Salesforce, Inc. annual report, FY2012

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Salesforce, Inc. — Form 10-K Summary

Reporting period: Fiscal year ended January 31, 2013 (fiscal 2013), compared primarily with fiscal 2012. The request metadata says “2011 Q4,” but the supplied filing is the fiscal 2013 annual report.

Business context

Salesforce provides subscription-based enterprise cloud software, principally CRM, through Sales Cloud, Service Cloud, Marketing Cloud, and the Salesforce Platform. Subscription and support fees generated 94% of fiscal 2013 revenue. About 30% of revenue came from outside the Americas. No customer accounted for 5% or more of revenue.

Financial results and liquidity

  • Revenue: $3.050 billion, up 35% from $2.267 billion. Subscription and support revenue was $2.869 billion, up 35%; professional services and other revenue was $181.4 million, up 29%.
  • Margins: Gross profit was $2.367 billion; gross margin was approximately 77.6%, versus 78.4% in fiscal 2012. Marketing and sales expense was 53% of revenue, up from 52%.
  • Profitability: Operating loss was $110.7 million (3.6% of revenue), compared with a $35.1 million loss. Net loss was $270.4 million, or $1.92 per share, versus a net loss of $11.6 million, or $0.09 per share. The fiscal 2013 loss included $379.4 million of stock-based expense and $88.2 million of purchased-intangible amortization. Non-GAAP diluted EPS was $1.63; the company’s non-GAAP measure excludes specified expenses and tax items.
  • Cash flow: Operating cash flow was $736.9 million, up from $591.5 million. Investing activities used $938.9 million, mainly for acquisitions, capital expenditures, and investments; financing activities provided $334.5 million. Capital expenditures were $175.6 million.
  • Liquidity: Cash, cash equivalents, and marketable securities totaled $1.758 billion at year-end; accounts receivable was $872.6 million. Current and noncurrent deferred revenue totaled $1.863 billion, and unbilled deferred revenue was approximately $3.5 billion. Reported working capital was negative $901.7 million, reflecting, among other items, deferred revenue and notes classified as current.
  • Debt and commitments: The $575 million principal amount of 0.75% convertible notes is due January 2015 and was classified as current because holders could convert. Contractual obligations totaled $2.244 billion, including $1.505 billion of facilities operating leases and $583.6 million for convertible notes and interest.

Material changes versus fiscal 2012

  • Revenue growth remained strong, while GAAP operating and net losses widened as operating expenses increased. Research and development rose to $429.5 million from $295.3 million; marketing and sales rose to $1.614 billion from $1.170 billion.
  • Operating cash flow increased by $145.4 million. Investing cash outflow increased to $938.9 million from $489.7 million.
  • Unbilled deferred revenue increased from approximately $2.2 billion to $3.5 billion; management cautioned that its fluctuations are not a reliable indicator of future revenue.
  • Cash and marketable securities rose from $1.447 billion to $1.758 billion; total assets increased to $5.529 billion from $4.164 billion, including goodwill growth to $1.529 billion, largely associated with acquisitions.

Outlook, commentary, and risks

  • Management planned to reinvest a significant portion of incremental fiscal 2014 revenue in hiring, sales and marketing, research and development, data center capacity, infrastructure, and acquisitions. It anticipated GAAP net losses for the next several quarters. The filing text does not provide a clear fiscal 2014 revenue or earnings guidance figure.
  • The August 2012 Buddy Media acquisition cost approximately $735.8 million. Its post-acquisition contribution through January 31 was $19.6 million of revenue and a $29.0 million loss, including approximately $21.0 million of stock-based expense. Integration and acquisition execution remain risks.
  • A significant valuation allowance was recorded against deferred tax assets. The MD&A describes a $186.8 million tax charge in its tax reconciliation, while another overview passage refers to a $149.1 million charge. The filing text therefore presents inconsistent descriptions of the one-time tax amount; the reported fiscal 2013 income tax provision was $142.7 million.
  • The company suspended pre-construction activity on its San Francisco land in fiscal 2013. The land, improvements, and parking rights had a carrying value of $321.1 million; a future sale below carrying value or development spending could affect results or liquidity.
  • Principal risks include service outages or security breaches, intense competition, customer renewal and adoption uncertainty, rapid growth and rising costs, international and currency exposure, privacy regulation, acquisition integration, and litigation. A non-practicing entity had alleged patent infringement, but no litigation had been filed as of the report; management said current matters were not expected to have a material adverse effect, while noting an unfavorable resolution could affect a quarter materially.
  • The company reported $1.2 billion of unamortized stock compensation at year-end and expected $491.0 million to be recognized in fiscal 2014. It had no bank line of credit and stated that available liquidity and operating cash flow should cover working capital and capital expenditure needs for the next 12 months.

Most important facts for investors to verify

  • Reconcile the differing $149.1 million and $186.8 million descriptions of the deferred-tax valuation allowance and assess future tax-asset realizability.
  • Track GAAP profitability, stock-based compensation, acquisition-related amortization, and the basis and reconciliation of non-GAAP results.
  • Assess renewal performance and the conversion of deferred and unbilled deferred revenue into recognized revenue and cash collections.
  • Review Buddy Media integration, acquisition returns, goodwill exposure, and continued acquisition spending.
  • Monitor the convertible notes’ conversion or repayment outcome, share dilution, lease commitments, and the suspended San Francisco property plans.
  • Review service reliability, security, and the status of material litigation or intellectual-property claims.

Audit and controls: Ernst & Young issued an unqualified opinion on the financial statements and internal control over financial reporting as of January 31, 2013.