Salesforce Inc (CRM) — Q1 2015 Earnings Call Transcript

Thanks so much, Hannah and good afternoon everyone and thanks for joining us for our fiscal first quarter 2015 results conference call. Our first quarter results press release, SEC filings and a replay of today's call can be found on our website at www.salesforce.com/investor. We will also post the highlights of today's call on Twitter at the handle @salesforce_IR. With me on the call today, are Marc Benioff, Chief Executive Officer, Keith Block, President and Vice Chairman and Graham Smith, Chief Financial Officer. We’ll start the conversation with a few prepared remarks and then we will turn the call for questions. As a reminder our commentary today will be in non-GAAP terms. Reconciliations between our GAAP and non-GAAP results and guidance can be found in our earnings press release issued earlier today. During the call, we may offer additional metrics to provide further insight into our business or results. And this detail may or may not be provided in the future. We may also reference certain unreleased services or features not yet available. We cannot guarantee the timing or availability of these services or features so we recommend customers listening today to make purchase decisions based on services and features currently available. The purpose of the call today is to provide you with information regarding our fiscal first quarter results. Some of our comments 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 could differ materially from these forward-looking statements. A description of risks, uncertainties, and assumptions and other risk factors that could affect our financial results are included in our SEC filings, 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.

Okay, hey thanks so much John, I really appreciate it and I am absolutely delighted to be with you once again and so have been over 15 years of customer success here at salesforce.com. This quarter was a very important birthday for us, it gave us an opportunity to look back, and how we’ve helped shape this new world of enterprise software. How we’ve grown to be the world’s largest CRM company and the world’s largest provider of enterprise cloud computing and as you can see from these results the fastest growing top-10 software company in the world today. All in just 15 short years. It’s been an exceptional journey and we’re very grateful to all of you who’ve been with us through this incredible decade and a half. The new world of enterprise software, the world is in the cloud, it’s a world of mobile, it’s a world of social and it’s a world that’s connected. Our customers are connecting with their customers in entirely new ways. They’re consistently turning to companies like Salesforce to make this customer connection. And this has driven incredible business for us. Whether you are looking for solutions for sales, for service, for marketing, for engagement, or building custom apps, Salesforce has consistently delivered the world’s best customer platform. And I’m proud of our employees, our customers and partners and what they’ve accomplished over the last 15 years and I’m looking forward to our very bright future. We’re delighted this quarter to be once again chosen by Fortune magazine as the world’s most admired software company for the second year in a row. An incredible accomplishment, and earlier this year Salesforce was recognized by Fortune as the world’s seventh best place to work, and we were Forbes magazine's most innovative company in the world three years in a row. And through our pioneering 1-1-1 model, we’ve now delivered more than 700,000 hours of community service, a little bit more than $50 million in grants, and are running more than 20,000 nonprofit organizations in our service for free. Through all of this, through all of these accomplishments nothing is more important to us than the trust and success of our customers. This deep commitment to our customers and their success is why Salesforce delivered these exceptional results especially now in this first quarter. Revenue grew by 37% from a year ago to more than $1.2 billion, pretty incredible. Deferred revenue grew by 34% year-over-year to more than $2.3 billion. Operating cash flow grew by 67% from a year ago to more than $470 million. And the dollar value booked business on and off the balance sheet grew by 34% from last year to $7.1 billion. And while we delivered world class growth we also grew operating margins sequentially this quarter which is why we’re able to deliver non-GAAP EPS of $0.11 exceeding our guidance. And we’ll deliver 125 to 150 basis points of operating margin improvement this year. Given our strong financial results and pipeline of new business, we’re once again raising our full fiscal year 2015 guidance by $40 million to reach $5.34 billion. With billions of users all over the world now using cloud services, mobile devices and software networks the technology world has deeply changed. And Salesforce continues to lead this change in enterprise software. Today, I run my business from my phone. I could never have imagined that just a few years ago. I don’t need a PC, a laptop, a desktop, to connect with my customers, employees or partners. I just need my phone. And that certainly isn’t where software was a decade ago. At Salesforce, we go with the flow of our services, under the new Salesforce1 Platform giving our customers the ability to use phones, tablet PCs or whatever they choose to manage and share all of their customer information. The Salesforce1 Platform has far exceeded our wildest dreams and has accelerated the success of our customers, our ISVs, our developers, our administrators, and their ability to be successful in this new world. And it’s why our flagship Sales Cloud and Service Cloud, our ExactTarget Marketing Cloud and our platforms are all leaders in the categories and growing faster than their competition. Our Sales Cloud is once again the undisputed leader in Gartner’s Magic Quadrant for Salesforce Automation in fact we extended our lead this last year according to Gartner, our multichannel sales now larger than the three next competitors combined. Service Cloud is the clear leader in both vision and execution in Gartner’s most recent Magic Quadrant for Customer Service and with Salesforce1 Platform we are bringing our world class customer service solutions to small businesses as well as to enterprises. The ExactTarget Marketing Cloud doubled its market share, according to the recent Gartner report adding more share than any other top-10 marketing vendor. And the Salesforce1 Platform is the only solution rated by Forrester as a leader in every single platform category and recognized as a leader in Gartner’s first ever Magic Quadrant for Enterprise Platforms. Now I am delighted to welcome our Vice Chairmen and President, Keith Block, to the earnings call and I would like to ask Keith to introduce himself, but also to give me a review of the quarter’s results. We are very fortunate to bring in Keith over a year ago now. He is a member of our Board and runs our distribution organization which represents more than half of our inflows. Keith?

