Salesforce.com Inc CRM
Q1 2014 Earnings Call Transcript
Transcript Call Date 05/23/2013

Operator: Good afternoon. My name is Shinel, and I will be your conference operator today. At this time, I would like to welcome everyone to the salesforce.com Fiscal First Quarter 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.

I will now turn the call over to John Cummings, Director of Investor Relations.

John Cummings - Senior Director, IR: Thank you Shinel, and good afternoon, everyone and thank you for joining us today to discuss our fiscal first quarter 2014 results. Access to the first quarter results press release, our SEC filings, and a webcast replay of today's call can be found on our Investor Relations website at www.salesforce.com/investor. And as a reminder, we'll also be posting the highlights of our call on Twitter at the handle @Salesforce_IR.

With me today to discuss our Q1 results are Marc Benioff, Chief Executive Officer; and Graham Smith, Chief Financial Officer. Marc and Graham will open with a few prepared remarks and then we'll turn the call over to answer questions.

Please note that our commentary today will primarily be in non-GAAP terms. Reconciliations between GAAP and non-GAAP metrics for both reported results and our forward guidance can be found in our earnings press release issued an hour ago. In addition, we may offer incremental metrics to provide greater insight into our business or our quarterly results. Please be advised that the additional detail may be one-time in nature and may or may not be provided in the future. It's also possible we may reference certain unreleased services or features not yet available, because we cannot guarantee the future timing or availability of these services or features. We recommend customers listening today make their purchase decisions based on services and features that are currently available.

The primary purpose of today's call is to provide you with information regarding our fiscal first quarter 2014 performance. Some of our discussion and responses to your questions may contain forward-looking statements, which 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 may or could differ materially from these forward-looking statements. All these risks, uncertainties, and assumptions, as well as other information on potential risk factors that could affect our financial results are included in our forms filed with the SEC, including our most recent report on Form 10-K, particularly under the heading, 'Risk Factors.'

So, with that, let me turn the call over to Marc.

Marc Benioff - Chairman and CEO: Hey, thanks John, and I am thrilled to kick off our fiscal 2014 with yet another great quarter at salesforce.com. Revenue for the first quarter rose 28% from a year ago to more than $890 million and in constant currency revenue grew faster at 30%. Operating cash flow exceeded $280 million for the quarter, also an increase of more than 30% year-over-year and deferred revenue grew to more than $1.7 billion, also up 30%.

Based on these great results, we're raising our full fiscal 2014 revenue guidance, which we now project at $3.835 billion to $3.875 billion and we're well on our way to our first billion dollar quarter.

In addition, I'm thrilled that after decade of growth in market share gains, Gartner announced this quarter that Salesforce is now the largest CRM platform in the world. We've displayed SAP to become the number one CRM market share leader. Regardless of on-premise or cloud, Salesforce is number one. I'd like to congratulate all of our employees, our customers, our shareholders on this incredible achievement on becoming the number one CRM company.

Salesforce has always been a catalyst and evangelist for innovation in enterprise software. We've pioneered the shift to cloud, to social, to mobile and today with this next generation of technology our customers are connecting with their customers in entirely new ways. They are becoming customer companies and they are transforming for managing systems of record to systems of engagement, and we're leading the way.

With our four product lines, the Sales Cloud, the Service Cloud, the Marketing Cloud and the Salesforce Platform customers are the tool to become customer companies and unlock greater levels of growth, innovation and success. That's why our customers have made us the clear leader in each of our four core markets. First, our flagship Sales Cloud is the number one app for sales teams helping customers to drive phenomenal sales productivity and top line growth. It's the only sales platform with built-in tools to motivate and align teams through Work.com and continuously refresh company and contact information through Data.com and with the latest release of Salesforce Chatter customers can access sales calls records and files right from their mobile devices. The new Chatter mobile app is available now from the Apple App Store and Google Play and I recommend that you download and see this incredible new vision of how CRM works in the mobile environment.

The Service Cloud is the world's number one app for customer service and support and is the only service platform that ties customer service with sales and social. In the quarter, we announced our latest Service Cloud mobile innovations, including mobile co-browsing, mobile communities, mobile chat and a touch-based agent interface, and I'm delighted to announce that just last week Gartner named Salesforce the clear leader in both vision and execution in the most recent Magic Quadrant for Customer Service. And if you didn't already know, SAP continue to fall behind in the Challenger quadrant which is why more SAP customers moved to Salesforce in the quarter than ever before.

The Marketing Cloud is the world's number one app for sales, social marketing and the only marketing platform that seamlessly connects with sales and service. Marketers want a unified platform to listen, to publish, to engage, to advertise, and give you then the power to target individuals at scale. That's why we want Social.com in the quarter, the first and only advertising app that ties ad campaigns on Facebook and Twitter with real-time customer and social listening data. Social.com is already managing 500,000 social ad campaigns for customers and is Facebook's largest advertising partner today.

