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Here’s the entire text of the Q&A from Salesforce.com’s (ticker: CRM) Q3 2006 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Question-and-Answer Session

Operator

Thank you today’s question and answer session will begin that is electronically. If you would like to ask a question please do so by pressing the “*” key followed by the digit “1” on your touchtone telephone. If you are using a speaker phone please make sure your mute function is turned off to allow your signal to reach our equipment. We’ll take as many questions if time permits. Once again please press “*”, “1” on your touchtone telephone to ask a question. Our first question today would be from Kash Rangan from Merrill Lynch.

Kash Rangan

Thank you very much, congrats on the quarter. One question for you Marc, and one for you, Steve. Question for you, Marc, how do you see the landscape changing as you get into 2006 with cable now tucked into Oracle and there is increasing volume talks from the big three Oracle SAP march talked about getting into the on-demand market. How do you see that changing the landscape positively or negatively? And question for you, Steve, with the cash flow as strong as it has been this quarter, almost equal to last year’s full-year cash flow, how do you see this on a quarter-to-quarter basis moving forward? Do we get more predictable? Or was there any one-time thing that really helped the cash flow this quarter? Thanks. Congrats again.

Marc Benioff

Thanks Kash. In regards to competitive situation, also before I go on, I misspoke. I think I said during my comments that we are the third-largest independent provider of on-demand business applications in the world. Actually, I meant to say that as of this quarter, we now passed what is now the second-largest provider of on-demand business services in the world, WebEx. And we are now the largest independent provider of on-demand business applications and the world delivered on-demand. In regards specifically to the competition, we as you know, have a rapidly changing competitive environment, at the beginning of this quarter of course, there was a very large independent CRM company out there, Siebel but its now basically suffered the same fate as PeopleSoft. We expect the same market dynamic to take hold. And so we’re optimistic about that from a competitive position. But also of course, we’re cautious. We’re watching what everyone is doing. Microsoft is making announcements; everyone is making announcements. But in terms of technology, we are really the only ones who have really delivered kind of the solid incremental improvement. And also, we are the only ones that have been able to deliver the solid customer success in both the small, the medium and the very large deployments. So we are very optimistic about the competitive situation, and we are excited. Certainly, there was a large CRM company out there that is essentially disappearing and getting integrated into Oracle. And so from an independent CRM perspective, that makes us certainly one of the largest stand-alone independent CRM providers in the world, is an exciting place to be right now and doing it all on-demand.

Steve Cakebread

And with regards to the cash flow comments, clearly we do manage the cash flow and it is a very important metric that we look at. We had an extraordinary quarter this quarter as everybody was focused on managing the business from operations. It’s still tough to do the predictable part as we still ramp up our growth in a variety of countries in the world. And as you know, the big drivers of cash flow are net income, changes in receivables, and timing of payables and accruals. So we had a great quarter. It’s a key focus for us. But also, we’re still in this heavy ramp cash flow area. It is going to be tough to be predictable for a while cash.

Operator

We will go next to Rick Sherlund from Goldman Sachs.

Rick Sherlund

Thanks a couple questions. Steve, you could explain why we are going up to a 45% tax rate next year. And also, is there more evaluation reserve left to be reversed? And any comments on subs for Q4?

Steve Cakebread

Good questions, Rick. On the valuation reserves, there is some. But those will all go to the equity, so they won’t necessarily impact the profit and loss statements going forward. A lot of the valuation reserve is around stock options. And those will go like I said to equity. With regards to the 45% tax rate, typically, a company will, as they’re growing, they start to make income and they start to pay income taxes, which is a good thing I guess. With our international expansion, we have issues around where we make profit versus where we have deductible net operating losses. That causes this rate to be slightly higher than you would expect from most companies in this growth phase. But I think you’ll see that start to moderate over time. But for next year, our current estimates, and we will certainly revise these as we get into our budgets, look at our specific geographic mix of revenue and income and where we are having losses versus where we make money. But this our best guess at this time. But I think also you can anticipate it will moderate over the next couple years as well.

