Salesforce, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and six months ended July 31, 2019 (Salesforce fiscal 2020 Q2), with comparisons to 2018. This differs from the request metadata, which labels the period “2018 Q2.” Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Revenue | $4.00 billion, up 22% from $3.28 billion | $7.73 billion, up 23% from $6.29 billion |
| Gross profit / margin | $3.03 billion / 76%; prior year $2.43 billion / 74% | $5.85 billion / 76%; prior year $4.67 billion / 74% |
| Operating income / margin | $58 million / 1%; prior year $115 million / 3% | $268 million / 3%; prior year $306 million / 5% |
| Net income | $91 million; prior year $299 million | $483 million; prior year $643 million |
| Diluted earnings per share | $0.11; prior year $0.39 | $0.61; prior year $0.84 |
| Cash from operations | $436 million; prior year $458 million | $2.40 billion; prior year $1.92 billion |
- Subscription and support revenue was $3.75 billion for the quarter, up 22%; professional services and other revenue was $252 million, up 14%. All major subscription offerings grew, led by Marketing and Commerce Cloud (36%) and Salesforce Platform and Other (28%).
- Quarterly operating expenses rose to $2.97 billion from $2.32 billion. R&D, marketing and sales, and G&A expenses increased; marketing and sales remained the largest expense category.
- Quarterly earnings included $109 million of net gains on strategic investments. The six-month total was $390 million, making investment gains a significant contributor to pretax income.
Liquidity, cash flow and debt
- At July 31, cash and cash equivalents were $3.51 billion and marketable securities were $2.53 billion, or $6.04 billion combined. Accounts receivable was $2.33 billion.
- Current assets were $9.90 billion and current liabilities $10.20 billion. Unearned revenue, a major current liability, was $7.14 billion.
- Debt had a carrying value of approximately $2.98 billion; $200 million of the 2021 term loan was repaid during the quarter. The company reported compliance with debt covenants and no borrowings under its $1.0 billion revolving credit facility.
- Operating lease liabilities were $3.05 billion and finance lease liabilities $412 million at quarter-end. The company also disclosed $2.0 billion of operating leases not yet commenced.
- Remaining performance obligation was $25.3 billion, including $12.1 billion current and $13.2 billion noncurrent. Management cautions that this measure is affected by renewals, billing patterns, foreign exchange and other factors and is not necessarily indicative of future revenue growth.
Material changes, unusual items and outlook
- Net income declined year over year despite strong revenue growth, reflecting lower operating income, a tax provision rather than a tax benefit, and differing investment gains. The quarter included a $73 million income tax provision versus a $68 million benefit in the prior-year quarter.
- The June 2019 Salesforce.org combination resulted in a one-time, non-cash $166 million operating expense for settling the reseller agreement, as well as a $300 million cash payment. Salesforce.org contributed approximately $51 million to quarterly subscription and support revenue.
- Salesforce adopted lease accounting Topic 842 prospectively in fiscal 2020, recording approximately $2.9 billion of operating lease right-of-use assets and $3.1 billion of lease liabilities at adoption. Prior-period balance-sheet figures were not restated and are not directly comparable.
- On August 1, 2019, after quarter-end, Salesforce completed its approximately $14.9 billion acquisition of Tableau, primarily using Salesforce shares. A UK Competition and Markets Authority hold-separate order required the businesses to operate separately pending review. In August, Salesforce also agreed to acquire ClickSoftware for approximately $1.35 billion, subject to closing conditions.
- Management expects foreign-exchange movements to continue to weigh on revenue outside the Americas during the remainder of fiscal 2020. It expects continued investment in sales, R&D, data-center capacity and infrastructure; no specific numerical financial guidance is provided in the supplied filing text.
- Management reported an attrition rate below 10% as of July 31, 2019, excluding Commerce Cloud and Integration Cloud, and expected it to remain consistent. Operating cash flow is seasonal, with the first fiscal quarter typically strongest for collections.
- Key disclosed risks include service outages and cybersecurity, privacy and data-transfer regulation, competition, acquisition integration and regulatory review, foreign-exchange exposure, volatility in strategic investment valuations, and the costs of growth and lease commitments. The filing describes shareholder and Tableau-related litigation; management says current matters are not expected to materially adversely affect results, but notes outcomes are uncertain and potential excess losses cannot be reasonably estimated.
Important facts for investors to verify
- Confirm the reporting-period label: the filed quarter ended July 31, 2019, not 2018 Q2.
- Assess operating-margin and net-income declines against revenue growth, including the $166 million Salesforce.org charge, higher operating costs, tax changes and investment gains.
- Review cash-flow seasonality and working-capital movements, alongside the $25.3 billion remaining performance obligation and its stated limitations.
- Evaluate the funding, share dilution, integration costs and regulatory implications of the Tableau acquisition and proposed ClickSoftware transaction.
- Track lease commitments, debt repayments, foreign-exchange effects, strategic-investment valuation volatility and the outcomes of disclosed legal matters.