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Executives

David Havlek

Marc Benioff - Co-Founder, Chairman and Chief Executive Officer

Graham V. Smith - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Thomas Ernst - Deutsche Bank AG, Research Division

Adam H. Holt - Morgan Stanley, Research Division

Heather Bellini - Goldman Sachs Group Inc., Research Division

Brent Thill - UBS Investment Bank, Research Division

Kash G. Rangan - BofA Merrill Lynch, Research Division

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Patrick D. Walravens - JMP Securities LLC, Research Division

Mark R. Murphy - Piper Jaffray Companies, Research Division

Jason Maynard - Wells Fargo Securities, LLC, Research Division

Tom Roderick - Stifel, Nicolaus & Co., Inc., Research Division

Richard G. Sherlund - Nomura Securities Co. Ltd., Research Division

Richard H. Davis - Canaccord Genuity, Research Division

Philip Winslow - Crédit Suisse AG, Research Division

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

salesforce.com, inc (CRM) Q1 2013 Earnings Call May 17, 2012 5:00 PM ET

Operator

Good afternoon. My name is Jamaria, and I will be your conference operator today. At this time, I would like to welcome everyone to the salesforce.com Q1 '13 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. David Havlek, Head of Investor Relations. Sir, you may begin your conference.

David Havlek

Thanks, Jamaria, and good afternoon to everyone joining us today to discuss salesforce.com's First Quarter Fiscal Year 2013 Results. The details of our results can be found in a press release issued about an hour ago or in our Form 8-K filed with the SEC.

Joining me today, as always, to discuss our first quarter performance, Marc Benioff, Chairman and CEO, as well as Graham Smith, our Chief Financial Officer. In response to your feedback, we've tried to shorten our prepared comments today, leaving more time for your questions. [Operator Instructions]

During today's discussion, either in our prepared remarks or in response to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that this additional detail maybe one-time in nature, and we may or may not provide or update these metrics in the future.

In addition, please note that our commentary today will primarily be in non-GAAP terms. Reconciliations between GAAP and non-GAAP metrics for both our reported results and our forward guidance can be found in our earnings press release. And finally, it's possible that we may reference certain unreleased services or features not yet currently available in our discussion today. Because we can't guarantee the future timing or availability of these services or features, we recommend customers make their purchase decisions based on services and features that are currently available.

With that, let me make this call official with a brief Safe Harbor. The primary purpose of today's call is to provide you with the information regarding our fiscal first quarter 2013 performance. Some of our discussion or responses to your questions may 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 form on Form 10-K, particularly under the heading Risk Factors. To access our press release, our historical results, any of our SEC filings, the webcast replay of today's call or simply to learn more about salesforce, I encourage you to visit our Investor Relations website.

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

Marc Benioff

Hey, thanks, David. salesforce.com's first quarter was a great start to our fiscal year, absolutely spectacular. And let me just go through some of these highlights of the quarter, just awesome.

Revenue for the first quarter was up 38% from a year ago to $695 million. We just couldn't have asked for anything more, and we now have an annual revenue run rate of nearly $2.8 billion. Operating cash flow exceeded $210 million, an increase of more than 50% year-over-year, and that absolutely is our strongest Q1 cash flow ever, 50% year-over-year growth.

Deferred revenue more than $1.3 billion, which is up 46% year-over-year, only better by the dollar value of book business, which now, on and off the balance sheet, now tops $4 billion. That's an increase of more than $400 million from the fourth quarter.

Now given our strong financial results and the pipeline of new business, we're thrilled to announce today that we are raising our full fiscal 2013 revenue guidance again. And after becoming the first enterprise software company to achieve the $1 billion run rate, the $2 billion run rate, now we're guiding to $3 billion for the year, fiscal year '13. That's an amazing new milestone for our industry.

The high end of our guidance keeps us on track to finish the year with a full year revenue growth rate of 32%, and I'm sure everyone recognizes there aren't too many enterprise software companies delivering that to the market for this year.

salesforce.com is the fastest-growing software company of its size. salesforce has always been a catalyst and evangelist for change in enterprise software, it's been a promoter of cloud, it's been a promoter of social, it's been a promoter of mobile, and those 3 axes really have defined who we are today.

Now in the first decade of our business, we pioneered the shift to cloud. Today, we're redefining what it means to be the social enterprise. Social enterprises are looking for a deeper connection with customers and employees. They're looking to delight their customers in a whole new way. They're building social profiles that deliver a more complete picture of customers', employees' social networks to rapidly collaborate, motivate, align their workforces and building customer social networks to better market, sell and service their customers. And they're building product social networks to help integrate their products and bring those back into the social enterprise as well.

Our social enterprise vision has opened a door for thousands of companies and empower them to revolutionize how they engage with their customers and their employees. And since sharing our vision for the social interface -- enterprise at Dreamforce last year, we've gone around the world now to more than 200,000 people, face to face, joining our events, to learn how they can use these social, mobile and cloud computing technologies to drive their businesses to a whole new level.

Now with the Sales Cloud, with our Service Cloud, with our marketing cloud, the heart of our CRM strategy built on our social enterprise platform, the core of our business at salesforce, our customers have the tools to create a true social front office. And salesforce is recognized as the leader in each of these 4 critical categories. And let's just review that briefly.

According to Gartner, salesforce.com has surpassed Oracle last year and now has the #2 market share position in the overall CRM market, which includes the -- both the cloud and on-premise CRM. Now, of course, we're already #1 far and away in cloud CRM, and now we are #2 overall, which includes cloud and on-prem. Two, the Service Cloud and the Sales Cloud are now both the absolute market leaders in customer service and sales force automation in Gartner's Magic Quadrant. So if you look at Gartner's Magic Quadrant for Sales Cloud, we are #1 in SFA, on-premise or cloud. salesforce.com is #1 in sales force automation. And if you look at the just-published Customer Service Magic Quadrant, salesforce.com Service Cloud is the #1, whether it's on-premise or in the cloud, #1 in customer service.