Rick Sherlund

And subs for Q4, any stabs at that?

Steve Cakebread

Subs at Q4, we haven’t necessarily been giving guidance. The revenues will give you a good indication of our expectations of the business going forward. But it’s like we said and I said in my commentary, subs are certainly an area that we manage to. But it’s tough to predict those because our customers drive that number so much.

Rick Sherlund

And the 43,000 increase, do you give any direction on how much of that was from new customers versus existing?

Steve Cakebread

There was a lot of add-on business that we got. We talked about in Marc’s component as well as mine a lot of existing customers got to add on. But we also added 1,800 new customers, which is the top number. So I can’t give you the percent breakouts, but it was good business across the board. New customers coming on, the 1,800 new customer adds was fairly significant for us. But we also in terms of subscriber adds had great add-on business from existing customers. So again, it was across the board not so much in big, big deals though like we have had in previous quarters. This was just good solid business across all aspects of it.

Rick Sherlund

Great quarter. Thanks.

Company Speaker

Thank you, Rick.

Company Speaker

Thank you, Rick.

Operator

We will take a question from Peter Coleman from ThinkEquity.

Peter Coleman

Thanks guys. Just one question on Mirrorforce launch, at least the first phase. We talked a lot about obviously the cost of this. I’m wondering what you might be able to comment on the opportunity from the revenue side may be, especially from the large end of the market, if there are people demanding this type of failsafes back end for you and may this unlock some bigger business down the road?

Company Speaker

Well, as you know and as I commented, salesforce.com has been building a datacenter. We built our business on a datacenter that is located in Northern California. And honestly, we just outgrew that architecture, we outgrew the datacenter, we outgrew the power and the bandwidth available in that datacenter and on and on and on. We have our customers come in on a regular basis, and they do detailed reviews of our infrastructure technology as well as security and so forth. And we really believed that it was time for us to upgrade that datacenter. We made a decision when we said, okay; we are going to cut loose this old datacenter. We want to not only build a brand-new datacenter with a state-of-the-art architecture built on the latest technology, but also we want to be able to build a mirror of that data center. And so we built a brand-new data center in Northern California. And we have also built a brand-new datacenter in Northern Virginia. And I’d have been to both datacenters. In my opinion, they are state-of-the-art. This weekend, we cut the old datacenter loose, so we cut the cord. We moved all the data, the applications, the software, everything from the old datacenter into our new datacenter architecture and turned it on for all of our customers worldwide. And that datacenter was live and operational at 8:30 San Francisco time on Saturday night. Since then, that datacenter has been running just fine. And now our attention is focusing on our Northern Virginia datacenter to create not only just a hardware mirror, which is what it is today. So in many ways, it is redundant that if for some reason we were to lose the entire datacenter, we would cut over and work to cut over to that Northern Virginia datacenter. We’re now working to make that a live mirror or replicated, fully replicated mirror datacenter so that if for some reason we lost the Northern California datacenter, it would be an automatic failover to the new Northern Virginia datacenter. We expect that software transition to happen this quarter. So we are very excited about the new datacenter architecture. The majority of that investment occurred in this quarter and partially in the second quarter as well. And we are very excited to be on this new infrastructure.

Peter Coleman

Any plans on needing to locate one over in Europe somewhere at some point?

Company Speaker

We today have this very solid infrastructure. We serve all of our customers worldwide with tremendously fast response times and excellent reliability out of our datacenter. And we expect that over time to add other datacenters. And, but when we are going to do that and where they are going to be located is something that I don’t think we are willing to talk about this point.

Peter Coleman

Okay thanks a lot, guys. Nice job.

Company Speaker

Thanks Peter.

Company Speaker

Thank you, Peter.

Operator

We have a question from Jason Maynard from CS First Boston.

Jason Maynard

Hi good afternoon guys.

Company Speaker

Hi, Jason.