The Salesforce Platform is the world's number enterprise cloud platform and it's the only platform with social and mobile built right into the core. Customers love having a fast and easy development platform to code next-generation apps that instantly work on any mobile device. And with the launch of new mobile services in the quarter, including developer mobile packs and Salesforce Mobile SDK, Salesforce is accelerating mobile app dev for all of our customers.

In addition, we are thrilled with the traction of our ISV ecosystem and we've doubled the number of ISVs in the AppExchange since the first quarter of last year.

The combination of our customer company vision and our clear leadership within each of these core markets is what's driving our success with customers today. That's why we continue to close some of the most exciting and strategic transactions in the industry. I am thrilled to announce that we closed the marquee transaction in the quarter with Japan's small and medium enterprise agency, a government agency that serves more than 3 million companies nationwide. Through our new partnership with Japan's government, Salesforce Platform and Chatter will touch (nearly) aspect of the agency's engagement with millions of SMEs.

Companies will be able to tap into an online marketplace that services professionals like attorneys and tax advisors and by connecting Japan's SMEs to each other and information real-time, Salesforce is helping this critical Japanese agency, bolster competition, innovation and growth in this phenomenal time into the Japanese economy. This continues our commitment to partner with the Japanese government as our most important and largest customer. On May 28th at our Customer Company Tour in Tokyo next week, you will be hearing more from me about how this agency plans to bring millions of SMEs together to launch the Japanese government's first social business collaboration network. I'd be thrilled to have you join me in Tokyo.

Also on May 28th, I've been selected to deliver a keynote to government leaders at the U.S.-Japan Council symposium along with U.S. Ambassador, John Roos, and I hope I look forward to seeing you there.

We continue to deliver tremendous success with companies like General Electric, where we had great momentum with major divisions, including GE Capital, GE Oil & Gas, GE Energy, GE Power & Water, GE Transportation, GE Aviation, and now GE Healthcare joining the Salesforce family. GE Healthcare is the world's biggest maker of medical imaging equipment. They're standardizing on Salesforce as their global CRM platform and by connecting their entire front office team directly to the millions of physicians and hospitals they serve. GE will be fueling a whole new level of customer intimacy.

Another great win in the quarter is TOMS Shoes. In the quarter, TOMS selected Service Cloud, Marketing Cloud, and Chatter to build the central hub, where its entire team of services agents can listen and gauge and service customers wherever they are.

While we are great for large companies, we are great for small and medium companies too. And by linking its SAP and Oracle back office systems with Salesforce, TOMS will be able to arm agents with a full view of the world that surrounds each and every customer. In every one of these examples, companies are transforming their business with Salesforce's next-generation technologies.

Our ability to deeply integrate our social and mobile front office solutions with legacy back office systems like Microsoft, SAP and Oracle is helping many of our customers transform into customer companies.

Our other new or add-on transactions in the first quarter included Belkin and Bristol Myers, GREE, (Conexo), New York Life, Novartis, Panasonic and Research in Motion, and we continue to crush the competition in the quarter against Microsoft. We won significant new or add-on business at companies like Johnston Press, KBDI, LodgeNet, McGraw, Old Mutual, Regence, and TalkTalk. Against Oracle we won at Baxter, BP, DIRECTV, at ING, at National Australia Bank, at NTT, at Virgin; and against SAP at Deloitte, at Fujitsu, at Juniper, at Lenovo, at Millipore, Nokia, Sony, TOMS Shoes, (indiscernible), Home Depot, and the list goes on. The pace at which these companies are embracing our social and mobile cloud technologies is phenomenal.

To review, just last quarter we passed our first 1 billion transaction day and already in this quarter we've delivered an average of 1.2 billion customer transaction each and every business day. Nothing speaks more to the value of Salesforce than the actual usage of our products with the speed, reliability and trust we've become known for.

In closing, I'd like to invite all of you to join me at one of our customer company tour events to see our new products, to hear our new message, to visit what the customers and prospects who are making these decisions of transforming our industry into the cloud and seeing why Salesforce has become the number one CRM provider in the world. You can join me Tokyo or Sydney, Australia on May 28, in Sao Paulo, Brazil on June 11, in New York City on June 14, in Rotterdam on June 18, in Toronto on June 19 and in Munich, Germany on July 2. More than 15,000 customers across 11 cities have already attended our sold-out customer company tour events. And we hope to see you at one of them soon, so you can feel the energy, the excitement, the momentum, and the growth and what's driving Salesforce into this incredible new position as the world's largest customer company. I am also thrilled to announce that registration for Dreamforce 2013, the world's largest technology vendor conference has opened today. We expect more than a 120,000 registered attendees to join us in San Francisco from November 18 through 21 and I look forward to seeing you there.

With that, let me hand it over to our Chief Financial Officer, Graham Smith.

Graham Smith - EVP and CFO: Thank you Marc. We delivered another solid quarter in Q1 with strong year-over-year revenue, deferred revenue and operating cash flow growth. Our success during the quarter was driven by continued demand across all of our cloud solutions, supported by further declines in attrition.

