Salesforce.com F3Q08 (Qtr End 10/31/07) Earnings Call Transcript

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 |  About: Salesforce.com, Inc. (CRM)
by: SA Transcripts

Salesforce.com, Inc. (NYSE:CRM)

F3Q08 Earnings Call

November 15, 20075:00 pm ET

Executives

David Havlek - Vice President of Investor Relations

Marc Benioff - Chairmanand Chief Executive Officer

Steve Cakebread - Chief Financial Officer

Analysts

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 AmericaSecurities

Steve Koenig - KeyBanc Capital Markets

Mark Verbeck - Cantor Fitzgerald

Operator

Good afternoon.  Myname is Cara and I will beyour conference operator today.  Atthis time, I would like to welcome everyone to thesalesforce.com third quarter '08 financial results conference call.

Alllines have been placed on mute to prevent any background noise.  After thespeakers' remarks, there will bea question-and-answersession (Operator Instructions).

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

David Havlek

Thanks, Cara, and welcome everyone to salesforce.com's thirdquarter fiscal year 2008 financial results conference call.  Joining metoday as always to discuss our outstanding performance arechairman and ChiefExecutive Officer, Marc Benioff and Chief Financial Officer, Steve Cakebread.

Before we begin, let mequickly remind you that allof our financial commentary today will bein GAAP terms unlessotherwise noted.  Afull disclosure of our third quarter financial performance can befound in our Q3results press release issued earlier today, and also on our Form8-K issued with theSEC. Additional financial information beyond what is provided inthe press release mayalso be found on ourwebsite.

Today's call is being web cast and areplay will beavailable shortly following theconclusion of the callthrough November 23.  To access thepress release, thefinancial detail, or theWeb cast replay, please consult our investor relations website atsalesforce.com/investor.

Finally, let meremind you that theprimary purpose of today's call is to provide you with information regardingour third quarter fiscal year 2008 performance.  However, some of our discussions or responsesto your questions will contain forward-looking statements.

These statements aresubject to risks, uncertainties, and assumptions.  Should any of these risks or uncertaintiesmaterialize or should our assumptions prove to beincorrect, actual company results could differ materially from theseforward-looking statements.

Allof these risks, uncertainties and assumptions as well as other information onpotential factors that could affect our financial results areincluded in ourreports filed with theSEC, including our most recent reports on Form10-K and Form 10-Q,particularly under theheading 'Risk Factors'.  These reports,again, are availableon our Investor Relations website.

Finally please bereminded that any unreleased services or features referenced intoday's discussion or inother public statements arenot currently available and may not bedelivered on time or atall.  Customers who have purchased ourservices should make thepurchase decision based upon features that arecurrently available.

With that, let meturn the call over toMarc.

Marc Benioff

Thanks, David.  Ina fiscal year full ofexciting firsts, our third quarter was ahigh point.  I'm delighted to report record revenue, recordoperating cash flow, and asharp increase in GAAPprofits.  Even more remarkable is that inthe third quarter wealso delivered anelectrifying Dreamforce that inspired arecord 7300 attendees.

Salesforce.com hasbecome the world'sfirst multi-application, multi-category software service company with avision that has neverbeen clearer.

Before I begin with thequarter results, let mefirst make animportant announcement about acustomer we have signed last week.  I'mabsolutely thrilled today to announce that Citigroup haschosen salesforce.com to deliver their financial adviser desktop to 30,000financial advisers around theglobe.

We believe this is thelargest and most important CRMagreement of 2007 and our largest deal ever.  After alengthy evaluation process to assess functionality, availability, security, andintegration capabilities, Citibank hasselected salesforce.com over every other CRMsolution, including Oracle, Microsoft, and SAP.

This is anincredible endorsement for thecompetitiveness of our company, service and for customer success inthe financial servicesmarketplace.  We look forward to buildingour relationship with Citigroup inthe years to come.

Citigroup will become our fifth customer with approximately25,000 or more subscribers joining alist that already includes Merrill Lynch, Japan Post, Dell, and Cisco.  As with other large agreements that we havesigned, we will recognize thesubscribers in revenueafter delivering keymilestones, which we anticipate occurring this quarter.

TheCitigroup deal follows athird quarter full of noteworthy wins and developments.  Solet's get to thedetails.

Revenue for thequarter was approximately $193 million dollars, anincrease of 48% from theyear-ago quarter and up 9% from Q2.  That’smore revenue in ninemonths this year than we did inour entire fiscal year 2007.

Atthis rate, we expect to bethe first on-demandcompany to push through the$800 million dollar run ratein thefourth quarter.  Looking ahead to fiscal'09, we're on track to become thefirst ever on-demand company to exceed $1 billion dollars inannual revenue.  Our on-demand industryleadership has neverbeen more evident.

Our outstanding revenue performance contributed to thirdquarter fully diluted GAAP EPS of $0.05 pershare.  This result included a$0.01 investment gain that Steve will discuss ina moment.  Net profit roseby $6.2 million dollars from last year and $2.87 from Q2 to finish at$6.5 million.  This was anamazing performance when you consider itincluded roughly $14 million dollars instock-based compensation.