Now the marketing cloud, based on our Radian6 technology, providing the foundation for our marketing cloud and also including our Data.com capabilities, is rated by Forrester as a leader and visionary in enterprise marketing platforms. And Forrester also named our social enterprise platform, which includes Force.com and Heroku, as the leading social enterprise platform for coders and business developers.

The combination of our social enterprise vision and our clear leadership in each of these core markets is what's driving our success with customers today. A great example is the largest transaction in our history, which we closed at the start of this quarter with an insurance company. They are building a customer social network to connect hundreds of thousands of employees with millions of customers, prospects and even Facebook fans. Their vision is to empower their entire customer-facing team, including their sales forces, their customer service organizations, their marketing organizations, their claims agents with a single view of customers across any of their chains. Customers can start a conversation in the call center, finish an application on the website, ask a question on Facebook, get a response on Twitter. They're pulling customers together and putting them in the driver's seat and at the heart of their social enterprise.

The world's largest food distributor, Sysco, spelled S-Y-S-C-O, not C-I-S-C-O, is swapping out SAP and deploying the Sales Cloud and Chatter. And Sysco's Social Enterprise will be able to create an interactive community with hundreds of thousands of restaurants, educational facilities, hotel venues that they serve.

In addition to that insurance company and Sysco, another great win in the quarter is -- direct from Japan, the Nippon Life Insurance Company, Japan's largest life insurance provider. They leverage Force.com to deploy insurance, policy, management, application to thousands of users in less than 30 days, and that's the speed of cloud, mobile and social, at which our customers want to transform their businesses today versus the traditional months or years it takes with the traditional legacy enterprise software companies.

The Post Office in the U.K. is taking its 400 Crown branches digital by creating a social enterprise for its entire team of financial service advisors. And citizens in the U.K. will soon be able to book appointments and engage with advisors online. And another great win in the quarter, the makers of Chivas and Absolut, Pernod Ricard, is one of the world's leading beverage brands and selected Chatter and Force.com to create a social enterprise for employees, customers and distributors. We use their products extensively here at salesforce and during this analyst call. Pernod plans to create a wall-to-wall employee social network to boost innovation, extend its strong culture of entrepreneurship, and by linking Force.com with on-premise back-office systems and applications, Pernod will be able to power its entire workforce with next-generation social, mobile and cloud apps.

Vodafone is swapping out Oracle and put salesforce.com at the heart of its social enterprise transformation in Germany. Their vision is to build a customer and employee social network that will integrate their back office, Amdocs and their Oracle financial systems and power a new level of customer insight for their management and sales teams. And Meritage Homes, builds homes across the U.S., is rolling out an amazing configuration app on Force.com that's going to allow its agents to modify home options on the fly, and with Force.com, our Sales Cloud and Chatter, Meritage is bringing together its front and back office systems, linking people with the documents they need to close deals faster. Another great innovation by our customers.

And one last customer I wanted to mention on the call today, Morningstar is a great win against Microsoft. They're bringing together sales and service teams across hundreds of product lines, including the Sales Cloud and Chatter. Morningstar's social enterprise will allow sales teams to collaborate on deals from the road, deliver a consistent brand experience to customers wherever they are.

Other new or add-on transactions in the first quarter include: Abbott and Allergan, Allstate and Amazon, Barclays and CHANEL [ph], Citrix, 4G Xerox, Honda and Nestlé, Office Depot, Rockaton, which is Amazon's -- the Amazon.com of Japan, and Tokyo Marina and thousands of others.

The pace at which these companies are embracing the social enterprise is amazing, and it's driving outstanding levels of usage. We now have nearly 2 million apps built on our Force.com and Heroku platforms. Our ability to deeply integrate our social front office solutions with back office systems like SAP and Oracle, the core back office systems of our customers combined with our social front office systems is helping many of our customers like Activision, Burberry and Kimberly-Clark to transform with the speed of social.

And I'm delighted to announce that we delivered 54 billion transactions for the quarter, an increase of 72% from a year ago. 54 billion transactions, that's more than 800 million transactions every business day, and to put that into context, that's more than double the number of posts on Twitter every day that the salesforce.com delivers as core transactions in its service.

In closing, I want to remind everyone about the next stop on our Cloudforce road show, Cloudforce London, our largest European event, with 14,000 people registered to attend, will be happening in London next week, May 22 at the ExCeL Center. It is going to be a phenomenal, phenomenal event.

I also want to remind everyone to save the date for Dreamforce. It's coming up. It's September 18 through the 21st right here in San Francisco. And it's going to be featuring some spectacular speakers, including Jeff Immelt, our great customer at General Electric. The CEO of GE will be speaking on GE becoming a social enterprise. You'll also be hearing from General Colin Powell as well as an entire day of motivation, energy and excitement featuring world-class motivational guru tony Robbins and great musical performance by the Red Hot Chili Peppers. It's going to be an awesome Dreamforce. And now is the time to sign up by going to www.dreamforce.com.

And with that, I'm going to turn the call over to Graham Smith, our Chief Financial Officer, to discuss the financial details of our first quarter. Graham?

Graham V. Smith

Thank you, Marc. We are off to an excellent start in fiscal 2013. First quarter results were better than we had expected, with strong execution and continued reduction in our attrition rate. With a goal this year of delivering robust top line revenue growth and improving profitability, we were also pleased to post EPS above our prior guidance.

We delivered strong operating cash flow, as Marc mentioned, with first quarter cash flow exceeding $210 million, that's our best Q1 on record. And our pipeline of new business continues to grow, as does deferred revenue and booked business on and off the balance sheet. Given our strong start, we're very pleased to be raising our full year revenue guidance by $50 million, with the high end of our predicted range now at $3 billion.

