Salesforce, Inc. — Form 10-Q Summary
Period clarification: The filing cover identifies the quarter ended October 31, 2020, Salesforce fiscal 2021 third quarter. This differs from the request metadata of “2019 Q3.” Unless otherwise indicated, comparisons below are with the corresponding 2019 period; balance-sheet comparisons are with January 31, 2020. Amounts are in U.S. dollars.
Business context and reporting period
Salesforce provides cloud-based customer relationship management software and related professional services. It reports as one operating segment. Subscription and support services represented 94% of revenue in both the three- and nine-month periods.
Financial performance and liquidity
| Metric | Three months ended October 31, 2020 | Nine months ended October 31, 2020 |
|---|---|---|
| Revenue | $5.419 billion; up 20% | $15.435 billion; up 26% |
| Gross profit / margin | $4.025 billion / 74%, versus 75% | $11.476 billion / 74%, versus 75% |
| Operating income / margin | $224 million / 4%, versus $65 million / 1% | $262 million / 2%, versus $333 million / 3% |
| Net income (loss) | $1.081 billion, versus a $109 million loss | $3.805 billion, versus $374 million |
| Diluted EPS | $1.15, versus $(0.12) | $4.11, versus $0.45 |
| Cash from operations | $339 million, versus $298 million | $2.627 billion, versus $2.699 billion |
Net income and EPS included substantial non-operating and tax benefits: Q3 gains on strategic investments were $1.036 billion, including a roughly $1.1 billion unrealized gain associated with an investee IPO. Nine-month results also included $1.910 billion of net investment gains and a one-time $2.0 billion tax benefit. Excluding these items, reported net income is not a straightforward indicator of underlying operating performance.
At October 31, cash, cash equivalents and marketable securities totaled $9.492 billion, compared with $7.947 billion at January 31. Current assets were $14.946 billion and current liabilities $12.234 billion. Principal due on debt was $2.691 billion; the company had no borrowings on its $1.0 billion revolving credit facility and reported compliance with debt covenants. Operating cash flow less capital expenditures was approximately $215 million for the quarter and $2.066 billion year to date; these are calculated amounts, not company-reported measures.
Remaining performance obligation (RPO) was $30.3 billion, including $15.3 billion current RPO. Management reported year-over-year growth of 17% and 20%, respectively. RPO is contracted future revenue, not a guarantee of revenue recognition or collection.
Material changes versus comparable periods
- Q3 revenue grew 20%; subscription and support revenue rose 20%, and professional services and other revenue rose 22%. Tableau contributed approximately $378 million to Q3 subscription and support revenue.
- Q3 operating income increased to $224 million from $65 million, while gross margin declined about one percentage point. For the nine months, operating income fell to $262 million from $333 million despite 26% revenue growth, reflecting higher costs and investment.
- Nine-month operating cash flow decreased to $2.627 billion from $2.699 billion. Management cited COVID-related billing-frequency changes and go-to-market investments; a $2.9 billion favorable accounts-receivable movement was offset in part by a $2.8 billion decrease in unearned revenue.
- Strategic investments increased to $3.927 billion from $1.963 billion at January 31, largely reflecting public-market valuation changes. The company disclosed concentration in a small number of publicly traded investments and lock-up restrictions on significant holdings.
- Goodwill was $26.313 billion, including $1.024 billion from the Vlocity acquisition. Vlocity was acquired for approximately $1.38 billion in June 2020; Evergage was acquired for approximately $100 million in February.
Outlook, commentary, risks and unusual items
- Management expected modest growth in Q4 fiscal 2021 incremental new business and renewals, revenue, RPO and operating cash flows. The filing does not provide a clear full-year numerical guidance range in the text provided.
- Management said new business declined in Q1 amid COVID-19 but grew in Q2 and Q3 at rates consistent with pre-pandemic historical trends. The pandemic could still affect customers, sales cycles, collections, renewals, employee productivity and future results; management said its longer-term revenue-growth impact remained uncertain.
- A strategic realignment, including resource shifts and some position eliminations, was expected to increase expenses in Q3 and Q4. The company also planned to consolidate and sublease certain offices, with potential impairments to operating lease right-of-use assets.
- In December 2020, after the quarter end, Salesforce agreed to acquire Slack for cash and stock at an indicated enterprise value of approximately $27.7 billion, subject to approvals and other closing conditions. It obtained a commitment for a $10 billion, 364-day bridge facility and expected to use new debt and balance-sheet cash for the cash consideration. In November, it also agreed to acquire Acumen Solutions for approximately $570 million in cash.
- Lease commitments included $1.9 billion of operating leases not yet commenced; total operating lease commitments including those leases were approximately $5.4 billion. A potential tax charge tied to integration of ClickSoftware and other Israeli entities remained uncertain.
- The filing describes ongoing Tableau securities class-action and derivative litigation. Salesforce said it could not reasonably estimate possible losses in excess of accrued amounts; management did not expect current matters to have a material adverse impact overall, while acknowledging an unfavorable resolution could affect a particular period.
- Key risks include COVID-19 and macroeconomic uncertainty, cyber incidents or service outages, competition, customer nonrenewals, acquisition execution and integration, investment-portfolio volatility, privacy and data-transfer regulation, foreign exchange, and substantial lease and financing obligations.
Important facts for investors to verify
- Confirm the period: the filing is fiscal 2021 Q3, not 2019 Q3.
- Assess operating results apart from the $1.036 billion Q3 strategic-investment gain and the $2.0 billion year-to-date discrete tax benefit.
- Track operating cash flow, billing patterns, unearned revenue and current RPO; these measures can move differently because of seasonality and invoice timing.
- Review the valuation, concentration, lock-up periods and subsequent price movements of strategic investments.
- Monitor the Slack transaction’s financing, approvals, closing timing and integration costs, as well as the Acumen agreement and lease commitments.
- Check subsequent disclosures for COVID-19 effects, office impairment charges, litigation developments, and any change in tax exposures or outlook.