this incredible modern experience in mobile environment.
And then of course we also added SalesforceIQ to bring machine intelligence to that. We introduced our IOC cloud, even bring it into the Internet of Things, and maybe you can you can transform that Internet of Things into Internet of Customer.
Well, of course, we also have our analytics cloud with our new Wave app, and there is just still much more. And I'll tell you that walking around Dreamforce, it was just blown away off with our ecosystem, and then hundreds and hundreds of companies who have built on this platform and who have made so much happen.
But I guess what I'm most proud of is that during Dreamforce we also held the largest book size ever collecting over a million book to schools. We also raised over $10 million for the UCSF Children's Hospital in San Francisco and Oakland, and I'll tell you that I want to thank all of our partners and our customers for helping us to achieve those numbers there, because it's really, really awesome.
Well, I'll tell you it's been an exciting few months here at Salesforce, and I would say that nothing is more indicative of how Salesforce is delivering customer success and how this Lightning platform is being adopted. In the third quarter we delivered more than $259 billion transaction, which was up 63% from a year ago. That's 4.1 transactions every single business. There is no other customer platform come close to that level of usage.
And while our transaction continue to skyrocket and our customer success continue to skyrocket, we committed also to reducing our carbon footprint. And the environment is a key stakeholder for us and we continue to show how the multi-tenant cloud platform is 98% more efficient than on-premise software. And we're helping customers avoid a many more than a million tons of carbon each year through our unique architecture of cloud computing.
Well, we have to do more, and we've made significant commitments to achieve net-zero carbon emissions by 2050. And over the next several weeks, in Paris at the COP21 Conference, we'll be making more announcements on how Salesforce is focused on the environment.
Well, as you're about to hear now from Keith, we're working with some of these great customers to deliver a fantastic result to accelerate the digital transformation. And I guess there was no more stronger evidence point in the analyst community than Gartner's 2016 CIO Agenda, which I am sure a lot of you follow as I do, and they found that Salesforce is rated as the number one accelerator by the majority of respondents and received the highest digital acceleration score. At a 30 vendors, Salesforce was at the top. And just Gartner did an amazing job on the CIO Agenda Report and we haven't had a chance to look at that, I would.
Well, anyway, let's hear from Keith, he's had a huge day already in New York. I can see him on the monitor here, so he's still there, which is good. And so Keith, tell us how did New York go today?
Thanks, Marc. We had a great day in New York with over 8,000 people registered. So it was a terrific event and well-received and the customers are very, very excited about our messaging.
Well, Keith, you know what, I think everyone on the call would love to talk to you now about how your experience was in the field. We obviously had a great Dreamforce. We saw more customers this year. I know you and I this year have been in front of more CEOs and CIOs I think ever in our entire career, and everyone wants to talk about how to transform the customer experience.
I don't know a company today that isn't reviewing on how to transform their customer experience and how to not get, I guess, a lot of them say, they don't want to get uberized out of the world. But some of them I think are don't want to get postmated out of the world, because I just ordered my lunch on postmates here in San Francisco. So maybe you can tell me your experience there in New York.
All right. So thanks, Marc, I appreciate it. And it's great to be here, and obviously thanks to everybody for joining the call. As Marc had indicated, this was just a terrific third quarter. And one that I would characterize, I think we all would characterize, as one of the most memorable exciting quarters that we've had here at Salesforce.
And we heard it today and we continue to hear, the message from our customers is very clear. And while many of our competitors are struggling quite frankly to catch up for the cloud, Salesforce is taking customers and foreigners forward into the age of the customers. We are squarely in this age of the customer.
Marc and I just talked about this, but I had the opportunity to kick off our Salesforce world tour here in New York. Again, over 8,000 people registered for this event. And people want to be here, both customers and prospects, companies like American Express, and Mattel, and Western Union and awful lot of customers through a variety of industries about how they are reinventing their futures and leveraging Salesforce.
And as I speak to you, the top customers around the world, and Marc is exactly right, many of them are CEOs, which is terrific. There is a constant theme that keeps coming through here, and that is that we are clearly in this age of the customer and the time of cutting your way to prosperity is over.