I'll talk more about guidance in a minute, but let me start by highlighting some of the key financial metrics from the quarter. Q1 revenue of $695 million was up 38% over last year. Q1 revenue was actually up 39% year-over-year, excluding the effect of $6 million of FX headwind, and this was our strongest constant currency revenue growth in more than 3 years.

Revenue in the first quarter benefited from a continued decline in dollar attrition, which fell for the 11th straight quarter and is now in the low teens on a percentage basis. Dollar attrition is now at its lowest level since we started reporting the number back in the first quarter of fiscal 2010.

On a geographic basis, we posted strong year-over-year revenue growth in each of our major regions. Revenue in the Americas grew 43% to $485 million. Revenue in Europe was $118 million, that's up 25% in dollars and 33% in constant currency, and revenue in Asia was $92 million, an increase of 32% in dollars and 30% in constant currency. Our business mix continues to become more diverse, with more than 40% of new business in the quarter coming from non-Sales Cloud contracts.

Turning to the income statement. Operating profit grew faster than revenue in Q1, with operating profit up 45% over last year. This enabled us to grow operating margins by nearly 60 basis points year-over-year, driven principally by improvements in G&A, even as we executed on key growth initiatives.

First, we continued to hire aggressively in Q1, adding more than 500 new employees with, of course, the emphasis on sales and engineering roles. Our total employee population is now more than 8,300. That's up 51% from the first quarter last year. Second, we continued our investment in corporate and product marketing in Q1, including staging some of the largest Cloudforce events ever in cities like Chicago, Washington D.C. and San Francisco.

Higher operating margins along with a lower-than-anticipated tax rate enabled us to translate overachievement on the top line to the bottom line, with non-GAAP EPS coming in at $0.37, and that was $0.03 above the high end of guidance. The lower tax rate contributed about $0.02 of that EPS overachievement, while the other $0.01 was due to better operating leverage. Our tax rate in the first quarter was lower than expected as a result of our finalizing the tax accounting related to our acquisition of Radian6.

Operating cash flow in Q1 was $213 million, that's up 53% over last year, a great result. Cash flow in the first quarter benefited in part from the 2 invoicing effects that contributed to our strong cash flow in the fourth quarter, including longer invoice [ph] durations. This quarter, we also collected the last tranche of the large multiyear invoice we discussed in the fourth quarter. However, this amount was more or less offset by the one-time tax payment of $40 million related to our acquisition of Radian6, which we have highlighted on earlier calls.

Free cash flow, which we define as operating cash flow less CapEx, was $168 million in Q1. That's up 50% over the first quarter last year. Free cash flow yield or cash flow as a percentage of revenue was 24% in the first quarter, again up from 22% in Q1 last year.

CapEx was approximately $45 million in the first quarter, up 64% over Q1 last year. New office buildouts and equipment related to headcount growth continue to be the largest driver of CapEx spending.

Deferred revenue in Q1 was approximately $1.3 billion, up 46% over the first quarter last year. Excluding an FX headwind of approximately $18 million, deferred revenue on a constant currency basis increased 48% over Q1 last year. On a sequential basis, currency had no material impact on deferred revenue.

In Q4, we discussed how increased discipline around annual invoicing contributed to the improvement in current deferred revenue and how a multiyear invoice contributed to the increase in the long-term deferred revenue. In Q1, deferred revenue benefited from the same 2 invoicing effects. Excluding these effects, first quarter deferred revenue grew approximately 30% year-over-year or 32% in constant currency. This was consistent with fourth quarter deferred constant currency revenue growth of 31%, excluding those same 2 effects.

As a point of reference, about 2/3 of total invoicing dollars in Q1 were from annual invoices, a significant improvement over last year. Off-balance sheet backlog, which is unbilled business that is booked but not yet invoiced, was $2.7 billion in the first quarter. That's an increase of more than 20% in Q4 and approximately 60% up over Q4 -- sorry, Q1 last year.

Our average contract length remains between 12 and 24 months. Taken together, deferred revenue plus backlog now exceeds $4 billion.

As we've said in the past, our deferred revenue balance has a lot of moving parts, and our focus on annual invoicing has added another variable. While deferred revenue overall is clearly benefiting from longer invoice durations, it's very difficult to predict net sequential changes in deferred revenue. In addition, it's important to understand that the deferred revenue benefits from longer average invoice durations in prior quarters actually served to create a sequential headwind to deferred revenue in subsequent quarters as the deferred revenue amortizes from the balance sheet to the P&L.

As a result, we expect a lower dollar benefit from invoice changes in Q2 than in Q1, just as we saw a decline in the dollar benefit from invoice changes from Q4 to Q1, and we expect this effect will continue through the end of the year. In that context, our best estimate is for second quarter deferred revenue to be approximately flat sequentially. And on an adjusted basis, excluding the effects of the invoicing changes, to be up slightly, consistent with our historical trend.

Let me close with guidance. For the full year, we are raising our revenue outlook by $50 million to $2.97 billion to $3 billion, which represents growth of 31% to 32% over fiscal 2012. We now estimate full year non-GAAP EPS in the range of $1.60 to $1.63. This is $0.01 higher than our prior guidance. While we received a $0.02 tax benefit in Q1, we now expect a higher share count to reduce full year non-GAAP EPS by roughly that same amount of $0.02.

Our non-GAAP EPS estimates reflect a slightly lower tax rate of 37% for the full year. This takes into account the lower tax rate in Q1 we discussed, along with an anticipated quarterly tax rate of about 38% for Q2 through the remainder of the year. For Q2, we anticipate revenue in the range of $724 million to $728 million for year-over-year growth of approximately 33%. We expect Q2 non-GAAP EPS in the range of $0.38 to $0.39.

