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F3Q08 Earnings Call

November 15, 20075:00 pm ET


David Havlek - Vice President of Investor Relations

Marc Benioff - Chairman and Chief Executive Officer

Steve Cakebread - Chief Financial Officer


Laura Lederman - William Blair

Heather Bellini – UBS

Jason Maynard - Credit Suisse

Brent Thill - Citigroup

Kash Rangan - Merrill Lynch

Greg Dunham - Deutsche Bank Securities

Mark Murphy - Broadpoint Capital

Brendan Barnicle - Pacific Crest Securities

Nathan Schneiderman - Roth Capital Partners

Ajay Kasargod - Piper Jaffray

Daniel Cummins - Banc of America Securities

Steve Koenig - KeyBanc Capital Markets

Mark Verbeck - Cantor Fitzgerald


Good afternoon.  My name is Cara and I will be your conference operator today.  At this time, I would like to welcome everyone to the third quarter '08 financial results conference call.

All lines have been placed on mute to prevent any background noise.  After the speakers' remarks, there will bea question-and-answer session (Operator Instructions).

I would now like to turn the conference over to Mr. David Havlek, Vice President of Investor Relations.

David Havlek

Thanks, Cara, and welcome everyone to's third quarter fiscal year 2008 financial results conference call.  Joining me today as always to discuss our outstanding performance arechairman and Chief Executive Officer, Marc Benioff and Chief Financial Officer, Steve Cakebread.

Before we begin, let me quickly remind you that all of our financial commentary today will bein GAAP terms unless otherwise noted.  A full disclosure of our third quarter financial performance can be found in our Q3 results press release issued earlier today, and also on our Form 8-K issued with the SEC. Additional financial information beyond what is provided inthe press release may also be found on our website.

Today's call is being web cast and a replay will be available shortly following the conclusion of the call through November 23.  To access the press release, the financial detail, or the Web cast replay, please consult our investor relations website at

Finally, let me remind you that the primary purpose of today's call is to provide you with information regarding our third quarter fiscal year 2008 performance.  However, some of our discussions or responses to your questions will contain forward-looking statements.

These statements are subject to risks, uncertainties, and assumptions.  Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements.

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

Finally please be reminded that any unreleased services or features referenced in today's discussion or in other public statements are not currently available and may not be delivered on time or at all.  Customers who have purchased our services should make the purchase decision based upon features that are currently available.

With that, let me turn the call over to Marc.

Marc Benioff

Thanks, David.  Ina fiscal year full of exciting firsts, our third quarter was ahigh point.  I'm delighted to report record revenue, record operating cash flow, and a sharp increase in GAAP profits.  Even more remarkable is that inthe third quarter we also delivered an electrifying Dreamforce that inspired a record 7300 attendees. has become the world's first multi-application, multi-category software service company with a vision that has never been clearer.

Before I begin with the quarter results, let me first make an important announcement about a customer we have signed last week.  I'm absolutely thrilled today to announce that Citigroup has chosen to deliver their financial adviser desktop to 30,000 financial advisers around the globe.

We believe this is the largest and most important CRM agreement of 2007 and our largest deal ever.  After a lengthy evaluation process to assess functionality, availability, security, and integration capabilities, Citibank has selected over every other CRM solution, including Oracle, Microsoft, and SAP.

This is an incredible endorsement for the competitiveness of our company, service and for customer success inthe financial services marketplace.  We look forward to building our relationship with Citigroup inthe years to come.

Citigroup will become our fifth customer with approximately 25,000 or more subscribers joining a list that already includes Merrill Lynch, Japan Post, Dell, and Cisco.  As with other large agreements that we have signed, we will recognize the subscribers in revenue after delivering key milestones, which we anticipate occurring this quarter.

The Citigroup deal follows a third quarter full of noteworthy wins and developments.  So let's get to the details.

Revenue for the quarter was approximately $193 million dollars, an increase of 48% from the year-ago quarter and up 9% from Q2.  That’s more revenue in nine months this year than we did in our entire fiscal year 2007.

At this rate, we expect to bethe first on-demand company to push through the $800 million dollar run ratein the fourth quarter.  Looking ahead to fiscal '09, we're on track to become the first ever on-demand company to exceed $1 billion dollars in annual revenue.  Our on-demand industry leadership has never been more evident.

Our outstanding revenue performance contributed to third quarter fully diluted GAAP EPS of $0.05 per share.  This result included a $0.01 investment gain that Steve will discuss ina moment.  Net profit rose by $6.2 million dollars from last year and $2.87 from Q2 to finish at $6.5 million.  This was an amazing performance when you consider it included roughly $14 million dollars in stock-based compensation.

Even more remarkable was our record cash generation.  Q3 operating cash flow was $52 million dollars, an increase of 70% from last year and up 50% from Q2.  Our year-to-date operating cash flow of $123 million is more than 11 times our reported GAAP net profit for the same period.  Our cash generation really shows the leverage in our model.