And when you think about it, the agenda for every CEO in the world is growth. And the reason why CEOs are coming to us is because they've see Salesforce as that catalyst for growth, and we are also quite frankly a catalyst for customer success.
So whether it's a company of all shapes and sizes, whether it's a business model with B2B or B2C, large company or small company, regardless of the industry, these CEOs are really looking at us now to be their trusted advisor, and really help them define their new customer strategy, their digital strategy, their engagement model in really new ways to transform into a customer companies, and that's just become super, super important to them.
And all of this has translated some of the most exciting deals that we've done in our industry. We had another huge quarter of fantastic wins. In fact, the total number of our large transactions in Q3 was up significantly compared to last year in terms of value. Our relationships are becoming bigger, they are becoming broader, they are becoming more strategic and deeper. And we are now working with some of the world's greatest brands, and this is a far different roster of companies that we have historically worked with.
A big part of that success quite frankly has been our industry strategy, and we talked about this on many calls, but this is about our ability to speak the lines of customers and to understand their business problems and drive a level of innovation and a point of view. And it's become a regular part of how we engage with customers of all size, from the smallest to the largest of enterprise. And it's really proving out in our results.
And I'll give you a few examples. Certainly, there is a company that we've all heard of called, General Motors. They have 125 million cars on the road. They have a significant vision for the connected vehicle. And in Q3, they selected Salesforce to connect drivers, the cars, merchants and retailer to bring a connected vision, a great experience to life.
And with a push of a button, drivers are going to be able to instantly connect with the OnStar advisor and retailers and merchants, and it doesn't matter where they are, and they're going to get real-time information. And this is an example of a company GM that is really embracing the opportunity around the Internet of Things. And we are really excited about working with them.
We are entering the holiday season, as we all know. We're seeing a lot of traction in retail. And I'm thrilled that we closed the largest marketing cloud deal in the company's history with a very large retailer in Q3. They are taking things to the next level by personalizing the shopper experience across every single channel.
We're going to be at the core of their omni-channel consumer engagement strategy, and they will be able to create a very personalized and predictive one-to-one relationship with customers at every single touchpoint, which is really compelling. And they're also going to be able to anticipate what the next step is and what the next action is, and what customer might need and relevant suggestions at exactly the right moment. So we are very excited about that new partnership.
Another great win was with AECOM. If you're familiar with AECOM, they design and build and finance and operate some of the largest and most iconic infrastructure projects around the globe, including here in New York the World Trade Center and the Tokyo 2020 Olympic stadium, which we're very excited about, as are they. They have nearly 100,000 employees in more than 150 countries. And we are all thrilled that AECOM has decided to move their entire company to our platform.
In finance and services, which is certainly a key focus area for us, we have expanded our relationship with American Express, one of the great brands in the industry, a company that has been delivering world-class service for more than 160 years. In the quarter, American Express selected Salesforce to bring their sales and marketing and product teams altogether to collaborate and to coordinate, so that they can further transform their customer experiences for their business payments. Super excited about that new relationship.
And what's interesting about that deal is that Amex and so many others continue to use our Ignite process to really reconceptualize their futures. And this is a very unique solution selling approach that is all about the art of the possible. We have increased our Ignite tenfold in the past few years. It is a standard part of our selling motion. It is one of the best investments quite frankly that we've made and it's having a significant impact with our customers.
If fact, one of the leading high-tech manufacturing company in the world also engaged with us in the quarter and in ignite. And that resulted in a significance eight figure deal, which we're very, very excited about. And right before Dreamforce, I think as we all know, we introduced our first vertical-specific product line with health cloud and financial services cloud.
We're very excited about the growth opportunity for these clouds. The interest has been very strong. We're excited about their future. And these products are really translating our incredible core technology into the language of the customer, which is part of our industry strategy. And we are cultivating an excellent ecosystem of partners for all of these solutions. So we're excited about that as well.