We expect operating cash flow in Q2 to grow slightly faster year-over-year than our revenue growth rate as we continue to migrate customers to annual billing. All of the underlying assumptions for our non-GAAP guidance as well as our GAAP guidance and a complete GAAP to non-GAAP reconciliation can be found in our earnings press release issued today.

Just to conclude, we had a great Q1 with top line revenue and bottom line EPS that exceeded guidance. We continue to deliver outstanding cash flow from operations, and our backlog of business on and off the balance sheet is now more than $4 billion. We look forward to updating you on our progress in Q2. Meanwhile, we hope to see many of you in Cloudforce London next week.

With that, we'll open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Tom Ernst with Deutsche Bank.

Thomas Ernst - Deutsche Bank AG, Research Division

Marc, I'd like to ask you a question that's kind of in the thread of common questions, I guess, from investors about the balance between the hype in cloud and social versus is it real. So the question I've got for you is if we look at kind of the downfall of some of the last-generation technology like Siebel, it was almost that they were too successful in selling and never got the usage and adoption. As your business is kind of continuously evolving here from a viral adoption to more strategic purchase, how are you changing the organization to make sure that you're connecting with the customer, driving success? And are you actually measuring that success staying high and sustainable?

Marc Benioff

Well, I think the most exciting thing that's happening this week certainly is the Facebook IPO tomorrow, and there's a couple of exciting things about Facebook. Number one is that we've just never seen an application -- a complex application of this size, this scale with a 1 billion registered users, 1/2 of them will log in every day. And you just have to take a step back and just say, "Wow!" in terms of adoption. And the new user interface models that have been created there like the feed, the status update, profiles, groups, I mean, we've been talking about this now for some time in our various forums. And I'm number one just in all of that. Number two, you just see the level of interactivity between users is really just awe-inspiring, and we've really adopted as fast as we can those user interface models into our own business and then brought them, of course, to the mobile platforms, brought them into the social platforms with Salesforce Chatter and into our core business, which is our Sales Cloud or Service Cloud, our marketing cloud and our social enterprise platform built on Chatter. And you've seen -- if you go to trust.salesforce.com, our transaction volumes have just been really awesome. I mean, you -- we're just anticipating this first billion-transaction day at salesforce.com. You can see days this week that where we've hit 800 million transactions. I mean, that's just awesome. And the question will be, "When we are going to have 1 billion transactions a day?" And I think you probably can see that those are happening faster than ever before at between 210 and 240 milliseconds per transaction. That's usage, that's growth, that's adoption. And that's what we're focused on, and the only reason we're successful at salesforce is because our customers are successful. And that's what we focus on every day. Is the customer successful? That's our #1 value in our company, the trust that we have with our customer in making them success. And after that, it's really all about creating that Customer for Life experience, where they're bringing their data, their business process into our services. And then, of course, it's the day-in and day-out execution of our business that you've seen now as we've delivered. Next month will be, I think, our 8 years as a public company since we went public in I think it was June 2004, right? So I mean, it's been consistent levels of execution, and those are really the things that we focused on. And I think it's -- we'll continue to focus on those things, and that will create the success. And the companies maybe who have come before us and have not been as successful as we have been, I think it's mainly they just weren't focused on the customer success at the end of the day. And I know that seems quite basic, but there's different ways to running a company and different motives, and that's ours.

Operator

Our next question is from Adam Holt with Morgan Stanley.

Adam H. Holt - Morgan Stanley, Research Division

My question is about the off-balance sheet number. That's an eye-popping number, and obviously, there's a big client that's contributing to that. But can you maybe walk through some of the elements behind that quarter-on-quarter increase and the off-balance sheet number? And how should we be thinking about the seasonality of that number through the duration of the year?

Graham V. Smith

Adam, this is Graham. Yes, of course, the large customer we signed, the largest in our history, the 9-figure deal, was certainly -- helped that backlog number significantly. But we also had some big renewals in the quarter. And when, clearly, we have large customers with large annual order values renewing for multiple years, that's very encouraging to us and really helps add to that backlog number. So we did a great job on renewals this quarter. As you heard, we finally got to a low-teens attrition rate which is great. And I do point out, we still see our average contract length between 12 and 24 months. So it's not like this number is getting moved -- getting skewed or anything like that, so we're still in that 12- to 24-month average contract length. But we're just renewing, we're renewing well, we're renewing often and we're renewing for longer contract periods, and that's just really helping boost that overall backlog number.

Operator

Our next question is from Heather Bellini with Goldman Sachs.

Heather Bellini - Goldman Sachs Group Inc., Research Division

This question is for Marc. Marc, I was wondering if you could talk to us a little bit -- I mean, you got the Magic Quadrant for Gartner this quarter for Service Cloud. I'm wondering if you could share with us where you think that market is in terms of kind of tipping into the SaaS' favor? When are we going to start those big rip and replaces from the legacy on-premise deals that were signed, God, over a decade ago? And if you could also just frame for us how big of an opportunity, if you were to characterize that opportunity versus Sales Cloud, if you could give us an idea of how you think that -- how attractive that market is for you.

