Salesforce, Inc. — Form 10-Q Summary
Period clarification: The request metadata says “2014 Q1,” but the supplied filing is for the three months ended April 30, 2015, Salesforce’s fiscal 2016 first quarter. Comparisons below are with the three months ended April 30, 2014.
Business context and reporting period
Salesforce provides enterprise cloud computing services, primarily CRM, on a subscription basis. Subscription and support revenue represented 93% of quarterly revenue. The company reports one operating segment. Financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Total revenue | $1.511 billion | $1.227 billion |
| Gross profit / margin | $1.129 billion / 74.7% | $934.5 million / 76.2% |
| Operating income (loss) / margin | $31.1 million / 2.1% | $(55.3) million / (4.5)% |
| Net income (loss) | $4.1 million | $(96.9) million |
| Diluted EPS | $0.01 | $(0.16) |
| Cash from operating activities | $730.9 million | $473.1 million |
| Cash, cash equivalents and marketable securities | $1.923 billion | — |
Revenue increased 23% year over year, or 27% on a constant-currency basis. Subscription and support revenue grew 22%; professional services and other revenue grew 33%. GAAP gross margin declined by about 1.5 percentage points. Management reported non-GAAP operating income of $176.8 million, up 48%, and non-GAAP net income of $108.3 million; these are company-defined measures and exclude specified expenses and gains.
At April 30, 2015, total assets were $10.366 billion and total liabilities were $6.130 billion. Current assets were $2.605 billion versus current liabilities of $3.961 billion; the difference largely reflects $3.033 billion of current deferred revenue. Accounts receivable was $926.4 million, and current plus noncurrent deferred revenue was $3.057 billion. Unbilled deferred revenue, a non-GAAP measure, was approximately $6.0 billion.
Debt included $1.077 billion carrying value of 0.25% convertible notes due 2018 and a $198.8 million loan assumed with the 50 Fremont acquisition, bearing 3.75% interest and due in 2023. The $650 million revolving credit facility had no outstanding borrowings at quarter-end. The filing also reports $553.1 million present value of capital lease obligations and $2.183 billion of future operating lease payments.
Material changes versus the prior comparable period
- Revenue rose $284.4 million, with growth driven primarily by new business, upgrades and additional subscriptions; management said pricing was not a significant growth driver.
- Operating results moved from a $55.3 million loss to $31.1 million income. The 2015 result included a $36.6 million non-cash gain on termination of the 50 Fremont lease; excluding that gain, GAAP operating income would have been lower.
- Net income improved from a $96.9 million loss to $4.1 million income. The prior-year quarter included an $8.5 million loss on conversions of older convertible notes.
- Operating cash flow increased $257.8 million, primarily from higher collections following fourth-quarter billings and changes in working capital and noncash items. Management cautioned that first-quarter cash flow is seasonally strong.
- Salesforce acquired its San Francisco headquarters building, 50 Fremont, for $637.6 million, funded partly with cash and an assumed $200 million loan. It also made approximately $145 million of strategic investments in private companies.
- Accounts receivable fell from $1.906 billion at January 31 to $926.4 million at April 30, consistent with management’s discussion of seasonal first-quarter collections.
Outlook, management commentary, risks and unusual items
- No specific revenue or earnings guidance for the remainder of fiscal 2016 is provided in the supplied filing text. Management said it expected to remain focused on improving non-GAAP operating profit.
- Management expects continued investment in sales and marketing, research and development, data-center capacity, infrastructure, personnel and acquisitions. It expects marketing and sales to remain a substantial cost and professional-services costs to continue exceeding related revenue.
- Management expects the stronger U.S. dollar to weigh on international revenue in fiscal 2016. International revenue was 26% of total revenue, down from 29% a year earlier; currency reduced reported revenue by approximately $52 million versus the prior-year quarter.
- Management cited an attrition rate of approximately 9% as of April 30, 2015, excluding Marketing Cloud, and expected it to remain consistent.
- Stock-based compensation was $142.6 million for the quarter, with $1.3 billion of unamortized compensation expected to be expensed over a weighted-average period of two years. The 77% effective tax rate reflected taxes in profitable jurisdictions, principally outside the U.S., and may not indicate a steady-state rate.
- Key risks include service interruptions or security breaches, competition, customer renewal and attrition trends, foreign-exchange exposure, acquisition integration, potential impairment or loss of private-company investments, regulatory and privacy requirements, and substantial lease and debt commitments.
- A large technology company had alleged patent infringement in a communication received during fiscal 2015; no litigation had been filed as of the report. Management did not expect current legal matters to materially affect overall financial position, but noted a matter could affect a particular quarter.
- The company said existing cash, short-term securities and operating cash flow should cover working capital, capital expenditure and debt repayment needs for the next 12 months. Adoption of the new revenue standard was still under assessment; the filing said its effect was not yet determined.
Important facts for investors to verify
- Confirm the reporting-period mismatch: this is Q1 of fiscal 2016, not 2014 Q1.
- Assess underlying operating performance apart from the one-time $36.6 million 50 Fremont lease-termination gain and distinguish GAAP results from management’s non-GAAP measures.
- Track constant-currency growth, international performance, renewal/attrition trends and the composition and timing of unbilled deferred revenue.
- Evaluate cash-flow seasonality and working-capital movements rather than treating first-quarter operating cash flow as a run rate.
- Review the scale and valuation risk of strategic investments, the assumed 50 Fremont loan, convertible-note terms, capital leases and future operating-lease commitments.
- Monitor the patent allegation, tax examinations and the potential financial-statement effects of adopting the new revenue-recognition standard.