Salesforce - Earnings Call - Q2 2012
August 18, 2011
Transcript
Speaker 4
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. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. 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.
Speaker 3
Thanks, Davis. 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 to 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 that this additional detail 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 account 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 added a large number of users, where 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 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 results could differ materially from our forward-looking statements.
All of these risks, uncertainties, and assumptions, as well as other information on potential factors that could affect our financial results, are included in our reports filed with the SEC, including our recent report on Form 10-Q, particularly under the heading Risk Factors. To access our Q2 release, including the GAAP to non-GAAP recons, historical results, any of our SEC disclosures, a webcast replay of today's call, or simply to learn more about Salesforce, I encourage you to visit the Investor Relations website at Salesforce.com/investor. Finally, before I turn the call over to Marc, please be advised that we may reference certain unreleased services or features that are not yet 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 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?
Speaker 0
Thanks, David. I'm absolutely delighted to discuss these strong second quarter results. Just two 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%. We haven't seen revenue grow that fast in almost three years, and that was when we were less than half 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.
We exited the quarter with 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 the 100,000 customer milestone. 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 two of our most recent acquisitions. We also saw continued strength in big deals during the second quarter. We signed more than 60 seven-figure transactions, a 40% increase compared with last year. We signed three eight-figure mega deals.
In addition, I'm thrilled to tell you we closed an additional eight-figure mega deal 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 2012 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 Toyodashan 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 through 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 the 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 eight-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 a sold-out crowd of over 1,700 attendees. There, we further articulated the power of cloud computing and showed how the power of cloud, combined with social and mobile, fundamentally changes how companies, their employees, partners, and customers collaborate, 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 are looking for exciting new ways to transform their business using the cloud.
Finally, we went to Minneapolis, not exactly a city known for large crowds showing up for technology events, but we were greeted by a record of 1,000 registered attendees, and we refined our social enterprise messaging based on our experiences in Tokyo and D.C. 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 developed a customer social network.
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 refined story of this next gen 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 of 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 of the major industry standards. The social revolution 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. Sales Cloud. 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, and productivity than ever before.
A great example is Chartis Property & 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 salespeople and other 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, LivingSocial, Penske, and Ricoh. 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 at companies like Cisco, Dex1, First National Bank of Omaha, George P. Johnson, Mutuel General in France, Transamerica Life, and VHA.
Against Oracle, we won deals including the Bank of New Zealand, Continental Casualty, JB Ware, Integra Telecom, and K12. Against SAP, we won deals with Ashland, Dolby, Fujitsu, and P&H Mining. As exciting as our Sales Cloud momentum is, making it the number one 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 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 of 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 a much more powerful service than ever before. 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 G-Energy, Honeywell, and Toto. 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.
In addition to elevating our conversation with customers into the C-suite, Chatter is 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, and CA, 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 ISVs.
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 its 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 exacting brand standards that will allow its associates, creative team partners, and vendors to collaborate like never before. 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 that's only possible with a social enterprise platform. Other new or add-on Force.com customers this quarter included the U.S. General Services Administration (GSA), F. Hoffmann-La Roche, 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. 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 three times last year's number, and 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. 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 into social enterprise will help us take even bigger share of that market than we already have. We see tremendous growth opportunities ahead, and you are going to see us invest in growth through hiring, through product development, through events, and more. Finally, I want to remind you that we are only eight 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 of special guests this year, including Neelie Kroes, 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 Morissette, and Jay Leno in our UCSF Children's Hospital fundraiser, which will be happening the night of September 1. Tickets for that event are still available, and you can get further information by contacting my office. We would love to see you at Dreamforce. Just register. Go to www.dreamforce.com. 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.
With that, I will turn the call over to Graham for the final financial details of our second quarter.
