Highlights From CRM's Q2 Conference Call: Continued Demand Shift to Enterprise Cloud Computing

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CRM Hot Sheet

EPS Growth %: +32.1%

Financial Fact:
Professional services and other: 40.25M

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TARO, BRLI, TLB, More

Last night (after the close), salesforce.com, Inc. (NYSE: CRM) reports Q2 EPS of $0.29, ex-items, 2 cents better than the analyst estimate of $0.27. Revenue for the quarter was $394.4 million, which compares to the estimate of $384.69 million. Shares are up 12.6% today.

Highlights From CRM's Q2 Conference Call:

Sees Q3 adj-EPS of 30-31c, vs. cons. of 29c.
Sees FY11 sales of $1.595-$1.6 billion, vs. the cons. of $1.57 billion. Sees adj-EPS of $1.15-$1.17, which compares to the Street estimate of $1.16.
(Marc Benioff, Chairman and CEO) An improving demand environment together with the continued shift to enterprise Cloud computing allowed us to post another great financial quarter.
Q2 revenue of 394 million rose 25% year-over-year. Even with an annual revenue run rate approaching 1.6 billion, our revenue growth is accelerating.
At 25%, Q2 revenue rose at its fastest rate in six quarters and it represents the third quarter in a row in which our growth rate has now increased.
Non-GAAP EPS of $0.29 was well above our outlook entering the quarter. GAAP EPS was $0.11. We also delivered roughly 76 million in operating cash flow, an increase of more than 66% from a year ago.
Over the past 12 months our business has generated more than 340 million of operating cash and we exited the quarter with roughly 1.9 billion of cash, cash equivalents and marketable securities.
While our Q2 financial performance speaks for itself, the big news this quarter was the release of Chatter in June. Just as Amazon (Nasdaq: AMZN) did a decade ago, Facebook and Twitter are now showing us the future of the Internet, this time, in the area of collaboration. According to Nielsen, use of social networking apps was up 43% as a percentage of time spent on the web between June 2009 and June 2010.
Leveraging the social features popularized by the consumer web, like profiles, status updates, real-time feeds and mobile apps, Salesforce Chatter helps companies increase employee productivity by empowering employees with a new level of collaboration.
Customer response to Salesforce Chatter has been nothing short of amazing. Within a week of the release more than 10,000 customers had turned on Salesforce Chatter.
Today, less than two months later, that number has now grown to nearly 20,000 customers or roughly one quarter of our total customer base. We believe this is the most successful new software release ever.
Some of our largest customers are deploying Chatter to very large user communities, among them: Dell (Nasdaq: DELL), Sprint (NYSE: S), Tyco (NYSE: TYC), Avis (NYSE: CAR), Budget, Misys, McAfee (NYSE: MFE) (Nasdaq: INTC), PerkinElmer (NYSE: PKI)and Dow Jones.
Chatter is an important part of our growth strategy for two primary reasons. First, customers that have deployed Chatter have high end log-in and usage rates indicating that they're seeing increased value in our products. Not only does Chatter further differentiate our already award winning apps, but we believe the higher levels of customer success translate into greater customer retention.
Longer term, Chatter represents our first enterprise-wide app, extending our value beyond our core sales and customer service base.
Our Service Cloud business was also very strong in the second quarter, growing faster than our other Cloud businesses. With fewer than 10,000 of our existing 82,000 customers using the Service Cloud today, we believe that we're just beginning to scratch the surface of a major future opportunity.
Finally, our Force.com business had another very strong quarter. Headlining our Force.com platform success was a great win in Japan at Japan Post, ALICO and Daiwa and outside of Japan Force.com also delivered another solid quarter of new business, including transactions at Nokia, RehabCare, Watson Pharmaceuticals, CIGNA, and IG Group.
During the second quarter, Force.com delivered 21 billion transactions, incredible, an increase of 44% year-over-year.
In addition to our tremendous transaction volume, our customers have now created more than 23 million database customizations, an increase of roughly 40% year-over-year.
To date, our developer community of more than 280,000 developers has created more than 600 million lines of Force.com code, up more than 7x from a year ago and more than 1.6 million custom Visualforce pages, up more than 5x from a year ago, and more than 170,000 custom apps, up roughly 50,000 from a year ago.
(CFO) Revenue rose 25% year-over-year to just over $394 million.
The FX environment is more favorable today than when we offered guidance at the end of the first quarter. Our second quarter revenue results included approximately $5 million of currency headwind versus a year ago. Adjusting for FX rates, constant currency growth would have been a point higher at 26%.
Looking at the regions, our Americas business rose 22% to just under $275 million. Revenue in Europe faced a significant currency headwind versus a year ago as the dollar strengthened almost $0.15 against the euro.
As a result, revenue of approximately $66 million was up 17% in dollars, but up 30% in local currency. The stronger yen created an opposite effect in Asia and that region continued to deliver very strong results. Revenue in Asia rose 59% in dollars and 53% in local currency to finish the quarter at approximately $54 million.