Marc Benioff

Well, it's -- I think we've been talking about this now for a few years in terms of how excited we are about Service Cloud and how much we've invested, and it's turned into a massive business for us and far exceeded all of our expectations. I think that the exciting part about Service Cloud has been the growth and the huge transactions that we've signed. We also have created our Service Cloud for small business that we've delivered with Desk.com, and I'm sure you've seen that as well, so we're really not only focused on the very high end of the market, but on the low end as well. And I think when you look at Service Cloud, when you look at Sales Cloud, Sales Cloud, of course, is just a much, much bigger business today, but Service Cloud is growing at a faster rate. So you're just going to see this just incredible tear, that business and we're investing more in Service Cloud than ever. And then we've got our marketing cloud right behind it that we're very excited, and as I said, it's really that Sales Cloud, the Service Cloud and the marketing cloud built on our social enterprise platform that is just awesome, and we're very happy with our strategy. We really do focus, like you mentioned, Sales Cloud the absolute leader in the Magic Quadrant, Service Cloud is the absolute leader, marketing cloud platform, all of these things, are they competitive? Are they winning deals? Are they at the top of their game? And then in our area in cloud, and in many cases, and not just in cloud but it's, as I said, it's #1 in cloud or on-prem. So I'm very excited about service, and I think that it will continue to perform this year in an extraordinary rate.

Operator

Our next question is from Brent Thill with UBS.

Brent Thill - UBS Investment Bank, Research Division

Marc, there was some concern going into the quarter about some of the sales changes that went on in Q1. I was wondering if you could maybe articulate the changes that were made. And obviously, it didn't seem to have any impact on the current quarter. And I had a quick follow-up for Graham.

Marc Benioff

Well, we're a fast-growing company. We're the fastest-growing, and that means that our organizational models that were competitive at $1 billion dollars are not the right organizational models at $3 billion. And so we make slight adjustments every year, and those slight adjustments generally take place in the first quarter, this year was no exception. But at the end of the day, it's -- it just sets us up to continue our growth and execution of our business. And we don't go into the nitty-gritty, because it would be kind of pathetic, I think, at some level to kind of like try to tell you how our sales force is organized. But at the end of the day, we're very excited. I mean, we have a tremendous focus on the enterprise, led by Blair Crump, who was a former executive at Verizon, running their enterprise business, and we've got an incredible business, small and medium business being run by Hilarie Koplow. She is doing a fantastic job, and it's this kind of these 2 businesses together that works so unbelievably well, and it's under the auspices of our Vice Chairman, Frank van Veenendaal, who kind of ensures that our core distribution strategy is propelling salesforce.com in the future. And that's kind of how we look at it. And it's very, very -- it's been -- it's a great organization. I couldn't be prouder of them in their success.

Operator

Our next question is from Kash Rangan with Merrill Lynch.

Kash G. Rangan - BofA Merrill Lynch, Research Division

Marc, I'm just wondering if you could comment on how trends for new business signings worked out during the month of April. There's been quite a bit of debate. One famous technology company, Nuvali, talked with how their business, not that it's a proxy for your business, but their business progressively weakened as the quarter came to a close. I'm wondering if you can share with us how your pace of new business held up in the month of April. That's it for me.

Marc Benioff

Well, February, March and April were all very strong months and we have -- that only offset in that -- in March that we had previously discussed with you, we closed our largest business deal -- the largest business deal of all time, which was this massive transaction, but then through the quarter, we saw some great transactions emerge in Europe. We saw some great transactions emerge in Japan, and our U.S. business is also outstanding. So I felt very good about business during the whole quarter, and I think we're, as you can see from these numbers, well set up to deliver an outstanding year, which is why we're raising our guidance now to $3 billion for the year.

Operator

Our next question is from Nathan Schneiderman with Roth Capital.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Marc, in past quarters, you've given us metrics on the number of 7-figure deals and the number of 8-figure deals. I'm sure we'd all love to hear that, if you'd be willing to share it this quarter.

Marc Benioff

I've -- we've talked about that, and we do that on a periodic basis but not on a regular basis, because we just don't want to set the expectation up that on this call, we're going to discuss the specifics of our bookings during the quarter and/or the specifics of the deals. But it's certainly our intention that on a semi-regular basis to tell you exactly how many 7- and 8-digit deals we do. And if you go look back over the last 3 or 4 years, I think we probably do that over 3 or 4 quarters, we show that to you, but we don't plan to do that on a regular and consistent basis. I don't think that that's an appropriate estimation of our business anyway, and I'll tell you why. We're not a company that's based on big deals. Yes, we close big deals. Big deals are exciting. We do a 9-figure deal, an 8-figure deal, a 7-figure deal. But the reality is, is that we do a lot of deals during the quarter, and we do a lot of business in the quarter, and this company has never been able to make this quarter on a big deal, and it makes its business happen on a solid book of business. It's highly distributed between, as I mentioned, small and medium business, product line and an enterprise product line and both of those product lines delivering consistently and effectively across the 7 or 8 countries that we do business in across the world. And that's how we really make our business. I think that if we emphasize the 7- or 8-digit deals to you, it's -- and while, as I said, we will do it on a regular basis, we -- it does not characterize kind of the true nature of our business, which is many, many transactions happening over the quarter, delivering a strengthened portfolio of customers in all markets.

Operator

Our next question is from Pat Walravens with JMP Securities.

Patrick D. Walravens - JMP Securities LLC, Research Division

Marc, do you think the window is closing on the on-premise license model faster than the Oracles and the SAPs of the world expected? And is it happening faster than you expected?

Marc Benioff

Well, I think that you can look at their license revenue growth over the past couple of quarters, both Oracle and SAP. And I don't think it's anything to write home about. And I think that if you compare that to our growth rate or the growth rate of companies like us in our category cloud companies or even private companies who are in the cloud, companies that have our model, the multi-tenant shared model, I mean, you just -- you can see where the future is. And if you're going to see a software company today, you're not going to start it as an on-premise company. It's just -- it would be unheard of. I mean, I think that really speaks to it. I don't know any venture capitalist that's starting a software company today. So it's not the future. And I think that what is the future is cloud, it's social, it's mobile, and I'm a huge, huge fan of our peers in the public markets and in the private markets as well who have pioneered these models, and I think they represent what the future of our industry looks like, and as you can see with our numbers this quarter, you can do it as a scale that this is what Oracle used to look like.

