Salesforce, Inc. (salesforce.com, inc.) — Form 10-Q Summary
Period clarification: The supplied filing covers the quarter ended July 31, 2013—Salesforce fiscal Q2 2014—and the six months then ended. It is not a 2012 Q2 filing; 2012 figures below are comparable periods.
Business context and reporting period
Salesforce provides subscription-based enterprise cloud computing services, primarily CRM. Subscription and support accounted for 94% of revenue. The interim financial statements are unaudited; fiscal 2014 ends January 31, 2014.
Financial performance and position
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Revenue | $957.1 | $731.6 | $1,849.7 | $1,427.1 |
| Subscription and support revenue | $902.8 | $687.5 | $1,745.1 | $1,342.7 |
| Gross profit / margin | $739.4 / 77% | $569.2 / 78% | $1,423.0 / 77% | $1,113.1 / 78% |
| Operating loss / margin | $(39.9) / (4%) | $(13.5) / (2%) | $(84.4) / (4%) | $(35.7) / (3%) |
| Net income (loss) | $76.6 | $(9.8) | $8.9 | $(29.3) |
| Diluted EPS | $0.12 | $(0.02) | $0.01 | $(0.05) |
| Operating cash flow | $183.2 | $136.2 | $466.4 | $349.4 |
- Q2 revenue rose 31% year over year; constant-currency growth was 32%. Six-month revenue rose 30%. Management attributed subscription growth to new customers, expansions, longer commitments and improved renewals.
- Operating expenses grew faster than revenue in Q2: total operating expenses were $779.2 million versus $582.7 million. Marketing and sales were $480.6 million, or 50% of revenue; R&D was 15% and G&A 16% of revenue.
- Q2 GAAP net income included a $128.8 million discrete tax benefit from a partial release of the deferred-tax valuation allowance, primarily enabled by deferred tax liabilities from the ExactTarget acquisition. Excluding specified items, company-reported non-GAAP net income was $56.3 million for Q2 and $117.3 million for the six months; non-GAAP diluted EPS was $0.09 and $0.19, respectively.
- At July 31, cash and cash equivalents were $579.9 million and marketable securities totaled $350.1 million, or $930.0 million combined, versus $1,758.3 million at January 31. Accounts receivable was $599.5 million; current deferred revenue was $1,734.8 million and noncurrent deferred revenue $54.8 million.
- Six-month investing cash outflow was $2,074.6 million, mainly reflecting acquisitions and capital spending. Financing cash inflow was $1,449.0 million, including convertible-note and term-loan proceeds.
- Debt included $575 million principal of 0.75% convertible notes due 2015, $1.15 billion principal of 0.25% convertible notes due 2018, and a $300 million term loan due 2016. The term loan had a 2.3% weighted-average rate at quarter-end; $30 million was current and $270 million noncurrent. Present value of capital-lease obligations was $517.1 million.
Material changes versus the prior comparable period
- ExactTarget was acquired for approximately $2.6 billion cash and assumed equity awards on July 12, 2013. Its results included after acquisition contributed $16.0 million of revenue and a $10.4 million pretax loss. Salesforce recorded preliminary goodwill of $1,852.9 million from the deal; total goodwill rose to $3,503.7 million.
- Salesforce also acquired EdgeSpring for approximately $133.7 million and completed two other acquisitions. Acquisition-related spending drove the sharp increase in investing cash outflow and contributed to higher amortization, staffing and integration costs.
- In March 2013 Salesforce issued $1.15 billion of 0.25% convertible notes and in July borrowed $300 million under a term loan to help fund ExactTarget. Interest expense increased to $19.7 million in Q2 from $8.0 million a year earlier.
- Revenue growth was accompanied by gross-margin compression of about one percentage point and a larger operating loss. Q2 net income turned positive principally because of the one-time valuation-allowance release, not improved GAAP operating profitability.
- Unbilled deferred revenue was approximately $3.8 billion, up from $3.5 billion at January 31; management cautioned that it fluctuates with contract timing and renewal cycles and is not a reliable standalone indicator of future revenue.
Outlook, commentary, risks and unusual items
- Management expected GAAP net losses for the next several quarters, citing growth investment, stock-based compensation and acquisition-related amortization. It expected R&D and marketing and sales expenses to rise in absolute dollars; capital spending was expected to be higher in the remaining six months of fiscal 2014.
- Management said existing cash, cash equivalents, short-term securities and operating cash flow should meet working-capital and capital-expenditure needs for the next 12 months. It also planned continued investment in data-center capacity, personnel, product development and acquisitions. No specific revenue or earnings guidance figures are provided in the supplied filing text.
- Renewal rates remained in the high-80% range at July 31 and had improved slightly from January 31. Management expected gradual improvement. Reported six-month stock-based compensation was $225.2 million, with $1.2 billion of unamortized compensation remaining.
- Risks highlighted include service outages, security and data-privacy incidents, competition, renewal and growth uncertainty, acquisition integration and valuation, international and currency exposure, and substantial debt and lease commitments. The term loan has financial covenants; Salesforce reported compliance at July 31. The convertible notes are unsecured and have limited covenant protections.
- Other notable items: $16.0 million of Q2 acquisition costs; approximately $8.0 million of prior-period expense recorded for a multi-year intellectual-property license; a nine-year software capital lease entered in June; and $57.2 million of outstanding letters of credit, substantially for office leases. Management did not expect current legal matters to have a material adverse overall effect, but noted an unfavorable resolution could affect a particular quarter.
Most important facts for investors to verify
- Confirm the period: this is the quarter ended July 31, 2013, not 2012 Q2.
- Assess recurring operating performance separately from the $128.8 million tax benefit; compare GAAP results with the company-defined non-GAAP reconciliations.
- Track ExactTarget integration, acquired revenue and losses, purchase-accounting adjustments, goodwill and expected amortization.
- Monitor cash conversion, deferred and unbilled revenue trends, capital spending, and the substantial decline in cash and marketable securities following the acquisition.
- Review total debt, conversion conditions and dilution exposure, term-loan covenant requirements, and capital-lease obligations.
- Evaluate whether renewal rates, margins and expense growth support management’s stated expectations; the filing cautions that results may fluctuate and does not provide numeric forward guidance.