Jason Maynard

Hi guys, a question about 2007. From an operating margin perspective, it appears you are going to be hiring fairly aggressively in sales and building out infrastructure. Steve or maybe Marc, can you guys talk a little bit about how we should think about margin expansion for the next year or so relative to your growth opportunities? And what is the dynamic in as much as you can quantify this between points of revenue growth versus operating margins?

Marc Benioff

Let me just comment on that briefly, and then I’ll pass it to Steve. Unlike a lot of enterprise software companies who today are trying to maximize their maintenance revenues amid declining topline growth and try to milk their existing customers for these kinds of additional fees, our approach is very, very different. And that is we believe we are in a new segment, a new market and a new opportunity. And we intend to capitalize on it. Now you have been following our company for a long time as most of the analysts on this call. You’ll know that that is not a new mantra for salesforce.com. We have said for a long time that we are in aggressive expansion and investment mode. And honestly, as these competitors kind of just vanish, we are more energized by that and feel that it is in our interest to expand our company on a global basis, not only in infrastructure which I just mentioned, but in distribution capacity and a lot of different areas. This is really becoming our time. But to maximize that and to get the market share that we believe is opportune for us, we need to invest and invest heavily. And that’s very much reflected in our FY ‘07 guidance. So while you’re seeing again very strong topline growth for any other midsized enterprise software company, perhaps some of the highest that you’re seeing in that sized company, we are also investing very strongly and we want to be able to continue to invest very, very strongly as well.

Steve Cakebread

Here I think Jason, a good example is, we talked about adding Steve Russell to Asia-Pacific based out of Singapore and going after the areas between south of Tokyo and north of Sydney. So you’ll see us continue to ramp that region. Also keep in mind and we’ve discussed this before, we serve a lot of customers in over 47 different countries. But we don’t have our physical presence there yet. And this is going to take some time to build out. One is, and let’s not forget the US, we don’t have a physical presence in a lot of major cities in the US, which we are going after let alone Europe and Asia. So we certainly are going after growth. We certainly respect the profit margins and the goals there, but they’re going to remain modest vis-à-vis going after market share, increasing our distribution and getting presence in all the countries we want to be in for our customers.

Jason Maynard

Okay, just one follow-up on that. Was there a change within the last say 30, 60 days as you started looking at your planning to accelerate the investment in infrastructure and hiring, given some of the moves by Oracle acquiring Siebel and Microsoft?

Marc Benioff

Well, I think that, we could not forecast specific actions like that. But certainly, we can forecast the general movements, we don’t think that companies are getting excited about buying big software packages and buying big hardware packages and trying to put it all together when they get this very affordable, low-risk approach with our service. And now as you know with the AppExchange, we are trying to get our customers to diversify their portfolio salesforce.com inside their companies, how do we want them to use us in new and exciting ways. And this means that what we are trying to do is push, we want to push the topline numbers in the topline revenue growth. And we want to push the topline subscriber number. We want a market share gain. And so this year, we have been able to get that. And we feel, if you look at this fiscal year compared to last fiscal year, this has been a very solid year for us so far. And we are by our guidance on the fourth quarter; you can see that we feel good about that as well. But next year is another pivotal year for us. And I do not want to say that every year is a pivotal year for us but it is. It is another pivotal year for us that we need to be able to execute, at Salesforce, we have a tremendous vision around the end of software as you know. But there are three values that are extremely important to us and they are the customer and partner success but also growth is very important to us as well as execution. And to make these things happen to make that values combination really occur internally, we need to invest. And the datacenter change is just a great example because it not only shows what we’re preparing for in terms of new customers coming in but also the tremendous accomplishment of our employees and technical teams in making this very smooth datacenter transfer. So this is very much our mantra ongoing.

Jason Maynard

Okay, thank you very much. Nice quarter.

Company Speaker

Thank you.

Operator

We have a question from Laura Lederman from William Blair.

Laura Lederman

Yes good quarter. A few questions. One, I don’t know if you could please give us any update on churn? Has that changed at all from the last number you gave? And also for Steve, any thoughts on cash flow, free cash flow for full year ‘06 and ‘07? And then I have got some separate questions.

