Salesforce, Inc. quarterly report, Q1 FY2014

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Business context and reporting period

Salesforce, Inc. filed a Form 10-Q for the three months ended April 30, 2014, its first quarter of fiscal 2015 (fiscal year ending January 31, 2015). The request metadata says “2013 Q1,” but the filing itself reports 2014 Q1 and compares it with the three months ended April 30, 2013. Salesforce provides enterprise cloud services, primarily subscription-based CRM, and reports as one operating segment. The results are unaudited.

Financial performance and position

  • Revenue: $1.227 billion, up 37% year over year. Subscription and support revenue was $1.147 billion, up 36% and 94% of total revenue; professional services and other revenue was $79.5 million, up 58%. Reported and constant-currency total revenue growth were both 37%.
  • Profit and margins: GAAP gross profit was $934.5 million, with a 76% gross margin versus 77% a year earlier. Operating loss was $55.3 million (5% of revenue), compared with $44.5 million; net loss was $96.9 million versus $67.7 million. Basic and diluted loss per share were $0.16 versus $0.12. Non-GAAP net income was $69.5 million and non-GAAP diluted EPS was $0.11; these exclude specified items and are not GAAP measures.
  • Cash flow: Operating cash flow was $473.1 million versus $283.2 million. Investing used $210.4 million, including $60.1 million of capital expenditures; financing used $219.2 million, primarily reflecting $283.9 million paid on convertible notes. Cash and cash equivalents rose to $827.9 million from $781.6 million.
  • Liquidity: Cash, cash equivalents and marketable securities totaled approximately $1.53 billion at April 30, 2014. Current assets were $2.04 billion and current liabilities $3.36 billion; current liabilities include $2.29 billion of deferred revenue. Accounts receivable was $684.2 million. Unbilled deferred revenue, not recorded on the balance sheet, was approximately $4.8 billion.
  • Debt and obligations: The 0.75% convertible notes had approximately $285.0 million principal outstanding and mature January 2015; $283.9 million was repaid during the quarter following conversions. The 0.25% notes had $1.15 billion principal outstanding and mature April 2018. The term loan balance was $277.5 million, at a 2.0% weighted-average rate for the quarter, with maturity in July 2016. Capital lease obligations had a $513.5 million present value. The company was compliant with term-loan covenants at quarter-end.

Material changes versus the prior comparable period

  • Revenue increased $334.1 million, or 37%, driven primarily by additional subscriptions from new customers and existing customers, upgrades, and lower attrition. Management reported attrition in the high-single-digit range, down slightly from January 31, 2014.
  • Operating expenses rose to $989.8 million from $728.2 million. Marketing and sales remained 52% of revenue; R&D rose to 16% from 15%, while G&A fell to 13% from 15%.
  • Stock-based compensation increased to $131.1 million from $114.7 million; purchased-intangible amortization increased to $43.6 million from $23.8 million. These costs contributed to the GAAP operating loss despite strong revenue growth.
  • Operating cash flow improved by $189.9 million, mainly because of a larger decrease in accounts receivable. Financing cash flow changed from a $1.12 billion inflow a year earlier, when notes were issued, to a $219.2 million outflow this quarter.
  • Interest expense increased to $20.4 million from $11.9 million, largely due to the term loan and capital lease financing. Other expense included an $8.5 million loss on conversions of the 0.75% notes.

Outlook, management commentary, risks and unusual items

  • Management expects continued investment in sales and marketing, R&D, employees, data-center capacity and facilities. It cautioned that GAAP losses may continue as the company pursues growth and incurs stock compensation and acquisition-related amortization.
  • No specific total-revenue or earnings guidance for the year is provided in the supplied filing text. Management said existing cash, cash equivalents, short-term marketable securities and operating cash flow should be sufficient for working capital, capital expenditures and debt repayment over the next 12 months.
  • Management expects marketing and sales to remain the largest expense, and R&D expense to increase in absolute dollars and potentially as a share of revenue. Future results may fluctuate due to seasonal billing, renewals, customer attrition, investment spending and acquisition integration.
  • Salesforce entered a 15.5-year lease for approximately 714,000 square feet of San Francisco office space, with estimated payments of approximately $560 million beginning in fiscal 2018. It also has a separate approximately 445,000-square-foot facility under construction, with an expected financing obligation of approximately $335.8 million.
  • The company received a $30 million nonrefundable deposit for a proposed sale of 8.8 acres of undeveloped San Francisco land; the sale was not expected to close within 12 months. A separate 3.7-acre parcel was classified as held for sale. Closing conditions remain relevant.
  • Key disclosed risks include service outages or security breaches, acquisition integration, privacy and regulatory changes, competition, dependence on customer renewals, international and currency exposure, litigation, substantial lease and debt commitments, and possible continued GAAP losses. Management said resolution of current legal matters was not expected to materially adversely affect results, cash flows or financial position, while acknowledging that an unfavorable outcome could affect a particular period.

Most important facts for investors to verify

  1. Confirm the reporting-period discrepancy: the filing covers the quarter ended April 30, 2014, not 2013 Q1.
  2. Track subscription growth, renewal and attrition trends, and the interpretation of the approximately $4.8 billion unbilled deferred-revenue figure, which management says can fluctuate and is not a reliable standalone indicator of future revenue.
  3. Assess the sustainability of operating cash flow, including the benefit from collections and working-capital movements, against ongoing capital spending and lease commitments.
  4. Review the remaining 0.75% note conversions and cash repayments, the January 2015 maturity, and the potential share dilution from conversions and related warrants.
  5. Evaluate the gap between GAAP losses and non-GAAP profitability, especially the scale and expected amortization of stock compensation and acquired-intangible costs.
  6. Monitor whether the land sales close and the planned office leases and data-center investments remain consistent with future liquidity and operating needs.