Salesforce Inc (CRM) — Q2 2017 Earnings Call Transcript

Thanks so much, Victoria, and good afternoon everyone, and thanks for joining us for our fiscal second quarter 2017 results conference call. Our second quarter results press release, SEC filings, and a replay of today's call can be found on our IR website at www.salesforce.com/investor. And with me today on the call is Marc Benioff, Chairman and CEO; Keith Block, Vice Chairman, President, and COO; and Mark Hawkins, CFO. As a reminder, our commentary today will primarily be in non-GAAP terms. Reconciliations between our GAAP and non-GAAP results and guidance can be found in our earnings press release. Also some of our comments today may contain forward-looking statements, which are subject to risks, uncertainties, and assumptions. Should any of these materialize or should our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements. A description of these risks, uncertainties, and assumptions and other factors that could affect our financial results are included in our SEC filings, including our most recent report on Form 10-Q. So with that, let me turn the call over to you Marc.

Outstanding, John. Thank you very much and thank you to everyone joining us on today's call. I am absolutely delighted to be here to talk about our second quarter results and tell you about everything that is going on at Salesforce. So revenue, as you see, has grown 25% in dollars and 26% year-over-year in constant currency to more than $2 billion, and congratulations to everyone at Salesforce. This is our first $2 billion quarter and no other enterprise software company of our size and scale is delivering this kind of growth rate. Congratulations to everyone. Deferred revenue was $3.8 billion, up 26% in dollars and 27% in constant currency. The dollar value of booked business on and off the balance sheet is now $11.8 billion, which is up 28% from a year ago. We are raising our fiscal 2017 revenue guidance to $8.325 billion at the high end of our range of 25%, and we are delivering on the strong pace of topline growth even as we continue to improve our non-GAAP operating margin. Salesforce continues to be the fastest-growing top ten software company in the world, and last week Forbes ranked us as one of the most innovative companies in the world for the sixth year in a row and has named Salesforce 'the innovator of the decade'. Thank you, Forbes. And that’s a great tribute to our amazing employees, especially our technology and product teams. Dreamforce is coming up, and you are going to see an incredible level of new innovation when we introduce Salesforce Einstein, the world's first comprehensive artificial intelligence platform for CRM. Salesforce Einstein is AI for everyone. It's going to democratize artificial intelligence. It's going to make every company and every employee smarter, faster, and more productive. We are going to deliver the world's smartest CRM. Over the last few years, we have acquired a number of AI companies, incredible companies like RelateIQ, MetaMind, Implisit, PredictionIO, Tempo AI, and more with amazing people and technology. We have been able to stitch all this together into this incredible AI platform, and this focus on AI and on the critical aspects of AI as the next wave of our industry has resulted in a machine learning team of more than 175 data scientists who have built this amazing Einstein platform. That’s why I am so excited and why everyone in Salesforce is so excited. When you come to Dreamforce, you are going to see how this fits together and how we are delivering Salesforce Einstein, and we will have some great new products like Sales Cloud Einstein and Service Cloud Einstein, Marketing Cloud Einstein, and our Analytics Cloud Einstein, along with many other artificial intelligence capabilities in all of our clouds. Our customers will be able to build their own AI capabilities using Einstein extensions and Heroku. This is going to be a huge differentiator and growth driver going forward as it puts us well ahead of our CRM competition once again. Salesforce Einstein is also a perfect example of how we have been able to combine organic innovation with exceptional acquisitions. We came into this year with a lot of excitement and energy around the investments we made in our technology. Earlier this year, as you know, market conditions changed, and my leadership, the board, and I were presented with some incredible opportunities that we just never thought would be available to us. We took a look at these amazing acquisitions. Our strategy was simple: we will acquire one-of-a-kind companies with unique technologies, amazing engineering teams, and, of course, visionary leaders that fit with our mission and our strategic plan to help our customers connect with their customers in new ways. Some of these acquisitions are helping us build out our CRM today; others are laying the foundation for our future. A great example is Demandware, a company we have had a great relationship with and have admired. There is no company like Demandware. It is the clear leader in the multibillion-dollar cloud e-commerce marketplace, a natural extension of our platform. It expands our CRM offering with capabilities our customers have been asking for, and when we have talked to customers, like Louis Vuitton or Brunello Cucinelli, See's Candy, or even Adidas, they talk about Demandware as the critical part of their e-commerce cloud, and that’s how it became Salesforce's e-commerce cloud. It's the solution that our customers drove us to, and we are absolutely thrilled with this great new family of e-commerce products at Salesforce. We also took advantage of opportunities to invest in our future with incredible companies like Quip, and everyone knows he is the great leader of Quip, Bret Taylor, creator of Google Maps and the former CTO of Facebook, who has created this next-generation technology of live documents, bringing a new level of content, communication, and collaboration right into our platform. We are creating the world's smartest CRM through sales, service, marketing, community, analytics, e-commerce, and IoT. We have never been better positioned for the future. You are going to see that at Dreamforce with an unprecedented rush of innovation. There has never been more new products and more capabilities released at Dreamforce, and you are never going to see a better place to see how all this incredible innovation and products comes together. This is our biggest customer event of the year, coming very soon from October 4 through 7. We have got more than 2300 customer speakers inspiring, motivating, empowering, and educating our amazing community of customer trailblazers. We also have an outstanding lineup of speakers, including Melinda Gates, General Motors' Mary Barra, Congressman John Lewis, and many more. And you are not going to want to miss U2 performing at our Dreamfest UCSF Benefit Concert to raise $10 million for children's hospitals. It's going to be an unforgettable event. Dreamforce is already sold out, so talk to John to get registered. I look forward to seeing everybody there. Now let's turn it over to Keith to talk about our customer highlights for the quarter.