International continues to be a cornerstone of our growth strategy. And in the quarter we extended our relationship with a company called AB InBev. They've been in the press a lot recently. They are one of the world's top five consumer product companies. They've standardized their collaboration with us globally, and that's after a successful relationship start in Europe. And now they're going to reinforce the consumer-eccentric digital approach and innovation efforts, leveraging our products as well. So we're excited about that.
And AB InBev joined ABB and Barclays and GlaxoSmithKline, Telefónica, Virgin Media and so many great leading companies in Europe, again who selected Salesforce in Q3. In Asia-Pac, we continue with our strength. We closed deals with Australian Post and Syntel, Commonwealth Bank of Australia, Toyota, and the list goes on there.
So I really couldn't be more thrilled about the success we're seeing internationally. We continue to invest in our selling capacity, our service capacity, our data centers, our offices, our partners, all to drive growth and to make our customers successful.
Another area where we continue to make progress quite frankly is with our partners in our ecosystem. And I'm very proud of the results we're seeing with regional and global systems integrators. Our partner certifications in the quarter, they were up more than 40% from a year ago, which is outstanding. And with all of our global SIs growing at an even faster rate, this is a great indicator that the most important consulting partners and firms in the world are betting their business and their customers' business on Salesforce.
So we have firms like Accenture and Deloitte, PwC and Cap Gemini, they're all increasing their Salesforce practices. They are walking arm-in-arm into the C-suite with Salesforce. And in addition our app cloud continues to be the platform of choice for innovation by our ISVs.
And a great example of where our industry strategy works hand in glove with our ecosystem strategy, a firm named Accenture we're all familiar with, selected Salesforce as a partner to transform the front office of consumer goods companies around the world. So they will be bringing their Accenture CAS solution on to the Salesforce app exchange, which is a great endorsement of our platform and critical to our join industry strategy.
So in closing I want to say, thank you to all of our customers and thank you to all of our partners for their trust in us and their confidence in us. And I'd also like to thank our incredible employees for their outstanding execution in the quarter and this unrelenting dedication to customer success.
And right now we are firing all cylinders, our investments in the industries, our partner ecosystem, our international regions is all paying off. And we have excellent momentum coming out of Dreamforce. And really Marc, based on what I say in New York this morning, we are very well positioned for a very strong finish to the FY '16, and we're looking forward to a historic close this year.
I will tell you, Keith, we couldn't be more proud of you and your sales team, so congratulations. It's so exciting. We really appreciate everything that you're doing. And Keith, I'll tell you, I watched the Sales Cloud Keynote after your keynotes today and Accenture was the speaker with Sarah Varney during the Sales Cloud Keynotes, and what was really interesting, they talked about how not only are they doing this incredible partnership, building products on our platform to sell to their customers, but that they have rolled out 25,000 users internally.
And their speaker today in New York, on the video I watched, talked about what how he learned working with Salesforce is that the key to success is to be bold and go fast and just go do whatever you can and just go as much, much faster than any other platform he had ever worked with. Keith, what are you hearing from Accenture, why are they having such a great success internally and now becoming this incredible reseller partner?
It's interesting. I had dinner before -- last night we had a dinner with 40 of our greatest customers and prospects. And I sat next to the CEO of Accenture, North America. And we had an excellent dialogue about the partnership and the relationship. And Accenture is just a culture that embraces transformation. And so they appreciate the level of transformation.
They know what their customers are looking for. And because of that they want to partner with a company like Salesforce, who understands growth, understands transformation. So it's a very good linkage between the two firms. And that's what we're seeing in interest marketplace and that's why Accenture was happy to establish that a partnership in the consumer packaged good space, that's why Accenture is our number one partner. And that's why they continue to evangelize a great message that we have to our joint customers.
Well, it has been impressive to see, Accenture is definitely jumped into cloud computing and the social, mobile and IoTs after than any of the other systems integrators. Even though they're largest, they move the fastest. And now to see them deploy internally and also build these solutions on the platform is still exciting, so congratulations on that, as well, Keith.
And let's go over to Mark Hawkins and hear about the numbers. Mark?
Fantastic. Thank you, Marc. We delivered another great quarter with consistent execution and balanced growth across all of our products and geographies. And our results this quarter set us up for a strong finish in FY '16, as discussed, and another solid year in FY '17.
