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Salesforce.com, Inc. (NYSE:CRM)

Q1 2009 Earnings Call

May 21, 2008 5:00 pm ET

Executives

David Havlek – VP of IR

Marc Benioff – Chairman & CEO

Graham Smith - CFO

Analysts

Brent Thill - Citigroup

Heather Bellini - UBS

Charles DiBona – Sanford Bernstein & Co.

Kash Rangan - Merrill Lynch

Laura Lederman - William Blair & Company

Thomas Ernst – Deutsche Bank

Philip Rueppel – Wachovia Securities

Rich Baldry – Canaccord Adams

Mark Murphy – Piper Jaffray

Brendan Barnicle – Pacific Crest Securities

Operator

Good afternoon, at this time I would like to welcome everyone to the Salesforce.com Q1 2009 financial results conference call. (Operator Instructions) I would now like to turn today’s call over to Mr. David Havlek, Vice President of Investor Relations. Please go ahead sir.

David Havlek

Welcome everyone to today's call. Earlier today Salesforce.com released its results for its first fiscal quarter 2009. A full disclosure of those results can be found on our Q1 results press release as well as in our Form 8-K filed earlier with the SEC. Additional financial information beyond what is provided in the press release may also be found on our website.

Joining me today to discuss our first quarter performance are our Chairman and Chief Executive Officer, Marc Benioff and Chief Financial Officer, Graham Smith. Following Marc and Graham’s prepared remarks, we’ll open the call up to your questions. Before we begin I’d like to remind you that all of our financial commentary today will refer to GAAP results unless otherwise stated. Also please note that that the primary purpose of today's call is to provide you with information regarding our first quarter fiscal year 2009 performance.

However some of our discussions 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 incorrect, actual company results could differ materially from these forward-looking comments. All the 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 on Form 10-K particularly under the heading Risk Factors. I also remind you that today's call is being webcast and a replay will be available shortly following the conclusion of the call through the 13th of June. To access the press release, the financial detail, the webcast replay or any of our SEC disclosures I encourage you to visit our investor relations website at www.salesforce.com/investor. And should you have any questions following the call, please contact me directly or send an email to investor@salesforce.com.

Lastly before I turn things over to Marc, please be reminded that any unreleased services or features referenced in today's discussion or in other public statements are not currently available and may not be delivered on time or at all. Customers who purchased our services should make their purchase decisions based on features that are currently available.

With that here’s Marc to tell you about our outstanding first quarter.

Marc Benioff

Thanks David and welcome everyone. No matter where we go in the world today we’re seeing an amazing transformation of the software industry. Salesforce.com has been the leader of the software-as-a-service movement. The appeal is as simple as it is compelling. For companies of all sizes its costs less and it’s easier to use. Just a few years ago our motto, the end of software, was a bold prediction but now it’s an apt description of current events in our business.

Just last week Aberdeen Group surveyed almost 5,000 business decision makers. The result, Salesforce.com ranks in the top 10 influential technology vendors for 2008 along with Microsoft, Oracle, SAP, IBM, Cisco, HP, Dell, ENC and Sun. And nothing speaks louder than peer recognition. Just last night we were thrilled to be recognized at the 23rd Annual Software and Information Industry Association’s 23rd Annual Codie Award event here in San Francisco. The Codies are the Oscar of software and we took top honors for Best Software-As-A-Service, Best On-Demand Platform and Best Relationship Management Solution. In fact, we’ve now won in the Customer Relationship Management category for seven years in a row.

I’d like to congratulate my co-founder Parker Harris and his amazing technology team on this prestigious award. As you can see clearly from our results, Salesforce.com is now preparing to exceed $1 billion of revenue in fiscal 2009; an important milestone for any technology company. We’re also about to start our second decade in business; a decade in which we plan to extend our leadership of the software-as-a-service industry and to find a new one, platform-as-a-service.

But before I get into the future, let’s talk about today. Our fiscal first quarter set records for Salesforce.com in revenue, operating profit, and cash flow. Revenue of $248 million was well above our outlook rising by 52% from the year-ago quarter. Significantly that growth is translating into record profitability and cash flow. GAAP operating margin rose more than six points from a year-ago and that contributed to GAAP earnings per share of $0.08, up significantly from $0.01 a year-ago and higher than our outlook.

And our growing profitability is fueling some pretty amazing cash generation. Operating cash flow of $84 million set a company record growing by more than 128% from a year ago. For the trailing four quarters we have now generated roughly $0.25 billion of operating cash and roughly $200 million in free cash. That translates into roughly $2.00 a share of operating cash or roughly $1.60 a share of free cash. Cash generation remains a strength of our software service model here at Salesforce.com.