Hi. Thanks Marc, it’s great to be here and I have to say that Salesforce is an absolutely incredible company. Over the past year I have spent a great deal of time speaking with customers and partners all around the world, and the feedback has been overwhelmingly consistent, it’s been about great vision, it’s been about great products, and it’s been about great people. And it’s really rare to find a company whose customers and partners have such a high degree of respect and admiration on a consistent basis. The great news is, our customers and our partners want more from us. They want us to go deeper with them, they want us to have a more strategic relationship, they want us to help them innovatively transform their business models, they want us to help them scale their business for the future, and ultimately at the end of the day they want us to be their trusted advisor on their journey to connect with customers in entirely new ways. This applies to every customer, from the smallest to the largest enterprises in the world. Now in the quarter we had some terrific success with companies of all sizes and across all industries, everywhere in the world, and I would like to just share a few thoughts with you. For example, we entered into a new relationship with Manulife, one of the world’s largest insurance and financial services providers. They selected the Service Cloud to create a single customer engagement platform and delivered personalized service across all of their life insurance wealth management and investment products, just a terrific story. Meiji Yasuda Life Insurance, one of the oldest and largest insurance companies in Japan, we’re thrilled to have that brand as part of our family. They selected Salesforce in the quarter and this will be the first enterprise-wide cloud implementation in Japan’s life insurance industry, absolutely excited about this. They selected our Service Cloud that allows agents to close deals and service customers right from their phones and they are also building out their next generation apps on Salesforce1, very exciting. And in communications and media, Sky Italia selected Service Cloud, the Salesforce1 Platform, Salesforce communities, all of which for an engine for the company’s B2C communications business from call centers to self-service department channels. In healthcare, another great brand that fit us started sales transformation with our Sales Cloud and in the quarter they expanded with ExactTarget Marketing Cloud delivering the power of social and connecting directly with millions of people shopping for insurance. Many great stories that we can go on to, but again some terrific brands and terrific stories. I certainly want to congratulate the team for their outstanding accomplishments in Q1 and I also want to thank our customers and our partners for their continued commitment to our collective success. I am absolutely thrilled to be part of this outstanding organization. So with that I will turn the call over to Graham.

