Salesforce Inc (CRM) — Q3 2015 Earnings Call Transcript

Thanks, operator. Good afternoon everyone, and thanks for joining us for our fiscal third quarter 2015 results conference call. Our third quarter results press release, SEC filings, and a replay of today's call can be found on our IR website. We’ll 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 Mark Hawkins, Chief Financial Officer. Marc, Keith, and Mark Hawkins will share a few prepared remarks and then we’ll turn the call over for your questions. As a reminder, our commentary today will primarily be in non-GAAP terms. Reconciliations between our GAAP and non-GAAP results and our guidance can be found in our earnings press release issued about an hour ago. During today’s call, we may offer additional metrics to provide further insight into our business or results. 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 make purchase decisions based on services and features currently available. The purpose of the call is to provide you with information regarding our fiscal third quarter results. Some of our commentary may contain forward-looking statements that are subject to risks and uncertainties. Should any of these risks or uncertainties prove to be incorrect any company results could differ materially from these forward-looking statements. A description of risks, uncertainties, and assumptions and any other factors that could affect our financial results are included in our SEC filings included in our most recent report on Form 10-Q, particularly under the heading Risk Factors. Now let me turn the call over to Marc.

Okay, thanks very much, and I really appreciate it, John, and hello from San Francisco. Look, I’m very excited to give you this quarter’s highlights and results and thrilled to be on the call with you, and let’s just start out with top highlights for the quarter. First of all, the San Francisco Giants have won the World Series. Congratulations. Now, in other news, it’s great to be with you today to talk about our strong quarterly financial results, our incredible Dreamforce last month, our contribution to our community, and the significant advancements in enterprise technology that Salesforce is leading. And that’s what Salesforce and our commitment to customer success is all about. Cloud computing is taking over our industry. You can see that at Dreamforce. In the four pillars of cloud computing, the cloud, the social world, the mobile, acceleration and data science are guiding us to transform our customer relationships. We saw that take form at Dreamforce. We see this where every company is going to be transformed over the next decade with these amazing changes. Salesforce is leading the way, and we look forward to our first $6 billion year next year. We’ve never been more confident or excited to give guidance. Here it is: Salesforce, the number one cloud computing company in the world, Salesforce the number one CRM company in the world, giving guidance of $6.5 billion in revenue next year as a top five enterprise software company. It’s a huge threshold moment for cloud computing. Now, before I begin, I’d like to thank so many of you who joined us at Dreamforce in San Francisco, with over 150,000 registered to attend and over 7 million who joined us online to hear our vision for the future of the industry. I know many of you were as inspired as I was by the attendees and the amazing response to what we have all created. At Dreamforce, we’ve held more than 1,450 sessions on how our customers are using these new worlds of cloud, social, mobile, and data science to transform their enterprises. All of our attendees experienced an incredible Dreamforce trade show with more than 400 partners presenting the next generation of cloud computing, and it was our highest-rated Dreamforce ever. We also had a great experience and led our commitment to giving back at Dreamforce by running San Francisco’s largest food drive, which raised 3 million meals, stuffed learning materials into backpacks for new mothers, alongside Hillary Clinton. Flew with our veterans on Chinook helicopters to Moffett Field to launch our new VetForce program, and we heard about important advancements in protecting our environment from Al Gore. At Dreamforce, we introduced important new innovations including the advancement of our core customer success platform and we also introduced our newest cloud, the fastest-growing cloud we’ve ever seen, the Wave analytics cloud, the first analytics product that makes data-driven insights accessible to everyone and on any device. We introduced the new Salesforce1 Lightning platform, which has now been released to developers, the fastest way for every company to build and deploy multiple apps. You could see the response from developers quite evident last week on Twitter, how they are receiving this major advancement in our development environments. We heard from amazing companies like Coca-Cola, Honeywell, General Electric, incredible nonprofits like Donors Choose, the Girl Scouts, and so many others who are using cloud computing and the Salesforce customer success platform to innovate and transform their business. Coca-Cola Germany’s CEO, Ulrik Nehammer, talked about Dreamforce, and just talked about it again today in New York City at our show, how the most dangerous place to make a decision is in the office, and how he runs his business from his phone with mobile apps built on Salesforce1 Lightning platform, and