Thanks, Marc, and thanks to everyone for joining the call today. Overall, we delivered a solid second quarter. Our results reflect our continued focus on becoming more strategic with the enterprise, expanding internationally, investing in our partner ecosystem, and broadening our penetration in our target industries. In each of these areas, we made good progress in Q2. At the same time, we saw some softness at the end of the quarter, primarily in the United States. After a thorough operational review of the United States business, from sales to products to marketing to really all aspects of our business, I am confident in our plan for the year. We have a proven and tenured sales leadership team. We have industry-leading products. We have continued high win rates, and our second-half pipeline is very strong. We also see very high levels of customer engagement. Let me take you through some of the highlights of the quarter. We continue to close some of the biggest and most strategic transactions in the industry. In fact, we closed another nine-figure transaction in Q2 with a Fortune 50 customer. This is now the third quarter in a row where we have established these very strategic nine-figure relationships. On the international front, over the last few years, we have steadily increased our distribution capacity, expanding our partner ecosystem, investing in our offices and infrastructure, and opening new data centers, and all these investments are clearly paying off. Europe was our fastest-growing region, powered by some great strategic wins with Cellcom, PostNord, TNT, AXA, and Nestle. Asia Pacific had exciting wins with Shinsei Bank, Meiji Yasuda, Samsung, and Telstra. In Latin America, we expanded our relationship with the largest private bank in Brazil, Itaú. In every region, our partners, which are critical to our strategy, have been a huge part of our success. Our ecosystem continues to expand with incredible ISVs and global and regional SIs. In fact, partner certifications reached 38,000 in the quarter, up 25% from a year ago, which is proof positive that our partner strategy is working and adding to our overall capacity. We continue to gain traction from our vertical focus, which produces our momentum in each of our major industries. In healthcare, UnitedHealth Group significantly expanded with us to help build its next generation of patient and customer engagement for more than 125 million people. This is an incredible vision to make healthcare more cost-effective, efficient, predictive, and intelligent. In retail, one of the world's largest brands expanded with us to consolidate their entire guest experience to turn the billions of messages they send to customers into one-to-one journeys that are seamless, intelligent, and predictive. Macy’s is another great example of how our retailers can transform with us. They started with Heroku for just portions of their mobile and e-commerce websites. Now, they are bringing Salesforce to 185,000 employees and 1000-plus HR call center agents. Our momentum in retail is only going to get supercharged with Demandware, our Salesforce Commerce Cloud. In financial services, we expanded with State Farm, Nationwide, Farmers, and the Advisor Group, one of the largest networks of independent broker-dealers in the country. They are rolling out the Salesforce Financial Services Cloud to thousands of affiliated advisors. This is a product we launched just last quarter, and the early interest has been remarkable. These are all incredible stories. I could go on and on, and at Dreamforce, you will hear even more from our customers and how they are transforming their business with Salesforce. Before I close, I would like to thank the team and the company for their hard work and efforts in driving customer success in the quarter, and of course, to our customers and partners for their trust in us. I look forward to a strong second half. With that, I would like to turn the call over to Mark to talk about our financial performance in the quarter.