Customer additions in the first quarter were the most of any first quarter in our history. In all we added more than 2,600 for over 43,600 customers worldwide. We believe Salesforce.com was the winner of the largest and most important CRM transactions of the quarter in all of the major markets that we are serving. In our first quarter success begins in the United Kingdom with Misys, the UK based software developer which is rolling out our call center, service and our customer portal service to more than 50,000 internal and partner employees.

I’d like to personally thank Misys CEO, Mike Lowery, for choosing Salesforce. As the former CEO of Siebel, he knows more than anyone what makes a great CRM application. In Paris, in a head-to-head battle against FAP, Salesforce.com won Areva, France’s nuclear power leader. As an aside, the European momentum was in evidence as our first ever Dreamforce Europe event earlier this month, more than 2,200 attendees packed the Barbican Center in London. With the Areva and Misys wins we now have more than 7,000 customers in Europe.

Our competitive victories were not limited to Europe by any means. We are also thrilled to have won the largest CRM transaction in Japan; Nippon Telephone and Telegraph. NTT will be converting over 5,000 subscribers from Siebel to Salesforce.com. They follow a chain of Siebel’s former large customers including Merrill Lynch, Cisco, Symantec and many others who have moved from legacy client server systems to the leader in software-as-a-service. And here in the United States we displaced Siebel yet again, this time at Thomson Reuters to push their total deployment to roughly 4,000 subscribers.

Paychecks also signed up to begin a rollout that is expected to be more than 3,000 subscribers at maturity. These customers join a long list of new business in the United States this quarter that included Sterling, Symantec, Xerox, Electronic Arts, [inaudible] Health, [inaudible] Entertainment, Auto Desk, Wells Fargo, and Transamerica Insurance. While we are proud to outgun the competition its important to remember that our customers choose us for only one reason; success.

Just last week on their Q4 earnings call, [Compuware] highlighted their global Salesforce.com deployment as key to their recent business success and their corporate transformation. Nothing speaks to the power of software-as-a-service and platform-as-a-service more than stories like Compuware’s. What’s so exciting about our new business is that customers are using us not only in sales but also in a broad range of our services.

For example Partner Edition, our partner relationship management offering is showing remarkable traction. This quarter I’m thrilled to report that one of our largest sales customers, Symantec, has selected Salesforce.com Partner Edition to help them manage a network of more than 10,000 of their partners. In all, we did more than 150 new partner relationship management transactions in the first quarter including ones at the [MC], Omniture, Bayer, and Red Hat. As we mentioned earlier the first decade of Salesforce.com has been about defining software-as-a-service and building a leadership role as a killer app company.

As we enter our second decade, a new era is beginning; platform-as-a-service. In the next 10 years we plan to not only to continue to develop the most innovative on-demand applications but also to leave this new category known as platform-as-a-service. The shift to platform-as-a-service disrupts the new class of companies just as software-as-a-service has disrupted companies like Siebel, SAP, and Microsoft. No longer will enterprises and ISVs have to buy Visual Basic, or Lotus Notes or SQL Server, or Web Logic as well as other application servers and databases. Instead they’ll be able to use services designed to build and deliver applications for both consumers and enterprises alike.

And we’re not alone in this new wave of platform-as-a-service innovation. Take a look at Google App engine for Python developers, and Amazon EC2 and S3 for LAMP developers and FaceBook for consumer apps. By our count there are 20 other platform-as-a-service vendors already online. We’re proud to take an early lead in this emerging market targeting the enterprise. Gartner last week placed the Force.com, our platform-as-a-service in the top right-hand of the visionary’s quadrant of its Magic Quadrant for application servers. It is the first pure service ever to be placed on Gartner’s application server industry report.

The good news for customers and developers is that unlike the last generation of platforms these new platforms as a service easily work together to empower application developers to their fullest. A prime example of that interoperability is our strategic global partnership with Google which we expanded in the first quarter. With Salesforce.com for Google apps the industry’s two leaders in Cloud computing are coming together to make it possible to run your entire business in the Cloud. Now Salesforce.com’s applications are tightly integrated with Google Docs, Spreadsheets, Mail, Presentations and [inaudible]. Because it’s all delivered as a service, customers and developers around the world can use this technology instantly. I want to thank [Eric Schmidt] and his team for their contributions to fantastic launch and incredible partnership. And while we are enthusiastic about the potential of the platforms to create a huge market in the future its important to note the customers are already embracing this new model.

As of the close of this quarter our platform edition customer list has grown to include Ryder, NBC Universal, Mashusta, Adecco, and CB Richard Ellis. These innovative customers along with the Japan close our largest subscriber deployment customer, are powering their next generation applications in the Cloud via Force.com. One thing that has always distinguished Salesforce.com from our client server competitors is our obsession with adoption and success. The Force.com platform-as-a-service is no exception. Customers and ISVs are embracing this new technology as fast as we can deliver it.