Let me take you through these and other highlights from our first quarter results starting with the income statement. Q1 revenue was $893 million. That's up 28% over last year. Excluding an approximately $10 million FX headwind, first quarter revenue was up 30% year-over-year.

Looking at year-over-year growth on a regional basis, revenue in the Americas grew 30% to $631 million, revenue in Europe grew 38% in dollars and in constant currency – sorry, and in constant currency to $163 million, and revenue in Asia increased 7% in dollars and 17% in constant currency to $99 million. As I mentioned previously, our dollar attrition continued its steady decline in the first quarter and is now in the low double-digit percentage range.

Our first quarter non-GAAP gross margin was 80.2%. That's about 160 basis points lower than Q1 last year. Our first quarter non-GAAP operating margin was 10.5%, or about 100 basis points lower than last year, leading to first quarter non-GAAP operating income of $94 million. That's up 18% over last year.

Our results in Q1 included an approximately $8 million charge for an IP licensing agreement, which was recorded in costs of revenue. This represented about 90 basis points of margin dilution in the quarter. We added more than 480 new employees in Q1, bringing our total headcount to 10,300, that's up 23% over Q1 last year.

Turning to EPS, non-EPS was $0.10 for the first quarter. The licensing agreement charge that I just mentioned represented approximately $0.01 of GAAP and non-GAAP EPS.

Turning to cash flow, first quarter operating cash flow was a record $283 million, up 33% over the first quarter of last year. We continue to expect full year growth in the low 20% range. CapEx in the first quarter was $54 million, up 20% over Q1 last year. CapEx continues to be primarily driven by new office build-outs related to our growing employment base and remain flat year-over-year to approximately 6% of revenue.

Free cash flow, which we define as operating cash flow less CapEx, was $229 million in the first quarter. That's up 36% over Q1 last year.

Turning to the balance sheet, we ended the quarter with approximately $3.1 billion in cash and marketable securities, up from appropriately $1.7 billion last year. As you recall in the first quarter, we successfully closed a $1.15 billion convertible senior note. Accounts receivable was up 35% over last year to $503 million. Deferred revenue ended the first quarter at approximately $1.7 billion. That's up 30% over Q1 last year. Excluding a year-over-year FX headwind of approximately $18 million, deferred revenue increased 31%. On a sequential quarter basis, deferred revenue was reduced by an FX headwind of approximately $16 million.

In addition, please recall that in our most recent fourth quarter we build and collected an approximately $30 million invoice that was initially build as new business early in the first quarter of fiscal 2013. This also created a sequential headwind to deferred revenue in the first quarter.

Deferred revenue continued to benefit from the shift toward annual billing. We're just under 70% of all invoices in Q1 issued with annual terms. This was about 5 percentage points higher than Q1 last year. The dollar benefit to deferred revenue from the shift to annual invoicing together with multiyear invoicing was approximately $100 million. That's down from $145 million at the end of Q1 last year. Unbilled deferred revenue or revenue that is contracted but not yet invoiced and is off the balance sheet was approximately $3.6 billion in Q1. That's an increase of 33% over Q1 last year.

Before I turn to our guidance for the second quarter and full year, I want to highlight the impact of foreign exchange, particularly the yen, is having on our financial results. We've had great success in Japan and today our Japan subsidiary represents approximately 6% of total corporate revenue. When we updated our fiscal 2014 guidance in February, the yen was around 92 to the U.S. dollar. This week the yen-dollar rate has been in the 101 to 103 range, a devaluation of about 10%. In fact, the yen has been the fastest falling major currency in the world this year. This and other currency fluctuations have reduced our full year revenue outlook by approximately $35 million, including the $10 million in Q1 that I mentioned earlier. As a reminder, FX rates impact not just revenue, but also operating margins, deferred revenue and cash flow.

So, with that context, we're pleased to be raising our full year revenue outlook to $3.835 billion to $3.875 billion, so a growth of 26% to 27%. Taking into account a difficult FX environment and the IP licensing agreement charge, we are also pleased to maintain our full year non-GAAP EPS guidance in the range of $0.47 to $0.49. This range assumes a full year effective non-GAAP tax rate of approximately 35% and no meaningful contribution for below the line interest or other income and expense.

For Q2, we anticipate revenue in the range of $931 million to $936 million for growth of 27% to 28%, and we expect non-GAAP EPS in the range of $0.11 to $0.12. We expect second quarter year-over-year operating cash flow in the mid-to-high teens percentage range. And in addition, we expect Q2 CapEx as a percentage of revenue to be approximately 11%. That's a little higher than normal. It's due to the pleasing of new office build-outs, increased data center investments, and the capitalized portion of the previously mentioned IP licensing agreement. For the full year, we expect CapEx as a percent of revenue to be about 7%, which is in line with previous years.

We anticipate reported year-over-year deferred revenue growth in the mid-to-high 20s percent range.

As Marc mentioned earlier, Dreamforce is being held in the fiscal fourth quarter. For modeling purposes, this will affect EPS linearity for the year as we expect Dreamforce to reduce non-GAAP EPS by approximately $0.02 to $0.03 in the fourth quarter. As a reminder, Dreamforce was in our fiscal third quarter last year.

