Salesforce, Inc. Form 10-Q Summary
Period identification: The request metadata says “2021 Q3,” but the filing covers the three and nine months ended October 31, 2022 (Salesforce fiscal 2023 Q3), and was signed November 30, 2022. Figures below follow the filing period.
Business context and reporting period
Salesforce provides cloud-based customer relationship management services through its Customer 360 platform. Subscription and support generated 92% of revenue for the nine months. The filing reports one operating segment and unaudited U.S. GAAP interim results.
Key financial metrics
| Metric | Three months ended October 31, 2022 | Year-over-year | Nine months ended October 31, 2022 | Year-over-year |
|---|---|---|---|---|
| Revenue | $7.84 billion | +14% | $22.97 billion | +20% |
| Gross profit / margin | $5.75 billion / 73% | $5.02 billion / 73% | $16.71 billion / 73% | $14.15 billion / 74% |
| Operating income / margin | $460 million / 6% | $38 million / 1% | $673 million / 3% | $724 million / 4% |
| Net income | $210 million | Down from $468 million | $306 million | Down from $1.47 billion |
| Diluted earnings per share | $0.21 | Down from $0.47 | $0.31 | Down from $1.53 |
| Cash provided by operating activities | $313 million | Down from $404 million | $4.32 billion | Up 8% |
Cash, cash equivalents and marketable securities totaled $11.92 billion at October 31, 2022, versus $10.54 billion at January 31, 2022. Accounts receivable was $4.28 billion. Current assets were $19.21 billion and current liabilities $18.23 billion.
Debt had a carrying value of approximately $10.6 billion, with $10.683 billion of principal outstanding; $1.182 billion was classified as current. There were no borrowings under the $3.0 billion revolving credit facility, and Salesforce reported compliance with debt covenants. Total remaining performance obligation (RPO) was $40.0 billion; current RPO was $20.9 billion.
Material changes versus comparable periods
- Quarterly revenue rose 14%, led by subscription and support revenue growth of 13%; professional services and other revenue increased 25%.
- Quarterly operating income increased to $460 million from $38 million, while nine-month operating income declined to $673 million from $724 million.
- Net income and EPS fell sharply year over year, reflecting lower strategic investment gains and a higher tax provision. Prior-year nine-month results included $1.18 billion of net strategic investment gains, compared with $75 million this period.
- Nine-month revenue increased $3.80 billion. The comparison was affected by the July 2021 Slack acquisition; the filing says acquisition expense contributions were generally not separately identifiable.
- Nine-month cash from operations increased 8%, while cash used in investing fell substantially versus the prior year, which included large acquisition outflows. Financing used $1.34 billion versus $7.64 billion provided in the prior-year period, primarily reflecting $1.68 billion of share repurchases versus prior-year debt issuance.
- RPO declined from $43.7 billion at January 31, 2022 to $40.0 billion at October 31, 2022, but management reported total RPO growth of 10% year over year and current RPO growth of 11% year over year.
Outlook, management commentary, risks and unusual items
- Management reported more cautious customer buying beginning in July 2022: longer sales cycles, additional approval layers and deal compression. It said these trends had not materially affected reported revenue or RPO through October 31, but warned that sustained slower new and renewal business could affect future revenue, RPO and targets.
- Foreign exchange reduced quarterly revenue and current RPO by approximately 4% compared with prior-year amounts at constant currency. Salesforce expected near-term revenue growth to be lower than in the past amid currency volatility. No specific financial guidance figures are provided in the supplied filing text.
- The nine-month effective tax rate was 51%, versus 15% a year earlier. The filing attributes the current rate primarily to taxes in profitable foreign jurisdictions and withholding taxes. Research and development cost capitalization requirements beginning in fiscal 2023 may increase future cash taxes; the company was assessing the Inflation Reduction Act, including its corporate minimum tax and excise tax on certain repurchases.
- Salesforce repurchased approximately 11 million shares for $1.7 billion in the quarter under a $10.0 billion authorization; $8.3 billion remained authorized at quarter-end. It disclosed an additional approximately $0.8 billion of repurchases paid through November 29, 2022.
- Strategic investments were $5.12 billion. Market volatility, valuation changes and impairments could cause further earnings volatility; nine-month investment gains were partly offset by $121 million of impairments and a $103 million unrealized loss on publicly held investments.
- Risk factors include uncertain economic conditions and customer spending, currency movements, competition, acquisition integration and Slack benefit realization, cybersecurity and service interruptions, privacy and regulatory changes, taxes, and debt and lease commitments. Salesforce disclosed an April 2022 Heroku security incident involving access to customer credentials; it said the incident had not materially affected its business or financial results.
- Slack-related securities litigation remained pending: a petition for U.S. Supreme Court review was pending, and the related state court action was stayed. The company said it could not reasonably estimate losses in excess of accrued amounts for its contingencies; it did not expect resolution of current matters to have a material adverse impact on its financial statements, while noting outcomes remain uncertain.
- Management concluded disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is fiscal 2023 Q3, not 2021 Q3.
- Assess whether slower buying, longer sales cycles and foreign-exchange headwinds persist, and how they affect new business, renewals, current RPO and revenue.
- Reconcile the sharp year-over-year declines in net income and EPS, including the effects of strategic investment gains and the 51% year-to-date tax rate.
- Review the quality and concentration of the $5.12 billion strategic investment portfolio, including valuation assumptions for private holdings and potential impairments.
- Track liquidity and obligations, including $10.683 billion of debt principal, upcoming maturities, lease commitments and the pace of share repurchases.
- Monitor the Slack litigation, the disclosed Heroku security incident, and evolving privacy, cybersecurity and tax requirements.