Business Context and Reporting Period
Company: Salesforce, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: January 31, 2007
Business Overview: Salesforce is the leading provider of on-demand customer relationship management (CRM) application services. The company delivers its service via a subscription model through a standard web browser, eliminating the need for customers to install or maintain hardware and software. As of January 31, 2007, the company served approximately 29,800 customers with 646,000 paying subscriptions worldwide.
Key Financial Metrics
| Metric (in thousands) | Fiscal 2007 | Fiscal 2006 |
|---|---|---|
| Total Revenues | $497,098 | $309,857 |
| Gross Profit | $378,208 | $240,731 |
| Gross Margin | 76% | 78% |
| Operating Income (Loss) | $(3,598) | $20,102 |
| Net Income | $481 | $28,474 |
| Cash from Operating Activities | $111,224 | $95,893 |
| Cash, Cash Equivalents & Marketable Securities | $412,512 | $296,792 |
| Deferred Revenue | $284,063 | $169,175 |
Stock-Based Compensation: Total stock-based expense for fiscal 2007 was $39.2 million (8% of total revenue), a significant increase from $3.4 million in fiscal 2006 due to the adoption of SFAS 123R.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 60% year-over-year, driven by a 64% increase in paying subscriptions (from 393,000 to 646,000).
- Profitability Shift: The company transitioned from an operating income of $20.1 million in fiscal 2006 to an operating loss of $3.6 million in fiscal 2007. This was primarily due to aggressive reinvestment in growth and the new accounting standard for stock-based compensation.
- Expense Increases:
- Marketing and Sales: Increased 69% to $252.9 million (51% of revenue) due to a 55% increase in headcount.
- Research and Development: Increased 91% to $44.6 million (9% of revenue) due to an 84% increase in headcount.
- General and Administrative: Increased 75% to $84.3 million (17% of revenue) due to a 62% increase in headcount.
- Professional Services Loss: The cost of professional services exceeded related revenue by $12.0 million in fiscal 2007, compared to $5.5 million in fiscal 2006, as the company invested heavily in consulting staff to support enterprise customers.
- Acquisition: Acquired Sendia Corporation in April 2006 for $15.5 million to enhance mobile capabilities.
Guidance, Outlook, and Risks
Management Commentary: Management expects to continue reinvesting revenue growth to expand data center capacity, hire additional personnel (particularly in sales and customer support), and expand international operations. Marketing and sales costs are expected to remain a substantial portion of total revenues.
Outlook: The company anticipates that the cost of professional services will continue to exceed related revenue in fiscal 2008 as it builds capacity to meet demand from large enterprise customers.
Key Risks and Contingencies:
- Market Acceptance: Reliance on the widespread adoption of on-demand application services, which is an emerging market.
- Competition: Intense competition from enterprise software vendors (e.g., Oracle, SAP, Microsoft) and other on-demand providers.
- Service Disruptions: Dependence on third-party hosting facilities (Equinix); any interruption could harm reputation and revenue.
- Legal Proceedings: A shareholder derivative action (Borrelli v. Benioff) is pending regarding alleged breach of fiduciary duties related to the IPO. Management intends to defend vigorously.
- Stock-Based Compensation: The requirement to expense stock options under SFAS 123R will continue to materially reduce reported operating results.
Investor Verification Checklist
- Stock-Based Expense Impact: Verify the long-term impact of SFAS 123R on future earnings, noting $152.4 million of stock compensation remains to be amortized.
- Customer Retention: Monitor renewal rates, particularly for small business customers who historically have higher attrition.
- Professional Services Economics: Track the timeline for professional services to reach profitability as headcount costs remain high.
- Deferred Revenue: Analyze the $284.1 million deferred revenue balance as a leading indicator of future revenue recognition.
- Legal Status: Monitor the status of the Borrelli v. Benioff shareholder derivative lawsuit.