Company Speaker

You know, Laura, we talked about churn last quarter, and we probably won’t give any updates for a while longer on that, continue to say however we’re focused on customer retention and customer success. And I think the fact that we had such strong, good add-on business from existing customers is testament to the fact that we are providing solutions that people love to use and keep adding to their organizations. On cash flow going forward, like I said, it’s a major focus for us but it is still tough to predict given the build-out that we have and the growth in the business that we are experiencing right now. Suffice it to say it’s one of the key metric focuses for the management team.

Laura Lederman

Also switching gears and maybe this is a question for Marc, so far, since Oracle’s announcement that they are going to acquire Siebel, is your sense that’s been a net positive when you talk to your salespeople and your customers in terms of creating a decision point in the Siebel base that benefits you?

Company Speaker

Honestly, there is, two net positives if you want to put it that way. First of course is Siebel essentially becoming part of Oracle, creates tremendous uncertainty for the seeable customer base and prospect community. And so for our salespeople, they can sell into that uncertainty and we are optimistic that we can train them and execute with them to be able to do that. And that’s a process that we are engaging with. And then two, of course Microsoft I am sure you saw, 2 weeks ago or a week ago now, coming along and announcing that they are moving in on-demand; that on-demand is the future. It’s the future of technology, just about every major CEO of a software company has now said on-demand is the future and it is the way their company is going. I am sure you saw Henning Kagermann’s comments last week to Dow Jones Newswires, to Chris Writer. I am sure that you have seen all of the software CEOs say that the future is on-demand. We’ve been saying that for about almost 7 years now; it will be 7 years March 8th. But we have done something different. We have written the code. And you’ve got to write the code; you have got to build the software. You have got to get the datacenters. You have to create the scaleable infrastructure. One thing that’s very unique about our offering is, as you know, we have very large customers. And we announced ADP with 6,100 live subscribers all the way down to companies with one user or five users. That’s a very unusual thing in the software industry to see a technology company that has created one piece of code that can run small, medium and very large companies. So while it’s very exciting on the high end with kind of the capitulation of Siebel and kind of their disappearance as Tom Siebel’s departure from the software industry entirely, as well as in the low end with Microsoft telling all their customers that the future is on-demand. We are excited about the market trends. But we have to execute, and that’s really the key. Every quarter is a new quarter. Every day is a new day. Every month is a new month here. We don’t take anything for granted. The software industry, you know it’s very tough; it’s very competitive. They have a lot of competitors out there. We probably must have over 100 competitors, is my guess. And they are all selling against us and honing their messages and trying to figure how they are going to beat us. Our job is to take our investment and to win those deals. That is a day-to-day process. And we just have to continue to be able to execute that. Fortunately for us, this quarter was very good with strong subscriber growth and strong customer growth and strong revenue and net income and then some. But every quarter is a new quarter, and we try to do our best every day. And that is how we take it, one day at a time.

Laura Lederman

Thanks very much.

Company Speaker

Okay thanks Laura.

Operator

We will go next to Brendan Barnacle from Pacific Crest.

Brendan Barnacle

Thank you I wanted to just follow up on the earlier cash flow question. Any, even high-level sense of what may be percentage of revenue we may see that traps the cash flow in 2007, any high-level ideas? And then AppExchange is that, can you give us a sense of what percentage you factor that into set the revenue guidance for next year, what sort of contribution we might look for that for next year?

Company Speaker

On the cash flow Brendan, a couple of things here where we are early stages on our ‘07 planning, I just want to throw that in. And then secondly I guess, we have not typically given guidance around cash flow at this time. Again, it’s a focus for us, but it’s also a difficult metric at the moment to take a look at because of the wide-ranging investments that we are making. Marc, do you want to talk about AppExchange?

