Salesforce, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2019 second quarter, three months ended July 31, 2018, with six-month year-to-date results. The filing period differs from the “2017 Q2” in the request metadata. Dollar amounts are in millions unless stated otherwise; prior-period results were adjusted for Topic 606.
Business context and key financial metrics
Salesforce provides cloud-based enterprise software, principally CRM, through subscription services and related professional services. Subscription and support generated 93% of revenue in the first half. The company operates as one reportable segment.
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $3,281 | $2,577 | $6,287 | $4,974 |
| Subscription and support revenue | $3,060 | $2,383 | $5,870 | $4,592 |
| Gross profit / margin | $2,432 / 74% | $1,907 / 74% | $4,671 / 74% | $3,653 / 73% |
| Operating income / margin | $115 / 3% | $84 / 3% | $306 / 5% | $88 / 2% |
| Net income | $299 | $46 | $643 | $47 |
| Diluted earnings per share | $0.39 | $0.06 | $0.84 | $0.06 |
| Operating cash flow | $458 | $331 | $1,924 | $1,561 |
| Capital expenditures | $170 | $128 | $292 | $285 |
At July 31, cash and cash equivalents were $2,319 and marketable securities were $1,108. Total debt carrying value was $3,676 (principal outstanding of $3,700); Salesforce reported covenant compliance and no borrowings on its $1.0 billion revolving facility. Current liabilities were $8,469, including $5,883 of unearned revenue. Remaining performance obligations were $21.0 billion, of which $9.8 billion was current.
Material changes versus prior comparable period
- Q2 revenue rose 27%; first-half revenue rose 26%. Subscription and support revenue grew 28% in both comparisons. Management attributed growth mainly to new business, upgrades and additional subscriptions, with MuleSoft contributing about $99 million in the first half.
- First-half operating income increased to $306 from $88, while operating expenses rose $800 to $4,365. Marketing and sales remained the largest expense category, at 45% of first-half revenue.
- Reported net income benefited materially from strategic investment gains: $143 in Q2 and $354 in the first half, versus losses in the prior-year periods. The first-half tax benefit was $27 and included a $139 discrete benefit from a partial release of the valuation allowance connected with MuleSoft.
- Operating cash flow increased to $1,924 for the first half. Investing cash outflow was $4,385, principally reflecting approximately $5.0 billion of net cash used for acquisitions, mainly MuleSoft; financing cash inflow was $2,214, including debt issuance and repayment of matured convertible notes.
- In May 2018, Salesforce acquired MuleSoft for approximately $6.4 billion. The acquisition added $4,816 of goodwill and $1,279 of acquired intangible assets; reported post-acquisition MuleSoft revenue was $122 and pretax loss was $105. CloudCraze was also acquired in April. Datorama was acquired after quarter-end in August for estimated consideration of approximately $726 million net of cash acquired.
Outlook, management commentary and risks
- Management stated it remained focused on improving operating margins in fiscal 2019 and beyond, while also expecting continued investment in personnel, research and development, sales and marketing, data-center capacity, security and infrastructure. No specific revenue or earnings guidance is provided in the supplied filing text.
- Management expects marketing and sales to remain a substantial cost, research and development expense to rise in absolute dollars, and interest expense to increase following new debt issuance. It expects general and administrative expense as a share of revenue to remain flat or decrease over the next several quarters.
- Management said available cash, securities, operating cash flow and, if needed, revolving-credit capacity should cover working capital, capital spending and debt repayments for the next 12 months. It also disclosed $3.6 billion of operating lease payments and approximately $1.9 billion remaining commitments to infrastructure providers.
- Strategic investment fair-value changes now flow through earnings under the adopted accounting standard, increasing potential earnings volatility. The company also reported $1,202 of strategic investments and warned of possible partial or total loss of investment capital.
- Other notable exposures include acquisition integration and purchase-accounting risk; substantial stock-based compensation ($603 in the first half, with approximately $2.9 billion remaining to be expensed); cybersecurity, service availability and data-privacy regulation; foreign-exchange and floating-rate debt exposure; tax uncertainty; and legal proceedings. Management did not expect current legal matters, in aggregate, to materially adversely affect results or financial position, but said individual outcomes remain uncertain.
Important facts for investors to verify
- How much of earnings growth reflects core operations versus strategic investment gains and the MuleSoft-related tax benefit.
- MuleSoft’s contribution, integration progress and ongoing acquisition-related amortization, compensation and financing costs; also the impact of the subsequent Datorama acquisition.
- Whether revenue growth, remaining performance obligations and customer attrition trends persist; management reported attrition below 10% as of July 31, 2018.
- Cash generation relative to acquisition spending, debt service, capital expenditures, lease obligations and infrastructure commitments.
- Potential earnings effects from strategic investment valuations, tax developments, stock compensation and the forthcoming lease-accounting standard.