Allow me to give you a few proof points, 450 ISVs are selling more than 800 applications on the AppExchange. More than 80,000 developers are part of our community, roughly twice what it was a year ago. They’ve already written more than 1.6 million lines of apex code and 11,000 custom interfaces have been developed with our new visual force technology. And our data center processes roughly 150 million transactions a day with more than half of them using our API. We have been taking this message of innovation, not infrastructure on the road and we hope that you are going to join us when we come to your city in the coming quarters. And if you were one of the thousands of people who attended one of our Tour de Force events in the past two months, thank you for sharing your enthusiasm for platform-as-a-service.

Of course the foundation for our Force.com platform is our hardware and software infrastructure and we’re scaling it to stay ahead of the needs of our customers. So I’m also excited today to announce the location of our third production data center. Our east and west coast US based data centers will soon be joined by a new facility in Singapore. This represents an important commitment to our international customer community particularly in Asia where we see tremendous opportunity to grow. In all we’re now spending more than $100 million annually on infrastructure so that our customers don’t have to.

To close, our first quarter was a great way to begin the year. At a time when our competitors are still trying to make sense of software-as-a-service, we’re extending our leadership and staking our claim to the new frontier; platform-as-a-service. And while our vision has never been bolder, our business has never generated more revenue, profit or cash. That’s what I call a great quarter.

Now let me turn it over to Graham Smith for more detail on our Q1 financial performance.

Graham Smith

Thanks Marc. Our Q1 performance was a great way to start fiscal 2009. Revenue, margin and cash momentum continued and we had another solid quarter of new business. Revenue for the first quarter was $247.6 million, and increase of 52% from the year-ago quarter and up 14% from Q4. This was a strong performance and well above our outlook. Our business continues to be strong in all major geographies. America’s revenue rose 43% from the year-ago quarter to $178.4 million. At this level our annual revenue run rate in the Americas alone is now more than $700 million.

In Europe growing awareness of the SaaS business model pushed revenue to $45.2 million, a 77% increase year-over-year in dollars and up 53% in local currency. And finally growth in Asia continued its rapid pace with revenue up 94% in dollars from the year-ago quarter to roughly $24 million. Local currency growth in Asia was 78%.

While we didn’t expect it entering the quarter Q1 benefited from a continuing weakening of the dollar from Q4. And in aggregate, currency contributed roughly 5% to our year-over-year growth. International grew to 28% of total Q1 revenue, that’s up from 23% a year ago. We believe that international share will continue to increase as we are still in the early stages of the overall market opportunities. As Marc noted our European Dreamforce customer event earlier this month exceeded even our own ambitious attendance goals and the new data center that we just announced in Singapore represents an important and necessary commitment to customer success in Asia.

Given the huge international opportunity ahead, these kinds of investments will remain a priority for us in the years to come. Our mix of revenue didn’t change much from a year ago, roughly 90% of our revenue continues to come from subscription service and support and about 10% from professional services. The overall revenue mix among small, medium and large businesses has also remained constant over the long-term at roughly one-third, one-third and one-third, although we do see some variation in this mix from quarter to quarter.

Subscriber attrition remains at less than 1% of net paying subscribers each month. For the first quarter gross margin was 79%, an increase of more than three points from a year ago and up almost a full point from Q4. The biggest driver of this gross margin improvement in Q1 was our professional services business. After several years of building capacity we are now able to focus more on expanding our services partners and improving billable utilization. In addition the deferral of revenue and expense required by EITF 0021 was less punitive to our results than in the early quarters of last year. All of these factors contributed to better professional services financials for the second quarter in a row.

On a gross margin basis, our professional services business is now almost breakeven, an improvement of almost $4 million of incremental gross profit versus a year ago. However, given the inter relationship between new services bookings, consulting hiring and billable utilization it may be a while before our professional services business is consistently profitable. Subscription gross margins continued to benefit from our growing scale and good cost management, finishing at 87%, up nearly a point from last year.

Operating expenses were once again well controlled during the quarter finishing at 73% of revenue. This result was roughly flat compared with Q4 which shows improvement by almost three points over Q1 last year primarily due to sales and marketing expenses. During the first quarter we grew headcount by more than 250 people to finish with approximately 2,850 full time employees globally, an increase of more than 600 from a year ago. Our customer, business and financial success continues to allow us to attract and retain the best people in the industry.

With more than 70% of revenue being spent on operating expenses, improving productivity in all of our functions was a key lever in our profitability improvement plans going forward. These productivity gains continued to drive margin expansion in our business in Q1. GAAP operating margin for the first quarter was 6.2%, an increase of more than a full point from Q4. This was a great performance when you consider we were essentially breakeven just a year ago. And remember, our Q1 GAAP operating results include roughly $18 million of stock-based compensation which represent just over 7% of revenue.