Great. Thanks, Keith. Total revenue for the second quarter was up 25% in dollars and 26% in constant currency, excluding a year-over-year FX headwind of $25 million. Demandware contributed $9 million to revenue in the second quarter, which was near the high-end of the guidance we provided in June. Our dollar attrition for the second quarter, which excludes Marketing Cloud, remains below 9%, supporting top line revenue growth. Looking at revenue by cloud, Sales Cloud grew 13% year-over-year in dollars. Service Cloud grew 29%, App Cloud and others grew 43%, and Marketing Cloud grew 28%, which now includes the subscription and support revenue from Demandware. While many enterprise software companies are aspiring to achieve a billion run rate in one product, we already have three products with revenue run rates of more than $1 billion today, with the Marketing Cloud soon to become our fourth. This gives us multiple levers of growth and provides additional business diversification. This was another quarter of consistent year-over-year constant currency revenue growth in our regions, with EMEA growing 32% and Asia Pacific growing 29%. During the second quarter, FX drove more revenue pressure than expense relief. I am very pleased that we were able to deliver 25 basis points of non-GAAP operating margin improvement year-over-year, our ninth consecutive quarter of expansion. We achieved this even while we began integrating Demandware and other recent acquisitions. I have already discussed our FX impact on our P&L, but the more meaningful impact was to the cash flow statement and balance sheet. Cash flow in the quarter was $251 million, down 18% over the last year. Operating cash flow was principally impacted by FX headwinds as well as the continued deepening of the seasonality of invoicing and one-time costs associated with the acquisition of Demandware. However, I am very pleased with our cash generation in the first half of the year of $1.3 billion, which is up 25% over the first half of last year. Deferred revenue ended the quarter at more than $3.8 billion, which includes approximately $23 million related to our acquisition of Demandware. This was up 26% in dollars and 27% in constant currency when excluding a year-over-year FX headwind of $35 million. Sequentially, deferred revenue had an FX headwind of $41 million. This was the largest sequential deferred revenue headwind we have ever seen. It highlights the dramatic effect that currency had at the end of Q2. In the quarter, approximately 78% of all subscription and support-related invoices were issued with annual terms. Q2's benefit to deferred revenue from the change in billing frequency was less than one percentage point of growth. Moving on to guidance. Just as FX had a significant impact on our Q2 results, we now expect FX pressures to persist for the remainder of the year, with a full-year revenue headwind of approximately $100 million to $150 million. In this context, I am pleased to raise our full-year revenue guidance to $8.275 billion to $8.325 billion. At the same time, we are making minor adjustments to our operating model to absorb and integrate recent acquisitions in order to deliver the profitability we committed to. As such, we continue to expect non-GAAP diluted EPS of $0.93 to $0.95, which implies approximately 70 basis points of non-GAAP operating margin improvement. Finally, with FX volatility we have discussed, we are updating our full-year operating cash flow guidance to a year-over-year growth rate of 20% to 21%, which allows us to remain on track for our first $2 billion cash flow year. For Q3, we are initiating guidance for revenue of $2.11 billion to $2.12 billion, non-GAAP diluted EPS of $0.20 to $0.21, and year-over-year deferred revenue growth of approximately 20%. To close, we delivered solid results in the second quarter and I am very pleased to be raising our top-line guidance while maintaining bottom-line guidance for the year. As Keith said, with our strong pipeline of new business and with Dreamforce in October, we have a great setup as we move to the back half of the year, and I look forward to welcoming many of you at Dreamforce in October. With that, we will open up the call for questions.

Keith, you mentioned some weakness at the end of the quarter, I was wondering if you could dig into that a little bit for us? Was it, from a competitive impact, was it in any particular product segment? Anything you could give us in terms of color, in terms of what happened at the end of the quarter, and to the degree to which it's going to persist into Q3 and the back half of the year? And then, Mark, if you could talk to us, Mark Hawkins, if you could talk to us about how much of that conservatism for the weakness at the end of the quarter is implied into the guidance that we have for Q3 and Q4? Particularly the implied billings guidance for Q3?