Operator

Our next question is from Mark Murphy with Piper Jaffray.

Mark R. Murphy - Piper Jaffray Companies, Research Division

Marc, when you consider the deal pipeline for the second half of the fiscal year, are you sensing a turning point in your ability to engage specifically at the CIO level in larger and more expansive deployments that are absorbing more of your products up front as a result of this social enterprise positioning?

Marc Benioff

Well, I think that we have a strong portfolio and a strong pipeline ahead. We are very excited about the pipeline and the opportunity for the fiscal year. And when I look out at those, it's a pretty big mix of customers who have not used us before, but we have a lot of customers that we have relationships with that are expanding and growing and adding -- what we call adding on, and I think it's a good balance of that. Graham, do you want to kind of comment on that?

Graham V. Smith

Yes, I think that's right. You've already talked about the portfolio of different businesses, and certainly, we have some customers where we start with a complete set of solutions and all the different products, but others, for example, some of the transactions in Q4 we saw were just around one product, and then we'll look to expand from there. So I don't think you can really typify it, but certainly, overall, our pipeline growth has been good.

Operator

Our next question is from Jason Maynard with Wells Fargo.

Jason Maynard - Wells Fargo Securities, LLC, Research Division

Marc, I have a question for you on the competitive positioning. SAP this week at Sapphire was talking about no big upgrade to their core apps for, I guess, 7 or 8 years. And post SuccessFactors, they're going all-in on, I guess, non-integrative, best-of-breed apps in the cloud. And I'm curious to see if you think this will impact customer buying decisions and, frankly, your sales strategy into their installed base.

Marc Benioff

Well, we're in some of their largest, most important customers in the world, and we're in dialogue with those customers on a regular basis. Some of those customers have become some of our largest and most important customers. And I think SAP does a great job in the back office. They do a great general ledger, and it's on-premise and it works, point-of-sale system, whatever it is for our customers. But in terms of that broad-based social front office, that vision that we've articulated that you've seen now, Jason, at so many Cloudforces and Dreamforce, and you see the fever with the customers and prospects that they want to become social enterprises. And if you watch the Sapphire videos, which I did, I just -- could've happened last year, could've happened 2 years ago, it could've happened 3 years ago. I didn't understand what was new and exciting. And if the new and most newest and exciting thing at SAP is the acquisition of SuccessFactors, well, then God help SAP, because that just isn't that exciting. I mean, that was a sub-$1 billion company that makes a human performance management software that you log into once a year. So where's the action and the vision? I think that they're a great company with a great product line that customers use in their back office, but I think that they have not shown us the future of company and of the industry, and I think it's kind of well represented by what we saw last week. And for us, we're trying to do our best to demonstrate the future of our industry, and that's why major customers like well, I guess, Kimberly-Clark is a great example, who was at Cloudforce in San Francisco, have shown how you can have a great salesforce.com social front office combined with that back office. And if you go to YouTube and you type Kimberly-Clark social enterprise, you'll see the video of their global CIO, Ramon Baez. He's probably the most respected CIO in the SAP ecosystem, used to be the CIO at Honeywell, talking about how this is the perfect fit. It's the best of both worlds. He has had his SAP back office now for a couple of decades, the SAP mainframe that's in the closet, and then they've got all their next-generation applications and systems being in salesforce. That sounds great to me.

Operator

Our next question is from Tom Roderick with Stifel, Nicolaus.

Tom Roderick - Stifel, Nicolaus & Co., Inc., Research Division

So Graham, I wanted to try on this deferred revenue issue, just make sure I get a little bit more clarity here and also thinking about sort of the pace of deferred as we go through the year. But can you just clarify what the total impact from sort of the invoicing changes and the longer-term changes were to Q4? And then into Q1, just trying to get an apples-to-apples compare on that and then how we think about Q2. And then I -- so understand where you're kind of guiding to. I was thinking about deferred revenue in Q2. As we think about the rest of the year, Q3 was sort of down sequentially. Is that kind of the right pattern to think about as the model out the rest of the year and then a big ramp into Q4?

Graham V. Smith

Yes, I mean, so this is -- as I say, there's a lot of moving parts in this number. If you remember, when we talked about Q4, we had overall coming out of Q4 net benefit on DR just around $150 million to total deferred, and that was split roughly between 2 items: one was the change in annual invoicing discipline, and the second was the multiyear invoice that you can see also showing up in long-term deferred. So if you sort of roll that forward to Q1, the net benefit actually is slightly less, because, as I mentioned earlier, what we do when we accelerate the invoicing to annual is you actually create a headwind for DR the next quarter. So roughly $150 million benefit at the end of Q4, roughly $140 million net benefit at the end of Q1. So that's why when we talk about the guide for Q2, we say -- but the actual total that we'll report will be roughly flat, but if you -- we expect when you back out the net sort of cumulative benefit on DR of these changes, it will actually be slightly up. And that's kind of the trend we've seen over the last couple of years with DR moving from Q1 to Q2.

Operator

Our next question is from Rick Sherlund with Nomura Securities.

Richard G. Sherlund - Nomura Securities Co. Ltd., Research Division

Graham, I'm kind of struggling as well with the adjustments for the effect of the changing terms. If I adjust last quarter and this quarter, do I end up with actually faster or, let's call it organic growth sort of after the adjustments? Though, I think I'm coming up with about 36% growth in billings as adjusted versus the 34% reported number. But I'm still playing with the math. Any -- am I doing it the right way?

Graham V. Smith

Yes, I think you're thinking -- I mean obviously, Rick, we don't talk about billings, because for all the reasons we've said in the past, we don't think it's a particularly accurate representation of what's happened in the quarter. But if you want to do that calculation, basically yes, it adds a little to the 34%, I think, that you would calculate normally on the balance sheet accounts. It adds a 1 or 2 points to that number for that calculation.