Thanks Keith. And we started fiscal 2015 as you have heard with a really strong first quarter, growing revenue, deferred revenue and operating cash flow at more than 30% and coming in ahead of our EPS guidance. We are well positioned to deliver another year of industry-leading growth. Let me take you through the financial highlights of our first quarter starting with the income statement. First quarter revenue was $1.23 billion, that’s an increase of 37% and which did include an FX benefit of approximately $6 million. Non-GAAP EPS for the first quarter was $0.11. On a regional basis revenue in the Americas grew 39% to $876 million, revenue in Europe grew 42% in dollars and 35% in constant currency to $231 million, and revenue in Asia Pacific increased 21% in dollars and 26% in constant currency to $120 million, that’s a nice uptick in growth after some of our recent quarters. In Asia-Pac dollar attrition continued its slow and steady decline for the 19th consecutive quarter and remains in the high single-digits percentage range. Our non-GAAP growth and operating margins continued to reflect the acquisition of ExactTarget last year, gross margins was 79.5% in Q1 that’s down 70 basis points from Q1 last year and non-GAAP operating margin was 9.7% which was down 80 basis points from Q1 last year, but actually up 280 basis points sequentially. In the first quarter we added more than 900 people that’s our most significant organic hiring quarter ever, and brings our total headcount at the end of the quarter to just over 14,200 that’s up 38% over Q1 last year. Turning to balance sheet we ended the quarter with approximately $1.5 billion in cash and marketable securities. During the quarter we paid approximately $280 million in principal related to conversions of our senior notes that are due in January 2015. This amount was partially offset by an approximately $30 million deposit we received for the potential sale of four of our eight lots we owned in Mission Bay. Deferred revenue ended the quarter up more than $2.3 billion, up 34% over the last year; excluding approximately $13 million of year-over-year FX benefit deferred revenue increased 33%. On a sequential quarter basis deferred revenue also had an FX benefit of approximately $9 million. We expect Q2 deferred revenue to be approximately flat sequentially from Q1. Approximately 68% of the value of all subscription and support related invoices and that includes ExactTarget were issued with annual terms in Q1 compared with approximately 68% Q1 last year. Keep in mind however that our billing frequency percentage last year did not include ExactTarget, if you exclude ExactTarget from this close calculation we saw a year-over-year increase in the proportion of invoices issued with annual terms but it is consistent with the fiscal 2014 average that was around a 5 percentage point improvement. Unbilled deferred revenue or revenue that is contracted but not yet invoiced and is off the balance sheet was approximately $4.8 billion in Q1, that’s an increase of 33% over last year. Turning to cash flow, we have an outstanding start for the year as we talked about for some time Q4 has historically always been our largest new business quarter and as a result has also become our largest renewals quarter. The seasonality of our invoicing has become more pronounced each year because of the compounding effects of the new business seasonality. The Q4 is our largest invoicing quarter, it follows that Q1 has become our largest collections and operating cash flow quarter. So in the first quarter operating cash flow was $473 million that’s up 67% over the last year. We anticipate our second quarter operating cash flow growth to be lower at approximately 10% year-over-year growth and continue to expect our full year operating cash flow to grow in the mid-20s percentage range year-over-year that we talked about on the call in February. CapEx was $60 million in the first quarter up 11% year-on-year, CapEx as a percentage of revenue in the first quarter was 5% that’s down from 6% in Q1 last year and we continue to expect our full year CapEx to be in the range of 5% to 7% of revenue. Free cash flow which we define as operating cash flow less CapEx was $413 million in the first quarter, that’s up 80% from last year. Turning to guidance with our solid results in the first quarter, we’re delighted to be raising our full fiscal 2015 revenue outlook by $40 million, the new range of $5.3 billion to $5.34 billion for year-over-year revenue growth of 30% to 31%. We’re raising our full year non-GAAP EPS guidance to reflect the Q1 beat and now expect it to be in the range of $0.49 to $0.51. As Marc mentioned we are still committed to increasing our full year non-GAAP operating margins by 125 to 150 basis points. But clearly that assumes no significant M&A activity during the year. FY15 non-GAAP EPS also assumes that other income expenses will continue to be a net expense and assumes a non-GAAP tax rate of 36.5%. For Q2 we anticipate revenue in the range of $1.285 billion to $1.29 billion representing year-over-year growth of approximately 34% to 35% and we expect non-GAAP EPS in the range of $0.11 to $0.12. As a reminder all of the underlying assumptions for our GAAP and non-GAAP guidance are on complete GAAP to non-GAAP reconciliation can be found in our earnings press release issued earlier today. To close Q4 and a great start for the year to Salesforce, a really good solid execution across the business sets us up well to deliver another year of amazing industry-leading growth. So with that, we’ll open the call up for questions.