All of the underlying assumption is for our GAAP and non-GAAP guidance and a complete GAAP to non-GAAP reconciliation can be found in our earnings press release issued today.

So, to conclude, we kicked off fiscal 2014 with a solid first quarter, delivering strong revenue, deferred revenue, and operating cash flow growth. Our dollar attrition continues to decline and is now at the lowest level since we began measuring it more than three years ago. We continue to see strong demand across all of our cloud solutions and are well positioned to deliver another great year of growth.

So, with that, we will open the call out for questions. Operator?

Transcript Call Date 05/23/2013

Operator: Brent Thill, UBS.

Brent Thill - UBS: Marc, I was curious, if you could just give us your view on the next steps for the Marketing Cloud? And if you could also address with Social.com as you mentioned, your pricing is now based on the percent of ad spend, a little different than your past pricing model, can you talk about – should we expect more changes going forward in some of the pricing methodologies that you unveiling some of the new products going forward?

Marc Benioff - Chairman and CEO: It's an area where I spent a lot of my time. Let me tell you how I look at this strategically. Number one, Salesforce is now the number one CRM company in the world. I mentioned that in the script and that has been an incredible accomplishment for the Company. For us to continue to be number one in CRM in the world, it means that we have to be number one in three main areas. One, we have to be number one is sales, which we are. And if you have seen the new Gartner Magic Quadrant in sales, it's clear that we're number one. It's not any clear than if you get the new Magic Quadrant for customer service and on support, and customer engagement which just came out about a week or two ago now, it's credible market and customer support we're number one in service. That has been an incredible journey. It's been a fight. It's been a tremendous accomplishment and especially gratifying when we saw SAP got pushed into the Challenger quadrant as we assumed this strong position in the Leader quadrant, and that's very important to us. So, number one in sales, number one in service and that's true in revenue, that's true in market share. That's true in feature functionality. Now, marketing is an area that we've recently entered into, as you know, and it's not really an area that we've gone into organically and through our own development, but we've acquired our way into marketing first by purchasing Radian6 and then by buying Buddy Media. Buddy Media had purchased just before we bought them Brighter Option which we then have rebuilt and now re-launched as Social.com. And by no means are we number one in revenue in marketing. This is the year where marketing revenue will enter into the nine digits for the first time, but it's not a $1 billion cloud yet. It's a $100 million plus cloud. And our goal is to be number one marketing. But we realize that to be number one in marketing we're going to have to achieve more than $1 billion in revenue in that cloud and be not just number one in listening, not just number one in publishing, not just number one in social advertising, but in a number of other key areas as well. And strategically, I believe that this is very important to the Company and so I've spending a lot of my time looking at this and you're going to see us experiment and try things and innovate in, as you saw in acquisition, which you've seen us do in the last two years, in pricing like you've seen with Social.com., in features and functionality, in position and in messaging like you've seen us evolve into the customer company messaging. And what that has meant to our customers is that they are looking to us more and more and I invite you to the customer company tour presentations so you can meet these customers and validate this that they look to us to help them understand how to connect with their customers in this kind of incredible new way. And our goal is to be that trusted advisor. And to do that it means that we're going to have to deliver world-class marketing functionality. We're focused on that. We're excited about that. Not just in B2B, but in B2C as well. And what you're seeing in those changes or in those pricing that you're asking about, Brent, is, our innovative and ideas and experiments as we move from $100 million business in marketing to a $1 billion plus business.

Operator: Heather Bellini, Goldman Sachs.

Heather Bellini - Goldman Sachs: I was just wondering Marc, we have a good number of private companies telling us they're starting to write you some very big checks for Force.com. I was wondering if you could talk about what we should be expecting in that business, what type of milestone should we be looking for. I know you mentioned what you did in Japan this past quarter, but is there anything else you could share with us on kind of things we should use to benchmark the business?