So excluding the impact of stock-based compensation our operating margin is already in the low teens. Finally and not unexpectedly a low interest rate environment reduced our rate of return on cash which dampened interest income a bit this quarter. Our investment strategy has been and continues to be focused on capital preservation and liquidity. We are achieving this objective by investing in high quality, diversified portfolios.

Our first quarter tax rate was 48% which is down a couple of points from our fiscal 2008 rate and was in line with our expectations. We believe that over time our tax rate will continue to fall as profitability improves particularly outside of the US where we can take advantage of lower corporate income tax rates. Our strong fourth quarter and improving profitability translated into another quarter of cash generation in Q1. Operating cash flow of $83.8 million was up more than 128% from year-ago and represented 34% of Q1 revenues. And as Marc mentioned earlier we generated more than $0.25 billion in operating cash over the past year, or roughly $2.00 a share. And expanding our operating margin has actually allowed us to grow cash even more rapidly than revenue.

Capital expenditures totaled $24.2 million in the quarter. Most of our regular ongoing CapEx is the leasehold improvements, furniture and equipment necessary to support our growth, together with some internally developed software that we capitalize in accordance with GAAP. This quarter CapEx also included $8 million for the purchase of some third party software which is an important component of our delivery infrastructure. Even with the slightly higher CapEx this quarter, free cash flow still finished at a very strong $59.6 million or roughly 24% of revenue, that’s up from 13% of revenue a year ago and just 9% of revenue two years ago.

Given the ratable rate of our revenue recognition model we believe that free cash flow is an important measure of financial performance with Salesforce.com and is a key focus for the company going forward. Strong cash generation in the first quarter increased our cash balance to slightly more than $0.75 billion of cash and marketable securities, that’s an increase of more than $300 million from Q1 of last year and our total assets now exceed $1.1 billion.

On the working capital side of things, receivables declined significantly in Q1 following the spike in invoicing we typically see in Q4. We’ve done a great job of managing our collections as you saw in our cash flow this quarter. Our total deferred revenue which includes off balance sheet, unbilled backlog increased in the first quarter and is now well in excess of $1 billion. Our on balance sheet deferred revenue was $470 million, that’s up 59% year-over-year although we did see a small sequential decline of $10 million. Because our business is seasonally stronger in Q4 than Q1, invoicing levels are at their highest in Q4. The cumulative affect of this annual pattern over the years resulted in deferred revenue amortization that exceeds new invoicing in Q1.

Because our install base continues to grow and because this pattern is well established we expect to see a sequential decline in deferred revenue from the fourth quarter to the first quarter in the future. Before I close with an update to our outlook, I’d like to make clear our financial priorities for fiscal 2009.

First our top priority remains growth. We view the overall market opportunities for our application services and platforms as massive. As such we will continue to invest in the sales, marketing and development capacity together with the infrastructure necessary to optimize growth and extend our industry leadership.

Second given the ratable nature of our revenue recognition model we believe that free cash flow is one of the best measures of our operating performance. No other on-demand company has been able to match our cash generation. In that context while we remain on track to deliver approximately 300 basis points of operating margin improvement this year, we are also very focused on disciplined cash management.

With that said, let me close with our outlook for Q2 and for the remainder of the year. For the second quarter we project revenue of $258 million to $259 million. GAAP EPS is expected to be in the range of $0.07 to $0.08, assuming a tax rate of approximately 48% on a fully diluted share count of 125 million shares. This estimate includes roughly $90 million of stock-based compensation and approximately $1.3 million of amortization of purchased intangibles. For the full year we project revenue of $1.060 billion to $1.065 billion and GAAP EPS of $0.33 to $.034 assuming a tax rate of approximately 48% and a fully diluted share count of 125 million shares.

This estimate includes roughly $83 million of stock-based compensation and approximately $5.2 million of amortization of purchased intangibles. To close Q1 was a really strong start to our fiscal ’09. We achieved record revenue, record operating income and record operating cash flow. We’ve raised our full-year revenue and EPS outlook and are on track to achieve our operating margin goal. I look forward to describing our progress against these objectives in the quarters ahead.

With that let me turn the call back to the operator and we’ll open things up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brent Thill - Citigroup

Brent Thill - Citigroup

Graham you mentioned there was a pretty strong balance between small, mid and large, were there any noticeable difference particular in the large enterprise deals this quarter with the current weak economic view that you saw shifting towards the small, mid or any noticeable trends?

Graham Smith

We didn’t see any particular changes. Clearly we didn’t do as many larger deals in the first quarter as we did in the fourth quarter but our Q1 was no different to how we saw Q1 last year.

