Salesforce, Inc. — Form 10-Q summary
Period clarification: The supplied filing is for the quarter ended October 31, 2010 (Salesforce fiscal Q3 2011), with comparative results for 2009 and year-to-date results for the nine months ended October 31. This does not match the request metadata of “2009 Q3.” Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Business context and reporting period
Salesforce provides subscription-based cloud CRM applications and a platform for business applications. Subscription and support represented 94% of revenue in both the quarter and nine-month period. The interim statements are unaudited; management states they include normal recurring adjustments and are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Three months ended Oct. 31, 2010 | Three months ended Oct. 31, 2009 | Nine months ended Oct. 31, 2010 | Nine months ended Oct. 31, 2009 |
|---|---|---|---|---|
| Revenue | $429.1 | $330.5 | $1,200.3 | $951.5 |
| Gross profit / gross margin | $347.0 / 80.9% | $265.0 / 80.2% | $968.8 / 80.7% | $761.7 / 80.0% |
| Operating income / margin | $35.2 / 8.2% | $30.1 / 9.1% | $97.9 / 8.2% | $89.8 / 9.4% |
| Net income attributable to Salesforce | $21.1 | $20.7 | $53.6 | $60.3 |
| Diluted earnings per share | $0.15 | $0.16 | $0.40 | $0.48 |
| Cash from operating activities | $74.0 | $35.5 | $293.3 | $179.4 |
- Growth and margins: Quarterly revenue rose 30% year over year; nine-month revenue rose 26%. Operating income grew more slowly than revenue, and operating margin declined in both comparisons as operating expenses increased. Quarterly net income attributable to Salesforce was nearly flat; nine-month net income declined.
- Cash flow and liquidity: At October 31, cash and cash equivalents were $630.3, and marketable securities totaled $1,172.1, for combined cash and securities of approximately $1.802 billion. Current assets were $1,192.9 and current liabilities $993.0. Nine-month operating cash flow was $293.3; investing cash outflow was $679.8, including securities purchases, acquisitions and capital spending.
- Debt and obligations: The company issued $575.0 of 0.75% convertible senior notes due 2015 in January 2010; carrying value at quarter-end was $466.8. Nine-month interest expense was $21.6, primarily reflecting amortization of the notes’ debt discount. The notes are unsecured and have no financial covenants. Capital lease obligations had a present value of $21.5; future operating lease payments totaled $464.9.
Material changes versus the prior comparable period
- Subscription and support revenue increased 31% in the quarter and 27% year to date, which management attributed mainly to new customers, upgrades, additional subscriptions and improved renewal rates.
- Quarterly and nine-month revenue outside the Americas grew faster than total revenue. Europe and Asia Pacific together represented 32% of quarterly revenue and 31% of nine-month revenue, compared with 30% and 29%, respectively, a year earlier.
- Marketing and sales expense increased 32% in the quarter and 28% for nine months, reaching 47% of revenue in both periods. R&D expense rose 44% quarterly and 37% year to date. Management cited hiring and investment in growth, product development and international expansion.
- Jigsaw Data Corporation was acquired in May for approximately $148.5 in cash, with purchase consideration including estimated contingent payments; the preliminary purchase price allocation recorded $133.3 of goodwill. During the quarter, Salesforce increased its Salesforce Japan ownership from 73% to 96% for $151.0 and said it intended to acquire the remaining shares.
- Cash and securities increased from $1.727 billion at January 31, 2010, but cash and cash equivalents alone declined from $1.011 billion to $630.3 as funds shifted into marketable securities and were used for investment and other activities.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific revenue or earnings guidance. Management expected sales and marketing expense to remain a substantial share of revenue and increase in absolute dollars; it also planned continued hiring, data-center expansion, R&D investment and international growth. Management said existing cash, cash equivalents, short-term securities and operating cash flow should cover the remaining Salesforce Japan purchase, working capital and capital expenditure needs over the next 12 months.
- Headquarters land purchase: On November 1, 2010, after quarter-end, Salesforce paid approximately $278.0 in cash for San Francisco land and related rights for a planned global headquarters. Construction timing had not been set; management anticipated additional future investment. This is a material subsequent event and liquidity commitment.
- Professional services: Professional-services costs exceeded related revenue by $1.9 in the quarter and $6.7 year to date. Management expected this to continue during fiscal 2011, describing the services as an investment in customer adoption.
- Taxes and contingencies: The nine-month effective tax rate was 41%, above the 35% federal statutory rate, reflecting state and foreign taxes, acquisition-related nondeductible expenses and California tax-law effects, partly offset by credits. A favorable discrete tax item arose from a court ruling and statutes of limitation. Microsoft patent litigation was settled through a cross-license agreement in August 2010; other ordinary-course legal matters remain, and management did not expect them to have a material adverse effect, while noting an unfavorable outcome could be material.
- Principal risks: Service interruptions, security or privacy breaches, reliance on third-party data centers and technology, customer renewals and adoption, intense competition, execution and integration of acquisitions, international and currency exposure, and economic conditions. The company also disclosed interest-rate sensitivity: a 100-basis-point change could move the investment portfolio’s market value by approximately $27.7. Stock-based compensation was $78.7 for nine months, with $237.7 remaining to be amortized.
Important facts for investors to verify
- Confirm the period: this is the October 31, 2010 10-Q, not a 2009 Q3 filing.
- Track whether revenue growth translates into operating-margin improvement as hiring and sales-and-marketing spending continue.
- Assess cash and securities after the $278.0 million headquarters land purchase and the planned acquisition of remaining Salesforce Japan shares.
- Review the convertible notes’ conversion, dilution and cash-settlement terms alongside the note hedges and warrants, including their potential effects on cash and shareholders.
- Monitor Jigsaw’s integration, contingent consideration, acquisition-related amortization and goodwill, and the professional-services cost shortfall.
- Evaluate renewal rates, deferred revenue and seasonality: management notes fourth-quarter billings are typically stronger, so interim balances may not indicate full-year activity.