As a result, we now have more than $571 million dollars of cash and equivalents on the balance sheet, an increase of $200 million dollars from the year ago quarter.  This tremendous financial success was fueled by another tremendous quarter of customer success.

And increasingly, customer success is being driven by the growing popularity of our platform as a service, which is also behind our largest deployment inthe world, the Japan Post.

During the third quarter, Japan Post continued to expand their massive custom application deployment built on our platform.  Today, less than six months since beginning their rollout, their deployment stands at more than 60,000 users.

This is a remarkable achievement for Japan Post and an exciting new subscriber milestone for the on-demand industry.  As an early adopter of our platform as a service, Japan Post is proving that robust enterprise class applications can be built and deployed globally ata scale more rapidly than ever before on our platform.

Our multi-application, multi-category strategy is working.  Nowhere was this more apparent that in our ever-expanding relationship with Dell.  Dell also expanded its deployment during the quarter and now has become our second-largest deployment with more than 40,000 subscribers.

Starting with a simple CRM deployment, Dell is now utilizing to help manage their partner relationships through our Partner edition.

Dell's customer website is also built entirely on our new Salesforce ideas service.  And less than a year since being deployed, the website has already recorded more than 7500 ideas and more than 500,000 promotions from theDell customer community.

And Dell's Win XPC initiative was the direct result of customer feedback on this site.  I encourage you to visit to see how Dell is collaborating with their customers.

We also added subscribers to existing deployments ata number of very large companies, including Aon, Ashland, IMS Health, Delta Air Lines, Qualcomm and McKesson.  These growth stories are important because they prove that our multi-application, multi-category strategy is working throughout our customer base.

In addition to all of the great expansion business from our installed base, we also added a large number of new customers to our ranks.  AIGhas selected Salesforce Unlimited Edition for roughly 2000 users to help them manage their broker-client relationships.

Citizens Telecom also became a new customer by signing for roughly 1200 subscribers of Salesforce Call Center during the quarter to become our largest call center deployment ever.  They join a growing list of more than 1100 companies using technology to manage their service call centers, including P&G, DuPont, Barclays, S&P, GMAC, Plantronics and Sumitomo.

In all, we added roughly 2800 net new customers to exit the third quarter with approximately 38,100 net paying customers.  This represents an increase of more than 11,000 customers over the past 12 months, remarkable when you consider it took us more than six years to win our first 11,000 customers.

I am also pleased to say that the investments we have been making in our international business are really paying off.  In Q3 nowhere was this more apparent than in Asia.  In addition to Japan Post, we won sizable opportunities at Mizuho, Sampo, Babcock & Brown, Macquarie Bank Limited, ABN AMRO, and Johnson & Johnson.

Our growth in Europe also accelerated inthe third quarter with wins at Siemens, BMW-Rolls Royce, Budget Group, Lloyd's Register, Software AG and Air Comm.  We seean increased opportunity internationally for our services and I'm very excited today to announce that we plan to build our first international data center inAsia inthe first half of next year.

Together with our two U.S. production data centers, this new international data center will bea key component in our global delivery infrastructure and we hope an engine to further accelerate our international growth.  This multi-data center architecture has become a tremendous differentiation to us in competitive situations.

While many of our largest competitors still only have one data center, we will soon have three.  The global shift to software service and platform as a service needs a truly global infrastructure.

The energy behind that global shift was inthe air this fall at Dreamforce in San Francisco where a record 7300 attendees representing 2000 companies and 179 partners saw amazing new technologies and heard world-class keynotes from John Chambers and George Lucas.

Of course, thebig newsat Dreamforce was the introduction of our platform as a service and the unveiling of our Visualforce user interface as a service.  With, developers can now design any application for any user and then deploy that application on any device anywhere in the world. includes our global infrastructure as a service, database as a service, logic as a service through our multi-tenant apex code allowing our customers to run their code on our servers.  Workflow as a service, integration as a service, and now with Visualforce, a framework for building any user interface as a service for any device.

And best of all, everything runs natively in our trusted data center architecture so developers can focus on innovation, not infrastructure.  Already developers like European ERP leader Coda and Latin American leader Datasul have selected the platform to build and run their next-generation applications, again all fully native on our platform.

This is an exciting development for and a game changer for the future of on-demand.  And we are already seeing tremendous momentum for this platform as service technologies from the developer community.  We have shown Visualforce delivering on-demand applications natively to Explorer, Firefox and Safari browsers as well as applications to a diverse set of devices, including the iPhone, BlackBerry and Nokio, among others.

And last month inJapan, we demonstrated native Visualforce applications running on a wide variety of Japanese mobile phones from diverse carriers.  It's no wonder why customers have already built over the 50,000 custom applications with and why ithas become our fastest-growing service.

We also announced two new application services to expand our core software service offering from four to six.  Our award-winning SFA service and support marketing and PRM services will soon be joined by Salesforce ideas and Salesforce contact.