Speaker 2
Thanks, Mark. Q2 was another exceptionally strong quarter. Our business results reflected both great execution and continued healthy business demand. Second quarter revenue of $546 million rose 38% from the year-ago quarter. The main drivers of the top-line growth were first new business, which Mark 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 half of new business sales in the quarter were into that customer base. 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 % range when compared to the year-ago quarter. As we've said in the past, minimizing attrition is an important foundation for growth, especially as our business scales over time. 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 eight-quarter trends for both regions and editions. 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 UK had a particularly strong year-over-year new business quarter. Finally, Asia revenue of roughly $77 million increased 42% in dollar 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. 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 one 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 Mark described earlier will likely require that we build a small team of architecture and user interface specialists to spearhead some of the implementation team. We've kept our billable consulting headcount more or less flat for the last two years.
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 at 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 build-out of our Japan data center, which we expect to become operational by the end of fiscal 2012. Similar to the first quarter, year-over-year non-GAAP gross margin for our professional services business swung from a negative to a positive in Q2, improving to 18%.
This margin improvement in the first half is the result of two factors. First, at the beginning of fiscal 2012, we reduced some of the headcount in non-billing roles in professional services. 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. Given 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 to building awareness of Salesforce.com.
Q2 sales and marketing expenses also included the approximately $0.04 per share cost of the one-time charge related to the settlement for a California state wage and hour lawsuit, which was disclosed mid-quarter in an 8-K filing. Finally, G&A costs rose by 33% from a year ago and were 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 five points from last year. The biggest driver, of course, is the fact that we've acquired nine companies over the past 15 months, all of which were either technology purchases such as DimDim and Heroku, or fast-growing businesses such as Jigsaw and Radian6, which have yet to achieve P&L breakeven.
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 as to a 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-plan 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 % 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 employment for employee growth, both in the form of leasehold improvements and computer equipment for employees. In fiscal 2012, we expect about half 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 cages, power, and network infrastructure. This category is by nature a little lumpy, and in Q2, it's higher than normal because of the Japan data center build-out. Just to remind everybody, we do lease most of the servers and storage equipment that goes into the data center, 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. Finally, we also spent $6.5 million purchasing domain names and technologies. We don't expect to see a regular item.
Year-to-date 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 at 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 $18 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. DSR 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. Radian6 was also the primary driver of changes to prepaid income taxes and income taxes payable. Finally, we're executing well on Radian6 cash collections.
The cash basis for revenue recognition that I discussed when we announced the deal did expect it to cause a small revenue spike in Q4. Two 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 will be watching for any changes to our strong business trends, growth continues to be our top priority. With that factor up, we are projecting third quarter revenue of approximately $568 million to $570 million, and non-GAAP EPS in the range of $0.31 per share.
For the full year, we now expect revenue in the range of $2.22 to $2.23 billion. This represents an increase of $65 million on the midpoint of prior GAAP, new midpoint, and implies 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. For a 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 and partner events that you should plan to attend on the first two days, David and I will be hosting an analyst summit on the Wednesday from 2:00 P.M. until 3:30 P.M. We really look forward to seeing you all there.
Let me turn the call back to the operator so we can take your question.
Speaker 4
Ladies and gentlemen, at this time, if you would like to ask a question, please press star then the number one on your telephone keypad. Your first question comes from Adam Holt, Morgan Stanley.
Speaker 3
Terrific. Thanks for taking my question. 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 into the beginning of the subsequent quarter? Did you change the way that you're thinking about conservatism for the third quarter to maybe bake in a softening environment?
Speaker 0
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 eight-digit transaction that I mentioned came in the week after the quarter, which is set up. This quarter has a strong start. I was out in the market very aggressively during the quarter, as I mentioned, in Japan and D.C., Boston, Minneapolis. 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. In each of these environments, I'm seeing two to three times what I would normally expect in terms of physical turnout.
When we look at 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. We don't see a softening environment. We see for our business a very strong and accelerating environment. That's why we're raising guidance. If the environment would change, we would, of course, let you know. We think we're really well positioned for the future. We certainly saw also in the quarter with the number of very large transactions that were happening, just a robust acceleration by our existing customers of going deeper with us. 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.
Attrition is really, really down from where we saw it peak out in 2009. That's, of course, helping the quarter as well.
Speaker 4
Your next question comes from the line of Heather Bellini of Goldman Sachs.