Marc Benioff - Chairman and CEO: The way to look at this business, which we call the Salesforce Platform is the following way. First of all, for our customers who are buying our sales or service or marketing products, they're extending those products with applications that are customer-centric and they are customizing, they're enhancing, they're configuring, using the Salesforce Platform, which includes Force.com, which includes our APIs, which includes Heroku, which includes Site.com, our website capability, which includes our AppExchange where we have approximately 2,000 applications in there. And that's step one. They're extending and complementing the work they've done with sales, service and marketing. Step two is a lot of those companies are building very unique custom applications and those applications are the applications that they need, the apps that they need to run their business. It used to be back in the day that few companies would buy SQL Server, Visual Basic, PowerBuilder, SQL Forums, whatever it was to basically do structured and unstructured data management, and have application development capability. We see those customers turning to our platform to get that same kind of capability rapidly. We are very excited about the growth that that brings us, the stickiness that brings us with the customer by starting to manage their metadata and not just their data and delivering those next-generation apps. Three, the AppExchange; you've seen a number of really great ISVs emerge on our AppExchange, many of them who are building natively on our platform and these application companies, I mean just great, great, great companies, some that are even going public now, I'm sure you know with native apps. And we couldn't be more excited for them. We are continuing to grow and also partner from a revenue and go-to-market perspective with a lot of those companies, and we have a whole sales force just dedicated to selling to ISVs. To help them unify with our platform and to go-to market to our customers. These three things together that are working really well with the platform, extending and complementing the CRM capabilities, building entirely new apps into traditional app dev space, (route space); and three, a platform for independent software vendors to build their own applications to target our customers or their own customers or specific industries. And it's these three things, Heather, together that you hear from some of these what might look like very small companies, writing us extraordinary checks, as you said, but it's really because we've become partners with them much in the way that we're partnered by the way with our key software vendors. Of course, companies provide us core technology that we write very large text too like Dell or like Cisco, or like EMC or especially Oracle where it's very important for us to have a strategic relationship with them that we're writing significant checks to them for their licensing and then it's a very important part of our business. You've seen that now. 14 years of business we wouldn't be in business without those relationships with those vendors providing us our technology and in the same way that they fuel us and we write them the checks. Those ISVs then write big checks back to us. So, it very much is done by (audit) relationship between us and those customers or between us and our core vendors. And our job is that rising feel will raise all boats and that's the economy that you're getting feedback on today.

Operator: Mark Murphy, Piper Jaffray.

Mark Murphy - Piper Jaffray: Marc, how do you think about the scale of the opportunity in the long-term for becoming the customer company and offering the Force.com platform? And specifically, if you compare the size of that opportunity or that market to other markets such as human resources or financials, what do you think has a more profound impact on an organization between modernizing the front office or automating the back office and therefore what do you think is a bigger opportunity.

Marc Benioff - Chairman and CEO: I've got two words for you which is transaction volumes. And I think that you see that with Salesforce, we make public, as you know. In nauseam, we've talked about this. I don't – got a revelation anybody on this call or in this room that we publish our transaction rates every single day. But the reason that you don't see other vendors provide their transaction numbers is because they're actually quite low. Now, when we publish a transaction number, that's a complex transaction; it's a complex transaction that we deliver. You saw that in the first quarter we delivered 78.7 billion transactions in the quarter. And if you think about other cloud providers, who else is telling you how many complex transactions. Now, when I talk about a transaction what I mean is, as defined by the late great Jim Gray, who basically defined transaction as a complete unit of work in the computing model and the ability to not only to commit that transaction which is a technical term, but also to be able to roll back that transaction. It's a unit of work. And that we're reporting that transaction number and we've done that for quite a few years. I think that you can determine the value that a company is placing on its customers by the amount of data that it holds, the amount of metadata that it holds, and that is reflected most accurately in the number of transactions. The transaction number is really the sum of all capabilities of the system than saying, we've delivered and we're on our way to delivering more than 100 billion transactions in the quarter. Okay, what's another one that we follow closely? Tweets. The way to really judge the success of Twitter is, of course, they had a great quarter, I think it was almost $300 million for the quarter. They're a great customer of Salesforce. We keep our eye on Twitter. And how do we manage Twitter's transactions? We look at their transaction number, how many tweets are happening in for Twitter, and in the same way you can really look at and you can track and graph and it is quite analytical Salesforce's transaction number over a period of time. So, I'd look to that and what I've seen is I continue to go back to and I am out with customers constantly. That's my job. This week I was in New York with dozens of customers and working with Bank of America. It is one of our largest customers where their next-generation systems are and it's all about the customer. You are following the customer and how do – the path of organic growth for our customers is the work with their customers and that's why we're right in the heart of all these companies' business. We want to help them grow their revenue. We want to help them grow their topline and the way we are going to do that is by helping them optimize their sales, service and marketing capabilities, grow their channels, and as we do that it's reflected in the transaction numbers. So, look what is my call to arms. My call to arms is for all cloud ISVs to publish their transaction number on a quarterly basis just as we do because it will give you more prospective on the stickiness and the intimacy and the integrity between the vendor and the customer. I hope that answers your question.

Operator: Brendan Barnicle, Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities: Marc, I wanted to follow-up on – it's been a while since the Rypple acquisition and at that time you talked of sort of building a whole new class of apps that had more social integrated into them. I was wondering, if you could give us a little more update on which of those have been most successful and sort of where you see that effort going?

