Salesforce, Inc. (CRM) Q2 2012 Earnings Report, Transcript and Summary

Good afternoon. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to the Salesforce.com Q2 Fiscal Results Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. David Havlek, Senior Vice President of Investor Relations. Sir, you may begin your conference.

Thanks, David. I'd like to welcome everyone to Salesforce.com's Second Quarter Fiscal Year 2012 Results Call. Here today to discuss our strong quarterly performance, are Marc Benioff, Chairman and CEO; as well as Graham Smith, our CFO. Following Marc and Graham's prepared remarks today, we'll open things up to your questions. We now have 43 analysts covering the company and because we want to get as many of you as possible, we will be limiting each of you to one question today. A complete disclosure of our second quarter results can be found in a press release issued about an hour ago, as well as in our Form 8-K filed with the SEC. Additional financial information, including detailed historical financial statements and facts is available on our website. 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. At times in our prepared comments or in responses to your questions, we may offer incremental metrics to provide a greater understanding of our business or our quarterly results. Please be advised these additional details may be one-time in nature, and we may or may not update them in the future. In addition, I remind you that this quarter is the last quarter in which the customer count metric will be provided as a regular part of our quarterly report. In the future, we expect to offer this metric periodically on a milestone basis. We're making this change because several of our recent acquisitions have had large number of users were linking those users to specific customer organizations can be extremely challenging and in some cases, impossible. As a result, we believe our traditional customer metric will be less meaningful over time. 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 information regarding our fiscal second quarter performance. Some of our discussions or responses to 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 results could differ materially from our forward-looking statements. All of these risks and 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 recent report on Form 10-Q, particularly under the heading Risk Factors. To access our Q2 release, including the GAAP to non-GAAP recons, our historical results, any of our SEC disclosures, a webcast replay today's call, or simply to learn more about salesforce, I encourage you to visit the Investor Relations website at salesforce.com/investors. Finally, before I turn the call over to Marc, please be advised that we may reference certain unreleased services or features that is not yet available on today's discussion. We can't guarantee the future timing or availability of these services or features. As such, customers who purchase our services should make their purchase decisions based on services and features that are currently available. With that, let me turn the call over to Marc to discuss our excellent second quarter. Marc?

