Salesforce, Inc. — FY2019 Form 10-K
Period clarification: The supplied filing is Salesforce’s Form 10-K for the fiscal year ended January 31, 2019—not a 2017 Q4 filing. Financial comparisons below are FY2019 versus FY2018; amounts are U.S. dollars.
Business context and reporting period
Salesforce provides cloud-based customer relationship management software and related platform, integration, marketing, commerce, analytics, and professional services. Subscription and support represented 93% of FY2019 revenue. The company reports as one operating segment.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $13.282B | $10.540B | +26% |
| Subscription and support revenue | $12.413B | $9.766B | +27% |
| Gross profit / margin | $9.831B / 74% | $7.767B / 74% | Margin unchanged |
| Operating income / margin | $535M / 4% | $454M / 5% | Income +18%; margin lower |
| Net income | $1.110B | $360M | +208% |
| Diluted EPS | $1.43 | $0.49 | — |
| Operating cash flow | $3.398B | $2.738B | +24% |
| Cash, cash equivalents and marketable securities | $4.342B | $4.521B | Down $179M |
| Principal outstanding on debt | $3.198B | $1.727B | Up $1.471B |
Gross margin was 74%; operating expenses rose to 70% of revenue from 69%. Operating cash flow less $595M of capital expenditures was approximately $2.803B. Working capital was negative $572M. Accounts receivable was $4.924B and unearned revenue $8.564B at year-end. Remaining performance obligations were $25.7B, including $500M related to fiscal 2019 acquisitions.
FY2019 net income included $542M of net gains on strategic investments and a $127M income-tax benefit. The tax benefit primarily reflected a $612M partial release of the valuation allowance, partly offset by increased unrecognized tax benefits. Consequently, reported net income growth was materially affected by investment gains and tax items, rather than operating income growth alone.
Material changes versus FY2018
- Revenue increased 26%, driven principally by new business, upgrades, and additional customer subscriptions. The filing attributes $431M of FY2019 revenue to MuleSoft following its acquisition.
- Platform and Other subscription revenue grew 49% to $2.854B; Marketing and Commerce grew 37% to $1.898B; Service Cloud grew 26% to $3.621B; Sales Cloud grew 13% to $4.040B. Management cautions that allocations across offerings and changes in product mix limit comparability.
- Operating expenses increased 27% to $9.296B. Marketing and sales rose 30% to $6.064B and remained the largest expense category; company headcount increased 16% year over year.
- Investing cash outflow increased to $5.308B, primarily due to $5.115B of business-combination spending, including MuleSoft, Datorama, and CloudCraze.
- Debt principal increased following issuance of $2.5B of senior notes and a $500M term loan; the company also repaid its prior convertible notes and 2019 term loan.
Outlook, commentary, risks and unusual items
- Management gave no specific forward revenue or earnings guidance in the provided filing text. It expects attrition to remain consistent; its reported attrition rate was below 10% as of January 31, 2019, with stated exclusions for Commerce Cloud and integration services.
- Management expects continued investment in sales, research and development, data-center capacity, security, international operations, and acquired technologies. It says it remains focused on improving operating margins, while noting expenses may rise in absolute terms and some expense ratios may increase.
- The company says existing liquidity, operating cash flow, borrowing capacity, and contracted but unbilled amounts should meet working-capital, capital-expenditure, and debt needs over the next 12 months.
- Key risks include cybersecurity and service availability, privacy regulation and cross-border data restrictions, intense competition, foreign-exchange volatility, acquisition integration and execution, and fluctuations in strategic-investment values. Adoption of new equity-investment accounting caused fair-value changes to flow through earnings; the filing identifies potential future earnings volatility.
- MuleSoft was acquired for approximately $6.4B; Datorama for approximately $766M; and CloudCraze for approximately $190M. MuleSoft contributed $431M revenue and a $286M pretax loss from acquisition through year-end. Acquisition-related amortization and stock compensation also weigh on reported results.
- Debt included $500M of floating-rate term loan debt, $1.0B of 2023 notes, $1.5B of 2028 notes, and the 50 Fremont loan. A $1.0B revolving facility was undrawn, and Salesforce reported compliance with debt covenants. Contractual commitments were significant, including office leases, infrastructure commitments, and future office-building lease obligations.
- Current legal matters were not expected by management to have a material adverse effect overall; however, the filing says outcomes are uncertain and an unfavorable resolution could affect a particular quarter. A consolidated shareholder derivative action concerning director compensation was disclosed.
Most important facts for investors to verify
- Confirm the period: this is FY2019, ending January 31, 2019, despite the request metadata specifying 2017 Q4.
- Assess underlying earnings quality by separating operating performance from the $542M investment gain and the tax benefit, including the valuation-allowance release.
- Review whether acquisition-driven growth, integration costs, amortization, and MuleSoft’s reported pretax loss develop as management expected.
- Track operating margin, stock-based compensation, sales and marketing costs, and management’s stated margin-improvement objective.
- Evaluate cash conversion, negative working capital, debt maturities, lease and infrastructure commitments, and the quality and timing of remaining performance obligations.
- Monitor strategic-investment valuation changes, foreign-exchange exposure, and material developments in litigation, privacy regulation, cybersecurity, and service reliability.