Executives: John Cummings - SVP, IR Marc Benioff - Chairman and CEO Keith Block - Vice Chairman, President and COO Mark Hawkins -

CFO
Analysts: Keith Weiss - Morgan Stanley Bhavan Suri - William Blair Kash Rangan - Bank of America Merrill Lynch Pat Walravens - JMP Securities Ross MacMillan - RBC Karl Keirstead - Deutsche Bank Tom Roderick - Stifel Sarah Hindlian - Macquarie Kirk Materne - Evercore

ISI
Operator: Good afternoon. My name is Torres, and I will be your conference operator today. At this time, I would like to welcome everyone to the Salesforce Fiscal 2018 Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session.

[Operator Instructions] Thank you. I will now turn the call over to Mr. John Cummings, Senior Vice President of Investor Relations. Sir, you may begin.

John Cummings: Thanks so much, Torres.

Good afternoon, everyone. Thanks for joining us for our fiscal second quarter 2018 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. With me on the call today 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. With that, let me turn the call over to Marc.

Marc Benioff: Okay. Thank you so much, John. I really appreciate it. And before I begin the script and talking about our quarter, I really wanted to review something that I sent to the Company last week, regarding some of the things that we’ve been seeing in the world. And I thought it would be appropriate if we just took one minute and just allowed you to hear these words as well.

As the world has watched with all of us the horrors of the last week taking place in the United States and Spain. The pure hatred that we have seen displayed is everything we all want to end. And I’ve been especially disheartened to see the display of symbols of hatred including Nazi flags and salutes to KKK hoods. The horrible tragic death of Heather Heyer was a senseless act of terror and this hatred must end now. Salesforce is a company that is built on the values of love, equality and generosity.

We work hard every day to improve the state of the world through our own work and promote our Company’s mission to others. We all have to recommit to our own personal acts of love and kindness as this is the only way to fight this pure hatred. We can all make our own choices between love and hate, and we can all love more. Now is the time for all of us to remember, love thy neighbor as thyself. Okay.

Thank you very much for allowing me to say that. And now, I’d like to move into the quarter. We had our best quarter ever and we reached a huge milestone for the company. As you might remember, two and a half years ago, I talked about our dream of surpassing $10 billion in revenue. And at that time, we were just on a $5 billion revenue run rate.

While I can remember how many employees and customers and partners came up to me and said there is no way you are going to get to $10 billion. What kind of a dream is this? And now, I am absolutely thrilled that in the second quarter we broke through the $10 billion run rate, doubling the Company in such a short time. Now, Salesforce is the first enterprise cloud software company in the history of the industry to reach the $10 billion run rate. No competitor has pierced $10 billion this fast, not Oracle, not Microsoft, not SAP and certainly not which has $15 billion of deferred revenue on and off the balance sheet. This makes Salesforce the fastest growing enterprise software company ever to reach this milestone.

And this incredible achievement is now coupled with an incredible dream. We now set our sights on $20 billion and doubling the Company again. And you can see today how we can get there organically with our unmatched product portfolio, world-class team, and as I mentioned $15 billion in booked business on and off the balance sheet. While this was a phenomenal quarter of growth, we continue to improve our profitability, executing at scale and we remain the fastest-growing of all the top five enterprise software companies. Now, let’s talk about some of the highlights of the quarter.

Revenue for the quarter rose to almost $2.6 billion, which was up 26%, and we are heading fast to $20 billion in revenue. As I mentioned, we have more than $15 billion in booked business on and off the balance sheet, that’s up 29% from a year ago. In fact, we added more than $3 billion to this balance since last year. Based on these strong results, we are raising full year top-line revenue guidance by $100 million to $10.4 billion at the high end of the range, 24% growth for this dream, and I will tell you personally, I’ve got dreams of 25%. This is the second quarter in a row we have raised our revenue guide by a $100 million and only the third time in our history.

Now, there is a reason for our incredible success year-after-year and why we continue to be investing at such an incredible rate to be the number one CRM company, is because no other company like ours has ever been as committed to customer success as Salesforce, and that’s reflected in how our customers are driving tremendous success for their customers. You all know that customer relationship management, whether it’s B2B or B2C, has already become the most important and fastest-growing enterprise software category, growing at nearly 14%, and that’s going to come for years to come. Well, it’s a massive $100 billion plus opportunity that Salesforce is leading, and we are in a phenomenal position going forward. We all see the $1 trillion CRM opportunity in front of us. Now, we see that by our -- through our number one position and that’s because we are number one in CRM, number one in sales, number one in service, number one in marketing, and we have the number one platform that we have a tremendous opportunity to deliver on these goals.

And we are delivering this at a scale every single day, creating nearly 3 million sales opportunities, more than 5 million customer cases sending 1.4 billion emails, processing 1 million purchases, and producing 40 million reports and dashboards every single day, that’s 1 billion reports and dashboards a month, by the way, all while delivering more than 5 billion platform transactions a day. And it’s no wonder that Forbes just named Salesforce the most innovative company in the world again. We were the first to bring innovations like cloud and social and mobile to CRM, and now we’re the first to deliver artificial intelligence to all of our customers with Einstein, right inside our core platform across all of our products. This is a massive $1 trillion growth opportunity. According to IDC, the combination of CRM and IA - excuse me, according to IDC, the combination of CRM and AI will create more than $1 trillion in new GDP impact worldwide; 800,000 net new jobs by 2021, amazing.