Richard G. Sherlund - Nomura Securities Co. Ltd., Research Division

That's terrific. I was braced for a lower number, but when I realized I got to adjust last quarter as well, I realized, well, actually, year over quarter, looking at from last quarter, it actually -- actually, I think it helps you little bit. All right, so that's a relief. Marc, I was -- I think I might have missed a little bit on your response to the earlier question about Cisco's comments. There was also a lot of speculation about your enterprise business being slower, and then Chambers made his comments, and you guys obviously had a terrific quarter. Have you noticed any change in your enterprise? Was the mix different in the quarter? Was enterprise slower? Any indication -- read across to what's happening in the broader economies?

Marc Benioff

For us, I think that we at a fundamental level believe that we're still very much a distribution-constrained organization and we're just trying to hire as many salespeople as we can around the world and get them properly organized and in their seats and trained and able to deliver on the opportunity. And it's not that the overall economy can't affect us. We saw when the whole world imploded, it did slightly impact us but probably not as much as everybody else, because when you have this level of growth and differentiation from the competitors, our greatest challenge is just the ability to close the business. And that's honestly what we're focused on when we look at these pipelines. Obviously, by the nature of our business, when we look at the second quarter pipeline, it's unlike anything we've ever seen in size and scale. And then the challenge is how we're going to close it and wrap it up, because there's only so many of us. And that's how kind of how we look at the business, and we don't really take into consideration these kind of things that we're hearing about. And I've got the highest, highest respect for John Chambers and Cisco, but I -- their business in pushing out switches is not directly related to our ability to close Sales Cloud, Service Cloud, marketing cloud and platform transactions and help our customers define their social enterprises. Our customers are trying to grow their top lines, and that's what we are. We're a top line company. We're a company that helps our customers close more business, and that's all we're focused on every day is our customer's success in closing those deals. And that pipeline is rich and deep, and we want to just mine it, and that's all about getting those salespeople in their chairs and out there and closing. And we've done a good job of that, that's why you can see the $3 billion guide for this year. That's why you see your -- these implied billings numbers that you're talking about are doing just fine. And at salesforce, it's never good enough. And we work -- we think we have to work harder and that we can even do better. And that's our goal, is to do better and to deliver -- and I've talked about this a few times, but it's been on my mind more this quarter than ever, is that $10 billion a year, and how do we deliver that $10 billion year, and how do we get that Sales Cloud to the level where it needs to be for the $10 billion year and the Service Cloud and the marketing cloud and the platform. And those are our 4 core businesses, and they need to all come in for that $10 billion year to manifest, and that's what Graham and I spend the time on, and we've got revenue goals for each of those buckets, and we're working hard to deliver them. And that's where we are.

Operator

Our next question is from Richard Davis with Canaccord.

Richard H. Davis - Canaccord Genuity, Research Division

Marc, how do you think about making your franchise in the developer world, specifically Force, as good as you have kind of at the application layer? And I realize the 2 are interlinked, but do you think of those separately? Or do you get people really playing on the test dev side of that equation?

Marc Benioff

Yes. Well, I think it's a multidimensional problem, and for us, we've got developers who are inside our existing customers, and those are core developers, and they love things like Force.com. You've got ISVs, who are building applications on Force.com, like companies that you've maybe read about in the Wall Street Journal, Canaan D [ph], which is building manufacturing on Force.com; or FinancialForce that's building the ERP solution; or BMC Software building revenue force and others. And then you've got, in addition to those ISVs, you've got kind of independent developers who are building on Force, but they're also building on our Heroku platform, and Facebook developers, of course, can access that Heroku platform right from inside Facebook, which is awesome and has created a lot of growth in the application number. And then you have developers who are building applications for websites and for interactive capabilities also on Heroku. So it's not one developer, it's many different developers, and our developer numbers are at record levels. And we're speaking, I think, with a competitive product for developers in a way that we've never been able to do before. We've just really been able to really beef it up since our acquisition of Heroku. It's really -- that really changed the tone in our ability and you saw that in our Cloudstock program at the Cloudforce, where we had a whole developer Pavilion. So we are very focused on the developer, but we are focused on the developer as part of our overall strategy, and it's one of 4 critical legs of our stool to make that happen, which is the social enterprise platform this quarter but so is sales, service and marketing as well.

Operator

Our next question is from Phil Winslow with Credit Suisse.

Philip Winslow - Crédit Suisse AG, Research Division

One of the things we -- you were talking about earlier, obviously, was the marketing cloud. Marc, just wondering as you kind of envision the future how you sort of see the marketing cloud evolving, both from a B2B and a B2C perspective.

Marc Benioff

Well, I've spent a lot of my time thinking about that question this quarter, because I'm sure, like you have, I have been reading a lot of stories about Chief Marketing Officers who are spending more on technology than ever before. That is a common story today. And I think an increasingly common story is that the CMO is going to spend more on technology in a company than the CIO. And that has not happened yet in most companies, but I believe that it will. And that is a whole new opportunity emerging, and we need to double and triple down internally at salesforce on creating that marketing cloud. We were very fortunate about a year ago to buy the #1 marketing company with Radian6, doing social listening. And we're really looking at what are all the things that we need to develop to deliver that marketing cloud. And I am really excited about the marketing cloud. I really think it is a multibillion-dollar opportunity just as we've seen the Sales Cloud is and the Service Cloud is and the platform is. So I'm trying to get my thinking around that, and by the time we get to Dreamforce, I think now we'll have a lot to talk about in regards to the marketing cloud. And you can already see a couple of strong tenets of that, and I just mentioned a few of those to you. We've got, of course, Radian6, which is doing amazing. We've got Heroku, which lets you build interactive applications for Facebook or for the Web. We've got Site.com that we introduced at Cloudforce San Francisco, which is -- lets you deliver your website. And we've also have Data.com, which is the critical data that marketers need to be able to figure out who their customers are and get key marketing materials and information to them. So that is the core of the marketing cloud today. Radian6, Heroku, Site.com and Data.com. And then the question is for us how do we build a full marketing suite? How do we become the marketing desktop? How do we have the marketing front office? And we're looking at that, and I think that's a very, very exciting opportunity. And I -- and then just like Heather was talking about how exciting Service Cloud is, she's absolutely right and it's stellar. And, of course, I've been talking about Sales Cloud for 13 years, and now you're going to hear me talk a lot about the marketing cloud, I think, over the next decade.

