Salesforce, Inc. — Form 10-Q Summary
Period clarification: The request metadata says “2011 Q2,” but the filing is for the quarter ended July 31, 2012—Salesforce fiscal 2013 second quarter—and the six months then ended. Comparisons below are with the corresponding 2011 periods. Financial amounts are in U.S. dollars.
Business context and reporting period
Salesforce provides enterprise cloud-computing services, with subscription and support accounting for about 94% of revenue. The company reports as one operating segment. These unaudited interim statements follow U.S. GAAP and should be read with its fiscal 2012 Form 10-K.
Key financial metrics
| Metric | Three months ended July 31, 2012 | Year-over-year comparison | Six months ended July 31, 2012 | Year-over-year comparison |
|---|---|---|---|---|
| Revenue | $731.6 million | Up 34% from $546.0 million | $1,427.1 million | Up 36% from $1,050.4 million |
| Subscription and support revenue | $687.5 million | Up 35% | $1,342.7 million | Up 37% |
| Gross profit / gross margin | $569.2 million / 77.8% | Margin approximately flat | $1,113.1 million / 78.0% | Margin down from 78.7% |
| Operating loss / margin | $13.5 million / 1.8% | Loss narrowed from $15.7 million | $35.7 million / 2.5% | Loss widened from $18.6 million |
| Net loss | $9.8 million; $0.07 per share | Compared with $4.3 million loss; $0.03 per share | $29.3 million; $0.21 per share | Compared with $3.7 million loss; $0.03 per share |
| Operating cash flow | $136.2 million | Up from $82.9 million | $349.4 million | Up from $222.5 million |
GAAP operating results include substantial noncash charges: stock-based expense was $85.4 million for the quarter and $166.7 million for the six months. Management also reported non-GAAP operating profit of $92.0 million and $171.9 million, respectively, and non-GAAP net income of $60.7 million and $115.2 million. These measures exclude specified expenses and should not be treated as GAAP results.
- Liquidity: Cash and cash equivalents were $1,000.7 million; marketable securities totaled $803.5 million, for combined cash, cash equivalents and securities of $1,804.3 million. Current assets were $1,853.1 million and current liabilities $2,329.2 million.
- Debt: The 0.75% convertible senior notes have $574.9 million principal outstanding and a $508.5 million net carrying amount. They were classified as current because holders could convert them; the filing says they would remain convertible through the quarter ending October 31, 2012, subject to the stated conditions.
- Deferred revenue: Current and noncurrent deferred revenue totaled $1,337.2 million, down from $1,380.3 million at January 31, 2012. Unbilled deferred revenue was approximately $2.8 billion, up from $2.2 billion; management cautions that fluctuations are not a reliable standalone indicator of future revenue.
- Other cash flows: Six-month investing cash flow was a use of $102.7 million; financing cash flow provided $138.1 million. Capital expenditures were $74.0 million. Cash increased by $393.4 million during the six months.
Material changes versus the prior comparable period
- Revenue growth was led by subscriptions, new customers, upgrades, additional subscriptions and improved renewal rates. The company said prices for its primary editions remained substantially consistent.
- Operating expenses rose substantially in dollars. For the six months, marketing and sales expense increased to $749.9 million from $537.5 million; research and development increased to $194.2 million from $138.7 million. Marketing and sales represented 53% of revenue versus 52% a year earlier.
- Six-month GAAP operating loss widened despite strong revenue growth, reflecting expense growth, including increased employee costs, stock compensation, service delivery and depreciation and amortization.
- Foreign exchange reduced revenue by $17.1 million in the quarter and $23.3 million in the six-month period versus the prior year.
- Cash and marketable securities increased from $1,447.2 million at January 31, 2012 to $1,804.3 million at July 31, 2012.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expects to reinvest significantly in fiscal 2013, expand data-center capacity, hire in sales, customer-related functions and research and development, and continue acquisitions and investments. It expects marketing and sales costs to remain a substantial share of revenue and certain expenses to increase.
- Management believed existing cash, short-term securities and operating cash flow would be sufficient for working capital and capital expenditures over the next 12 months. It also warned that additional financing might be needed for future acquisitions or investments and may not be available on favorable terms or at all.
- Management expected capital expenditures to be significantly higher in the remaining six months of fiscal 2013, primarily for improvements to the 50 Fremont Street office. It expected later operating cash flow to be lower following the Buddy Media acquisition and wage-and-hour settlement payment.
- Subsequent acquisition: On August 13, 2012, Salesforce acquired Buddy Media. Consideration included $467.1 million cash, net of cash acquired, 1,393,859 shares, and $33.1 million of assumed employee awards. Buddy’s results were to be included beginning in the quarter ending October 31, 2012.
- Other subsequent item: On August 16, 2012, the company paid approximately $9.7 million to settle a California wage-and-hour lawsuit; the estimated settlement expense had been recorded in fiscal 2012.
- Real estate: The company suspended pre-construction activity on undeveloped San Francisco land during fiscal 2013’s first quarter. Land, improvements and parking rights had a carrying value of $321.1 million at July 31, 2012; management was evaluating future facility needs and options for the property.
- Key risks: Service availability, security and data protection; competition and customer renewals; economic and foreign-exchange conditions; acquisition integration and related costs; significant stock-based compensation; litigation and intellectual-property claims; and interest-rate exposure. A 100-basis-point interest-rate change was estimated to change the investment portfolio’s market value by approximately $13.0 million.
- The company reported no material change in internal control over financial reporting and stated disclosure controls were effective at a reasonable assurance level. Management did not expect current legal matters, in aggregate, to materially adversely affect results, cash flows or financial position, while noting an unfavorable outcome could materially affect a particular period.
Important facts for investors to verify
- Confirm the intended reporting period: the filing covers fiscal 2013 Q2, not 2011 Q2.
- Track whether subscription growth and renewals continue to outpace expense growth, and whether GAAP operating performance improves.
- Assess the significance of stock-based compensation and acquired-intangible amortization when comparing GAAP results with management’s non-GAAP measures.
- Review the convertible notes’ conversion status, current classification, cash repayment exposure and potential dilution, as well as Buddy Media’s final acquisition accounting and integration costs.
- Monitor operating cash flow, capital spending, deferred revenue and unbilled deferred revenue together; the company cautions that deferred-revenue measures are affected by billing seasonality and renewal timing.
- Follow the use and recoverability of the San Francisco land investment, the anticipated office spending, and the company’s liquidity after the Buddy acquisition and settlement payment.