Business Context and Reporting Period
Company: Salesforce, Inc.
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended January 31, 2009
Business Overview: Salesforce is the leading provider of software on demand (SaaS), specifically Customer Relationship Management (CRM) services and the Force.com cloud computing platform. The company operates on a subscription model, serving approximately 55,400 customers worldwide as of the period end. The company is a large accelerated filer incorporated in Delaware.
Key Financial Metrics
| Metric (in thousands) | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Total Revenues | $1,076,769 | $748,700 |
| Gross Profit | $856,298 | $577,109 |
| Gross Margin | 80% | 77% |
| Operating Income | $63,742 | $20,309 |
| Net Income | $43,428 | $18,356 |
| Diluted EPS | $0.35 | $0.15 |
| Cash, Cash Equivalents & Marketable Securities | $882,565 | $669,800 |
| Deferred Revenue (Current & Noncurrent) | $594,026 | $480,894 |
| Stock-Based Compensation Expense | $77,366 | $55,207 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 44% year-over-year to $1.077 billion, driven by a 45% increase in subscription and support revenues ($984.6 million) and a 35% increase in professional services ($92.2 million).
- Profitability: Operating income more than tripled to $63.7 million (6% of revenue) from $20.3 million (3% of revenue). Net income increased 136% to $43.4 million.
- Customer Base: The number of customers grew to approximately 55,400, up from 41,000 in the prior year.
- Geographic Mix: International revenues (Europe and Asia Pacific) grew 57% to $300.3 million, representing 28% of total revenue, up from 25% in the prior year.
- Acquisitions: The company acquired InStranet, Inc. in August 2008 for $32.3 million to expand customer service offerings and increased its ownership in its Japanese joint venture to 72%.
Guidance, Outlook, Risks, and Unusual Items
- Outlook & Strategy: Management plans to continue investing heavily in marketing and sales (50% of revenue) to acquire new customers and expand into international markets. A new data center in Singapore is planned for fiscal 2010. The company expects stock-based compensation to remain a significant expense.
- Unusual Items: The company recorded a $1.2 million other-than-temporary impairment loss related to an investment in The Reserve Primary Fund, a money market mutual fund that suspended redemptions. As of January 31, 2009, $19.5 million was invested in this fund with a fair value of $18.3 million.
- Risks:
- Economic Conditions: Severe global recession could delay customer purchasing decisions or affect renewal rates.
- Service Disruptions: Reliance on third-party data centers (Equinix) creates risks regarding service interruptions, security breaches, or natural disasters.
- Competition: Intense competition from enterprise software vendors (Microsoft, Oracle, SAP) and on-demand providers.
- Stock Volatility: The trading price of common stock ranged from $21.96 to $74.43 during the fiscal year.
Investor Verification Checklist
- Deferred Revenue: Verify the $594 million deferred revenue balance, which represents future revenue recognition and is a key indicator of future growth stability.
- Stock-Based Compensation: Confirm the $77.4 million expense and the remaining $261.3 million of unamortized stock compensation, which will impact future earnings.
- Investment Portfolio: Review the status of the $19.5 million investment in The Reserve Primary Fund and potential recovery amounts.
- Customer Concentration: Note that no single customer accounted for more than 5% of revenue, indicating low concentration risk.
- International Exposure: Assess the impact of foreign currency fluctuations, as over 25% of revenue is generated outside the Americas.