Yes. Okay. Keith, thanks for the question. So, listen, we had a solid quarter. Our results were good. We did have some weakness and some softness, if you will, in parts of our business in the United States. As I mentioned in my earlier comments, we conducted a very detailed operational review which is, by the way, part of our normal cadence. It's what we normally do. But we took a deeper look given that we had some softness in parts of the U.S. At the end of the day, I would boil this down to just a bit of blocking and tackling. We have taken a look at it, and we have made the adjustments, looked at our playbooks, tightened up on a few things. But in these quarters, things push out, things pull in, and that’s happened in every single quarter that I have ever been involved with, and I think many of you know that I have been in this business for over 30 years. So as I said, we have taken a look at the operational aspects of the business, and I feel very positive about the second half. Our pipeline is strong. Our win rates were very strong in the quarter. Our level of engagement has never been stronger. In fact, over the last two weeks, I have spent time with three of the CEOs and COOs of the top ten U.S. banks in the United States. All of them are talking to us about transformation and raising their level of engagement with customers, and they view us as a trusted advisor and want to know how we can help them. They are talking to us; they are talking to Salesforce; they are not talking to other customers. When I look at the leadership team that we have in place, which has been a very high-performing team historically, I look at our second-half pipeline, and I look at our level of engagement, which is unprecedented, I feel very strongly about the second half of the fiscal year.

Yes. Let me pick up on the second point, Keith, the questions you asked there around DR and, you asked about billings. Let me just talk about our DR, deferred revenue. Obviously, we have some impact from the foreign exchange. We talked about having such an impact in Q2; it's the biggest sequential change that we have seen ever in the history of Salesforce. So it has to be factored in appropriately. The other thing that I know you will get, Keith, also is the seasonality and the compounding effect that we talked about at Dreamforce last year; we showed all the map and the multiyear trend that’s happening there. Of course, we would look at that as well. When I level it up, basically, and say that we think it's appropriate. When we look at the overall topline demand of revenue growth as described, I am just pleased to be able to raise our annual guidance for revenue for the year for the third time this year. We are doing that predicated on all the things Keith talked about, the second-half pipeline. Looking at things like our market share, we continue to gain momentum based on the most recent market share data that was released. Win ratios. At the end of the day, what I am most pleased about doing is doing that for the third time in the face of $100 million to $150 million in FX headwinds at the topline, and we are still doing a third raise. I think we have a good setup, as Keith described; and obviously we have to factor in all the things he covered. That’s my point of view. Hope that helps.

This question is for Marc Benioff. Marc, there's obviously been a lot of news coming out of Salesforce over the past 90 days. You also had a bunch of comments in the press surrounding LinkedIn. I guess, what I'm wondering is, the last time I believe you set out a big public goal for the company was your $10 billion target several years ago, which obviously, looks like you'll trip over very soon. I'm just wondering if you could share with everyone your vision for the company as you look out over the next three to five years? How you're thinking about the company's revenue potential and how important M&A will be going forward in achieving those goals? Thank you.

I really appreciate your question, Heather. Regarding M&A, when we started this year, it wasn't part of our plan because we typically look for unique, strategic companies that are available at an excellent price. We have a thorough process involving our board, M&A committee, and internal corporate development team. Initially, we didn't see such opportunities. However, significant market changes occurred, notably LinkedIn's disappointing quarter, leading to a 50% drop in their stock. This situation prompted us to act because it presented a unique asset at an attractive price. We placed a bid for LinkedIn, but Microsoft ultimately outbid us. Then, a similar situation arose with Demandware, a company we had admired for years. They were approached by another firm, and we seized the opportunity to bid for them as well, recognizing it as a strategic fit for our future e-commerce platform. After discussions with LVMH, which uses both Salesforce and Demandware, it became clear that this acquisition was essential. We successfully acquired Demandware, and then I received a call from Bret Taylor, the CEO of Quip, whom I have a high regard for. We've been exploring the possibility of Salesforce acquiring Quip, with Bret joining our team in a key technical role. This unexpected opportunity transformed our earlier plans of not pursuing acquisitions into successfully acquiring two major companies, Demandware and Quip. We have identified additional promising companies in this open M&A environment that I mentioned in the last call. I believe this window may close by the year's end, but it's been an exciting time to acquire great assets. I'm more excited about Salesforce and our product line than ever, especially with Dreamforce approaching. While I’m not providing forward guidance, I agree there's potential for us to approach our $10 billion goal. You can see from our quarterly numbers that we’re on track to take an assertive approach to double the company. I am committed to both top-line and bottom-line growth, as we've shown in our results this quarter, and we intend to maintain that momentum while navigating this M&A landscape. As evidenced by our recent acquisitions and results, we will continue to execute effectively. I hope that addresses your questions.

