Salesforce, Inc. — Form 10-Q Summary
Period clarification: The request labels this “2018 Q3,” but the filing is for the quarter ended October 31, 2019, Salesforce fiscal 2020 third quarter. Comparisons below are against the comparable 2018 period. Dollar amounts are in millions unless otherwise noted.
Business context and reporting period
Salesforce provides cloud-based customer relationship management software and related services. The filing reports unaudited results for the three and nine months ended October 31, 2019. Salesforce completed the Tableau acquisition in August 2019 and the ClickSoftware acquisition in October 2019; their results are included from their respective acquisition dates.
Financial results and key metrics
- Third-quarter revenue: $4,513, up 33% year over year. Subscription and support revenue was $4,239, up 34%; professional services and other revenue was $274, up 22%.
- Nine-month revenue: $12,247, up 27%. Subscription and support revenue was $11,480, up 27%.
- Profitability: Third-quarter gross profit was $3,379, with a 75% gross margin, compared with 74% a year earlier. Operating income was $65 (1% margin), versus $92 (3%) in the prior-year quarter. Net loss was $109, or $0.12 per diluted share, compared with net income of $105, or $0.13 per diluted share.
- Nine-month results: Operating income was $333 (3% margin), compared with $398 (4%) a year earlier. Net income was $374, or $0.45 per diluted share, versus $748, or $0.97. Results included $396 of net gains on strategic investments, compared with $417.
- Cash flow: Operating cash flow was $298 in the quarter, up from $143; management noted the third quarter is typically its smallest operating-cash-flow quarter. Nine-month operating cash flow was $2,699, versus $2,067. Cash, cash equivalents and marketable securities totaled $6,529 at quarter-end.
- Balance sheet and liquidity: Cash and cash equivalents were $3,868 and marketable securities were $2,661. Accounts receivable was $2,573; unearned revenue was $6,858. Total assets were $49,942 and total liabilities were $16,663. Remaining performance obligation was $25.9 billion, including $12.8 billion current.
- Debt and leases: Debt carrying value was $2,827, including $2,824 noncurrent; no borrowings were outstanding under the $1.0 billion revolving facility. The company reported compliance with debt covenants. Operating lease liabilities totaled $3,270; finance lease liabilities totaled $399.
Material changes versus the prior comparable period
- Revenue accelerated with acquisition contributions and growth across product groups. Third-quarter subscription and support revenue included approximately $308 from Tableau; Salesforce.org contributed approximately $80. Tableau generated $327 in revenue and a $251 pretax loss from acquisition through October 31.
- Operating expenses grew faster than revenue: third-quarter expenses were $3,314, up $903, and rose to 74% of revenue from 71%. Research and development increased 61%; marketing and sales increased 30%.
- Acquisition-related amortization and employee stock compensation increased. Nine-month stock-based expense was $1,274, versus $954 in the prior year; third-quarter expense was $543, versus $351.
- Third-quarter tax expense rose to $173 from $23, producing a 270% effective tax rate on $64 of pretax income. The nine-month effective tax rate was 47%, versus a tax benefit and negative 1% rate in the prior year; the prior-year comparison included a $140 tax benefit tied to MuleSoft.
- Shares issued in business combinations increased additional paid-in capital by $15,588 during the quarter; common shares outstanding were approximately 886 million at October 31.
Outlook, commentary, risks and unusual items
- No specific forward revenue or earnings guidance is provided in the supplied filing text. Management expects continued investment in research and development, sales capacity, data centers, security and infrastructure; these costs may increase in absolute dollars, and R&D may rise as a percentage of revenue.
- Management cited longer, less predictable sales cycles, potential sales-force disruption, acquisition integration demands and foreign-exchange pressure. Currency movements reduced revenue outside the Americas by approximately $113 over nine months; further negative impact was expected for the remainder of fiscal 2020.
- The Salesforce.org combination generated a one-time, non-cash $166 operating expense from settlement of its reseller agreement. Tableau acquisition transaction costs were approximately $40; about $90 of Tableau transaction costs affected third-quarter operating cash flow.
- Strategic investment gains are volatile: third-quarter gains were only $6, including unrealized losses on publicly traded holdings partly offset by gains on private investments. Management warned that investment value changes could materially affect results.
- Salesforce adopted lease accounting in fiscal 2020, recording substantial right-of-use assets and lease liabilities; management said the adoption did not materially affect operating results or operating cash flow. Additional operating leases of $2.5 billion had not yet commenced. Total lease commitments, including those leases, were approximately $6.1 billion.
- Key disclosed risks include cybersecurity incidents and service outages, data privacy and regulatory requirements, competition, acquisition integration and dilution, strategic-investment valuation changes, foreign exchange and Brexit uncertainty, taxes, litigation, and substantial debt and lease commitments. Management said current legal matters were not expected to have a material adverse effect, but outcomes remain uncertain.
- After quarter-end, the U.K. competition authority cleared the Tableau acquisition; Salesforce also repaid the remaining $150 term loan and agreed to purchase two San Francisco properties for approximately $150.
Important facts for investors to verify
- Separate organic growth from acquired revenue, particularly Tableau’s contribution, and monitor remaining performance obligation growth excluding acquisition effects.
- Assess whether expense growth, stock compensation and acquired-intangible amortization continue to pressure operating margins and earnings per share.
- Review the drivers and sustainability of operating cash flow, including seasonal billings, unearned revenue movements and acquisition-related cash costs.
- Track the valuation and concentration of strategic investments and the effect of realized and unrealized gains or losses on reported earnings.
- Monitor integration progress, acquisition-related dilution, lease commitments and any potential tax charge associated with integrating ClickSoftware.
- Check subsequent disclosures for updates to litigation, cybersecurity and service reliability, foreign-exchange exposure, tax audits and management guidance.