Thanks, David. I'm absolutely delighted to discuss these strong second quarter results, just 2 quarters now into our fiscal year and we will soon exceed a $2.2 billion annual revenue run rate, validating both our growth strategy and our ability to execute on the incredible opportunity. I'll begin by reviewing some of these financial highlights. Number one, revenue of $546 million rose by 38%, and we haven't seen revenue grow that fast in almost 3 years, and that was one we are less than 1/2 our current size. Non-GAAP EPS of $0.30 was at the high-end of our guided range, and we delivered that result even as our headcount has grown by more than 800 during the quarter. Deferred revenue increased by 37% to finish the quarter at $935 million, and operating cash flow rose by 9% to $83 million in the quarter, and we exit the quarter of nearly $1.3 billion of cash and equivalents on our balance sheets. Our financial success was powered by another quarter of tremendous customer success. And during the quarter, we added roughly 6,300 net new customers, that's a company record, smashing past 100,000 customer milestone. And let me just say that, while we ended the quarter with 104,000 customers using our core Salesforce services, that number does not include the thousands more who are using Heroku and Radian6, which are 2 of our most recent acquisitions. We also saw continued strength in big deals during the second quarter and all we signed more than 60, we signed more than sixty 7-figure transactions a 40% increase compared with last year, and we signed three, three 8-figure megadeals. In addition, I'm thrilled to tell you, we closed an additional 8-figure megadeal just after the quarter ended with a large telecommunications company that we will be announcing at Dreamforce. Given this strong financial and customer momentum, we're again, raising our full year fiscal year '12 revenue guidance, which we now project at $2.22 billion to $2.23 billion. Over the quarter, I had the opportunity to travel around the world, discussing the power of cloud computing with customers, prospects, partners. And I started the quarter with an exciting trip to Japan where I announced our Toyota Friend vision with Toyota CEO Toyoda-san in Tokyo. The idea of Toyota Friend is simple. If I have friends on Facebook, why is my car not one of those friends? With Toyota Friend, Toyota is building a product social network, where its employees, customers, dealers and its products, the cars themselves are all collaborating to a private and secure enterprise social network. The car is talking to me, telling me when it needs to be charged, where the service station is or important updates from dealers or the factory. It's a vision of a social enterprise that has awakened us to the opportunity of showing our customers a new way of delighting their customers. I then traveled to Washington, D.C. to present at a sold-out Cloudforce of over 1,400 registered attendees, where I announced that Salesforce.com has received a U.S. General Services Administration Moderate Level of Authority to Operate. We had exciting presentations in D.C. from a variety of salesforce customers, including the Department of Commerce, the Department of State, the GSA and the Department of Health and Human Services. Now I'm able to announce that one of the 8-digit deals in the quarter was with the GSA, which has signed an enterprise license agreement for 12,000 users. When we went on to Boston, again, we were greeted by sold-out crowd of over 1,700 attendees. There, we further articulated the power of cloud computing and showed the power of cloud, combined with social and mobile, fundamentally changes our companies, their employees partners and customers' collaborated, share and manage information. This time, it was Enterasys Networks who showed not only an employee social network and a customer social network, but also a product social network based on their new chatter-enabled switch. This vision of a next-generation social enterprise inspired us further that customers looking for exciting new ways to transform their business using the cloud. And finally, we went to Minneapolis, not exactly a city known for a large crowds showing up for technology events, but we are greeted by a record 1,000 registered attendees. And we refined our social enterprise messaging based on our experiences in Tokyo and DC and Boston, and we showed the amazing social experience in the next generation of apps for Disney's theme parks, built on our Heroku platform. The Disney apps are tightly integrated with Facebook and can be seen at www.facebook.com/disneyland. Take a look and try out those amazing Heroku apps. They showed attendees how one of the world's most important brands has refined interactivity with its customers and develop a customer social network. And by the time we get to Dreamforce just a few days from today, where we expect over 40,000 people to register to attend, we will be showing a further assigned story of this nextgen of computing. We'll demonstrate how companies, their employees, their customers, their products use the cloud social mobile technologies to create the social enterprise. We have seen the power of this transformation at small, medium and large customers around the world, and we believe we are witnessing a transformation of our industry based on this social revolution. A revolution that has shown our customers how to delight their customers in a whole new way. This revolution is only possible through the power of the cloud. With the cloud, we're able to deliver what every company is asking for, a solution that is fast to get going, easy to use and open to all the major industry standards. And the social resolution is also changing the relationship we have with our customers. We're now engaging at a higher, more-strategic level than ever before. That's certainly evidenced by the number of large transactions that we closed during the quarter, and customers are buying a broad selection of our services as you can see by the growth across all of our clouds. Sale Cloud, "hey, I'd like to start with our flagship Sales Cloud where our social enterprise message gives us a solution that is highly differentiated, enabling customers to sell with greater collaboration, mobility, productivity than ever before." A great example is Chartis Property and Casualty, which selected Salesforce for 10,000 seats of the Sales Cloud and 40,000 chatter seats. Chartis's vision for the social enterprise is an employee social network that fuels a new level of collaboration between their sales people and other in global employees across 117 countries. The Chartis Social Enterprise will allow sales teams