And we’re already seeing how Einstein is a game changer for customers, delivering hundreds of millions of critical insights, recommendations and predictions every single day. But, our biggest advantage is more than 27,000 talented employees of Salesforce, these incredible people who are focused on making our customers successful with our products. No other company can match this level of focus on the CRM market. All of this adds up to Salesforce, becoming increasingly strategic to our customers and to our partners who are trusting us to bring them into this incredible new future. You’ll hear more about that in a second from Keith.

While it’s only August, we’re officially on the road to Dreamforce, which is going to take place in San Francisco, November 6th through 9th, and it’s going to be the most exciting, most inspirational and most innovative Dreamforce ever. And I hope all of you can be there; you’re not going to want to miss one moment. Okay, Keith.

Keith Block: Thanks, Marc. Good afternoon, everybody.

As you can see from our results, Q2 was another outstanding quarter across the board. It’s clear that our strong execution and commitment to customer success are enabling us to build deeper and more strategic relationships with companies around the world of all shapes and sizes. And every conversation I have with CEOs, they mention growth as their number one priority, and getting closer to their customers is a key driver of that growth. That’s why leading companies like Amazon or 21st Century Fox, or Jefferies Investment Bank, Samsung, all of them chose Salesforce this quarter to drive their digital transformation. One of the largest automakers is also going wall-to-wall with Salesforce, building a seamless brand experience for consumers across all touch points and channels.

Today, 8 of the top 10 automakers around the world rely on Salesforce for their digital transformations. We also expanded with one of the world’s leading logistics and transportation firms to transform the way that they deliver service to their millions of customers worldwide across every channel, social, mobile and the web. We continue to establish and grow relationships with marquee brands and unlock new value for customers by delivering innovative solutions and executing on three key priorities, expanding internationally; focusing on industries; and growing our partner ecosystem. Now, our international growth continues to represent a huge opportunity for Salesforce as we march towards that $20 billion plus goal that Marc mentioned. We continue to make significant investments in our international go-to-market resources, our operations and our infrastructure to serve our global customers.

In fact, more than 40% of our new hires year to date have been outside the United States. And in Q2, Salesforce went live on Amazon’s cloud infrastructure in Canada, very, very exciting. Customers can now access Salesforce locally via the AWS Canada Region. And Amazon continues to be an incredible partner as we expand in Canada as well as Australia. These investments contributed to our outstanding international results this quarter with constant currency revenue growth of 31% in EMEA and 27% in APAC, complementing our strong and consistent growth of 24% in the Americas.

In APAC, we had a very strong quarter in Japan, closing deals with established companies including Toshiba and Nomura, and we had some great winds in Australia with Queensland Urban Utilities and Australia Post. In Europe this quarter, we entered into new relationships with Kering, one of the world’s top luxury groups. I think everybody was excited about that one. Salesforce will be their clienteling solution across all of their brands including Gucci and Yves Saint Laurent. We also expanded with Carrefour, the region’s second largest retailer, formed a new relationship with Groupe Auchan, and we close a strategic Commerce Cloud deal with Sephora Europe.

All good stuff, and clearly the leading retailers of the worlds continue to turn to Salesforce. In fact, companies are coming to Salesforce as their trusted partner in digital transformation. Speaking of trust, we’re committed to helping our customers comply with the forthcoming GDPR, including a GDPR website, a new trailhead module and the contractual addendum to assist our customers with compliance. This fall, we will be publishing product specific best practices and we will have several sessions at Dreamforce. Now, let’s turn to industries.

You’ve already heard about our momentum in retail, we had a great quarter with retail, and we’re very, very proud of those results, but we’re also expanding our relationships in financial services with Hero Price [ph], New York Life, and HSBC. Hero Price [ph] chose the financial services cloud to deliver personalized, highly relevant service to clients across every channel. New York Life, a great customer doubled down rolling out Sales Cloud and Service Cloud to another 6,000 agents and customer service specialists. And HSBC will leverage Marketing Cloud globally across its retail and wealth management divisions to create personalized banking experiences for their customers. In the public sector, the Department of Veteran Affairs which is working hard to improve services for veterans expanded with Service Cloud analytics and platform in the quarter.

Lastly, in health and life sciences, we had a very large expansion with one of the top pharmaceutical companies in the world. And today, 15 of the world’s 20 largest pharmaceutical firms rely on Salesforce. Our success in the quarter was driven by our ability to speak the language of our customers and that is translating into outstanding industry momentum for us. Now, as Salesforce grows, so does the opportunity for our partners. Salesforce partner certifications have increased 5x in the last four years, and partners are investing more in their Salesforce practices.

Accenture is actually a great example. In Q2, they expanded their Salesforce capabilities in the federal market and they are also leveraging the Salesforce platform to provide vertical solutions across many industries. I’m sure, you all saw the announcement that Accenture will provide trade promotion and marketing operations for Unilever, all of which is built on the Salesforce platform. Now, before I close, I want to give you a quick update on the integration efforts. We’ve moved quickly to integrate both products and operations across the companies that we acquired in FY17 including Demandware, Quip and Krux.

And it’s clear that our integration efforts are absolutely paying off. In the case of Demandware and Krux, these products did not only enhance our B2C product offerings and expanded our total adjustable market but they also accelerated our growth. So, to close, I would like to thank our partners and our customers for their continued trust in us and of course our 27,000 employees who are laser-focused on making our customers successful every single day. Now, I would like to hand the call over to Mark Hawkins who will share a bit more about our financial execution in the quarter. Mark?

Mark Hawkins: Thank you, Keith.