Marc Benioff - Chairman and CEO: Well, of course, I will talk about Rypple, which is now known as Work.com and if we haven't seen the new version of Work.com, it's phenomenal. We've own the Company I think for just a little bit over a year now. A couple of incredible founders that joined our company from that company were Daniel Debow and David Stein. And under the leadership of a tremendous executive in our industry, John Wookey here at Salesforce who is running that capability as well as our GoInstant acquisition which is also another phenomenal story underway. But in the case of these small acquisitions that we are doing like Rypple, like GoInstant and others, a lot of these are what we are – acquisitions that we're doing to acquired talent and to kind of extend and complement our capability. The one that we've really kicked all this off with was Jigsaw. You probably remember when you bought Jigsaw for about a $150 million and I don't remember the exact amount. It's not in front of me obviously at the table. And of course, we've worked on that we evolved the team. We've evolved the product and the technology. We loosely coupled it into our architecture. We rebranded at Data.com. And you know what, this year, Data.com had a phenomenal quarter. I think they are going to do more than $100 million year. It's pretty exciting or approximately that. They are well on their well to doing. And it's a great success story here at Salesforce and it's a commitment. I have to tell you when we were in quarter one or quarter two or even quarter five or six, that could buy the company, that's not one where we're looking at is this is a success or is this a failure. We want to get down the with the year three or year four and that's really when we can really judge it. In our industry people always overestimating what you can do in a year and they are underestimating what you can do in a decade and that is really true in these kind of technology acquisitions that we make. Now, don't make any mistakes; these are high-risk moves. When we buy a small company, there is a higher risk that it's going to fail and succeed. We have to keep these founders in the boat. And it's complex. But I'll tell you that we've had a lot of great success; another great success in addition to Work.com, which is Rypple, in addition to Data.com which was jigsaw, is a Company called Heroku. And Heroku is also has this incredible growth rate; it hasn't gotten yet to $100 million in revenue, we bought the Company approximately two and a half years ago for about $200 million to $250 million. It's a phenomenal piece of technology. And they have just done a great job at Heroku. It's really become a great standard in the industry. It's huge extension to our platform. It gave a lot of confidence to our customers that we're in the platform area. In the same way, getting back to your original question, Work.com has become a tremendous performance and productivity enhancer to our sales application, and we see customers who are buying the Sales Cloud look to Work.com as the way to motivate and align and compensate their sales organizations. And you'll see in the new version of Salesforce this summer; I'm not going to tip my hat too much, but the deep integration of Work.com into that next-gen sales application. We've already seen us include some components of Work.com in the current vision of Salesforce and some customers have been able to deploy that. But soon all customers will be able to and it's given us a great vision for the future of our Company, and I couldn't be more thrilled to have that group with us. They're based in Toronto, Canada and they're doing a fantastic job. We want to keep them going, (fueled), and exciting..

Operator: Nandan Amladi, Deutsche Bank.

Nandan Amladi - Deutsche Bank: A question on the off-balance sheet backlog. That seem to have slowed a little bit. We're still up 33% year-on-year. But compared to where it was last year, was it tough comps or were there some other moving parts we need to understand?

Graham Smith - EVP and CFO: Sure. There's a couple of things. I think firstly, in Q1 last you'll recall that we signed a largest deal in the Company's history that was signed in Q1 that added a big boost to the off balance sheet, because it's multiyear agreement. And also, we renewed one of our largest customers Japan Post for several years, and that's also I think in our top five customers worldwide. And so, those two transactions in the first quarter of last year made it kind of a tough comp. And then, secondly, I think, over the last few years, we've seen extension of our average contract length. We talked about that on our fourth quarter call, that our average contract length is now just over two years, and at some point, the pace of that contract extension length will slow, and so that will provide a bit of a drag on that off balance sheet number, but it's still a very healthy growth rate off of tough comp, so we were happy with the number.

Operator: Keith Weiss, Morgan Stanley.

Keith Weiss - Morgan Stanley: I just wanted drill down on margins a little bit. One, it was a clarification. The licensing impact, that was 90 basis points year-on-year on gross margins or operating margins?

Graham Smith - EVP and CFO: Well, it's about the same. It's about $8 million on our revenue numbers, so it's basically got the same 90 point impact on – it's recorded in cost of sales, so it was in the gross margin number and it was also obviously in the operating margin number.

Operator: David Hilal, FBR.

Samad Samana - Morgan Keegan: This is Samad Samana for Dave. We've been hearing a lot about traction in the government space. Can you give us an update on the government focus and amongst your existing products, where you see the biggest opportunity and which could be the most successful there?

Marc Benioff - Chairman and CEO: Okay, yes, I will do that. As you know, salesforce.com has not focused on the U.S. Government as a major opportunity over the last 14 years. We've been too emerged and amassed really in the commercial markets. It just has not been a major focus for us. A couple of years ago, we started to get much more excited about that opportunity and we really looked at how would we start to build and expand our capabilities. What we realized was that that would require us to do a couple of things; one, bring in new leadership to focus on not only the U.S. government but also the global government opportunity, which includes the Japan government or the U.K. government et cetera, as well as a new technology capability which would be to build the government, we call it government pod;, that is, to build a pod that is a special version of our product that would be accessible only to the government, and that would allow critical agencies that we saw becoming interested in our technology like the GSA for example or others to become more invested in using our technology. We also had to bring in a new set of leadership and we hired Vivek Kundra who is our Executive Vice President of our Global Government business unit and he is based in Washington D.C. In addition to that, in addition to focusing upon building a new technology platform in addition to focusing on that next-generation leadership, we also recognized we had to spend a lot more time with the government and also do more marketing events in Washington D.C. And just as an example, yesterday, we had more than 2,000 customers attend our Washington D.C. program. Now, in addition to that, you may know that about 60 days ago I also personally led a program in Washington D.C. myself which was a sub-1,000 seminar focused on government agencies as well. Now, these are primarily federal agencies; this is not – this does not also include our work in cities and also in states or in foreign governments. Overall, we see that as a tremendous opportunity for growth and we're continuing to invest there. And as you know, it's a long process, but we're very excited by our work in a number of agencies, in a number of states, in a number of cities and we'll be doing more to communicate that progress and success stories in the future. It's wide-ranging from automating the GSA, which is the government's (determining arm) to 311 call centers in a number of cities around the country to foreign governments, and I think a great example is Ministry of Economy, Trade and Industry that we talked about today with METI and what's going on in Japan. So, all of those things together make us very optimistic about our work with the government in the future, and I do think that the government is ready to go to the cloud.