Good afternoon guys and congratulations on the quarter. I have a question that’s probably for Marc and I would assume maybe for Keith as well. I’d love to get your perspective when you look out over the next 12 months really kind of two parts here one is do you believe you are fully penetrated in sales automation and that the majority of the growth or the incremental growth is going to come from up-selling the Sales Cloud and Marketing Cloud and Platform? And then maybe Keith on the distribution side, what do you need to do to turn some of your accounts that maybe you’re spending a couple of million dollars with you today into accounts that maybe can spend upwards of $10 million a year with you on a recurring basis? Thanks.

You need to consider that our Sales Cloud product is a very significant part of our Company and will remain essential for the foreseeable future. We also have other strong growth drivers, particularly in our Service Cloud, Marketing Cloud, Platform, and new engagement and community capabilities. However, the sales product is such a crucial element of the Company’s success that it will undoubtedly play a major role in driving future growth.

Yes Jason, there are several things to consider. I believe there is still substantial opportunity across all of our cloud offerings, with the Sales Cloud being our flagship product. However, we have implemented a multi-faceted strategy to enhance our relationship with customers, whether they are in the SMB sector or the enterprise space. This effort begins with our focus on industries. A consistent piece of feedback from our customers is the importance of communicating in industry terms and establishing a trusting relationship to address business challenges specific to their sectors. As a result, we have launched our industry business unit to create those solutions, which will ultimately allow us to capture a larger market share and cultivate more strategic relationships with customers. Additionally, we have initiated a strong partnership initiative, encompassing both our System Integrators and Independent Software Vendors, which is crucial to our strategy and beneficial for our customers. We are experiencing remarkable progress in these areas, alongside a focus on international growth. By combining our industry focus with partnerships, we significantly enhance our relevance within these accounts, enabling us to maintain momentum moving forward.

And Jason, this is Graham, just one more thing I have to add. I think one of the things we’ve seen over the last few years is the continued underestimation of the market sizes. I think directionally clearly we’ve shown huge increases in share velocity use and consistent gains in shares but I think the other exciting thing is then the trend all constant optimization of the market size. So I think that obviously gives us more confidence around continued growth with the Sales Cloud.

Yes, hi, thanks. Two questions first Keith, actually, both for Keith. Can you talk about the changes you’ve made to the sales organization? And did it have any impact in Q1 so did you do well despite changes if you could kind of talk about that a bit? And also I think we’re all waiting for nine figure deals is that realistic and are there deals of that magnitude in the pipeline we should look forward to over the balance of this year?

Hi, Rick. Thanks for the question. So a couple of things, as far as the changes before, there were no major reorganizations. We put strategy in place about six months ago around our industry growth plan and our partners and international stance and focused on continuing to attract and retain the best talent in the industry for our most strategic accounts in specialized sales and really solving business problems as a person not necessarily selling products. And since those things have been in play for a while, it really mitigated any sort of risk around reorganization that I think most people always worry about when you start the fiscal year. So these plans were put a little while ago and we continue to see traction. We actually saw traction in the second half of the year and we certainly saw that traction continue and the momentum continue in Q1. Listen as far as large deal sizes go, I think the net-net of this thing as we continue to execute and we did a terrific job, and I am very proud of the team and the Company for how we executed in Q1 is only natural to assume that our relationships with these customers will become more meaningful and more strategic overtime and that will just translate into continued growth and we’re excited about it.