And as you’ve heard from Marc and Keith, we delivered a great second quarter. Revenue grew 26% in dollars and 25% in constant currency, excluding a year-over-year FX tailwind of approximately $7 million. We also saw a sequential tailwind of approximately $23 million. Our portfolio of products performed extremely well in the quarter with balanced year-over-year revenue growth across the board. Sales Cloud growth accelerated to 17%, driven principally by core Salesforce automation and continue traction of Salesforce CPQ.

Service Cloud continued to outpace the market with 21% growth. This is a slight uptick in growth from last quarter, reflecting the investments we’ve made in the product and sales enablement. Platform and Other grew 32% where we saw especially strong growth from Heroku. Marketing Cloud excluding Commerce Cloud grew 36%, touching the $1 billion run rate this quarter and Commerce Cloud contributed $63 million to total revenue with $51 million in subscription and support revenue. Dollar attrition for the second quarter excluding Marketing Cloud and other acquired businesses remained below 9%.

We expanded our second quarter non-GAAP operating margin by 195 basis points year-over-year. In the quarter, operating margin benefitted from an FX tailwind that was roughly offset by a margin headwind related to the fair value adjustments of Demandware. Non-GAAP EPS was $0.33, which was up 38% over the last year. Operating cash flow was $331 million, up 32% over last year. Deferred revenue ended the quarter at $4.82 billion, up 26% in dollars and 25% in constant currency, excluding an FX tailwind of $32 million.

On a sequential basis, deferred revenue benefitted from an FX tailwind of $17 million. Commerce Cloud contributed $54 million to deferred revenue in Q2. Moving on to guidance, starting with revenue. Coming out of another quarter of outstanding performance, we once again are raising our full year FY18 revenue guidance by $100 million to $10.35 billion to $10.4 billion for 23% to 24% growth year-over-year. We are also raising our FY18 GAAP diluted EPS guidance of $0.07 to $0.09 and non-GAAP diluted EPS guidance of $1.29 to $1.31.

It’s important to note that coming out of a strong second quarter, we are accelerating our investments in expanding our distribution capacity, new product initiatives, and Trailhead. These investments are set up for the long-term growth while pressuring our near-term margins. Nevertheless, we remain on track to deliver a 125 to 150 basis points of non-GAAP operating margin improvement in FY18, despite a slight FX headwind. These investments are critical to sustaining our long-term growth and leadership in the largest and most important marketing and enterprise software. And at the same time, we are mindful of how important profitability is to our investors.

And we remain committed to ongoing margin improvement year-after-year in our long-term non-GAAP operating margin target in the mid-30s. Turning to cash flow. We are maintaining our full-year operating cash flow growth guidance of 20% to 21% year-over-year. Among other items, guidance considered one, strong new business in the second quarter, which drove higher cash commission obligations; and two, the fact that Q4 is our second largest cash collection quarter. So, without the benefit of that quarter, it’s difficult to further refine its full projection at this time.

That said, we are closely managing our capital expenditures in the second half of the year and now expect FY18 CapEx as a percent of revenue to be approximately 5%. In context, we expect free cash flow to grow faster than operating cash flow for the full year. For Q3, we are expecting revenue of $2.64 billion to $2.65 billion; GAAP diluted EPS of $0.04 to $0.05; non-GAAP diluted EPS of $0.36 to $0.37; and year-over-year deferred revenue growth of 18% to 19%. This deferred revenue guide reflects the continued deepening of invoicing seasonality that we’ve been discussing for the past several years; and as a reminder, the same seasonality also impacts cash flow. And one final item, we’re on track with our implementation of ASC 606 for Q1 of next year.

We expect to talk more about this at our Analyst Day at Dreamforce on November 7th. If you’re interested in attending, please reach out to our Investor Relations team. So to close, our second quarter wrapped up a great first half of fiscal 2018. I’d like to thank our employees, our customers, our partners, and our stockholders for their continued support. And with that, we’ll open up the call for questions.

Operator: [Operator Instructions] Our first question is from the line of Keith Weiss Morgan Stanley.

Keith Weiss: Thank you, guys, and very nice quarter. And also, Mr. Benioff, thank you for those comments; definitely, I think needed in these times. I wanted to ask a little bit about sort of the margin profile for FY 2018, sticking with 125 to 150.

It’s evident that with FX getting a little bit easier into the back half of the year, you guys see something from that to move for investment? [Ph] I was wondering if you could drill a little bit on the decision to sort of keep operating margin guidance where it is. And may be as a follow-up. What are those incremental investments you’re planning on making to the back half of the year to offset that FX alleviation or the pressure.

Marc Benioff: Thank you very much for asking that question. I think that when we think about earnings, and obviously we have this incredible top line growth, and there is one word that really comes to mind and that’s balance, which is that it’s incredibly important as we grow our company and exceed these incredible revenue targets that we also continue to grow our bottom-line.

And I am sure that Mark will address the specifics of how much we’ve grown our bottom line in the last few years. But one of the things that continues to be on our minds is, how -- what are the ways that we can grow our margin while also continuing to grow our top line, and we’re absolutely committed to doing both. And I think that’s on the mind of every single member of our management team. I think we’ve continued to deliver those numbers actually very well and we’ll continue to do that going forward. And that’s also under the guise of pressure that we get from foreign exchange, like every time the euro increases, its valuation that puts more pressure on our bottom-line.

Mark, do you want to address?

Mark Hawkins: Sure. I am happy to do that Marc. Thank you Keith for the question. I will address both parts of it, Keith, one is the margin and one is the specifics of where we’re investing. The first thing I just want to clarify is that for the full fiscal year, we’re seeing a slight headwind from an FX standpoint for the full fiscal year.