With Salesforce ideas, companies will be able to harness the wisdom of their customers and communities by giving them a place to submit, discuss, and promote ideas.  It's the same technology that powers's own live community idea exchange and Dell's

Salesforce content will bring the power of on-demand to the challenges of managing unstructured data within the enterprise.  This new service is challenging traditional document management applications from the rapidly fading client server era.

Utilizing Web 2.0 technology, such as tagging, subscriptions, and recommendations, Salesforce content will enable users to more effectively manage all of the documents and critical business information necessary for their success.

These new application offerings together with Visualforce are expected to be available before the end of fiscal Q4.  They reinforce our position as the world's first multi-application, multi-category on-demand company.

Dreamforce '07 also represented the second anniversary of the unveiling of AppExchange.  In just two short years, AppExchange has gone from concept to vibrant marketplace, connecting on-demand developers with our more than 38,000 customers.

Today, there are roughly 750 applications on the AppExchange.  To date, more than 280,000 user test drives have resulted in the installation of more than 38,000 applications at more than 13,000 customers.  This is an amazing success and we're just getting started.

Our enhanced platform development capabilities together with our growing customer community make the platform and AppExchange marketplace the most attractive way for ISV’s to tap into the on-demand revelation.

Before I close, let me may make a couple of comments about our outstanding delivery in Q3.  Put simply, our delivery quality has never been better.  During the third quarter, our system availability exceeded 99.98%, a remarkable achievement when you consider that our transaction volume now frequently exceeds 125 million transactions per day.

In total, we delivered more than 8 billion transactions inthe third quarter, more than twice what we delivered a year ago.  There is no greater measure of success than customers actively using our system.  These robust user statistics are remarkable when you consider that the packaged software sold by our client server competitors is known for the shelf wear that it represents.

To close, Q3 was a tremendous quarter.  We have grown from an SFA provider to a CRM provider and now onto a multi-application, multi-category on-demand leader.  We're looking to a forward to a strong Q4 and to achieving our goal of becoming the first ever billion dollar on-demand company next year.

And now with that, let me turn things over to Steve Cakebread.

Steve Cakebread

Thanks, Marc.  Q3 was simply outstanding.  Revenue for the third quarter was $192.8 million dollars, up 48% year-over-year and 9% sequentially.  While currency did provide an incremental $1 million dollars over our forecast, it was primarily strong business demand that pushed overall revenue to nearly $4 million dollars above the high end of our outlook.

For the full year, revenue rose 51% from the prior year to $531.8 million dollars.  Our subscription and support business continues to be very strong, growing 49% from the year-ago quarter to $176.4 million dollars.

As Marc mentioned, we are executing well on our strategy of growing our installed base accounts along with a strong pipeline that once again brought us an excellent mix of new business.

Professional services revenue was $16.4 million dollars for the third quarter, up 41% versus fiscal year '07 but down slightly 1% sequentially.  This sequential decline was not unexpected given the summer seasonality in the business and our strategy of increasing our business through a growing ecosystem and system integration partners.

Geographically revenue inthe Americas was $141.7 million dollars, up 40% year-over-year, up 6% sequentially.  And in Europe, revenue grew 71% year-over-year and 16% sequentially to $33.9 million dollars.  Revenue of $17.2 dollars million in Asiarose 92% from the year ago quarter and 22% from Q2.

The accelerated growth internationally is starting to show up in our geographic business mix.  For Q3, 73% of our revenue came from theAmericas while 27% came from Europe and Asia-Pacific.  For the same quarter a year ago, America-based business accounted for 78% of our revenues while Europe and Asia accounted for just 22%.

The international opportunity remains largely untapped.  So we will continue to invest in sales capacity and the data center that Marc mentioned earlier in his comments over the coming year.

Turning next to our margin performance, gross margin for the third quarter finished at 77%, up slightly from Q2 and more than a full point from last year.  This improvement continues to be driven by stronger gross margins in our subscription and support business, which raised 40 basis points from last year to finish the quarter at just more than 86%.

Despite a lot of rhetoric from our competition, there has been no notable change in the pricing environment and our delivery continues to get more efficient as our business scales.  Gross margins in professional services continued to be negative.  As our SI ecosystem matures, we can modify the capacity of our own professional services business.  And while that will slow revenue growth a bit in professional services, it should result in improved margins over time.

As to operating expenses, as a percentage of revenue, operating expenses finished the quarter at 74%, down 1 point from Q2 and down a full 2 points from a year ago quarter.  The biggest driver of the decline is sales and marketing, which fell to 50% of revenue from 51% in Q2 and in the year ago quarter.

Even as we invest in new geographies where we get very little immediate return, we're still driving better and better sales efficiencies into our model as our business scales.  We are also being more efficient in our G&A spend, which declined 1 point from the year ago quarter to 15% of revenue.

While we expect to continue investing in infrastructure necessary to support our growth, I expect G&A continue its slow march lower in the years ahead.  And finally, our R&D spend remained flat for the past year at 9%, well within our target range of 8 to 10.

Importantly, our excellent expense management was not the result of slower hiring, but rather the result of more efficient use of our resources.  In fact, after a slow hiring quarter in Q2, we resumed our more normal pace of hiring in Q3.