to engage customers in a whole new way and proactively reach out to customers before policies expire. Other new or add-on deals for the Sales Cloud this quarter included Continental Casualty and ING, and LivingSocial Penske and REECO. And as I mentioned, the social enterprise message makes the Sales Cloud highly differentiated, allowing us to crush the competition. Against Microsoft, we won new or add-on business of companies like Cisco, Dex One, First National Bank of Omaha, George P. Johnson, Mutual Générale in France, Transamerica Life and VHA. And against Oracle, we won deals including the Bank of New Zealand, Continental Casualty, JBWere, Integra Telecom and K-12. Against SAP, we won deals with Ashland, Dolby, Fujitsu and P&H Mining. As exciting as our Sales Cloud momentum is making it the #1 sales application in the world, perhaps nowhere is the social enterprise messaging as critical as customer service. Companies realize they need to meet customers where they are today on social networks like Facebook and Twitter. That's why we saw a continued strong growth in The Service Cloud as customers look for a new generation of technology designed from the ground up for a cloud, social and mobile world. An amazing example of this is our largest Service Cloud transaction in the quarter, Tyco ADT, the leading home security company. ADT will be taking the social enterprise directly to the customer by arming its 4,000 field reps with iPads. These iPads will be loaded with mobile apps that allow ADT to deliver as much more powerful service than ever before. And to think that at the beginning of last year, iPad didn't even exist. The pace at which these companies are embracing social enterprise is amazing. Other new or significant add-on deals in The Service Cloud include GE Energy, Honeywell and Toto. And today, I'm thrilled to tell you that more than 100,000 companies are now actively using Chatter, making it our most successful product introduction ever. We believe Chatter is the largest, most actively used social network in the world. These aren't 100,000 trials, these are 100,000 active social networks. Chatter lies at the heart of the social enterprise, giving companies a new level of collaboration, transparency and speed. And in addition to elevating our conversation with customers into the C-suite, Chatter's also taking our deployments enterprise-wide. New enterprise-wide deployments this quarter include Chartis Property & Casualty, which I mentioned is deploying Chatter to more than 40,000 users; ADP, which is deploying Chatter to 42,000 users; MCA which extended Chatter to 14,000 users. They join a growing list of enterprises taking Chatter wall-to-wall, including Dell and SunGard. Of course, the social enterprise needs a social enterprise platform. We've built Force.com and Heroku from the ground up to be social mobile and open, and that strategy has propelled us to an incredible level of momentum. The market for cloud platforms is growing faster than ever, and we're thrilled that the salesforce platform was selected by Forrester as the leading cloud platform for developers, companies and ISPs. In this quarter, Force.com was our fastest growing business, outpacing even The Service Cloud, which continues to exceed overall company growth. This quarter, one of the world's great luxury brands, Burberry, selected Force.com to create a social enterprise for it's employees, partners, suppliers and customers. You'll meet Burberry at Dreamforce and you'll find out how they plan to create an employee social network tailored to Burberry's exact theme brand standards that will allow it's associates, creative teams, partners and vendors to collaborate like never before. And Burberry will also be delivering next generation social apps that let customers experience the Burberry brand and culture anywhere on any device. It's an amazing vision, it's only possible to social enterprise platform. Other new or add-on Force.com customers this quarter included the GSA, F. Hoffman-LaRoche and Information Service International, Dentsu. This quarter, we are seeing great traction with developers and partners building their own social enterprise apps. Force.com boasts now more than 400,000 developers and 240,000 custom apps. And Heroku has dramatically expanded its developer community, now supporting over 170,000 social and mobile apps written in Ruby on Rails. That's more than 3x last year's number, and if you can expect some exciting announcements about Heroku at Dreamforce. Of course, products are only great if people use them, and that's why adoption is such an important indicator of customer success. During the second quarter, the Force.com platform delivered a record of 36 billion transactions. That's more than 500 million transactions from Force.com every business day. Look if companies realize that cloud, social and mobile are the future, Forrester predicts that the public cloud will grow from 25 billion this year to nearly 160 billion in 2020, and we expect our strategy of transforming companies in the social enterprise will help us take even bigger share of that market than we already have. We see tremendous growth opportunities ahead, and you're going to see us invest in growth through hiring, through product development, through events and more. And finally, I want to remind you that we're only 8 business days away from the world's largest cloud computing event and soon, the industry's largest enterprise software conference, Dreamforce, which runs August 30 to September 2 right here in San Francisco. Dreamforce is the place to hear how customers use the cloud, social, mobile technologies to create a next generation of social enterprise. In addition to hosting the biggest selection of cloud products under one roof, with nearly 300 partners in the expo, which is going to be amazing, we will have a number special guests this year including Neelie Kroes, the European Commissioner for Digital Agenda; Vivek Kundra, the former CIO of the U.S. Federal Government; Google Chairman, Eric Schmidt; Metallica and will.i.am. Also performing, Neil Young, Alanis Morrissette and Jay Leno in our UCSF Children's Hospital Fundraiser, which will be happening in the night of September 1. Tickets for that event are still available and you can get further information by contacting my office. Also, we'd love to see you at Dreamforce. Just register, go to www.dreamforce.com. And whether we see you at Dreamforce, at one of our keynotes, at Metallica or at our UCSF benefit on September 1, we look forward to seeing you all in San Francisco. And with that, I'll turn the call over to Graham for the final -- financial details of our second quarter.