how it has transformed and accelerated the growth of Coca-Cola Germany. Now, let’s get to the financial results for the quarter. Revenue in the third quarter rose to nearly $1.4 billion, up 30% in constant currency from a year ago. No other top 10 software company is growing faster, and we’re delivering the growth while pushing through the $5 billion revenue milestone this year. Deferred revenue grew by 31% in constant currency from a year ago to more than $2.2 billion, and the dollar value of booked business on and off the balance sheet is now more than $7.6 billion. That is amazing. $7.6 billion on and off the balance sheet. As we deliver on this outstanding pace of top line growth, we also remain committed to delivering 125 to 150 basis points of non-GAAP operating margin improvement this fiscal year. You can see that in our numbers and we are committed to making this better next year. In an exceptionally tough foreign exchange environment that has decelerated this quarter, we are pleased to be initiating fiscal year 2016 revenue guidance, and this is revenue guidance that we’re saying where we’re going to be 15 months from now, at the end of January 2016, of $6.5 billion at the high end of our range, and we are the first enterprise cloud company to be able to say $6.5 billion. I’m seeing that every enterprise of every size is committing itself to cloud computing. Today, more than ever, connecting with customers is an imperative because everyone and everything is becoming digital and connected. And a company’s relationship with those digitally connected customers is the new bottom line, exactly as Ulrik said. The customer success platform provides what every company needs to connect with customers in a whole new way, and during the quarter, we announced a number of very important innovations. Our new Wave analytics cloud is an incredible achievement by our technology and products organization. I’ve never seen a product as Salesforce, I think in my career actually, get off to a faster start. There’s never been this kind of customer traction and excitement around a new product before. It’s analytics for the rest of us. Major customers like EMC, Verizon, General Electric all signed up in the quarter, and since launching the analytics cloud just a month ago, more than 45 partners have joined our analytics cloud ecosystem and the pipeline is just awesome. We’ve never seen faster traction for a new product or a new cloud. I’m just confident this is going to be our fastest and most exciting new cloud ever. The new Salesforce1 Lightning takes the Salesforce1 platform to a whole new level. There’s no better way to create mobile apps, with drag and drop, interactive process builders that turn businesses users into citizen programmers. And there was a great article about that posted by our developer community last week on Twitter that I retweeted, and our customers are doing better marketing around our platform than even we are doing, because this is such an exciting moment for our developer community around this next generation Lightning platform. Salesforce remains the largest enterprise cloud ecosystem in the world. No one else in the industry is providing a software platform that makes it as easy for any company to develop and deploy next-generation apps as well as breakthrough apps for sales, service, marketing, community analytics. Each one of these is a major product line in cloud now for us. Our Sales Cloud, our Service Cloud, our Marketing Cloud, our Community Cloud, our analytics cloud, our platform for building apps; each one of these is a major product line that we have entered the market with and have taken a significant position in the industry. Our Sales Cloud continues to lead in its category on its way to becoming the first $3 billion app cloud at Salesforce. The service cloud is on a tear with its new SOS functionality. Every company wants to have a mayday button just like Amazon has, and now with the service cloud, they can have one connected all back to their call centers and contact centers. With the click of a button, a customer can connect to an agent via video in real time for personal assistance within any mobile app. And I’m thrilled that the community cloud and its all-new public communities; everybody knows how committed we are to social. We’ve pioneered it with employees, we’ve pioneered it with partners, we’ve pioneered it in vendor communities, and now we’re pioneering it again with public communities. All people integrated into all our other clouds. You can see that at community.homedepot.com as a great example of this new public community cloud capability. Finally, the marketing cloud introduced a major advancement this quarter with the Journey Builder for apps capability, kind of showing the next-generation vision of what the marketing cloud can become. Nothing speaks more to the value of the Salesforce platform, and to our customers, than the actual tool usage of the platform, which we make public each and every day. Salesforce delivered more than 159 billion transactions in the quarter, which was up 64% from a year ago. 64% growth in the use of our platform. That’s nearly 2.5 billion transactions every business day. No other enterprise cloud platform comes close, with the dominant transactions coming from our application program interfaces. I am absolutely thrilled with the quarter, and congratulations, Keith, on a strong quarter. Now I’d like to turn it over to you.