Even more remarkable was our record cash generation.  Q3 operating cash flowwas $52 million dollars, anincrease of 70% from last year and up 50% from Q2.  Our year-to-date operating cash flowof $123 million is more than 11 times our reported GAAP net profit for thesame period.  Our cash generation reallyshows the leverage inour model.

As aresult, we now have more than $571 million dollars of cash and equivalents on thebalance sheet, anincrease of $200 million dollars from theyear ago quarter.  This tremendous financial success was fueledby another tremendous quarter of customer success.

And increasingly, customer success is being driven by thegrowing popularity of our Force.com platform as aservice, which is also behind our largest deployment inthe world, theJapan Post.

During thethird quarter, Japan Post continued to expand their massive custom applicationdeployment built on our Force.com platform.  Today, less than sixmonths since beginning their rollout, their deployment stands atmore than 60,000 users.

This is aremarkable achievement for Japan Post and anexciting new subscriber milestone for theon-demand industry.  As anearly adopter of our Force.com platform as aservice, Japan Post is proving that robust enterprise class applications can bebuilt and deployed globally ata scale more rapidlythan ever before on our platform.

Our multi-application, multi-category strategy is working.  Nowhere was this more apparent that inour ever-expanding relationship with Dell.  Dellalso expanded its deployment during thequarter and now hasbecome our second-largest deployment with more than 40,000 subscribers.

Starting with asimple CRM deployment,Dell is now utilizing salesforce.comto help manage their partner relationships through our Partner edition.

Dell's ideastorm.com customer website is also built entirelyon our new Salesforce ideas service.  Andless than a year sincebeing deployed, the IdeaStorm.comwebsite has alreadyrecorded more than 7500 ideas and more than 500,000 promotions from theDell customercommunity.

And Dell's WinXPC initiative was thedirect result of customer feedback on this site.  I encourage you to visit IdeaStorm.com to seehow Dell iscollaborating with their customers.

We also added subscribers to existing deployments ata number of very largecompanies, including Aon, Ashland, IMSHealth, Delta AirLines, Qualcomm and McKesson.  Thesegrowth stories areimportant because they prove that our multi-application, multi-categorystrategy is working throughout our customer base.

Inaddition to all of thegreat expansion business from our installed base, we also added alarge number of new customers to our ranks.  AIGhas selected SalesforceUnlimited Edition for roughly 2000 users to help them manage their broker-clientrelationships.

Citizens Telecom also became anew customer by signing for roughly 1200 subscribers of Salesforce Call Centerduring the quarter tobecome our largest call center deployment ever.  They join agrowing list of more than 1100 companies using salesforce.com technology tomanage their service call centers, including P&G, DuPont, Barclays,S&P, GMAC, Plantronics and Sumitomo.

Inall, we added roughly 2800 net new customers to exit thethird quarter with approximately 38,100 net paying customers.  This represents anincrease of more than 11,000 customers over thepast 12 months, remarkable when you consider ittook us more than sixyears to win our first11,000 customers.

I amalso pleased to saythat the investmentswe have been making inour international business arereally paying off.  InQ3 nowhere was this more apparent than inAsia.  Inaddition to Japan Post, we wonsizable opportunities atMizuho, Sampo, Babcock & Brown, Macquarie Bank Limited, ABNAMRO, and Johnson & Johnson.

Our growth inEurope also accelerated inthe third quarter withwins at Siemens,BMW-Rolls Royce, Budget Group, Lloyd's Register, Software AG and AirComm.  We seean increasedopportunity internationally for our services and I'm very excited today toannounce that we plan to build our first international data center inAsia inthe first half of nextyear.

Together with our two U.S.production data centers, this new international data center will bea keycomponent in ourglobal delivery infrastructure and we hope anengine to further accelerate our international growth.  This multi-data center architecture hasbecome a tremendousdifferentiation to us incompetitive situations.

While many of our largest competitors still only have onedata center, we will soon have three.  Theglobal shift to software service and platform as aservice needs a trulyglobal infrastructure.

Theenergy behind that global shift was inthe airthis fall atDreamforce in San Francisco where arecord 7300 attendees representing 2000 companies and 179 partners saw amazingnew technologies and heard world-class keynotes from John Chambers and GeorgeLucas.

Of course, thebig newsat Dreamforce was theintroduction of our Force.com platform as aservice and theunveiling of our Visualforce user interface as aservice.  With Force.com, developers cannow design any application for any user and then deploy that application on anydevice anywhere in theworld.

Force.com includes our global infrastructure as aservice, database as aservice, logic as aservice through our multi-tenant apex code allowing our customers to run theircode on our servers.  Workflow as aservice, integration as aservice, and now with Visualforce, aframework for building any user interface as aservice for any device.

And best of all, everything runs natively inour trusted data center architecture sodevelopers can focus on innovation, not infrastructure.  Already developers like European ERP leaderCoda and Latin American leader Datasul have selected theForce.com platform to build and run their next-generation applications, again allfully native on our platform.

This is anexciting development for Force.com and agame changer for thefuture of on-demand.  And we arealready seeing tremendous momentum for this platform as service technologiesfrom the developercommunity.  We have shown Visualforcedelivering on-demand applications natively to Explorer, Firefox and Safaribrowsers as well as applications to adiverse set of devices, including theiPhone, BlackBerry and Nokio, among others.