Thanks. For Marc, maybe if you could just talk a little bit about Salesforce1 platform, it seems like there are a lot of really new interesting applications being built that require the rest of the platform to be deployed to help reinforce the whole enterprise build out. Can you just give us a sense of what you are seeing from some of the larger commitments on the platform?

Well, thanks for that question. We have made a huge investment on the Salesforce1 platform over the last couple of years and so many customers now have deployed it. As a user myself, I can tell you how dramatically changed how I work, as I mentioned I work in parallel with my phone but more than that I think it’s because we completely re-architected our product on a whole family of APIs and delivered a full range of services, it’s really opened up the opportunity for our customers to build applications like we have never really thought they were going to build before. One of the applications that I saw that got deployed this quarter was with Home Depot where they rolled out this amazing new How-To application. And right on that, you got to right on homedepot.com, you will see our platform poking through where it gives them the ability to have deep engagement with all of their customers who are building and crowd sourcing and interacting with Home Depot employees and all in real-time and it’s really all possible by the platform. In addition to that we continue to see really strong support from the ISV community and if you go to the AppExchange, you will see more applications available for Salesforce1 than ever before and some of them are just incredibly well reviewed. I mean you will see hundreds or in some cases thousands of reviews around these apps and these are enterprise apps. I don’t think there is another AppExchange or app store in the industry like that and so many new apps emerging for Salesforce1. The combination of this just gives us a tremendous competitive advantage with our customers and I will tell you why. A lot of our competitors, it’s not that they haven’t moved to the phone, they have moved into the cloud and here we are, we have a solution that’s not only runs great as a service, as cloud service, running billions of transactions every single day, two, that service is available in whatever device you are using. And three, it runs the way any other cell-phone network would work like Facebook or Twitter but it’s your own private company network or with your partners or with customers. And then finally, we are now seeing where companies can take all of this and build their own apps well that’s really exceeded our expectations. So, we are very excited and we are feeling great about where Salesforce1 is and I really think it’s given us this huge leg-up against the competition.

Hi, thank you very much. Marc, the off-balance sheet backlog growth rate is just simply stunning. And I am curious if you could talk to which particular products in the portfolio are driving that superb strength? And also with respect to Salesforce1, can you specifically talk about how the industry solutions strategy in the six verticals is going to be differentiated and facilitated with Salesforce1 in particular? Thank you very much.

Hi, Kash, great to see you, so let me just talk a little bit about the industry strategy and Salesforce1, I think Marc has touched on it. We are incredibly excited about the adoption of Salesforce1 and how our ISV community is responding to it. And specific to industry, you may have seen a press release that we issued the other day with Deloitte and our partnership with Deloitte in financial services around financial services solutions, all built on our platform. And so there is enormous enthusiasm for the Salesforce1, our ISV community is rallying for the cause and that obviously is an integral part of our strategy. The other thing that I think is important to understand here is that as we continue our transformation, one of the things that we are trying to accomplish here is to solve business problems for our customers. Whereas traditionally we will go to market by product and we will obviously continue to do that. I think the important thing is to listen to our customers and bring a point of view around an industry solution, again the example would be what we did, the press release that we did with Deloitte. When you sell a solution, you bring multiple clouds, so it’s not necessarily one cloud or two clouds, it’s a multi-cloud solution and that is certainly the momentum that we enjoyed over Q3 and Q4 and certainly saw that carry over in Q1 and that multi-cloud solution approach is really paying off for us and looks very, very strong for us in the future.

Marc, your counselors and partners sound very excited about a product called Communities that for some reason it doesn’t seem to be as widely recognized in the investment community. And we’ve been told that it’s capable of going wall to wall and really touching every employee in an organization. Could you walk us through what is happening under the radar with Communities and maybe any comment on how strategically significant the offering can be?

