Business Context and Reporting Period
Company: Salesforce, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 31, 2008 (Third Quarter of Fiscal Year 2009)
Business Overview: Salesforce is the leading provider of on-demand customer relationship management (CRM) software. The company operates in a single segment, offering subscription-based services and professional services globally. The fiscal year ends on January 31.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Oct 31, 2008 | Nine Months Ended Oct 31, 2008 |
|---|---|---|
| Total Revenues | $276,487 | $787,186 |
| Gross Profit | $220,139 | $625,449 |
| Gross Margin | 80% | 79% |
| Operating Income | $16,133 | $47,652 |
| Net Income | $10,124 | $29,675 |
| Diluted EPS | $0.08 | $0.24 |
| Cash from Operating Activities | $17,121 | $154,028 |
| Cash, Equivalents & Marketable Securities | $804,606 (as of Oct 31, 2008) | |
| Deferred Revenue | $469,534 (as of Oct 31, 2008) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 43% year-over-year for the quarter and 48% for the nine-month period, driven by a 44% increase in subscription and support revenue due to a higher number of paying subscriptions.
- Profitability: Operating income rose to $16.1 million (6% of revenue) from $6.1 million (3% of revenue) in the prior year quarter. Net income increased to $10.1 million from $6.5 million.
- Expense Increases: Operating expenses increased significantly due to strategic investments. Marketing and sales expenses rose 42% (to $136.5M) and R&D expenses rose 55% (to $26.3M) to support growth and product development.
- Stock-Based Compensation: Stock-based expenses totaled $19.3 million for the quarter (7% of revenue), up from $14.2 million in the prior year period.
- Investment Losses: The company recorded a $1.2 million other-than-temporary impairment loss related to an investment in The Reserve Primary Fund, a money market mutual fund that suspended redemptions.
Guidance, Outlook, and Risks
- Acquisitions: In August 2008, Salesforce acquired InStranet, Inc. for $31.6 million in cash to expand its customer service and support offerings. The company also increased its ownership in its Japanese joint venture to 72%.
- Investment Liquidity Risk: The company holds $45.1 million in The Reserve Primary Fund. While management believes it has the right to recover the full amount, the timing of fund dispersal is uncertain, and a $1.2 million loss has already been recognized.
- Interest Rate Sensitivity: With $804.6 million in cash and marketable securities, a 100-basis point change in interest rates could result in a $3.7 million market value change.
- Future Outlook: Management expects revenue growth to continue but notes that growth rates may decline as the revenue base expands. The company plans to continue investing heavily in marketing, sales, and data center capacity (including a new center in Singapore).
- Stock-Based Compensation: Approximately $219.6 million of stock compensation remains to be amortized over the next five fiscal years, which will continue to materially reduce reported operating results.
Key Facts for Investor Verification
- Deferred Revenue: Verify the $469.5 million deferred revenue balance, which represents future revenue recognition and indicates the health of the subscription pipeline.
- Investment Exposure: Confirm the status of the $45.1 million investment in The Reserve Primary Fund and any updates regarding the recovery of these funds.
- Operating Leverage: Monitor the ratio of operating expenses to revenue, particularly marketing and sales costs, to assess if the company can maintain profitability as it scales.
- Stock-Based Expense Impact: Review the $219.6 million remaining stock compensation obligation to understand future non-cash expense pressures on net income.
- Geographic Mix: Note that 28% of revenue came from Europe and Asia Pacific; monitor foreign currency exchange rate impacts on these regions.