Salesforce, Inc. — Form 10-K Summary
Period clarification: The supplied filing is Salesforce’s annual report for the fiscal year ended January 31, 2010 (FY2010), filed March 11, 2010. It is not a filing for 2008 Q4. Unless noted otherwise, amounts below are in U.S. dollars.
Business context and reporting period
Salesforce provides subscription-based cloud CRM applications and the Force.com platform. Subscription and support generated 93% of FY2010 revenue; professional services and other revenue generated 7%. The company reports one operating segment.
Financial performance and position
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Total revenue | $1,305.6 million | $1,076.8 million | +21% |
| Subscription and support revenue | $1,209.5 million | $984.6 million | +23% |
| Gross profit / margin | $1,047.7 million / 80% | $856.3 million / 80% | Margin unchanged |
| Operating income / margin | $115.3 million / 9% | $63.7 million / 6% | Improved |
| Net income attributable to Salesforce | $80.7 million | $43.4 million | +86% |
| Diluted earnings per share | $0.63 | $0.35 | +80% |
| Cash from operating activities | $270.9 million | $229.6 million | +18% |
| Capital expenditures | $53.9 million | $61.1 million | Lower |
| Cash, cash equivalents and marketable securities | $1,727.0 million | $882.6 million | +96% |
| Working capital | $798.0 million | $301.6 million | +165% |
| Deferred revenue, current and noncurrent | $704.3 million | $594.0 million | +19% |
Operating cash flow less capital expenditures was approximately $217.0 million in FY2010 (calculated from the reported figures). At January 31, 2010, accounts receivable were $321.0 million. The company also disclosed more than $1.0 billion of unbilled deferred revenue under noncancelable subscriptions; it cautions that this balance fluctuates with billing and renewal timing and is not a reliable standalone revenue indicator.
Salesforce issued $575.0 million principal amount of 0.75% convertible senior notes due January 2015. The balance sheet reported the notes at $450.2 million net of debt discount; estimated fair value was $545.2 million. Cash and investment balances include the offering proceeds. The company reported total liabilities of $1,403.5 million and total assets of $2,460.2 million.
Material changes versus the prior year
- Revenue growth slowed to 21% from 44% in FY2009; subscription and support remained the main growth driver.
- Operating margin increased to 9% from 6%, while gross margin held at 80%. Marketing and sales expense declined to 46% of revenue from 50%, although it rose in dollars to $605.2 million.
- Operating cash flow increased, while investing cash outflow rose to $378.6 million, mainly reflecting purchases of marketable securities and infrastructure investment. Financing provided $637.2 million, substantially reflecting the convertible-note transactions.
- International revenue (Europe and Asia Pacific) reached $381.8 million, or 29% of total revenue, versus $300.3 million, or 28%, in FY2009.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific quantified revenue or earnings guidance. Management expects continued investment in sales and marketing, research and development, personnel and data-center capacity; it expects marketing and sales to remain the largest expense category. It also expected professional-services costs to exceed related revenue in FY2011 and interest expense to rise significantly due to the notes.
- Liquidity: Management said available cash, cash equivalents, short-term marketable securities and operating cash flow should cover working-capital and capital-expenditure needs for the next 12 months. It noted that additional financing might be sought for acquisitions or investments and might not be available on favorable terms.
- Debt and dilution: The notes are convertible subject to specified conditions; the company also entered into note hedges and sold warrants covering approximately 6.7 million shares each. The hedges are intended, but not guaranteed, to reduce conversion-related dilution; the warrants may dilute shareholders if the share price exceeds their $119.51 strike price.
- Key risks: Service outages, data-center or security failures; customer renewals and spending amid economic weakness; competition and adoption of cloud services; scaling infrastructure and operations; foreign-currency and regulatory/privacy exposure; and stock-price volatility. The company has no earthquake insurance for direct quake-related losses despite critical operations near San Francisco Bay Area seismic faults.
- Contingency: A large technology company alleged patent infringement in a communication received in FY2009. Discussions continued and no lawsuit had been filed; management did not expect a material financial-condition impact but said the matter could materially affect a particular quarter’s income or cash flow.
- Other items: Stock-based compensation was $88.9 million, or about 7% of revenue, and $283.6 million remained to be expensed over future periods. The effective tax rate was 41%, down from 44%; a California tax-law change resulted in a $2.7 million FY2010 tax expense. No customer accounted for 5% or more of revenue.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective as of January 31, 2010.
Most important facts for investors to verify
- Confirm the intended period: this filing covers FY2010, not 2008 Q4. FY2010’s fourth-quarter revenue was $354.0 million and net income attributable to Salesforce was $20.4 million.
- Review subscription growth, customer renewal and expansion trends, and the timing and composition of deferred and unbilled deferred revenue.
- Assess whether improved operating margins persist as Salesforce continues hiring and investing in sales, R&D and data-center capacity; consider the $88.9 million stock-compensation charge and future expense schedule.
- Examine the notes’ conversion, hedge and warrant terms, potential dilution, and the difference between $575.0 million principal and the $450.2 million carrying value.
- Monitor cash generation, investment-portfolio risk, capital commitments, the patent matter, and operational, security, privacy and disaster-recovery exposures.