Salesforce, Inc. — Form 10-Q Summary
Period clarification: The supplied filing covers the quarter ended July 31, 2020 (Salesforce fiscal Q2 2021), not 2019 Q2 as stated in the request. Amounts are U.S. dollars.
Business context and reporting period
Salesforce provides cloud-based enterprise software, principally CRM, and reports as one operating segment. The unaudited filing presents results for the three and six months ended July 31, 2020, compared with the corresponding 2019 periods.
Financial performance and liquidity
- Revenue: Q2 revenue was $5.151 billion, up 29% year over year; subscription and support revenue was $4.840 billion, also up 29%. Six-month revenue was $10.016 billion, up 30%. Tableau contributed approximately $375 million of Q2 subscription and support revenue.
- Profit and margins: Q2 gross profit was $3.840 billion, a 75% gross margin, versus 76% a year earlier. Operating income was $178 million, or 3% of revenue, versus $58 million, or 2%. Net income was $2.625 billion and diluted EPS was $2.85, compared with $91 million and $0.11, respectively. Results included a one-time $2.0 billion tax benefit and substantial strategic-investment gains; reported net income and EPS therefore do not reflect recurring operating performance alone.
- Six-month results: Operating income was $38 million versus $268 million in 2019; net income was $2.724 billion versus $483 million. The tax benefit more than offset the lower operating income.
- Cash flow: Q2 operating cash flow was $429 million, down 2% year over year. Six-month operating cash flow was $2.288 billion versus $2.401 billion. Six-month investing cash outflow was $3.030 billion, largely reflecting acquisitions and purchases of marketable securities.
- Cash and liquidity: Cash, cash equivalents and marketable securities totaled $9.283 billion at July 31, up from $7.947 billion at January 31. Current assets were $14.846 billion and current liabilities were $12.963 billion. Management said available liquidity and expected operating cash flows should meet needs for the next 12 months.
- Debt and obligations: Debt carrying value was approximately $2.676 billion; principal outstanding was $2.692 billion. No borrowings were drawn on the $1.0 billion revolving facility, and Salesforce was in compliance with debt covenants. Operating lease liabilities totaled $3.174 billion; an additional $2.4 billion of operating leases had not yet commenced.
- Contracted revenue: Remaining performance obligation (RPO) was $30.6 billion, up 21% year over year; current RPO was $15.2 billion, up 26%. Unearned revenue was $8.711 billion, down from $10.662 billion at January 31.
Material changes versus the prior comparable period
- Revenue growth reflected new business, expansion within existing customers and acquisitions; pricing was not a significant growth driver. Salesforce Platform and Other revenue grew 66% in Q2, including Tableau contributions.
- Operating costs increased with headcount, data-center capacity, stock-based compensation and acquired-intangible amortization. Gross margin declined year over year, while operating expenses were 72% of revenue versus 74% in Q2 2019.
- Strategic-investment gains rose to $682 million in Q2 from $109 million. This included a $617 million unrealized gain following an investee’s IPO; the associated investment was subject to a lock-up through January 2021.
- Q2 operating cash flow was pressured by customer payment delays, changed billing frequency and go-to-market investments. Cash flow also reflects billing seasonality.
- Salesforce acquired Vlocity in June 2020 for approximately $1.4 billion and Evergage in February 2020. Tableau, acquired in 2019, affected year-over-year comparability.
Outlook, commentary and risks
- Management expected modest growth in new incremental business and renewals, revenue, RPO and operating cash flow for the remainder of fiscal 2021. The filing provides no numerical forward guidance in the supplied text and says the pandemic’s long-term revenue impact remained uncertain.
- Management reported that new business declined in Q1 amid COVID-19 but grew in Q2 at rates consistent with pre-pandemic historical trends. Payment delays continued, and the company expected higher expenses from increased go-to-market and product investment and strategic realignment, including some position eliminations.
- COVID-19 risks include customer spending and collections, sales cycles, employee productivity, service delivery and cybersecurity. Other significant exposures include competition, acquisition integration, strategic-investment volatility, privacy and cross-border data rules, foreign exchange, and litigation.
- One material unusual item was the $2.0 billion discrete tax benefit from recognizing deferred tax assets after an international restructuring involving intangible property in Ireland. Realization depends on future taxable income and tax assessments.
- Salesforce disclosed ongoing Tableau securities class-action and related derivative litigation. Management could not reasonably estimate possible losses beyond accrued amounts; it did not expect current matters to materially adversely affect consolidated results, cash flows or financial position, while noting outcomes are uncertain.
Important facts for investors to verify
- Separate recurring operating performance from the one-time tax benefit and investment gains when assessing earnings and EPS.
- Track operating cash flow, receivables, customer payment timing and unearned revenue, given COVID-19 effects and seasonal billing patterns.
- Assess whether current RPO and new-business trends convert to revenue as expected, and account for acquisition-related contributions.
- Monitor strategic-investment concentration, valuation changes and the IPO investment’s January 2021 lock-up expiration.
- Review the execution and expense impact of Vlocity integration, planned investments and strategic realignment, as well as lease commitments and disclosed litigation.