Salesforce, Inc. — Form 10-Q Summary
Period clarification: The filing is for the quarter ended July 31, 2009, Salesforce’s fiscal 2010 second quarter, with six-month results also presented. This conflicts with the request metadata’s “2008 Q2.” Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context and reporting period
Salesforce provides subscription-based cloud CRM services and a platform for business applications. Management reported approximately 63,200 customers worldwide. The statements are unaudited; management cautions that interim results are not necessarily indicative of the full fiscal year.
Financial performance
| Metric | Q2 FY2010 | Q2 FY2009 | Six months FY2010 | Six months FY2009 |
|---|---|---|---|---|
| Revenue | $316.1 | $263.1 | $621.0 | $510.7 |
| Gross profit / margin | $253.6 / 80.2% | $209.0 / 79.4% | $496.7 / 80.0% | $405.3 / 79.4% |
| Operating income / margin | $29.5 / 9.3% | $16.1 / 6.1% | $59.6 / 9.6% | $31.5 / 6.2% |
| Net income attributable to Salesforce | $21.2 | $10.0 | $39.6 | $19.6 |
| Diluted earnings per share | $0.17 | $0.08 | $0.31 | $0.16 |
| Cash from operating activities | $45.9 | $53.1 | $143.8 | $136.9 |
- Q2 revenue grew 20% year over year; subscription and support revenue rose 22% to $293.4 million and represented 93% of revenue. Professional services and other revenue declined 3% to $22.6 million.
- For the six months, revenue grew 22%; subscription and support revenue increased 24%. Europe and Asia Pacific revenue grew 21% to $174.3 million, 28% of the total. Foreign exchange reduced year-over-year revenue by $12.5 million in the six-month period.
- Operating income increased 83% in Q2 and 89% for the six months. The six-month operating cash flow increased 5%; Q2 operating cash flow declined 14% year over year. Six-month capital expenditures were $32.8 million, implying operating cash flow less capital expenditures of approximately $111.1 million.
- Stock-based compensation was $42.5 million for the six months. A further $212.1 million remained to be recognized over future service periods, subject to forfeitures and other assumptions.
Balance sheet, liquidity and cash flows
- Cash, cash equivalents and marketable securities totaled $1.030 billion at July 31, 2009, versus $882.6 million at January 31, 2009. Cash and cash equivalents alone were $246.2 million.
- Total assets were $1.557 billion; total liabilities were $754.1 million. Current assets of $701.3 million were slightly below current liabilities of $712.6 million. Total current and noncurrent deferred revenue was $549.0 million, down from $594.0 million at January 31.
- Six-month investing cash outflow was $413.8 million, mainly reflecting purchases of marketable securities and capital expenditures; financing provided $35.9 million. Cash and cash equivalents decreased $237.7 million during the six months, while the combined cash and securities balance increased.
- The filing reports no bank line of credit. Capital lease obligations had a present value of $17.9 million; future operating lease payments totaled $287.6 million. Letters of credit outstanding were $10.4 million.
Changes, outlook and risks
- Management expected fiscal 2010 revenue growth to be significantly below fiscal 2009’s 44% growth. New business in the first half was slightly below the prior-year period; management cited longer sales cycles, smaller initial deployments, slower customer expansion and slightly lower renewal rates, particularly among small and medium-sized businesses.
- Management expected cost management to improve fiscal 2010 operating income performance as a percentage of revenue versus fiscal 2009. It continued to plan investment in data center capacity, research and development, and domestic and international sales and marketing. Hiring was sharply reduced: 87 employees were added in the first half versus 440 a year earlier; July 31 headcount was 3,653.
- Professional services demand weakened, and its cost exceeded related revenue by $2.5 million in the first half. Management expected this imbalance to continue during fiscal 2010.
- Notable investment exposure: $9.2 million invested in the Reserve Primary Fund was valued at $8.0 million at July 31. Salesforce had recorded a $1.2 million other-than-temporary loss in fiscal 2009 and said ultimate recovery was uncertain.
- A patent infringement notice had been received, but no litigation had been filed. Management did not expect a material effect on financial condition, while acknowledging a possible material impact on a particular quarter’s income or cash flows. Other ordinary-course legal matters were not expected to have a material adverse effect.
- Interest-rate sensitivity analysis estimated that a 100-basis-point rate change could change portfolio market value by approximately $12.5 million. Other key risks include recession-related spending and renewal pressure, service availability and security, competition, international and currency exposure, and future tax changes. A California tax-law change resulted in a $2.2 million tax expense in the six-month period and is expected to affect the company beginning in fiscal 2012.
- Management stated that existing cash, short-term securities and operating cash flow should cover working capital and capital expenditure needs for the next 12 months. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended reporting period: the filing covers Q2 FY2010, not Q2 2008.
- Track new business, renewal rates, deferred revenue and receivables for evidence that reported subscription growth is translating into sustained billings and cash generation.
- Review subsequent disclosures on the Reserve Fund’s liquidation and recoverability, as well as the quality and duration profile of the broader securities portfolio.
- Monitor operating margins alongside stock-based compensation, continued infrastructure spending and the expected professional-services loss.
- Follow developments in the patent claim, lease commitments, foreign-exchange exposure and tax matters.