Good afternoon. My name is Ashley, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Salesforce fiscal third quarter 2016 earnings conference call. [Operator Instructions] I would now like to turn the call over to our host, Mr. John Cummings, Vice President of Investor Relations. Sir, you may begin your conference.

Thanks so much, Ashley. Good afternoon, everyone, and thanks for joining us for our fiscal third quarter 2016 results conference call. Our third quarter results press release, SEC filings and a replay of today's call can be found on our Investor Relations website at www.salesforce.com/investor, and we'll also post the highlights of today's call on Twitter at the handle, @salesforce_ir. With me today is Marc Benioff, Chief Executive Officer; Keith Block, President and Vice Chairman; and Mark Hawkins, Chief Financial Officer. Marc, Keith and Mark will share a few prepared remarks, and then we'll open the call for questions. 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. 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 recommend that customers listening today make purchase decisions based on services and features currently available. Some of our comments today may also 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 with our 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. And with that, let me turn the call over to Marc.

Well, thank you, John. And before we start and go into the call, which of course would go through our results, we want to let everybody know that our thoughts and prayers are with everyone in Paris, with all of our employees and all of our customers that have been going through such a horrible situation. And we've also been just especially shaken by our customers, who have lost employees in this horrible tragedy. So we're so sorry, and our thoughts and prayers are with everybody in Paris. Now, I want to go through our third quarter results and give you an update on how we're doing. Also, joining me on the call is Keith Block, who is in New York City, who just finished the world tour there, and we watched him this morning with his team. Keith, are you there? Can you hear us?

I am absolutely here Marc.

Fantastic. All right. Well, Mark Hawkins is also with us, our Chief Financial Officer, and the three of us really feel the duty today to talk about another outstanding growth quarter for Salesforce. Now, you can see from these results, we are on pace to deliver well over $6.6 billion this year, which is faster than any other enterprise software company in history. And I am thrilled to share with you that we are expecting to deliver more than $8 billion in revenues or $8.1 billion revenue at the high-end of our range for next year. So that is amazing. And we could not be more excited about the results of the third quarter, we could not be more excited about coming into the fourth quarter and we could not be more excited about the potential for next year. And you can see that we have something in sight, which we have been talking about now for several years, which is our $10 billion a year. And of course, Salesforce, as you can see will be the fourth largest software company in the world next year, but you can see that we'll be one of the only software companies ever to reach $10 billion in revenue. And as we become number four, we have number three in our sight, and we certainly [technical difficulty] goal as well quite wholeheartedly. Now, as many of you are predicting, Salesforce will be indeed the fourth largest enterprise software company in the world next year, behind only Microsoft, Oracle and SAP. And we are really making a difference for our customers and the industry, and it's attributed to our employees, almost 20,000 of these employees, who are similarly focused on one thing, our customer success. I'd like to kind of give you some specific…

Thanks, Marc. We had a great day in New York with over 8,000 people registered. So it was a terrific event and well-received and the customers are very, very excited about our messaging.

Well, Keith, you know what, I think everyone on the call would love to talk to you now about how your experience was in the field. We obviously had a great Dreamforce. We saw more customers this year. I know you and I this year have been in front of more CEOs and CIOs I think ever in our entire career, and everyone wants to talk about how to transform the customer experience. I don't know a company today that isn't reviewing on how to transform their customer experience and how to not get, I guess, a lot of them say, they don't want to get uberized out of the world. But some of them I think are don't want to get postmated out of the world, because I just ordered my lunch on postmates here in San Francisco. So maybe you can tell me your experience there in New York.

All right. So thanks, Marc, I appreciate it. And it's great to be here, and obviously thanks to everybody for joining the call. As Marc had indicated, this was just a terrific third quarter. And one that I would characterize, I think we all would characterize, as one of the most memorable exciting quarters that we've had here at Salesforce. And we heard it today and we continue to hear, the message from our customers is very clear. And while many of our competitors are struggling quite frankly to catch up for the cloud, Salesforce is taking customers and foreigners forward into the age of the customers. We are squarely in this age of the customer. Marc and I just talked about this, but I had the opportunity to kick off our Salesforce world tour here in New York. Again, over 8,000 people registered for this event. And people want to be here, both customers and prospects, companies like American Express, and Mattel, and Western Union and awful lot of customers through a variety of industries about how they are reinventing their futures and leveraging Salesforce. And as I speak to you, the top customers around the world, and Marc is exactly right, many of them are CEOs, which is terrific. There is a constant theme that keeps coming through here, and that is that we are clearly in this age of the customer and the time of cutting your way to prosperity is over. And when you think about it, the agenda for every CEO in the world is growth. And the reason why CEOs are coming to us is because they've see Salesforce as that catalyst for growth, and we are also quite frankly a catalyst for customer success. So whether it's a company of all shapes and…