And last month inJapan, wedemonstrated native Visualforce applications running on awide variety of Japanese mobile phones from diverse carriers.  It's no wonder why customers have alreadybuilt over the 50,000custom applications with Force.com and why ithas become ourfastest-growing service.

We also announced two new application services to expand ourcore software serviceoffering from four to six.  Ouraward-winning SFA service and support marketing and PRMservices will soon bejoined by Salesforce ideas and Salesforce contact.

With Salesforce ideas, companies will beable to harness thewisdom of their customers and communities by giving them aplace to submit, discuss, and promote ideas.  It's thesame technology that powers salesforce.com's own live community idea exchangeand Dell's IdeaStorm.com.

Salesforce content will bring thepower of on-demand to thechallenges of managing unstructured data within theenterprise.  This new service ischallenging traditional document management applications from therapidly fading client server era.

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

These new application offerings together with Visualforce areexpected to beavailable before theend of fiscal Q4.  They reinforce ourposition as theworld's first multi-application, multi-category on-demand company.

Dreamforce '07 also represented thesecond anniversary of theunveiling of AppExchange. Injust two short years, AppExchangehas gone from conceptto vibrant marketplace, connecting on-demand developers with our more than38,000 customers.

Today, there areroughly 750 applications on theAppExchange.  To date, more than 280,000 user test driveshave resulted in theinstallation of more than 38,000 applications atmore than 13,000 customers.  This is anamazing success and we're just getting started.

Our enhanced platform development capabilities together withour growing customer community make theForce.com platform and AppExchangemarketplace the mostattractive way for ISV’s to tapinto the on-demandrevelation.

Before I close, let memay make a couple ofcomments about our outstanding delivery inQ3.  Put simply, our delivery quality hasnever been better.  During thethird quarter, our system availability exceeded 99.98%, aremarkable achievement when you consider that our transaction volume nowfrequently exceeds 125 million transactions perday.

Intotal, we delivered more than 8 billion transactions inthe third quarter,more than twice what we delivered ayear ago.  There is no greater measure ofsuccess than customers actively using our system.  These robust user statistics areremarkable when you consider that thepackaged software sold by our client server competitors is known for theshelf wear that itrepresents.

To close, Q3 was atremendous quarter.  We have grown from anSFA provider to a CRMprovider and now onto amulti-application, multi-category on-demand leader.  We're looking to aforward to a strong Q4and to achieving our goal of becoming thefirst ever billion dollar on-demand company next year.

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

Steve Cakebread

Thanks, Marc.  Q3 wassimply outstanding.  Revenue for thethird quarter was $192.8 million dollars, up 48% year-over-year and 9%sequentially.  While currency did providean incremental $1million dollars over our forecast, itwas primarily strong business demand that pushed overall revenue to nearly $4million dollars above thehigh end of our outlook.

For thefull year, revenue rose51% from the prioryear to $531.8 million dollars.  Oursubscription and support business continues to bevery strong, growing 49% from theyear-ago quarter to $176.4 million dollars.

As Marc mentioned, we areexecuting well on our strategy of growing our installed base accounts alongwith a strong pipelinethat once again brought us anexcellent mix of new business.

Professional services revenue was $16.4 million dollars for thethird quarter, up 41% versus fiscal year '07 but down slightly 1% sequentially. This sequential decline was notunexpected given thesummer seasonality in thebusiness and our strategy of increasing our business through agrowing ecosystem and system integration partners.

Geographically revenue inthe Americas was$141.7 million dollars, up 40% year-over-year, up 6% sequentially.  And inEurope, revenue grew 71% year-over-year and 16% sequentially to $33.9 milliondollars.  Revenue of $17.2 dollars millionin Asiarose 92% from theyear ago quarter and22% from Q2.

Theaccelerated growth internationally is starting to show up inour geographic business mix.  For Q3, 73%of our revenue came from theAmericas while27% came from Europe and Asia-Pacific.  For thesame quarter a yearago, America-based business accounted for 78% of our revenues while Europe and Asiaaccounted for just 22%.

Theinternational opportunity remains largely untapped.  Sowe will continue to invest insales capacity and thedata center that Marc mentioned earlier inhis comments over thecoming year.

Turning next to our margin performance, gross margin for thethird quarter finished at77%, up slightly from Q2 and more than afull point from last year.  Thisimprovement continues to bedriven by stronger gross margins inour subscription and support business, which raised 40 basis points from lastyear to finish thequarter at just morethan 86%.

Despite alot of rhetoric from our competition, there hasbeen no notable changein thepricing environment and our delivery continues to getmore efficient as our business scales.  Grossmargins inprofessional services continued to benegative.  As our SI ecosystem matures,we can modify thecapacity of our own professional services business.  And while that will slow revenue growth abit in professionalservices, it shouldresult in improvedmargins over time.

As to operating expenses, as apercentage of revenue, operating expenses finished thequarter at 74%, down 1point from Q2 and down afull 2 points from ayear ago quarter.  Thebiggest driver of thedecline is sales and marketing, which fell to 50% of revenue from 51% inQ2 and in theyear ago quarter.

Even as we invest innew geographies where we getvery little immediate return, we're still driving better and better salesefficiencies into our model as our business scales.  We arealso being more efficient inour G&A spend, which declined 1 point from theyear ago quarter to15% of revenue.