Third quarter revenue was $1.71 billion, up 24% in dollars and 27% in constant currency. Foreign exchange, continue to impact revenue with a year-over-year headwind of $40 million and a sequential headwind of $6 million. We continue to see strong year-over-year constant currency growth in all of our geographies with the Americas growing 27%, EMEA growing 28%, and Asia-Pac growing 25%
Each of our clouds delivered outstanding year-over-year growth on a dollar basis with Sales Cloud growing 10%, Service Cloud growing 38%, App Cloud and other growing 40%, and Marketing Cloud growing 29%. Dollar attrition for the third quarter excluding Marketing Cloud was approximately 9%.
From a bottomline perspective, we delivered another quarter of improving profitability. In fact, we have now increased our year-over-year non-GAAP operating margin for the sixth consecutive quarters, up 221 basis points over Q3 of last year. Our Q3 non-GAAP EPS was $0.21. Non-GAAP EPS includes approximately $0.01 from our lower than anticipated non-GAAP tax rate, which I'll discuss more in a moment.
Our great topline and bottomline performance in Q3 drove another solid quarter of cash generation with operating cash flow of a $118 million. This was slightly down year-over-year about 4%, while operating cash flow year-to-date was up 37% compared to the same period over last year and that's now up to $1.2 billion year-to-date, which is very exciting. Marc, it took us 15 years to get to a $1 billion in cash flow and we did it in the first two quarters and now we're topping it, so we're really excited about that.
For the full year, we continue to anticipate operating cash flow in the growth of 24% to 25%, consistent with our prior guidance and our revenue growth operating margin framework. Third quarter free cash flow defined as operating cash flow plus CapEx was $38 million, down 23% over the last year. Again, year-to-date free cash flow was $937 million, up 47% over the first nine months of the last year.
Looking at billed deferred revenue, we delivered growth of 28% year-over-year. Excluding an FX headwind of $41 million, deferred revenue grew 30% over last year. On a sequential basis, deferred revenue was impacted by an FX headwind of $7 million.
In the quarter, 79% of the value of all subscription and support related invoices were issued with annual terms compared to 73% in Q3 of last year. This is a bit higher than anticipated and translated into approximately 2 percentage points of deferred revenue growth in the quarter.
Moving on to guidance. With our great performance into the third quarter, we are raising our full year revenue guidance by $25 million. We now anticipate revenue to be $6.64 billion to $6.65 billion for 24% growth year-over-year. The guidance continues to include an FX headwind of approximately $175 million. We are also raising our full year non-GAAP EPS to $0.74 to $0.75 or $0.03 at the high end of the range, which is approximately $0.02, as a result of our outperformance and about $0.01 as a result of our lower full year non-GAAP tax rate.
Now, let me take a minute to discuss our non-GAAP tax rate. We are adjusting our projected full year non-GAAP tax rate to 35.5%, in light of a recent Altera tax opinion. You may recall that we began to compute and use the fixed long-term non-GAAP tax rate during FY '15, and as we said, we would reevaluate this rate annually and/or as the situation rises where we need to reevaluate that and that is exactly the case as it relates to Altera, and that's just the situation where we needed to true that up. And we'll continue to reevaluate that and give you update as we need to.
For Q4, our full year guidance implies revenue growth of approximately $1.782 billion to $1.792 billion, non-GAAP EPS of $0.18 to $0.19 and billed deferred revenue growth of approximately 23% to 24%. And as you heard from Marc, we are pleased to be initiating fiscal revenue guidance of approximately $8 billion to $8.1 billion for year-over-year growth of 20% to 22%.
In fact, FY '17 feels very similar to last year, as we continue to deliver strong growth at scale. And we will provide additional details about our outlook for FY '17 on our fourth quarter call in February. To close, we had a strong third quarter and we are well-positioned for a great finish to FY '16 and to deliver another solid year in FY '17.
Thanks to all of our employees for continuing to deliver these outstanding results. And with that I'd like to open the call for questions.
