Business Context and Reporting Period
Company: Salesforce, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 31, 2006 (Third Quarter of Fiscal Year 2007)
Business Overview: Salesforce is the leading provider of on-demand customer relationship management (CRM) application services. The company operates in a single segment, delivering services via a subscription model to businesses worldwide. As of October 31, 2006, the company served approximately 27,100 customers with 556,000 paying subscriptions.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Oct 31, 2006 | Nine Months Ended Oct 31, 2006 | Nine Months Ended Oct 31, 2005 |
|---|---|---|---|
| Total Revenues | $130,053 | $352,876 | $218,793 |
| Gross Profit | $98,693 | $267,825 | $171,007 |
| Gross Margin | 76% | 76% | 78% |
| Operating Income (Loss) | $(123) | $(1,522) | $14,850 |
| Net Income (Loss) | $339 | $(35) | $22,517 |
| Diluted EPS | $0.00 | $0.00 | $0.19 |
| Cash from Operating Activities | $30,627 | $73,065 | $56,553 |
| Cash & Marketable Securities | $371,278 (as of Oct 31, 2006) | ||
| Deferred Revenue | $219,431 (as of Oct 31, 2006) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 57% year-over-year for the quarter and 61% for the nine-month period, driven by a 60% increase in paying subscriptions (from 347,000 to 556,000).
- Profitability Decline: The company reported an operating loss of $123,000 for the quarter and a net loss of $35,000 for the nine months, compared to operating income of $6.4 million and net income of $22.5 million in the prior year periods.
- Stock-Based Compensation Impact: The adoption of SFAS 123R (effective Feb 1, 2006) resulted in significant non-cash expenses. Stock-based compensation totaled $10.2 million for the quarter and $28.0 million for the nine months, compared to $0.8 million and $2.6 million in the prior year periods.
- Expense Increases: Marketing and sales expenses rose 73% for the quarter and 66% for the nine months, primarily due to headcount increases (62% increase in sales staff) and higher stock-based compensation. Cost of revenues increased due to data center expansion and professional services headcount growth.
- Acquisition: In April 2006, the company acquired Sendia Corporation for $15.5 million to enhance wireless solution capabilities.
Guidance, Outlook, and Risks
- Outlook: Management expects to continue reinvesting revenues to expand data center capacity, upgrade development infrastructure, and increase headcount in sales, professional services, and R&D. Marketing and sales costs are expected to remain a substantial portion of total revenues.
- Future Expenses: The company anticipates continued increases in absolute dollar expenses for R&D, marketing, and general administration. Stock-based compensation is expected to materially reduce reported results in future periods, with $113.4 million remaining to be amortized.
- Liquidity: The company holds $371.3 million in cash and marketable securities. Management believes existing resources are sufficient to meet working capital and capital expenditure needs for the next 12 months.
- Risks:
- Market Acceptance: Reliance on the on-demand model and potential reluctance by enterprises to migrate from traditional software.
- Service Disruptions: Dependence on a single third-party hosting facility (Equinix) creates vulnerability to outages, despite disaster recovery arrangements.
- Competition: Intense competition from enterprise software vendors (e.g., Oracle, SAP, Microsoft) and pricing pressures.
- Legal Proceedings: A shareholder derivative action (Borrelli v. Benioff) remains pending; a prior securities class action was dismissed with prejudice and the appeal was voluntarily dismissed.
Investor Verification Checklist
- Stock-Based Compensation: Verify the impact of SFAS 123R on future earnings, noting the $113.4 million of unamortized stock compensation.
- Customer Metrics: Confirm the growth in paying subscriptions (556,000) and the correction of historical subscription data noted in the filing.
- Deferred Revenue: Analyze the $219.4 million deferred revenue balance as an indicator of future revenue recognition and contract stability.
- Operating Leverage: Assess the ability to convert revenue growth into operating profit given the significant increase in marketing and sales headcount.
- Legal Status: Monitor the status of the pending shareholder derivative action regarding fiduciary duties.