Operator: Phil Winslow, Credit Suisse.

Philip Winslow - Credit Suisse: A lot of focus has been put on obviously Force.com and the Marketing Cloud. Just wanted to focus back in on the Service Cloud, just curious what trends you are seeing there? Obviously, you have had very strong momentum in the past. Is that continuing? Then also competitively with (write-down) having been inside of Oracle for a bit, wondered if you could just talk about the competitive environment?

Marc Benioff - Chairman and CEO: I think that it's really fascinating the competitive situation because in our industry CEOs like myself tend to basically have to predict the future or do their best to predict the future and then focus in certain areas. It's a great example is – of course, Microsoft is extremely focused on Windows 8. That's a huge part of their story. They're trying to save their operating system business and their Office business through Windows 8, which they have seen Windows to accelerate very aggressively as the world has moved away from the personal computer and towards the phone and the tablet and with launching Windows 8 this year, Microsoft basically have said they want to be the Windows 8 company and that in all situations the answer is Windows 8. That's true for SAP. You saw Sapphire last week and the main focus of Sapphire was HANA. The focus of HANA – this HANA application or that HANA implementation or even HANA in the cloud and SAP has said it's the HANA company. Oracle, I know Larry extremely well. He has a very impressive piece of technology with Exadata and he is very much wants to be the Exadata company, he views that as the future of the database and the future of its applications, and I get that and Oracle wants to be the Exadata company. But we don't want to be the Exadata company or the HANA company or the Windows 8 company, we want to be the customer company. We want to enable our customers to help their customers connect in a new way, and that is along the lines of sales, service and marketing and the development of a customer platform. Number one, how do you market the customers when they are everywhere? Number two, how do you sell to customers as a team? Number three, how do you service the customers when they are everywhere? Number four, how do you build a customer platform? Number five, how do you transform the way that you work in the world of social and mobile? These are the five things that I am personally focused on each and every day at Salesforce, and look, when I am working with customers in designing next-generation solutions, we're looking at doing that. Let me give you an example. This quarter, we had really enjoyed working with Frank Blake, he's the CEO of Home Depot, and his team on – they've got incredible new business in roofing and sidings and windows, and they need new applications rapidly, and we want to help build those applications and we want to help connect them with their customers and help them build the quotes and the orders and the sales and service systems for their RSW business, which they see as a tremendous opportunity going forward, and I agree. We have to get in there, we have to deliver with speed; that's critical for their future success, and we also have to build and deliver that technology in radically different form factors than we were delivering in just 24 months ago. So when we're working with the Home Depot in that environment, we're coming in against existing and (niche) competitors in that organization. Of course, they really work with every customer and every vendor in the industry. We have to show that we're different, and the way we're going to show we're different is we're able to take any device that they show us, rapidly deploy an application in that device and make it world-class and that's what we did with Frank and his team this quarter. And that's we have to reproduce in each and every situation around the world. And honestly, I think we're doing a great job of that. I think you're going to see – you saw some great new technology from us this quarter. If you haven't seen what we've delivered on the app stores, it's incredible. And this summer you're going to see some more amazing things. We're going to completely transform the CRM market, and by the time we get to Dreamforce the end of this year, I promise you, we will have completely transformed our vision and our core for CRM market and how we're operating and we're going to do in whether it's a user interface or application programming interfaces. And I'll tell you, it's not a focus of our competitors because if you go and look at their conferences that are seminars, they're webinars, which I do, it's my job to do that, they're not focused in this area, they're focused in other areas. And you know what, they probably should be focused in other areas because that's their core. But our core is the customer here at Salesforce. And that what we're focused on moving forward in sales and service and marketing and every day we want to move that (technology) down the field to make it more social, more mobile, more capable with Big Data, the ability to build and develop new next-generation communities, helping our customers become software companies like we just did with Home Depot in building these next-generation apps for them, get it deployed on the cloud and helping our customers build the next level of trust with their customers. And those seven tenants and those things that we're doing every day, that is not what our competitors are doing. They've got a different focus. You can read their earnings – you can attend their earnings calls and read their scripts. It's not what they talked about. So that's how I look at the competitor situation and that's why we've become the number one CRM company in the world.