I would be happy to explain. We announced this product at Dreamforce and have begun rolling it out. For example, I mentioned it in relation to Home Depot, which has launched Communities as a core part of their platform. Picture this: I'm using my phone with Salesforce1, scrolling through my social network, checking on employee updates, deal statuses, customer service matters, quotes, and I'm able to navigate between different apps. I might be submitting a request or providing employee feedback, all within Salesforce1. Suddenly, a notification appears in my feed, informing me that Frank Blake at Home Depot just commented on the product I'm working on. This is linked to my website, where I am part of a community of customers. You can see this by visiting success.salesforce.com, our community site, where you can explore what Communities looks like and how we have implemented it. As a customer, I can seamlessly connect with Salesforce employees based on the products, events, or customers I'm interested in. Honestly, I believe every customer could benefit from this, whether it’s for partner communities, customer service, or employee interactions. We are very enthusiastic about this, as it falls under the category of engagement. This product focuses on sales, service, marketing, and engagement. It has been very successful for us, and we continue to see strong enthusiasm from our customers. This all began with Chatter, which was our initial brand, but we have integrated everything into Salesforce1 now, making it a central part of our platform. Our core collaboration capabilities are intertwined with our sales, service, and marketing applications. This is an exciting time for us, and we will share more about it at Dreamforce as we continue to develop and expand this offering. I want to emphasize that this is not just a separate app; it's a fundamental aspect of our platform, and collaboration is central to Salesforce's identity. I hope that clarifies things for you.

I had two questions, one for Marc and one for Keith. I guess Keith to start out with you, you mentioned the vertical solutions and the business problems that you are trying to solve as a result of your verticalization. How do we think about how long it takes for you to really take your stride to serve the customers in the way that you’re thinking about it? And kind of back to Rick’s question, how do we think about how deal sizes scale as you become that trusted solution provider if you use your past history as a guide? And then the question I have for Marc just in regards to the marketing cloud, a lot of the customers we talk to, talk about big desire to have one integrated dashboard for marketing so they could open app instead of opening multiple apps to kind of find out what they’re doing, how they’re doing with new products and with their customers. I’m just wondering where you are as a company in terms of kind of pursuing that vision?

Yes, hi Heather. The focus on industry is crucial for us, and we started to see positive results in Q4 after being organized around industries for about six months. In that quarter, we gained traction with retail banks due to our management solution created by the industry business unit. This momentum carried into Q1, where we also saw interest from insurance companies. Our ability to communicate effectively within the industry is key to addressing customer business challenges. As we continue to roll out our solutions, I believe we will strengthen our reputation, build strategic partnerships, collaborate with system integrators and independent software vendors, and take on a more meaningful role as a trusted advisor. It’s reasonable to expect that as these efforts gain traction, we will capture more mind share and market share. We are very pleased with the initial results in Q4 and Q1, and I believe we have substantial opportunity ahead, which will enable us to grow over time.

My question is for Graham. Graham, the operating cash flow growth 67%, pretty stellar. I think I understand the seasonality but I’m just curious if there were any other kickers that made the quarter particularly strong on that front and if your confidence in your mid-20s operating cash flow growth for the full year has increased as a result of the good Q1 performance. Thank you.

Yes. I think it feels great to get a good start. So clearly confidence in mid-20s I say is incrementally higher because of our strong start. Just to reiterate, the compounding effect just our large fourth quarter really has been going on over a long period of time? And then I think you layer on top of that. Clearly we’ve also been expanding our annual billings. And then we saw some margin expansion sequentially from Q4 to Q1. Q4 was still affected by short-term cash flows from Dreamforce, those kind of things. And so you kind of roll that up and we saw really strong first quarter results. As I said, I would expect this would be more of our trend in the future that we’ll have this huge receivables number at the end of the fourth quarter and then a very large collections number in Q1. So very happy to get a strong start on the year here.

Two questions. I guess Graham can you tell us what the contribution was from ExactTarget in the quarter? And then Marc now that you have over 14,000 employees, it’s got to be harder to maintain the same culture you had when you were smaller. How are you going about doing that?

