Business Context and Reporting Period
Company: Salesforce, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 31, 2007 (Third Quarter of Fiscal Year 2008)
Business Overview: Salesforce is the leading provider of on-demand customer relationship management (CRM) application services. The company operates in a single segment, delivering services via subscription and professional services globally. The fiscal year ends on January 31.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Oct 31, 2007 | Nine Months Ended Oct 31, 2007 | Three Months Ended Oct 31, 2006 | Nine Months Ended Oct 31, 2006 |
|---|---|---|---|---|
| Total Revenues | $192,803 | $531,794 | $130,053 | $352,876 |
| Gross Profit | $148,522 | $406,934 | $98,693 | $267,825 |
| Gross Margin | 77% | 77% | 76% | 76% |
| Operating Income (Loss) | $6,118 | $9,579 | $(123) | $(1,522) |
| Net Income (Loss) | $6,512 | $10,977 | $339 | $(35) |
| Diluted EPS | $0.05 | $0.09 | $0.00 | $0.00 |
| Cash from Operating Activities | $51,998 | $123,482 | $30,627 | $73,065 |
| Cash & Marketable Securities | $571,003 (as of Oct 31, 2007) | |||
| Deferred Revenue | $340,808 (as of Oct 31, 2007) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 48% year-over-year for the quarter and 51% for the nine-month period. Subscription and support revenues (91% of total) grew significantly, driven by an increase in paying subscribers and international expansion.
- Profitability: The company transitioned from an operating loss in the prior year periods to operating income of $6.1 million for the quarter and $9.6 million for the nine months. Net income improved from $339,000 to $6.5 million for the quarter.
- Expense Increases: Operating expenses rose substantially due to strategic investments. Marketing and sales expenses increased 46% for the quarter (to $96.2 million) and 51% for the nine months (to $270.4 million) to support headcount growth and brand building. Research and development expenses increased 47% for the quarter.
- Stock-Based Compensation: Stock-based expenses totaled $14.2 million for the quarter and $39.6 million for the nine months, representing 7% of total revenue. This is a significant non-cash charge impacting reported profitability.
- Geographic Mix: Revenues from Europe and Asia Pacific grew 77% for the quarter, now accounting for 27% of total revenue, up from 22% in the prior year.
Guidance, Outlook, and Risks
- Outlook: Management expects to continue reinvesting revenues to expand data center capacity, hire personnel (particularly in sales and R&D), and expand international operations. Marketing and sales costs are expected to remain a substantial portion of total revenues.
- Professional Services: The company expects the cost of professional services to continue to exceed related revenue for the remainder of fiscal 2008 as it invests in headcount to meet demand.
- Stock Compensation: As of October 31, 2007, there was $156.3 million of stock compensation remaining to be amortized over future periods, which will continue to materially reduce reported results.
- Risks:
- Service Disruptions: Reliance on third-party hosting facilities creates risks of downtime due to natural disasters or technical failures.
- Competition: Intense competition from enterprise software vendors (e.g., Oracle, SAP, Microsoft) and on-demand providers.
- Security: Risks associated with data breaches and unauthorized access to customer data.
- Market Acceptance: The on-demand application market is still developing; widespread enterprise adoption is not guaranteed.
- Legal: A patent infringement lawsuit was filed by Triton IP, LLC in May 2007; management intends to defend vigorously.
Investor Verification Checklist
- Deferred Revenue: Verify the $340.8 million deferred revenue balance as a leading indicator of future revenue recognition.
- Stock-Based Expense Run-Rate: Confirm the $156.3 million remaining stock compensation obligation and its impact on future earnings.
- Professional Services Margins: Monitor the trend of professional services costs exceeding revenues and the timeline for achieving profitability in this segment.
- International Growth: Assess the sustainability of the 77% growth rate in Europe and Asia Pacific revenues.
- Liquidity: Review the $571 million cash and marketable securities position against future capital expenditure needs for data center expansion.