Business context and reporting period
Salesforce, Inc. filed this unaudited Form 10-Q for the three months ended April 30, 2020, its first quarter of fiscal 2021. The request metadata says “2019 Q1,” but the filing covers 2020 Q1. Salesforce provides cloud-based CRM and related enterprise software; subscription and support generated 94% of quarterly revenue.
Financial results and key metrics
Amounts are in U.S. dollars; financial statement amounts are in millions unless noted otherwise.
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $4,865 | $3,737 | +30% |
| Subscription and support revenue | $4,575 | $3,496 | +31% |
| Gross profit / margin | $3,611 / 74% | $2,823 / 76% | Margin down about 2 percentage points |
| Operating income (loss) / margin | $(140) / (3%) | $210 / 6% | Declined $350 |
| Net income | $99 | $392 | Down 75% |
| Diluted earnings per share | $0.11 | $0.49 | Down $0.38 |
| Cash from operating activities | $1,859 | $1,965 | Down 5% |
Net income included $192 million of net gains on strategic investments and a $52 million income tax benefit; the prior-year quarter included $281 million of investment gains and a $90 million tax provision. The tax benefit reflected favorable discrete items, including stock-based compensation. Operating expenses rose to $3,751 million, or 77% of revenue, from $2,613 million, or 70%. Stock-based expense was $504 million versus $343 million; acquired-intangible amortization was $271 million versus $129 million.
At April 30, 2020, cash and cash equivalents were $5,772 million and marketable securities were $4,030 million, totaling $9,802 million. Current assets were $14,713 million and current liabilities $12,843 million. Accounts receivable was $3,076 million; unearned revenue was $9,112 million. Debt principal outstanding was $2,693 million, with no borrowings on the $1.0 billion revolving credit facility. The company reported compliance with debt covenants.
Remaining performance obligation (RPO) was $29.3 billion, including $14.5 billion current RPO. Cash from operations was affected by customer payment deferrals and commission-guarantee payments; a large receivables collection contributed to the reported cash flow. Investing cash outflow was $437 million and financing cash inflow was $209 million.
Material changes versus the prior comparable period
- Revenue increased by $1,128 million, with growth across service offerings and geographies. Salesforce Platform and Other grew 62%, including approximately $273 million from Tableau; Salesforce.org contributed approximately $104 million to subscription and support revenue.
- Profitability weakened despite higher revenue: gross margin fell, operating results shifted to a loss, and net income declined. Higher employee-related costs, acquisition-related amortization, infrastructure spending and COVID-19 response expenses contributed to increased costs.
- RPO increased 18% year over year; current RPO increased 23%. The sequential decrease from January 31 reflects billing and renewal seasonality and is not directly comparable to year-over-year growth.
- Cash and marketable securities increased from $7,947 million at January 31, 2020, while operating cash flow decreased 5% year over year.
Outlook, risks and unusual items
Management said COVID-19 had slowed new incremental business from the second half of March, shortened average contract duration by about three months, and reduced certain upfront software-license revenue. Salesforce expected fiscal 2021 growth in new business, total revenue, RPO and operating cash flow to be slower than planned before the pandemic. The filing gave no numerical updated revenue or earnings guidance and said the longer-term revenue impact remained uncertain.
COVID-19-related and other notable items included a direct-sales partial minimum commission guarantee with a total commitment of approximately $140 million; about $65 million of accelerated expenses from cancelling or modifying in-person events; a net operating-expense benefit of about $75 million from reduced travel and work-from-home measures; approximately $25 million of estimated operating-lease asset impairment; more than $20 million in donations and relief expenses; and about $77 million of strategic-investment impairment charges. Net strategic-investment gains were $192 million, including realized gains from investment sales, making reported earnings sensitive to investment valuations and market conditions.
Management said existing cash, securities, operating cash flows and available credit should be sufficient for working capital, capital expenditure and debt repayment needs over the next 12 months. Key risks include prolonged pandemic-related customer spending and collection pressure, potential attrition, sales-cycle and contract-duration changes, investment losses, cybersecurity and service availability, privacy regulation, acquisition integration, foreign exchange, and litigation. Tableau-related securities class-action and derivative proceedings remained unresolved; management said the impact of current legal matters was not expected to be material, while noting outcomes are uncertain. In June 2020, after quarter-end, Salesforce acquired Vlocity for estimated consideration of approximately $1.2 billion.
Most important facts for investors to verify
- Whether slower new-business growth, shorter contract durations and customer payment deferrals persisted in subsequent quarters, and how these affected revenue, RPO and operating cash flow.
- How much of earnings and quarter-to-quarter volatility came from strategic-investment gains, impairments and discrete tax benefits, rather than operating performance.
- Whether expense growth, stock-based compensation and acquisition-related amortization continued to pressure operating margins.
- Whether the $9.8 billion cash-and-securities position and available credit remained sufficient alongside debt, lease commitments and the Vlocity acquisition.
- Developments in COVID-19 impacts, Tableau litigation, investment valuations and other disclosed legal or business contingencies.