While we expect to continue investing ininfrastructure necessary to support our growth, I expect G&A continue itsslow march lower in theyears ahead.  And finally, our R&Dspend remained flat for thepast year at 9%, wellwithin our target range of 8 to 10.

Importantly, our excellent expense management was not theresult of slower hiring, but rather theresult of more efficient use of our resources.  Infact, after a slowhiring quarter in Q2,we resumed our more normal pace of hiring inQ3.

During thequarter, we added 159 full-time equivalent heads to bring our total headcountto 2,461 full time employees.  Thesehires came in allareas sales, marketing, and G&A.  Thenet effect of our excellent delivery inexpense management was aQ3 GAAP operating margin of 3.2%.  Thiswas up more than 3 full points from last year and up 130 basis points from Q2.

We did anexcellent job this quarter of managing our revenue over performance to thebottom line, resulting theinherent leverage inour business, sorry, illustrating theinherent leverage inour business.  And remember, we achievedthese results while absorbing $14 million of 123-R stock-based compensationexpense and roughly $1.5 million inamortization of purchased intangibles.

Excluding these expenses, non-GAAP operating marginincreased to 11%.  Inthat context, I was very pleased with our results.  Our GAAP tax ratefell a bit thisquarter to 46%.  Essentially we got abit more profitable abit more quickly than we expected insome of our foreign tax jurisdictions.

Predicting thetime of these events hasbeen challenging, sopredicting our tax ratehas and will continueto be abit difficult.  Net profit roseto $6.5 million dollars, up roughly $2.8 million dollars from Q2 and upapproximately $6.2 million dollars from last year.

Fully diluted GAAP EPS finished thequarter at $0.05.  This result was benefited by roughly a$0.01 gain associated with aninvestment we made inOKERE. Their acquisition by Fujitsu Consulting during thequarter resulted in therecognition of this gain.

Strong earnings translated into arecord cash generation inQ3.  Operating cash of $52 million dollarsfor the quarter was thehighest in ourhistory, up 70% from ayear ago and up 50%sequentially.  Our operating cash marginfor Q3 was aremarkable 26% and is now 23% year-to-date.

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

This outstanding and growing cash generation performanceunderscores theinherent leverage potential inour business.  Thebalance sheet continued to strengthen inQ3.  Cash and cash equivalents finished thequarter at $571million dollars, anincrease of $74 million dollars from Q2 and anincrease of $200 million dollars from ayear ago quarter.

There were few other minor changesto assets on thebalance sheet.  Prepaid expenses fellroughly $2 million dollars quarter-to-quarter, but this is seasonally typicallydriven by our Dreamforce event inQ3.  Goodwill increased by nearly $2million dollars from Q2 related entirely to theincreased ownership inour Japanese joint venture we announced late last year.

On theliabilities side of thebalance sheet, another quarter of strong bookings pushed deferred revenue to$341 million dollars, anincrease of 55% year-over-year and 6% sequentially.  Importantly, our off-balance sheet deferredrevenue grew at morethan twice that rate sequentially,and as a result, our off-balancesheet deferred revenue is now materially higher than what you seeon the balance sheet.

And finally, sequential increases inaccounts payable and taxes payable were simply afunction of the timingof these expenses relative to our normal payment cycles.  Solet me close with ouroutlook.

For our full fiscal 2008, our strong business momentum isexpected to push revenue to arange of $737 million to $739 million dollars.  This translates into expected Q4 revenue ofapproximately $206 million to $208 million dollars inrevenues.

GAAP EPS for thefull fiscal year '08 is now expected to beapproximately $0.12 to $0.13 pershare. This estimate includes anexpected $56 to $58 million of stock-based compensation, aprojected $5.5 million of amortization of purchased intangibles.  Itfurther assumes a GAAPtax rate of 50% and anaverage fully diluted share count for theyear of 123 million shares.

These results imply anexpected Q4 GAAP EPS of approximately $0.03 to $0.04. This fourth quarterestimate includes anestimated $16 to $18 million dollars of stock-based compensation and $1.5million dollars of purchased intangibles.  Itfurther assumes a tax rateof 46% for the quarterand an average fullydiluted share count for thequarter of 125 million shares.

Finally, as we look ahead to our fiscal 2009, we remain verybullish about themomentum of our industry generally and demand for our services specifically.  We now believe we arepositioned to achieve our goal of becoming thefirst ever on-demand company with $1 billion dollars inannual revenue.

We areprojecting revenues for fiscal '09 of approximately $1 billion to $1.20 billiondollars.  Importantly for fiscal year'09, our number one priority will be, continue to grow.  That means continuing to invest inglobal sales capacity and infrastructure, particularly international where theopportunity remains mostly untapped.

Our costs will beimpacted by the build-outof our first international data center described by Marc, and inthat context, as our business scales, I expect continued modest growth inoperating margins for next year.  We'restill finalizing budgets for next year, sowe will plan to provide you more specific fiscal year '09 earnings estimateswhen we announce our fourth quarter results inFebruary.

To close, I would like to thank you allfor joining us today.  And with that, Iwill turn things back over to theoperator so we cantake up your questions, Operator?