Marc Benioff

Yeah, I would be delighted to, when we look at AppExchange for us and, I’m not going to avoid your question with this answer, but I want to give you an honest answer. And that is it’s taken us almost 7 years as I mentioned to get salesforce.com to where it is today, people always tend to overestimate what you can do in 1 year in our industry and underestimate what you can do in 1 decade. And we have a 1 decade dream at salesforce.com, and we have our targets for where we want to be after a decade. We’re almost 70% into that timeframe, and we feel good about where we are right now but we have higher goals of course. Now with the AppExchange, it is not even live yet; it is coming live this quarter. And we look at it exactly the same way. We have got a 10-year horizon for this product. We think that salesforce.com is a killer app. I will be totally honest with you; I think AppExchange has the potential to be our second killer app. But it’s not going to be an overnight sensation. That’s not how it has been architected; that is not what it’s about. AppExchange is going to require investment. It’s going to require time; it’s going to require caution over a long period of time. There is a lot of things that we have to do right to make AppExchange work. AppExchange is a great idea. It’s one of the most exciting things I have ever worked on, as I have mentioned. But we need to focus on it over a long time. I personally work on a lot of the plans for that product. As you probably know, I’ve got some spectacular engineers and architects and product managers and business development executives on that. But we will need time to make that happen. We then of course announced it in September. And then we will need to grow it and extended enhancement. It’s not kind of a consumer product, which starts out, you launch it. And 9 months later, it gets replaced with something else like a new TV or the next version of the iPod or something like that. This is something that you really take a long-term view on. And that’s what we’re going to do to make this successful.

Brendan Barnacle

Great thank you.

Company Speaker

Thanks Brendan.

Operator

We will go next to Philip Rueppel from Wachovia Securities.

Philip Rueppel

Yes thank you. A couple questions. First of all, you talked a number of times about investment in the Salesforce. Could you give us a little color on how do you plan to do that? Is it really just in geographies, where you don’t have as broad a presence? Or is it more on the enterprise side or inside sales versus enterprise etc? Just how you think you’d like to expand going into ‘07? And then second, on Mirrorforce, I am trying to balance some of the comments that suggest that much of the investment has already taken place. And it appears from where you are at least in turning it on, that it appears to be true. I’m trying to balance that with sort of the commentary that gross margins will still be under pressure as we enter the fourth quarter. Can you tell us what still has to be done with Mirrorforce? And then kind of when, that step function will be, 90% or 100% complete?

Marc Benioff

Well first and foremost in distribution, in our distribution strategy, it is an essential part of our business. We do need to invest in it. We have not found other channels to be able to sell our product other than our self. There have been other companies who have come along and tried to develop other channels and have failed at that. We don’t think the traditional channels are totally ready for that. We’re working in trying to develop those channels. We hope that ISVs and software developers can participate in the AppExchange, could be another channel for example. But very much our distribution is self-made and self-executed. And as the Company scales, as it goes into new geographies, as it goes into new markets, as it goes into a different sized companies, we need different types of different distribution. But again, those are self-executed initiatives, and so they do require our own investment. I will let Steve comment on the Mirrorforce investment going forward. But let me first just give you a little bit of color that the investment that we just made was kind of a step function up. That is, we did just make, I think we characterized it on the call last time, this $50 million investment in Mirrorforce. This was a significant investment. These datacenters, there’s three of them that are replacing one. The three datacenters are two production mirrored datacenters. But also, we have this new development datacenter, and these are world-class initiatives. And it did require us to initiate a step function that we were willing to kind of bear down and take the majority of which was in the third quarter and partly in the second quarter but now we assume in our expense run rate. But let me just say of course we will buy more technology of course as we continue the lifespan of this Company. And we expect to continue to upgrade and update our systems over time. But these step functions don’t happen every day.

Steve Cakebread

Marc is right in that keep in mind we have leased a fair amount of our equipment. So as we bring on the leases, we start to expense it, a lot of the equipment obviously showed up in the last quarter. So you got the step function up. Now the fact that they turn on the solutions in the fourth quarter means we will have some amount of expenses that will be there in the fourth quarter as well. But it’s a big step function year over year that you should look at. And since it is a fairly large expense in the third and fourth quarter, then you’ll start to see the leverage come about as we grow our subscriber base going into next year.