Operator

Your next question comes from the line of Heather Bellini – UBS

Heather Bellini - UBS

I know you haven’t given cash flow guidance in the past, but cash flow was obviously tremendous in Q4, it was even better this quarter. I think one question people might be wondering is just like this quarter we saw the first sequential decline in deferreds for the reasons that you discussed and the size of the business and the seasonality, are we at a point where we didn’t see the seasonality in cash flow this quarter but you might want to point people to that come your second quarter?

Graham Smith

Well we don’t give guidance on cash flow. We obviously think we’re doing a great job in terms of generating cash from our business model. I think clearly the way to look at, if you want to model our operating cash flows, to look at our receivables and then you can make some assumptions about what cash is going to look like in any particular quarter and clearly we had huge receivables entering Q1 and we collected a lot of cash and that drove the cash flow performance in Q1. Our receivables at the end of Q1 are clearly lower so it would be unlikely we’re going to collect the same amount of cash.

Heather Bellini – UBS

So just to follow-up on that, I think the net change in receivables if we look at your adjusted DSOs versus what you did last year from quarter-to-quarter, it added maybe about $18 million to your cash flow number. Would that be the right way to think about it on a normalized basis?

Graham Smith

I don’t want to try and get into calculating these things on the fly, I’m sure you’re able to do a good job of projecting our cash flow for the second quarter.

Operator

Your next question comes from the line of Charles DiBona – Sanford Bernstein & Co.

Charles DiBona – Sanford Bernstein & Co.

Marc, I was wondering you gave some interesting metrics about developer adoption of Force, I was wondering if you bring that back to the customer side, maybe talk a little bit about what you’re seeing in terms of numbers of customers adopting Force as a stand-alone platform and what you’re seeing on the revenue side there.

Marc Benioff

I spent a tremendous amount of the quarter myself on the road doing the Tour de Force programs. I’ll also be on the road for the rest of the year doing a lot of those and I of course am seeing a couple of things. The first thing is we’re seeing huge crowds. In New York I think we had a thousand people in the room and we had I think three or four thousand people over the six weeks that we were on the road attend a combination of about five events not including Dreamforce in London. These customers which are primarily customers and some independent software developers as well, are tremendously focused and interested in finding new tools to replace their client server development system.

So whether they’re trying to get rid of Lotus Notes or IBM Web Steer or Microsoft Visual Basic, they’re looking for things that are modern and new and that are service oriented and we’ve got some tremendous technology. That has resulted in the generation of quite f few exciting new customers. Some of them I described in this and quite a bit new platform deals are appearing in our pipeline. I can’t go through those with you because of the competitive situation, and finally the other thing that’s been really clear to our sales people and to our prospects is the platform has become our number one differentiator as the rest of the competitors try to deliver a kind of first generation software-as-a-service solution.

When our sales people go in to customer sights, they’re demonstrating these tremendously highly customized systems because all of our applications are built on our platform technology. Its been a very, very exciting time for the platform and as we head towards Dreamforce this year, which will be in November, you’re going to see us show you a lot of new exciting things with the platform that you probably didn’t expect it to be able to do.

Operator

Your next question comes from the line of Kash Rangan - Merrill Lynch

Kash Rangan - Merrill Lynch

Graham, on the off balance sheet backlog, you mentioned that it was up sequentially. I would assume that it probably goes up sequentially anyway not just this quarter but going from a Q4 to a Q1 in your past couple of years, just wondering if there is anything in particular that made you mention that comment. Was there any one particular transaction that was unusually large that could have skewed things one way or the other from Q4 to Q1 or ended up closing way late in Q1 to really have any backlog on the balance sheet in Q1 on the deferred revenue side?

Graham Smith

No there were no unusual sized transactions in the in DR mix. It was sort of invoicing and all those sort of things that we look at each quarter was very typical in Q1. I mentioned it because we typically have mentioned it in the past on our calls, what our total deferred which includes what the unbilled backlog is and that’s why I mentioned it.

Kash Rangan - Merrill Lynch

So the short answer maybe I could ask you about the CapEx, if you exclude the one-time items what is the run rate of CapEx that we should be thinking about in our models?

Graham Smith

Well the total CapEx in the quarter was just around $24 million and as I mentioned $8 million of that related to one item that was the software purchase. So we spent $16 million so absent that in Q1 and we spent about $8 million in Q4 so it’s sort of tough to really give you a run rate for CapEx and obviously we don’t give guidance but probably Q1 was a reasonably large size quarter but we just don’t give guidance on CapEx. We have to too many projects going on.