David Havlek

All right. We're down to the final stretch, so maybe 1 or 2 more questions.

Operator

Our next question is from Derrick Wood with Susquehanna International.

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

Graham, I was wondering, the $140 million number you gave. Does that include the impact from the 9-figure deal? And if not, could you give us what came on the balance sheet from that? And then I guess for Marc, back to kind of the macro question, if you were to see some budgets come under pressure, are there proof points that you can look at past deal flow that has helped that accelerate -- helped accelerate decision-making to move off of on-premise and over to cloud given the ROI?

Graham V. Smith

So Derrick, the $150 million and the $140 million numbers for Q4 and Q1 don't include the invoicing impact of the 9-figure deal, because that's a normal deal. Those 2 numbers we've given for Q4 and Q1 are changes that we want to call out, either because it's a multiyear invoice or because it's a change in sort of invoicing, either from quarterly or semiannual to annual. So the 9-figure deal was just a normal annual deal, and so it's not included in those numbers.

Marc Benioff

Yes, I'll tell you that in today's world, and the world has changed, and we're going to see that tomorrow with the Facebook IPO, that it's a social world and it's a mobile world and it's a cloud world, and social, mobile and cloud have really been defined by Facebook. That's what Facebook is today, and that's what we're trying to be at salesforce, but we're trying to deliver it through our Sales Cloud and Service Cloud and marketing cloud and platform. If you haven't redefined your company at this point around those pieces, you're probably grasping for straws in your strategy. We saw that yesterday at Sapphire, and we've seen that with other competitors as well, where they're just trying to sell the past to the future, and the past does not equal the future. And by the time we get to Dreamforce and you see the power of our customer base, 100,000 attendees attending Dreamforce this year in September. When you see major CEOs show up and say they're using salesforce.com, like Jeff Immelt at General Electric, and you hear that the incredible stories of success of these customers, you're going to see the world has changed, and this isn't just about cloud. This has been a fundamental transformation of our customers themselves and users, and I'm sure everyone on this call is looking at their iPhone or their iPad or their Android device or some other mobile technology, and maybe they've got Twitter or Facebook in front of them. And we just didn't have that 4 or 5 years ago. And yesterday, I re-watched Steve Jobs rolling out the iPhone in 2007, and it just inspired me that the world can change so fast, that so many exciting things are happening, and now you do have these great new prophets emerging, like Mark Zuckerberg and Jack Dorsey, and our job is just to listen and follow them, because I think the enterprise is going to get pulled into the future through these consumer services. And that's what salesforce.com is going to help our customers do. All right. I'm getting some tired stares here, so we're going to take one last question. Let's bring it home strong.

Operator

Our last question is from Steve Ashley with Robert W. Baird.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

Actually, you pointed out that large deals aren't your whole business, you make a lot of it on base hits. And I just want to talk about maybe the small and midsized business, how you continue to see that represent the same kind of percentage of your business. And then also Desk.com, Concur Force, some of the initiatives you've talked about in the past of bringing to that market. Are you having any success selling into that small and midsized markets with those products?

Marc Benioff

Well, Desk.com and Do.com are phenomenons. And with Do.com, we have now more than 100,000 customers on there who've created more than 1 million tasks, which is amazing. We've just never seen any kind of growth like that before, and that's very much a future for salesforce. It's not where our revenue is today, but we look at that almost like our skunk-works, our R&D center. And these new companies that we bought, that we're nurturing along and that we honor and respect, because hey, we respect the future at salesforce, and what we see at companies like that is what we have to become in the mainstream. And we look at those as beacons of the future. And if you're not using Do.com, you should be. I mean, it is something that I use every day, it's phenomenal. And for small and medium business, Desk.com is awesome. And we've also talked about all the other great services of salesforce. Even great capabilities like we have, like our Database.com service, letting customers roll out their databases, our Site.com for websites and, of course, Salesforce Chatter, and you can see that at Chatter.com where you can sign up and just get going, and we've seen so many customers there, and we have these massive customer implementations now with Chatter. We didn't have time to talk about that in deep depth on the call, but I was just reviewing that with the head of our Chatter unit, and the size and scale of the Chatter deployments are as large as they've ever been. So a lot of exciting oars in the water and working to get to that $10 billion business in the era of Facebook and Twitter, that we are paying attention to these next-generation companies, and we are working hard to build those concepts into who we are as a company so we can deliver that in the mainstream of the enterprise.

David Havlek

All right. I think that wraps things up. Before we sign off here, I want to encourage everyone to attend our upcoming Cloudforce London event. As Marc indicated, that's next Tuesday, May 22 at the ExCeL Center in London. The event is going to be hosted by cofounder Parker Harris as well as our Chief Operating Officer, George Hu; and this is an event you absolutely won't want to miss. We already have more than 12,000 customers registered. You can go ahead and register, as Marc said, at Dreamforce.com, or you can go ahead and just send me an email. We'll make sure to get you in. We look forward to seeing everybody there. Thank you for joining us today, and we'll look forward to catching up with you soon. Bye-bye now.

Operator

Ladies and gentlemen, thank you for your participation in today's conference call. You may now disconnect.

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