Philip Rueppel

Great, thanks very much.

Company Speaker

Thanks.

Operator

We will take a question from Thomas Ernst from Deutsche Bank.

Thomas Ernst

Good afternoon and thank you.

Company Speaker

Hi Tom.

Thomas Ernst

Marc, quick question here on the IBM side. Any developments there in, how you work with IBM as a partner?

Marc Benioff

I will give you my honest answer. There are certain groups in IBM that I think really understand how to work with us. And we’ve tried very hard to work with those groups over the last 5 or 6 years that we have been out in the marketplace. A great example is the WebSphere group. You probably know that IBM has done extensive integration work between WebSphere and our service. Our customers can buy WebSphere, build applications, but use salesforce.com data to drive WebSphere applications. And we really like IBM’s WebSphere organization. However, as we have moved around in the company and talked to different organizations at IBM and of course we have some very senior former IBM executives in our Company, including Jim Steele who is my President of Worldwide Distribution, who was 22 years at IBM, including running significant parts of their Asian-Pacific and Americas businesses. Not all parts of IBM really understand what it is we do, why we are successful, how we are successful and what we can offer customers. I think IBM is a company that is in transition. They have done a great job at advertising on-demand and educating people on on-demand. They do some beautiful television commercials. They just have no products. So we thank them for that market development. But we just have not seen them be able to understand how to work with a company like ours to be perfectly honest with you, except in isolated situations like the leadership in their WebSphere group.

Thomas Ernst

Okay, so no real shift either relatively recently either, I would assume?

Marc Benioff

I don’t expect anything honestly. I do not have a lot of optimism about IBM’s ability to deliver an on-demand, nor have I in the past as you know.

Thomas Ernst

Maybe a follow-up on that as well. IBM has been closely aligned with Siebel. But what are you seeing directly out of Siebel as a competitor? I recognize they are not everywhere. But they have been fiercely aggressive in trying to win business in the past. Do they still have that same posture here right up until now? Or has anything changed in terms of what you have observed tactically out of them as a competitor?

Marc Benioff

Well, very good question. First of all, the first part of your question, as you know, Siebel built their on-demand product on DB2 and WebSphere. And that did not go very well for Siebel as far as we can tell. As you know, they’ve had fairly pathetic growth in on-demand. But when we talked to customers, we believe that Siebel has suffered substantial quality issues also with their product, including poor performance by IBM’s datacenters. They have not had the same level of customer success that we have been able to deliver our customers. For more information on that, you should just talk to their customers. I think that will bring you the information that you are looking for. But also let me say that we believe that much in the same way that PeopleSoft has disappeared out of our opportunity pipeline over the last year since they have been acquired, we expect that that very well could happen as well with Siebel. It’s still too early to tell. I do not want to give unbridled optimism in an area that’s unknown. But customers do not respond well to this type of acquisition situation. They lose confidence in the vendor. They tend to stop looking for them for new solutions. That may be different than existing Siebel customers, who are trying to lower their long-term maintenance agreements by buying licenses or additions in any specific quarter. But this is not something that we thank the customers are very excited about going forward.

Thomas Ernst

Okay thank you.

Company Speaker

Thanks Tom.

Operator

We will go next to Ross MacMillan from Morgan Stanley.

Ross MacMillan

Yes thank you. Steve, just a quick one first on capital expenditures. It sort of bounced around for three quarters. I think it was nine and then three and now five. Can you just help us understand I know you’ve got to build out the datacenter, but a lot of that is leased. So I’m just trying to understand what is making up those numbers? And then as we look into next year, would you expect CapEx to actually be up year over year?

Steve Cakebread

Well, you are right. We do lease a lot of equipment. We also have and did buy some software and other capital assets over the last two or three quarters. You have to keep in mind as well as we add offices, we have to capitalize leasehold improvements as well. So you’ve got a number of effects going on because of our expansion. We are more focused on cash flow from operations than capital asset growth. But it does happen just because of those couple activities. For next year, we haven’t gotten into the budgeting cycle enough to know. Certainly, we will continue to invest. As Marc said, we add datacenter equipment on a fairly routine basis. We are adding offices on a fairly routine basis as well. So you should expect us to make future investments. But it is not an area that drives the company. It’s really more focused on cash flow from operations.