I will tell you, Keith, we couldn't be more proud of you and your sales team, so congratulations. It's so exciting. We really appreciate everything that you're doing. And Keith, I'll tell you, I watched the Sales Cloud Keynote after your keynotes today and Accenture was the speaker with Sarah Varney during the Sales Cloud Keynotes, and what was really interesting, they talked about how not only are they doing this incredible partnership, building products on our platform to sell to their customers, but that they have rolled out 25,000 users internally. And their speaker today in New York, on the video I watched, talked about what how he learned working with Salesforce is that the key to success is to be bold and go fast and just go do whatever you can and just go as much, much faster than any other platform he had ever worked with. Keith, what are you hearing from Accenture, why are they having such a great success internally and now becoming this incredible reseller partner?

It's interesting. I had dinner before -- last night we had a dinner with 40 of our greatest customers and prospects. And I sat next to the CEO of Accenture, North America. And we had an excellent dialogue about the partnership and the relationship. And Accenture is just a culture that embraces transformation. And so they appreciate the level of transformation. They know what their customers are looking for. And because of that they want to partner with a company like Salesforce, who understands growth, understands transformation. So it's a very good linkage between the two firms. And that's what we're seeing in interest marketplace and that's why Accenture was happy to establish that a partnership in the consumer packaged good space, that's why Accenture is our number one partner. And that's why they continue to evangelize a great message that we have to our joint customers.

Well, it has been impressive to see, Accenture is definitely jumped into cloud computing and the social, mobile and IoTs after than any of the other systems integrators. Even though they're largest, they move the fastest. And now to see them deploy internally and also build these solutions on the platform is still exciting, so congratulations on that, as well, Keith. And let's go over to Mark Hawkins and hear about the numbers. Mark?

Fantastic. Thank you, Marc. We delivered another great quarter with consistent execution and balanced growth across all of our products and geographies. And our results this quarter set us up for a strong finish in FY '16, as discussed, and another solid year in FY '17. Third quarter revenue was $1.71 billion, up 24% in dollars and 27% in constant currency. Foreign exchange, continue to impact revenue with a year-over-year headwind of $40 million and a sequential headwind of $6 million. We continue to see strong year-over-year constant currency growth in all of our geographies with the Americas growing 27%, EMEA growing 28%, and Asia-Pac growing 25% Each of our clouds delivered outstanding year-over-year growth on a dollar basis with Sales Cloud growing 10%, Service Cloud growing 38%, App Cloud and other growing 40%, and Marketing Cloud growing 29%. Dollar attrition for the third quarter excluding Marketing Cloud was approximately 9%. From a bottomline perspective, we delivered another quarter of improving profitability. In fact, we have now increased our year-over-year non-GAAP operating margin for the sixth consecutive quarters, up 221 basis points over Q3 of last year. Our Q3 non-GAAP EPS was $0.21. Non-GAAP EPS includes approximately $0.01 from our lower than anticipated non-GAAP tax rate, which I'll discuss more in a moment. Our great topline and bottomline performance in Q3 drove another solid quarter of cash generation with operating cash flow of a $118 million. This was slightly down year-over-year about 4%, while operating cash flow year-to-date was up 37% compared to the same period over last year and that's now up to $1.2 billion year-to-date, which is very exciting. Marc, it took us 15 years to get to a $1 billion in cash flow and we did it in the first two quarters and now we're topping it,…

[Operator Instructions] And your first question comes from Phil Winslow with Credit Suisse.

I have a question on Service Cloud, because obviously the revenue there, which is obviously lagging a bit, continues to grow just phenomenally. No sort of sign of deceleration there. If it continued at this pace, you could almost see within a couple of years, Service Cloud overtaking Sales Cloud. So the question is what are dynamics that are going on there? How would you compare them to the Sales Cloud, when it was sort of at this point of its lifecycle? And are you displacing more legacy vendors? Is it net new? Is it replacing to give custom developed software? I mean, how should we think about Service Cloud?

