Salesforce, Inc. — Form 10-K Summary
Period clarification: The supplied filing is Salesforce’s Form 10-K for the fiscal year ended January 31, 2020 (fiscal 2020), filed March 5, 2020. It is not a filing for 2018 Q4.
Business context and reporting period
Salesforce provides cloud-based customer relationship management software and related subscription, support, analytics, integration, commerce and professional services. It reports as one operating segment. Subscription and support accounted for 94% of fiscal 2020 revenue.
Key financial metrics
| Metric | Fiscal 2020 | Fiscal 2019 |
|---|---|---|
| Total revenue | $17.10 billion | $13.28 billion |
| Gross profit / gross margin | $12.86 billion / 75% | $9.83 billion / 74% |
| Operating income / margin | $297 million / approximately 2% | $535 million / approximately 4% |
| Net income | $126 million | $1.11 billion |
| Diluted earnings per share | $0.15 | $1.43 |
| Cash provided by operating activities | $4.33 billion | $3.40 billion |
| Cash, cash equivalents and marketable securities | $7.95 billion | $4.34 billion |
| Remaining performance obligation | $30.8 billion | $25.7 billion |
Revenue increased 29% year over year; subscription and support revenue rose 29%, and professional services and other revenue rose 21%. The filing reports cash used in investing activities of $2.98 billion and cash provided by financing activities of $164 million. At year-end, debt principal outstanding was $2.69 billion; no borrowings were outstanding under the $1.0 billion revolving credit facility. The company reported $6.2 billion of accounts receivable and $10.66 billion of unearned revenue.
Material changes versus the prior comparable period
- Revenue growth reflected new and expanded customer subscriptions, acquisitions and a full year of MuleSoft revenue. Fiscal 2020 included approximately $689 million of Tableau revenue and $228 million from Salesforce.org.
- Platform and Other subscription revenue rose 57%, including approximately $652 million from Tableau; Service Cloud rose 23%, Marketing and Commerce Cloud 32%, and Sales Cloud 14%.
- Net income fell to $126 million from $1.11 billion. The comparison includes a $580 million tax provision in fiscal 2020 versus a $127 million tax benefit in fiscal 2019; the latter included a $612 million partial release of a valuation allowance.
- Operating income declined despite higher revenue. Operating expenses rose to $12.57 billion from $9.30 billion, including higher staffing, stock-based compensation and acquired-intangible amortization, as well as a $166 million one-time, non-cash charge related to settling the Salesforce.org reseller agreement.
- Net gains on strategic investments were $427 million, down from $542 million, and contributed materially to pretax income in both years. Fiscal 2020 also included $792 million of amortization of acquired intangible assets and $1.79 billion of stock-based expense.
- Cash from operations increased 27%. Cash and marketable securities rose by $3.61 billion, while total assets increased substantially, in part following acquisitions. Tableau was acquired for approximately $14.8 billion, predominantly in Salesforce shares; ClickSoftware was acquired for approximately $1.4 billion, and Salesforce.org for $300 million in cash.
Outlook, management commentary, risks and unusual items
Management emphasized continued investment in customer expansion, enterprise and international growth, product development, data-center capacity and acquisitions. The filing does not provide a clear numeric revenue or earnings guidance target. Management stated that it expected existing liquidity, operating cash flow, borrowing capacity and contracted unbilled amounts to be sufficient for working capital, capital expenditures and debt repayment needs over the next 12 months.
- Near-term uncertainty: The company said the financial impact of the Coronavirus outbreak was uncertain, citing potential effects on customers, sales cycles, events and vendors. Some customer events had shifted to virtual formats.
- Acquisition and integration risks: Acquisitions expanded products and markets but increased amortization, stock-based expense, integration demands and valuation uncertainty. Salesforce issued approximately 102 million shares in connection with acquisitions during fiscal 2020.
- Tax exposure: Tax costs associated with acquired operations and assets drove the fiscal 2020 provision. Unrecognized tax benefits were $1.43 billion; potential tax associated with integrating ClickSoftware and other Israeli-based operations remained uncertain.
- Service and cybersecurity: Salesforce disclosed a significant fiscal 2020 service disruption caused by a software update, which it said was not material to its business or financial results. It also cautioned that security breaches, outages and third-party infrastructure failures could harm customers and results.
- Other financial risks: Strategic investment gains are volatile; a 10% decline in the value of significant investments was estimated to reduce the portfolio by $97 million. Foreign exchange movements negatively affected fiscal 2020 revenue, and the company faces substantial lease and contractual commitments.
- Other events: The fourth-quarter operating loss was attributed in part to the timing of Dreamforce and Tableau integration investments. Keith Block resigned as co-CEO and a director in February 2020. The company reported an unqualified audit opinion and effective internal controls, although acquired companies were excluded from the internal-control assessment for the year.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers fiscal 2020, not 2018 Q4.
- Assess how much revenue growth and remaining performance obligation growth came from acquisitions versus organic customer demand, and how foreign exchange affected reported growth.
- Review the sustainability of profitability and cash generation after acquisition costs, stock-based compensation, acquired-intangible amortization and tax effects.
- Examine acquisition integration, share dilution, goodwill and intangible-asset valuations, and the expected realization of acquisition benefits.
- Monitor tax audits and potential integration-related tax liabilities, including the company’s unrecognized tax benefits.
- Evaluate liquidity alongside debt, lease liabilities, construction-related commitments and planned acquisitions; the filing lists $11.74 billion of contractual obligations under its stated schedule.
- Track service reliability, cybersecurity, privacy-law compliance, and the potential business and financial impact of the Coronavirus outbreak.