One for Keith. First of all, if I think I heard right that the Demandware revenue went into the Marketing Cloud segment. So, if I took that out and looked at it organically, it seemed that that cloud decelerated to maybe something in the low 20% growth range. And I was just curious, Keith, if the Marketing Cloud in particular was an area of softness in the quarter, or if there were any other dynamics going on there that are leading to that business decelerate here?

Yes. So thanks for your question. Obviously, some of this, and Mark Hawkins can discuss it, but some of that effect would come from FX. Generally speaking, we are still very excited about the Marketing Cloud. As you know, we have had a strong push on industry focus, and retail is one of our top industries. The Marketing Cloud obviously plays a big role there, and when you add Demandware in concert with Marketing Cloud from a portfolio perspective, that just means we are bringing a very compelling solution to retail. So we continue to be very competitive with the Marketing Cloud. We are locked in a lot of deals. Our win rates have remained the same. Mark, I don’t know if you want to make a comment on the FX component?

Yes. No, I think there is that, and the only comment I would add is, as recently reported, we continue to take market share in this area as well, and that bodes well, and it supports our win ratio.

Maybe I'll start with Keith. Keith, you mentioned the second half pipeline looks pretty strong, it gives you confidence, but the Q3 deferred revenue and hence billings guidance doesn't imply that much strength actually. So are we to interpret your comment that you're looking at a fairly strong Q4 print? I guess, that's my question; I'll stop there. Thanks.

Yes. Let me address the pipeline issue, and then, of course, Mark, if you want to weigh in, that’s fine. We are coming into a second half for the year where we feel very strongly about our pipeline. Of course, we have got our big event with Dreamforce coming up in October, and that obviously will help supercharge our quarter and we get an incredible turnout from our customers and our partners. We feel strongly about that pipeline. What gives me confidence about the second half is not just the pipeline but it is also, as I mentioned earlier, the level of engagement that we are seeing. I mentioned the three executives that I recently spent time with. I will tell you a very quick story about the gentleman named Stephen Hemsley, who is the CEO of UnitedHealth Group, who spent hours with me talking about his vision for healthcare and his industry and why he was committed to working with us, hence signing an agreement with the quarter. There are dozens and dozens of those conversations taking place. Marc recently came back from Europe where he was surrounded with other CEOs, and he may want to comment on that, talking about the opportunity to drive transformation in customer engagement in their businesses. I think the level of engagement is very strong. The pipeline feels very good. As I mentioned earlier, again, this is a very high-performing leadership team that we have that has delivered quarter in and quarter out, and obviously, I have enormous confidence. We all do in the company and those folks.

Yes. Absolutely. Karl, I think at the end of the day, when you take the most significant FX sequential headwind to deferred revenue that we have ever experienced in Q2, obviously that has to be factored into our overall plan. All the context Keith gave you as well gets factored into our plan for the second half. But certainly in Q3, we had to factor in the foreign exchange, and don’t forget what we talked about. I know you know this well too, the continued compounding effect of invoicing that we described mathematically at Dreamforce continues, and those are things to think about as well. Certainly, the FX has a real bearing.

Keith, on the deals in Q2 that slipped in the U.S., it seems like, just implying from your comments that those deals are still in the pipe. You didn't lose them competitively; it's just a matter of timing. It wasn't an issue of those deals going somewhere else?

Yes. I want to make sure that I am very clear that what we saw the softness in parts of the U.S. business was at the end of the quarter, really in July. Our win rates continue to be very strong. As far as these deals that slipped, again, typical of my experience, some of these deals will close in the next quarter or the next quarter, or the next quarter. None of these deals are going away. None of these deals have been lost. They may take different shapes, sizes, and forms, but all of these deals are very much in play.