Well, I think the way to think about Service Cloud is, first and foremost, these are mega markets. Sales, service, marketing, analytics, these are all multibillion dollar markets. We actually called them internally swimmers and we call them swimmers in their lanes. And we look at these products each going down their own lane, and yes, you're right, service is performing incredibly well, but so is sales, so is analytics, so is community, so is our platform, so is marketing, we have many, many high-performing swimmers. And we don't just look it at that way, by the way. We not only see that, we see it by geography, and we also look at it in verticals. And in each of the strategic areas that we've made this big bets, we continue to see very high performance. And in customer service and support, if you read Gartner's most recent Customer Engagement Magic Quadrant, you'll see Salesforce is number one. We've displaced Oracle, we've displaced SAP. These were traditionally the leaders in the Gartner Magic Quadrant, and so we're not only now the number one in the Magic Quadrant on sales, which we have been for few years, but now we're number one in the Magic Quadrant for service, which means we actually have the best product possible. Our customers just have phenomenal success. We have great examples of customers who have tens of thousands of users deployed on this product. We have examples of customers who have tens of users, hundreds of users. But what's unusual our Service Cloud is you could be a very small company or you could be a massive company, and you can use our Service Cloud. And when you look at requirements for customers to provide extended customer service, especially in regards to areas like the Internet of Things, when our core customers like Cisco or Phillips or even Coca Cola are more connected to their customer than ever before, the first point of access with those customers is customer service, so they better have their customer service act together if they're going to drive the customer revolution. So of course, we continue to do well in all of our core products, but also customer service is a critical part of our portfolio. Keith, you want to add anything to that.

I think, Marc, you're spot on. I mean, at the end of the day, we are performing well across all of our clouds. And certainly as we talked about service, a lot of companies in a variety of industries differentiate themselves with service. And when you think of this Age of the Customer where there are billions of connected devices and connected things, and you think about what service can do in terms of the business model, leveraging IoT and Analytics it's very, very powerful in terms of disruption and differentiation and changing business models and that is really the level of dialog that we are having with many, many companies and it's very exciting.

Your next question comes from Keith Weiss with Morgan Stanley.

I wanted to ask a little bit about the platform business, and in two directions. We saw a little bit of acceleration in that business. I think, Marc, you talked a little bit about some of the internal reasons for that. We also see in acceleration in some of the other big platforms out there like Amazon Web Services and Azure, both of them have seen accelerating growth. So I wanted your view on it. Are we seeing something of a broader industry trend, that's sort of really an acceleration in the move towards those cloud-based platforms, as de facto standard of where we're going to developing applications. So I just wanted your view on that? And two, similarly, do you see Amazon Web Service and Azure increasingly as competitors for their platform business for you guys?

Yes, that's a great question, and let me address that. So there is no doubt, we are at a tipping point in cloud platforms. And companies who have been cloud deniers like SAP and Oracle are paying a horrible price in single-digit and negative growth, because companies are not buying their products, because they are not modern. And they are not built-in this kind of modern architecture. When you look at the cloud opportunity there is different opportunities. And one opportunity is at the applications layer, where we dominate in sales and service and marketing, where we have these multi, multiple billion dollar clouds, all kind of underway, which I've just talked about in the last question. But the next layer down, which is declarative and programmatic application development and deployment, especially in rapid application development and deployment, this is an area where we also have incredible success. Gartner calls this aPaaS, Application Platform-as-a-Service. You look at our product like our App Cloud, Salesforce1, Lightning, Heroku, this is an area that's very strategic to us, because our core applications are built with our platform, which gives our customers basically the plasticity necessary to kind of take our applications apart and putting them back together, this is an area that's very important to us. The next layer down is, kind of what we traditionally call Infrastructure-as-a-Service. Amazon Web Services, which we are a huge customer of Amazon Web Services, Amazon is also a huge customer of Salesforce, and we use the Amazon Web Services to build our products. For example, Heroku is one of the most successful platforms on the Amazon Web Services and has been incredible success for Salesforce.com and also demonstrates the power of Amazon's platform. Salesforce also has been working with Microsoft on how we're going to be…

And your next question comes from Brent Thill with UBS.

