Q4 2011 Salesforce.com, Inc. Earnings Conference Call on Feb ...

[Pages:20]FINAL TRANSCRIPT

CRM - Q4 2011 , Inc. Earnings Conference Call

Event Date/Time: Feb. 24. 2011 / 10:00PM GMT

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Feb. 24. 2011 / 10:00PM, CRM - Q4 2011 , Inc. Earnings Conference Call

CORPORATE PARTICIPANTS

David Havlek , Inc. - VP, IR Marc Benioff , Inc. - Chairman and CEO Graham Smith , Inc. - EVP and CFO

FINAL TRANSCRIPT

CONFERENCE CALL PARTICIPANTS

Heather Bellini ISI Group - Analyst

Adam Holt Morgan Stanley - Analyst

Brent Thill UBS - Analyst

Kash Rangan BAS-ML - Analyst

Brendan Barnicle Pacific Crest Securities - Analyst

Laura Lederman William Blair & Company - Analyst

Mark Murphy Piper Jaffray & Co. - Analyst

Ajay Kasargod Morgan Keegan & Co., Inc. - Analyst

Brad Zelnick Macquarie Securities - Analyst

Patrick Walravens JMP Securities - Analyst

PRESENTATION

Operator Good afternoon. My name is Marvin and I will be your conference operator today.

At this time I would like to welcome everyone to the fiscal Q4 and full-year results conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

I will now turn the call over to our host Mr. David Havlek, Vice President of Investor Relations. Sir, you may begin.

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Feb. 24. 2011 / 10:00PM, CRM - Q4 2011 , Inc. Earnings Conference Call

FINAL TRANSCRIPT

David Havlek - , Inc. - VP, IR

Thanks, Marvin, and welcome, everyone, to 's fourth-quarter fiscal year 2011 earnings call. Joining us remotely today is Marc Benioff, chairman and CEO; and here in San Francisco I am joined by Graham Smith our CFO.

Following our prepared remarks today, we will open things up to your questions. We're going to try to get to many of you as possible. So as a courtesy to your peers, please limit yourself to one question today.

A complete disclosure of our fourth-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 also 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 are our forward guidance can be found in our press release.

At times in our prepared comments or in responses to your questions today we may offer incremental metrics to provide a greater understanding of our business or our quarterly results. Please be advised that some of these disclosures are one-time in nature and we may or may not update these metrics in the future. 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 fourth-quarter 2011 performance. Some of our discussion or responses to your questions may contain forward-looking statements.

These statements are subject to risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, actual Company results could differ materially from these forward-looking statements. All of the 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 most recent Form 10-Q particularly under the heading Risk Factors.

To access our Q4 press release including the GAAP to non-GAAP reconciliations, our historical results, any of our SEC disclosures or simply to learn more about , I encourage you to visit our investor relations website at investor.

In addition, a webcast of today's call will be available for 90 days and a dial-in replay will be made available through March 23. Finally before I turn the call over to Marc, please be advised that we may reference certain unreleased services or features that are not currently available in 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 purchase decisions based on services and features that are currently available. With that, let me turn the call over to Marc to discuss our Q4.

Marc Benioff - , Inc. - Chairman and CEO

Thanks, David. Our fourth quarter was an extremely strong finish to a fantastic year. Let me begin by briefly reviewing some of our financial highlights.

Revenue for the fourth quarter rose 29% from a year ago to $457 million. For the full year we delivered approximately $1.66 billion, an increase of 27% from fiscal year 2010 and we exited the year with an annual revenue run rate that now exceeds $1.8 billion.

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Feb. 24. 2011 / 10:00PM, CRM - Q4 2011 , Inc. Earnings Conference Call

FINAL TRANSCRIPT

Non-GAAP EPS of $0.31 rose 3% from the year ago period even as we accelerated our investments in key areas of growth. We also set a Company record for cash flow in the quarter delivering approximately $170 million in operating cash, an increase of more than 80% year over year.

For the full year, operating cash flow rose approximately 70% to roughly $460 million or 28% of revenue in fiscal year 2011. Our multiproduct strategy is really taking off. Not only was Q4 the best quarter in our history, we also signed more new business in each of our sales, service, collaboration and platform clouds than ever before.

In the fourth quarter alone, we signed two eight-figure transactions including our largest deal ever and more than 30 seven-figure deals. All told, we added approximately 5100 net new customers in the quarter excluding customers from Heroku and Dimdim, taking our global customer community to more than 92,300.

For the full year, we added approximately 20,000 net new customers and more than 1 million net new subscribers. We now have a global community of more than 3 million net paying subscribers.

Given strong Q4 demand and a strong pipeline of new business, we are were pleased to be able to raise revenue guidance to $2.03 billion to $2.05 billion for fiscal year 2012. This will make the first enterprise cloud computing company to generate more than $2 billion in revenue by the end of this year.

