Revenue: Total Q3 revenue was $429 million, an increase of 30% on a year-over-year basis.  Subscription and support revenues were $403 million, an increase of 31% on a year-over-year basis.  Professional services and other revenues were $26 million, an increase of 10% on a year-over-year basis.  

Earnings per Share:  Q3 GAAP diluted earnings per share decreased 6% year-over-year to $0.15, and non-GAAP diluted earnings per share increased 14% year-over-year to $0.32.  The company’s non-GAAP results exclude the effects of approximately $26 million in stock-based compensation expense, approximately $5 million in amortization of purchased intangibles, and approximately $6 million in non-cash interest expense related to the company’s convertible senior notes.  All EPS calculations are based on 137 million diluted shares outstanding during the quarter.

Customers: Net paying customers rose approximately 4,800 during the quarter. The number of total net paying customers at the end of the fiscal third quarter was approximately 87,200. Since October 31, 2009, the company has added approximately 19,300 net paying customers, an increase of approximately 28%.

Cash: Cash from operations for the fiscal third quarter was approximately $74 million, up 108% year-over-year.  Total cash, cash equivalents and marketable securities finished the quarter at approximately $1.8 billion, an increase of approximately $732 million from the prior year, which includes approximately $500 million in net proceeds from the company’s issuance of convertible senior notes in January 2010.

Deferred Revenue: Deferred revenue on the balance sheet as of October 31, 2010 was $695 million, an increase of 27% on a year-over-year basis.

Q4 FY11 Guidance:  Revenue for the company’s fourth quarter is projected to be in the range of approximately $447 million to approximately $449 million.  

GAAP diluted EPS is expected to be in the range of approximately $0.06 to approximately $0.07, while non-GAAP diluted EPS in Q4 is expected to be in the range of approximately $0.27 to approximately $0.28.  The company’s non-GAAP EPS estimate excludes the effects of stock-based compensation expense, expected to be approximately $35 million, amortization of purchased intangibles related to acquisitions, expected to be approximately $6 million and non-cash interest expense related to the convertible senior notes, expected to be approximately $6 million.  EPS estimates assume a GAAP tax rate of 42%, and a non-GAAP tax rate of 38%.  All EPS estimates assume an average diluted share count of approximately 140 million shares.

Full Year FY11 Guidance:  The company is raising its expected full fiscal year 2011 revenue from the guidance previously provided on August 19, 2010.   Revenue for the company’s full fiscal year 2011 is projected to be in the range of approximately $1.647 billion to approximately $1.649 billion.

For the company’s full fiscal year 2011, diluted GAAP EPS is expected to be in the range of approximately $0.46 to approximately $0.47, while diluted non-GAAP EPS is expected to be in the range of approximately $1.18 to approximately $1.19.  The non-GAAP estimate excludes the effects of stock-based compensation expense, expected to be approximately $114 million, amortization of purchased intangibles related to acquisitions, expected to be approximately $18 million, and non-cash interest expense related to the convertible senior notes, expected to be approximately $23 million. EPS estimates assume a GAAP tax rate of 42%, and a non-GAAP tax rate of 38%.  All EPS estimates assume an average diluted share count of approximately 136 million shares.

Full Year FY12 Guidance:  The company is initiating revenue guidance for fiscal year 2012 with projected revenue in the range of approximately $1.97 billion to approximately $2.0 billion.  The company expects to update this guidance, as well as provide its expectations for FY12 GAAP EPS, when it announces its fourth quarter, fiscal year 2011 results in February, 2011.

Fiscal 2011

Q4

FY2011

GAAP diluted EPS Range

$0.06-$0.07

$0.46-$0.47

Plus

Amortization of purchased intangibles

0.04

0.14

Stock-based expense

0.25

0.84

Amortization of debt discount

0.04

0.18

Less

Income tax effect of certain Non-GAAP items

(0.12)

(0.44)

Non-GAAP diluted EPS

$0.27-$0.28

$1.18-$1.19

Shares used in computing diluted net income per share (millions)

140

136

Stock-Based Expenses:  The company’s compensation strategy is to use stock-based compensation to attract and retain key employees and executives.  It is principally aimed at aligning their interests with those of our stockholders and at long-term employee retention, rather than to motivate or reward operational performance for any particular period.  Thus, stock-based compensation expense varies for reasons that are generally unrelated to operational decisions and performance in any particular period.  

Amortization of Purchased Intangibles:  The company views amortization of acquisition-related intangible assets, such as the amortization of an acquired company’s research and development efforts, customer lists and customer relationships, as items arising from pre-acquisition activities.  These are costs that are determined at the time of an acquisition.  While it is continually viewed for impairment, amortization of the cost is a static expense, one that are not typically affected by operations during any particular period.

Amortization of Debt Discount:  Under GAAP, certain convertible debt instruments that may be settled in cash (or other assets) on conversion are required to be separately accounted for as liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate.  Accordingly, for GAAP purposes we are required to recognize imputed interest expense on the company’s $575 million of convertible subordinated notes that were issued in a private placement in January 2010.  The imputed interest rate is approximately 5.9%, while the coupon interest rate is 0.75%.   The difference between the imputed interest expense and the coupon interest expense is excluded from management’s assessment of the company’s operating performance because management believes that this non-cash expense is not indicative of ongoing operating performance.  Management believes that the exclusion of the non-cash interest expense provides investors an enhanced view of the company’s operational performance.