I’ll address that first and also respond to Heather’s question. Heather is absolutely correct. Our goal is to create a comprehensive marketing cloud, which we are achieving by acquiring companies like Radian6, Buddy Media, and ExactTarget. We're integrating these into a unified application to help our customers manage their marketing efficiently, and you will see the development of this product at Dreamforce. To truly grasp where we're headed and how we're preserving our culture, you need to examine our product. It may seem unusual, but I use Salesforce1 daily to communicate and collaborate with our team. We foster an environment that's transparent, which has built trust among us. This level of communication, or what I call over communication, is integral to our operations. We continuously align and engage in our internal process known as V2MOM, which stands for visions, values, methods, obstacles, and measurements. All of this is incorporated into our application, and at the heart of it is our philanthropic model. From the inception of the company, we allocated 1% of our equity, profit, and employee time to a charity. As I mentioned earlier, this initiative has led to remarkable outcomes, including 700,000 hours of community service and over $50 million in grants benefiting 20,000 nonprofits. On your first day at Salesforce, we guide you to your desk and the kitchen, and then you participate in a charitable activity—whether that’s volunteering at a soup kitchen, a homeless shelter, or a hospital. This establishes the tone for our culture and maintains its integrity. Our culture stands apart from other tech companies. As we expand, we ensure our philanthropy remains a priority, which underscores our essential values. When we consider values like trust, the commitment to giving back, and service, coupled with our strong execution, it's clear these principles have cemented our culture. We've had many successful quarters, not just this one, which reinforces how we maintain the culture we value today. I hope that clarifies your question.

And just on your second question we don’t intend to provide a breakout of the ExactTarget contribution going forward on either the P&L or the balance sheet.

My question is for Keith. Keith, you mentioned you’ve been earlier talking to customers and what message is it that you wanted to convey to them? What did you want them to take away from your meetings?

Well, I think there are several messages that are important, not the least of which is our corporate messages around the Internet of customers and connected customers and how we sell and service in market and how we are a company of system engagement. So those are all very strong messages that certainly resonate with our customers and our partners. But the other set of conversations that take place are around a dialog around having a strategic relationship with those customers and what does that mean. It’s all about predictability and transparency, some of the values that Marc talked about earlier. It’s about trust, it’s about being an advisor. It’s about how do those contribute to how our customers unleash the power of social and cloud and mobile in our technologies to change their business models, to transform their businesses and really unshackle them from old technologies. If you think about what’s happened in the marketplace, companies have had business processes around selling and servicing and marketing to their customers that have really been hindered and shackled by old technologies and we are providing them with a path forward here in that guidance. So these are messages that truly resonate with customers. They want these conversations. They want this impact that we can bring to the table and they’re excited about our opportunity to partner with them.

Two questions from Graham. One related to headcount, definitely a big increase in headcount this quarter. Should we think about this in any extent in terms of a pull forward of hiring, of getting a lot of the hiring done upfront or what kind of pace should we think about throughout the year? And question number two, if we look back seasonally, you typically see deferred revenues up 2 to 3 percentage points quarter on quarter into Q2 and your guidance is approximately flat. Does that sort of hold with the normal seasonality or should we be thinking about a different seasonality this year versus prior years?

Thanks Keith. So, on the headcount question, typically we’ve often had slow starts to our hiring in the year and then we’ve sort of built on organic hiring versus people we bring in through acquisitions through the year and we really have tried to focus hard this year on getting off to a fast start and have slightly more linear hiring. It actually seems to have worked really well. I don’t view this necessarily as an intentional pull forward but I think we’re still very much as the destination employer and I think our reputation out there is great and our hiring in Q1 sort of reflects that profile. On your second question, I think generally, clearly we’ve said in the past, deferred revenues are always tough to forecast accurately. There is a sort of general scene that relates to what I talked about earlier around the compounding effect of our fourth quarter and because Q4 is largely a business quarter it becomes a large renewals quarter and it just becomes more and more dominant in terms of its invoicing. As you know, invoicing drives deferred revenue. So I think gradually over time that Q4 spike of deferred revenue and then a more flattish profile through the year is gradually going to change. It’s tough to know how quickly but we haven’t changed anything in the methodology, the way we forecast deferred revenue, and clearly as I said it’s tough to get super accurate on either a $2.3 billion number but I’d say that overall trend that I described is probably will play out over the next few years.