During the quarter, we added 159 full-time equivalent heads to bring our total headcount to 2,461 full time employees.  These hires came in all areas sales, marketing, and G&A.  The net effect of our excellent delivery in expense management was a Q3 GAAP operating margin of 3.2%.  This was up more than 3 full points from last year and up 130 basis points from Q2.

We did an excellent job this quarter of managing our revenue over performance to the bottom line, resulting the inherent leverage in our business, sorry, illustrating the inherent leverage in our business.  And remember, we achieved these results while absorbing $14 million of 123-R stock-based compensation expense and roughly $1.5 million in amortization of purchased intangibles.

Excluding these expenses, non-GAAP operating margin increased to 11%.  In that context, I was very pleased with our results.  Our GAAP tax rate fell a bit this quarter to 46%.  Essentially we got a bit more profitable a bit more quickly than we expected in some of our foreign tax jurisdictions.

Predicting the time of these events has been challenging, so predicting our tax ratehas and will continue to be a bit difficult.  Net profit rose to $6.5 million dollars, up roughly $2.8 million dollars from Q2 and up approximately $6.2 million dollars from last year.

Fully diluted GAAP EPS finished the quarter at $0.05.  This result was benefited by roughly a $0.01 gain associated with an investment we made in OKERE. Their acquisition by Fujitsu Consulting during the quarter resulted in the recognition of this gain.

Strong earnings translated into a record cash generation in Q3.  Operating cash of $52 million dollars for the quarter was the highest in our history, up 70% from a year ago and up 50% sequentially.  Our operating cash margin for Q3 was a remarkable 26% and is now 23% year-to-date.

Capital spending declined from Q2 to finish at roughly $9 million dollars, so free cash was also very strong this quarter at $42 million dollars, or roughly 22% of revenue.  For the full year, free cash flow margin is now more than 16%, a full 14 points higher than our operating margin.

This outstanding and growing cash generation performance underscores the inherent leverage potential in our business.  The balance sheet continued to strengthen in Q3.  Cash and cash equivalents finished the quarter at $571 million dollars, an increase of $74 million dollars from Q2 and an increase of $200 million dollars from a year ago quarter.

There were few other minor changes to assets on the balance sheet.  Prepaid expenses fell roughly $2 million dollars quarter-to-quarter, but this is seasonally typically driven by our Dreamforce event in Q3.  Goodwill increased by nearly $2 million dollars from Q2 related entirely to the increased ownership in our Japanese joint venture we announced late last year.

On the liabilities side of the balance sheet, another quarter of strong bookings pushed deferred revenue to $341 million dollars, an increase of 55% year-over-year and 6% sequentially.  Importantly, our off-balance sheet deferred revenue grew at more than twice that rate sequentially, and as a result, our off-balance sheet deferred revenue is now materially higher than what you see on the balance sheet.

And finally, sequential increases in accounts payable and taxes payable were simply a function of the timing of these expenses relative to our normal payment cycles.  So let me close with our outlook.

For our full fiscal 2008, our strong business momentum is expected to push revenue to a range of $737 million to $739 million dollars.  This translates into expected Q4 revenue of approximately $206 million to $208 million dollars in revenues.

GAAP EPS for the full fiscal year '08 is now expected to be approximately $0.12 to $0.13 per share. This estimate includes an expected $56 to $58 million of stock-based compensation, a projected $5.5 million of amortization of purchased intangibles.  It further assumes a GAAP tax rate of 50% and an average fully diluted share count for the year of 123 million shares.

These results imply an expected Q4 GAAP EPS of approximately $0.03 to $0.04. This fourth quarter estimate includes an estimated $16 to $18 million dollars of stock-based compensation and $1.5 million dollars of purchased intangibles.  It further assumes a tax rate of 46% for the quarter and an average fully diluted share count for the quarter of 125 million shares.

Finally, as we look ahead to our fiscal 2009, we remain very bullish about the momentum of our industry generally and demand for our services specifically.  We now believe we are positioned to achieve our goal of becoming the first ever on-demand company with $1 billion dollars in annual revenue.

We are projecting revenues for fiscal '09 of approximately $1 billion to $1.20 billion dollars.  Importantly for fiscal year '09, our number one priority will be, continue to grow.  That means continuing to invest in global sales capacity and infrastructure, particularly international where the opportunity remains mostly untapped.

Our costs will be impacted by the build-out of our first international data center described by Marc, and in that context, as our business scales, I expect continued modest growth in operating margins for next year.  We're still finalizing budgets for next year, so we will plan to provide you more specific fiscal year '09 earnings estimates when we announce our fourth quarter results in February.

To close, I would like to thank you all for joining us today.  And with that, I will turn things back over to the operator so we can take up your questions, Operator?

Question-and-Answer Session


(Operator Instructions)

David Havlek

Just quickly here while we're waiting for the calls to queue, I would like to remind everybody of a couple of upcoming events at which executives will be presenting.  First on Thursday, November 29, George Hu, our Executive Vice President of Products and Marketing, will be presenting at the Credit Suisse Technology Conference inPhoenix, Arizona.