As you know, we kicked off the fourth quarter with an amazing Dreamforce. More than 23,000 customers, partners, and developers attended our 8th annual event.

I have to tell you, I've rarely felt such excitement from a crowd, truly a testament to how our strategic vision our customers view in their enterprises. We're our customers' path to the next phase of cloud computing which we call Cloud 2.

Cloud 2 is a new paradigm for computing that is inherently social, mobile and open. It redefines teams, pushes out information in real time and works with revolutionary devices including iPad, iPhone, BlackBerry and smartphones using Android. is leading the effort to bring Cloud 2 to the enterprise, infusing everything we offer to customers with the social collaboration, mobility and openness that are the hallmark of this brave new world.

As you know, Chatter is at the heart of our efforts to lead the enterprise into Cloud 2. We see social computing as a strategic new enterprise category which is why this year you've seen us deliver Chatter, Chatter Plus, Chatter Mobile, Chatter Free and at the Super Bowl, .

And leveraging the social features popularized by Facebook and Twitter such as profiles, status updates and real-time feeds, Chatter provides a private and secure corporate social network for companies of all sizes and because it is at the core to platform, its social capabilities are an integral part of every salesforce product. Today, you can sign up directly at . And all Chatter customers can upgrade with a single button to our full range of services.

Today more than 80,000 of our 92,300 paying customers have deployed Chatter since its release in June. This makes the largest provider of enterprise social networks in the world.

And now with , the free and viral version of the service, we're looking to introduce the power of the cloud to employees at every company around the world. We've already added more than 10,000 new networks since introducing and airing our first-ever Super Bowl ad only a few weeks ago to get the momentum going. Our Super Bowl ad marks a milestone in how enterprise software companies can accelerate important new services and brands like .

New Chatter deployments in the fourth quarter included Analog Devices, Avaya, Avis Budget, Citrix, Epson, McAfee and 3M. Customers also deployed Chatter into new departments and functions across the enterprise and companies purchasing additional subscriptions to Chatter included BSkyB, Sony, Trend Micro and Wachovia.

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Feb. 24. 2011 / 10:00PM, CRM - Q4 2011 , Inc. Earnings Conference Call

FINAL TRANSCRIPT

In addition, SunGard will deploy Chatter across the entire enterprise replacing its existing enterprise social network just as Dell did before them. Both are now standardized enterprisewide on salesforce's Chatter.

Customers using Chatter tell us they're thrilled with the productivity gains and the open communication it brings to their organizations. In a recent survey we commissioned of more than 6000 global customers, users reported 28% fewer meetings, 33% less e-mail and a 49% increase in finding information after deploying Chatter. Those are amazing statistics.

Customers that have deployed Chatter within our sales and service clouds also have shown higher log-in rates and higher usage rates as their employees spend more time and do more work within our applications. These are amazing results from a technology that is literally just months old. We are so delighted to see such strong results from the Chatter technology.

Our customer momentum was powered by our flagship Sales Cloud which added more new business in Q4 than in any quarter in our history. Customers buying new or additional subscriptions to the Sales Cloud included Groupon, Juniper Networks, Staples, and Tyco Healthcare Group.

Against Oracle we won significant new or add-on business this quarter with customers such as AT&T, Citi, Telefonica and Xerox. And companies also preferred our Sales Cloud over Microsoft's CRM just has not kept pace with the social, mobile and open technologies the rest of the world has embraced and offers customers no competitive advantage.

Q4 wins for new or add-on business against Microsoft include Abbott, Gannett, Hilton, and Scripps. We also saw strong momentum in our Service Cloud which racked up record new business.

Approximately 15,000 companies now use our Service Cloud as they look for ways to connect with their customers both against traditional and new service channels including social media, the Web, e-mail and telephone. Major wins or expansions of the Service Cloud include Huntington, MedAssets, MTP, Thomson Reuters and Valiant.

In addition, we see momentum building in the platform and service category as companies demand more social, mobile and open applications to serve their employees and customers. We have the only platform for building Cloud 2 applications that is a trusted proven solution for the enterprise.

And with our strategic moves toward an open multi-language, multi-device strategy in the last 90 days, we believe is positioned to be the long term leader in the platform as a service category.

We introduced our revolutionary , the first enterprise database built for the cloud which allows developers to write apps in any language on any platform for any device. We also acquired Heroku, the leading platform as a service for writing apps in Ruby on Rails.

And now developers have the freedom to use any Ruby app for writing social and mobile cloud apps on Heroku, Java for creating sophisticated enterprise apps with VMforce, and Apex for building native apps on . And, achieved some truly impressive milestones.

This year we attracted an additional 100,000 developers creating a global customer community of more than 340,000 developers writing on the platform. And I am excited to tell you today that as of today, developers have now written more than 1 billion lines of Apex code.