That’s one point I want to clarify. We’re maintaining the 125 to 150 basis-point improvement, again that’s consistent with what the guide has been on a larger base now, as we raise the revenue and other $100 million; second time we’ve raised a $100 million as you know, it’s on a bigger base and consequently we’ve raised the EPS by a $0.01. And what we looked at in terms of the opportunities, we looked at the big opportunity that Marc has talked about of over a $100 billion in TAM, and we see that opportunity with unit economics that are very attractive in the mid 30s in terms of unit operating margin economics. And so, we’re pursuing that. Obviously, we’re investing and accelerating investing in distribution capacity, number one, Keith, very specifically; and also in new product initiatives, number two; and also Trailhead, number three.

These are three things very specifically that we’re doing to really help us even in the growth beyond this current year. And so that is something that we’re mindful of because this opportunity is very, very large, as we described. As Marc called out, this is the fourth year in a row of operating margin expansion. We are mindful of that. We are very focused on delivering this 125 and 150 plus the growth.

Hopefully that gives you a little complexion of both.

John Cummings: Keith do you want to address …

Keith Block: Yes. I think that Marks have done a very good job articulating what our strategy is here. I think at the end of the day, we see the opportunity in the marketplace. We are already the market leader and we are expanding our share.

We are taking share. But we do see that opportunity. So that means that we have the opportunity to invest and continue to invest in our innovation, in our infrastructure, in our customer-facing assets, to capitalize on that opportunity. And that’s exactly what our strategy is.

Marc Benioff: I’d like to think of this investing in growth by design and enhancing our profitability every step of the way.

Operator: Our next question is from the line of Bhavan Suri with William Blair.

Bhavan Suri: Hey, guys. Thanks for taking my questions. And to Keith, Marc Benioff, thank you. Thank you for those comments.

It was meaningful. I guess, I’d ask my two questions quickly. One is, you’ve seen acceleration now for a couple of quarters in Sales Cloud, Service Cloud accelerated despite the very, very healthy growth last year, Marketing Cloud on organic basis doing really well. If you were to think about the breakout outside the cross-sell, meaning how are these clouds doing on their own? Because obviously, cross-sell in Keith’s business of sort of doing the enterprise deals is helping. Is there any way to understand sort of how these are doing on their own? I’d like to get a little color on sort of pure Sales Cloud without sort of the cross-sell and its growth.

And the follow-up question I had was one of the challenges you’ve had over the years is sales people entering data into a CRM system and obviously Salesforce had a huge step forward above Siebel and Bon [ph] and Legacy Solutions and now Lightning has enabled that. What do you think sort of -- Marc, as you think about sort of acquisitions or organic strategy, like natural language processing, talk to systems as for sales guys enter data themselves is a path you will go? Just wanted to get some color on both of those? Thank you.

Marc Benioff: Well, let me take the last question first, which is that Salesforce actually gets its data from a lot of different places. More than half of the transactions, when we talk about 5 billion transactions a day, more than half of those transactions are API transactions already, that’s other computers filling our database with data. And we have just amassed a huge amount of customer data based on that.

We have so many integrations and so many customers so deeply integrated. And then there is many different ways that customers get their information into our system. Of course, we have many natural language type systems like one you mentioned, voice type systems like you’ve seen us do work with Alexa, with Amazon and I think you will continue to see an evolution of that. One area that I am especially proud of is mobile. I don’t think any enterprise software company has done as good a job with mobile as Salesforce.

Salesforce has -- with Salesforce1, with My Salesforce1, Salesforce Inbox, many of our mobile offerings and mobile platform capabilities, more mobile capability than any other enterprise software company. And that has really allowed customers to access and work with an input data in lots of new ways. Because mobile devices are empowered and enabled to so many kind of, I would say, next generation capabilities including many operating systems that have very deep AI, as you know, all of that is already tied into Salesforce. So, it’s a very extremely powerful.

Keith Block: Let me try to address the first part of that question.

So, it’s interesting. I think if you look at the history of software, most companies are lucky to have a great first act but Salesforce is a company that’s had a great first act with Sales Cloud, a great second act with Service Cloud, a great third act with Marketing Cloud, a great fourth act with Platform, and we continue to innovate for our customers and we speak the language of the customer. So whether it’s pure play cloud innovation with add-ons or just pure play features and functions, or it’s the solutions that we assemble by vertical, the financial services industry was particularly strong one for this quarter, we have this retail as with HLS. This gives us the opportunity to cross sell and up sell. So, each of these clouds by themselves would be the largest cloud company in the world or amongst the largest cloud companies in the world.

So, standing alone, they’re very, very, very strong, they’re each a market leader. But when we have the opportunity to drive digital transformation for CEOs, the walls between sales, service and marketing come down. And we have the right solutions and that’s why you’re seeing these results.

Operator: Our next question’s from the line of Kash Rangan with Bank of America Merrill Lynch.

Kash Rangan: Let me echo my congratulations, one for Marc Benioff, one for Mr.

Hawkins. Marc, when you look at your goal to double the Company size to $20 billion in revenue organically, historically you’ve seen some of your peers like SAP Oracle struggle to maintain that hyper growth once they hit the $10 billion mark after the ERP cycle ended. What have you been able to observe from history that gives you the confidence that you can overcome those odds and position Salesforce to be an organic growth company, even at that level at which Oracle SAP could not maintain their growth rate? And one for Hawkins. I calculated your bookings margin. By the way, your bookings growth rate included the off balance sheet backlog change and the on balance sheet for revenue.