Operator

Your next question comes from the line of Laura Lederman - William Blair & Company

Laura Lederman - William Blair & Company

Can you talk a little bit about whether you’ve seen Microsoft’s new dynamic live product, any sightings of business by design. I know they’re delaying the rollout but have you seen that at all and how do you tell the difference between seasonality in Q1 versus any potential slowdown in the economy?

Marc Benioff

In regards to Microsoft I personally and I’m not aware but there must be right, because it’s a huge market but I don’t know where they are with the new product. I haven’t seen it. I haven’t been up against it in a customer or prospect site. I haven’t been asked about it although I’ve been on the road a lot. No press or journalists have contacted me regarding it and I don’t really understand it in terms of what’s going on with it. I follow the industry like you do, so I saw the press release and some of the initial news clips but any start-up can get that. So I don’t know and if we see it to be coming consequential or we lose a deal to it or I’m sure that Microsoft would let us know but we have not seen that from them.

So I think the problem really is that Microsoft is trying to as I said kind of deliver a first generation product in a time when we’re looking at third generation technology today. And especially with the platform-as-a-service capabilities that are in our new summer release which is about to go online there is very little comparison between any technology they have on premise or online and what we’re able to offer customers. And also don’t underestimate that customers want an open solution and Salesforce.com works with all of Microsoft’s products, Microsoft Office and Exchange and so forth, but we also work with all of Google’s products and Salesforce’s products, we work with Microsoft’s mobile devices but we also work with the Blackberry and we work with the iPhone.

But when you choose a Microsoft you choose all Microsoft. It only works with Exchange not Google. It only works with their PDA not Blackberry or iPhone and on and on and you get locked into that world and I think that turns a lot of customers off in today’s environment especially when these other vendors have so many cool things that you can bring in to your corporate environment and I think that’s why Microsoft has not done very well in enterprise software overall and why a lot of their tactics and traditional marketing techniques have failed in the dynamics product line, not just in CRM but throughout.

In regards to SAP that of course, they’re whole on-demand strategy is a huge train wreck. We have saw originally SAP CRM on-demand which they now disavow that they never announced or offered but that whole kind of press release and announcement which was a year or two years ago, when they had some of their prospects or customers announcing that product, those are now our customers who are live on our service and you see their largest customers standardized on our service and one of the very largest deals globally this year with Areva, I know that and I was very nervous because they’re new CEO, he lives right there in Paris. He probably was very involved, we know of course he was involved in the transaction and they of course lost the deal to us and that’s because their product is really pretty bad. And that’s not me, I won’t use the term on the call because its offensive that their Chairman used in a debate with me describing his own CRM product but it started with an S and ended with a Y.

In regards to the economy, I have CNN in my office running right now and economic conditions are not the best, but when we wrote our business plan for this year we didn’t take those conditions into consideration and we were ahead of our business plan in the first quarter on all the various metrics that we measure. So we are very excited about that and these results are way beyond our expectation. So we’re very excited about where we are and our positioning in the market and where we are going.

Graham Smith

I think I’ll just echo what Marc said, we didn’t see anything unusual in terms of seasonality and as Marc said we executed well against our plan.

Operator

Your next question comes from the line of Thomas Ernst – Deutsche Bank

Thomas Ernst – Deutsche Bank

The last three quarters we’ve seen a pretty significant acceleration in the business, moving north of 50% organic growth year-on-year, how would you rank order contribution to that acceleration between just the international growth, platform expansion, and just the core SFA?

Marc Benioff

It’s a very good question which is what are the primary drivers for our growth and when you’re running a new business and we’re not really a new business anymore so I probably can’t use that as an excuse, we’ll be 10 years old on March 8th of next year so we’re in our ninth year, you have to do a number of things to continue the growth because we’re larger than a lot of other certainly software service companies and yet we’re growing faster than they are and the reason why is because we’re trying to do more. That’s the net. And when we’re trying to do more it’s all the things you just mentioned and other things too.

So is it international, is it the platform, is it the full portfolio of customers that we try to reach from small, medium to large? Is it the scalability, is it our focus on selling more into our installed base? That was a big focus for this quarter. We wanted to sell more into existing customers. So when you hear about more than 100 new platform deals, that doesn’t show up for example in the customer number, we become stickier, we become more deeply entrenched inside existing customers. That’s a major focus. There’s many different major focuses and all of those things have resulted in the last two quarters being at greater than 50% growth which is pretty awesome for an enterprise software company for the current season. So we’re very excited about that and we’re going to continue to do all of those things and a lot more as well.

Operator

Your next question comes from the line of Philip Rueppel - Wachovia Securities

Philip Rueppel – Wachovia Securities

Can we dig in a little bit more on the platform-as-a-service initiatives? You talked a lot about wins in-house with customers. Are you seeing the same kind of interest with ISVs and I appreciate the gestation period might take a little bit longer but is that something that we might to see some major ISVs announce using Force as a platform and along those lines are you seeing a different set of competitors such as Cisco’s WebEx division as you start to sell the Force.com?