That is Apex which is our language that runs within providing stored procedures and triggers to our developers. With this 1 billion lines of Apex code, the community has really grown, combined with more than 6 million Java developers and 1 million Ruby developers shows that we have the opportunity to harness a vibrant ecosystem as the platform as a service market heats up, and allowing our customers to fully customize and deeply integrate our customer information systems into all of their corporate information and data.

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Feb. 24. 2011 / 10:00PM, CRM - Q4 2011 , Inc. Earnings Conference Call

FINAL TRANSCRIPT

And we have are already seeing it. While the Service Cloud was our fastest growing product for the full year, the platform business edged out the Service Cloud as the fastest growing business within the fourth quarter. Customers that are now building on the platform or have extended their deployments include AIG, Facebook, Genentech, Honda, Mizuho, Novartis and Sony. 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 fourth quarter, the platform delivered roughly 30 billion transactions, an increase of nearly 80% from the year ago. That is 30 billion transactions delivered by the platform. Nothing speaks more to the value of our platform than usage.

I want to remind you that at the start of fiscal year 2012 Q1, we changed how we count transactions. When we introduced Chatter desktop in October 2010, we included pings from the desktop to the servers when we reported our transactions. As more people adopt Chatter desktop, we think a better way is no longer to count those pings. And you can see these changes directly at trust. as well as our all of our performance and security information and reliability information as well.

We believe the market for our applications and platform is tremendous. IDC predicts companies worldwide will spend more than $40 billion in 2014 on cloud computing services. Our growth opportunity has never been more exciting. And we intend to build out our presence and our lead in every one of our core markets.

In fiscal 2011, we grew our sales distribution capacity by approximately 40% after holding it steady in fiscal 2010. And we're being more aggressive with acquisitions, fueling innovation by buying great companies with great technologies.

With Heroku, we now have the leading platform as a service for writing apps in Ruby on Rails, which is the leading language for creating apps that are social, mobile and open. It's the very definition of Cloud 2.

But the reason we bought Heroku is it's much more than a Ruby development platform. In the future, its open and scalable technologies will support other popular languages, providing a roadmap for the salesforce platform that our competitors will be hard-pressed to match and that our developers will be excited to build applications in whatever language they are working in.

Dimdim brought us technology we will use to immediately accelerate the development of Chatter, adding vital communication capabilities such as screen sharing, messaging and presence to mirror the proven Facebook model of combining communication and collaboration into an integrated service. Of course, we take that one step further by integrating those capabilities with business information.

Etacts will help us make contacts more social. At the heart of our service is our contact capability and contact management used by the most all of our customers, Etacts is going to take that technology to another level. And finally in a deal we closed earlier this month, we acquired the number one app in the Google app marketplace, Manymoon.

Its project management application already helps more than 50,000 organizations and individuals organize complex tasks. We are very excited to be innovating at the small business as well.

I would like to quickly recap our fiscal 2011 because it highlights many of our operating principles. We started last year with a revenue expectation of roughly $1.5 billion and beat this estimate by more than $100 million.

We reinvested that money to help grow our sales capacity by more than 40% and to help offset the cost of three of the largest and most strategic acquisitions in our history. And even with these strategic investments in future growth, we ended fiscal 2011 within $0.03 of the $1.25 to $1.27 target that we set in February 2010.

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Feb. 24. 2011 / 10:00PM, CRM - Q4 2011 , Inc. Earnings Conference Call

FINAL TRANSCRIPT

Although on lower operating margins. We think this is the right trade-off because we're exiting fiscal year 2011 far stronger than we began with a much higher growth trajectory and significantly greater distribution and product capabilities.

It's been an amazing year, just amazing. We saw that at Dreamforce, we see that every day at and we are looking forward to being the first cloud computing company to deliver more than $2 billion in revenue this year. You should expect us to continue to invest in growth in fiscal year 2012 as we start to focus on our next milestone, $3 billion, it's coming.

Before I close, I want to take this opportunity to invite you to join me next week at the first Cloudforce of 2011 on March 3. It's going to be at the Javits Center in New York City.

Look outside of Dreamforce, this is our biggest customer event of the year. We're going to be expecting more than 2500 customers, more than 3000 have already registered to attend this event. This will be our largest domestic event outside of Dreamforce ever. I hope to see you there. And with that, I will hand it back over to Graham.

Graham Smith - , Inc. - EVP and CFO Thanks, Marc. In addition to delivering an excellent quarter across all key financial measures, particularly cash and deferred revenue, we accelerated our pace of investment in people and technology, positioning us for continued growth in fiscal 2012.

I will begin with some of the financial highlights of the quarter. Fourth-quarter revenue of $457 million was well above our outlook entering the quarter, primarily the result of a strong new business quarter Marc has already discussed.

