Business context and reporting period
Salesforce.com provides subscription-based cloud CRM applications and a platform for business applications. The supplied filing is a Form 10-Q for the quarter ended July 31, 2010—fiscal 2011 Q2—and compares results with the same periods in 2009. This differs from the request metadata, which labels the period “2009 Q2.” Financial statements are unaudited; dollar amounts below are in millions unless noted.
Key financial metrics
| Metric | Three months ended July 31, 2010 | Three months ended July 31, 2009 | Six months ended July 31, 2010 | Six months ended July 31, 2009 |
|---|---|---|---|---|
| Revenue | $394.4 | $316.1 | $771.2 | $621.0 |
| Subscription and support revenue | $369.0 | $293.4 | $719.7 | $575.2 |
| Gross profit / margin | $316.6 / 80.3% | $253.6 / 80.2% | $621.8 / 80.6% | $496.7 / 80.0% |
| Operating income / margin | $29.7 / 7.5% | $29.5 / 9.3% | $62.7 / 8.1% | $59.6 / 9.6% |
| Net income attributable to Salesforce | $14.7 | $21.2 | $32.5 | $39.6 |
| Diluted EPS | $0.11 | $0.17 | $0.24 | $0.31 |
| Operating cash flow | $76.1 | $45.9 | $219.3 | $143.8 |
At July 31, cash, cash equivalents and marketable securities totaled $1,858.9, versus $1,727.0 at January 31, 2010. Cash and cash equivalents alone were $409.9, down from $1,011.3 at fiscal year-end, as the company invested in marketable securities and completed acquisitions. Current assets were $1,112.1 and current liabilities $928.6. Deferred revenue, current and noncurrent, was $683.0, compared with $704.3 at January 31, 2010.
The company issued $575.0 of 0.75% convertible senior notes due 2015 in January 2010. Their balance-sheet carrying value was $461.2 at July 31, reflecting the debt discount; the reported estimated fair value was $739.6. The notes have no financial covenants. Present value of capital lease obligations was $17.8. Operating lease commitments totaled $451.6 in future minimum payments.
Material changes versus comparable periods
- Quarterly revenue rose 25% year over year; six-month revenue rose 24%. Subscription and support revenue, about 93–94% of revenue, grew 26% in the quarter and 25% for the half year.
- Operating income was nearly flat in Q2 and increased 5% for the half year, while operating margin fell to 7.5% from 9.3% in Q2 and to 8.1% from 9.6% for six months. Sales and marketing, R&D, and G&A spending increased substantially.
- Net income attributable to Salesforce declined 30% in Q2 and 18% for six months. Management attributed higher interest expense largely to the January convertible-note offering; six-month interest expense was $14.2 versus $0.5 a year earlier.
- Operating cash flow improved to $219.3 for six months from $143.8, which management linked primarily to customer growth, renewals, billings and collections. Investing cash outflow increased to $924.8 from $413.8, including marketable-security purchases, Jigsaw, and capital expenditures.
- International revenue grew faster than total revenue: Europe and Asia Pacific together represented 30% of Q2 revenue versus 28% a year earlier, and 31% for the six-month period versus 28%.
Outlook, commentary, risks and unusual items
- No quantified revenue, earnings or cash-flow guidance is provided. Management said it expects continued investment in data-center capacity, sales and marketing, R&D, personnel and international expansion; sales and marketing is expected to remain the largest expense. It expected G&A costs as a percentage of revenue to remain flat for the next several quarters.
- Professional-services costs exceeded related revenue by $3.4 in Q2 and $4.8 for the six months; management expected this to continue during fiscal 2011, describing the spending as an investment to support customer adoption.
- In May 2010, Salesforce acquired Jigsaw Data Corporation for a preliminary total purchase price of $161.9, including estimated contingent consideration. Jigsaw added $133.3 of goodwill; its results were not material in the reported periods. The purchase-price allocation remained preliminary, including tax-related amounts. A smaller cloud-vendor asset acquisition for approximately $10.0 was also completed in Q2.
- Reported results include substantial stock-based compensation: $53.1 for six months, with $254.1 remaining to be expensed based on outstanding awards. Management warned this expense would continue to materially reduce reported results.
- Management identified risks including service outages or security breaches, customer renewal and spending levels, competition, international expansion and currency exposure, acquisition integration, privacy regulation, and dependence on third-party data centers. A 100-basis-point interest-rate move was estimated to change the investment portfolio’s market value by $39.5.
- Microsoft patent litigation was settled by a cross-license agreement on August 2, 2010, after quarter-end, and the parties dismissed their cases. Management said resolution of other ordinary-course legal matters was not expected to have a material adverse effect, while noting an unfavorable outcome could still materially affect a period.
- Management stated existing cash, cash equivalents, short-term securities and operating cash flow should be sufficient for working capital and capital expenditures over the next 12 months. The company had no bank line of credit and reported $11.2 of letters of credit outstanding.
Important facts for investors to verify
- Confirm the intended period: the filing covers the quarter ended July 31, 2010, not 2009 Q2.
- Review revenue growth against the decline in net income and operating margin, including the effects of hiring, stock compensation, acquisition amortization and note interest.
- Assess cash-flow quality and the large shift from cash into marketable securities, alongside acquisition spending and capital expenditures.
- Track deferred revenue, renewals, billings and collections; the filing notes seasonal billing patterns and that deferred revenue is not total contract value.
- Review the convertible notes’ cash obligations and potential dilution, together with the related note hedges and warrants.
- Monitor Jigsaw integration, contingent consideration, and finalization of its preliminary purchase-price allocation.