Question-and-AnswerSession

Operator

(Operator Instructions)

David Havlek

Just quickly here while we're waiting for thecalls to queue, I would like to remind everybody of acouple of upcoming events atwhich salesforce.com executives will bepresenting.  First on Thursday, November29, George Hu, our Executive Vice President of Products and Marketing, will bepresenting at theCredit Suisse Technology Conference inPhoenix, Arizona.

On Friday, December 7, co-founder and EVP of TechnologyParker Harris will bepresenting at theLehman Conference in San Francisco.  Andwe encourage all ofyou to get out andattend these events.  There is no betterway to learn about Salesforce than to attend one of these events.

Finally, before we take our first call, as acourtesy to the manyanalysts who want to ask questions, I ask that you please limit your questionstoday to a singlequestion.  If you would like ask asecond question, I respectfully ask that you getback in thequeue.

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

Operator

Your first question will come from Laura Lederman withWilliam Blair.

Laura Lederman -William Blair

Hi.  Great quarter youguys.  Can you talk alittle bit about what you're seeing inthe economy?  Obviously thevolatility of thestock market shows that investors areconcerned about deterioration inthe economy, andparticularly in thefinancial services.

Theinternational numbers were great.  TheU.S. seemed to bemore in line.  Socan 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 inour fundamentally inour customers' businesses.  Don't forget,we're primarily aB-to-B supplier, but we don't seeany material changes. We continue to seeour largest customers add users.

As you saw with Japan Post they expanded from 45,000 to60,000 users.  We have alot of customers expanding with us.  We'resigning new transactions of consequence as I mentioned.  We have signed Citigroup, which is our largestdeal ever for 30,000 users.  That’s not theonly transaction we signed inthe financial servicesindustry.  We're seeing alot of purchasing there obviously as well.  SoI think our numbers really speak for themselves across theboard, that our business looks really good.

Laura Lederman -William Blair

Let meask another quick if I could for Steve.  Whenyou talk about modest margin improvement, areyou talking 200 basis points, 100 basis points?  Because I think thestreet is higher that that.

Steve Cakebread

You know what, Laura, we're like I said we areworking on our ’09 estimates and we'll getback to you inFebruary about that.  There's alot of opportunity here and we need to make sure we take advantage of it.

Operator

Your next question comes from theline of Heather Bellini with UBS.

Heather Bellini - UBS

Hi, great.  Sorryabout that.  I was wondering if you couldshare with us a littlebit about the adoptionof the platformtechnology in theISV community, if there areany success stories that you could share with us and how far away you think we arefrom seeing significant adoption by that group. Thank you.

Marc Benioff

We have had increasing and exciting interest by ISV’s inour platform.  You saw atour conference really theemergence of a wholenew category of application on our platform, which is thenative application.

Up till recently and really up to theintroduction of our Apex logic is aservice capability, most of theapplications on our platform arewhat we would call mash-ups, which was integrating our technology with othertypes of services like Google Maps or Skype or something like that.

But now we're seeing awhole new generation of application built by theISV, which is thenative app, and that’s increasing.  Wehave more ISV’s working with us today than ever before and we seethese native apps emerging.

We also believe that we're going to seesome very significant ERP-style applications emerge natively on our platformover the next year.  Thecombination of Visualforce with thecapabilities of Apex really hasenabled this at alevel that we haven’t seen previously.

Inaddition to that of course, theplatform is also rapidly accelerating inside our customer base.  As I mentioned, we have now more than 50,000custom applications written by our customers.  And as we close more and more deals and beatmore of our competitors, one of themain reasons is thecapabilities of our Force.com platform and theability for us to not only customize our CRMsystems to meet exact customer needs, but also to beable to deliver any application.

Operator

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

Jason Maynard -Credit Suisse

Hi.  Good afternoon,guys.  I just had acouple or a questionabout expenses and margins.  Onprofessional services, that business is obviously still running inthe red and I'm justcurious how you seeyour ProServ strategy playing out to maybe getting to breakeven and perhapsfacilitating adoption by partners and even with customers.

And also just theinvestment in theAsian data center, I'm curious as to what you're seeing inthe European marketand why not a datacenter in Europe,especially considering some of theprivacy laws that perhaps could inhibit large financial services deals to comeyour way.

Marc Benioff

Well, let metake the data centerquestion and then I will pass theother question to Steve.  We plan to add anumber of new data centers over thecoming years and our ability to add this Asian data center, as our thirdstrategic data center is really result of thetremendous growth that we seein Asia.

Of course we have one of our largest subscriber customers inAsia, Japan Post, but we areseeing a lot ofexciting opportunities inAsia.  And atthe end of theday, our decision of where thedata center should go is really not our decision atall it's really whatour customers aretelling us.

Sofor our large global customers as well as for our Asian customers, I think thatthey would love to seea data center inAsiaand we believe that will accelerate our business there.  And interms of Europe, I amsure that at somepoint in thefuture we will see adata center emerge there, but we don't have theopportunity to tell you exactly when that is.

Steve Cakebread

And with regards to themargins in theprofessional services area, as we've been reaching out and working well with alarge number of different system integrators, ithas always been partof our strategy.  Our business evolvesslowly though, but we aregoing to take advantage of thegrowing system administrator or system integrator partners that we have, andyou will see thosemargins.

