Salesforce, Inc. — Form 10-Q Summary
Period and context: The filing covers the three months ended April 30, 2013, Salesforce’s fiscal 2014 first quarter, with comparisons to the three months ended April 30, 2012. Although the request metadata says “2012 Q1,” the filing itself reports 2013 Q1 results. Salesforce provides subscription-based enterprise cloud services, including CRM applications and platforms. Amounts below are in U.S. dollars.
Financial performance and position
- Revenue: $892.6 million, up 28% year over year. Subscription and support revenue was $842.2 million, up 29% and 94% of total revenue; professional services and other revenue was $50.4 million, up 25%.
- Profitability and margins: Gross profit was $683.6 million; gross margin was approximately 77%, versus 78% a year earlier. Operating loss was $44.5 million, compared with $22.2 million; operating margin was approximately negative 5%, versus negative 3%. Net loss was $67.7 million, or $0.12 per share, versus a $19.5 million loss, or $0.04 per share. Non-GAAP net income was $61.0 million, but excludes significant expenses and is not a GAAP measure.
- Costs: Operating expenses rose to $728.2 million from $566.2 million. Stock-based expense was $114.7 million, versus $81.3 million; purchased-intangible amortization was $23.8 million, versus $20.9 million. Marketing and sales remained the largest expense at 52% of revenue.
- Cash flow: Operating activities generated $283.2 million, versus $213.2 million. Investing activities used $219.3 million, versus $475.0 million. Financing activities provided $1.124 billion, primarily from the March convertible-note offering. Cash and cash equivalents increased to $1.928 billion from $747.2 million.
- Liquidity and working capital: Cash, cash equivalents, and marketable securities totaled $3.079 billion at April 30, up from $1.758 billion at January 31. Current and noncurrent deferred revenue totaled $1.733 billion, down from $1.863 billion at January 31; management notes seasonal billing patterns. Unbilled deferred revenue was approximately $3.6 billion, versus $3.5 billion at January 31, and is not recorded as deferred revenue on the balance sheet.
- Debt and commitments: Salesforce issued $1.15 billion of 0.25% convertible senior notes due 2018 in March. Together with the 0.75% notes due 2015, principal outstanding was $1.725 billion; balance-sheet carrying value was approximately $1.557 billion. The 2015 notes were classified as current and remained convertible at holders’ option. Future minimum operating lease payments were $1.695 billion; capital lease obligations had a present value of $60.8 million. Letters of credit totaled $60.2 million.
Changes, outlook, and commentary
- Revenue growth reflected new customers, upgrades and additional subscriptions, and improved renewals; management cited longer contract durations and increased enterprise adoption. International revenue growth was partly offset by currency effects.
- Operating costs grew as the company expanded hiring, sales and marketing, research and development, service delivery, and data-center capacity. Headcount was up 30% year over year in service delivery and R&D, and 22% in marketing and sales.
- Management said it expected GAAP net losses for the next several quarters as it reinvested in growth, and expected marketing and sales costs to remain a substantial portion of revenue. It also anticipated higher absolute R&D, G&A, and capital expenditures. The filing provides no specific numerical revenue or earnings guidance.
- Unusual item: Salesforce recorded approximately $8.0 million of expense for prior-period coverage under a multi-year intellectual-property license agreement entered into in May 2013. Management said current legal matters were not expected to have a material adverse impact overall, while acknowledging an unfavorable resolution could materially affect a particular quarter.
- Other risks include service availability, security and data-center disruptions; competition and customer renewal or upgrade rates; international, currency, privacy and regulatory exposure; acquisition integration; and significant stock-based compensation. A 100-basis-point interest-rate change was estimated to change the investment portfolio’s market value by approximately $20.4 million.
- The company completed a four-for-one stock split in April 2013; share and per-share figures in the filing reflect the split. Management stated existing liquidity and operating cash flow were expected to meet working-capital and capital-expenditure needs for the next 12 months.
Most important facts for investors to verify
- Reconcile the strong revenue growth and operating cash generation with widening GAAP losses, rising operating expenses, and the company’s expectation of continued GAAP losses.
- Assess the quality and timing of growth using subscription revenue, renewals, deferred revenue, and unbilled deferred revenue; the latter is not a reliable standalone indicator of future revenue, according to the filing.
- Review the convertible notes’ cash-settlement terms, conversion conditions, current classification of the 2015 notes, and potential dilution or liquidity needs; note hedges are intended to reduce, but do not guarantee elimination of, dilution.
- Consider the scale of stock-based compensation, remaining unamortized compensation of approximately $1.2 billion, and management’s non-GAAP exclusions when evaluating profitability.
- Monitor the $8.0 million license expense, future intellectual-property claims, data-center and security risks, and the company’s substantial lease commitments.