Marc Benioff

In specific in terms of the platform I think that the big threshold that has happened with the platform is that we’re able to articulate to our customers what platform-as-a-service is and also we’re not alone in the market, we’re not one man a monkey and a bell. We’ve got basically competitors in the platform-as-a-service area. We have Google with Google App engine, we’ve got Amazon with EC2 and S3, and there are about 20 companies and I put them on our slides because the cool thing about platform-as-a-service is it is the future. You can talk to the Gartner platform analysts, they’re doing a whole new report on platform-as-a-service. The existing platform vendors have kind of pooh poohed it and said, oh no its not real, don’t really think about it, but the customers and ISVs are really coming to town saying, okay we recognize we need these next generation of solutions and what we’re really doing is, we’re really focused number one on the this seven layer architecture that we’ve articulated and that is really our global infrastructure as a service number one.

Our integration layer and the through-put and the depth of our API and in regards to our infrastructure layer I’m sure you saw more than 150 million transactions a day and the uptime is spectacular and all the information you can see at trust.salesforce.com, the AP I think we’re doing something like 2 billion or more transactions a month. The work flow and also our new virtual machine that let’s our customers run their code on our servers and we’re seeing that as a threshold event for customers. The user interface so you can build your own user interface on top of it. This is about to go into production.

Customers as I mentioned have already built 11,000 custom interfaces on iPhones and [kiosks] and PDAs and replacing our tab based interface with the interface of their choice and we’ve shown some new interfaces including one that’s been by Dolby for the rollout of their new 3D theater systems. And then on top of that user interface we have our AppExchange where you can package all this up and offer it for sale around the world and the seventh layer is our new meta data API where you can take the eclipse development browser, wrap all of our servers and if you’re an eclipse developer using eclipse to built or deploy another app it is now, you’re now programming our servers using eclipse which is a tremendous opportunity for software developers.

Now when we roll that out to customers, the larger CIOs in the world and honestly even the smallest they aren’t very interested. And they are looking at how they can build and deploy and we’ve seen a lot of customers of course already do a lot of things with our platform. I think customers have deployed over 60,000 custom applications objects already but we’re seeing them finally really get that its more than building a recruiting app, for example, if you are dealing with branch offices and you need to automate all your branches offices, you’re not going to put servers and enterprise software in every branch office, you don’t have the IT personnel. You can do all this with custom applications and office productivity in the branch office environment and that becomes extremely exciting.

In terms of traditional or large ISVs we’re talking to some of the largest ISVs in the world right now about potentially becoming their SaaS strategy. A lot of very large ISVs have kind of ignored SaaS to their peril and to their growth rate and with our infrastructure in six months or less we can probably take a lot of the enterprise applications that these companies have built and port them to our platform and we’re talking to those large ISVs about doing that. One of them that’s out there is a unit for Agresso and their division CODA whose a 30-year-old company, it’s the number two ERP solution in Europe and we’ve been taking them on stage and showing that they’ve built an AP, AR, and GL in less than a year on our platform and we’re really excited about that. They’re claiming it will be production by our November Dreamforce and they’re already signing up their first customers.

That’s just an example but we’re really working hard, talking to the world’s largest ISVs about porting to Force.com and then finally in regards to Cisco WebEx, we’re very excited about our relationship with Cisco as a customer of ours and we work hard to demonstrate to our customers how WebEx integrates very easily all of their services with our services. One of the great things about these platforms-as-a-service is the ease of interoperability, its what led to our Google partnership this quarter. It’s what will lead to a lot of new partnerships that you’ll hear about this year but the ability to [pull]. You don’t have to use our platform. You can use our seven layers, maybe you want to use Google App engine for something. Maybe you want to use EC2 or S3 for something from Amazon or others and you can combine this to build your application and you’ll be seeing some pretty cool stuff coming in the next few months on the market to Dreamforce from us in this area.

So platform-as-a-service obviously has got my full attention. We’ve worked hard over the last decade to define software-as-a-service. In the next decade of course we’re going to continue to focus on software-as-a-service but we’re going to be also focused on platform-as-a-service because we believe that it is the next thing. We think it is Web 30, that this is what will be known as Web 30 the platforms, and we want to be a leader in that just was we have been a leader at software-as-a-service.

Operator

Your next question comes from the line of Rich Baldry – Canaccord Adams

Rich Baldry – Canaccord Adams

Last quarter you actually gave an explicit dollar amount of $425 million that you think the venture community has put into partners, just wondering if you have any update on that number and then maybe qualitatively discuss where you think that group of companies is in terms of having actual products developed and moving into a sales process that would drive revenue for Salesforce and then maybe a light comment on the balance sheet and maybe thoughts to as you close in on almost a billion dollars whether you’d put that to work on either buybacks or acquisitions.

