Salesforce, Inc. — Form 10-K Summary
Reporting period: The supplied filing is the annual report for the fiscal year ended January 31, 2018 (fiscal 2018), filed March 9, 2018. This does not match the request metadata of “2016 Q4.” Figures below are fiscal-year comparisons, not quarterly results. Amounts are U.S. dollars.
Business context
Salesforce provides subscription-based cloud CRM software and related professional services. Its portfolio spans sales, service, marketing, commerce, platform and industry solutions. Subscription and support generated 93% of fiscal 2018 revenue. The company reports one operating segment.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $10.48 billion | $8.39 billion |
| Subscription and support revenue | $9.71 billion | $7.76 billion |
| Professional services and other revenue | $769 million | $636 million |
| Gross profit / gross margin | $7.71 billion / 73.5% | $6.16 billion / 73.4% |
| Operating income / operating margin | $236 million / 2.3% | $64 million / 0.8% |
| Net income / diluted EPS | $127 million / $0.17 | $180 million / $0.26 |
| Cash provided by operating activities | $2.74 billion | $2.16 billion |
| Capital expenditures | $534 million | $464 million |
| Cash, cash equivalents and marketable securities at year-end | $4.52 billion | $2.21 billion |
| Debt carrying value at year-end | $1.72 billion | $2.01 billion |
| Working capital | $(839) million | $(1.30) billion |
Operating cash flow less capital expenditures was approximately $2.20 billion in fiscal 2018, calculated from the reported figures. Deferred revenue was $7.09 billion and unbilled deferred revenue, an operational measure not recorded on the balance sheet, was $13.3 billion at year-end. The company says first-quarter collections and operating cash flow are typically strongest because of billing seasonality.
Material changes versus the prior year
- Revenue grew 25%; subscription and support revenue also grew 25%. Professional services and other revenue increased 21%.
- By offering, subscription and support revenue growth was strongest in Marketing and Commerce Cloud (45%), followed by Salesforce Platform and Other (34%), Service Cloud (24%) and Sales Cloud (16%).
- Operating income rose to $236 million from $64 million, with operating margin improving to 2.3% from 0.8%. Gross margin was broadly stable.
- Net income declined from $180 million to $127 million despite higher operating income. Fiscal 2017 included a $210 million tax benefit from a partial release of a valuation allowance; fiscal 2018 recorded a $75 million tax provision.
- Operating cash flow increased by $576 million. Cash and marketable securities more than doubled, while reported debt declined, including repayment of the remaining $200 million revolving-credit borrowing.
- Demandware, acquired in July 2016, contributed $288 million of fiscal 2018 revenue, compared with $120 million from acquisition through fiscal 2017 year-end.
Outlook, commentary and risks
- Management said it remained focused on improving operating margins in fiscal 2019 and beyond, while continuing substantial investment in sales, research and development, data-center capacity, infrastructure and international expansion. The filing provides no quantified fiscal 2019 revenue or earnings guidance in the supplied text.
- Management expects research and development spending to increase in dollars and potentially as a share of revenue. Marketing and sales costs are expected to remain a substantial portion of revenue; general and administrative costs as a share of revenue were expected to remain flat or decline over the next several quarters.
- Management said it believed available cash, operating cash generation and borrowing capacity would be sufficient for working capital, capital expenditures and debt repayment over the next 12 months. The $1.03 billion 0.25% convertible notes were due in April 2018; subsequent to year-end, $73.6 million had been converted or submitted for conversion by the filing date. A $500 million term loan matures in July 2019. The $1 billion revolving facility had no year-end borrowings.
- Contractual obligations totaled $6.14 billion, including $2.73 billion of facilities operating leases, $556 million of computer-equipment and furniture leases, debt, a leased-facility financing obligation and other commitments. The company also disclosed a 15.5-year Salesforce Tower lease with approximately $774 million of payments.
- The December 2017 U.S. Tax Act created uncertainty in tax estimates. Salesforce recorded a provisional $206.9 million tax expense for deferred-tax remeasurement, offset by a reduction in valuation allowance; management had not completed its analysis. Management said its provisional assessment indicated no cash-tax impact from the one-time transition tax over the next 12 months.
- Fiscal 2018 other income included a $58.6 million reclassification of previously unrealized gains on public investments, partly offset by impairments on strategic investments. The company held strategic investments in more than 200 private companies; valuations, liquidity events and potential impairments are uncertain.
- Key risks include security breaches and service outages; competition and customer renewals; data privacy and cross-border transfer rules, including the EU GDPR effective May 2018; integration and returns from acquisitions; foreign-exchange and interest-rate movements; substantial lease and debt commitments; and tax and legal uncertainties. The company reached an approximately $6.3 million settlement in a TCPA class action, subject to final court approval. Management did not expect current legal matters collectively to materially affect results, cash flows or financial position, but noted that an unfavorable resolution could affect a particular quarter.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded internal control over financial reporting was effective as of January 31, 2018.
Most important facts for investors to verify
- Confirm the intended reporting period: this filing covers fiscal 2018, not 2016 Q4.
- Review post-year-end conversion and repayment details for the $1.03 billion notes due April 2018, and the company’s subsequent liquidity and debt position.
- Assess whether operating-margin improvement can continue alongside planned sales, product and infrastructure investment, including nearly $1.0 billion of fiscal 2018 stock-based expense.
- Track subscription growth, renewal and attrition trends, deferred revenue, and unbilled deferred revenue, recognizing that billings and cash flows are seasonal.
- Review the final accounting and cash-tax consequences of the Tax Act and the fiscal 2019 adoption of new revenue-recognition and investment-accounting standards; management expected commission capitalization changes to materially affect the balance sheet and income statement.
- Monitor the settlement approval in the TCPA case, other contingencies, strategic-investment valuations and the planned $100 million strategic investment disclosed as a subsequent event.