Thanks, Marc, and good afternoon everybody. Great to be here, and thanks to everybody for joining the call. So as Marc mentioned, I’m here in New York today to kick off the Salesforce World Tour, and with more than 10,000 people registered to attend, and a million people watching online, which is great, you can absolutely feel the incredible energy and momentum, and all of that driving our customer success and our growth. I was with some of our top customers last night, including Coca-Cola and Stanley Black & Decker, and GE Capital, and many others, and all of these customers are talking about our customer success platform and driving a more meaningful relationship with us here at Salesforce. In fact, Marc alluded to this earlier, but GE Capital is using our analytics cloud, which just launched a few short weeks ago, which is pretty incredible, and they’ve already shortened the cycle time from learning to action, from months to minutes and seconds, and it truly is decision-making at the speed of thought. It’s pretty clear that analytics is going to be a game-changer, and based on what I’m seeing from customers, what I saw today in my conversations and today at the conference, I agree with Marc, that analytics will be the most successful product launch in the company’s history. There’s no question about it. With our customer success platform, which brings together sales and service and marketing, communities, platforms, and of course analytics, customers are transforming their business models and they’re looking at Salesforce in entirely new ways. So here in New York this week, and at Dreamforce last month, certainly when I speak with customers on a daily basis, it’s pretty clear, just like last evening, they want more strategic and meaningful relationships with us. This was certainly evidenced by the number of large deals that we closed in Q3. In fact, we signed more 7- and 8-figure deals this quarter than in any Q3 in the history of the company, and what’s even more exciting is that we doubled the number of 8-figure deals in the quarter from a year ago. I am very proud of the entire team for this accomplishment. We’ve added significant relationships with companies like AB InBev, Archer Daniels Midland, and Johnson & Johnson, and that’s just the beginning. We absolutely strengthened existing ones with customers like EMC and HP and Verizon. I’ll share a couple of those stories with you right now. Verizon, a longstanding customer, continues to do business with us, continues to enhance our relationship. It was a great story for the quarter. They selected our service cloud for their entire enterprise team so that they could service customers across all their products from a single platform, the customer success platform. Interestingly enough, after seeing our analytics product in action at Dreamforce, again just a few weeks ago, Verizon signed up for the analytics cloud to put the power of real-time data and insights right into the hands of their reps. It’s a great story. Another story for the international side of the house is AB InBev, the leading global brewer, and they selected the Salesforce1 platform and service cloud to power their customer success platform in several of their key markets. Salesforce can now give AB InBev the ability to sell, service, and market to customers from a single platform. Nobody else can do that. Leveraging Salesforce1, they’re able to integrate all their legacy systems and develop social and mobile apps on the fly. I want to congratulate the team in Europe for building this outstanding and great brand relationship. We also saw strong momentum in the public sector this quarter. As you know, this is an industry that we’re focusing on and it included a significant win with the U.S. Department of Commerce. They selected Salesforce for our ability to deliver a mobile-first customer success platform, and that will connect all of their legacy systems again as a common theme—driving from systems of record into systems of engagement. With our service cloud and community cloud, they plan to put iPads and iPhones into the hands of their employees so that they can better serve American businesses. We also expanded relationships in other areas of government this quarter, including the State of Ohio and the U.S. Department of Agriculture. They’re turning to Salesforce to transform the government experience for citizens, for partners, and for employees. Our momentum in financial services continues as well. Barclays, a global top 10 bank and a terrific brand, selected Sales Cloud and Salesforce communities in the quarter to connect 15,000 brokers and put them in touch with Barclays experts right from their mobile devices. Barclays joined a growing list of financial services organizations around the world, including State Street, Sun Life, Zurich Insurance, and many others, all of whom are turning to Salesforce as their platform for innovation and growth. We also signed new or expanded relationships in the quarter with Isuzu, L’Oreal, Merck, NBC Universal, Office Depot, which by the way was a significant marketing cloud win in the quarter, Symantec, Time Warner, Toyota. In Asia-Pac, we signed a significant deal with a large Japanese manufacturer where we replaced Microsoft with Sales Cloud after rolling out a pilot in a matter of just a few weeks. Pretty impressive. This speaks to the speed at which our customers want to transform their businesses versus the months or years it takes on legacy platforms. So a compelling story. Just getting started on our international growth opportunity. We’ve been aggressively investing in our international markets by increasing distribution capacity, expanding our partner ecosystem into the largest partner ecosystem in technology, and building new data centers. In fact, we just opened our first European data center in the U.K. a few weeks ago, and we plan to open two more in Europe in the next year. Industries is another growth opportunity, whether it’s communications, financial services, healthcare, manufacturing, retail, or the public sector. Our customers are looking to us for deep industry expertise and a solution that allows them to transform their business models, leveraging our customer success platform. Our ecosystem, which I mentioned a second ago, partners are integral to our strategy, and certainly another growth opportunity. The world’s largest and most strategic SIs continue to expand their Salesforce practices, and we recently revamped our ISV model to better focus on vertical markets, and that’s starting to really pay off in bigger and more strategic ways. It’s an exciting time for us here at Salesforce as we close our first $5 billion year. I echo Marc’s comments; it’s absolutely amazing. And build the pillars for our next decade of growth. I want to thank our customers and our partners for their continued commitment, and last but not least, I want to congratulate the team on the quarter for continuing to drive our customer success. With that, I’ll turn the call over to Mark.

