Salesforce, Inc. — Form 10-Q Summary
Period mismatch: The request identifies 2016 Q2, but the supplied filing is for the quarter ended July 31, 2017 (Salesforce fiscal 2018 Q2), with six-month comparisons to July 31, 2016. This summary reflects the filing provided.
Business context and reporting period
Salesforce provides cloud-based enterprise software, primarily CRM, through subscription and support services, alongside professional services. Subscription and support generated about 92% of revenue in the first half of fiscal 2018. The company reports one operating segment.
Financial results and liquidity
| Metric | Three months ended July 31, 2017 | Six months ended July 31, 2017 |
|---|---|---|
| Revenue | $2.562 billion, up 26% | $4.949 billion, up 25% |
| Gross profit / gross margin | $1.891 billion / 74% | $3.628 billion / 73% (74% prior year) |
| Operating income / margin | $50.8 million / 2% | $41.9 million / 1% (versus $84.5 million / 2%) |
| Net income | $17.7 million (versus $229.6 million) | $8.5 million (versus $268.4 million) |
| Operating cash flow | $331.3 million | $1.561 billion (versus $1.302 billion) |
Cash and cash equivalents were $1.949 billion and marketable securities $1.552 billion at July 31, 2017. Current assets were $5.811 billion and current liabilities $7.526 billion; current liabilities included $4.819 billion of deferred revenue and $1.131 billion carrying value of convertible notes.
- Debt included $1.15 billion principal of 0.25% convertible notes due April 2018, a $500 million term loan due July 2019, and a loan assumed with 50 Fremont with about $198 million carrying value. The $1 billion revolving facility was undrawn; the company reported compliance with debt covenants.
- Six-month investing cash outflow was $1.291 billion, primarily reflecting marketable-security purchases and capital spending. Financing cash inflow was $67.6 million, including employee-plan proceeds, partly offset by repayment of $200 million on the revolving facility and capital-lease payments.
Material changes versus prior comparable periods
- Q2 revenue rose 26%, driven mainly by new customers, upgrades, and additional subscriptions; Demandware contributed $51.1 million in the quarter and $96.9 million in the half-year.
- First-half operating income fell by roughly half despite 25% revenue growth. Operating expenses grew 26%, including higher hiring, sales commissions, infrastructure and data-center costs, stock compensation, and acquired-intangible amortization.
- First-half net income dropped sharply from 2016, principally because the prior-year period included a $265.7 million discrete tax benefit from a partial release of the valuation allowance following the Demandware acquisition. First-half 2017 tax benefit was only $1.0 million.
- Deferred revenue was $4.819 billion, down from $5.543 billion at January 31, 2017; unbilled deferred revenue was $10.4 billion, compared with $9.0 billion at January 31, 2017. Management cautions that unbilled deferred revenue fluctuates with contract timing and is not a reliable standalone indicator of future revenue.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expects continued investment in sales, R&D, data-center capacity, infrastructure, and international expansion; it said it remained focused on improving operating margins in fiscal 2018.
- Management reported an attrition rate of 8%–9% as of July 31, 2017, excluding Marketing and Commerce Cloud, and expected it to remain consistent. Sales and marketing represented 46% of first-half revenue and is expected to remain a substantial cost.
- About $2.2 billion of unamortized stock-based compensation remained, with $487.8 million expected to be expensed in the rest of fiscal 2018. Stock compensation and acquired-intangible amortization materially affect reported operating results.
- The $1.15 billion convertible notes become holder-convertible for the quarter ending October 31, 2017, following the stock-price conversion test. Cash settlement of principal and potential dilution are relevant considerations; note hedges are intended to reduce, but do not eliminate, potential dilution.
- Operating lease commitments totaled $3.211 billion; additional infrastructure-service payments of $108 million in fiscal 2019 and $126 million in fiscal 2020 were disclosed. A 25-year naming-rights agreement carries annual payments of about $4.4 million.
- Key risks include service outages and cybersecurity incidents, privacy and cross-border data regulation, competition, acquisition integration and strategic-investment valuation, foreign exchange, and substantial lease and debt commitments. The company cited an interest-rate sensitivity of about $29.8 million for a 100-basis-point move in the value of its fixed-income portfolio.
- The company said current legal matters were not expected to have a material adverse effect overall, but outcomes are uncertain and losses beyond accruals could not be estimated. It is defending a TCPA class-action matter involving ExactTarget. Management reported disclosure controls were effective and 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 2018 Q2, not 2016 Q2.
- Review revenue growth quality, renewal/attrition trends, unbilled deferred revenue, and Demandware’s contribution.
- Assess whether expense growth, stock compensation, and acquired-intangible amortization constrain operating-margin improvement.
- Track the April 2018 convertible-note maturity, conversion or cash-settlement outcome, and potential share dilution.
- Evaluate liquidity alongside lease commitments, planned capital spending, and risks to strategic-investment valuations.