On Friday, December 7, co-founder and EVP of Technology Parker Harris will be presenting at the Lehman Conference in San Francisco.  And we encourage all of you to get out and attend these events.  There is no better way to learn about Salesforce than to attend one of these events.

Finally, before we take our first call, as a courtesy to the many analysts who want to ask questions, I ask that you please limit your questions today to a single question.  If you would like ask a second question, I respectfully ask that you get back in the queue.

With that, Cara, let's go ahead and take our first question.


Your first question will come from Laura Lederman with William Blair.

Laura Lederman - William Blair

Hi.  Great quarter you guys.  Can you talk a little bit about what you're seeing inthe economy?  Obviously the volatility of the stock market shows that investors are concerned about deterioration inthe economy, and particularly in the financial services.

The international numbers were great.  TheU.S. seemed to be more in line.  So can you talk about what you're seeing inthe U.S.?

Marc Benioff

Well, we're not economists, Laura, as you know.  We don't seechanges in our fundamentally in our customers' businesses.  Don't forget, we're primarily a B-to-B supplier, but we don't see any material changes.  We continue to see our largest customers add users.

As you saw with Japan Post they expanded from 45,000 to 60,000 users.  We have a lot of customers expanding with us.  We're signing new transactions of consequence as I mentioned.  We have signed Citigroup, which is our largest deal ever for 30,000 users.  That’s not the only transaction we signed inthe financial services industry.  We're seeing a lot of purchasing there obviously as well.  So I think our numbers really speak for themselves across the board, that our business looks really good.

Laura Lederman - William Blair

Let me ask another quick if I could for Steve.  When you talk about modest margin improvement, are you talking 200 basis points, 100 basis points?  Because I think the street is higher that that.

Steve Cakebread

You know what, Laura, we're like I said we are working on our ’09 estimates and we'll get back to you in February about that.  There's a lot of opportunity here and we need to make sure we take advantage of it.


Your next question comes from the line of Heather Bellini with UBS.

Heather Bellini - UBS

Hi, great.  Sorry about that.  I was wondering if you could share with us a little bit about the adoption of the platform technology in the ISV community, if there are any success stories that you could share with us and how far away you think we are from seeing significant adoption by that group.  Thank you.

Marc Benioff

We have had increasing and exciting interest by ISV’s in our platform.  You saw at our conference really the emergence of a whole new category of application on our platform, which is the native application.

Up till recently and really up to the introduction of our Apex logic is a service capability, most of the applications on our platform are what we would call mash-ups, which was integrating our technology with other types of services like Google Maps or Skype or something like that.

But now we're seeing a whole new generation of application built by the ISV, which is the native app, and that’s increasing.  We have more ISV’s working with us today than ever before and we see these native apps emerging.

We also believe that we're going to see some very significant ERP-style applications emerge natively on our platform over the next year.  The combination of Visualforce with the capabilities of Apex really has enabled this at a level that we haven’t seen previously.

In addition to that of course, the platform is also rapidly accelerating inside our customer base.  As I mentioned, we have now more than 50,000 custom applications written by our customers.  And as we close more and more deals and beat more of our competitors, one of the main reasons is the capabilities of our platform and the ability for us to not only customize our CRM systems to meet exact customer needs, but also to be able to deliver any application.


Thank you.  Your next question will come from Jason Maynard with Credit Suisse.

Jason Maynard - Credit Suisse

Hi.  Good afternoon, guys.  I just had a couple or a question about expenses and margins.  On professional services, that business is obviously still running inthe red and I'm just curious how you see your ProServ strategy playing out to maybe getting to breakeven and perhaps facilitating adoption by partners and even with customers.

And also just the investment in the Asian data center, I'm curious as to what you're seeing inthe European market and why not a data center in Europe, especially considering some of the privacy laws that perhaps could inhibit large financial services deals to come your way.

Marc Benioff

Well, let me take the data center question and then I will pass the other question to Steve.  We plan to add a number of new data centers over the coming years and our ability to add this Asian data center, as our third strategic data center is really result of the tremendous growth that we seein Asia.

Of course we have one of our largest subscriber customers inAsia, Japan Post, but we are seeing a lot of exciting opportunities inAsia.  And atthe end of the day, our decision of where the data center should go is really not our decision atall it's really what our customers are telling us.

So for our large global customers as well as for our Asian customers, I think that they would love to seea data center inAsia and we believe that will accelerate our business there.  And in terms of Europe, I am sure that at some point in the future we will see a data center emerge there, but we don't have the opportunity to tell you exactly when that is.

Steve Cakebread

And with regards to the margins in the professional services area, as we've been reaching out and working well with a large number of different system integrators, ithas always been part of our strategy.  Our business evolves slowly though, but we are going to take advantage of the growing system administrator or system integrator partners that we have, and you will see those margins.