Thanks, Marc. Q2 was another exceptionally strong quarter. Our business results reflected both great execution and continued healthy business demand. Second quarter revenue of $546 million was 38% from the year ago quarter. The main drivers or the top line growth were: first, new business which Marc has already discussed. Not only did we add a record 6,300 net new customers in the quarter, but we also saw strong add-on and upgrade business in our customer base. In fact, more than 1/2 of new business sales in the quarter were Internet customer based. As you know, many of our most successful customers start small and grow over time. With over 100,000 accounts now and an expanding portfolio of products, our customer base represents a huge growth opportunity. Second, a continued reduction in our attrition rate. Dollar attrition fell for the eighth consecutive quarter and continues to be in the mid-teens percentage range when compared to the year-ago quarter. As we said in the past, minimizing attrition is an important foundation for growth, especially as our business scales over time. And lastly, a weaker dollar. Excluding a year-over-year FX tailwind of approximately $18 million, constant-currency revenue growth was 34%. We didn't see any changes in pricing based on our rolling 8 quarter trends for both regions and additions. On a regional basis, revenue in the Americas grew 34% from a year ago to $367 million. European revenue of $102 million rose 56% year-over-year in dollars and 36% in constant currency. Within the region, the U.K. had a particularly strong year-over-year in new business quarter. And finally, Asia revenue of roughly $77 million increased 42% in dollars and 33% in constant currency versus Q2 a year ago. While second quarter new business in Japan was down slightly versus a year ago, the demand environment improved significantly from Q1. So we're incrementally more optimistic for Japan in the second half of the year. Our revenue mix was 93% subscription and support and 7% professional services. On a year-over-year basis, the 1-point increase in the consulting proportion was primarily the result of implementing the EITF 08-01 accounting standard that we discussed at the start of the year. Our vision of the social enterprise that Marc described earlier will likely require that we build a small team of architecture and user interface specialists to spearhead some of implementation teams. We've kept our bill of consulting headcount while it's flat for the last 2 years, so the combination of building this team, together with a more-favorable accounting treatment for consulting revenue, will likely result in this small mix shift back to professional services for the remainder of fiscal 2012. Moving on to the rest of the income statement. Non-GAAP gross margin remained unchanged from Q1, and the year-ago quarter approximately 82%. While non-GAAP gross margin for our subscription and support business was flat sequentially at 86%, it was down a bit from last year, primarily as a result of some of our acquired businesses like Heroku and Radian6, as well as the buildout of our Japan data center, which we expect to become operational by the end of fiscal '12. Similar to the first quarter, year-over-year non-GAAP gross margin for our Professional Services business went from a negative to a positive in Q2, improving to 18%. This margin improvement in the first half is the result of 2 factors: First, at the beginning of fiscal 2012, we reduced some of the headcount in non-billing roles in Professional Services; and second, accounting standard EITF 08-01 has had the effect of bringing forward certain project-related revenues that were previously deferred. Now on to expenses. Total non-GAAP operating expenses were roughly 71% of revenue for Q2. That's unchanged from Q1, but up 5 percentage points from the year-ago quarter. The year-over-year increase was primarily the result of our accelerated M&A activity over the past year, as well as our continued aggressive hiring. During the quarter, we added more than 800 people. That includes more than 300 from the acquisition of Radian6. Our total employee population is now more than 6,300, that's an increase of more than 1,900 or about 40% from a year ago. As in the past, our hiring focus continues to be in the area of sales and engineering capacity, and acquisitions are obviously also fueling our employee growth. At this point, we expect aggressive hiring to continue through the second half of fiscal 2012. R&D was our fastest growing expense category in Q2, up 60% year-over-year to 11% of revenue. In the importance of product innovation, we'll continue to invest in hiring and retaining the best software engineers in the world. Sales and marketing expenses were up 50% year-over-year at 46% of revenue. In addition to hiring, our sales and marketing expense reflects a very active event campaign through the second quarter, including Cloudforce events in Washington, New York, Boston and Minneapolis. As you know, we view these events as important not just for near-term revenue growth through pipeline generation, but also the building awareness of Salesforce.com. Q2 sales and marketing expenses also included the approximately $0.04 per share costs of the one-time charge related to the settlement for a California state wage in our lawsuit, which was disclosed mid-quarter in an 8-K filing. Finally, G&A costs rose by 33% from a year ago and was 13% of revenue. While G&A costs can be somewhat lumpy as we scale for growth and integrate acquisitions, we remain fully committed to our long-term goal of reducing G&A as a percentage of revenue. Our non-GAAP operating margin was flat from Q1 at 11%, but down roughly 5 points from last year. The biggest driver, of course, is the fact that we've acquired 9 companies over the past 15 months, all of which were either technology purchases such as Dimdim the Heroku, or fast-growing businesses such as Jigsaw and Radian6, which have yet to achieve in our break even. While we exclude the amortization of purchased intangibles in our non-GAAP results, it's important to remember the impact these acquired companies are having on our fiscal 2012 GAAP operating results. Our effective non-GAAP tax rate for Q2 was roughly 26%. This was a bit lower than our guided rate of 30%, primarily due to a larger-than-expected tax benefit relating to the acquisition of Radian6 and as well to -- as to the bigger-than-anticipated federal R&D tax credits benefit. Because of the lower Q2 tax rate, we now estimate our full year fiscal 2012 tax rate to be approximately 32%, that's a point better than our last estimate. Looking ahead to fiscal 2013, we do expect our tax rate to increase, probably to a level somewhere between fiscal 2010 and 2011 levels due to the scheduled expiration of the federal R&D tax credits, and also because the Radian6 acquisition will cause a slight drag on our tax rate next year versus actually being a benefit this year. Non-GAAP EPS was $0.30 for the quarter, at the high end of our guidance range entering the quarter. While we did benefit by roughly $0.02 from the lower tax rate I just mentioned, we were also able to absorb the approximately $0.04 charge from the legal settlement that I discussed earlier. Strong execution and above planned growth enabled us to overcome that net $0.02 deficit and deliver on our EPS guidance. Moving on to the cash flow and the balance sheet. Operating cash flow increased by 9% from a year ago to just under $83 million in Q2. However, it's important to note that we prepaid just over $13 million of Dreamforce expenses in Q2 compared with $0 in the comparable quarter last year. We still expect full year operating cash flow to grow by the mid to high teens percentage rate that I highlighted on our last call. We project Q3 operating cash flow growth well above the Q2 level. And without Dreamforce in the fourth quarter numbers, we should see a record cash flow quarter to end the year. CapEx finished the quarter at around $45 million. This was a little higher than we've seen recently, so let me take a moment just to drill into that detail. The biggest driver of capital spending continues to be employee growth, both in the form of leasehold improvements and computer equipment for employees. In fiscal '12, we expect about 1/2 of all CapEx to be employee-growth related. The second largest category is data centers, primarily the data center build out and core components, which includes CAGR, power and network infrastructure. This category is by nature, a little lumpy and in Q2 was higher than normal because of the Japan data center build out. And just to remind everybody, we do lease most of the service and storage equipment that goes into the data centers. So those items are not included in CapEx. The third largest category is capitalized, internal software costs for our service delivery and for large IT projects. And finally, we also spent $6.5 million purchasing domain names [indiscernible] we don't expect to be regularizing. If the CapEx is up 83%, for the full year, we would expect it to increase by approximately 50% based on anticipated hiring and the completion of the Japan data center. We expect Q3 CapEx to be down from Q2. With that background, Q2 free cash flow, defined as operating cash flow less reported CapEx, was approximately $38 million, that's down 22% compared to a year ago. However, given my operating cash flow commentary above, we are projecting free cash flow growth in Q3 and Q4. Cash and equivalents, including short and long-term marketable securities finished the quarter of just under $1.3 billion, this was down approximately $200 million from Q1, primarily, a result of our acquisition of Radian6 earlier in the quarter. Deferred revenue finished the quarter at $935 million, that's an increase of 37% from the year ago quarter. Our deferred revenue result included about $2 million of sequential FX headwind, and approximately $80 million of tailwind from the year-ago quarter. Adjusting for FX, year-over-year constant currency growth for deferred revenue was 34%. Receivables were once again well managed during the quarter. DSO of 58 days was up slightly over the prior year number of 53 days but well within the range we would expect for a business with an accelerating top line. Our receivables aging remains excellent. Obviously, our acquisition of Radian6 affected several balance sheet accounts, most notably goodwill, moved higher by $265 million. In addition, capitalized software increased by $70 million, almost all of which was the result of the acquired Radian6 technology. And Radian6 was also the primary driver of changes to prepaid income taxes and income taxes payable. And finally, we're executing well on Radian6 cash collections. The cash basis full year revenue recognition that I discussed when we announced the deal is expected to cause a small revenue spike in Q4. 2 quarters out, it's difficult to predict the Q4 to Q1 revenue transition with a lot of precision but it's possible that Radian6 revenue may actually decline slightly in Q1 as we complete the transition from cash to invoice-based revenue recognition. As we look to the remainder of the year, our strong first half performance and pipeline of business are encouraging. While we are mindful of the macro environment, and we'll be watching for any changes to our strong business trends, growth continues to be our top priority. With that backdrop, we are projecting third quarter revenue of approximately $568 million to $570 million, and non-GAAP EPS in the range of $0.30 to $0.31 per share. For the full year, we now expect revenue in the range of $2.22 billion to $2.23 billion. This represents an increase of $65 million from the midpoint of prior guidance, a new midpoint and a prior full year revenue growth of approximately 34%. We plan to invest this revenue upside back into the business, particularly in distribution capacity. In that context, we are leaving our full year non-GAAP EPS estimate unchanged at $1.30 to $1.32. Before I close, I'd like to personally invite all of you to Dreamforce 2011. As Marc indicated, we're expecting our biggest and most amazing Dreamforce ever. In addition to the customer or partner events that you should plan to attend on the first 2 days, David and I will be hosting an analyst summit on the Wednesday from 2:00 until 3:30, and we really look forward to seeing you all there. So with that, let me turn the call back to the operator so we can take your questions.