[Operator Instructions] And your first question comes from Phil Winslow with Credit Suisse.
I have a question on Service Cloud, because obviously the revenue there, which is obviously lagging a bit, continues to grow just phenomenally. No sort of sign of deceleration there. If it continued at this pace, you could almost see within a couple of years, Service Cloud overtaking Sales Cloud.
So the question is what are dynamics that are going on there? How would you compare them to the Sales Cloud, when it was sort of at this point of its lifecycle? And are you displacing more legacy vendors? Is it net new? Is it replacing to give custom developed software? I mean, how should we think about Service Cloud?
Well, I think the way to think about Service Cloud is, first and foremost, these are mega markets. Sales, service, marketing, analytics, these are all multibillion dollar markets. We actually called them internally swimmers and we call them swimmers in their lanes. And we look at these products each going down their own lane, and yes, you're right, service is performing incredibly well, but so is sales, so is analytics, so is community, so is our platform, so is marketing, we have many, many high-performing swimmers.
And we don't just look it at that way, by the way. We not only see that, we see it by geography, and we also look at it in verticals. And in each of the strategic areas that we've made this big bets, we continue to see very high performance. And in customer service and support, if you read Gartner's most recent Customer Engagement Magic Quadrant, you'll see Salesforce is number one.
We've displaced Oracle, we've displaced SAP. These were traditionally the leaders in the Gartner Magic Quadrant, and so we're not only now the number one in the Magic Quadrant on sales, which we have been for few years, but now we're number one in the Magic Quadrant for service, which means we actually have the best product possible.
Our customers just have phenomenal success. We have great examples of customers who have tens of thousands of users deployed on this product. We have examples of customers who have tens of users, hundreds of users. But what's unusual our Service Cloud is you could be a very small company or you could be a massive company, and you can use our Service Cloud.
And when you look at requirements for customers to provide extended customer service, especially in regards to areas like the Internet of Things, when our core customers like Cisco or Phillips or even Coca Cola are more connected to their customer than ever before, the first point of access with those customers is customer service, so they better have their customer service act together if they're going to drive the customer revolution. So of course, we continue to do well in all of our core products, but also customer service is a critical part of our portfolio.
Keith, you want to add anything to that.
I think, Marc, you're spot on. I mean, at the end of the day, we are performing well across all of our clouds. And certainly as we talked about service, a lot of companies in a variety of industries differentiate themselves with service. And when you think of this Age of the Customer where there are billions of connected devices and connected things, and you think about what service can do in terms of the business model, leveraging IoT and Analytics it's very, very powerful in terms of disruption and differentiation and changing business models and that is really the level of dialog that we are having with many, many companies and it's very exciting.
Your next question comes from Keith Weiss with Morgan Stanley.
I wanted to ask a little bit about the platform business, and in two directions. We saw a little bit of acceleration in that business. I think, Marc, you talked a little bit about some of the internal reasons for that. We also see in acceleration in some of the other big platforms out there like Amazon Web Services and Azure, both of them have seen accelerating growth.
So I wanted your view on it. Are we seeing something of a broader industry trend, that's sort of really an acceleration in the move towards those cloud-based platforms, as de facto standard of where we're going to developing applications. So I just wanted your view on that? And two, similarly, do you see Amazon Web Service and Azure increasingly as competitors for their platform business for you guys?
Yes, that's a great question, and let me address that. So there is no doubt, we are at a tipping point in cloud platforms. And companies who have been cloud deniers like SAP and Oracle are paying a horrible price in single-digit and negative growth, because companies are not buying their products, because they are not modern. And they are not built-in this kind of modern architecture.
When you look at the cloud opportunity there is different opportunities. And one opportunity is at the applications layer, where we dominate in sales and service and marketing, where we have these multi, multiple billion dollar clouds, all kind of underway, which I've just talked about in the last question.
But the next layer down, which is declarative and programmatic application development and deployment, especially in rapid application development and deployment, this is an area where we also have incredible success. Gartner calls this aPaaS, Application Platform-as-a-Service.
