Thursday, November 20, 2014's (CRM) CEO Marc Benioff on Q3 2015 Results - Earnings Call Transcript (NYSE:CRM)
Q3 2015 Results Earnings Conference Call
November 19, 2014, 5:00 p.m. ET
John Cummings - Head, IR
Marc Benioff - CEO
Keith Block - President
Mark Hawkins - CFO
Kash Rangan - Merrill Lynch
Keith Weiss - Morgan Stanley
Brent Thill - UBS
Walter Pritchard - Citi
Ross MacMillan - RBC Capital Markets
Tom Roderick - Stifel
Heather Bellini - Goldman Sachs
Jason Maynard - Wells Fargo
Brendan Barnicle - Pacific Crest Securities
Good afternoon. My name is Dustin, and I will be your conference operator today for today’s Q3 FY15 earnings conference call. [Operator instructions.] I’ll now hand the call over to our host today, Mr. John Cummings. Sir, you may begin.
John Cummings - Head, IR
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.
Marc Benioff - CEO
Okay, thanks very much, and really appreciate it, John, and hello from San Francisco. Look, very, 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 absolutely 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.
Look, 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. It’s completely amazing to me.
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, and 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 joined us online to hear our vision for the future of the industry. And I know many of you were as inspired as I was by the attendees and the amazing response to what we have all created.
And at Dreamforce, we’ve held more than 1,450 sessions on how our customers are using these new worlds of cloud, of 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 we 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.
And 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, and you could just 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.
And I just now have heard that once again with him today. He offers a great description of our vision at Salesforce, how his team is making smarter decisions at exactly the moment and place that it matters. 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 and on and off the balance sheet.
Now, 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.
And 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, for 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.
And 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 thrill that the community cloud and it’s 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.
And you can see that at as a great example of this new public community cloud capability. And 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.
Look, 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.
Look, I am absolutely thrilled with the quarter, and congratulations, Keith, on a strong quarter, and now I’d like to turn it over to you.
Keith Block - President
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.
Now, 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.
And 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.
And 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 history. There’s no question about it.
And 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. And 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, and I am very, 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. And we absolutely strengthened existing ones with customers like EMC and HP and Verizon. And I’ll share a couple of those stories with you right now.
So Verizon, 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.
And 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. So now, Salesforce can give AB InBev the ability to sell, service, and market to customers from a single platform. Nobody else can do that.
And leveraging Salesforce1, they’re able to integrate all their legacy systems and develop social and mobile apps on the fly. So again, I want to congratulate the team in Europe for building this outstanding and great brand relationship.
So 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. And 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.
And 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 obviously 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, SunLife, 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.
And also 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. And that really speaks to the speed at which our customers want to transform their businesses versus months or years it takes on legacy platforms. So pretty compelling story.
So just getting started on our international growth opportunity. We’ve been aggressively investing in our international markets by increasing distribution capacity, as you know, and 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.
So 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, I mentioned that 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.
So 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. And 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.
So with that, I’ll turn the call over to Mark.
Mark Hawkins - CFO
Well, thank you, Keith. I’m very pleased to be with all of you today to discuss the third quarter. Despite a challenging FX environment, we delivered another strong quarter of results. We exceeded our Q3 revenue guidance by $14 million. We exceeded our non-GAAP EPS guidance by $0.01. Deferred revenue was up 28% year over year in dollars and 31% in constant currency, compared to our guidance of 30%. And our non-GAAP operating margin was up 244 basis points year over year.
The third quarter revenue was $1.38 billion, up 29% over last year. Excluding a year over year FX headwind of approximately $12 million, revenue was up 30%. On a sequential quarterly basis, we had an even larger FX headwind of $15 million.
Non-GAAP EPS for the quarter was $0.14. On a year over year regional basis, revenue grew in the Americas by 29%. In EMEA, it grew 30% in dollars and 34% in constant currency, and Asia Pacific grew 21% in dollars and 25% in constant currency.
Looking at the third quarter revenues by cloud, Sales Cloud was $625 million. Service Cloud was $340 million. Salesforce1 platform and other was $192 million, and Marketing Cloud was $132 million. Dollar attrition for the third quarter, excluding ExactTarget, remained between 9% and 10%.
Now, turning to margins, our third quarter non-GAAP gross margin was 78.4%, down approximately 90 basis points from last year, which reflects the continued investment in our infrastructure, including international data center expansion.