I guess a fair question to Marc Benioff, given this potential about three years back. Three years back or so, I think your Q1 new business was a little weak, and everybody was worried on Wall Street, and then subsequently the next three or four quarters, your billings growth rate went from 17% to 19% in that quarter to, well north of the high 20%s, 30%s. Is it just a temporary phase with the slippage of deals, or could there be some broader macroeconomic forces at work that have a fair bit of probability? Just wanted to get your feel for that. And also, secondly, more strategically, what could be the impact of Einstein? Could there be a replacement cycle within your base or new TAM ops that you think could be opened to Salesforce that were previously not available? Thank you so much.

Thanks, Kash. You are right, and you know, I mean we have been – Keith and I had a lot of conversations about this because Keith and I have both been in the enterprise software business for 25 years or more, 30 years, and I think we both started at Oracle in '86. You do get a quarter now and then when some specific geography, in this case the United States, has some softness; and it's just the nature of enterprise software, and that’s where we are. I don’t attribute it to any other factor than that; it is what it is, and you move on to the third quarter and assess your pipelines, and ours are full and robust. You assess your competitive position, and our win rates are strong. You look at where your innovation cycle is, and we have never had a bigger new product cycle, as your question indicates. When we roll into Dreamforce, we are going to have incredible releases of Einstein. You are going to see dramatic enhancements to our Salesforce Lightning platform, new mobile capabilities, and enhancements with Salesforce1. Of course, the productivity tools available through Quip are remarkable live documents. It's just a great piece of technology. And then, we have some of these incredible new platforms that we did not have a year ago, like Ecommerce Cloud. All of that together provides for a very exciting Dreamforce. In regards to pricing, you have seen that Sales Cloud continues to do really well, even though it's a monster in terms of revenue. One reason that growth continues is we have these amazing options available with Sales Cloud like, of course, Pardot, which we picked up when we bought ExactTarget three years ago. We also have another amazing option on Sales Cloud, which is CPQ or SteelBrick, which we acquired last year. Another amazing option will be Einstein for Sales Cloud to give you this incredible intelligence. So, you are going to see some awesome capabilities, and you can also have those options available with it. For example, Analytics Cloud will have the Einstein option as well to enhance it. While nobody likes softness in any particular region, this seemed quite isolated, in my opinion, to the U.S. We saw great growth and deal flow in the U.S. but did experience some softness at the end of the quarter. We had great performances in Europe, Asia Pacific, Japan had a record quarter and a record month in July. It’s an incredible part of the enterprise industry, and it’s something that you learn to manage through and use to make your company stronger, which is exactly what we did the last time we saw that which was in the quarter that you talked about.

So maybe, Marc, one for you, kind of on this theme around digital transformation projects. As you speak to CEOs, do you sense, at least in the U.S., any change in the pace of those digital transformation projects? And then, maybe one for Mark Hawkins, within your framework of growth and profitability, what is the triggering mechanism to start showing incremental leverage if there is some moderation in growth?

It's a great question. Last week, I was with a lot of customer CEOs: CEO of Unilever, ABB, Coca-Cola, PricewaterhouseCoopers, and the CEO of Bank of America. In each and every case, those customers are not only absorbing more and more of our technology than ever before, but they are getting more aggressive about their digital transformation. Today, ABB, which is an incredible manufacturing company based in Switzerland, has deployed now more than 20,000 users and is connecting all of their machines, building an incredible customer network using Salesforce. When I look at the work that Brian is doing at the Bank of America, again, it's a huge fundamental transformation of his business to be customer-first and digital and integrated. Both of those companies and the other companies I mentioned have chosen Salesforce as their CRM platform to do that work. I could go through dozens of others that I think that that pace, not just digital transformation but what I would say customer transformation. Creating a customer-first environment that is intelligent and mobile and one that allows their companies to build these one-on-one relationships with either their BtoB customers or BtoC customers as well. This is a pace of change that I have never seen, and I don’t think there is a company that we are working with today who is reducing their digital transformations. If anything, I think almost every single one that I met with this quarter and I even spent a couple of weeks in Japan this quarter are accelerating it.