Thank you, Keith. I’m very pleased to be with all of you today to discuss the third quarter. Despite a challenging foreign exchange environment, we delivered another strong quarter of results. We exceeded our third quarter revenue guidance by $14 million and our non-GAAP EPS guidance by $0.01. Deferred revenue increased by 28% year over year in dollars and by 31% in constant currency, compared to our guidance of 30%. Our non-GAAP operating margin improved by 244 basis points year over year. The third quarter revenue reached $1.38 billion, a 29% increase compared to last year. Excluding a year over year foreign exchange headwind of about $12 million, revenue was up 30%. On a sequential quarterly basis, we faced a larger foreign exchange headwind of $15 million. Non-GAAP EPS for the quarter was $0.14. Year-over-year, revenue grew by 29% in the Americas, by 30% in dollars and 34% in constant currency in EMEA, and by 21% in dollars and 25% in constant currency in Asia Pacific. In the third quarter, Sales Cloud revenue was $625 million, Service Cloud revenue was $340 million, Salesforce1 platform and other revenue was $192 million, and Marketing Cloud revenue was $132 million. Dollar attrition for the third quarter, excluding ExactTarget, remained between 9% and 10%. Now, regarding margins, our third quarter non-GAAP gross margin was 78.4%, a decrease of about 90 basis points from last year, reflecting our ongoing investment in infrastructure, including the expansion of international data centers. This investment is crucial for maintaining the high level of trust and service delivery we are recognized for. We may see a slight impact on gross margins next year as we increase data center investment in Germany and France. However, we are confident that we will be able to improve operating margins in fiscal year 2016 by gaining efficiencies in other areas. Our third quarter non-GAAP operating margin was 11%, which is a 244 basis point increase from the third quarter last year, even as we hosted our largest and best Dreamforce ever, which had about a $0.02 impact on non-GAAP EPS. Year-to-date, we are up 90 basis points, and with our guidance for the fourth quarter, we are on track to achieve an improvement of 125 to 150 basis points for fiscal 2015. From a headcount perspective, we finished the quarter with approximately 15,500 employees, an increase of 21% compared to the third quarter of last year. In terms of cash flow, we generated $123 million, which is down 11% from last year, primarily due to the timing of Dreamforce happening in the third quarter this year instead of the fourth quarter last year. However, year-to-date, cash flow is up 39% compared to the previous year, and we now expect year-end operating cash flow growth of 27% to 28%. Capital expenditures were approximately $73 million in the third quarter, a slight increase from last year. Capital expenditures as a percentage of revenue stood at about 5%, down from 7% in the third quarter of last year. For the full year, we still expect capital expenditures as a percentage of revenue to remain within the 5% to 7% range. Free cash flow, defined as operating cash flow minus capital expenditures, was $49 million. Turning to the balance sheet, we concluded the quarter with around $1.8 billion in cash and marketable securities. Deferred revenue was at $2.22 billion, a 28% increase year over year. Excluding a year-over-year foreign exchange headwind of $33 million, deferred revenue grew by 31%. Foreign exchange also led to a sequential reduction in deferred revenue of about $30 million. During the quarter, 73% of the value of all subscription support-related invoices were issued with annual terms, compared to approximately 69% in the third quarter of last year. Unbilled deferred revenue, which represents contracted revenue not yet invoiced, ended the quarter at approximately $5.4 billion, marking an increase of $1.2 billion or 29% year over year. Regarding guidance, our results for the quarter indicate that foreign exchange has significantly impacted our financial performance. As mentioned, we faced a $15 million sequential headwind to revenue this quarter, and we anticipate a similar impact in the fourth quarter. In light of this, we are maintaining the high end of our full fiscal year 2015 revenue guidance range, expecting revenue to be between $5.365 billion and $5.370 billion, which would represent a 32% year-over-year growth. This guidance suggests fourth quarter revenues between $1.436 billion and $1.441 billion, indicating year-over-year growth of 25% to 26%. We expect our full year non-GAAP EPS to be in the range of $0.51 to $0.52, translating to fourth quarter non-GAAP EPS of $0.13 to $0.14. We anticipate fourth quarter deferred revenue growth of approximately 27% year over year in reported dollars. Today, we are also pleased to announce our initial revenue guidance for fiscal 2016 at around $6.45 billion to $6.50 billion, which reflects a year-over-year growth of 20% to 21% and an expected foreign exchange headwind of about $125 million to $150 million. Keep in mind that we are 15 months away from the end of fiscal 2016, and this is our preliminary guidance made without knowing our fourth quarter results. The fourth quarter is our largest quarter, providing the most new business and renewals, making it particularly critical for revenue forecasts. We will provide an update on our fiscal 2016 guidance when we report our fourth quarter results in February. In conclusion, despite the significant foreign exchange headwinds, we achieved strong results in the third quarter. This quarter positions us well for a strong finish in fiscal year 2015, and we remain on track to accomplish all our key financial goals set at the start of the year: revenue growth, an improvement in our full-year non-GAAP operating margins by 125 to 150 basis points, and strong operating cash flow. I want to thank all of our employees for their dedication to delivering these excellent results. I’m very excited about our positioning for fiscal year 2016. Now, I’d like to open the call for questions. Operator?