Question for Keith. On the industry strategy, you mentioned that's providing a very nice tailwind for you in the field. You mentioned the retail case. I'm curious, if you could talk about some of the other verticals that you're starting to see open up given the all the hard work that you've been laying in many of the other vertical segments?

Yes, no problem, I'm happy to fill that question. Look, across the board, I mean if you look at the wins in the quarter, we had some terrific experiences with financial services, obviously with American Express and automotive with General Motors and consumer package goods with AB InBev and Mattel. So financial services is very strong, healthcare and life sciences is very strong, retail is really picking up, CPG is really picking up, manufacturing has always been a strength for the company, but we continue to do very, very well. I alluded to that deal that we closed earlier. So it really has become a situation where in no surprise customers want to speak to us and we should be speaking to them in their language. And that is the whole idea behind the industry strategy, and it starts with that. It starts with the messaging and the creation of the solution. It also moved into making sure they're organized carefully and we've done that very carefully over the last 2.5 years in physical organizations that focus on vertical markets. And then the third is to start delivering product, which we announced, again, just before Dreamforce around Health Cloud and Financial Services Cloud. So it's really a three pronged industry strategy that is resonating with our customers. They want more of it. They certainly don't want less of it. And we already had a very compelling and differentiated solution, but when you also add this sort of layer on it with the industry messaging and going to market by industry and also adding to this product set, it becomes super compelling and customers really, really like what we're doing.

Your next question comes from Kash Rangan with Merrill Lynch.

Marc, one question for you. When you look at the company from a $1 billion to $5 billion, Service Cloud really led that engine of growth. As you look to expand the business for up about 50% to a $10 billion revenue company, what are the lead engines here? Obviously, service and sales as big as they are, they cannot get you to grow as rapidly. So are we going to see other engines come to the forefront in order to help you to increase your business by 50%, be it analytics or platform or verticals? And one for you, Mark Hawkins, as the renewal business becomes larger and larger, what kind of impact does it have on your margins?

Well, I think this is a great question, Kash, and is something that Keith and Mark and I are talking about with Alex Dayon as well almost every single day, because we're working on our fiscal year '17 budgets. And when you look at the great success of a lot of these core products, we want to continue to fuel them. Certainly, Service Cloud is amazing. Marketing Cloud, obviously, is also amazing, and Sales Cloud, of course, has achieved a level of revenue that we never could have anticipated and continues to grow. And we have other, as I said, kind of swimmers in their lanes doing very, very well. Now, in addition of those core products, especially with the tip of the Marketing Cloud and its outstanding performance, especially since we acquired ExactTarget and integrated that very deeply into the company, I think also you have to look at what Keith has done with public sector, which is very exciting for us and is a huge opportunity for our company. And of course, the verticals where we're continuing to build some new products, including our wealth management product that we've announced and our health product and other applications categories that we see, and that I will also have to say ISVs. So ISVs remains a really powerful growth channel as well. So if we have any problem with Salesforce, it's that we have a huge amount to invest next year, but we can't just peanut butter and give everybody something. We have to make some bet and to invest in some these winners that I'm talking about, because we have had some phenomenal results as well.

So one of the things that I just want to jump in on, Marc, on that point is, the second aspect of the question, which is around renewals and what we saw there from margins, Kash, I'm happy to address that. The first thing we always think about obviously is customer success. And we want to make sure that happens and that really promotes renewals. And we'd love the attrition rate, Kash, it's been happening. You track the company for a long, long time, and you watched that come down now into the approximately 9% range and that really helps us. And so as we think about margins going forward, as it relates to renewals, one of the things I just would almost level it up and say, all of our unit economics suggest that we can hit the mid-30s in terms of our operating margin over the long-term at mature revenue growth rates. And part of that is because we're taking good care of the customer, part of that is because we keep the attrition rate low and part of that is we continue to get scale with unit economics that we can see today. So Kash, I think the long and the short of it is, as that renewal business continues to grow, our number one priority is to take care of the customer and number two is we will fulfill the operating margin in the mid-30s, long, long-term.

Your next question comes from the line of Mark Murphy with JPMorgan.