As we have said all along, negative is not where we want to run that business and over time we'll grow that.  I don't have specifics for the future for you, Jason, because we're working on our plans for next year, but I think you will see the business continue to evolve both to serve our customer needs as well as improve our margins.  Next question please.


Thank you.  Yes sir your next question will come from Brent Thill with Citi.

Brent Thill - Citi

Thanks, Marc, you alluded to the large financial services win, I'm just curious.  I know you mentioned it will be recognized over time, but can you just give a sense of how that timing hits, and also if you could just comment on some of the larger transactions who you are seeing the most when you're going up against some of these larger deals.  Thanks.

Marc Benioff

Okay, and Brent, are you referring to the Citicorp deal and when that will be recognized?

Brent Thill - Citi


Marc Benioff

Okay, well the Citicorp deal, like a lot of our large transactions, we withhold the actual revenue and subscriber recognition until we meet certain milestones and we will recognize the subscribers and the revenue after delivering those milestones and we anticipate that occurring this quarter.

And then as with all of our transactions, Brent, as you're familiar with our model, the revenue is ratable over time.  So over the life of the agreement of course is a multi-year agreement like a lot of our large agreements are and the revenue is ratable over the life of that agreement and is incremental.  And what was the second part of your question?

Steve Cakebread

Marc, it was about financial services and the impact that we may or may not seein our business.

Marc Benioff

Well, in terms of financial services industry, you can see with this transaction, even with Japan Post as well as so many other transactions that we are announcing here on the call, including Mizuho and Sampo and AIG and others, we have a very healthy business in that sector and we continue to see aggressive spending as evidenced by the transactions that we're announcing here today.  But of course, all of our segments continue to be very strong.  Next question please, Operator?


Yes sir, your next question comes from, Kash Rangan, with Merrill Lynch.

Kash Rangan - Merrill Lynch

Hi, thank you very much.  I'm just curious to see if there's any change in your subscriber base as to the mix of PRM, unlimited, enterprise, professional, if you want to look atit from a sequential basis or a year-over-year basis, trying to geta feel for that.  I know you don't share the specifics of it, but I'm just looking for the incremental changes inthe mix of your subscribers.

And also, Steve, one follow-up for you I know you have been consistently saying that the off-balance sheet backlog is 2X the on-balance sheet deferred revenues.  I wasn’t sure the way you characterized it if that stoop came to bethe case.  And also, if you have any statistics on retention or attrition, any trend you can share with us on a sequential basis year-to-date that would be useful.  Thanks a lot.

Steve Cakebread

Hey, Marc, I’ll start with off-balance sheet.  We've never characterized off-balance sheet as 2X, Kash.  Just to be clear, we have always said ithas been roughly the same as what you see on the on-balance sheet.  This quarter, we do have more off-balance sheet than you see on the balance sheet, but I'm not going to characterize itin terms of magnitude.

So Marc, with that question one, attrition just around that.  We have been fairly consistent with prior quarters.  So there's now news there.

Marc Benioff

In terms of the subscriber mix, Kash, as our subscribers now fall into a number of different buckets, including subscribers like you have with the Japan Post, traditional sales type subscribers like we have announced like for example the transaction with Citigroup.

Marketing transaction subscribers like what we announced with Aon.  Service and call center subscribers that we announced today, like Citizens Telecom and partner editions subscribers like we announced with Dell.  And of course, we have mobile and ideas and content.

So, all of these things, we have a rapidly evolving mix of subscribers because our company has evolved very substantially, certainly just inthe last year.  And for that reason Kash, we can’t really characterize what the mix is of our subscriber base because it's changing very, very, very rapidly.  And that's very exciting to us.  It's what we want.

We want to bea multi-application, multi-category company.  And as we've mentioned on previous earnings calls, I think for the last couple of years now, the actual number of subscribers is an increasingly and relevant measure of our business and we point you to our traditional GAAP measurements, which we believe is the correct and proper way to evaluate our success.

Steve Cakebread

I will follow up and say that we talk a lot about some very large corporations, but our business mix between small, medium and large still remains roughly a third, a third, a third.  And I think that's testament to the broad range of solutions that we have and our ability to provide solutions as businesses start small and grow.  That particular relationship hasn’t changed.


Next question comes from Thomas Ernst with Deutsche Bank.

Greg Dunham - Deutsche Bank

Hi.  Yes, actually, this is Greg Dunham on behalf of Tom.  My first question really revolves around the competitive landscape and how we're a here into a number of announcements by the larger players and I wanted to get your thoughts on what they announced this week, what they announced through the year and how that has changed business day in and day out on the ground?

Marc Benioff

Well, that is a very good question, and we have seen a lot of competitive announcements with quotes around announcements over the last year, two years.  And of course, we always get a lot of calls here whenever these announcements happen.

And for those of you who saw the Oracle show this week, I thought it was a tremendous show in size and in scale, but perhaps not in innovation.  And that is probably best reflected in the lack of focus on on-demand, software as a service, multi-tenancy.