This continued investment is important for us to maintain the high level of trust and service delivery we are known for. We may see a slight impact on the gross margins next year as we ramp up the data center investment in Germany and France. However, we’re still very confident that we’ll be able to improve operating margins in FY16 by gaining efficiencies in other areas.
Our Q3 non-GAAP operating margin was 11%, up 244 basis points from Q3 last year, even as we held our biggest and very best Dreamforce ever, which had, by the way, about a $0.02 impact on non-GAAP EPS.
For the nine months year to date, we are up 90 basis points, and with our Q4 guidance, we’re on track to deliver 125 to 150 basis points improvement for fiscal 2015.
From a headcount perspective, we ended the quarter with approximately 15,500 employees, up 21% over Q3 of last year.
Now turning to cash flow, we delivered cash flow of $123 million, down 11% from last year. Now, this was primarily impacted by the timing of Dreamforce, which occurred in Q3 this year as opposed to Q4 last year. However, year to date, cash flow is up 39% year over year, so despite the modest decline in the third quarter cash flow year over year, we now anticipate a full year operating cash flow growth of 27% to 28%.
Capex was approximately $73 million in the third quarter, up slightly over last year. Capex as a percent of revenue was approximately [5%], and that was down from 7% in Q3 of last year. For the full year, we continue to expect capex and the percent of revenue to be around the 5% to 7% range.
Free cash flow, which we define as operating cash flow less capex, was $49 million.
Now, moving back to the balance sheet, we ended the quarter with approximately $1.8 billion in cash and marketable securities. Deferred revenue ended the quarter at $2.22 billion, up 28% over last year. Excluding a year over year FX headwind of $33 million, deferred revenue grew 31%. FX also reduced deferred revenue sequentially by approximately $30 million.
During the quarter, 73% of the value of all subscription support related invoices were issued with annual terms compared with approximately 69% in Q3 of last year.
Unbilled deferred revenue, our revenue that is contracted but not yet invoiced, and is off the balance sheet, ended the quarter at approximately $5.4 billion, up $1.2 billion over last year, for an increase of 29%.
Turning to guidance, based on our results for the quarter, clearly FX has had a significant impact on our financial performance. As I mentioned, we saw a $15 million sequential headwind to revenue in the quarter, and we expect an additional similar sequential impact to revenue in Q4 as well.
In that context, we are maintaining the high end of our full fiscal year 2015 revenue guidance range and expect revenue to be $5.365 billion to $5.370 billion for a year over year growth of 32%. This full year guidance implies Q4 revenues in the range of $1.436 billion to $1.441 billion, representing year over year growth of 25% to 26%.
We expect our full year non-GAAP EPS to be in the $0.51 to $0.52 range. This implies Q4 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, and today, we are pleased to be initiating fiscal 2016 revenue guidance at approximately $6.45 billion to $6.50 billion for year over year growth of 20% to 21%, which reflects an expected FX headwind of approximately $125 million to $150 million.
Now, keep in mind we are 15 months away from the end of fiscal 2016, and this is our initial guidance without knowing our Q4 results. Q4 is our biggest quarter, and it provides the most new business and renewals in any quarter. Add this to the compounding nature of the business model, and Q4 becomes especially important to revenue forecasting. We’ll have an update to our FY16 guidance for you when we report on our fourth quarter results in February.
So to close, despite significant FX headwinds, we delivered strong third quarter results. The third quarter sets us up for a strong finish in FY15, and we are on track to deliver all of our key financial goals we set out at the beginning of the year: revenue growth, improving our full year non-GAAP operating margins by 125 to 150 basis points, and strong operating cash flow.
I’d like to thank all of our employees for their dedication in delivering these great results. I’m very excited about how we are positioned for FY16. Now, with that, I’d like to open the call for questions. Operator?
Question-and-Answer Session
[Operator instructions.] Our first question comes from the line of Kash Rangan with Merrill Lynch.
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 as having a near term impact. And as you look at your fiscal 2016 guidance, typically you guys have been conservative, sort of, 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?
Marc Benioff - CEO
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. And 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, what we do is we look at, number one, what is the size of the market that we’re entering into? When we look at sales, it’s obviously a multibillion dollar market service platform, especially marketing is becoming that way. But analytics is already that way. Analytics, business intelligence, is one of the biggest, most exciting markets in the whole industry.
This is not a CRM story. This is analytics for the rest of us, period. And we have the best analytics and business intelligence product on the planet, and we are going to market in a huge way, and 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.