You look at our product like our App Cloud, Salesforce1, Lightning, Heroku, this is an area that's very strategic to us, because our core applications are built with our platform, which gives our customers basically the plasticity necessary to kind of take our applications apart and putting them back together, this is an area that's very important to us.
The next layer down is, kind of what we traditionally call Infrastructure-as-a-Service. Amazon Web Services, which we are a huge customer of Amazon Web Services, Amazon is also a huge customer of Salesforce, and we use the Amazon Web Services to build our products. For example, Heroku is one of the most successful platforms on the Amazon Web Services and has been incredible success for Salesforce.com and also demonstrates the power of Amazon's platform.
Salesforce also has been working with Microsoft on how we're going to be using Azure as part of our product line as well. We're very excited about Microsoft. We also have a great relationship with Microsoft. We've talked about that, and I think Azure is terrific. And Google, by the way, is a huge customer of Salesforce. We use Google's platform very extensively at Salesforce as well. And I'll tell you something that it's critical for the operations of our company, and the Amazon, Microsoft and Google's cloud platforms.
We're a very modern company and how we've deployed IT internally, that's given us the flexibility to grow. We tutor and mentor other CIOs and industry leaders and show them what we've done to build a modern company using this highly flexible IT infrastructure, but it's because we're doing all three of these layers.
One, very flexible dynamic, highly innovative, three releases a year, applications at the top; in the middle, rapid application development and deployment of apps, like I was talking about new apps appearing on my phone instantly from my IT department in that APAS area; and also an Infrastructure-as-a-Service, where we partner with Amazon, we partner with Microsoft and we partner with Google, those are three core strategic partners in Infrastructure-as-a-Service, and that's the modern IT infrastructure.
And of course, what do we all run it on, we don't run it on our laptops, but we run it on our phones. And that's the power of the modern age. And this gives you the level of speed in IT. It gives you much lower total cost of ownership. And it gives you a rate of innovation, because you're not waiting three or four years for a new release, you're waiting three or four months, sometimes three or four days before you're getting incredible new features and functionality.
And so yes, we are at a tipping point. You could see that in the results of Amazon. You can see it in the results of Microsoft. You can see it in the results of Google. And you can see it in the results of Salesforce. And for companies who have denied that this shift is happening, for companies who have fooled customers to be afraid of this shift, and for companies who have tried to stop this shift, look at where they are today. It's quite a good example of Clayton Christensen theories regarding The Innovator's Dilemma.
And your next question comes from Brent Thill with UBS.
Question for Keith. On the industry strategy, you mentioned that's providing a very nice tailwind for you in the field. You mentioned the retail case. I'm curious, if you could talk about some of the other verticals that you're starting to see open up given the all the hard work that you've been laying in many of the other vertical segments?
Yes, no problem, I'm happy to fill that question. Look, across the board, I mean if you look at the wins in the quarter, we had some terrific experiences with financial services, obviously with American Express and automotive with General Motors and consumer package goods with AB InBev and Mattel.
So financial services is very strong, healthcare and life sciences is very strong, retail is really picking up, CPG is really picking up, manufacturing has always been a strength for the company, but we continue to do very, very well. I alluded to that deal that we closed earlier. So it really has become a situation where in no surprise customers want to speak to us and we should be speaking to them in their language.
And that is the whole idea behind the industry strategy, and it starts with that. It starts with the messaging and the creation of the solution. It also moved into making sure they're organized carefully and we've done that very carefully over the last 2.5 years in physical organizations that focus on vertical markets.
And then the third is to start delivering product, which we announced, again, just before Dreamforce around Health Cloud and Financial Services Cloud. So it's really a three pronged industry strategy that is resonating with our customers. They want more of it. They certainly don't want less of it.
And we already had a very compelling and differentiated solution, but when you also add this sort of layer on it with the industry messaging and going to market by industry and also adding to this product set, it becomes super compelling and customers really, really like what we're doing.
Your next question comes from Kash Rangan with Merrill Lynch.
Marc, one question for you. When you look at the company from a $1 billion to $5 billion, Service Cloud really led that engine of growth. As you look to expand the business for up about 50% to a $10 billion revenue company, what are the lead engines here? Obviously, service and sales as big as they are, they cannot get you to grow as rapidly.