My question is for Marc Benioff, Aneel Bhusri recently said that if the first 10 years is about cloud, the next 10 years is going to be about data and analytics. And he commented that there won't be any difference between the transaction systems and the analytical systems. So I was just wondering first off, Marc, what do you think of that statement and how far do you want to push the boundaries of data science at Salesforce? In other words, do you think you would have more of a focus on analytics to support sales service and marketing or are you thinking very broadly pushing into machine learning, predictive behavioral unstructured data, massive data volumes for Internet of Things, and really becoming a hub for essentially any kind of data?

Well, here is how I look at it, which is, Aneel is a very close friend of mine and I just got a text from him, while we're on the call here. And I look at it differently and I'll tell you why. I think the next 10 years is the age of the customer. I don't think it's the age of data science or the age of machine intelligence or the age of cognitive or the age of mobility or the age of social or the age of cloud or whatever, okay, because all of those things are going to be important in the next 10 years. All of those things, the cloud, social, mobile, data science, deep learning, MLP, machine intelligence, those are table stakes. Those are table stakes. What you're going to do with that technology? Who is not using those technologies? Phillips is using that technology. GE is using that technology. Apple is using that technology. Cisco is using that technology. Coca Cola, Unilever, they're all using. Look, if the next 10 years for these companies is going to be about customer, what are they doing to build a world-class customer experience? How do they transform from being product companies to customer experience companies? And as millennials takeover in these enterprises, they're going to be much more focused on experiences and that is going to be the transformational lever for growth with these companies. And I think that if we get to into any one particular technology, or if I was to all of a sudden wave the flag like I used to do 15 or 16 years ago for cloud, okay, that would be a huge misstate for a company, because the number one thing, most important thing to this company is the customer. So…

Your next question comes from the line of Karl Keirstead with Deutsche Bank.

First off, Marc, I love the interview format with you and Keith. Please do that again, it makes the call pretty entertaining. I've got two questions for Mark Hawkins. Mark, at Dreamforce in the Analyst Day, you talked a little bit about the renewal activity skewing a little bit more fourth quarter. And I wanted to just check to make sure you're as confidant that that will happen, as you were a few months ago. And then secondly, you talked about the mix of annual invoicing hitting 79%, that to me as well felt a little high and I thought maybe you could explain why it did? And if that rate of increase is likely to continue?

Happy to do both there, Karl, and again good to talk to you. Let's just talk about the second question first, and then we'll go back to the renewals. I'll say the first thing is that we are pleased, we have been on a path to just increase our invoices to annual from FY '12, so we've been on a steady path with continuous improvement. And we report out when we next progress, and last quarter we continued to make progress. As you noted, Karl, year-on-year, we went from 74% of our invoices being annual to 79%, and so that is just good progress, good execution. We're pleased to see it. It works well for lots of and lots of different reasons. And that added, as I called out, about roughly 2 points of growth to deferred revenue year-on-year. But I think we have continued runway on this in the sense that the more enterprise business we get, the more natural it is for people to go to the annual terms that we're looking for. So I wouldn't expect any sharp turns, Karl. I think about this is a steady progression with, yes, more runway in the future. Key thing about it is moderate and that's what we're intending and I think it's just good execution. That's number one. Number two, in terms of renewals, and one of the things for everybody on the call just as a reminder, we just talked about the quantum of our renewals. If you think about when they show up, and Q4 is when they show up the most, when you think about kind of the historical patterns of our business, and in fact, that is what we expect. And that's all comprehended in our guidance, which we feel really good about both for Q4, the strong finish, and also as we point into next year. Obviously, hitting something worth $8 billion to $8.1 billion on topline revenue, we feel really good about for the company to continue to grow and execute at the scale. So those are my answers on both points, Karl.

There are no further questions at this time. End of Q&A

Great. Thank you so much, Ashley, and thanks so much everyone for joining us. Sorry, we couldn't get to all your questions. If you have any follow-up for us, you can reach out to us investor@salesforce.com. And if you miss the world tour in New York today, you'll have multiple other opportunities. We'll be in Tokyo and Los Angeles in December, in Minneapolis, Atlanta, Houston and Dallas and Seattle. And so if you'd like to hear some of these great transformational stories of how Salesforce is changing customer experiences, you can tune into that. Otherwise, we look forward to giving you an update on our progress in Q4 in February.