As we have said allalong, negative is not where we want to run that business and over time we'll growthat.  I don't have specifics for thefuture for you, Jason, because we're working on our plans for next year, but Ithink you will see thebusiness continue to evolve both to serve our customer needs as well as improveour margins.  Next question please.

Operator

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

Brent Thill - Citi

Thanks, Marc, you alluded to thelarge financial services win, I'm just curious.  I know you mentioned itwill be recognizedover time, but can you just give asense of how that timing hits, and also if you could just comment on some of thelarger transactions who you areseeing the most whenyou're going up against some of these larger deals.  Thanks.

Marc Benioff

Okay, and Brent, areyou referring to theCiticorp deal and when that will berecognized?

Brent Thill - Citi

Correct.

Marc Benioff

Okay, well theCiticorp deal, like alot of our large transactions, we withhold theactual revenue and subscriber recognition until we meet certain milestones andwe will recognize thesubscribers and therevenue after delivering those milestones and we anticipate that occurring thisquarter.

And then as with allof our transactions, Brent, as you're familiar with our model, therevenue is ratable over time.  Soover the life of theagreement of course is amulti-year agreement like alot of our large agreements areand the revenue isratable over the lifeof that agreement and is incremental.  Andwhat was the secondpart of your question?

Steve Cakebread

Marc, itwas about financial services and theimpact that we may or may not seein our business.

Marc Benioff

Well, interms of financial services industry, you can seewith this transaction, even with Japan Post as well as somany other transactions that we areannouncing here on thecall, including Mizuho and Sampo and AIGand others, we have avery healthy business inthat sector and we continue to seeaggressive spending as evidenced by thetransactions that we're announcing here today.  But of course, allof our segments continue to bevery strong.  Next question please,Operator?

Operator

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

Kash Rangan - MerrillLynch

Hi, thank you very much.  I'm just curious to seeif there's any changein your subscriberbase as to the mix ofPRM, unlimited, enterprise, professional, if you want to look atit from asequential basis or ayear-over-year basis, trying to geta feel for that.  I know you don't share thespecifics of it, but I'm just looking for theincremental changes inthe mix of yoursubscribers.

And also, Steve, one follow-up for you I know you have beenconsistently saying that theoff-balance sheet backlog is 2X theon-balance sheet deferred revenues.  Iwasn’t sure the wayyou characterized itif that stoop came to bethe case.  And also, if you have any statistics onretention or attrition, any trend you can share with us on asequential basis year-to-date that would beuseful.  Thanks alot.

Steve Cakebread

Hey, Marc, I’ll start with off-balance sheet.  We've never characterized off-balance sheet as2X, Kash.  Just to beclear, we have always said ithas been roughly thesame as what you seeon the on-balancesheet.  This quarter, we dohave more off-balance sheet than you seeon the balance sheet,but I'm not going to characterize itin terms of magnitude.

SoMarc, with that question one, attrition just around that.  We have been fairly consistent with priorquarters.  Sothere's now newsthere.

Marc Benioff

Interms of the subscribermix, Kash, as our subscribers now fall into anumber of different buckets, including Force.com subscribers like you have withthe Japan Post,traditional sales type subscribers like we have announced like for example thetransaction with Citigroup.

Marketing transaction subscribers like what we announcedwith Aon.  Service and call centersubscribers that we announced today, like Citizens Telecom and partner editionssubscribers like we announced with Dell.  And of course, we have mobile and ideas andcontent.

So, allof these things, we have arapidly evolving mix of subscribers because our company hasevolved very substantially, certainly just inthe last year.  And for that reason Kash, we can’treally characterize what themix is of our subscriber base because it's changingvery, very, very rapidly.  And that'svery exciting to us.  It's what we want.

We want to bea multi-application,multi-category company.  And as we'vementioned on previous earnings calls, I think for thelast couple of years now, theactual number of subscribers is anincreasingly and relevant measure of our business and we point you to ourtraditional GAAP measurements, which we believe is thecorrect and proper way to evaluate our success.

Steve Cakebread

I will follow up and saythat we talk a lotabout some very large corporations, but our business mix between small, mediumand large still remains roughly athird, a third, athird.  And I think that's testament to thebroad range of solutions that we have and our ability to provide solutions asbusinesses start small and grow.  Thatparticular relationship hasn’t changed.

Operator

Next question comes from Thomas Ernst with Deutsche Bank.

Greg Dunham -Deutsche Bank

Hi.  Yes, actually,this is Greg Dunham on behalf of Tom.  Myfirst question really revolves around thecompetitive landscape and how we're ahere into a number ofannouncements by thelarger players and I wanted to getyour thoughts on what they announced this week, what they announced through theyear and how that has changedbusiness day in andday out on the ground?

Marc Benioff

Well, that is avery good question, and we have seen alot of competitive announcements with quotes around announcements over thelast year, two years.  And of course, we alwaysget alot of calls here whenever these announcements happen.

And for those of you who saw theOracle show this week, I thought itwas a tremendous show insize and in scale, butperhaps not ininnovation.  And that is probably bestreflected in thelack of focus on on-demand, software as aservice, multi-tenancy.

Oracle seems extremely vested inthe single-tenanttraditional enterprise software model and theintegration of their businesses and trying to getout their fusion applications.  So, when itcomes right down into acompetitive situation ina large transactionlike Citigroup, where we beat Oracle, of course both of our management teamsshow up and then we show both sets of our technology.

