Salesforce, Inc. — Form 10-K Summary
Period clarification: The filing is for the fiscal year ended January 31, 2016 (fiscal 2016), not 2014 Q4 as stated in the request metadata. Comparisons below are primarily with fiscal 2015. Figures are in U.S. dollars.
Business context
Salesforce provides subscription-based enterprise cloud software, principally CRM, and related professional services. Its offerings include Sales, Service, Marketing, Community, Analytics, IoT and App Cloud services. Subscription and support generated 93% of fiscal 2016 revenue. The company operates as one reportable segment.
Financial performance
| Metric | Fiscal 2016 | Fiscal 2015 |
|---|---|---|
| Total revenue | $6.667 billion | $5.374 billion |
| Subscription and support revenue | $6.206 billion | $5.014 billion |
| Gross profit / gross margin | $5.013 billion / 75% | $4.084 billion / 76% |
| Operating income (loss) / margin | $114.9 million / 2% | $(145.6) million / (3)% |
| GAAP net income (loss) | $(47.4) million | $(262.7) million |
| Operating cash flow | $1.613 billion | $1.174 billion |
| Free cash flow (company-defined non-GAAP) | $1.328 billion | $883.3 million |
- Revenue increased 24% reported and 27% on a constant-currency basis. Subscription and support revenue rose 24%; professional services and other revenue rose 28%.
- Core offering growth in subscription and support revenue: Sales Cloud 10%, Service Cloud 38%, App Cloud and Other 39%, and Marketing Cloud 29%. Analytics and Community revenue was not significant; IoT Cloud was being piloted.
- Operating results improved as revenue grew faster than operating expenses. Marketing and sales remained the largest expense category at 49% of revenue, down from 51%.
- GAAP net loss narrowed, but the company reported positive non-GAAP net income of $506.8 million and non-GAAP diluted EPS of $0.75. These measures exclude, among other items, stock compensation and acquisition-related amortization; GAAP EPS was a loss of $0.07.
- Stock-based compensation was $593.6 million, with $1.6 billion of unamortized awards at year-end. The filing reports non-GAAP free cash flow as operating cash flow less capital expenditures; it excludes strategic investments and specified facilities-related spending.
Liquidity, debt and commitments
- Cash, cash equivalents and marketable securities totaled $2.725 billion at year-end, up from $1.890 billion. Accounts receivable was $2.496 billion; current liabilities exceeded current assets, resulting in negative working capital of $1.270 billion.
- Deferred revenue was $4.292 billion and unbilled deferred revenue, a non-GAAP operational measure, was approximately $7.1 billion, versus $5.7 billion a year earlier. Management cautions that unbilled deferred revenue fluctuates with contract and renewal timing and is not a reliable stand-alone predictor of revenue.
- Principal due on outstanding debt was $1.350 billion, primarily the $1.15 billion 0.25% convertible notes due 2018 and the loan assumed with 50 Fremont. The $650 million revolving facility had no borrowings outstanding; the company reported covenant compliance.
- Contractual obligations included $2.319 billion of operating lease payments, $558.4 million of capital lease obligations and a $334.0 million financing obligation for a leased facility. The filing also discloses a later San Francisco office sublease commitment of approximately $311 million over about 12 years.
Changes, outlook and notable items
- Revenue growth slowed from 32% in fiscal 2015 to 24% in fiscal 2016 on a reported basis; constant-currency growth was 27% in fiscal 2016 versus 33% in fiscal 2015. Management attributed the international revenue headwind to U.S. dollar strength, which reduced fiscal 2016 international revenue by $170.5 million.
- Attrition was between 8% and 9%, an improvement from 9% to 10% a year earlier; the calculation excludes Marketing Cloud. Management expected attrition to remain in that range.
- Management said it would continue prioritizing improved operating margins in fiscal 2017 while investing in hiring, sales and marketing, R&D, data-center capacity, international expansion, and new and acquired offerings. The filing does not provide a clear numerical fiscal 2017 revenue or earnings guidance figure.
- Fiscal 2016 included a $36.6 million non-cash gain from terminating the 50 Fremont lease after purchasing the building, and a $21.8 million gain on land and building-improvement sales. The tax provision was $111.7 million on pretax income of $64.3 million; management cited tax effects and a valuation allowance on U.S. deferred tax assets. These items materially affect interpretation of GAAP results.
- After year-end, Salesforce acquired SteelBrick for estimated consideration exceeding $300 million, primarily in shares, and issued approximately 4.8 million shares. A new office sublease commitment was also entered into after year-end.
- A shareholder derivative action alleging excessive director compensation was dismissed with prejudice in March 2016 without payment. A separate patent-infringement allegation from a large technology company remained under analysis; no litigation had been filed, and the company said a resolution could still materially affect a particular quarter’s results or cash flows.
- Principal risks include security incidents or service outages, privacy and cross-border data-transfer regulation, intense competition, foreign-exchange exposure, customer renewals and attrition, acquisition integration and investment losses, significant lease and debt obligations, and tax uncertainty. The invalidation of the U.S.-EU Safe Harbor framework was identified as a potential compliance and data-transfer risk.
Most important facts for investors to verify
- Confirm the intended period: this filing covers fiscal 2016, not 2014 Q4.
- Assess the quality and sustainability of growth, including constant-currency performance, product-level growth, renewals and the attrition measure’s exclusion of Marketing Cloud.
- Reconcile GAAP losses with non-GAAP profitability and cash flow, particularly the recurring impact of stock-based compensation, acquisition amortization and excluded items.
- Review cash conversion and working-capital seasonality alongside deferred revenue, unbilled deferred revenue and receivables.
- Evaluate debt, convertible-note dilution and cash requirements, as well as long-term lease and facilities commitments.
- Track the tax valuation allowance, tax audits and uncertain tax positions; the filing reports $172.7 million of gross unrecognized tax benefits.
- Monitor SteelBrick integration and share dilution, strategic investment valuations, and the outcome of the unresolved patent allegation.