Oracle seems extremely vested inthe single-tenant traditional enterprise software model and the integration of their businesses and trying to get out their fusion applications.  So, when it comes right down into a competitive situation ina large transaction like Citigroup, where we beat Oracle, of course both of our management teams show up and then we show both sets of our technology.

Well, as you know because you attended our Dreamforce conference, our technology is highly differentiated from anything else inthe marketplace, whether it's our service, which is unique or any of our applications.  When you look ata demonstration and the capabilities of our sales force as well as our proven success in these different marketplaces, our trust website, we area whole different kettle of fish.

And we believe that we arethe product that customers want today and are looking for.  A lot of our competitors, we think just aren't showing up.  Surprisingly, companies like SAP have made big announcements regarding SAPCRM on-demand.

It's almost two years since they made that announcement.  We haven’t seen them really show up inthe marketplace.  As a consequence, we haven’t seen the customer wins.  And finally, when it comes to the overall competitive situation, I'm sure that Gartner recently awarded as the industry leader in our category, which we think is further evidence of how we are doing competitively.


Your next question comes from Mark Murphy with Broadpoint.

Mark Murphy - Broadpoint Capital

Thank you, Marc.  I'm interested in what you feel the key determinants were in winning the Citigroup transaction.  Was it something around scalability requirements?  Was ita multi-tenant architecture or something new like Visualforce and also was Citigroup open-minded in terms of considering on-premise solutions, or did they go into this knowing that they needed and wanted on-demand?

Marc Benioff

Well, of course, Citigroup is one of the very largest banks in the world and has one of the very largest and most impressive IT budgets and staffs, as well as IT departments and they have the ability to buy anything, as I'm sure you know and have.

And we are extremely fortunate in that their evaluation of and all of our code of all of our capability as well as our tremendous customer success with companies like Merrill Lynch, with Deutsche Bank, with Mizuho and our many others inthe financial services industry.

When you stack it up and compare it to other providers, we came out superior and it was much more than just Visualforce, which of course is a very important part of our strategy, or the platform, or any specific technology.  It's really our ability to bring success to that customer and that's, I believe, atthe end of the day why they signed the agreement with us versus any other provider.

It was not price.  It was not I wouldn't say any particular technical feature.  It was really all about our ability to make them a success, just as we have so many other customers around the world today.


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

Brendan Barnicle - Pacific Crest Securities

Thanks so much.  I was wondering if we could look at this revenue issue a different way rather than subscribers as we move away from that, is there a way to start thinking about revenue in terms of how it breaks down into different broad product categories around sales or marketing or service or mobile, and start to think about it that way, as the same way that maybe some of the and I think he breaks out the different areas of its products several different application areas and selling product.

Marc Benioff

Well, I think that's a good question and when we look at customers, we go in and look at implementations at accounts like Dell or now Citi or Merrill or so many of our large customers today and we see them using so many different parts of our service as well as our platform.

But as you know, we don't actually make individual kind of like software units our SKU’s or CD’s.  It's one fully integrated service with the capabilities for the customers to kind of pull what they need out of that service as they need it.

There are sales components and marketing components and service components and when we look at any one particular customer implementation, it's very difficult for us to look at them and say “Oh!  This customer is all about sales or this customer is all about marketing”.

And I would encourage for you to go and look at some more customer implementations and validate that.  It's not like the traditional company that's shipping that box and can say that box is going here.  Therefore that revenue must going into this category.  It's much more of a hybrid and an integrated approach.  So…

Steve Cakebread

I think that's true.  The small business too, I've been working with a couple of potential customers where they took us on as CRM for just 25 seats and are now aggressively looking at content and ideas and Visualforce.  So Brendan, I think that is across the Board.

As people learn how to use on-demand and get more comfortable, they're going to expand the types of uses that they have, and that's why it's so difficult to categorize it into a particular SKU.  They're just using our solution in general.


Your next question comes from Nathan Schneiderman with Roth Capital Partners.

Nathan Schneiderman - Roth Capital Partners

Hi, thanks very much.  Congratulations on the nice quarter.  Marc, inthe past you have shared with us some information about cumulative investment by venture capitalists and companies developing AppExchange solutions.

I was wondering if you have an update there on how much investment dollars, have been spent by the VC’s and then also, could you speak to any meaningful OEM or platform deals that you booked during Q3?

Marc Benioff

Sure.  I would be delighted to.  If you take a look at AppExchange, of course you will seethe top 10 installs as well as the latest listing and then if you track those back to the actual companies emerging, I think what you will see is just an innovation explosion that is happening inSilicon Valley in on-demand.

And as we talk to venture capitalists around the world, what we see is an increasing amount of their portfolios going towards on-demand.

And in fact, you've also seen two of them come forward recently and create an AppExchange fund, which we thought was really impressive.  That continues to result in much more innovation on the AppExchange with these ISV applications, and that has been, I would say ithas exceeded our expectations.

I did not expect that.  We're coming up on and I believe we will soon have 1000 applications inthe AppExchange and there is such a wide diversity.  And also when you go to different countries, for example I just got back from Japan.  We have a whole Japanese AppExchange with all applications just for the Japanese marketplace.

