Highlights From CRM's Q3 Conference Call: Revenues Grew 20% Y-o-Y, Raises FY Guidance

November 18, 2009 11:48 AM EST

salesforce.com, Inc. (NYSE: CRM) reports Q3 EPS of $0.16, inline with the analyst estimate of $0.16. Revenue for the quarter was $330.5 million, which compares to the estimate of $324.20 million.

Highlights From CRM's Q3 Conference Call:

• Sees Q4 EPS of $0.14-$0.15, versus the consensus of $0.15, on sales of $340-$342 million, versus the Street estimate of $334.58M million.
  
• Sees FY11 sales up 15-16%.
  
• (CEO) Revenue grew 20% from a year ago to approximately 331 million and this result was well above our outlook entering the quarter, primarily because of improvement in new business demand and lower attrition.
  
• At this level, our annual revenue run rate is now more than 1.3 billion.
  
• Perhaps the most exciting part of our quarter was the improvement we saw in some of the key growth drivers of our business.
  
• On a year-over-year basis, new business performance was up in Q3 and was our best growth quarter of the year. As a result, we now expect new business for the full year to be flat to slightly up.
  
• Customer demand for our services has never been greater. During Q3, we added a record 4,700 net new customers. That's 500 more than we've ever added in a single quarter.
  
• In all, our global customer community is now more than 68,000 customers. Despite this challenging
  economic environment, we're up 30% from a year ago.
  
• We also won other major transactions at a long list of new and existing customers including Akamai (Nasdaq: AKAM), ING Australia (NYSE: ING), Net One Systems, the U.S. Census Bureau, Avaya and EMC (NYSE: EMC).
  
• We also had success against Microsoft (Nasdaq: MSFT) in Q3 at MCSI, Needham and Company, Den-Mat, Vital Images, Ashworth College in Nevada.
  
• We also teamed up with Cisco (Nasdaq: CSCO) to offer a complete cloud contact center solution.
  
• This is a breakthrough in cloud computing and really is evidence of the power of having a multi-data center architecture. We have three major data centers now that are production in Singapore, on the West Coast and the East Coast of the United States.
  
• (CFO) International revenues grew more rapidly than in North America and international reached 30% of total revenues for the first time in salesforce.com's history.
  
• America's revenue was approximately $233 million, a year-over-year increase of 16%. Europe revenue was approximately $61 million.
  
• That's a year-over-year increase of 26% in dollars and 24% in local currency. And in Asia, revenue was approximately $37 million, representing dollar growth of 31% and local currency growth of 21%.
  
• GAAP gross margin for the quarter was approximately 80.2%.
  
• For the three quarters of this fiscal year, our operating margin is 9.4%, which is also up 330 basis points versus the same three-quarter period a year ago.
  
• We expect Q4 operating cash flow to be slightly higher than what we generated in Q4 last year. Free cash flow, which we define as operating cash flow less capital expenditures, was roughly $21 million for Q3. Over the past four quarters, free cash flow of $196 million translates into roughly $1.50 a share.
  
• Strong cash generation over the past year has created a cash and cash equivalents balance of 1.070 billion, approximately, at the end of Q3. That's an increase of just around $265 million from a year ago. This total cash balance equates to about $8.50 a share.
  
• Deferred revenue rose 16% from Q3 a year ago, but declined four million from last quarter to $545 million. In constant currency terms, the sequential decline was closer to $10 million after taking into account the roughly $6 million currency benefit we experienced in the quarter from the weakening dollar.
  
• Raising our full year guidance to approximately $1.29 billion. That's up from our prior estimate of 1.27 to 1.28. (Consensus is $1.28B)
  
• As far as profitability is concerned next year, although we haven't finished our detailed planning, we're not necessarily expecting our operating margin to grow at quite the same pace as it has for the last three years.
  
• (Q&A) We're occasionally running into customers that are indicating Salesforce.com has become a top three or a top five line item in their IT budgets. And in many cases, they say they're not scrutinizing it because of the value that is created. And I'm just wondering if you can comment on the role that Force.com is playing in terms of driving customers to purchase those kinds of ELAs or in creating other kinds of stickiness within the customer base?(A)Well, you're really touching on really our fundamental core product strategy, which is to cement ourselves as a position as a standard in the enterprise of our customers. Of course in many cases, we've started a smaller implementation or what we refer to a seed. We then talked about how we want to grow those implementations. And then we try to take those implementations and turn them into what we call ELAs, or enterprise wide agreements. The technology that you'll see released tomorrow and announced tomorrow - not released tomorrow, but announced tomorrow and released in the first part of next year. That - you'll see when we announce it and when we release it, I'll just give you a little preview into the strategy behind it, is an expansion strategy. It's all about - we've looked at the category that we think will accelerate users into the enterprise. How do we go from, if you will, a Trojan Horse strategy, where we've gotten through the doors and the horse is
  there in the middle of the city, but we want lots and lots of guys to come out of the horse. And to do that, of course, we have the Sales Cloud, we have the Service Cloud. We have a lot of custom applications. That's what you're seeing with these customers who have built these custom applications so that we - beyond sales and service users and into other things like recruiting and project management or order management and so forth. We have built an application that we believe will take us much, much, much further. And as we have detailed conversations about this, which I'm looking forward to tomorrow at lunch, you'll see and keep in mind during my keynote that the whole fundamental strategy, the product strategy, the packaging strategy, the pricing strategy, the feature strategy, the branding strategy - is to move our approximately 70,000 customers to be enterprise wide with us. We think the biggest expansion opportunities for growth and in our growth stance is with - in many cases, of course, within our own customers. Although we added a record number of customers this quarter at 4,700, we continue to make this a major theme of the company. It's how we compensate our salespeople. It's the work we do in these kind of cloud forces, where we schlep around the world to kind of keep reiterating our conversations. Because the reality is, customers are looking for new ways to manage and share information and they're tired of getting the answer from Microsoft. But more SQL servers. Buy more Visual Studio. Buy more Oracle databases. They're looking for new ways to do that.
  One of my big revelations when I went to Oracle OpenWorld, was - spectacular conference and it's hugely accelerated from when I was last there, which was actually in '99. But I was shocked that as I went up and down all the little escalators, that as I got to the bottom of a lot of escalators, I was greeted
  by an Oracle Exadata computer. And while I understand an Exadata computer is great for Oracle's strategy and I'm sure it's a high margin product and I'm sure it's high quality and well made. And the point, of course, for every Oracle customer, if they came down the elevator to look at the Exadata computer, and it had flashing lights on it and all these things, is buy one. And that's when I said, wow, this is a clear differentiation of strategy. Where certain vendors, their strategy is to sell you more hardware and more software, and continue to enrich their cash cows. Our strategy is no software, hardware at all. And I think the customers want that message and I think in this environment, need that message, and I think that's really helped us. And I think that you'll see from this quarter's results, that we have that. But keep this in mind, this point tomorrow, that this is our key strategy is that we want to be enterprise wide. When we go to our customers and there are certain - I was with a customer this week. I won't tell you who it is. They've got a few 100,000 employees. And we only have - we're in the tens of thousands of employees with them. And I'm like, how we get the other 270,000? And I have in the back of my mind, I think that this service that we are going to be releasing in the first part of next year, that we're going to announce tomorrow, is going to be a key way to do it. And I'm very motivated and excited and pumped up about it. And it's hard for me not to give you any clues. But I really believe, I really believe and I agree with you that our opportunity is enterprise wide, and that's where I have the mindset of our management team.

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