Salesforce, Inc. — Form 10-Q Summary
Period: Quarter and six months ended July 31, 2022 (fiscal 2023 Q2). The request metadata says “2021 Q2,” but the supplied filing covers 2022. Unless otherwise stated, amounts are in U.S. dollars.
Business context and reporting period
Salesforce is a global CRM and cloud-services provider operating as one segment. Subscription and support generated 93% of revenue in the first half of fiscal 2023. Results include Slack, acquired in July 2021; Traction on Demand was acquired in April 2022, with an immaterial contribution to reported results.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $7.720 billion | $6.340 billion | $15.131 billion | $12.303 billion |
| Gross profit | $5.593 billion | $4.727 billion | $10.959 billion | $9.135 billion |
| Operating income | $193 million | $332 million | $213 million | $686 million |
| Net income | $68 million | $535 million | $96 million | $1.004 billion |
| Diluted EPS | $0.07 | $0.56 | $0.10 | $1.06 |
| Cash from operations | $334 million | $386 million | $4.010 billion | $3.614 billion |
Q2 revenue increased 22% year over year; first-half revenue increased 23%. Q2 gross margin was approximately 72%, compared with 75% a year earlier; operating margin was approximately 2.5%, compared with 5.2%. First-half gross margin was 72%, versus 75%, and operating margin was 1%, versus 6%. Lower operating income and net income reflected higher operating costs and much smaller strategic-investment gains than in the prior-year periods. Strategic-investment gains were $45 million in Q2 and $52 million for the first half, compared with $526 million and $814 million, respectively, a year earlier.
Cash, cash equivalents and marketable securities totaled $13.533 billion at July 31, 2022. Operating cash flow rose 11% for the first half; the filing attributes the increase in part to $5.015 billion from the change in accounts receivable, partly offset by a $2.807 billion decrease in unearned revenue. Capital expenditures were $382 million for the first half.
Total debt carrying value was $10.599 billion, including $1.183 billion current; outstanding principal was $10.684 billion. The company had no borrowings under its $3.0 billion revolving credit facility and reported compliance with debt covenants. Total liabilities were $34.050 billion and stockholders’ equity was $60.098 billion.
Material changes versus the prior comparable period
- Subscription and support revenue grew 21% in Q2 and 22% for the first half. Professional services and other revenue grew 35% and 33%, respectively.
- Platform and Other subscription revenue grew 53% in Q2, with Slack contributing approximately $376 million to Q2 subscription and support revenue and $720 million for the first half.
- Cost of revenue rose to 28% of revenue from 25%. Management cited employee-related costs, service-delivery and data-center costs, stock compensation, and acquired-intangible amortization.
- First-half operating expenses increased $2.297 billion year over year. Headcount was up 36% overall from July 31, 2021; research and development headcount rose 14%, and marketing and sales headcount rose 17%.
- Foreign currency movements negatively affected Q2 revenue by approximately 4% versus the prior-year period; the company also cited an approximately 4% currency impact on current remaining performance obligation on a year-over-year constant-currency basis.
- Remaining performance obligation was $41.6 billion at July 31, down from $43.7 billion at January 31; the company reported 15% year-over-year growth in total and current RPO.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance in the supplied text. Management said that, beginning in July, customers showed more measured buying behavior, including stretched sales cycles, added approval layers and deal compression. It reported no material effect on Q2 revenue or July RPO, but warned sustained slower new-business growth could affect future RPO, revenue and margins.
- Management expected a stronger U.S. dollar to weigh on near-term revenue growth and cautioned that continued currency volatility could materially affect near-term results and forecasting. Seasonality may compound the impact; the fourth quarter has historically been strongest for new business and renewals.
- Management intends to continue investing in product development, sales, data-center capacity, security and infrastructure. It expects research and development and marketing and sales expenses to rise in absolute dollars; marketing and sales may also increase as a percentage of revenue.
- The investment portfolio is exposed to public-market volatility, private-company valuation uncertainty and impairment risk. A 10% decline in enterprise values of the largest private investments could reduce portfolio value by an estimated $165 million, according to the filing.
- In April 2022, a threat actor accessed several Heroku databases and downloaded stored customer security credentials and passwords. Salesforce said it did not believe the incident materially affected its business or financial results, but warned future incidents could have a material effect.
- The filing discusses continuing operational, competition, acquisition-integration, privacy, cybersecurity, regulatory, foreign-exchange, tax, macroeconomic and litigation risks. It states that possible legal losses beyond accrued amounts could not be reasonably estimated; management did not expect current matters to have a material adverse impact overall, though a particular period could be affected.
- In August 2022, after quarter-end, the board authorized repurchases of up to $10 billion of common stock, without a fixed expiration date or obligation to buy a specific number of shares. The company was evaluating the Inflation Reduction Act, including the corporate minimum tax and the excise tax on certain repurchases.
- The company adopted ASU 2021-08 in fiscal 2023; the impact was not material. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the reporting-period label: the filing is for the quarter ended July 31, 2022, not 2021.
- Track whether slower buying behavior, deal compression and currency headwinds persist, and how they affect RPO, revenue growth and margins.
- Assess whether operating-margin pressure from hiring, sales investment, data-center spending, stock-based compensation and acquired-intangible amortization moderates.
- Review operating cash flow alongside seasonal billing and collections, unearned-revenue movements, and the large accounts-receivable cash-flow contribution.
- Monitor strategic-investment valuations and gains, debt maturities, lease commitments, and the funding and execution of the $10 billion repurchase authorization.
- Follow developments in the Heroku security incident, Slack-related litigation and other legal or regulatory matters; the filing does not quantify potential losses beyond accrued amounts.