It looks like you did billings growth on a constant currency basis of 29%, which I recollect, Marc, was exactly the same percentage you grew three years back. You’re a much larger company, so the law of large numbers doesn’t seem to apply to you guys. As it relates to the analytics cloud, Marc, I’m wondering if you could give us some sense of how you expect user adoption to take place. What segments in the global markets do you see this having a near-term impact? And as you look at your fiscal 2016 guidance, typically you guys have been conservative, which is very much appreciated. Are you assuming the full thrust of the analytics cloud in your next year numbers, or do you want to just take it one step at a time, see how it goes for the next couple of quarters, and see what you do about fiscal 2016 as it relates to analytics before you guide the street on the analytics product?

I just want to say, at a high level, what I said in the script is the most important thing regarding the analytics cloud, which is that we have never seen faster uptake and faster traction when it comes to new product. That gives us a level of incredible excitement. I’m sure if you downloaded the product or seen reviews on the app stores that you realize we had a huge breakthrough in our ability to enter a major new segment. For those of you who look at the TAMs of these different markets and understand how we actually enter a market, we look at, number one, the size of the market that we’re entering into. When we look at sales, it’s a multibillion dollar market service platform, especially marketing is becoming that way. But analytics is already that way. Analytics and business intelligence is one of the biggest, most exciting markets in the industry. This is not a CRM story; this is analytics for the rest of us, period. We have the best analytics and business intelligence product on the planet, and we are going to market in a huge way. I’d just like to ask Keith now to talk about the changes that he’s making to his organization to focus on this opportunity, some of the advancements he’s seen in the pipeline regarding analytics. It’s a super exciting moment, and Keith can also talk to you about some of the deals he’s already closed in the third quarter.