Your bookings grew about 39%, fully spectacular. And I also calculated your bookings margin to be 30%. And I was intrigued when you said your unit economics were running in the mid 30s. Just wanted to clarify and see what you meant by that. Thank you so much.

Marc Benioff: Yes. Thanks for that, Kash. I think that number one for us, here we are, we’re blasting through $10 billion, all of you have your models for Salesforce, you can plug these preferred revenue numbers into your models and do your calculations of where our revenues going to be in each of the next several years. And I’ll tell you, we took our whole management team offsite two weeks ago to lay out our plan for what we call chapter three. Chapter one for us certainly was zero to $1 billion, it’s well documented in the book Behind the Cloud, how we did it, what we did, all of those capabilities.

We want to write a second book now for entrepreneurs of what we did from $1 billion to $10 billion. We think that’s an important story that needs to be told. That’s certainly chapter two. Now, we’re in chapter three, which is to go from $10 to $20 billion. And I’m sure all of you can see that’s going to happen in fairly short order.

I think that one of the things that we have done to focus on and make sure that we blast through $10 billion is to focus on customer success. I think a lot of mistakes that the other entrepreneurs have made and I can go through each one. In enterprise software specifically, it’s not to really double down at this point, again on the customer. Get absorbed in your own myopia, get absorbed in your corporate politics, get absorbed in your corporate bureaucracies and yourselves, and try to break out of yourself and recognize the most important thing, continues to be the customer. And how do we enable that customer and empower that customer and of course, we’re going hold ourselves accountable and we’re also going to deliver all kinds of other capabilities along the way as well.

But, that is really our focus, which is how do we make our customers more successful than ever. And I think that’s the heart of our culture. We have a great culture at Salesforce, it’s a culture built on our core values of trust, of growth, of innovation, of quality. But I think nothing is more important to our Company than customer success. And even though the vast majority, let’s say half of the 27,000 employees that work for us today probably were not with us two years ago.

So that is something that we really have to spend time with them at. We’re different than other software companies because we really care about that customer and we’re going to make sure that customer is successful. When you’re an enterprise software, you have to realize, it’s hard work, not everything is going to be perfect all the time, there is going to be problems. That’s why being so committed to the customer I think is more important than ever. And I think that’s why you’re going to see extraordinary growth for years to come, because of this culture that’s really driving it forward.

And then we coupled it with this incredible CRM opportunity. And I have to say our competitors have really done a horrible job in last few years. I just would say that a lot of them have abandoned the CRM market. If you talk to the major CRM analysts and we do that, we just had one of them at our management conference, they are shocked, we’re shocked of how these companies have really walked out of the CRM market, companies that had huge multibillion dollar positions in the CRM have ceded that market to us. And that’s very exciting when you look at the huge investments that we’ve made, not just in product but also distribution.

More than half of our organization is a customer-facing organization. We sell directly and service directly to the customer. That is going to serve us very well for years to come. So, I feel very good and I think you can see it in the numbers here. As I said, we’re here forecasting 24% growth for the year that’s our official guidance.

I have personal dreams of 25%. I think that would be amazing. No software company kind went through the $10.4 billion number at these rates. And so, when we chart, we had a chart couple of weeks ago, Microsoft’s growth over 30 years, Salesforce’s growth, Oracle’s growth, SAP growth and wow, we really separated ourselves from those traditional growth trajectories. And I feel that that’s going to continue to happen.

Mark Hawkins: So, let me take the second part of the question. Kash, thank you for the question. Kash, I haven’t seen the modeling that you’ve done but let me disclose what we disclose, which is around the total book of business, we have billed and unbilled deferred revenue totally at $15.2 billion; the billed portion of course grew 26%; the unbilled portion grew 30% to make up that that total amount of our business. And as we like to think about, that total billed and unbilled deferred revenue is obviously revenue waiting to happen over time. The one thing I would say to you about the unit economics, if we go back to our Dreamforce presentations for the last several years, we talk about life time economics, the cost of book, the cost to serve and then what that results in over time is in the mid-30s in terms of the unit economics at mature growth rates and that’s what we see very specifically.

That’s what I can share with you. And obviously that’s against the $100 billion market that we’re pursuing. So, that’s what I would share.

Operator: Our next question is from line of Pat Walravens with JMP Securities.

Pat Walravens: Marc, first of all, thank you for sharing that message and for standing up for what’s morally right.

I mean that’s great to see from corporate America. What I would love to hear is your thoughts on the platform strategy, how the environment has changed and how you think the platform strategy should evolve over time?

Marc Benioff: Well, the platform strategy has evolved over time. I mean, one of the cool things for us is we have a tremendous capability with our platform. And that really started with this idea that we are building these amazing CRM apps like sales and service app but our customers wanted apps really designed for them. The traditional approach has been companies building vertical apps, almost from the get-go and creating these customizations and enhancements right inside the hard line code.

That never sat well with me, mostly because my background was in application development and deployment tools. So, we really built our platform in a way that let us build our core applications and let our customers extend them. And that is why so much amount of data has been built inside of Salesforce. I don’t think a single customer has the same implementation of Salesforce. And yet when we upgrade and update our software which we do three times a year, we don’t break links and we don’t break these customizations, and customers get Einstein and mobile and all of our enhancements and yet they have their highly customized capability, no other company in the world has that.

Even today when most companies upgrade and update their core applications even in the cloud, they don’t upgrade all customers democratically, they kind of give customers warning bells that we are going to do this but it’s going to break your system. We don’t do that. We have a way through our metadata architecture to really extend that. And then, as we have acquired companies, we have brought that platform religion to them. So, when we look at all of our core products, they all have core platforms.