Approximately 94% of fourth-quarter revenue was generated by subscription and support, that's up from 93% a year ago. As we move increasingly towards a partner-based model for implementation consulting, we expect the percentage of professional services revenue to gradually decline.

Dollar attrition fell for the sixth consecutive quarter. Our dollar attrition rate expressed as the amount of annual order value lost as a percentage of the prior year quarter value remains in the mid-teens range as it was in the third quarter. Given that approximately half of the value of our annual invoicing occurs in the fourth quarter, strong Q4 renewals will help our topline growth in FY 2012.

Turning to pricing, when we compare the net price per seat for the professional enterprise Unlimited service editions over the past eight quarters, we continue to see very little change. While others in our market compete largely on price, we continue to focus on value add technologies like Chatter and Jigsaw to differentiate our products.

A slightly weaker dollar in Q4 added a nominal $1 million to our sequential revenue performance but the year-over-year comparison included a currency headwind of approximately $4 million. In local currency terms, fourth-quarter revenue grew 30% year over year.

We showed excellent growth in all regions. In the Americas, revenue rose by 26% to approximately $309 million. In Europe revenue of roughly $83 million was up 30% in dollars and 41% in local currency. And in Asia, revenue of $65 million rose 43% in dollars and 35% in local currency.

In total, international revenue comprised 32% of total revenue and that's versus 31% in fiscal 2010. Growing our international business is an important goal for and we continue to focus our sales and marketing resources in the largest software markets in the world.

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Feb. 24. 2011 / 10:00PM, CRM - Q4 2011 , Inc. Earnings Conference Call

FINAL TRANSCRIPT

Our product mix is also becoming more diversified over time. To give you one Q4 data point lead by our service and platform clouds, approximately 35% of new business in the quarter came from non-Sales Cloud services and that compares with 30% in Q4 of last year.

Turning to the income statement, non-GAAP gross margins were at 82% in the fourth quarter, unchanged from both Q3 and the year ago quarter. Turning next to OpEx which I will discuss in non-GAAP terms, at 71%, Q4 operating expenses as a percentage of revenue trended higher from the year ago quarter.

Sales and marketing expenses increased to 46% of revenue, up from 44% in FY 2010 primarily as a result of three things. First, sales headcount additions; second, commission expense because we had a significantly higher percentage of our sales teams being above quota and on accelerated commission rates. And third of course, the biggest Dreamforce in our history which as predicted had a net EPS impact of around $0.05 in the quarter.

R&D expenses increased to 11% of revenue versus 9% a year ago primarily as a result of increased headcount both through organic hiring as well as via acquisitions. And finally, G&A expenses as a percentage of revenue remained flat at 14% of revenue.

During the quarter we added roughly 550 people to finish the quarter with just over 5300 employees. Approximately 65 of those additions came via acquisitions that closed in Q4. Year over year our employee population has grown by over 1300 including just over 200 from acquisitions. The great majority of our hiring continues to be in growth critical functions like sales and R&D.

Non-GAAP operating margin of 11% was down from 15% a year ago in Q4. But last year we added about 160 people in the fourth quarter and as I just said, this year we added 550 people.

So hopefully it is clear what has changed. Importantly for the fourth quarter, we still delivered non-GAAP EPS at the high end of our guidance range. At the beginning of Q4, we guided non-GAAP EPS at $0.27 to $0.28 and then reduced that range by $0.03 as a result of our acquisitions of Heroku and Dimdim.

Our $0.31 non-GAAP EPS result for Q4 included a one-time tax benefit of approximately $8 million or approximately $0.055 associated with the extension of the federal R&D tax credit. We ended the year with a non-GAAP effective tax rate of 35%.

Moving onto cash flow, operating cash flow for the fourth quarter was just over $166 million, an increase of roughly 81% from a year ago. Our fourth-quarter results included approximately $25 million in a one-time benefit related to a recent tax change on the accounting treatment of employee stock expense. I would like to emphasize that this should be really viewed as a windfall when assessing our overall cash performance for the quarter and the year and our growth rate for fiscal 2012.

For the full year we generated more than $459 million in operating cash flow. That's an increase of more than 69% from a year ago.

Capital expenditure for the quarter was just under $31 million. The primary drivers of CapEx was certain components of our data center buildouts primarily here in the US and also leasehold improvements to support our growing employee population.

Free cash flow defined as operating cash flow less capital expenditures was also strong at just over $135 million and that's an increase of roughly 60% from last year. For the full year our free cash flow was just over $368 million, an increase of 70% from fiscal 2010.

Looking to fiscal 2012, we think operating cash flow will grow in the low to mid-teens percentagewise for three principal reasons. First, the one-time tax benefit of $25 million that I just mentioned. Second our headcount increase of 850 people in the second half of FY 2011 was nearly three times the number we added in the second half of FY 2010.

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