Well, as you know because you attended our Dreamforceconference, our technology is highly differentiated from anything else inthe marketplace,whether it's our Force.com service, which is unique or any of our applications. When you look ata demonstration and thecapabilities of our sales force as well as our proven success inthese different marketplaces, our trust website, we area whole differentkettle of fish.

And we believe that we arethe product thatcustomers want today and arelooking for.  Alot of our competitors, we think just aren't showing up.  Surprisingly, companies like SAPhave made bigannouncements regarding SAPCRM on-demand.

It's almost two years since they made that announcement.  We haven’tseen them really show up inthe marketplace.  As aconsequence, we haven’t seen thecustomer wins.  And finally, when itcomes to the overallcompetitive situation, I'm sure that Gartner recently awarded salesforce.com asthe industry leader inour category, which we think is further evidence of how we aredoing competitively.

Operator

Your next question comes from Mark Murphy with Broadpoint.

Mark Murphy -Broadpoint Capital

Thank you, Marc.  I'minterested in what youfeel the keydeterminants were inwinning the Citigrouptransaction.  Was itsomething around scalability requirements?  Was ita multi-tenantarchitecture or something new like Visualforce and also was Citigroupopen-minded in termsof considering on-premise solutions, or did they go into this knowing that theyneeded and wanted on-demand?

Marc Benioff

Well, of course, Citigroup is one of thevery largest banks in theworld and has one of thevery largest and most impressive ITbudgets and staffs, as well as ITdepartments and they have theability to buy anything, as I'm sure you know and have.

And we areextremely fortunate inthat their evaluation of salesforce.com and allof our code of all ofour capability as well as our tremendous customer success with companies likeMerrill Lynch, with Deutsche Bank, with Mizuho and our many others inthe financial servicesindustry.

When you stack itup and compare it toother providers, we came out superior and itwas much more than just Visualforce, which of course is avery important part of our strategy, or theForce.com platform, or any specific technology.  It's really our ability to bring success tothat customer and that's, I believe, atthe end of theday why they signed theagreement with us versus any other provider.

Itwas not price.  Itwas not I wouldn't sayany particular technical feature.  Itwas really all aboutour ability to make them asuccess, just as we have somany other customers around theworld today.

Operator

Your next question comes from Brendan Barnicle with PacificCrest Securities.

Brendan Barnicle -Pacific Crest Securities

Thanks somuch.  I was wondering if we could look atthis revenue issue adifferent way rather than subscribers as we moveaway from that, is there away to start thinking about revenue interms of how it breaksdown into different broad product categories around sales or marketing orservice or mobile, and start to think about itthat way, as the sameway that maybe some of theand I think he breaksout the differentareas of its products several different application areas and selling product.

Marc Benioff

Well, I think that's agood question and when we look atcustomers, we go inand look atimplementations ataccounts like Dell ornow Citi or Merrill or somany of our large customers today and we seethem using so manydifferent parts of our service as well as our platform.

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

There aresales components and marketing components and service components and when welook at any oneparticular customer implementation, it's very difficult for us to look atthem and say “Oh!  This customer is allabout sales or this customer is allabout marketing”.

And I would encourage for you to go and look atsome more customer implementations and validate that.  It's not like thetraditional company that's shipping that box and can saythat box is going here.  Therefore thatrevenue must going into this category.  It'smuch more of a hybridand an integratedapproach.  So…

Steve Cakebread

I think that's true.  Thesmall business too, I've been working with acouple of potential customers where they took us on as CRMfor just 25 seats and arenow aggressively looking atcontent and ideas and Visualforce.  SoBrendan, I think that is across theBoard.

As people learn how to use on-demand and getmore comfortable, they're going to expand thetypes of uses that they have, and that's why it's sodifficult to categorize itinto a particular SKU. They're just using our solution ingeneral.

Operator

Your next question comes from Nathan Schneiderman with RothCapital Partners.

Nathan Schneiderman -Roth Capital Partners

Hi, thanks very much.  Congratulations on thenice quarter.  Marc, inthe past you haveshared with us some information about cumulative investment by venturecapitalists and companies developing AppExchangesolutions.

I was wondering if you have anupdate there on how much investment dollars, have been spent by theVC’s and then also, could you speak to any meaningful OEM or platform dealsthat you booked during Q3?

Marc Benioff

Sure.  I would bedelighted to.  If you take alook at AppExchange,of course you will seethe top 10 installs aswell as the latestlisting and then if you track those back to theactual companies emerging, I think what you will seeis just an innovationexplosion that is happening inSilicon Valley inon-demand.

And as we talk to venture capitalists around theworld, what we see is anincreasing amount of their portfolios going towards on-demand.

And infact, you've also seen two of them come forward recently and create anAppExchange fund,which we thought was really impressive.  That continues to result inmuch more innovation on theAppExchange withthese ISV applications, and that hasbeen, I would say ithas exceeded ourexpectations.

I did not expect that.  We're coming up on and I believe we will soonhave 1000 applications inthe AppExchangeand there is such awide diversity.  And also when you go todifferent countries, for example I just got back from Japan.  We have awhole Japanese AppExchangewith all applicationsjust for the Japanesemarketplace.

