Salesforce, Inc. Form 10-Q Summary
Period clarification: The request metadata says “2020 Q2,” but the filing covers the quarter ended July 31, 2021—Salesforce fiscal 2022 second quarter—and the six months ended July 31, 2021. Comparisons below are against the corresponding 2020 periods. Amounts are in U.S. dollars.
Business context and reporting period
Salesforce provides cloud-based customer relationship management services and operates as one reportable segment. The filing is unaudited interim financial information. Subscription and support represented 93% of revenue for the six-month period. Salesforce acquired Slack on July 21, 2021; Slack’s results included after acquisition were not material to this quarter’s reported results.
Financial performance and position
| Metric | Three months ended July 31, 2021 | Year-over-year change | Six months ended July 31, 2021 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $6.340 billion | +23% | $12.303 billion | +23% |
| Subscription and support revenue | $5.914 billion | +22% | $11.450 billion | +22% |
| Professional services and other revenue | $426 million | +37% | $853 million | +42% |
| Gross profit / gross margin | $4.727 billion / approximately 75% | Margin broadly stable | $9.135 billion / approximately 74% | Up from approximately 74% |
| Operating income / margin | $332 million / approximately 5% | Up from $178 million / approximately 3% | $686 million / approximately 6% | Up from $38 million / less than 1% |
| Net income | $535 million | Down from $2.625 billion | $1.004 billion | Down from $2.724 billion |
| Diluted earnings per share | $0.56 | Down from $2.85 | $1.06 | Down from $2.96 |
| Cash from operating activities | $386 million | Down from $429 million | $3.614 billion | Up from $2.288 billion |
Six-month capital expenditures were $384 million, making operating cash flow less capital expenditures approximately $3.230 billion, compared with $1.851 billion in the prior-year period. These are derived figures. Strategic-investment gains were $526 million for the quarter and $814 million for six months, contributing materially to pretax income and subjecting reported results to investment-market volatility.
At July 31, 2021, cash and cash equivalents were $6.299 billion and marketable securities were $3.351 billion, totaling $9.650 billion. Accounts receivable was $4.074 billion and unearned revenue was $11.067 billion. Remaining performance obligation was $36.2 billion, including approximately $800 million from Slack; current remaining performance obligation was $18.7 billion.
Total debt carrying value was $11.931 billion, including $1.339 billion of current Slack convertible notes; principal outstanding was $11.551 billion. Salesforce issued $8.0 billion of senior notes in July to help fund Slack’s cash consideration. The company reported no borrowings on its $3.0 billion revolving credit facility and compliance with debt covenants. Total liabilities were $33.138 billion and stockholders’ equity was $55.520 billion.
Material changes versus the prior comparable period
- Revenue grew 23% in both the quarter and first half, principally from volume-driven increases in new business, upgrades and additional subscriptions. Professional services growth also reflected Acumen’s acquisition.
- Operating income improved, while net income and EPS fell sharply because the prior-year periods included a one-time $2.0 billion tax benefit from recognition of deferred tax assets. The 2021 six-month effective tax rate was 30%, versus a negative 207% in 2020.
- Slack was acquired for approximately $27.1 billion: $15.8 billion cash, $11.064 billion in Salesforce shares, and assumed awards and convertible notes. The acquisition added $21.453 billion of goodwill and $6.140 billion of identifiable intangible assets, based on preliminary valuations.
- Debt principal increased from $2.690 billion at January 31, 2021 to $11.551 billion at July 31, largely due to the Slack financing and assumed convertible notes. Cash, cash equivalents and marketable securities decreased from $11.966 billion to $9.650 billion.
- Headcount increased 29% year over year. Higher employee-related costs, data-center capacity investment, acquired intangibles amortization and Slack transaction costs contributed to higher expenses.
Outlook, commentary, risks and unusual items
- No specific revenue, earnings or cash-flow guidance for fiscal 2022 is provided in the supplied filing text. Management expects to continue investing in product development, sales capacity, data centers, security and integration of acquired businesses; it expects research and development and marketing and sales expenses to increase in future periods.
- Management said existing liquidity, operating cash flow, contracted but unbilled amounts and the revolving facility should meet working-capital, capital-expenditure and debt-repayment needs for the next 12 months. This is management’s assessment, not a guarantee.
- The company identified continuing COVID-19 uncertainty, including the Delta variant, possible effects on customers, sales cycles, employee productivity, offices and cash flows. It also cited cybersecurity and service availability, third-party infrastructure dependence, competition, customer renewals, acquisition integration, foreign exchange, tax, regulation and strategic-investment volatility as material risks.
- Operating leases totaled $3.591 billion in recognized operating lease liabilities; an additional $1.5 billion of operating leases had not yet commenced. Letters of credit totaled $135 million.
- Salesforce expects substantially all of Slack’s convertible notes to be converted and settled in cash in the quarter ending October 31, 2021; it had received conversion notices covering $852 million of $863 million principal by the filing date.
- Tableau securities litigation had a settlement agreement awaiting final court approval. Slack securities and derivative matters remained disclosed; the company said it could not reasonably estimate possible losses beyond accrued amounts. Management did not expect current matters to materially adversely affect consolidated results, cash flows or financial position, but noted outcomes are uncertain.
- Acquisition accounting for Slack remained preliminary and subject to measurement-period adjustments. A possible future Israeli tax charge related to integration of ClickSoftware and other acquired Israeli entities was disclosed, but its timing and amount were uncertain.
Important facts for investors to verify
- Reconcile the period label: this filing is for fiscal 2022 Q2, not 2020 Q2.
- Track organic revenue, remaining performance obligation and customer attrition, considering that Slack was consolidated only from July 21 and contributed approximately $800 million to remaining performance obligation.
- Assess earnings excluding volatile strategic-investment gains and the prior-year one-time tax benefit; confirm how acquired-intangible amortization and stock-based compensation affect margins.
- Monitor post-acquisition debt, cash balances, expected cash settlement of Slack convertible notes, and the timing and benefits of Slack integration.
- Follow final Slack purchase-accounting valuations, outstanding Tableau and Slack litigation, tax uncertainties, and COVID-19-related operating impacts.