[Operator Instructions] Your first question comes from Adam Holt, Morgan Stanley.

I had base -- I'll start with a macro question since you're one of the first companies to report since we've really seen the pullback in the marketplace. Did you see any change in the demand environment through the quarter or even in the beginning of the subsequent quarter? And did you change the way that you're thinking about conservatism for the third quarter to maybe bake in a softening environment?

We haven't seen a softening environment. We saw a strong quarter. Each month was very strong. We had a strong finish to the quarter. It would have been a blowout quarter except for that fourth 8-digit transaction that I mentioned, came in the week after the quarter which is setup. This quarter was a strong start. And our -- I was out in the market very aggressively during the quarter, and as I mentioned, in Japan, in DC, Boston, Minneapolis, and I just want to tell you that when I show up in Minneapolis, I expect a crowd of 200 to 300 people, not 1,000. And in each of these environments, I'm seeing 2x to 3x what I would normally expect in terms of physical turnout. And when we look at kind of already the registrations that are done for Dreamforce, and the ones that are easiest for us to spot are the paid registrations, our numbers are up, I think, 30% to 40% year-over-year. So we don't see a soft rate environment, we see for our business, a very strong and accelerating environment, and that's why we're raising guidance. If the environment would change, we would, of course, we would let you know. And we think we're really well positioned for the future. We certainly are -- we certainly saw also in the quarter with a number of very large transactions that were happening just a robust acceleration of our existing customers of going deeper with us. And I think that, that's going to be very, very powerful. I also want to say, attrition was really low during the quarter, which was amazing, we saw attrition drop. And so attrition is really, really down from where we saw it peak out in 2009. And that's, of course, a help in the quarter as well.

Your next question comes from the line of Heather Bellini of Goldman Sachs.

I had 2 quick questions, Marc. I guess can you talk a little bit about your hiring plans in the back half of the year? Because there were some concern today that the company was actually putting in place a hiring freeze? And then the second question would be Graham, if you could talk a little bit about what you're doing -- if you're doing anything differently in relation to churn to help drive it down? And how much room for improvement, if you just kept the macro environment status quo, how much room for improvement is there based on some of these initiatives you might be employing?

In regards to hiring, you saw us -- we've onboarded a huge number of employees already this year, and we plan to onboard a huge number of employees in the next 2 quarters as well. Our hiring plans are very aggressive this year. We are onboarding another 30% increase in distribution capacity this year. You'll remember that last year, we onboarded approximately 40% distribution capacity increase. And I think that you're seeing that payout when you see 38% year-over-year growth and 37% growth in deferred, we spied a lot of that coming from this distribution capacity that we added last year, that's still coming online. So our gut reaction is adding more distribution capacity because the more distribution capacity we add, the more sales and more market share we get. And we're still very small in our distribution organization in terms of size compared to a Microsoft, Oracle or SAP, which are really our targets, and so we want to grow aggressively. And I think that if there's anything you're going to see us do, we are going to invest, we are going to grow and we are going to hire, because we want to take advantage of this opportunity. And if you look back at things different times of turbulence in the last 10 years that I've been CEO of Salesforce, the biggest mistake I ever made in any one particular time was when I did not hire aggressively. Hiring has always paid out for this company. And the market is so enormous and so exciting on a global basis. And right now, the products in such a mature and exciting point in being able to handle very large companies or very small companies, we want to be able to satisfy that demand through our distribution organization. And I believe we're still a distribution constrained organization. So we're hiring, and if you heard of a hiring freeze, that may be one of our competitors but that's not at Salesforce.com.

And Heather, on the...

And by the way, recently onboarded a former financial analyst, very successful. We are hiring, we're taking all resumes, so e-mail me your resumes. Sales obviously is primary, but Graham is hiring too. So keep us in mind.

Alright. And Heather, on the churn front, I don't think we're doing anything differently other than just staying really focused on it. We continue to refine our customer success model. We really brought in some very strong management talent under Maria Martinez, who as you know, joined us over a year ago from Microsoft. We've got our early warning system statistics that we -- enables us to pick up on trends earlier than maybe a few years back. As you know, when we give guidance, we generally assume attrition is flat. I don't really know exactly where it's going to go potentially. The best case maybe is low teens but clearly, the macro environment does affect that.

Your next question comes from the line of Jason Maynard from Wells Fargo.

First, congratulations on scoring Metallica. And I have a question about Radian6 and what you're seeing in the social space. And I'm curious just on 2 fronts. One, what do you see in terms of adoption now that, that product is more distributed to salesforce? And two, how is it playing into some of your service cloud and sales engagements?

Well, I think that usually, we'll buy a company. We've bought a lot of companies and what's exciting about a new company coming on board is the new people. It's always exciting and as a new customers, that's always very exciting. And as a new brand, that's very exciting. But really, Radian6 is the first company that we've bought where we really feel like it's transforming the company. And that's really what Radian6 has done. I mean, when we bought Radian6, we talked about, "Well, it's the beginning of the marketing cloud, which it certainly is, and it's about social listening which is certainly is." But what Radian6 did was it opened our eyes to the opportunities in the social enterprise. And if you go to YouTube and you type Gatorade social media monitoring or you type Dell social media command center or others, you're going to find these social media command centers that Radian6 is building all over the world to help companies monitor and manage what's going on in the social enterprise. And that really woke us up to what are all the other things that we should be doing in regards to social monitor and social enterprise. And we were already in employee, in social, what we call kind of employee social networks. That was our -- that was Chatter, right? And then we're like, "Well, we're thinking about moving into customer social networks." And you're going to see some exciting technology at Dreamforce around new types of customer social networks, and we're excited about that, new products coming. And then we saw the product social networks with the Toyota examples, and other examples. But it is where the Radian6 that we have been inspired to do all of this. And when we're out there demoing this -- their technology, it really shows how all of this can work together, and we have not yet even done the total deep technical integration because we haven't had the property that long. So we're growing them, we're expanding their sales organization, we're hiring in Halifax if you're interested, Jason, we got some great opportunities up there in Fredericton, Nova Scotia, it's beautiful this time of year. And this is just huge. And how do we play that out? Well, you're going to find out at Dreamforce.

Your next question comes from the line of Tom Ernst of Deutsche Bank.

So Marc, I'm one of those Minnesotans who always come see your show when you come up here. There's plenty of us. Question for you. You talked a little bit about already about the traction at the high-end of our customer standardizing more and more strategic purchases. You clearly have a lot more to sell. The platform technology, a lot of usage comes free at the high end of the market. The question is, are you beginning to see that drive some monetization at the high-end of the market? Is it something you feel like you've got the power, the demand pull now to be able to charge in a material basis for Force.com? And how quickly do you pull that lever as you look forward here in this early adoption phase?