Ross MacMillan

Great., maybe one just for you, Marc. Obviously pricing was something we looked at last quarter. It seems to be a little bit more stable this quarter. I’m just curious as to, clearly at least some accounts; you would have had more competition from a pricing perspective from Siebel. Is that changing at all? And in addition to that, just how do you sense customers are, viewing the prices you charge? Are they still very much willing to pay? Or do you have to give incremental discounts to some of the larger accounts? Thanks.

Marc Benioff

Well, pricing is extremely interesting part of our business because we do have a new pricing model. Customers have to learn about kind of this new on-demand pricing model, where you kind of have less risk because you’re paying over a long period of time. There’s more consistency. Customers really have not I think appreciated this change from kind of the typical end of the quarter license slam. And I would say that we’ve seen a lot of change in the pricing situation over the last few quarters. And I think that’s probably reflected in our results. One thing that we probably will see changing going forward is as we get ready to release our winter ‘06 version, I expect that we may have some different products, combinations and pricing combinations for customers. So that I think will probably be the only change that we will really see in pricing going forward is our own implied pricing changes, which you will see as we get ready to bring our winter ‘06 production with some exciting new high-end features associated with that product.

Operator

We will take a question from Heather Bellini from UBS.

Heather Bellini

Hi thank you. I was just wondering back to the cash flow question, I am sorry to keep hitting this, should we expect that your cash taxes paid are also going to be similar to 45%? Or is that just a P&L 45% we should…

Company Speaker

It is a P&L 45%. Because now that we have the deferred tax assets, you’re going to see us have the ability to have expense and tax cashes paid differently.

Heather Bellini

So, what type of cash tax rate should we be modeling? Because I think that’s what everyone is kind of perplexed by, is what type of cash flow number are we going to have next year and with net income, with people’s EPS numbers coming down due to the higher tax rate, how do we think about the cash taxes to adjust for that?

Company Speaker

If you have the tax, I mean certainly, we are looking at that. But again, we’re early in budget. It has a lot to do with country mix. The effective tax rate that we have the tax expensed is driven by a lot of that. It is virtually impossible at this time to tell you what that tax cash is going to be. And I am probably, not an area I’m going to go to right now just given the state of the budgets and where we are at. We can talk further later on this year when we give the Q4 guidance. But that number is pretty darn hard to call based on the taxing jurisdictions you are in. You guys know we are focused on cash flow from operations. We’ve done very, very well this year. I don’t think that attitude is going to change. But really it is about changes in receivables, it is about the net income you deliver, and it’s about changes in deferred that really drive cash flow from operations. The tax cash payment is not going to be a big driver.

Operator

And we will go next to Dave Koning from Robert W. Baird.

Dave Koning

Hi guys. Another great quarter. I just had a question on the Service and Support group. I’m wondering how many user adds came from this group in Q3? And then how many total subs are in this group and what percent of your total subs this could represent at some point?

Company Speaker

Well, it’s a great question, and I wish I had the answer honestly. I do not know if you saw the slides from our Salesforce Service and Support announcement. But I would just characterize that product as roughly about 10% of our business. That probably is not an exact number; that’s an approximate rough scale. That’s how many customers we roughly said we had in that area that are using this type of functionality and product. There is certainly an opportunity for us to expand in our sales customers the use of service and support. We are working to identify a demand in our customers for this product. We’re marketing aggressively to them. And like AppExchange and my comments there, this is a long-term initiative for us. We are in this one only about a year. For where we are after a year, we are very comfortable. We think that there’s more work to do. We have made substantial investment in the Salesforce Service and Support group over the last I would say, 6 months. We hired a new Vice President and General Manager to run the group. She has done a fabulous job. She has also added a number of product management and marketing and business development executives. We have hired quite a few new developers. And we are looking to invest in the long-term in the Salesforce Service and Support product line. And I am cautiously optimistic that this also could be another very substantial way for us to be able to expand inside of our existing customers. That said, let me just a step back and say Salesforce as a product remains our primary product that we’re selling. It is where we are closing most of our deals. It is our Trojan horse. It is the product that goes in to the customer first. And from there, we expand through sales or Service and Support or through AppExchange applications. And we feel very, very good about the direction there and the potential of that product.