Thanks, Marc. Let me just give some color commentary on this. Obviously, as I said in the opening comments, this is a product that has been around for just a few short weeks. We’re starting to see, with some pretty large companies, interest in the product. We’ve already signed some customers, so we’re very excited about the momentum. As far as readiness for the organization, we’ve had our entire sales organization go through what we call a black belt process for training, so they are completely enabled and ready to engage with our customers around analytics. We also have a specialized organization focused every day, and they wake up thinking about how to deploy analytics with our customers to make them successful. We’re seeing some interesting characteristics, and I’ll talk about opportunities. We don’t like to talk about pipeline, but we’re starting to see customers who are not Salesforce customers who are interested in analytics because they see how robust it is. We are very excited about the opportunity. It is an early release product, but we believe that there’s a lot of momentum and we’re off to a very strong start here.

Maybe one for Mark Hawkins. Did a really nice job on operating margins this quarter, up 244 basis points. It seems like you’re being a little more conservative going into Q4, where we typically see a little bit more flow through on operating margins. Can you give us a little bit of color on the investment profile going into Q4, why you see less of an operating margin gain in that Q4, and some insight on how you’re initially thinking about FY16?

First of all, we are pleased with the operating margin progress, particularly year to date. I think Q4 will be a nice step up here. You can see some efficiencies in G&A, and I expect and will be planning towards having G&A down 10% over time. We saw some nice efficiencies in other parts of the company. Don’t forget, when you go into Q4, as you get to the end of the year you start to encounter things like commissions, which obviously have a bearing in that regard. We feel great about our recommitment to the 125 to 150 basis points for the year, and obviously we’re always driving to achieve more than that. But that’s where we’re at on that. As you look at FY16 in terms of margins, you should keep in mind that we are 15 months away from the end of FY16. We’re initiating guidance on the revenue side, and we’ll be talking about margins in Q4. The Q4 earnings call in February will allow for a more in-depth discussion.

I had a question regarding the analytics cloud. Do you see that in terms of adoption mainly coming initially from your existing customer base, or a lot of projects from the partner community? And also, in terms of between the mid market and enterprise, how do you see that going forward?

It’s a great question, and it’s something that’s on all of our minds, because the demand that we have is universal. What you saw at Dreamforce is that whether it was small companies, medium, or large, they were all extremely interested. Obviously, GE is the launch customer. If you didn’t see the New York World Tour show, John Sabino, who is a marquee executive at General Electric, spoke today on the significance of this product as it relates to General Electric. I think that sums it up very well for enterprise. I haven’t found a customer who doesn’t want to have a significant interest in the product, and that also includes our nonprofit customers. This was surprising to me. For us, it’s about staging which companies we’re going to engage with, and how fast we can do it. We have aggressive goals for the product for next year. I’d also add that this is not just an app; it’s a platform. This is a product that others will build on. Yes, it’s a great end-user capability that you can access on your mobile device. Alex Dayon and his team have done an unbelievable job. I've been personally involved in the development process, meeting with the analytics cloud team every two weeks for the last six to 12 months, and what they’ve accomplished, I have not seen, in my career.

Listen, I will tell you again, there’s tremendous momentum. As Marc mentioned, we signed up nearly 50 partners in just a few short weeks who have expressed interest. They see the value that the analytics cloud can provide their customers. While Marc was talking about the platform, I mentioned that we are seeing some opportunities; companies that are interested in the analytics cloud are not Salesforce customers. It would be natural to expect that we would be able to sell analytics very nicely into our installed base. But if what we’re seeing trends out, we could actually be seeing a Trojan Horse, if you will, of analytics into the non-Salesforce installed base, dragging our customer success platform. The potential is very strong, and again, we’re in the early days, just to temper everyone’s enthusiasm. Our customers seem very enthusiastic, and we’re mobilizing the entire organization to drive our customer success.

Question for Keith Block. On the sales side, can you give us a sense of how far through the sort of realignment and changes that you feel need to be made to get yourself to this kind of vertical organization that you want to have, and what plans do you have in the new fiscal year to get yourselves there?

I appreciate the question. I will tell you that, you know, this is a great company, and the company is driven by an incredibly strong culture, and it’s a culture of innovation and continuous improvement. Our work is never going to be done, and we will always continue to do better and innovate and continuously improve and experiment, and we’re not afraid to take risks here. Obviously, they’re calculated risks and we’re smart about how we do things. There are three things that are important as we go to market. One is to speak the language of industry so that when you speak to a bank, you understand their customer challenges and the opportunities and how you can apply the customer success platform to that business problem. The second is to build up the largest ecosystem in the world; that takes many forms. It starts with SIs and boutiques and agencies which are key influencers. It’s also about ISVs, and we’re doing some terrific work with ISVs. We revamped our ISV process. The last is our international expansion. You can see the results already starting to happen, particularly in Asia-Pacific and Europe. We’ve continued to invest across the board in our distribution capacity, adding more AEs, more reps, more selling capacity, opening our data centers, and expanding our partner networks. This is an ongoing process. We’re seeing traction over the last 12 months. We’ll always be looking for how we can optimize.

