Salesforce, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended October 31, 2017, Salesforce fiscal 2018 third quarter, with nine-month results through October 31, 2017. This does not match the request metadata’s “2016 Q3.”
Business context and reporting period
Salesforce provides cloud-based enterprise software focused on CRM, with subscription and support revenue accounting for approximately 92% of revenue for the first nine months. The company reports as one operating segment. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Three months ended Oct. 31, 2017 | Three months ended Oct. 31, 2016 | Nine months ended Oct. 31, 2017 | Nine months ended Oct. 31, 2016 |
|---|---|---|---|---|
| Revenue | $2.680 billion | $2.145 billion | $7.629 billion | $6.098 billion |
| Operating income | $116.0 million | $3.0 million | $157.9 million | $87.6 million |
| Net income (loss) | $51.4 million | $(37.3) million | $59.9 million | $231.1 million |
| Diluted EPS | $0.07 | $(0.05) | $0.08 | $0.33 |
| Operating cash flow | $125.8 million | $154.3 million | $1.687 billion | $1.456 billion |
- Quarterly revenue increased 25% year over year; subscription and support revenue rose 25%. Nine-month revenue also increased 25%.
- Gross margin was approximately 73% in the quarter, unchanged year over year; nine-month gross margin was approximately 73%, versus 74%.
- Operating margin improved to approximately 4% for the quarter from approximately 0%; nine-month operating margin was approximately 2%, unchanged as a rounded percentage.
- Nine-month net income fell year over year largely because the prior-year period included a $205.6 million tax benefit from a partial release of the valuation allowance following the Demandware acquisition. The 2017 nine-month tax provision was $54.0 million, an effective rate of 47%.
- At October 31, cash and cash equivalents were $2.072 billion and marketable securities were $1.557 billion, totaling $3.629 billion. Accounts receivable were $1.520 billion. Current assets were $5.946 billion and current liabilities were $7.216 billion; deferred revenue of $4.392 billion is a major component of current liabilities.
- Total liabilities were $8.650 billion. Debt included approximately $1.138 billion carrying value of 0.25% convertible notes classified as current, a $500 million term loan, and a $198 million 50 Fremont loan. The $1.0 billion revolving facility had no borrowings outstanding. The convertible notes’ approximately $1.15 billion remaining principal was due April 1, 2018, unless converted.
- Nine-month investing cash outflow was $1.427 billion, including $396.3 million of capital expenditures; financing cash inflow was $201.9 million. Cash increased $465.3 million over the nine-month period.
Material changes versus the prior comparable period
- Quarterly operating income rose to $116.0 million from $3.0 million, while the company moved from a quarterly net loss to net income. Higher revenue and lower operating expenses as a share of revenue contributed; marketing and sales fell to 44% of quarterly revenue from 47%.
- Nine-month operating income increased to $157.9 million from $87.6 million, but net income declined to $59.9 million from $231.1 million, principally reflecting the prior-year Demandware-related tax benefit.
- Marketing and sales, research and development, and general and administrative expenses all increased in dollars. Headcount was up 14% year over year overall; marketing and sales headcount rose 24%.
- Nine-month operating cash flow increased to $1.687 billion from $1.456 billion. The company attributed cash flow variability in part to billing, collections, and renewal seasonality.
- Cash, cash equivalents and marketable securities rose to $3.629 billion from $2.209 billion at January 31, 2017. The company repaid the remaining $200 million revolving-facility borrowing in February 2017.
Outlook, risks, contingencies, and unusual items
- No specific numeric revenue or earnings guidance is provided in the filing. Management said it remains focused on improving operating margins in fiscal 2018 and beyond, while continuing to invest in sales, R&D, data-center capacity, infrastructure, and international expansion.
- Management expects marketing and sales costs to remain a substantial share of revenue, although the percentage may remain flat or decline over the next several quarters. R&D and G&A expenses are expected to rise in dollars; professional services costs are expected to be approximately in line with related revenue.
- Management reported an attrition rate of 8–9%, excluding Marketing and Commerce Cloud, and approximately 10% including Marketing Cloud, as of October 31, 2017; it expected attrition to remain consistent.
- Revenue from Marketing and Commerce Cloud increased 50% for the nine-month period; Commerce Cloud contributed approximately $160.9 million of that period’s revenue. Growth by cloud offering may not be directly comparable because of allocation methods and acquisitions.
- The company expects adoption of the new revenue standard, ASU 2014-09, in fiscal 2019 using the full retrospective method. It expects a material impact on the balance sheet and statement of operations from broader capitalization and longer amortization of contract acquisition costs; it does not expect an impact on operating cash flows. The revenue impact had not been finalized.
- Material exposures include security incidents or service outages, competition, acquisition integration, strategic-investment losses, foreign exchange and interest-rate movements, privacy and cross-border data rules, and substantial lease and infrastructure commitments. Operating lease commitments totaled $3.291 billion; letters of credit were $96.6 million.
- The company reported a proposed $6.3 million settlement of a Telephone Consumer Protection Act lawsuit, subject to court approval. It stated that resolution of current matters was not expected to materially adversely affect consolidated results, cash flows, or financial position, but unfavorable outcomes could affect a particular quarter.
- Management believed available liquidity, operating cash flow, and borrowing capacity would be sufficient for working capital, capital expenditures, and debt repayment needs over the next 12 months. The convertible notes’ near-term maturity and conversion activity remain relevant: the filing noted additional conversion notices for $26.7 million of principal after quarter-end.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is fiscal 2018 Q3, not 2016 Q3.
- Track the April 2018 convertible-note maturity, conversions, cash settlement requirements, and potential share dilution.
- Assess whether operating-margin improvement can continue while Salesforce increases sales, R&D, data-center, and infrastructure spending.
- Monitor the adoption effects of ASU 2014-09, especially commission capitalization, amortization, and restated revenue and earnings comparability.
- Review deferred revenue and unbilled deferred revenue trends with seasonality in mind; the filing cautions that unbilled deferred revenue is not a reliable standalone indicator of future revenue.
- Evaluate the valuation and liquidity risks in strategic investments, including privately held investments, and the effect of future accounting changes on reported earnings volatility.