Operator

We will go next to Peter Goldmacher from SG Cowen.

Peter Goldmacher

Hi, just a quick question on the winter release and what sort of features will be in there to tantalize the option of that exchange?

Company Speaker

Okay, well thank you for that question. In the winter ‘06 release, there is of course the whole AppExchange platform as you know, Peter. There is the ability to build applications for the AppExchange, which is an integrated and inherent part of the winter ‘06 release, builds your tabs, your forms, your workflow and so forth. But of course, there’s a major new feature in the winter ‘06 release, which is the ability to save your application. We have never had a save button before. You can hit save, and it packages all that stuff up. And then you can save it off to the directory, either a private or a public directory. And that ability to save apps, we’ve never had it before. So we don’t know how many apps are going to get saved. But we are going to teach people how to save apps. We are going to go out and encourage developers to build and save apps. And then customers are also going to find something else that’s very exciting in the winter ‘06 release. You have seen, Peter, I’m sure you seen the Multiforce technology, which was the on-demand OS and the ability to switch between multiple applications, right? And that has evolved into AppExchange, as you know. You are going to find the ability to go right to that menu, switch between different apps. And then, you’re going to see that there is a more function there. So you will click on there, you’ll say, oh good, it’s Salesforce. So, go to the Service and Support product, oh go to the custom recruiting application or product management application I’ve built. And then it will say more. And then when you go to more, it will bring you the AppExchange and you will say, oh, and now add this additional application. And it will automatically get populated into that menu. Your data will automatically be integrated. The applications will have the same user interface that you are already familiar with, the same data model. Your security model will get inherited automatically. So those are the key functions for AppExchange for the winter ‘06 release. And I’m really, really looking forward to seeing how customers like this technology. I think it will take two or three quarters before we know what kind of traction we have with this. But we are really excited about this opportunity.

Operator

And we will go next to Mark Murphy from First Albany.

Mark Murphy

Thank you Steve, on the cash flow statement, the amortization of deferred commissions has been down year over year for several quarters in a row now, while the revenue is growing 70 to 80%. Can you just walk us through that dynamic? Is there a change in the amortization schedule? And also, Marc, relative to the API calls that you referenced, can you shed any light on the nature of the systems that are making the API calls? In other words, what part of that mix is exchange servers versus ERP apps or other CRM systems or database calls?

Steve Cakebread

Mark on commissions, nothing has really changed. Again as you’ll know, we amortize commission expense. What shows up on the balance sheet is a function of the types of business that we have. If we have a lot of small business, it doesn’t tend to have longer-term agreements and tends to be on shorter quarterly billings. So you will have some influence there. But there’s no changes at all in our programs, and there won’t be until next year. On the API calls to enterprise, I don’t…

Marc Benioff

Well, here’s the deal. I don’t actually now. I guess we could look at it, I don’t really know where all those different API calls are going. Customers are just doing more types of integration. Some of it is happening on the desktops, which is what you mentioned. A lot of it is happening on the enterprise. I can tell you for large customers like Cisco, while we are tightly integrated with their internal systems through a secure Web services messaging, that’s true of a lot of our large customers and so you see deep integration on the enterprise as well as on the desktop, and it’s really across the board and I have not actually seen any characterization of it internally before.

Operator

And that does conclude our question-and-answer session and also our conference call today for salesforce.com. We do appreciate your participation. You may now disconnect.

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Source: Full Transcript of Salesforce.com’s 3Q06 Conference Call - Q&A (CRM)

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