Speaker 1
Hi, thank you, and good afternoon. I had two quick questions, Marc. I guess, can you talk a little bit about your hiring plans in the back half of the year? There was some concern today that the company was actually putting in place a hiring freeze. 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, you know, 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?
Speaker 0
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 two 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. I think that you're seeing that payout when you see, you know, 38% year-over-year growth and 37% growth in deferred. We find a lot of that coming from this distribution capacity that we added last year that's still coming online. Our gut reaction is adding more distribution capacity because the more distribution capacity we add, the more sales and more market share we get.
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. We want to grow aggressively. 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. If you look back at things, you know, different times of turbulence in the last 10 years that I've been, you know, 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. The market is so enormous and so exciting on a global basis.
Right now, with the products, you know, in such a mature and exciting point and being able to handle very large companies or very small companies, we want to be able to satisfy that demand through our distribution organization. I believe we're still a distribution-constrained organization. We're hiring. If you heard of a hiring freeze, that may be one of our competitors, but that's not at Salesforce.com. Heather, by the way, recently onboarded a former financial analyst, very successful. We are hiring. We're taking all resumes. Email me your resume. Sales, obviously, is primary, but Graham is hiring, you know, too. Keep us in mind.
Speaker 2
All right. 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've 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 enable 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 sort of 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.
Speaker 4
Your next question comes from the line of Jason Maynard of Wells Fargo.
Speaker 3
Good afternoon, guys. First, congratulations on scoring Metallica. I have a question about Radian6 and what you're seeing in the social space. I'm curious just on two fronts. One, what do you see in terms of adoption now that that product is more distributed with Salesforce? Two, how is it playing into some of your Service Cloud and Sales engagements?
Speaker 0
I think that, you know, usually we'll buy a company. We've bought a lot of companies. What's exciting about a new company coming on board is the new people. It's always exciting. The new customers, that's always very exciting. The new brand, that's very exciting. Really, Radian6 is the first company that we've bought where we really feel like it's transforming the company. That's really what Radian6 has done. I mean, you know, 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 it certainly is. What Radian6 did was it opened our eyes to the opportunities in the social enterprise.
If you go to YouTube and you type Gatorade, you know, social media monitoring, or you type Dell, you know, social media command center and 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. That really woke us up to what are all the other things that we should be doing in regards to social monitoring and social enterprise. We were already in, you know, employee, you know, social, you know, what we call kind of employee social networks. That was our, that was Chatter, right? 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.
We saw the product social networks, you know, with the Toyota examples and other examples. It is with Radian6 that we have been inspired to do all of this. When we're out there demoing this, you know, their technology, it really shows how all of this can work together. We have not yet even done the total deep technical integration because we haven't had the property that long. We're growing them. We're expanding their sales organization. We're hiring, you know, in Halifax, if you're interested, Jason, you know, we've got some great opportunities up there in Fredericton, Nova Scotia. It's beautiful this time of year. This is just huge. How do we play that out? You're going to find out at Dreamforce.
Speaker 4
Your next question comes from the line of Tom Ernst of Deutsche Bank.
Speaker 3
Good afternoon. Thanks for taking my question. Marc, I'm one of those Minnesotans that will always come see the show when you come up here. There's plenty of us. Question for you. You talked a little bit already about the traction at the high end and about customers 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 on a material basis for Force.com? How quickly do you pull that lever as you look forward here in this early adoption phase?
Speaker 0
We're looking at new ways to 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. I think that we would really like to move more to a per-app model on Force.com. I think that was certainly a great way to get going with the products. 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. 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 move to the social enterprise, our customers are saying, what about social enterprise license agreements?
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, 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. We're like, we've got to take this off the table and give these customers the ability to step way up with SELAs. I think that's another huge opportunity that we just have not played out yet. 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.
Speaker 4
Your next question is from the line of Cash Rangan of Bank of America.
Speaker 3
Hi, thank you very much. I'm not going to ask about the hiring question, Marc, but I wanted to ask you about the eight-figure, seven-figure transactions. 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 really you're seeing broader adoption of Force. What kinds of custom applications are being replaced with Force? Maybe if I could entertain you to giving us some idea, are we at the tipping point of Force becoming really something mainstream? It does sound like there's a lot going on at Force. Certainly, these big-figure transactions can't be happening unless you're selling a broader suite of products. If you could just elaborate on that, that would be great. Thank you.
