Business context and reporting period
Salesforce, Inc. provides enterprise cloud-computing services, primarily subscription-based CRM applications and related support. This filing covers the quarter and nine months ended October 31, 2012 (fiscal 2013), compared with the same periods in 2011. The request metadata says “2011 Q3,” but the filing itself is for 2012 Q3.
Financial results and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended Oct. 31, 2012 | Prior-year quarter | Nine months ended Oct. 31, 2012 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $788.4 | $584.3 | $2,215.5 | $1,634.6 |
| Gross profit / margin | $602.2 / 76% | $455.7 / 78% | $1,715.3 / 77% | $1,282.1 / 78% |
| Operating loss / margin | $(54.2) / (7)% | $(10.2) / (2)% | $(89.9) / (4)% | $(28.7) / (2)% |
| Net loss | $(220.3) | $(3.8) | $(249.6) | $(7.5) |
| GAAP diluted loss per share | $(1.55) | $(0.03) | $(1.78) | $(0.06) |
| Operating cash flow | Not clearly provided for the quarter in the summarized MD&A | $455.3 | $351.2 |
- Subscription and support generated 94% of revenue. Quarterly revenue grew 35%; nine-month revenue grew 36%, driven chiefly by new customers, upgrades, additional subscriptions and improved renewals. Foreign exchange reduced revenue by $14.0 million for the quarter and $37.4 million for the nine months.
- GAAP operating losses widened as costs grew: nine-month marketing and sales expense was $1,178.5 million (53% of revenue), R&D was $308.3 million (14%), and stock-based expense totaled $271.8 million. Non-GAAP operating profit was $77.2 million for the quarter and $249.1 million for nine months; non-GAAP net income was $49.6 million and $164.8 million, respectively. These company-defined measures exclude significant expenses.
- Operating cash flow was $455.3 million for nine months. Investing used $760.6 million, including acquisitions and capital expenditures; financing provided $210.1 million. Cash and cash equivalents were $521.7 million at quarter-end, and cash plus marketable securities totaled $1,416.1 million, versus $1,447.2 million at January 31, 2012.
- Current assets were $1,257.3 million and current liabilities $2,323.2 million. Current and noncurrent deferred revenue totaled $1,291.7 million; unbilled deferred revenue was approximately $3.0 billion, up from $2.2 billion at January 31, 2012. Management cautions that unbilled deferred revenue fluctuates and is not a reliable indicator of future revenue.
- The $575.0 million principal amount of 0.75% convertible senior notes due January 2015 had a $514.9 million net carrying amount and was classified as current because holders could convert. Capital lease obligations had a $63.8 million present value. The filing reports $896.2 million of future minimum operating lease payments.
Material changes, outlook, and risks
- Buddy Media was acquired in August for approximately $735.8 million, including cash, shares and assumed awards; its results contributed $9.1 million of revenue and an $18.3 million loss after acquisition. Salesforce also acquired Rypple, GoInstant and other smaller businesses. Goodwill rose to $1,525.2 million from $785.4 million at January 31, largely due to acquisitions.
- A one-time, non-cash $149.1 million tax charge established a valuation allowance against a significant portion of deferred tax assets; an additional quarterly valuation-allowance change was $25.9 million. Management said this does not affect the ability to use tax attributes to reduce future cash taxes, but future valuation assessments may change.
- Management expected GAAP net losses for the next several quarters, citing growth investments, stock compensation and purchased-intangible amortization. It planned continued hiring, sales and marketing investment, R&D, data-center expansion and acquisitions; capital expenditures were expected to increase in the remainder of fiscal 2013. Management believed available liquidity and operating cash flow would cover working-capital and capital-expenditure needs for the next 12 months, while noting future financing might be needed for acquisitions or investments.
- Risks include service availability, security and data-center disruptions; competitive and renewal pressures; integration and execution risks from acquisitions; foreign-exchange and interest-rate exposure; and litigation, privacy regulation and economic weakness. Management did not expect current legal matters to materially affect consolidated results or financial position, but an unfavorable outcome could affect a particular quarter.
- Salesforce suspended pre-construction activity on undeveloped San Francisco land; the land, improvements and parking rights carried at $321.1 million. Management continued to evaluate future office needs and options for the property. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Most important facts for investors to verify
- Reconcile the sharp GAAP net loss with the $149.1 million valuation-allowance charge, recurring stock compensation and acquisition-related amortization; assess the assumptions behind non-GAAP measures.
- Track operating cash flow against acquisition spending, capital expenditures, deferred commissions and cash-plus-securities balances.
- Assess the sustainability of subscription growth and renewals, and interpret the $3.0 billion unbilled deferred revenue figure in light of billing timing and renewal-cycle effects.
- Review the integration, performance and final purchase accounting for Buddy Media and other acquisitions, including the increased goodwill balance.
- Monitor convertibility and potential settlement of the notes, lease commitments, and management’s expected continued GAAP losses and investment spending.