Well, we're looking at new ways to be more deeply monetize Force.com. I think that the way we charge for Force.com is, it's on a per user basis, and then you can get all the apps you can eat. And I think that we would really like to move more to a per app model on Force.com. I think that, that was certainly a great way to get going with the product, but wow, we have seen companies, so many companies build so many apps on Force.com that I think we're ready to start talking about per app pricing, not just per user pricing. And that's an evolution. I think another major evolution is enterprise license agreements. We've seen salesforce deliver enterprise license agreements, but it just has not been a big focus for us as we've moved to the social enterprise, our customers are saying, "What about social enterprise license agreements?" And when we look at these SELAs, we're like, "Wow, how do we deliver to this customer a full social enterprise license?" I was in plenty of customers this quarter where they're like, "Well, I don't know about this per user pricing over here, and I don't know about the Force.com pricing over there. And what about Radian6 over here? And what about the Jigsaw pricing over there, and blah, blah, blah?" And we're like, "We've got to take this off the table and give these customers the ability to step way out with SELAs." And I think that's another huge opportunity that we just have not played out yet. So though you're touching in and you're stepping in, I think, one of the really great areas for us to optimize which is pricing, which we just have not touched in a long time and we can offer customers much better deals.

Your next question is from the line of Kash Rangan from Bank of America.

I'm not going to ask about the hiring question, Marc, but I wanted to ask you about the 8-figure or 7-figure transaction. Certainly, we've not heard you describe the metrics in that fashion before. I'm just curious if you can give us a bit of a perspective as to what these customers are deploying salesforce for? And if you're really seeing broader adoption of Force? What kinds of customer applications are being replaced with force? And maybe if I could entertain you into giving us some idea? Are we at the tipping point of Force becoming really something mainstream? Because it does sound like there's a lot going on at Force. Certainly, these big figure transactions can't be happening unless you're setting a broader suite of products. So if you could just elaborate on that, that will be great.

Well, you want to build the next generation application in your enterprise, what are you going to do? Buy more Oracle, are you going to blow it up on one of these big Oracle Exadata machines, that's just not realistic for a lot of our customers. And what are you going to buy? More SQL server? Are you buying more BA? Are you buying NetWeaver? These are last generation technologies. Lotus Notes, SharePoint, I mean, these are more -- this is more server, more servers and more software and not more solutions. And I think customers have seen with Force.com, they can basically build at 5x faster at 1/2 the cost. That's proven over and over again by every major independent analyst firm that's out there. And they can do it whether they want to do it clicks or code and now we're extended it with Heroku, giving them another tremendous option in terms of opening the platform of Ruby on Rails, and you're going to see the platform open up much further with exciting new languages, that we have been foreshadowing at Dreamforce. And we're high on Platform-as-a-Service. And at the heart of these social enterprise agreements, we talk about you've got to build your employee social network, which is getting your collaboration employees with Chatter and your sales people in place with our Sales Cloud and the service organization. And then we get right into, "Okay, let's build some custom applications and automate and extend what you're doing and Force.com plays right into that." Then we start to talk about like what Tom mentioned on the call here like with Disneyland, let's build some sites for public consumption. Like we've done at facebook.com/disneyland, and then let's move into the partner social networks and the product social networks and the listening through Radian6, it's a big indicator to customers that they need to move the Force.com and to Heroku to maximize their investments of salesforce and thousands and thousands have, and it's really because those old software companies have not stepped up with new tools and new solutions. They have -- they look a little bit long on the tooth. There, it's a little bit too much if your grandfather's enterprise software, and it's not enough about cloud, mobile and social. And that's I think, the opportunity for salesforce and when you get to Dreamforce, you're going to see that play out even further.

Your next question is from the line of Laura Lederman of William Blair. Laura Lederman - William Blair & Company L.L.C.: Can you similarly talk about monetization of Chatter? Is it mainly a platform that customers are building applications on? Or what about if there is a site license for Chatter, what are customers paying for that because free versus not free Chatter, I guess is what I'm to understand? And separately, on the potential change and how do you price things, have you test floated that with customer? What's their feedback? Would you roll it out on one product slowly and then on others over time? Just sort of how you would, over time, address change in pricing?

Well, I think different products have different levels of value to the customer based on, honestly, where previous competitors have priced those products. And that's really why we've always talked about Chatter as an entry point to us, and in many cases, a Trojan horse for us, and in many ways, it's really establishing our position wall-to-wall for the first time inside of a customer. And the Chatter price points have been, I would say, very exciting but not as exciting as a very rich price point of traditional CRM systems or data management systems, or even application development and deployment systems. And that's been 100% our expectation all along. There is no sexier demo and no more exciting place to enter a company than with Chatter. If you've been watching every Monday in the Wall Street Journal, we have a different customer being featured, and we've had CEO after CEO after CEO in those ads, and there's a line of them still coming. We did not have a product that CEOs were using before. And when you see those CEOs using that product on their iPads, that is the kind of positioning we want that we want to be able to go into the C-suite with a strong clear message of, "How do increase your productivity, get your company going faster and get greater alignment and collaboration?" That's what Chatter is all about. But in terms of building a social enterprise, well, it's much more than just Chatter, it's about the Sales Cloud, The Service Cloud and Force.com, Heroku, Radian6 and all the other technology that we have. And when you put all of that together, that is exactly, as you said, the opportunity for the social enterprise license agreement, and those, with those large customers that are all over the country that we've been building up over time, more and more, we hear, we want a one price for the next 3 years, and the true-up opportunity, so that we can really double down on your technology. And we're really working on understanding how to do that, and I think by Dreamforce, we'll have the first introduction of that capability.

Your next question comes from the line of Brent Thill of UBS.