Just on the vertical industry strategy, I guess it’s a question for Keith. Aside from the actual verticalization of the sales organization, what are the sorts of things we should be looking for in terms of product enhancements or partner enhancements to the platform that could drive further penetration into particular verticals?

I would look at this in multiple dimensions. Number one is obviously equipping and arming our sales team so that when they’re in front of the customer, they are speaking the language of the customer. Two is in certain markets - and we already have this today - organizing geographically by vertical. For example, in the broader market today, here in the United States, we have a financial services vertical sales team that wakes up every day and they call just on financial services accounts. The same thing is being done for healthcare and life sciences. The third is actually developing product, creating product that Salesforce builds organically. We have some announcements that we’ll be releasing soon; we don’t want to get into that right now, but we will be building out some product for certain industries that are very important and strategic to us. Lastly, cultivating our ISV community is super important. We signed an agreement with one ISV in the quarter that we consider to be very strategic, and it’s around really two industries, which are telecommunications and insurance. They will enhance our footprint so that they have industry relevant apps on our customer success platform.

I wanted to switch gears and talk a little about the Marketing Cloud, particularly see if we can get an update on some of the technical integration that’s gone on over the last several months. Beyond just the technical integration, can you talk a little bit more about how Pardot is progressing in the B2B marketing automation world?

I think starting with Pardot, I mean, it’s one of our biggest success stories of the year. We’ve just had a phenomenal growth rate. It was the unpolished jewel inside the ExactTarget ecosystem. We broke it off, and we run it separately, and we’ve invested in it significantly. We’ve also integrated it into our core, and the leader of the unit has done a phenomenal job. I could not be happier with that. It’s run out of our Atlanta headquarters, and the team in Atlanta has exceeded our expectations. Today, just before World Tour, we had a press event and launched our new Social Studio. You saw the vision for these incredible new capabilities with all of our social products, not just our social advertising products that you’ve seen at Social.com, but the next generation of our social listening products, social publishing and social engagement platforms. The team has done a great job. Today, that product is disintermediated from our core marketing platform, and you are correct in intuiting that the next step is the Social Studio will become an integrated part of our marketing cloud, deeply integrated into the Journey Builder itself. When that happens, I think you’re really going to see all of these assets come together in an incredible new way, as well as deep integration into our Salesforce1 platform. We’ve owned the ExactTarget asset just a little more than a year, and it’s been a very exciting year. We’ve created the next generation of the leadership team that has performed very well. We’ve delivered the next generation of structure where the product teams are deeply integrated with our core Salesforce product teams under our president, Alex Dayon. Distribution is run directly by Keith. The functional integration has happened, the product integration is underway, and I think if you saw the demonstrations today, you’d say that our products are state of the art. From the financial numbers, we’re very excited about where we have gotten. Acquisitions are hard. I can tell you that myself. We’ve done a couple dozen acquisitions in the last five years. They’re super high risk; not all of them are successful. You aren’t able to bring the revenue forward and grow it in all acquisitions. In this case, you see the revenue growing significantly, and we have a lot of dreams and hopes for this cloud. What I’m excited about regarding the marketing cloud is the macro view: our customers want from us a customer success platform, and you can’t deliver a customer success platform without a strong marketing component. We have that. We have a best-in-breed capability. We’ve got the sales capability in the customer success platform, the service, the marketing, analytics, community, as well as with Heroku, the ability to build highly customized customer-facing apps. It’s a very exciting moment for Salesforce with these six core clouds, all underway and all engaged.

Marc, you’re always great with bold predictions, and given the excitement with analytics cloud and the comment you and Keith made that you see this as being the most successful cloud you’ve ever launched, thinking about how customers can leverage this product, either existing Salesforce customers and new ones across their businesses, any predictions on how fast this could ramp to a billion in billings?