Dr. Benioff, congratulations on a strong quarter and on receiving your honorary Doctorate degree last week from USC in recognition of your impressive achievements, especially in philanthropy. I wanted to ask about the marketing cloud, Marc. When you acquired ExactTarget, you mentioned that we shouldn't expect any large deals for some time as you integrated the acquisition. I would like to hear your thoughts today on the completeness of the marketing cloud and your intentions to expand it further through acquisitions.

Well, I think that we have done a fantastic job building our marketing cloud and it’s a very important market. It’s something our customers have pushed us to and you saw us start with the Region 6 where we moved in the social listening of Buddy Media with social publishing. But then with ExactTarget, which is really a comprehensive application and that has really gone to a whole new level with our journey builder capabilities. If you have seen some of the demonstrations that I’ve done on the Salesforce1 tour, you will notice that the ExactTarget marketing cloud has just gone leaps and bounds from when we first started working on it. Now, as we kind of go forward, there are still gaps in terms of things that we want to fill in. When will we fill those in, what the right companies are? It’s not as easy and not straight forward as it was. We honestly got the best company. I don’t think we could have ended up with a better company than ExactTarget and they have so much product and capability that it’s really kept us incredibly satiated. I don’t really see that pace like you saw that we were really going through resuming. That said, we are always looking for great new companies and when we see a great entrepreneur or we see a great company or we see a great revenue stream or we see a great way to cement our position in our market, which is all customer facing applications, we’re going to take that.

Hi Graham, could you discuss the matrix you've mentioned for a few years that looks at growth and profits? It seems you're firmly in the growth phase as opposed to high growth or maturity, and in that phase, you spoke about achieving 100 to 300 basis points of margin expansion. You've guided for the year at 125 to 150 basis points of margin expansion. Considering you are still dealing with some expenses from ExactTarget, do you believe you are closer to the high end of that range if we factor in ExactTarget? Any thoughts as we progress through the year with much of that work behind us and how should we view your position on the matrix for next year?

Thanks, Walter. From what I remember about the model, I don’t have it in front of me, but we’ve mentioned that if we are growing at over 30%, people could reasonably anticipate at least a 100 basis points improvement in margin within a year, barring any major mergers or acquisitions. We’ve committed to a bit more than that this year, and it's slightly backend loaded since the effects of the purchase accounting related to ExactTarget will largely fade after the first half. We expect to complete the bulk of the revenue write-downs and are forecasting a strong EPS performance in the second half of the year, aiming for around a 50% increase in overall non-GAAP EPS. We believe the model is sound. As long as our top-line growth exceeds 30%, and again unless there are significant acquisitions, we’re confident in achieving at least a 100 basis points improvement each year, and hopefully, we’ll do even better this year. We’ll see.

I realized it’s somewhat small but what you kind of think about drawing the line on HR because I guess right now it’s ripple social performance management but do you need to get deeper into HR to fully monetize that purchase? I am just wondering how your thoughts on that component are? Thanks.

We’re not an HR software company. We’re really a customer relationship management software company and all of our focus is customer facing applications, sales, service, marketing, engagement. Any HR capabilities that we have inside our product really just allow our employees to collaborate and share in the engagement world. So whether it's employee profiles or the performance management that’s built into the field, that’s where our focus is. We're not really interested in the HR software market. We will let others worry about that one.

Alright. Hannah, thank you so much for hosting us today. Thanks everyone on the call for joining us. We’ll look forward to updating you on our second quarter results in summer.