A question for Graham. I think the last downturn, Graham, that the churn had ticked up at the low end, and I'm curious if you think that anything is different this cycle, that assuming that you did see a slowdown, I know your results and forecast don't suggest that, but is there something that insulates you more this cycle than perhaps, the last cycle?

First of all, I want to reiterate, clearly, if we've seen anything in any of these trends, we would have commented on it. So you're right, in the last downturn, we did see it first in small business. That moved up quicker and actually, churn came down quicker in small business. So that's just one of the things that we'll just continue to watch and be mindful of as we head into Q3. I think all the things that Maria...

Well, we haven't seen anything so far if anything like that. Except for on this call.

So I think all the other things that I talked about earlier, that Maria's team has done will help us, but it's difficult to know clearly, if we're heading, even heading into that kind of environment. Sorry, I don't really want to try and speculate on what we might or might not see.

And your next question is from the line of John DiFucci of JPMorgan. John DiFucci - JP Morgan Chase & Co: Marc and Graham, just a follow-up to Brent's question, it's obvious from your results and also from your guidance that strong new business momentum continues here. Marc, you were very clear that you're going to be hiring even if macro backdrop seems a little bit funky. And by the way, there are others that are showing this macro backdrop slow down, and that's why the concern is on the call that you obviously understand. But it seems to me that some of the things that people are concerned about, you're actually better positioned than others. And I just wanted to know if you could share with us a little bit more. I know for EMEA exposure, you're somewhere around 20%, maybe a little less than that? Which, by the way, is an opportunity you started here, and you're a relatively young company, it makes sense that you have less exposure than the average software company. But what about public sector and financial services exposure? Can you tell us a little bit about how much of your revenue or bookings, or even generally, comes from those 2 verticals?

Well, I would say number one is when we look out at what are the opportunities and what is the "exposure" for us, we have a very balanced portfolio across the world of small and medium companies and enterprises. We're probably very unique as a software company, number one, in that we have such a huge stratification of enterprises that we work with in size from the very smallest to the very large. So if it's all about SMB, maybe it's shifts up to the enterprise. If it's all about the enterprise, maybe it shifts down to the SMB. And then, we are again, diversified our portfolio across the 8 main countries that we do business in. And then, we have a number of industries that we have strengthened but no one industry and no one market and no one geography, except for maybe the United States, really is, are we that dependent on, I would say. And public sector is not something that we have really ever been able to turn in -- we've never focused on it honestly. It's probably a mistake that I've made. I probably should be focusing more in the last 13 years on public sector. I just haven't really gotten around to it because we've had so many other exciting opportunities. Some of our competitors have been able to move into the public sector because we haven't. And that hasn't been a big focus. They've come more to us. You saw that transaction with the GSA this quarter. We see more opportunity in the federal government obviously in the future. We've had great success in Japan. And obviously, Japan has not been the best environment in the last couple of quarters because of the disaster. It's happened there but we continue to have a robust business there. So I have really focused on building this company to be having a very diverse portfolio of business and I think that is why, when you look at the last recession in 2008 and 2009, and I don't think we are going into another recession, by the way. I'm not an economist, but that's my off-hand comment. I think that we can see that this company came out of it roaring, and the reason why is, because we maintain our customers and we mitigate their risk, and they want to double down with us because they don't want to buy more software and hardware. There's nothing riskier in the technology industry than loading up with another Exadata mainframe or another huge piece of enterprise software where you're not going to see a return for 2 to 3 years. The way to get value and the way to get innovation in your company, and the way to get your company rightsized and growing, is get them on the cloud and get them on the public cloud, not this kind of false cloud called which is the virtualization train. So I say, here's another great opportunity. Every time I see these somewhat volatile markets, where companies are working to mitigate their risks, I'm like, "Here we go. Let's just ramp up sales because this is the opportunity to take advantage of customers' desire to innovate in an ever-changing environment, but to do it without burdening themselves, without all that traditional horrible technology."

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

Marc, I have a question on your social enterprise messaging, it's really become a huge and hot topic, and no other company is pursuing it in this way. But it seems to resonate with certain companies whereas other companies don't yet have an executive level mandate to pursue this kind of social strategy. And so I'm wondering what inning do you think we're in? And overall, is it reminiscent of how customers responded to idea of the Sales Cloud, say 6 or 7 years ago before it was really mainstream?