Keith Block - President
Thanks, Marc. So let me just give some color commentary on this. So obviously as I said in the opening comments, this is a product that has been around for just a few short weeks. And already we’re starting to see, with some pretty large companies, interest in the product. We’ve already signed some customers.
So we’re very, very excited about the momentum, and 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 that they’re completely enabled and ready to engage with our customers around analytics.
We also have a specialized organization that focuses every day. They wake up every day and all they think about is how to deploy analytics with our customers to make them successful. And we’re seeing some interesting characteristics, and I’ll talk about opportunities. We don’t like to talk about pipeline, but we’re actually starting to see customers who are not Salesforce customers, who are interested in analytics, because they see how robust it is.
So we’re very, 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. So we feel very good about it.
Our next question comes from the line of Keith Weiss with Morgan Stanley.
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 bit more conservative going into Q4, where we typically see a little bit more flow through on operating margins. Maybe you can give us a little bit of color on sort of 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, absolutely, when we look at the operating margin progress just really year to date, and I think Q4 was a really nice step up here. You can see some efficiencies in G&A, and we had talked about, you know, I expect and will be planning and driving toward having G&A [indiscernible] 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 get to things like commissions and things of that nature that obviously have a bearing from that standpoint. We feel great about our recommitment to the 125 to 150 basis points for the year, and obviously we’re always driving to achieve and better. But that’s where we’re at on that.
And then if there’s anything else, I’m happy to follow up on that. I guess also, as you look at FY16 in terms of margins, I think the thing to think about there is this is a period, as Marc teed up, we’re 15 months away from the end of FY16. We’re initiating guidance on the revenue side. We’ll be talking about margins in Q4, at the Q4 earnings call in February, so we’ll get into that for next year.
Our next question comes from the line of Brent Thill with UBS.
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 midmarket and enterprise, how do you see that going forward?
Marc Benioff - CEO
It’s a great question, and it’s something that’s on all of our minds, because the demand that we have is universal, and what you saw at Dreamforce is that whether it was small companies, or medium, or large, they were all extremely interested. Obviously, GE is the launch customer. We just showed them, speaking today.
If you didn’t see the New York World Tour show, John Sabino, who is a marquee executive at General Electric, who’s [indiscernible] through many different GE units, spoke today on the significance of this product as it relates to General Electric. I think that 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. That has surprised me. So for us it’s the staging of which ones we’re going to get on, and how fast we can do it. We have aggressive goals for the product for next year.
And I would also add, and I think this gets to the other part of your question, this is not an app. This is a platform. This is a product that others will build on. Yes, it’s a great end user capability. You can get to that on your mobile device.
And 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 I can just tell you, it’s our absolute highest-performing team, what they’ve accomplished, I have not seen, in my career. So huge congratulations out to Alex.
But there’s been three key design goals. One was the final user interface that you saw, which is obviously super sexy. The second one is that it’s not just for analysts, which are kind of the traditional targets for the products, but for everyone in the organization.
So you can just ask any Salesforce executive to show you how they’re already starting to use the analytics cloud, because all of our executives are getting teed up on using it. And that’s one of Keith’s goals, is to have every one of his executives using the analytics cloud and be able to demonstrate how they’re using it to run their business.
And three is, you saw that we have a huge number of partners already, not just the ETL vendors and integration vendors, not just the systems integrators, but also application developers. You know, when we first showed the product, to give you a little inside baseball here, to Gartner, they said to us, well, this is really a great product, and I’m sure you’ve seen now the first draft note. They said this is a really great product, but what we thought you were going to roll out is an analytics app for SFA, for Salesforce Automation. Why are you not delivering the analytics app for SFA?
And we said no, no, no, that’s not our vision. Our vision is we want to be the platform for analytics for all companies. And we don’t want to roll first with an analytics app. I hope that partners out there are building that app on our platform, but this is what’s existing, is that we’re going to have a huge ecosystem around this product, and that’s what’s going to drive it.
It’s a huge part of our philosophy and our business. We don’t make an SFA app, we make an SFA platform. We don’t make a service app, we make a service platform. We don’t make a community app, we make a community platform. It’s all built on our Salesforce1 platform. If you’ve ever been with a Salesforce employee, just have them show you on their iPhone or their Android device, on their iPad or whatever they’re using, how we run our business on our phones.
