Business context and reporting period
Salesforce, Inc. provides subscription-based cloud CRM applications and a platform for customers and developers. This 10-Q reports the three months ended April 30, 2011, the first quarter of fiscal 2012, with results compared with the three months ended April 30, 2010. The request metadata says “2010 Q1,” but the filing itself covers fiscal 2012 Q1. Salesforce reports one operating segment.
Financial performance
Amounts below are in millions of U.S. dollars, except per-share data.
| Metric | Quarter ended Apr. 30, 2011 | Quarter ended Apr. 30, 2010 |
|---|---|---|
| Subscription and support revenue | $473.5 | $350.7 |
| Professional services and other revenue | $30.9 | $26.1 |
| Total revenue | $504.4 | $376.8 |
| Gross profit / gross margin | $401.3 / 79.6% | $305.2 / 81.0% |
| Operating income (loss) / margin | ($2.8) / (0.6)% | $33.1 / 8.8% |
| Net income attributable to Salesforce | $0.5 | $17.7 |
| Basic and diluted EPS | $0.00 | $0.14 basic; $0.13 diluted |
| Cash from operating activities | $139.5 | $143.2 |
- Total revenue increased 34%; subscription and support revenue rose 35% and represented 94% of revenue. Management attributed the increase to new customers, upgrades and additional subscriptions, and improved renewals.
- Operating expenses rose to $404.1 million from $272.2 million, growing faster than revenue. Marketing and sales was $254.5 million (51% of revenue), R&D $65.3 million (13%), and G&A $84.3 million (17%).
- Stock-based expense was $47.6 million, versus $26.5 million a year earlier. The filing reports $542.1 million of unamortized stock compensation at quarter-end.
- Gross margin decreased about 1.4 percentage points; operating margin fell from 8.8% to (0.6)%. The company cited higher hosting and data-center costs, depreciation and amortization, staffing, and acquired-technology amortization.
- Operating cash flow was $139.5 million. Investing cash flow was positive $79.4 million, chiefly reflecting marketable-security sales and maturities, partly offset by purchases, capital expenditures, acquisitions and strategic investments. Financing cash flow was $28.0 million. Capital expenditures were $27.3 million; operating cash flow less capital expenditures was approximately $112.2 million.
Financial position, debt and liquidity
- At April 30, 2011, cash and cash equivalents were $664.6 million; marketable securities totaled $857.7 million, for combined cash, cash equivalents and securities of $1.522 billion. Total assets were $3.128 billion.
- Current assets were $1.188 billion and current liabilities $1.685 billion. Current liabilities included $478.4 million carrying value of convertible notes classified as current; the notes’ principal amount is $575 million.
- The 0.75% convertible senior notes mature January 15, 2015. They were convertible at holders’ option for the quarter ending July 31, 2011 following the stock-price conversion trigger. Conversion would require cash up to principal, with excess value payable in cash, shares or both at Salesforce’s election. Note hedges were intended to reduce potential dilution; separate warrants may create dilution.
- Deferred revenue, current and noncurrent, was $915.1 million, down from $934.9 million at January 31, 2011 but up from $664.5 million at April 30, 2010. Management notes that deferred revenue is not total contract value and that quarterly balances reflect seasonal invoicing.
- Management said existing cash, short-term securities and operating cash flow should cover working-capital and capital-expenditure needs for the next 12 months. The company had no bank line of credit and disclosed $10.5 million in outstanding landlord letters of credit.
Outlook, commentary, risks and unusual items
- Management expects to reinvest a significant portion of incremental fiscal 2012 revenue in growth, including sales and marketing, R&D, hiring and data-center capacity. It expects fiscal 2012 diluted EPS to be significantly below fiscal 2011; no specific EPS or revenue forecast is provided in the supplied filing text.
- Salesforce expects marketing and sales to remain its largest expense and to increase in absolute dollars. It also expects R&D and G&A expenses to rise in absolute dollars; management expected G&A as a percentage of revenue to remain flat for the next several quarters.
- After quarter-end, Salesforce acquired Radian6 for approximately $344.5 million net of cash acquired, including $285.1 million cash and 436,167 shares. It expected to include Radian6 results beginning in the quarter ending July 31, 2011. During the reported quarter, it acquired Manymoon for $13.6 million in cash.
- Salesforce adopted new multiple-deliverable revenue guidance prospectively from February 1, 2011; management said adoption had no material effect. The company continued to recognize $58.7 million of deferred professional-services revenue and $27.5 million of related deferred costs under the prior guidance.
- Foreign-currency derivatives recorded an $11.0 million loss in the quarter, while reported other expense was $0.8 million; derivatives were used to offset exposure on underlying balances, not for trading. An adverse resolution of tax positions could materially affect a period, although management did not expect a significant change in unrecognized tax benefits over the next 12 months.
- Key disclosed risks include service outages, security and data-protection failures, dependence on third-party data centers and technology, customer renewal and growth uncertainty, intense competition, acquisition integration, foreign-exchange and interest-rate exposure, and intellectual-property litigation. Management did not expect existing legal proceedings to have a material adverse effect, but noted an unfavorable outcome could materially affect future results or cash flows.
- The company estimated that a 100-basis-point interest-rate move could change the market value of its fixed-income portfolio by approximately $24.3 million. It also disclosed a contractual obligation to begin construction on undeveloped San Francisco land by September 2014 or face penalties; management did not expect to incur those penalties.
Most important facts for investors to verify
- Confirm the reporting-period mismatch: the filing is for the quarter ended April 30, 2011, not 2010 Q1.
- Track whether revenue growth, renewals and deferred-revenue trends support management’s growth plans, accounting for seasonal billing patterns.
- Assess whether expense growth, stock-based compensation and acquisition-related amortization continue to pressure operating margins and EPS.
- Review the notes’ convertibility, potential cash settlement needs, note hedges and warrant dilution, alongside the post-quarter Radian6 cash and equity consideration.
- Monitor data-center capacity and service reliability, security and privacy exposure, acquisition integration, foreign-currency effects, and the company’s ability to fund planned investment while maintaining liquidity.