Income Tax Effects:  The company’s estimated non-GAAP effective tax rate is lower than the estimated GAAP effective tax rate due to the exclusion of the expense items described above.  

salesforce.com, inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

Three Months Ended October 31,

Nine Months Ended October 31,

2010

2009

2010

2009

Revenues:

Subscription and support

$402,948

$306,870

$1,122,611

$882,078

Professional services and other

26,139

23,679

77,661

69,456

Total revenues

429,087

330,549

1,200,272

951,534

Cost of revenues (1):

Subscription and support

54,089

40,745

147,127

116,744

Professional services and other

28,042

24,825

84,375

73,122

Total cost of revenues

82,131

65,570

231,502

189,866

Gross profit

346,956

264,979

968,770

761,668

Operating expenses (1):

Research and development

47,305

32,763

130,357

95,450

Marketing and sales

200,544

152,166

558,812

436,647

General and administrative

63,951

49,909

181,713

139,818

Total operating expenses

311,800

234,838

870,882

671,915

Income from operations

35,156

30,141

97,888

89,753

Investment income

11,699

7,503

28,309

19,780

Interest expense

(7,374)

(292)

(21,619)

(793)

Other expense

(921)

(336)

(4,659)

(1,037)

Income before provision for income taxes and noncontrolling interest

38,560

37,016

99,919

107,703

Provision for income taxes

(16,192)

(15,573)

(41,092)

(45,426)

Consolidated net income

22,368

21,443

58,827

62,277

Less: Net income attributable to noncontrolling interest

(1,296)

(752)

(5,266)

(1,952)

Net income attributable to salesforce.com

$21,072

$20,691

$53,561

$60,325

Basic net income per share attributable to salesforce.com common shareholders

$0.16

$0.17

$0.41

$0.49

Diluted net income per share attributable to salesforce.com common shareholders

$0.15

$0.16

$0.40

$0.48

Shares used in computing basic net income per share

130,888

124,561

129,461

123,871

Shares used in computing diluted net income per share

137,044

128,596

135,007

126,993

(1) Amounts include stock-based expenses, as follows:

Cost of revenues

$    2,357

$    2,995

$       8,617

$    9,322

Research and development

3,976

2,707

12,119

8,741

Marketing and sales

11,969

9,055

36,496

28,314

General and administrative

7,330

5,650

21,483

16,570

salesforce.com, inc.

Condensed Consolidated Statements of Operations

As a percentage of total revenues:

(Unaudited)

Three Months Ended October 31,

Nine Months Ended October 31,

2010

2009

2010

2009

Revenues:

Subscription and support

94%

93%

94%

93%

Professional services and other

6

7

6

7

Total revenues

100

100

100

100

Cost of revenues:

Subscription and support

13

12

12

12

Professional services and other

6

8

7

8

Total cost of revenues

19

20

19

20

Gross profit

81

80

81

80

Operating expenses:

Research and development

11

10

11

10

Marketing and sales

47

46

47

46

General and administrative

15

15

15

15

Total operating expenses

73

71

73

71

Income from operations

8

9

8

9

Investment income

3

2

2

2

Interest expense

(2)

0

(2)

0

Other expense

0

0

0

0

Income before provision for income taxes and noncontrolling interest

9

11

8

11

Provision for income taxes

(4)

(5)

(3)

(5)

Consolidated net income

5

6

5

6

Less: Net income attributable to noncontrolling interest

0

0

(1)

0

Net income attributable to salesforce.com

5%

6%

4%

6%

Stock-based expenses as a percentage of total revenues, as follows:

Cost of revenues

- %

1%

1%

1%

Research and development

1

1

1

1

Marketing and sales

3

3

3

3

General and administrative

2

1

2

2

salesforce.com, inc.

Condensed Consolidated Balance Sheets

(in thousands)

October 31,

January 31,

2010

2010

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$630,303

$1,011,306

Short-term marketable securities

139,545

230,659

Accounts receivable, net

258,764

320,956

Deferred commissions

50,361

47,388

Deferred income taxes

49,620

40,116

Prepaid expenses and other current assets

64,343

55,734

Total current assets

1,192,936

1,706,159

Marketable securities, noncurrent

1,032,592

485,083

Fixed assets, net

116,078

89,711

Deferred commissions, noncurrent

32,856

28,140

Deferred income taxes, noncurrent

30,501

27,579

Capitalized software, net

79,499

34,809

Goodwill

187,038

48,955

Other assets, net

69,194

39,765

Total assets

$2,740,694

$2,460,201

Liabilities and stockholders' equity

Current liabilities:

Accounts payable

$23,320

$14,791

Accrued expenses and other current liabilities

287,627

194,738

Income taxes payable

9,644

8,424

Deferred revenue

672,454

690,177

Total current liabilities

993,045

908,130

0.75% Convertible senior notes due 2015, net

466,847

450,198

Income taxes payable, noncurrent

18,284

17,551

Long-term lease liabilities and other

27,949

13,485

Deferred revenue, noncurrent

22,103

14,171

Total liabilities

1,528,228

1,403,535

salesforce.com stockholders' equity:

Common stock

131

127

Additional paid-in capital

1,041,005

938,544

Accumulated other comprehensive gain (loss)

9,030

(1,430)

Retained earnings

160,122

106,561

Total stockholders' equity  controlling interest

1,210,288

1,043,802

Total stockholders' equity noncontrolling interest

2,178

12,864

Total stockholders' equity

1,212,466

1,056,666

Total liabilities and stockholders' equity

$2,740,694

$2,460,201

salesforce.com, inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

Three Months Ended October 31,

Nine Months Ended October 31,

2010

2009

2010

2009

Operating activities:

Consolidated net income

$            22,368

$                21,443

$                58,827

$                62,277

Adjustments to reconcile net income to net

cash provided by operating activities:

Depreciation and amortization

19,710

13,601

52,008

37,890

Amortization of debt discount

6,655

0

17,639

0

Amortization of deferred commissions

19,959

15,698

57,554

45,959

Expenses related to stock-based awards

25,632

20,407

78,715

62,947

Excess tax benefits from employee stock plans

(14,578)

(7,401)

(46,768)

(32,536)

Changes in assets and liabilities:

Accounts receivable, net

(30,212)

(22,515)

67,326

75,355

Deferred commissions

(25,687)

(18,013)

(65,243)

(43,018)

Prepaid expenses and other current assets

(16,583)

(12,892)

(6,463)

(14,711)

Other assets

(5,263)

(506)

(9,405)

(624)

Accounts payable

2,575

2,228

6,500

(762)

Accrued expenses and other current liabilities

57,926

27,045

95,320

35,165

Deferred revenue

11,538

(3,575)

(12,691)

(48,591)

Net cash provided by operating activities

74,040

35,520

293,319

179,351

Investing activities:

Business combinations, net of cash acquired

(3,834)

(4,500)

(155,337)

(4,500)

Land activity

(8,000)

0

(8,000)

0

Investments in privately-held companies

(4,000)

(3,700)

(6,500)

(4,400)

Changes in marketable securities

280,340

(41,243)

(449,633)

(422,274)

Capital expenditures

(20,790)

(10,389)

(60,311)

(42,445)

Net cash provided by (used in) investing activities

243,716

(59,832)

(679,781)

(473,619)

Financing activities:

Purchase of subsidiary stock

(150,970)

0

(152,243)

0

Proceeds from the exercise of stock options

44,353

18,559

115,996

32,866

Excess tax benefits from employee stock plans

14,578

7,401

46,768

32,536

Principal payments on capital lease obligations

(3,116)

(2,398)

(7,157)

(5,904)

Net cash provided by (used in) financing activities

(95,155)

23,562

3,364

59,498

Effect of exchange rate changes

(2,223)

(2,531)

2,095

(6,176)

Net increase (decrease) in cash and

cash equivalents

220,378

(3,281)

(381,003)

(240,946)

Cash and cash equivalents, beginning of period

409,925

246,169

1,011,306

483,834

Cash and cash equivalents, end of period

$          630,303

$              242,888

$              630,303

$              242,888

Supplemental cash flow disclosure:

Cash paid (received) during the period for:

Interest

$              1,378

$                     292

$                  3,980

$                     793

Income taxes, net of tax refunds

$              4,260

$                  6,446

$                   (530)

$                27,520

Non-cash financing and investing activities

Fixed assets acquired under capital leases

$              6,765

$                  3,105

$                12,929

$                17,897

salesforce.com, inc.  

Additional Metrics

(Unaudited)

Oct 31,

Jul 31,

Apr 30,

Jan 31,

Oct 31,

Jul 31,

2010

2010

2010

2010

2009

2009

Full Time Equivalent Headcount 

4,758

4,447

4,106

3,969

3,814

3,653

Financial data (in thousands):

Cash, cash equivalents and marketable securities

$1,802,440

$1,858,928

$1,901,548

$1,727,048

$1,070,092

$1,030,406

Deferred revenue, current and noncurrent 

$694,557

$683,019

$664,529

$704,348

$545,435

$549,010

Three Months Ended October 31,

Nine Months Ended October 31,

2010

2009

2010

2009

Revenues by geography
(in thousands):

Americas

$                             292,540

$                             232,802

$                            826,493

$          679,460

Europe

76,464

60,761

208,851

168,355

Asia Pacific

60,083

36,986

164,928

103,719

$                             429,087

$                             330,549

$                         1,200,272

$          951,534

As a percentage of total revenues:

Revenues by geography:

Americas

68

%

70

%

69

%

71

%

Europe

18

18

17

18

Asia Pacific

14

12

14

11

100

%

100

%

100

%

100

%

Supplemental Revenue Analysis (1)

Three Months Ended

Three Months Ended

Three Months Ended

October 31, 2010

July 31, 2010

April 30, 2010

Revenue constant currency growth rates (as compared to the comparable quarter a year ago)

Americas