Salesforce, Inc. — Form 10-K Summary
Period clarification: The supplied filing is Salesforce.com, Inc.’s annual report for the fiscal year ended January 31, 2011, not a 2009 Q4 filing. Financial figures below are for fiscal 2011 and, where shown, fiscal 2010.
Business context and reporting period
Salesforce provided subscription-based cloud CRM applications and a platform for developing business applications, alongside collaboration products including Chatter. Subscription and support generated 94% of fiscal 2011 revenue. The company reported one operating segment; no customer accounted for 5% or more of revenue.
Key financial metrics
| Metric | Fiscal 2011 | Fiscal 2010 |
|---|---|---|
| Revenue | $1.657 billion | $1.306 billion |
| Subscription and support revenue | $1.551 billion | $1.209 billion |
| Gross profit / gross margin | $1.333 billion / 80% | $1.048 billion / 80% |
| Operating income / margin | $97.5 million / 6% | $115.3 million / 9% |
| Net income attributable to Salesforce | $64.5 million | $80.7 million |
| Diluted earnings per share | $0.47 | $0.63 |
| Cash provided by operating activities | $459.1 million | $270.9 million |
| Cash, cash equivalents and marketable securities at year-end | $1.408 billion | $1.727 billion |
At January 31, 2011, current assets were $1.075 billion and current liabilities were $1.276 billion, resulting in negative working capital of $201.5 million. Total deferred revenue was $934.9 million; the company also reported more than $1.5 billion of unbilled deferred revenue under non-cancelable subscriptions, which is not recorded as deferred revenue and is not presented as a reliable stand-alone revenue forecast.
The company reported $575 million principal amount of 0.75% convertible senior notes due 2015, with a $472.5 million net carrying amount at year-end. The notes became convertible at holders’ option for the quarter ending April 30, 2011, potentially requiring cash payment up to principal. Fiscal 2011 investing cash outflow was $1.063 billion and financing cash inflow was $14.1 million.
Material changes versus fiscal 2010
- Revenue rose 27%, primarily from new customers, additional subscriptions and upgrades, and improved renewals. Subscription and support revenue grew 28%.
- Gross margin held at 80%, but operating margin fell from 9% to 6%; operating income declined about 15% and attributable net income about 20%.
- Sales and marketing expense increased to $792.0 million, or 48% of revenue versus 46%. Research and development rose to $187.9 million, or 11% of revenue versus 10%. Management attributed the increases largely to employee growth and investment.
- Operating cash flow increased to $459.1 million. Cash and marketable securities fell by about $319.5 million, alongside substantial acquisition spending, the headquarters land purchase and investment activity.
- International revenue share increased to 32% from 29%; Asia Pacific’s share increased to 14% from 11%.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2012 diluted EPS to be significantly below fiscal 2011 as Salesforce reinvested a significant portion of incremental revenue in growth. It planned further hiring, data-center capacity, sales and marketing, R&D, international expansion and acquisitions. No specific fiscal 2012 revenue or EPS forecast is provided in the supplied text.
- Fiscal 2011 acquisitions included Jigsaw, Heroku and DimDim; cash paid for business combinations, net of cash acquired, was $403.3 million. Salesforce also paid $172.0 million to acquire the remaining interests in Salesforce Japan.
- Salesforce paid approximately $278 million for San Francisco headquarters land and related rights. It expects further construction spending and is contractually required to begin construction by September 2014; potential penalties for missing that date are not quantified.
- Stock-based compensation was $120.4 million in fiscal 2011, with $559.8 million of compensation cost remaining to be amortized, subject to assumptions and future grants. Management expected professional-services costs to exceed related revenue in fiscal 2012.
- Key disclosed risks include service disruption or security breaches, dependence on third-party data centers and technology, customer renewal and spending trends, intense competition, acquisition integration, international and foreign-exchange exposure, privacy regulation, and earthquake risk in the San Francisco Bay Area. The company said it did not carry earthquake insurance for direct quake-related losses.
- Management said ordinary-course legal matters were not expected to have a material adverse impact, while noting that an unfavorable resolution could affect future results or cash flows. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management concluded controls were effective.
Important facts for investors to verify
- Whether subscription growth and renewal trends support future revenue, given ratable revenue recognition and the company’s warning that deferred-revenue movements can be seasonal.
- How fiscal 2012 reinvestment affects operating margins and diluted EPS, including stock compensation and acquisition-related amortization.
- The liquidity and cash-flow implications of negative working capital, headquarters construction, acquisition spending and possible conversion or repayment of the notes.
- Whether acquired businesses deliver expected product, developer-ecosystem and revenue benefits, and whether purchase-price allocations or contingent consideration change.
- Exposure to service outages, cybersecurity incidents, litigation and indemnification claims, foreign exchange, tax matters, and natural disasters.