So, Marc, let me pick up the second part of the question. Alex, thank you for the note on revenue and operating margin framework and how do we think about profitability and triggers and such. As Marc said, we think about that a lot. Growth is number one, and as we showed this quarter, whether it be at the bottom line, as we are showing for the year with our guide, operating margin expansion is important to us as well. Very consistent with our framework. When you think about the trigger points of that framework, it's growth rates and we think about those three categories. What that brings to mind for me, for this quarter and the information we are sharing with you, we have a guide that’s in the 25% range revenue growth rate for the year. Again, as we said, it’s the third raise of the year. That’s what that number looks like. What we haven't talked about as much is $11.8 billion of billed and unbilled deferred revenue that grew, and it's a big number at 28% in the aggregate. We think about growth a lot; we think about profitability a lot; we think about the revenue framework. It's very much intact. You have heard from Marc and me, but clearly, it's keeping growth number one but also delivering profitability consistent with that framework. Growth is the trigger.

First for Marc Benioff. A follow-up on Alex's question around your conversations about digital transformation. Did those conversations already start gearing into AI as well? I’m curious with Einstein coming out, do you think that the customer base that's already thinking about digital transformation, are they asking questions about AI from you all? And then, Keith, just on your commentary around the pipeline looking good, you mentioned your last company had modest seasonality in the fourth quarter. Are we just starting to see more seasonality in the business as well as you guys get into larger deals? Thanks a lot.

You are absolutely right, and it's obviously one of the reasons that we have invested so significantly in artificial intelligence. We strongly believe that when we look at the future of Salesforce, the future of our industry, we have seen the evolution from the cloud. We talked about that on many calls. We have talked about social, we have talked about mobile. I think we are now evolved into four key areas. My employees and executives all know that I feel very strongly around this. The first one is intelligence. Companies demand that your software is intelligent and smart. You need machine learning and deep learning and machine intelligence built in. That it’s going to be excellent. That this machine intelligence is going to be declarative as well as programmatic. You are going to leave no customer behind. If a customer is a programmer, they can use it. If a customer is non-programmatic or what we call declarative, they can use it. This is very important going forward, and I really believe we are going to have the best artificial intelligence platform in the industry. We have phenomenal executives, phenomenal minds. The progress so far has been incredible. You will see with Einstein that it is on par and capable with any other AI platform you have seen like Watson and others. But with Einstein, it has capabilities like non-programmatic capabilities as well as programmatic capacities that are built into our applications as well as being independent. All that will be very powerful. Second, platform. I think everyone knows that you can't just build an application; you have to build platforms. The platforms also have to be declarative as well as programmatic. I believe that our Lightning platform is the best in enterprise software. You can build applications that run on any device, whether it's any phone, any tablet, any PC, or any kind of IoT capability. I believe that Lightning will be an incredible capability for us going forward. Third is mobility. Salesforce now has millions of users on its mobile platforms. I know many people on this call use Salesforce1 every day. We have many other key mobile technologies like Salesforce Inbox and others available as well, and mobility remains a huge focus for Salesforce. When you come to Dreamforce, you are going to see more capabilities on mobility as billions of users around the world go online on their phones. They want to be able to run their business using Salesforce from their mobile device. Salesforce1 remains, I believe, the absolute most popular application development and deployment vehicle for mobile. Finally, productivity. We have to have productivity built in. All of our applications need to have core productivity applications, whether it is email, like with Salesforce Inbox or spreadsheets or word processors like Quip, live documents. All of that has to be an integrated part of what we are doing. We believe that strongly. We have obviously done a lot of great work with Microsoft as well and have now our own product in this category. This is going to be really important to us going forward and the reason that we bought Quip is that we believe productivity is the fourth leg of the stool and that when you look at artificial intelligence, platform, mobility, and productivity, and then you look at our core applications in sales, service, marketing, community, analytics, apps, IoT, and eCommerce, you could even break productivity out as its own application category. Productivity itself has a huge TAM, a $26 billion a year TAM. Those nine applications, differentiated by these four capabilities, that’s how I look at where our product line is going. I hope to articulate that in a much simpler, easy-to-understand way when we get to Dreamforce for our customers.