I can certainly provide that information, but I won’t be doing so at this time, Heather. The reason for this is that with these new products, it’s hard to predict the next steps completely. My team knows I’m very positive about our progress, not just in development but also in customer engagement. We have several additional features planned for the next six months that I believe will impress everyone. I anticipate being able to make those predictions in one or two quarters once we are fully operational. We have a significant first-year contract value target for this product this year, and if we meet that target, I will gladly share the billion-dollar forecast. It's important to note, Heather, that my ambition goes beyond just having a billion-dollar product line known as AOV with the analytics cloud. I don’t want to get into specifics regarding timing or methods, but I am incredibly optimistic about the potential. Now Keith just needs to focus on selling it.

I guess I have to follow up on that question with some more bold predictions since you seem to be in a good prediction-making mood. How about on the service cloud? Service cloud is probably one of the areas, if we look at at-scale, still growing, high growth, big, massive replacement opportunity potential. When does something like service cloud start to match the sales cloud, and what are you guys seeing maybe from a customer standpoint in terms of actually moving off of legacy call centers? And Keith, if you want to talk about the Verizon deal, if you can share any more color on that, that would be great.

Number one, you’ve seen us deliver now the first $3 billion cloud with sales, and you don’t have to go very far to put together the numbers that we now report with sales cloud to see that service cloud is probably not far behind. The exact timing of when that service cloud can get to that level, you’re going to have to do the model yourself. I have my model, you’ll have your model. There’s no doubt that service cloud has that kind of capability and more in it, and it’s pure potentiality at this point. Keith is closing some terrific deals with service cloud because really these other vendors have not delivered in the service area. Before I move on to Keith, if you haven’t been tracking it, it’s not just service cloud on the high end, it’s also desk.com on the low end. If you haven’t been to www.desk.com and given yourself an account and seen the huge traction on desk.com or seen what that team has done, we have got an incredible executive running desk.com and is doing a great job at the very low end of the market. Let me have Keith talk about the mainstream, high-end enterprise capability with service cloud.

You know, service cloud is a whole area that I think is very interesting because it’s certainly an area where companies want to go and have the opportunity to take on a major transformation. More and more companies want to differentiate themselves from their competition by improving their service in many ways, and a lot of that is leveraging our customer success platform. I could talk about Verizon, but they probably don’t want me to get into too much detail about how they’re leveraging the platform because there may be some competitive advantage there. I have to be sensitive to that. Just generally speaking, we are finding significant interest from major corporations to work with us to extend and enhance our service cloud offering, which gives you an indication of the interest that they’re looking to work with us on. Suffice it to say, it is a major transformational opportunity for a lot of organizations, and the great news is that they want to talk to us, and they’re working very closely with us to make that happen.

Marc, you mentioned on the call this impressive transaction growth that you had, this over 60% transaction growth. As we were monitoring that through the quarter, we saw a particular spike in September. Can you give us any color on what might be spiking those transactions so dramatically?

Before I get into that, let me just say that when we talk about service cloud, one of the reasons it’s so successful is there’s no technical separation between sales cloud and service cloud and the platform and community. This is one code base, and of course we label it and market it and deliver it as different SKUs, but unlike other software companies, these are not like separate disks; this is one integrated service. If you look at our growth for next year, you might note that we’re going to grow more next year than I think the second largest enterprise cloud company in absolute numbers, which is amazing. This is kind of lost by a lot of people regarding what’s happening right now with Salesforce. So it’s very exciting. In regards to September and the transaction spikes, many times it’s actually linked to fiscal quarters associated with our customers closing their quarters. Most companies are organized around fiscal quarters, calendar quarters, and you will see a spike—for example, in September—because a lot of customer activity tends to happen around a quarter close, and that’s what happened probably at the end of the third fiscal quarter, which is for most companies the end of September, not for Salesforce, but for probably the majority of customers we have on our system. I want to thank you so much. I want to congratulate Larry Baer and the San Francisco Giants for winning the World Series. I want to congratulate my team for delivering the first enterprise cloud company that’s giving $6.5 billion of guidance for a fiscal year, and I want to thank all of you for coming to the New York City event today as well as for coming to Dreamforce.