Speaker 0
You want to build a next-generation application in your enterprise. What are you going to do? Buy more Oracle? Are you going to bloat up on one of these big Oracle Exadata machines? That's just not realistic for a lot of our customers. You know, what are you going to buy? More SQL Server? Are you buying more BA? Are you buying NetWeaver? You know, these are last-generation technologies. Lotus Notes, SharePoint. I mean, you know, these are more servers, more servers and more software and not more solutions. I think customers have seen with Force.com, they can basically build it five times faster at half the cost. That's proven over and over again by every major independent analyst firm that's out there. They can do it whether they want to do it with Quix or Code.
Now we've extended it with Heroku, giving them another tremendous option in terms of opening the platform with Ruby on Rails. You're going to see the platform open up much further with exciting new languages that we have been foreshadowing, you know, at Dreamforce. We're high on platform as a service. At the heart of these social enterprise agreements, we talk about you got to build your employee social network, which is, you know, getting your collaboration in place with Chatter and your salespeople in place with our Sales Cloud and the service organization. We get right into, OK, let's build some custom applications and automate and extend what you're doing. Force.com plays right into that. We start to talk about, like what Tom mentioned on the call here, like with Disneyland, you know, let's build some sites, you know, for public consumption, like we've done at Facebook.com/Disneyland.
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 to Force.com and to Heroku to maximize their investments with Salesforce. Thousands and thousands have. It's really because those old software companies have not stepped up with new tools and new solutions. They look a little bit long in the tooth. It's a little bit too much of your grandfather's enterprise software, and it's not enough about cloud, mobile, and social. I think the opportunity for Salesforce is there. When you get to Dreamforce, you're going to see that play out even further.
Speaker 4
Your next question is from the line of Laura Letterman of William Blair.
Speaker 1
A question. Can you similarly talk about monetization of Chatter? Is it mainly a platform that customers are building applications on? Or what about if there's a site license for Chatter, what are customers paying for that? Because, you know, free versus not free Chatter, I guess, is what I'm trying to understand. Separately, on the potential change in how do you price things, have you test floated that with customers? What's their feedback? Would you roll it out on one product slowly and then on others over time to sort of how you would over time address change in pricing? Thanks.
Speaker 0
I think, you know, different products have different, you know, levels of value to the customer based on, honestly, where previous competitors have priced those products. That's really why we've always talked about, you know, Chatter as an entry point to us and in many cases a Trojan horse for us. In many ways, it's really establishing our position wall to wall, you know, for the first time inside of a customer. The Chatter price points are, you know, have been, I would say, very exciting, but not as exciting as the very, you know, rich price points of, you know, traditional CRM systems or data management systems or even application development and deployment systems. 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, you know, in those ads. There's a line of them still coming. We did not have a product that, you know, CEOs were using before. 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 you increase your productivity, get your company going faster, and get greater alignment and collaboration. That's what Chatter is all about. In terms of building a social enterprise, 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.
When you put all of that together, that is exactly, as you said, the opportunity for the social enterprise license agreement. With those large customers that are, you know, all over the country that we've been building up over time, you know, more and more we hear, you know, we want a one price, you know, for the next three years and a true up opportunity so that we can really double down on your technology. We're really working on understanding how to do that. I think by Dreamforce, we'll have the first introduction of that capability.
Speaker 4
Your next question comes from the line of Brent Thill of UBS.
Speaker 3
Thanks. A question for Graham. I think the last downturn, Graham, the churn had picked up at the low end. 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 forecasts don't suggest that, is there something that insulates you more this cycle than perhaps the last cycle?
Speaker 2
I don't, you know, first of all, I want to reiterate, clearly if we'd seen anything in any of these trends, we'd have commented on it. 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. 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—
Speaker 0
We haven't seen anything so far of anything like that, you know, except for on this call we're hearing, you know.