To respond to the second part of the question regarding seasonality, over three years ago, Marc and I had many conversations about coming onto Salesforce which I was super excited about and I continue to be very excited about being here. A couple of the charters, coming on board, were obviously to continue the outstanding operational excellence of our broader market or SMB business. Still, we have made excellent progress there. As you continue this SMB business and accelerate into the enterprise, of course, you are going to balance out the portfolio, and by definition, the nature of enterprise typically is backended in the second half of years. I think it's natural to expect that will drive some degree of seasonality for the second half of the year. But we run a balanced portfolio of business, and that’s what we strive to every single day.

Question for Marc Benioff. Essentially, all the major services firms experienced problems recently, including Cognizant and Infosys and Genpact. Several of them mentioned softness in digital projects in the month of July. Some of that was attributed to the big banks that were counting on a midyear interest rate increase, which did not happen, partially as a result of the Brexit vote. I'm just curious, do you look at all of that as purely coincidental relative to what you mentioned at the end of the quarter in the U.S.? Or is it possible that there was a brief pause, maybe a little macro-induced, that just potentially may have pushed some number of transactions out of Q2 and perhaps leading into a bigger second half of the year?

You know, I honestly believe in kind of manifest destiny that this is always about us. We have to look at our own ability to execute. Over the last 18 years, I always come back to that. Regardless of what the environment is—whether it's very strong or a bit softer—it's always about you. This is the most important thing. If you always went to macroeconomic views—well, it's a low growth rate environment, or it's a low-interest rate environment, or whatever—you cannot really focus on and work on your own business. An example is Japan this quarter. I spent two weeks in Japan, a very exciting IT environment. Japan is still a huge part of the enterprise software industry, and we are just getting going in Japan. We have these incredible relationships with some of Japan's important companies and government agencies. If I listened to what everyone said about Japan for 18 years, we wouldn’t be in business. I don’t believe in that stuff. I believe you get what you focus on. You see results when you focus on success.

You are right. We have to stick to our netting, and our netting is all around the customer and growth for the customer. Specific to our partners, the statistics I mentioned earlier: we have 38,000 partner certifications, which is up 25% year-over-year. I don’t think it's appropriate for us to comment on what they are seeing in their business or the softness in their business. But that level of certification growth says they are betting on the long-term on Salesforce, and I think that is something to pay attention to.

You know, Keith, you had some amazing transactions in the quarter we talked about. UnitedHealth Group is one of them specifically. But you had some really amazing companies that you were personally with. I know we have talked about the financial service companies that you spent time with in the quarter and traveled a bit during the quarter as well. So when you are out there, what are customers really zeroing in on in terms of what they want from Salesforce?

What aligns us with our customers is, if you look at the CEO agenda, number one is growth. Followed very quickly with shareholder value and then of course the concern about the employee and community, all that stuff that’s important to us and our values. But the CEO agenda is very clear. I mean, you listen to our story and our messaging, and the value we bring to customers on a daily basis. It is growth—so, there is great alignment there. When I talk to financial services institutions, they are talking about streamlining processes around customer engagement and reinventing themselves. They know we are an innovative company, and because we drive innovation and inspire customers, that’s why they want to have those conversations with us. That's pretty typical of what I see regularly.

It's Macquarie. First, a question for Keith and/or Mark B. I don't want to beat a dead horse, and I certainly understand the nature of large deals and enterprise software playing at this level and size in particular. But I was wondering, as you guys examine the business, do you think there was any impact from the rollout of Lightning with its improved feature set and the subsequent price increases that may have caused some slowness at the end of the quarter? If you could talk a little bit about how the market is receiving those new Lightning prices, that would be really helpful. And then a second one for Mark H. In regard to billing, Mark, how much of a factor is Demandware in your outlook? Thanks, guys.

Let me take the first part of that. Regarding the pricing increase we have been talking about for some time. When I did the full operational review of the U.S, every element of the business was inspected. We did not see a material impact in the quarter in pricing. The pricing change we made demonstrates value for our customers, and that was the impetus behind it.

Yes, sure. Let me carry on regarding the second question, Sarah, about Demandware. When Keith and I were on the call in June, we expect Demandware's revenue to be around $100 million to $120 million for the year. That’s something to think about as you consider billings from that standpoint. I just want to point out that we're super pleased to have Demandware. It's an exciting addition, adding functionality and a unique asset, as Marc pointed out.