So are we going to see other engines come to the forefront in order to help you to increase your business by 50%, be it analytics or platform or verticals? And one for you, Mark Hawkins, as the renewal business becomes larger and larger, what kind of impact does it have on your margins?
Well, I think this is a great question, Kash, and is something that Keith and Mark and I are talking about with Alex Dayon as well almost every single day, because we're working on our fiscal year '17 budgets. And when you look at the great success of a lot of these core products, we want to continue to fuel them.
Certainly, Service Cloud is amazing. Marketing Cloud, obviously, is also amazing, and Sales Cloud, of course, has achieved a level of revenue that we never could have anticipated and continues to grow. And we have other, as I said, kind of swimmers in their lanes doing very, very well.
Now, in addition of those core products, especially with the tip of the Marketing Cloud and its outstanding performance, especially since we acquired ExactTarget and integrated that very deeply into the company, I think also you have to look at what Keith has done with public sector, which is very exciting for us and is a huge opportunity for our company.
And of course, the verticals where we're continuing to build some new products, including our wealth management product that we've announced and our health product and other applications categories that we see, and that I will also have to say ISVs. So ISVs remains a really powerful growth channel as well.
So if we have any problem with Salesforce, it's that we have a huge amount to invest next year, but we can't just peanut butter and give everybody something. We have to make some bet and to invest in some these winners that I'm talking about, because we have had some phenomenal results as well.
So one of the things that I just want to jump in on, Marc, on that point is, the second aspect of the question, which is around renewals and what we saw there from margins, Kash, I'm happy to address that. The first thing we always think about obviously is customer success.
And we want to make sure that happens and that really promotes renewals. And we'd love the attrition rate, Kash, it's been happening. You track the company for a long, long time, and you watched that come down now into the approximately 9% range and that really helps us.
And so as we think about margins going forward, as it relates to renewals, one of the things I just would almost level it up and say, all of our unit economics suggest that we can hit the mid-30s in terms of our operating margin over the long-term at mature revenue growth rates. And part of that is because we're taking good care of the customer, part of that is because we keep the attrition rate low and part of that is we continue to get scale with unit economics that we can see today.
So Kash, I think the long and the short of it is, as that renewal business continues to grow, our number one priority is to take care of the customer and number two is we will fulfill the operating margin in the mid-30s, long, long-term.
Your next question comes from the line of Mark Murphy with JPMorgan.
My question is for Marc Benioff, Aneel Bhusri recently said that if the first 10 years is about cloud, the next 10 years is going to be about data and analytics. And he commented that there won't be any difference between the transaction systems and the analytical systems. So I was just wondering first off, Marc, what do you think of that statement and how far do you want to push the boundaries of data science at Salesforce?
In other words, do you think you would have more of a focus on analytics to support sales service and marketing or are you thinking very broadly pushing into machine learning, predictive behavioral unstructured data, massive data volumes for Internet of Things, and really becoming a hub for essentially any kind of data?
Well, here is how I look at it, which is, Aneel is a very close friend of mine and I just got a text from him, while we're on the call here. And I look at it differently and I'll tell you why. I think the next 10 years is the age of the customer. I don't think it's the age of data science or the age of machine intelligence or the age of cognitive or the age of mobility or the age of social or the age of cloud or whatever, okay, because all of those things are going to be important in the next 10 years.
All of those things, the cloud, social, mobile, data science, deep learning, MLP, machine intelligence, those are table stakes. Those are table stakes. What you're going to do with that technology? Who is not using those technologies? Phillips is using that technology. GE is using that technology. Apple is using that technology. Cisco is using that technology. Coca Cola, Unilever, they're all using.
Look, if the next 10 years for these companies is going to be about customer, what are they doing to build a world-class customer experience? How do they transform from being product companies to customer experience companies? And as millennials takeover in these enterprises, they're going to be much more focused on experiences and that is going to be the transformational lever for growth with these companies.
