Salesforce, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the three and nine months ended October 31, 2018 (Salesforce fiscal 2019 third quarter), not 2017 Q3. Prior-year figures are adjusted for Topic 606 where indicated. Amounts are in U.S. dollars.
Business context and reporting period
Salesforce provides cloud-based enterprise software, principally CRM, and reports as one operating segment. Subscription and support generated 93% of nine-month revenue. The filing describes acquisitions of MuleSoft (May 2018), CloudCraze (April 2018) and Datorama (August 2018), expanding integration, commerce and marketing capabilities.
Key financial metrics
| Metric | Three months ended Oct. 31, 2018 | Three months ended Oct. 31, 2017 | Nine months ended Oct. 31, 2018 | Nine months ended Oct. 31, 2017 |
|---|---|---|---|---|
| Revenue | $3.392B | $2.701B | $9.679B | $7.675B |
| Gross profit / margin | $2.503B / 74% | $1.987B / 74% | $7.174B / 74% | $5.640B / 73% |
| Operating income / margin | $92M / 3% | $155M / 6% | $398M / 4% | $243M / 3% |
| Net income | $105M | $107M | $748M | $154M |
| Diluted EPS | $0.13 | $0.14 | $0.97 | $0.21 |
| Operating cash flow | $143M | $125M | $2.067B | $1.686B |
Quarterly revenue increased 26% year over year; nine-month revenue also increased 26%. Nine-month gains on strategic investments were $417M, versus a $4M loss in the prior-year period, and included significant fair-value and sale gains. The nine-month tax benefit was $4M, including a $140M discrete benefit from a partial release of the valuation allowance related to MuleSoft. These items materially influenced reported nine-month net income.
At October 31, 2018, cash and cash equivalents were $2.105B and marketable securities were $1.345B. Current assets were $6.870B and current liabilities $8.022B; current liabilities include $5.376B of unearned revenue. Debt carrying value was $3.676B, including $503M current and $3.173B noncurrent. The company reported $3.5B of cash, cash equivalents and marketable securities in its liquidity discussion, and said it was compliant with debt covenants. Remaining performance obligations were $21.2B, of which $10.0B was current.
Material changes versus the prior comparable period
- Subscription and support revenue rose 26% in the quarter and 27% year to date; MuleSoft contributed $104M and $203M, respectively.
- Operating income declined to $92M from $155M in the quarter despite revenue growth. Operating expenses increased 32% to $2.411B, with marketing and sales expense rising to 47% of revenue from 43%.
- Strategic-investment gains increased sharply, driving much of the nine-month net income increase. Under ASU 2016-01, equity investment fair-value changes are recorded in earnings, adding potential volatility.
- Debt increased substantially from January 31, 2018, reflecting new term debt and senior notes used partly to fund MuleSoft; the 0.25% convertible notes matured and were repaid in April 2018.
- Cash from operations for the nine-month period increased, while investing cash outflow rose to $4.930B, principally due to $5.115B of net cash used for business combinations.
Outlook, commentary, risks and unusual items
- No specific revenue, earnings or margin guidance is provided in the supplied filing text. Management said existing liquidity, operating cash flows and available credit were expected to meet working-capital, capital-expenditure and debt needs for the next 12 months.
- Management expects continued investment in sales, R&D, data-center capacity, security and infrastructure; marketing and sales costs are expected to remain a substantial expense. Management also said it remains focused on improving operating margins, while noting growth investments and acquisition-related costs weigh on operating income.
- Management reported an attrition rate of approximately 10%, described as consistent with the prior year, and expected it to remain consistent, while noting this is difficult to predict.
- Key risks include cybersecurity incidents or service disruptions, privacy and cross-border data rules, intense competition, acquisition integration and realization risks, foreign-exchange movements, investment-valuation volatility, tax uncertainty, and debt and lease commitments.
- Operating lease commitments totaled $3.704B; infrastructure-provider commitments were $2.0B in total, with approximately $1.9B remaining. Two November 2018 office agreements disclosed after quarter-end involve approximately $500M and $475M of minimum payments over 16 and 17 years, respectively.
- Legal matters are described as not expected to have a material adverse effect overall, though outcomes are uncertain. The ExactTarget TCPA class action settlement was approved in October 2018; approximately $6M was paid in November.
Important facts for investors to verify
- Confirm the intended period: this filing covers fiscal 2019 Q3, not 2017 Q3.
- Assess operating performance apart from strategic-investment gains and the $140M discrete tax benefit; verify the composition and sustainability of these effects.
- Review acquisition integration, MuleSoft’s reported $250M post-acquisition revenue and $208M pretax loss, and the purchase-accounting effects on goodwill and amortization.
- Track operating-margin trends, stock-based compensation ($954M for nine months; $2.7B remaining to be amortized), and investment-related expense growth.
- Evaluate liquidity against debt maturities, operating and infrastructure commitments, and the newly disclosed office leases.
- Monitor remaining performance obligations, renewal/attrition trends, and the effect of seasonality on billings and operating cash flow.