Speaker 2
Yeah. 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, you know, clearly if we're even heading into that kind of environment. I don't really want to try and speculate on what we might or might not see.
Speaker 4
Your next question is from the line of John Difucci of J.P. Morgan.
Speaker 3
Thank you. Mark and Graham, this is 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. Mark, you were very clear that you're going to be hiring, even if the macro backdrop seems a little bit funky. By the way, there are others that are showing this macro backdrop slowdown. That's why the concern is on the call, which you obviously understand. It seems to me that some of the things that people are concerned about, you're actually better positioned than others. I just want to know if you could share with us a little bit more. I know for EMEA exposure, you're somewhere around 20%, maybe even 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. 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 two verticals?
Speaker 0
I would say, you know, number one is, you know, when we look out at what are the opportunities and what is the quote unquote 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. If it's all about SMB, maybe it shifts up to the enterprise. If it's all about the enterprise, maybe it shifts down to the SMB. We are, again, diversified our portfolio across the eight main countries that we do business in.
We have a number of industries that we have strength in, but no one industry and no one market and no one geography, except for maybe the United States, really is, you know, are we that dependent on, I would say. Public sector is not something that we have really ever been able to, you know, turn in. We've never focused on it, honestly. It's probably a mistake that I 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 public sector because we haven't. That hasn't been a big focus. They've come more to us. You saw that transaction with the U.S. General Services Administration this quarter.
We see more opportunity, you know, in the federal government, obviously, in the future. We've had great success, you know, in Japan. Obviously, Japan has not been the best environment in the last couple of quarters because of the disaster that's happened there, but we continue to have a robust business there. I, you know, I have really focused on building this company to be having a very diverse portfolio of business. I think that is why when you look at the last recessions 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-the-hand comment. I think that we can see that this company came out of it roaring. The reason why is because we maintain our customers and we mitigate their risk.
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 receive return for two to three years. The way to get value and the way to get innovation in your company and the way to get your company right sized and growing is get them on the cloud and get them on the public cloud, not this kind of false cloud, which is the virtualization train. 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 a customer's desire to innovate in an ever-changing environment, but to do it without burdening themselves with all that traditional horrible technology.
Speaker 4
Your next question is from the line of Mark Murphy of Piper Sandler.
Speaker 3
Yes, thank you, 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. 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. I'm wondering what ending do you think we're in? Overall, is it reminiscent of how customers responded to the idea of the Sales Cloud, say, six or seven years ago before it was really mainstream?
Speaker 0
Right. I think that, you know, where we are is certainly in the first inning. You know, 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, you know, we kind of moved from the first generation of cloud, which is where we started, which was, you know, people still have their notebooks and their laptops, you know, which they have less and less every day of. They had this, you know, more stable browser environment. They had HTML. 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 into social networks, with Facebook, with Twitter, with, you know, Google+, with the mobile environment, you know, with the iPhone and the iPad and the Android accelerations.
The continued amplification of the cloud itself being more robust, more scalable, more secure than ever before. Customers would say, what is Cloud 3? You know, 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? 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? I kind of was, 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 know, you need a friend. Your friend, you know, should be your car.
The way that you have a Toyota Corolla and a Toyota Tacoma, you should, you know, you should have, and you have a Prius, you should have a Toyota friend. The Toyota friend should be a car on the social network that is talking to you. As we started to build it out for him, you know, I started to lay out all the things that he should do for Toyota. Build the Toyota friend, put in Chatter and build his employee social network, get his Salesforce aligned, you know, build in customer, build his customer service, get his dealers on board, get him to rebuild these kind of legacy factory applications, and build this integrated environment. At the end of it, I'm like, wow, you know, what is this?
After we looked at it and, you know, we obviously positioned it to him and he's become a huge fan of this and others, we're like, are we building a customer cloud? Is that what it is? We're like, well, that's not exactly it. This is really the social enterprise. This is the next step in business. As we've defined that and been able to articulate it to very large crowds, customers have 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. That actionable aspect of it is very powerful for the company. Now what 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. There are other examples.
