Salesforce, Inc. — Form 10-Q Summary
Period: Three months ended April 30, 2019 (Salesforce fiscal 2020 first quarter), compared with the three months ended April 30, 2018. The request metadata says “2018 Q1,” but the filing reports fiscal 2020 Q1.
Business context and results
Salesforce provides cloud-based CRM software and related professional services and reports as one operating segment. Subscription and support generated 94% of quarterly revenue.
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $3.737 billion | $3.006 billion | +24% |
| Gross profit / margin | $2.823 billion / 76% | $2.239 billion / 74% | Margin +2 pts |
| Operating income / margin | $210 million / 6% | $191 million / 6% | +10% |
| Net income | $392 million | $344 million | +14% |
| Diluted EPS | $0.49 | $0.46 | +7% |
| Operating cash flow | $1.965 billion | $1.466 billion | +34% |
Revenue growth included $170 million from MuleSoft, acquired in May 2018. By service offering, subscription and support revenue increased 11% for Sales Cloud, 20% for Service Cloud, 46% for Salesforce Platform and Other, and 33% for Marketing and Commerce Cloud. Foreign-exchange movements reduced revenue outside the Americas by an estimated $60 million year over year.
Financial position, liquidity and cash flow
- At April 30, 2019, cash and cash equivalents were $4.110 billion and marketable securities were $2.269 billion, totaling $6.379 billion. Accounts receivable was $2.153 billion.
- Total debt carrying value was $3.177 billion; no borrowings were outstanding under the $1.0 billion revolving credit facility. The company reported compliance with debt covenants.
- Current assets were $10.035 billion and current liabilities were $10.488 billion. Current liabilities included $7.585 billion of unearned revenue.
- Operating cash flow was $1.965 billion; investing activities used $726 million, principally reflecting marketable-security purchases; financing activities provided $207 million.
- Remaining performance obligation was $24.9 billion, including $11.8 billion current and $13.1 billion noncurrent, versus $20.4 billion a year earlier and $25.7 billion at January 31, 2019.
- Salesforce adopted lease accounting prospectively in February 2019, recording about $2.9 billion of operating lease right-of-use assets and $3.1 billion of operating lease liabilities. This makes the April balance sheet not directly comparable with January.
Material changes and unusual items
- Net income included $281 million of net gains on strategic investments, compared with $211 million a year earlier. These gains were primarily from publicly traded investment mark-to-market adjustments and a privately held investment valuation adjustment; they are subject to market volatility.
- Operating expenses rose 28% to $2.613 billion, faster than revenue. Marketing and sales remained the largest expense at $1.697 billion, or 45% of revenue.
- Stock-based expense was $343 million, versus $252 million a year earlier. Unamortized stock compensation was approximately $3.6 billion.
- The effective tax rate was 19%, compared with 11%, mainly reflecting higher U.S. tax provision after a prior-year valuation allowance release, partly offset by stock-based compensation tax benefits.
- Operating lease cost was $206 million for the quarter. The company disclosed $2.0 billion of additional operating leases not yet commenced, chiefly for future office facilities.
Outlook, management commentary and risks
- No numeric full-year revenue, earnings or cash-flow guidance is provided in the supplied filing text. Management said it expects foreign-currency movements to continue weighing on revenue outside the Americas for the rest of fiscal 2020 and expects continued investment in sales, research and development, data-center capacity and security.
- Management said sales-organization changes were more pronounced than usual and contributed to slower-than-anticipated recent new-business growth. It reported no material impact on quarterly revenue or remaining performance obligation, but noted sustained slower new-business growth could affect future results.
- Management reported attrition below 10% as of April 30, 2019 and expected it to remain consistent, while acknowledging uncertainty.
- Liquidity commentary states existing cash, marketable securities, operating cash flow, available credit and contracted but unbilled amounts are expected to cover working capital, capital expenditure and debt repayment needs over the next 12 months.
- Key disclosed risks include cybersecurity incidents and service outages, privacy and cross-border data regulations, competition, foreign-exchange volatility and Brexit, acquisition integration, strategic-investment valuation swings, sales execution, litigation, and substantial debt and lease commitments. The filing describes a significant service disruption following a software update; management did not believe it would be material.
- Subsequent events: Salesforce acquired MapAnything in May 2019 for estimated consideration of approximately $225 million and completed the Salesforce.org combination in June 2019 for $300 million. The Salesforce.org transaction was expected to produce a one-time, non-cash operating expense charge of approximately $200 million in the subsequent period.
Most important facts for investors to verify
- How much reported earnings growth is repeatable, given the $281 million investment gain and rising operating expenses.
- Whether slower new-business growth persists and how it affects future revenue, billings and remaining performance obligation.
- The durability of operating cash flow after considering first-quarter collection seasonality and working-capital movements.
- The performance and liquidity of strategic investments, including the risk of further gains or losses and any lock-up restrictions.
- The full effect of lease commitments, future facility obligations, foreign-exchange pressure and the Salesforce.org charge on subsequent-period results and cash requirements.