And that’s our vision for this analytics app platform as well. It’s really deeply integrated into our Salesforce1 platform, but it itself is also its own platform. I know that’s a little bit of a confusing statement.
So look, I’m super excited, and I’m sure that’s getting conveyed to you, and it’s going to be a huge focus. We call fiscal year’16 at Salesforce the year of analytics. Everybody knows about our V2MOM process. At the head of our V2MOM for fiscal year 2016, it’s the year of analytics. And we’re going to be super excited about [indiscernible] for fiscal year 2017. It will also be a year of analytics, because it’s not just a one-year initiative.
This is going to be a super exciting moment. Keith, do you want to add to that?
Keith Block - President
Yeah, listen, I will tell you again, there’s just tremendous momentum. Marc mentioned the ecosystem. We signed up nearly 50 partners in just a few short weeks, who have some pure interest. And they see the value that analytics cloud can provide their customers.
While Marc was talking about platform, just a thought. I mentioned that we are seeing some opportunities, companies that are interested, in analytics cloud that are not Salesforce customers. So 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.
So the potential is very strong, and again, we’re in the early days, just to temper everybody’s enthusiasm. But our customers seem to be very enthusiastic, and we’re mobilizing the entire organization around making sure that we can drive our customer success.
Our next question comes from the line of Walter Pritchard with Citi.
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 sort of what plans do you have in the new fiscal year to get yourselves there?
Keith Block - President
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. And I think we have to start there. And so to that point, our work is never going to be done, and we will always continue to do better and to 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, but listen, we have said that there are three things that are important as we go to market. One is obviously to speak the language of industry. We think that’s very important, because when you speak to a bank, you need to understand the language of the bank, what the customer challenges are, and what the opportunities are, 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, and that takes many forms, starting with SIs and boutiques and agencies which are key influencers, obviously. It’s also about ISVs, and we’re doing some terrific work with ISVs. We kind of revamped our ISV process. And then resellers for coverage. So that’s the second area.
And then the third is our international expansion, and you can see the results already starting to happen, for example, in Asia Pac and Europe. And we continue 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. So this is an ongoing process. We’re obviously seeing traction over the last 12 months. So again, we’ll always, always be inspecting to see what we can optimize.
Our next question comes from the line of Ross MacMillan with RBC Capital Markets.
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?
Keith Block - President
So I would look at this in multiple dimensions. So 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. So we want to make sure that they’re enabled and ready and we’re giving them the right content.
Number two is in certain markets - and we already have this today - organizing geographically by vertical. So 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. And we also have the same thing for healthcare and life sciences.
So that’s another access that you can look at. The third is actually developing product, creating product, that Salesforce builds organically, and you know, we have some announcements that we’ll be releasing soon, so we don’t want to get into that right now, but we will be in the position where in certain industries that are very, very important to us and strategic to us, we will be building out some product.
And then the last is cultivating this ISV community, our partner community, and that is super important. We signed an agreement with one ISV in the quarter that we consider to be very, very strategic, and it’s around really two industries. One is around telecommunications and the other one is around insurance. And they will continue to enhance and extend our footprint so that they have industry relevant apps on our customer success platform.
Our next question comes from the line of Tom Roderick with Stifel.
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. And beyond just the technical integration, as you look at the interplay between Sales Cloud and Marketing Cloud, can you talk a little bit more about how Pardot is progressing in the B2B marketing automation world?
Well, I think starting with Pardot, I mean, it’s one of our heated success stories of the year. We’ve just had a phenomenal growth rate. It was the unpolished jewel inside the exact target, the ecosystem. We broke it off, and we run it separately, and we’ve invested in it very significantly. We’ve also integrated it into our core, and the leader of the unit has done just a phenomenal job. And I could not be happier with that. It’s run out of our Atlanta headquarters, and the team in Atlanta has just exceeded our expectations.
I would also now kind of point to, today, just before World Tour, we had a press event and launched our new Social Studio. You saw the vision for this incredible new capabilities with all of our social products, not just our social advertising products, that you’ve seen at, 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 the next step is the social studio will become an integrated part of our marketing cloud, deeply integrated into the Journey Builder itself. And 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 now owned the ExactTarget asset just a little more than a year, and it’s been a very exciting year. We’ve obviously created the next generation of the leadership team that has performed very, very well. We’ve also delivered a next generation of a structure where the product teams are deeply integrated with our core Salesforce product teams under our president, Alex Dayon. And distribution is run directly by Keith.