And I think that if we get to into any one particular technology, or if I was to all of a sudden wave the flag like I used to do 15 or 16 years ago for cloud, okay, that would be a huge misstate for a company, because the number one thing, most important thing to this company is the customer.
So there was a really good discussion between Ginni Rometty, who is the CEO of IBM and John Stumpf, who is the CEO of Well Fargo Bank at a conference that I was just at put on by Fortune Magazine here in San Francisco, and I'm sure that the transcript is available online, but you will see that when she is discussing her strategy is to become the cognitive company. And when he is discussing his strategy it's to become the customer company.
And I think that we too have to decide what kind of companies are we going to be? I'm going with customer-company. I want to be a customer company like John Stumpf does. He is all about the customer, maintaining the integrity and the fidelity of the customer relationship.
I want to help him do that, and yes, will cognitive help him to do that? Yes. Will cloud help him to do that? Yes, it's doing it. Is mobile, yes; social, yes; IoT, yes; all of these things. But let's keep our eye on the ball, which there is a transformational force that is wafting its way through all of these companies and every company is afraid that they're going to be uberized out of the world. And they see it happening. And it could be financial services. It could be IBM, okay.
Every company is worried about -- look at the decline of IBM over the last decade. Technology is shaking every company at its roots. So that's why the companies who will be the most successful are the ones who are most connected to the customers, because the customers are the ones who guide us into the future. They are the ones with the true vision of where we have to go. So I'm going with customer on this one.
Your next question comes from the line of Karl Keirstead with Deutsche Bank.
First off, Marc, I love the interview format with you and Keith. Please do that again, it makes the call pretty entertaining. I've got two questions for Mark Hawkins. Mark, at Dreamforce in the Analyst Day, you talked a little bit about the renewal activity skewing a little bit more fourth quarter. And I wanted to just check to make sure you're as confidant that that will happen, as you were a few months ago.
And then secondly, you talked about the mix of annual invoicing hitting 79%, that to me as well felt a little high and I thought maybe you could explain why it did? And if that rate of increase is likely to continue?
Happy to do both there, Karl, and again good to talk to you. Let's just talk about the second question first, and then we'll go back to the renewals. I'll say the first thing is that we are pleased, we have been on a path to just increase our invoices to annual from FY '12, so we've been on a steady path with continuous improvement. And we report out when we next progress, and last quarter we continued to make progress.
As you noted, Karl, year-on-year, we went from 74% of our invoices being annual to 79%, and so that is just good progress, good execution. We're pleased to see it. It works well for lots of and lots of different reasons. And that added, as I called out, about roughly 2 points of growth to deferred revenue year-on-year.
But I think we have continued runway on this in the sense that the more enterprise business we get, the more natural it is for people to go to the annual terms that we're looking for. So I wouldn't expect any sharp turns, Karl. I think about this is a steady progression with, yes, more runway in the future. Key thing about it is moderate and that's what we're intending and I think it's just good execution. That's number one.
Number two, in terms of renewals, and one of the things for everybody on the call just as a reminder, we just talked about the quantum of our renewals. If you think about when they show up, and Q4 is when they show up the most, when you think about kind of the historical patterns of our business, and in fact, that is what we expect.
And that's all comprehended in our guidance, which we feel really good about both for Q4, the strong finish, and also as we point into next year. Obviously, hitting something worth $8 billion to $8.1 billion on topline revenue, we feel really good about for the company to continue to grow and execute at the scale. So those are my answers on both points, Karl.
There are no further questions at this time.
End of Q&A
Great. Thank you so much, Ashley, and thanks so much everyone for joining us. Sorry, we couldn't get to all your questions. If you have any follow-up for us, you can reach out to us email@example.com. And if you miss the world tour in New York today, you'll have multiple other opportunities. We'll be in Tokyo and Los Angeles in December, in Minneapolis, Atlanta, Houston and Dallas and Seattle. And so if you'd like to hear some of these great transformational stories of how Salesforce is changing customer experiences, you can tune into that. Otherwise, we look forward to giving you an update on our progress in Q4 in February.
This does conclude today's conference call. You may now disconnect.