I won't tell you which ones they are, but we've talked about some of them previously in the last call. Groupon was another one that came out of this exercise. Now for our top 1,000 customers, we're defining for them at the C-level what the social enterprise is. Every executive, Graham has one. You know, every executive has multiple customers. We're all out there positioning what is the social enterprise. 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. You know, they've got their Oracle, their SAP, all this horrible stuff in there. On their front office, they just have not really, you know, evolved it in a long time. It's not just about SFA or a call center. It's about rethinking their customer experience.
That is the company we want to be. We want to be a company that defines what you do with your customers. The way you're going to interact with your customers and be more successful than ever before is by becoming a social enterprise. That's what Salesforce.com has articulated. That's what you will see further articulated at Dreamforce. It's a solution sell. It's not a product sell. It's an advisory role. Customers are really loving it and looking at us in a whole new way. That's why I think you're going to see the deals get bigger.
Speaker 3
All right, I'm going to take a couple more questions. I'm going to wrap things up.
Speaker 4
Your next question is from the line of Mark Moerdler of San Francisco, Bernstein.
Speaker 3
Hello. Question on the full-year GAAP guidance. You've given it now at a loss per share of $0.09 to $0.11. 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?
Speaker 0
The big thing I am follow through is, you know, we're buying a lot of companies. We're making a lot of investments. As we buy these companies, really for the first time in the last 12 months, we've bought, you know, three big companies with Jigsaw, Heroku, and Radian6. It's really impacted that GAAP number. 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. If we were focused on the GAAP number, we would not be buying anybody, number one. We would be, you know, probably running a much leaner machine. We would not be as excited on market share gains.
What I've really instructed the company to do is to blow it out on the top line. That's why, you know, there aren't too many enterprise software companies at the $2 billion plus level delivering a 38% top line growth this quarter. You can forecast that out through next year as well. 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, we're not going to buy any more companies. We're very satisfied where we are. Now we're going to maximize GAAP profit. 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. This is a growth story. This is about the next generation.
You aren't going to build a great company if you focus only on GAAP profit. That's why the non-GAAP number is very important. The ultimate number and the most important number is the top line. Graham, do you want to add to that?
Speaker 2
Sure. Just to give you the details on that, Mark. Our 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. 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 reconciling items. This quarter, we think the blended rate is about 35%. If you take all of those, it basically moves that GAAP guide range.
Speaker 0
That's a great example where I'm like, you know, are we supposed to be really focused on the stock comp number, you know, as part of the GAAP guidance? You know, is that the key to growing this company? I don't think that's the right place for us to focus.
Speaker 3
All right, operator, we got time for one more question. Marc's got energy for one more. Let's go ahead and do one last question.
Speaker 4
Your final question of the evening comes from Brad Zelnick of Jefferies.
Speaker 1
Hey, guys. Thanks for taking my questions. I was curious, as someone had mentioned earlier, you haven't given the big deal metric before. How do you categorize big deals? Do those include upgrades from existing customers? Or is that just 60 new customers at $1 million plus? Thank you.
Speaker 0
That's a combination. It's new customers and existing customers. We actually have given these numbers before in terms of eight-digit deals and seven-digit deals that we've done. I thought it was appropriate to roll that out in this quarter because it is a focus of our company strategically. Because we're able to deliver these three solid eight-digit transactions this quarter and the fourth transaction that rolled into the first day of this current quarter, I would like to continue to focus on big deals. That's the SELA focus. That's getting our own Salesforce 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. 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.
Speaker 3
All right. I want to apologize to all of you still in the queue. We got to actually less than half of you today despite the number of questions. The good news is Dreamforce is just around the corner. You'll have plenty of Q&A time with Marc, Graham, George Hu, Alexandre Dayon, Byron Sebastian, and the list goes on and on. The two key dates for analysts are August 31 and September 1. In addition to keynotes each day from Marc and other senior execs, Graham and I will be hosting an analyst session on the afternoon of the 31st. 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'll look forward to seeing you in two weeks at Dreamforce.
Speaker 0
See you in 25 minutes on Kramer.
Speaker 3
Bye-bye now.
Speaker 4
Ladies and gentlemen, this does conclude today's conference. Thank you for your participation.