So the functional integration has happened, the product integration is underway, and I think if you saw the demonstrations today, I’m sure you’d say that our products are state of the art, and I’m sure you can see from the financial numbers, we’re very excited about where we’ve 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 in a significant way, and we have a lot of dreams and hopes for this cloud.
What I’m excited about the marketing cloud is the macro view, is that 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 of breed capability. So 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, very exciting moment for Salesforce with these six core clouds, all underway and all engaged.
Our next question comes from the line of Heather Bellini with Goldman Sachs.
Marc, you’re always great with bold predictions, and given the excitement with analytics cloud and the comment that 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?
Well, I would be happy to give you that, and it’s not that I don’t have that, I certainly do, but I am not going to do that, Heather, and I’ll tell you why, which is that in these new products, you’re never really completely sure what the next step is. You talk to my team, and they know I am super optimistic about what we’ve seen, not just in what we’ve developed, but what we’re seeing with customer traction. We have a few other things we want to deliver in the next six months for this product, which will, I think, blow everyone away.
And I think I can start to make those predictions by, I would say, within one or two quarters of getting fully ramped. We have a big ACB number, which is our kind of first year contract value number, for this product, for this year, and if we deliver that number, then I’ll be happy to give you the billion dollar prediction.
Make no mistake, Heather, my goal is not just a billion dollars product line that we call [AOV] with the analytics cloud. It’s far beyond that. But I don’t want to get into specifics of when and how we’re going to be able to do that. Just know that I’m extremely optimistic about what is possible. And now Keith just needs to go out and sell it.
Our next question comes from the line of Jason Maynard with Wells Fargo.
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.
Yeah, let me take the first part, and I’ll shoot it over to Keith. You know, 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.
But there’s no doubt that service cloud has that kind of capability and more in it, and it’s pure potentiality at this point, and Keith is closing some terrific deals with service cloud, because really these other vendors have not delivered in the service area.
And by the way, 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 on the low end. And if you haven’t been to and given yourself an account and seen the huge traction on or seen what that team has done, we have got an incredible executive running and is doing a great job at the very, very, very low end of the market.
But let me have Keith talk about the mainstream, high end enterprise capability, with service cloud.
Keith Block - President
You know, service cloud, I think, it’s a whole area that I think is very, very interesting, because it certainly is an area where companies want to go and have the opportunity to take on a major transformation, because as you know, many companies are always looking for that area to differentiate themselves, and service is certainly one. And more and more companies want to differentiate from their competition by improving their service in many, many ways. And a lot of that is leveraging our customer success platform.
And I could talk about Verizon, but Verizon probably doesn’t want me to get into too much detail, specifically, about how they’re leveraging the platform, because there may be some competitive advantage there. So I have to be sensitive to that.
But just generally speaking, we are finding significant interest from some major corporations to work with us and collaborate 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. So I think that’s very, very existing.
We also have some companies that have gone on record. I mean, if you talk to GE, they talk about transforming into a service company, and certainly they want to do that with our assistance by leveraging, again, our customer success platforms.
Suffice it to say, it is a major transformational opportunity for a lot of enterprise 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.
Our next question comes from the line of Brendan Barnicle with Pacific Crest Securities.
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. That is, this is one code base, and of course we label it and market it, and we deliver it as different SKUs, but unlike other software companies, these are not like separate disks that you can get, this is one integrated service.
And of course marketing cloud is an acquisition that we are working to integrate into that core system, but that core kind of if you will it’s a monolithic code base with sales, service, community, and analytics is actually deeply integrated and is an extension of that core.
It’s kind of unprecedented. When we added Lightning in the service cloud, we added Lightning in the sales cloud, we added Lightning into community. When we add Salesforce1, we add it into each of those things simultaneously, because it’s the same code. And I really want to just point that out as one of the reasons that service cloud has had such an incredible success.
And if you look at service cloud against any other cloud company, that’s amazing in terms of its size. But also, 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. That is, we will add another cloud company on just through our organic growth next year, which is kind of amazing. And I think it’s kind of lost by a lot of people, about what’s really happening right now with Salesforce. So it is a very exciting time.
In regards to September, when you see those transaction spikes, and many times it’s actually linked to fiscal quarters associated with our customers closing their quarters. So most companies are organized around fiscal quarters, calendar quarters, and so you will see a spike, for example, in September, like what you saw, 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 that we have on our system. So that probably answers your question.
Anyway, 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. Okay? And thanks so much for attending the call.


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