Marc Benioff

In regards to the venture community, I don’t think venture capitalists are funding any more software companies. I said that for awhile that I don’t really believe that they’re funding any more enterprise application or enterprise application companies. That most of it is software-as-a-service companies and so the numbers have, only have to be increased. I don’t have a current number for you, you’d have to come up with it on your own. But number two in the same case, I don’t think that venture capitalists are funding any new platform companies. Nobody is going to be buying new software platforms to install. That’s a very important concept as well that the next generation platforms will be services also and I think that will only accelerate that investment by venture capitalists.

In regards to your question about cash, we’ve now increased our cash by about $0.25 billion in the last year, and we until we get over a billion in cash, we won’t be looking at strategic things to do with that cash. Instead we continue to look at a lot of these kinds of small tactical acquisitions or things that we can do and just have the cash as a strategic asset for the company.

Operator

Your next question comes from the line of Mark Murphy – Piper Jaffray

Mark Murphy – Piper Jaffray

I’m wondering if you could estimate the mix of your non-SFA bookings as a percentage of the total or perhaps offer any future targets that would help us access the diversification of the business and if you don’t want to quantify it, could you qualitatively maybe talk about how the platform is impacting your application deals.

Marc Benioff

I would give you the numbers if we had them but we just don’t really have that. But we will look to try to give you quantitative measures some time in the future. There isn’t a deal that we do that doesn’t include the platform today. Every demonstration, every transaction, every customer is implementing the platform. The reason that we’re winning, why we have such a strong win rate and why these competitors have failed to get traction against us over the years of announcements of new products and capabilities that they have is really I think it gets down to the platform. Its because when they come into a competitive situation with us, when we demo our product for prospects, I’ve said this once before, but when you look at, when Japan [post] looks at doing CRM and when Merrill Lynch looks at doing CRM or Cisco looks at doing CRM, or Areva the nuclear exports, that France are doing CRM or Citibank is doing CRM, its not the same CRM. It’s not like email. Its not some generic app that we all are on CRM and that when we move around from company to company and we’re doing CRMs, CRM is kind of your business processes. It’s very complex applications, workflow, and business logic, integration that empowers those workers, front office and back office to have better customer relationship success and integrate with the ERP on the backend.

And that is highly customized and integrated and for those competitors who have mocked us, they’ve done it at their own peril because the reality is is that this is what customers need. They need these highly customized environments and this is what gives us adoption and gets us the renewal because don’t forget in our model we’re only successful if the customer is successful and what I like to do when I meet people and talk to them about our business, make a list, how many people do you personally know who are users of Salesforce or companies that you know who are users of Salesforce or our platform, or our various offerings and then make a list if you can of other CRM products used by other vendors. Microsoft customers and users, SAPs customers and users, Oracle, the smaller companies and so forth and see which list is longer. And I think at the end of the day, you’re going to find our list is longest because this is what customers need to be successful is the platform and that its so hot and the derivative of course and the secondary gain is, its brought us in to become the recruiting standard at Electronic Arts or at Morgan Stanley or the, so many other custom applications that we’ve delivered for customers all over the world.

Operator

Your final question comes from the line of Brendan Barnicle – Pacific Crest Securities

Brendan Barnicle – Pacific Crest Securities

Marc you mentioned more ISVs going to Force and going Force [native], I wonder if you had any numbers or any more color you could give us numbers there. I know we talked about some of those companies in the past and then as you continue to build out the international effort, how are you in terms of staffing of that international sales force and how much more growth do you think you need on that side?

Marc Benioff

We need a lot more sales people. The name of the game is distribution capacity because you can’t win a war in the software industry without an army and we are signing up recruits every day. Its an inherently critical and essential part of our business because what we’re doing is so strange, weird and different than everybody else that we need really smart people to explain it to customers as to why it is the right thing and that really takes the kind of traditional hand-to-hand combat that happens in the software industry to make deals happen and why traditional resellers of ours have not, that have been the traditional strength of the computer industry channel, have not worked for other SaaS vendors is because you have to have an evangelical and entrepreneurial approach to closing these transactions.

And in regards to the updated numbers I would encourage you to get my slides from the Dreamforce Europe presentation because that had all the most current statistics that we’re delivering.

I’d like to thank everyone for participating on the call today.

David Havlek

Thank you very much everybody. Again if you have any follow-ups please contact me directly or investor@salesforce.com. Thank you and have a good day.

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Source: Salesforce.com, Inc. F1Q09 (Qtr End 04/30/08) Earnings Call Transcript
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