Platforms are incredibly important because they let customers enhance their system in highly specialized way. Platforms are also extremely important because they drive down attrition. I think as we -- we just ran our numbers for this management conference that I mentioned, two weeks ago, if you look at our attrition rate over the last 10 years, one of the reasons we drive it down is because of our platform. I think one of the reasons we have been able to deliver so quickly this amazing work and financial services that Keith has led, which is the building of our financial services cloud and our financial services business unit is -- and our success in financial services is because of our platform, rapidly. When we figure out a market or capability that we want to have or focus on, we can rapidly deliver that.

That’s also true with Keith’s healthcare initiative as well. And that I think has been a very powerful part of our approach. Our platform is unique, because not only of course do we have our core platform, which includes our Sales Cloud platform and our Service Cloud platform and our Marketing Cloud platform but we also have extensions of that platform like Heroku, which is one of the most powerful and popular application development and deployment capabilities on Amazon. And we of course have tightly integrated that into our core platform. So, customers for example, I’m wearing this amazing new Louis Vuitton watch today.

And this Louis Vuitton watch is connected to something called LV Pass, which is the Louis Vuitton app that helps me manage all of my Louis Vuitton products. And that is built on Heroku. And then all of the CRM data for Louis Vuitton however is built and managed inside our core platform, and all of it is deeply integrated. So, when I walk into a Louis Vuitton store, they know who I am, they know all the products that I bought like the watch, or my carryall or whatever it is that I like of their products, and I am managing it all through that Heroku app on my phone with all LV Pass. That’s a great example of our platform strategy where we let customers build highly complex applications like Louis Vuitton with their icon app and you can see that inside any Louis Vuitton store when you go into work with a Louis Vuitton account executive and you can see it yourself as a consumer with Heroku when you use LV Pass on your phone.

I hope that answers your question.

Keith Block: I think it’s great. At the end of the day the other thing is our partners, our ISV community. If you look at the explosion of our ISV community, we’ve now gotten into a situation where our ISVs are building mission critical apps. Just a few short quarters ago, we made an announcement of a company that’s actually building a clinical trial management software, which is pretty interesting, again on top of our allocation.

You probably saw the Unilever announcement most recently with Accenture about Accenture building CPG related applications on our platforms. So, it’s very, very robust for our partner community. And of course, we have our largest ISV, which is Veeva, which is unique in the sense that it focuses just on pharmaceutical firms.

Operator: Our next question is from the line of Ross MacMillan with RBC.

Ross MacMillan: Thank you very much and my congrats as well and thank you Marc Benioff for the comments.

One for Marc Benioff or Keith to start with. Just on Einstein, I know it’s early days. But, we started to see some bigger customer announcements like Airbus and U.S. Bank. I am just curious as to when you think Einstein actually will start to have a material impact on your numbers, on the results? And then a follow up for Mark Hawkins.

Just, we raised revenue for two quarters here, we raised EPS for two quarters here but we didn’t raise the cash flow from operations growth guidance. And I just wondered if you could revisit that as to why. Thanks.

Marc Benioff: Yes. I mean, I think Einstein has hugely exceeded our expectations.

And I would say from my perspective, it’s already material part of our results. I think it’s a critical part of how we differentiate our product against now all of our competitors because we’re the first company to take the robust AI capabilities including machine intelligence, machine learning and deep learning, and offer that to our customers in a unified CRM platform through our sales, service, marketing applications, commerce applications across the board. That has really happened faster than we expected, more deeply than we’ve expected, and it’s been more exciting for our customers than we expected. I think also, the branding choice that we made with Einstein also exceeded our expectations because it let us rapidly communicate to our customers that we’ve extended our core platform with artificial intelligence. As we kind of head towards Dreamforce, you’re going to see a lot of exciting things.

With AI, I have seen some amazing things. In financial services, I just saw some amazing things in healthcare; I am not going to go into the details on the call because some of the results are still early. But, we’ve seen some amazing breakthroughs in using artificial intelligence with healthcare. I think this is going to be one of the huge new drivers of growth. You can see that the cloud is a huge driver of growth for Salesforce, mobile is a huge driver of growth for Salesforce, and now you’ve got AI as this next generation system.

And every company has to look at what are they using -- what are they doing with AI to make their customer relationship better. I just gave you the story about Louis Vuitton. Einstein is built into all of those apps. And I can tell you that helps that Louis Vuitton account executive when I walk in the store; they are able to give me that next best offer. I think it’s probably one of the reasons that we already closed at Kering Group in this quarter, another incredible luxury brand family with Gucci and Bottega Veneta because we’re able to offer these companies the ability to have much better, much smarter relationships and do it so unbelievably quickly.

I also just bought some amazing new sneakers on Adidas and called Primeknit Shoes, checked out some of the stuff they have or some of the stands that tennis shoes or other Yeezy 350s that they have on the Adidas and a lot of the recommendations and capabilities that you are getting already on the platform are through Einstein. So, Einstein is an incredible advancement and it’s great for all of our clouds. And again, I don’t think the other enterprise software companies that moved fast enough into artificial intelligence.

Mark Hawkins: And let me pick up the second part of the question, Ross. Thank you for that.

A couple of things here, one is our guide. You are absolutely right. We are holding that at $2.6 billion, roughly speaking. Really two things that I would elaborate on. One is that we have a very distinct seasonality in Salesforce.