Operator: Jason Maynard, Wells Fargo.

Jason Maynard - Wells Fargo: Marc, in your comments you've made some really interesting points about the shift to engagement apps and this new customer company point of view. Can you maybe share your vision around how Chatter, the new mobile apps, and the UI changes drive that positioning change?

Marc Benioff - Chairman and CEO: Well, I think it's a great question, and I'll tell you that I am not ready to spill the beans which I'm very good at doing. What I'll tell you is that the world is changing faster than ever and in our industry it's no different. And you can really see it by what users are carrying with them when they even travel. I used to always have my laptop with me when I traveled, but now I mostly just have my phone. And that's amazing to me. And I switch off between an iPhone and an Android device probably like a lot of people. Sometimes I have both with me. LTE networks have really changed this device performance everywhere I go in the world. And the phones are actually quite a bit bigger than they were just a couple of years ago and I have seen some of the new phones that are coming and they're all starting to stretch a little bit more towards the iPad. I think that that is a very unusual and interesting change in our industry. It's subtle, but it is seminal. And the reason why it's seminal is because it's not the focus of the enterprise that all of a sudden I (should feel like go in) the pocket of my jacket and run my whole company. But that's really my focus. My focus is and really has been that in the shift to mobility, which is way bigger than tablets. Just phone – the billions and billions of devices are phones. In the world of social which is billions of users in the social world and the world of next-generation Big Data, which is a lot about the APIs that are coming out of all these systems that we have to re-conceptualize what does it mean to manage and build and create compelling enterprise software. The things that we were building when we started our company, we said hey, why are all enterprise apps not like Amazon. In 2010, we started to ask the question why are enterprise apps not like Facebook. Now that was about a decade, but I can tell you that by the time that we get to – by the time that we get to Dreamforce, we have to ask that same question. But in the same way that Facebook has re-conceptualize their company and they run entirely on the phone. And they have these great new phone apps, which I use every day or Twitter – Twitter is another great example of phone apps. We have to be at that same level of acuity and excellence in that environment, not just for our fixed apps but in the ability to build and deliver custom apps, like I just referenced with some of these big customers. And this transformation or kind of the re-platforming – we have already re-platformed successfully a couple of times in the company, but I strongly believe we have to re-platform again in today's world. I don't see the competitors doing that honestly. And I really think that we have to do it again and we're going to have to get ready to do it again because the market is changing. And it's exciting and I think it's getting bigger. I think our ability to reach more users is out there, and we want to build or provide a broader solution that's agnostic across all operating systems and devices. That becomes the dominant applications that our customers use to manage their businesses. To back to Heather's point that we want to have all of those apps right there in the palm of your hand, and I think that we've got it figured out, and I think we're imminently ready to deliver the next-generation of our platform and our capabilities.

Operator: Walter Pritchard, Citi.

Walter Pritchard - Citi: Graham, I wonder if you could talk about deferred sales commission. If we look at the new deferred commissions on the cash flow, that was actually down substantially year-over-year, but $32 million comes into about half of that. Can you talk about what the drivers of that number were?

Graham Smith - EVP and CFO: Well, I think we still have some comparison issues with Q1 and Q4 of the previous year, where we had sort of really, really spectacular large transactions closing that drove very high commission payments to sales teams that were involved in those transactions. And clearly, we had a strong fourth quarter here, but we didn't have some of those marquee transactions that really drive the big, big commission checks. So, other than that, we haven't – I'd say our year-over-year growth in terms of; A, hiring is a bit slower this year versus the previous year. But we haven't changed the comp plans particularly or anything like that. So, I think it's really the profile and the distribution of the transactions that creates a lot of that change.

Operator: Raimo Lenschow, Barclays.

Raimo Lenschow - Barclays: Just a quick one on the regions. I noticed that Asia has been decelerating now for two quarters and is actually growing at a growth rate that doesn't look overly exciting. Can you just talk about some of the drivers, Graham?

Graham Smith - EVP and CFO: So, Raimo, I think we've highlighted that on previous calls that in spite of the fact we obviously have some very large, very successful customers in Japan, generally that market has been quite tough for us over the last couple of years, particularly in the Enterprise. I think small businesses continue to kind of motor along very nicely, but Enterprise in Japan has been slow and of course that takes time to kind of feed through into our revenues numbers. Now you're seeing obviously a very different approach to managing the Japanese economy. We'll be there next week for a customer company tour. I think our sales team over there feel much more excited about the prospects for large enterprise transactions this year, it's primarily that's affecting that revenue growth number. The rest of Asia which is sort of Australia, New Zealand, and ASEAN has been relatively consistent performer over the last few years.

Marc Benioff - Chairman and CEO: Great. Well thanks everyone and thanks for joining us today. Just encourage you all again to register for Dreamforce; do that early. And we look forward to updating you in August. Thanks very much.

Operator: Thank you everyone for joining today's conference call. You may now disconnect.