Right. Well, I think that where we are is certainly in the first inning. And when you look at it, we've been talking a lot for the last couple of years now about something called Cloud 2, which is, we kind of moved from the first generation of cloud, which is where we started, which was people still have their notebooks and their laptops, which they have less and less every day of. And they have this more stable browser environment, they had HTML and we were able to deliver them enterprise-class services right into the browser, customized exactly for them. That was really Cloud 1. Cloud 2 was when we saw this huge shift from -- into social networks, with Facebook, with Twitter, Google+, with the mobile environment, with the iPhone and the iPad and the Android accelerations. And then the continued amplification of the cloud itself being more robust, more scalable, more secure than ever before. And then customers would say, "Well, what is Cloud 3?" And when we saw Cloud 3, we're like, "We're not sure when we're going to have Cloud 3. What is Cloud 3?" And then all of a sudden, something amazing happened to me personally last December, which was the CEO of Toyota came over to my house and he said, "What am I supposed to do with my company?" And I kind of was, "Well, I'm not exactly sure." I looked down and I grabbed my hat and I pulled a rabbit out of it, and I said, "You need a friend and your friend should be your car in the way of a Toyota Corolla and a Toyota Tacoma. You should have -- And you have a Prius, you should have a Toyota friend." And the Toyota Friend should be a car on the social network that is talking to you, and then as we start to build it out for him, I started to lay out all the things that he should do for Toyota, build the Toyota Friend, put in Chatter and build an employee social network, get your sales force aligned, build in -- custom build his customer service, get his dealers onboard, get it rebuilt with these kind of legacy factory applications, and build this integrated environment. And then at the end of it, I'm like, "Wow, what is this?" And after we looked at it and we're obviously positioned it to him and he's become a huge fan of this and others, we're like, "Well, are we building a customer cloud? Is that what it is?" And we're like "Well, that's not exactly it." And then we're like, "This is really the social enterprise. This is the next step in business." And as we've defined that and been able to articulate it, it's very large crowds, customers are really absorbed it and looked at it as the way where they can really understand and accept our product strategy, and how they can action it. And that actionable aspect of it is very powerful for the company, and now, we've done is we've taken our management team and we've pushed them back out to our top 1,000 customers and said, "Go out and define. Here's the Toyota example." And there's other examples I won't tell you which ones they are. We've talked about some of them previously in the last call, Groupon was another one came out of this exercise. And now for our top 1,000 customers, we're defining for them at the sea level, what the social enterprise is. Every executive, Graham has one, I have, every executive has multiple customers, and we're all out there positioning what is the social enterprise, and we have really found a way to help companies go to the next level. They've worked a lot on their back offices. Their ledgers, their payables, their receivables, they've got their Oracle, their SAP, all these horrible stuff in there, but on their front office, they just have not really evolved it in a long time, and it's not just about SFA or call center, it's about rethinking their customer experience. And that is the company we want to be. We want to be a company that defines what you do with your customers, and the way you're going to interact with your customers and be more successful than ever before, is by becoming a social enterprise. And that's what Salesforce.com has articulated and that's what you will see further articulated at Dreamforce. And it's a solution sell, it's not a product sell, it's an advisory role and customers are really loving it and looking at us as in a whole new way, and that's why I think you're going to see the deals get bigger. Alright operator, we can take a couple of more questions, and we'll wrap things up.

Your next question is from the line of Mark Moerdler of Sanford C. Bernstein. Mark Moerdler - Sanford C. Bernstein & Co., Inc.: Question on the full year GAAP guidance. You've given it now at a loss per share of $0.09 to $0.11. And prior, it was $0.01 to $0.03. Obviously, $0.04 of that is the one-time tax. Can you give a little more clarity on what the rest of it might be?

Well, the big thing that [indiscernible] -- follow-through is we're buying a lot of companies, we're making a lot of investments. And as we buy these companies really for the first time in the last 12 months that we bought 3 big companies with Jigsaw, Heroku and Radian6, it's really impacted that GAAP number. And as CEO, my job and how I look at it at this point in this company's history is not to focus on that GAAP profit number. I think I've said that a number of times, that we are really focused on that top line and the market share opportunity. And if we were focused on the GAAP number, we would not be buying anybody, number one. And we would be probably running a much leaner machine, and we would not be as excited as on market share gains. And so what I really instructed the company to do is to blow it out on the top line, and that's why there are too many enterprise software companies at the $2 billion-plus level, delivering a 38% top line growth this quarter. And you can forecast that out through the next year as well. And the cost of that comes in the GAAP line, of course, and the GAAP profit line. I'm sure there will be a day in the future where we'll say, "Well, we're not going to buy any more companies. We're already satisfied where we are. And now, we're going to maximize GAAP profit." And we've shown how we can do that by slowing hiring or whatever. That's not where this company is. This is a growth company, and this is a growth story, this is about the next-generation and you aren't going to build a great company if you focus only on GAAP profit. And that's why the non-GAAP number is very important but the ultimate number and the most important number is the top line. And Graham, do you want to add to that?

Sure. Just a few bit of details on that Mark. So estimate on stock comp charges was up a little, I think it was up about $3 million for the full year. Amortization of intangibles again was up a little bit, a couple of million. And then actually, the biggest factor in the move on the GAAP guide was last quarter, we estimated the blended effective tax rate was 38% on those reconciled items. This quarter, we think the blended rate is about 35%. So if you take all of those, it basically moves that GAAP guided range.

And that's example where I'm like, "Are we supposed to be really focused on the spot comp number as part of the GAAP guidance? Is that the key to growing this company?" I don't think that's the right place for us to focus.

Alright, operator, we've got time for 1 more question. Marc's got energy for one more, so let's go ahead and do 1 last question.

And your final question in the evening comes from Brad Whitt of Gleacher. Bradley Whitt - Gleacher & Company, Inc.: I was curious as someone have mentioned earlier, you haven't given the big-deal metric before. How do you categorize the big deals? Do those include upgrades from existing customers? Or is that just 16 new customers at $1 million-plus?

It's a -- that's a combination and it's new customers and existing customers. And we actually have given these numbers before in terms of 8-digit deals and 7-digit deals that we've done. But I thought it was appropriate to kind of roll that out in this quarter, because it is a focus of our company strategically. And because we're able to deliver these 3 solid 8-digit transactions this quarter and the fourth transaction that rolled into the first day of this current quarter. So I would like to continue to focus on big deals, that's the SELA focus, that's getting our own sales force to think more about us being more strategic, being less of a product sell, being more of a solution sell, being more about the social enterprise. And we're rolling that out, testing it and we'll see at Dreamforce what the customer reaction is. Before we end, I also want to encourage you to see me tonight on Cramer with Mad Money, where I'll make further commentary on that.

Alright, I want to apologize to all of you still in the queue, we got to actually less than 1/2 of you today despite the number of questions. The good news is Dreamforce is just around the corner, so you all have a plenty of Q&A time with Marc, Graham, George Hu, Alex Dayon, Byron Sebastian, the list goes on and on. The 2 key dates for analysts are August 31 and September 1. In addition to a keynote each day, for Marc and other senior execs, Graham will now be hosting an analyst session on the afternoon of 31st. So I encourage all of you to register. If you haven't already done so, you can go to our main website, click on Dreamforce registration, and then click the financial analyst button. That closes our call today. We look forward to seeing you 2 weeks at Dreamforce.

And see you in 25 minutes on Cramer.

Goodbye now.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect.