Salesforce, Inc. — Form 10-Q Summary
Period clarification: The request identifies “2014 Q3,” but the supplied filing is for the quarter ended October 31, 2015 (Salesforce fiscal 2016 third quarter), with comparisons to October 31, 2014.
Business context and reporting period
Salesforce provides enterprise cloud-computing services, primarily CRM, on a subscription basis. Subscription and support generated 93% of revenue in the nine months ended October 31, 2015. The filing reports one operating segment. Financial statements are unaudited.
Financial performance and position
| Metric | Quarter ended Oct. 31, 2015 | Prior-year quarter | Nine months ended Oct. 31, 2015 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $1.712 billion | $1.384 billion | $4.858 billion | $3.929 billion |
| GAAP gross margin | 75% | 76% | 75% | 76% |
| GAAP operating income (loss) | $43.4 million | $(22.0) million | $94.4 million | $(110.8) million |
| GAAP net income (loss) | $(25.2) million | $(38.9) million | $(21.9) million | $(196.9) million |
| Operating cash flow | $117.9 million | $122.5 million | $1.153 billion | $841.5 million |
| Free cash flow, company-defined | $37.9 million | $49.1 million | $937.2 million | $636.4 million |
Quarterly revenue rose 24% year over year (27% in constant currency); nine-month revenue also rose 24%. Subscription and support revenue increased 24% for the quarter and 23% for the nine-month period. Management attributed growth mainly to new customers, upgrades, and additional subscriptions. Quarterly GAAP operating margin was approximately 2.5%, versus a loss margin of approximately 1.6% a year earlier.
At October 31, 2015, cash and cash equivalents were $1.223 billion and marketable securities totaled $1.078 billion, or approximately $2.3 billion combined. Current assets were $2.939 billion and current liabilities $3.977 billion. Debt included $1.089 billion carrying value of 0.25% convertible notes and a $198.9 million loan assumed with the 50 Fremont acquisition; the $650 million revolving facility had no borrowings outstanding. Stockholders’ equity was $4.750 billion.
Material changes versus the prior comparable period
- Quarterly revenue increased $328.3 million; nine-month revenue increased $928.8 million.
- GAAP operating results improved to income in both reported 2015 periods, although the nine-month result included a $36.6 million non-cash gain from terminating a lease after purchasing 50 Fremont.
- GAAP net losses narrowed, but remained losses. The 2015 tax provision was unusually large relative to pretax income: $68.5 million for the quarter and $90.3 million for nine months. The respective effective tax rates were 158% and 132%.
- Nine-month operating cash flow increased by $311.7 million, while quarterly operating cash flow was slightly lower year over year. Management noted seasonal billing and collection patterns.
- Marketing and sales expense remained the largest operating expense: 48% of quarterly revenue and 49% for nine months, down from 52% and 51%, respectively. Cost of revenue increased to 25% of revenue from 24%, contributing to lower gross margin.
- The company acquired 50 Fremont for total consideration of $637.6 million, including a $200 million assumed loan, and made $325.2 million of strategic investments during the nine-month period. Strategic investments on the balance sheet rose to $496.8 million from $175.8 million at January 31, 2015.
Outlook, management commentary, risks, and unusual items
- Management expected continued investment in data centers, infrastructure, research and development, professional services, and sales and marketing. It expected marketing and sales to remain a substantial share of revenue, and research and development expense to increase in dollars.
- Management said GAAP net losses could continue absent one-time gains, citing growth investment, stock-based compensation, and acquisition-related amortization. It highlighted continued focus on improving non-GAAP operating income; the filing provides no numerical revenue or earnings guidance in the supplied text.
- Management reported an attrition rate of approximately 9% as of October 31, 2015; its calculation excludes Marketing Cloud. It expected the rate to remain consistent.
- Unbilled deferred revenue, a non-GAAP measure, was approximately $6.7 billion, up from $5.7 billion at January 31, 2015. The company cautioned that fluctuations in this measure are not a reliable indicator of future revenue.
- Management said existing cash, cash equivalents, short-term marketable securities, and operating cash flow should be sufficient for working capital, capital expenditures, and debt repayment over the next 12 months.
- Unusual gains included a $21.8 million gain on a real-estate sale in the quarter and the $36.6 million non-cash 50 Fremont lease-termination gain in the first quarter. Non-GAAP results exclude various items, including stock-based expense, acquisition-related amortization, debt discount amortization, and specified gains; these measures are not substitutes for GAAP results.
- Key risks include foreign-exchange exposure, service outages or security breaches, privacy and cross-border data-transfer regulation, intense competition, execution and integration risks from acquisitions, and possible impairment of illiquid strategic investments. The company also disclosed a shareholder derivative suit over director compensation and a patent-infringement allegation from a large technology company; no litigation had been filed on the latter claim as of the filing.
Important facts for investors to verify
- Confirm the period: this is fiscal 2016 Q3, not 2014 Q3.
- Reconcile GAAP operating income and net loss with the company’s adjusted non-GAAP measures, including excluded items and tax adjustments.
- Assess the sustainability of revenue growth, customer retention, and deferred-revenue trends, accounting for seasonality and foreign exchange.
- Review the unusually high effective tax rates, the intercompany cost-sharing change, and open tax examinations.
- Monitor strategic-investment valuation and impairment exposure, the 50 Fremont loan and other debt, and substantial lease commitments.
- Track the status and potential financial effects of the disclosed patent allegation and shareholder derivative action.