We get a lot of our cash in Q1 and then the other big cash flow quarter is in Q4. And so, at this time, with the line of sight that we have, I think it’s better to wait and get better visibility than we have today. We think it’s a very solid guide and we will revisit that in November, number one. Number two, I would say to you that, I did call a little bit earlier in the call, but I’ll elaborate a little bit. We had deferred commissions, the obligations on that on a cash basis because we had a strong book of business in Q2, having effect in the year even if the expense is capitalized over a longer period of time.

And so, obviously, we try to factor things like that into it. I would say the third point is just as a matter of reference, if you look at our trailing 12-month operating cash flow and revenue growth, they are pretty close together, looking back. So, that’s where we are at today. We think it’s appropriate. And lastly, we are managing our CapEx tightly and we will talk again in November.

Operator: And our next question is from the line of Karl Keirstead with Deutsche Bank.

Karl Keirstead: Thanks. I’ve got two questions on two backlog numbers. First is the 30% unbilled backlog you put up, that’s a fantastic number because it’s actually accelerating I think over the last couple of quarters, despite that number getting larger. So, I am wondering, if you could offer any added color, maybe there was more multiyear deals, some larger deals? And then secondly is the 18%, 19% 3Q DR growth.

I guess this one would be for Mark Hawkins. Mark, you mentioned that’s due largely -- it’s obviously less than normal seasonality. Is it due entirely to the invoicing seasonality, may be something else going on? I know Dreamforce drops in 4Q this year rather than 3Q. Does that pick any zip out of your 3Q DR growth? Thank you.

Marc Benioff: Sure.

Let me jump in and then maybe Keith or Mark might want to add on the first one and I will close loop on the second one on the 18% and 19%. You are absolutely right, Karl. The unbilled deferred revenue at 30% is a slight acceleration and a very, very big number in terms of growth. We have -- I think it’s really reflective of a strong business that we’ve been describing, that Keith has been describing in his dialogue, a large sort of deals over a long time but just overall health, across geos, [ph] across clouds. Keith, if you want to jump more into that, but I think the 30% is a slight acceleration.

Karl’s absolutely right. If you want to add any more commentary, I will circle back to 18% and 19% DR.

Keith Block: I think at the end of the day, the strategy around the innovation of our products is very, very compelling and we’re backing it up with incredible execution. So, I want to take you back to our three growth levers of international strategy, speaking the language of the customer, which is the industry orientation of course and our partner strategy. And all of three of those are just executing beautifully right now.

We’re very, very proud of the team. And that results in very deep relationships, very strategic relationships, multi-year relationships, multi-cloud relationships across all these different verticals, and that’s why you’re seeing this bit of an uptick. It manifests itself in small companies and large companies, but certainly we’re establishing or we continue to establish these very, very deep multi-year, very strategic relationships with these customers and that’s why you see these financial results.

Marc Benioff: Thank you, Keith. And let me just pick up the second point, Karl.

In terms of the DR of 18% to 19%, this is really about the deepening invoice seasonality, it just continues. And one of the things that I would call out to everyone and I think just to share with you is that we have 12 years of history on our webpage, our IR webpage with supplemental information that shows every quarter for 12 years and the sequential impact because this has been a topic we’ve been trying to share at Dreamforces for the past several years. But you can actually see the math and even fit in the guide for this quarter, and it really shows us deepening invoice seasonality continues. And the other thing that I would add and I do think there is one little extra bit of color that I would like to add, Karl, which is look at that trending just as it is and then you take a look at the fact that last year in Q2 2017, we had a seasonally soft Q2 2017 and we had a seasonally strong Q3 2017. And so, you put that and you look at that results delivered at minus 9% quarter-on-quarter and you’ll see it perfectly on the graph but then you put it in juxtaposition to this year in Q3 2018, we have a -- obviously we’re appropriately guided and we had a very strong Q2.

So, those are the things to think about as well the bottom line and that’s where we’re at, that’s what you should consider.

Operator: Our next question is from the line of Tom Roderick with Stifel

Tom Roderick: Thank you for taking my questions. Nice job on the results. So, Keith, you referenced a great third act here in your Marketing Cloud. And if we look at the numbers, I think you said 36% growth, when you strip out the impact of Demandware.

So, can you just talk a little bit more about what’s driving that? What sort of role is the Krux DMP playing here? And then, how is the Demandware integration is going to serve to pull through core growth on the marketing side around the B2C business? Just love to hear little bit more about that. Thank you.

Keith Block: So, there is a lot in there. So, I appreciate the question. So, let me just start by saying that we’re absolutely thrilled with the acquisitions that we’ve made.

And they have worked out very strategically, not just in our financial results but more importantly with our customers driving success. If you think about the product portfolio and our pivot here towards more vertical orientation, the assembly of Marketing Cloud plus Krux plus Demadware/Commerce Cloud is a very, very nice portfolio. If you think about the companies that we’re doing business with, we talked about Kering, we talked about Carrefour, we talked about Groupe Auchan, we talked about Sephora. I mean, we just continue to bring up quite a roaster of some of the world’s leading retailers. And it’s not just retailers by the way, because every company is trying to go from, for example B2B to B2B2C or directly to B2C, and that’s where they are buying for our vision and what these products bring to bear.

So, they are clearly resonating from a transformation perspective with these customers, not just in retail space but in other companies who are trying to become more consumer-oriented. We’re trying to get more insights around their customers or just connecting to the customers, like they have never been able to do before. As far as the integrations are going, we’re thrilled with the way that the integrations have gone. I think we all know that integrations can be difficult, they can be fraught with risk, there is lots of complexities associated with those integrations. And we’ve certainly cut our teeth on a number of acquisitions.