Second quarter non-GAAP gross margin improved about 30 basis points from the year ago quarter and remained at about 82 due primarily to a change in business mix.
On the pricing front we continued to see no material changes when we compare average price per seat across additions, geographies or customer segments.
Our fastest growing expense category is R&D which now stands at roughly 11% of revenue.
Sales and marketing expenses were 43% of revenue, that's flat with last year and finally G&A was a higher than last year, 14% of revenue.
Our overall full-time employee count rose by approximately 340 people in Q2 to finish at just under 4,450 people worldwide. Remember this increase includes approximately 150 people from the acquisition of Jigsaw.
As a result, the related amortization in fiscal 2011 is approximate $7 million less than the amount we included in the FY 11 GAAP EPS guidance we provided with our first quarter results.
Our Q2 GAAP tax rate for the quarter rose to 44% as a result of certain acquisition and investment related non-deductible expenses and a decrease in pre-tax GAAP income. Our Q2 non-GAAP tax rate was 39%.
CapEx in the quarter was approximately $28 million.
Second quarter free cash flow, which we define as operating cash flow less CapEx, was approximately $48 million. That's an increase of 77% from last year. Year to date, our free cash flow has increased 61%.
Total cash, cash equivalents and marketable securities on the balance sheet finished the quarter at approximately $1.9 billion. This was down about $50 million from Q1, primarily due to acquisition-related disbursements of $150 million, offset by stock option exercises and operating cash flow.
Our Q2 deferred revenue balance included a roughly 3 million sequential currency benefit, primarily the result of the stronger yen.
(Q&A) Nice to see good results in revenue and bookings acceleration. Marc, I'm curious to get your overall take on the environment. There's been some crosscurrents of economic data and also one of your mentors, John Chambers, talked about some questionable business conditions. I'm just curious to get your color, what are you seeing with your customers, especially since you have a unique view into 80,000-plus customers? I would assume your business is a good barometer of roader IT spending or business confidence in general. So if you can address that broad brush question, that's it for me. (A) Well, Kash, I'm very bullish on Cloud Computing and real Cloud Computing which is the kind of very efficient model that Salesforce.com has been able to deliver. As I mentioned in my script, we have about 3,000 servers and that includes 1,500 that are just standing by in case there's a disaster. You have to kind of ask yourself, if Salesforce.com did not exist for the, you know, 82,000 customers that we have and the couple hundred thousand apps that they're running on our servers, how many servers would they need? And you could quickly, you know, determine that, you know, we are operating at a level of efficiency that's probably a few percentage points of what they would have had to buy. And that's why I think Cloud Computing is so exciting to customers because it's -- certainly for our customers it's a CapEx free, you know, environment. They're not buying hardware, they're not buying the kind of traditional capital expenditures necessary and taking on the risk to deliver automation into their companies. I think that that's a big juxtaposition against my bullishness and you know, I love John Chambers, I think he's probably one of the really greatest CEOs in our industry. And - but his company is all about CapEx. I mean, at the end of the day, Cisco is very different than salesforce because Cisco is all about routers and hubs and switches and phones and set-top boxes and TelePresence devices. And all of those things are, you know, they're all made out of plastic, they've got wires and they've got to ship them and build them and factories and, you know, we don't have any factories. We've got, you know, our software engineers and we've got a few thousand PC's that we're deploying those -- deploying that software on to and then it's able to be consumed over the Internet the way customers consume Facebook or Twitter. They're able to consume enterprise software and that's a very different model and it's a model that gives customers success; a much higher level of success than they have ever seen in enterprise software before. I think the reason why is for all the reasons that I said, you know, no upgrades, it's no updates. And I think best of all when you look at a release like we had this quarter of Chatter, you know, almost a quarter of our customers are now on Chatter. You look at any other enterprise software company who puts out a major new functionality release - a new product, a quarter of their customers don't uptake the product. You usually wait to hear about that over a period of years. So I don't think it's fair to contrast us against the Cisco environment. We have to really look at Cloud Computing is where the action is in our industry, and companies that are delivering true Cloud Computing, which are the very, very high levels of efficiency, very, very low levels of cost through the multi-tenant architectures that we have pioneered, I think you're going to continue to see strong growth, which is why we're delivering such a huge increase of our guidance in today's call.