Salesforce, Inc. — Form 10-K Summary
Period clarification: The request identifies 2012 Q4, but the supplied filing is Salesforce’s Form 10-K for the fiscal year ended January 31, 2014 (FY2014). It includes quarterly data for FY2014, including the quarter ended January 31, 2014.
Business context and reporting period
Salesforce provides subscription-based cloud software, principally CRM, across Sales Cloud, Service Cloud, Marketing Cloud and its platform. Subscription and support represented 94% of FY2014 revenue. The company acquired ExactTarget in July 2013 for approximately $2.6 billion, expanding its digital marketing business.
Key financial metrics
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $4.071 billion | $3.050 billion |
| Subscription and support revenue | $3.825 billion | $2.869 billion |
| Gross profit / margin | $3.103 billion / 76% | $2.367 billion / 78% |
| Operating loss / margin | $286.1 million / (7%) | $110.7 million / (4%) |
| Net loss | $232.2 million | $270.4 million |
| Operating cash flow | $875.5 million | $736.9 million |
| Cash, cash equivalents and marketable securities | $1.321 billion | $1.758 billion |
| Deferred revenue, current and noncurrent | $2.522 billion | $1.863 billion |
| Unbilled deferred revenue | Approximately $4.5 billion | Approximately $3.5 billion |
FY2014 revenue increased 33%; management attributed subscription growth mainly to new customers, upgrades, additional subscriptions and lower attrition. Gross margin declined two percentage points as delivery costs rose. Operating expenses grew faster than revenue, and the operating loss widened. The net loss narrowed largely alongside a $125.8 million income-tax benefit; the filing cites a $143.1 million partial valuation-allowance release related primarily to ExactTarget. Non-GAAP net income was $221.9 million, down from $242.5 million; this measure excludes, among other items, stock compensation and acquired-intangible amortization.
FY2014 investing cash outflow was $2.432 billion, primarily reflecting acquisitions, capital expenditures and investments; financing cash inflow was $1.598 billion, including convertible-note and term-loan proceeds. Working capital was negative $1.300 billion. The filing states existing liquidity and operating cash flows should meet working-capital, capital-expenditure and debt needs for the next 12 months.
At January 31, 2014, principal due on convertible notes and the term loan was approximately $2.004 billion: $568.9 million of 0.75% notes, $1.15 billion of 0.25% notes and $285.0 million outstanding on the term loan. The 0.75% notes were convertible and classified as current; Salesforce reported conversion requests for at least $280 million principal to be settled in cash in FY2015. Capital-lease obligations totaled $606.5 million in future minimum payments, in addition to substantial operating-lease commitments.
Material changes and quarterly results
- ExactTarget’s results were consolidated from July 12, 2013; it contributed $194.0 million revenue and a $152.9 million loss after acquisition. Goodwill rose to $3.501 billion from $1.529 billion.
- Cash and marketable securities fell by $437.3 million year over year, while accounts receivable increased to $1.361 billion from $872.6 million.
- Stock-based expense reached $503.3 million, compared with $379.4 million; purchased-intangible amortization was $146.5 million, compared with $88.2 million.
- FY2014 fourth-quarter revenue was $1.145 billion; operating loss was $103.7 million and net loss was $116.6 million. The filing identifies the fourth quarter as seasonally strongest for new business and renewals.
Outlook, risks and unusual items
The filing provides no specific forward revenue or earnings guidance. Management expected continued investment in sales and marketing, research and development, data-center capacity, personnel and international expansion; these costs could remain substantial, and management warned GAAP losses could continue. It expected research and development and cost of revenue to rise in absolute dollars, and marketing and sales to remain the largest expense category. Attrition was in the high-single-digit range at year-end, down from low double digits a year earlier; management expected a gradual further decline.
Key risks include service availability, data security and privacy regulation; intense competition; acquisition integration and goodwill/intangible valuation; customer renewals and growth sustainability; foreign-exchange exposure; and the company’s significant debt, lease commitments and potential dilution from notes, warrants and stock awards. Management said current legal matters were not expected to have a material adverse effect, while noting an unfavorable outcome could affect a particular period. The company reported effective disclosure controls and internal control over financial reporting; the ExactTarget control environment was excluded from management’s assessment for the acquisition year. The independent auditor issued an unqualified opinion.
Important facts for investors to verify
- Confirm the intended period: the supplied filing covers FY2014, not 2012 Q4.
- Assess whether subscription growth and declining attrition can continue, and distinguish recurring organic growth from ExactTarget’s contribution.
- Review the drivers of declining gross margin and widening operating loss, including stock compensation and acquired-intangible amortization.
- Check cash conversion, receivables collection, seasonal billing effects, and the quality and timing of deferred and unbilled revenue.
- Track cash settlement of convertible-note conversions, debt maturities, lease obligations and potential dilution.
- Evaluate ExactTarget integration, its reported post-acquisition loss, and the recoverability of acquisition-related goodwill and intangibles.