And no integration is perfect but I will tell you with Krux and Commerce Cloud, we’re thrilled with the way those integrations have gone. And we continue to invest in those products more than those companies would have invested in themselves had they remained standalone. And again, you’re seeing it with the market penetration. Just to give you an example, Marc alluded to earlier that we’re investing in our second half. Well, one of the things that we’re doing is we’re doubling down on the Salesforce associated with the Commerce Cloud, because we see the opportunity for that particular product.

So, the net-net is, I think we’ve assembled a really course at our products whether its Krux across individually, whether its Marketing Cloud which has performed marvelously for us over the last four years or whether it’s a Commerce Cloud acquisition that is resonating with our customers, and that’s why you’re seeing such great results.

Operator: Our next question is from the line of Sarah Hindlian with Macquarie.

Sarah Hindlian: I wanted to get to few areas with both Marks. I will start with you, Marc Benioff. I want to pick your brain on the overall macro backdrop and how you’re seeing in particular the federal vertical? Are you seeing anything going around potential debt ceilings and anything there in regard to the federal strategy? And then, for Mark H.

Hi, Mark. I wanted to talk to you a little bit about the channel work we’re doing and finding, which has some nice early ASP uplift from new adopters of Einstein, in particular in services, sales as well. So, I really want to talk to you about, what is your Einstein strategy, where it’s evolving, and how you see that uptake impacting the financials going forward?

Marc Benioff: First of all, I think you can see this great win with the Veteran’s administration this quarter is an indication of the government vertical is working better than we expected. We’ve organized by specialized verticals, one I mentioned was financial services and built products there. We’ve also organized by healthcare, we’ve also built products there.

Third one is government and we built products there. And I think our win with the veterans this quarter, I think all of us know that nobody delivers better systems and better customer service than our veterans, and that’s why we’re so excited to be able to align with the agency to go to build these next generation systems for them. And I think we started to see government spending come back on line this quarter, really for the first time. And so, we’re very excited about what the future could mean, as the government looks to kind build next generation systems, looks to move to the cloud and provide better service and support to its customers.

Mark Hawkins: Okay.

And the second part, Sarah, happy to take this well here, and may be, Keith, you might want to jump in too on the channel work that we’re doing. I think the first thing I would say is that Einstein is early days sort. But with that being noted, to your point, we do see opportunity. Some of the Einstein capability is built into all aspects of our cloud. And some of it is incremental SKUs where there is -- the value is such that they’ll be incremental money on those SKUs as well to deliver that specific value.

And so, there will be a combination of those two. Everything gets smarter and then some things will have even more SKUs that will create even more solutions for our customers, which obviously, if done well, creates great growth opportunity for us. And that’s the way we think about it and I think that’s the way it will show up in the financials. And Keith maybe want to elaborate a little on that.

Keith Block: I want to go back to the Marc’s comments about the veterans administration.

Our public sector team is one of our highest performing organizations of the Company. And they’ve had over the last four years -- they have done incredibly well in terms of expanding their capabilities in all branches of the government, both federal and state and local. And that has been very, very exciting for us. I think we all know that the government is trying to undertake some sort of digital transformation. This is nothing new.

It actually started under the Obama administration. And the CIO under the Obama administration was one of our former employees. And he was very keen on introducing the cloud to the federal government. So, we’ve just picked that up and continued but it’s clear that the government is really trying to accelerate that digital transformation, and that’s why the veterans administration is yet again another example of trying to drive that transformation, leveraging our technology.

Operator: Our last question is from the line of Kirk Materne with Evercore ISI.

Kirk Materne: Keith, I want to follow-up on a comment you made around AWS and the partnership there in Canada. When we talk to some bigger financial institutions, data privacy has been something has come up as maybe something that’s been a bit of a gluing [ph] machine in terms of feeling comfortable adopting Salesforce. It seems that this partnerships are opening up that. And as you look across other geos, especially with financial services customers. Do you feel like that that partnership is going to give a lot of leverage and hopefully accelerating there some deals that were stuck on some localization questions? Thanks.

Keith Block: First of all, thanks for the question, it’s great to hear from you. So, look, we have a great partnership with AWS. They are one of our largest customers. We continue to build that partnership out with them. So, we’re thrilled about that.

And of course, we’ve chosen them as our platform in Canada and plan for the second half of the year in Australia. I think there is a lot of synergies there in the eyes of financial services customers as well as other customers outside of the industry. And we’re going to continue to leverage that. Some of these customers already are already AWS customers, so there is a natural comfort level as well. So, look, I think at the end of the day, how a strong partner, having a set of very strategic partnerships is a great thing, obviously AWS is one; we have strong partnerships with others like IBM as another.

And those things help to play out very nicely for our customers. But AWS, that relationship is strong and that just gives us a lot of flexibility as we continue to focus and expand internationally.

Marc Benioff: Yes. And as you mentioned, IBM, we continue to get more and more integrations with IBM. We’ve had some great early successes with Watson.

And our opportunities are to work with all of these amazing companies to deliver a solution that serves our customers. And I think we’ve been probably done a better job I think in forming the strategic alliances and maintaining them than probably any other company in the industry. And I think it’s one of the reasons we had such a great quarter. Well anyway, thank you everyone for a great call. And we couldn’t be more excited, as I said.

I think this is probably our best quarter ever. It’s far exceeded our expectations. We’re thrilled to raise guidance for the year and set our next dream as $20 billion, and here we go. Thank you.

Operator: Ladies and gentlemen, this does conclude today’s conference call.

You may now disconnect.