Interms of how that translates then into our customers and platform agreementsfor our customers, atDreamforce, I talked about quite afew of those that we have put together recently, including theWalt Disney Company, Electronic Arts, theBronx Lab School.

But, again, I point to not just thebig wins and how thesecustomers see Force.comas a critical part oftheir implementation strategy like with Citigroup today, but our largestsubscriber implementation is Japan Post, which is not part of theany of our core apps.

It's acustom application built with Force.com.  I think that is really evident of what we'regoing to continue to seemore of in thefuture, which is customers not just customizing their CRMwith the platform, butbuilding their own custom applications that arediscrete and unique from our traditional CRMofferings.

Operator

Your next question comes from Ajay Kasargod with PiperJaffray.

Ajay Kasargod - PiperJaffray

Just acouple of.  just anumber one for Steve.  On theoperating margins, thepreliminary guidance, can you just maybe tell us what arethe variables thatyou're deliberating here inthe near-term?  And Marc, just one quick follow-up on Citi,  I just want to confirm, that is runningmulti-tenant, correct?  SoI will turn it over toyou guys.

Marc Benioff

Go ahead, Steve.

Steve Cakebread

Yes.  Again, we'reworking through those now.  It's alittle early to characterize any of that, but certainly that will bring youback for our February conference call, and Marc?

Marc Benioff

We only have one copy of basically salesforce.com foreverybody.  It's amulti-tenant architecture.  Unlike thetraditional single-tenant architecture of theclient/server vendors, who basically set up their own server and their ownpiece of software for each customer, we area multi-tenant sharedarchitecture similar to what you would find on Amazon.com or eBayor Google.  And we take that multi-tenantarchitecture concept and allof our customers arepart of that, and that includes Citigroup.

Operator

Your next question comes from Daniel Cummins with Banc ofAmerica Securities.

Daniel Cummins - Bancof America Securities

Thanks.  Can youupdate the periodicchurn rate for thecustomer base?  And then I just had aquestion on theCitigroup wins.

Steve Cakebread

Well, as I said before, thechurn rates really haven't changedover the last coupleof quarters.  So, there's no real need toupdate that.  And then Marc, you want totalk about more on Citi?

Daniel Cummins - Bancof America Securities

Yes.  Can I ask thequestion on Citi?  I assume a30,000 seat win for theFA product is terrific, but could there not bealso significant follow-on opportunity for thebroader business there?  I assume theystill have a largeSiebel implementation that everybody who works there is not sohappy with.

Marc Benioff

Well, that's kind of thestatus quo in mostSiebel implementations, I think, and itcontinues to be agreen field for us inmany accounts that have Siebel.  Butwe're very happy with starting with aninitial 30,000 users atCitigroup.  And if and when that expands,we will be thefirst to let you know that.

Operator

Your next question comes from Steve Koenig with KeyBancCapital Markets

Steve Koenig -KeyBanc Capital Markets

Hi, thanks for getting meon here.  Thequestion, the categoryI guess I would ask about, itlooks to be definitelygood progress in termsof broadening the CRMand other apps.  If there is apoint of even theslightest bit of controversy, it's around maybe thespending on theplatform and progress on thePlatform strategy.

You're certainly areable to point to some good wins on Platform.  Would you consider atany point in thefuture giving transparency into what percent you arespending on Platform or even revenues from Platform Edition, which I dobelieve is a separateedition?

Marc Benioff

Well, today, we just don't really see, first of all, how wewould do it.  I would behappy to set up ademonstration of our technology for you anytime.  As I mentioned our platform technology and ourapplications technology or any discrete application is not anindividual SKU or apiece of software, it's one fully integrated service.

It's theability for thecustomers to then pull from that service as well as from other services around theinternet and through our AppExchangeto then build theapplication that they use internally.  Andthat is what is exciting about our product.

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

But we think that theGAAP measurements that we provide you today and revenue and expense incash flow and inother areas is thecorrect and proper way to report our results to you.

Operator

Your final question will come from Mark Verbeck, with CantorFitzgerald.

Mark Verbeck - CantorFitzgerald

Thank you very much.  Canyou tell, give me anupdate on your efforts around security of your system and preventing attacks onyour customers?  What was thereaction from your customers on your efforts to improve their security?

And doyou have plans to improve your security with things like financial institutionsare doing with eithersecurity images or known machine type authentication?

Marc Benioff

Yes.  Thank you forthat question.  Of course, security issomething that we doevery day at Salesforce,and you are right inthat we have seen anincrease in thenumber of attacks recently on our customers, specifically phishing attacks.

We have taken both offensive and defensive measures toprotect our customers.  These attacks, bythe way theycharacterize them, have resulted inattacks on less than 1% of our customers and we haven’t seen any changein our business becauseof these attacks.

But we have learned quite abit from our customers, including with some of thetechnologies that you're mentioning on how to protect our customers fully fromphishing, and you will seesome of that new technology inplace as early as next week.  Thank youvery much for that question.

Operator

There areno further questions.

David Havlek

Thank you very much for joining us and we will look forwardto catching up with everybody next quarter.  If you have any follow-ups, please contact InvestorRelations.  Thank you and have agood day.

Operator

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

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