In terms of how that translates then into our customers and platform agreements for our customers, at Dreamforce, I talked about quite a few of those that we have put together recently, including the Walt Disney Company, Electronic Arts, theBronx Lab School.

But, again, I point to not just thebig wins and how these customers see as a critical part of their implementation strategy like with Citigroup today, but our largest subscriber implementation is Japan Post, which is not part of the any of our core apps.

It's a custom application built with  I think that is really evident of what we're going to continue to see more of in the future, which is customers not just customizing their CRM with the platform, but building their own custom applications that are discrete and unique from our traditional CRM offerings.


Your next question comes from Ajay Kasargod with Piper Jaffray.

Ajay Kasargod - Piper Jaffray

Just a couple of.  just a number one for Steve.  On the operating margins, the preliminary guidance, can you just maybe tell us what arethe variables that you're deliberating here inthe near-term?  And Marc, just one quick follow-up on Citi,  I just want to confirm, that is running multi-tenant, correct?  So I will turn it over to you guys.

Marc Benioff

Go ahead, Steve.

Steve Cakebread

Yes.  Again, we're working through those now.  It's a little early to characterize any of that, but certainly that will bring you back for our February conference call, and Marc?

Marc Benioff

We only have one copy of basically for everybody.  It's a multi-tenant architecture.  Unlike the traditional single-tenant architecture of the client/server vendors, who basically set up their own server and their own piece of software for each customer, we area multi-tenant shared architecture similar to what you would find on or eBay or Google.  And we take that multi-tenant architecture concept and all of our customers are part of that, and that includes Citigroup.


Your next question comes from Daniel Cummins with Banc of America Securities.

Daniel Cummins - Banc of America Securities

Thanks.  Can you update the periodic churn rate for the customer base?  And then I just had a question on the Citigroup wins.

Steve Cakebread

Well, as I said before, the churn rates really haven't changed over the last couple of quarters.  So, there's no real need to update that.  And then Marc, you want to talk about more on Citi?

Daniel Cummins - Banc of America Securities

Yes.  Can I ask the question on Citi?  I assume a 30,000 seat win for the FA product is terrific, but could there not be also significant follow-on opportunity for the broader business there?  I assume they still have a large Siebel implementation that everybody who works there is not so happy with.

Marc Benioff

Well, that's kind of the status quo in most Siebel implementations, I think, and it continues to be a green field for us in many accounts that have Siebel.  But we're very happy with starting with an initial 30,000 users at Citigroup.  And if and when that expands, we will be the first to let you know that.


Your next question comes from Steve Koenig with KeyBanc Capital Markets

Steve Koenig - KeyBanc Capital Markets

Hi, thanks for getting me on here.  The question, the category I guess I would ask about, it looks to be definitely good progress in terms of broadening the CRM and other apps.  If there is a point of even the slightest bit of controversy, it's around maybe the spending on the platform and progress on the Platform strategy.

You're certainly are able to point to some good wins on Platform.  Would you consider at any point in the future giving transparency into what percent you are spending on Platform or even revenues from Platform Edition, which I do believe is a separate edition?

Marc Benioff

Well, today, we just don't really see, first of all, how we would do it.  I would be happy to set up a demonstration of our technology for you anytime.  As I mentioned our platform technology and our applications technology or any discrete application is not an individual SKU or a piece of software, it's one fully integrated service.

It's the ability for the customers to then pull from that service as well as from other services around the internet and through our AppExchange to then build the application that they use internally.  And that is what is exciting about our product.

If you can meet with some of our customers, review their implementations, how they have used it, and you can come out with a better way to describe our revenue in GAAP terms better than what we're doing now, of course we're open to it.

But we think that the GAAP measurements that we provide you today and revenue and expense in cash flow and in other areas is the correct and proper way to report our results to you.


Your final question will come from Mark Verbeck, with Cantor Fitzgerald.

Mark Verbeck - Cantor Fitzgerald

Thank you very much.  Can you tell, give me an update on your efforts around security of your system and preventing attacks on your customers?  What was the reaction from your customers on your efforts to improve their security?

And do you have plans to improve your security with things like financial institutions are doing with either security images or known machine type authentication?

Marc Benioff

Yes.  Thank you for that question.  Of course, security is something that we do every day at Salesforce, and you are right in that we have seen an increase in the number of attacks recently on our customers, specifically phishing attacks.

We have taken both offensive and defensive measures to protect our customers.  These attacks, by the way they characterize them, have resulted in attacks on less than 1% of our customers and we haven’t seen any change in our business because of these attacks.

But we have learned quite a bit from our customers, including with some of the technologies that you're mentioning on how to protect our customers fully from phishing, and you will see some of that new technology in place as early as next week.  Thank you very much for that question.


There are no further questions.

David Havlek

Thank you very much for joining us and we will look forward to catching up with everybody next quarter.  If you have any follow-ups, please contact Investor Relations.  Thank you and have a good day.


This concludes today's conference call.  You may now disconnect.

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