Salesforce, Inc. — Form 10-Q Summary
Period clarification: The filing is for the three months ended April 30, 2017 (Salesforce fiscal 2018 first quarter), not 2016 Q1 as stated in the request metadata. Comparisons are with the three months ended April 30, 2016.
Business context
Salesforce provides cloud-based enterprise software, principally CRM, with subscription and support revenue supplemented by professional services. It reports as one operating segment. Subscription and support generated 92% of quarterly revenue.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $2.388 billion | $1.917 billion | +25% |
| Subscription and support revenue | $2.201 billion | $1.775 billion | +24% |
| Professional services and other revenue | $186.7 million | $141.1 million | +32% |
| Gross profit / gross margin | $1.737 billion / 73% | $1.420 billion / 74% | Margin down about 1 percentage point |
| Operating income (loss) / margin | $(8.9) million / (0.4)% | $52.0 million / 2.7% | Lower |
| Net income (loss) | $(9.2) million | $38.8 million | Declined to a loss |
| Operating cash flow | $1.230 billion | $1.051 billion | +17% |
Operating cash flow less capital expenditures was approximately $1.073 billion, calculated from reported figures. Net loss per share was $0.01. Cost growth outpaced revenue: operating expenses rose 28%, led by marketing and sales, up $213.6 million, and research and development, up $115.1 million. Stock-based compensation was $251.6 million, versus $188.9 million a year earlier.
Revenue by cloud offering: Sales Cloud grew 14% to $829.6 million; Service Cloud grew 21% to $651.2 million; Salesforce Platform and Other grew 32% to $431.1 million; Marketing and Commerce Cloud grew 56% to $289.0 million. Demandware contributed $56.5 million of revenue for the quarter.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $2.025 billion and marketable securities were $1.195 billion, totaling $3.220 billion at April 30, 2017.
- Accounts receivable was $1.440 billion; deferred revenue was $5.043 billion. Unbilled deferred revenue, an operational measure, was $9.6 billion.
- Reported debt included $1.124 billion net carrying value of 0.25% convertible notes, $497.5 million of term-loan carrying value and $198.3 million for the 50 Fremont loan. The $1.0 billion revolving facility had no borrowings at quarter-end.
- The $1.15 billion convertible notes mature April 1, 2018 and were classified as current. The company reported compliance with the term-loan and revolving-facility covenants.
- Future minimum operating lease payments totaled $2.903 billion; letters of credit outstanding were $83.9 million.
Changes, outlook and notable items
- Growth was primarily volume-driven, including new customers, upgrades and additional subscriptions. Management said changes in net price per user were not a significant growth driver. International revenue rose 26% in dollars, with currency movements reducing reported international revenue by $10.5 million year over year.
- Management said it remained focused on improving operating margins in fiscal 2018, while also planning continued investment in sales, research and development, data-center capacity, infrastructure and acquisitions. No specific numerical revenue or earnings guidance is provided in the supplied filing text.
- Management attributed the first quarter’s strong collections and operating cash flow partly to seasonal billing patterns: the fourth quarter is typically strongest for billings and renewals, and the first quarter for collections.
- The $13.8 million income-tax benefit on a pretax loss of $23.0 million produced a 60% effective tax benefit rate. Management expected pretax income for the full year and tax expense primarily in profitable non-U.S. jurisdictions.
- Other income was $2.8 million, compared with expense of $13.8 million in the prior-year quarter; the prior period also included a $12.9 million gain from strategic-investment acquisitions. Strategic-investment valuation changes contributed to comprehensive income, which was $76.1 million despite the net loss.
- Key risks include intense competition, service availability and security, privacy and cross-border data regulation, acquisition integration, foreign-exchange and investment valuation exposures, significant stock compensation, and substantial lease and debt commitments. The filing says current legal matters are not expected to have a material adverse effect overall, but an unfavorable resolution could affect a particular quarter.
- Management believed existing cash, cash equivalents, marketable securities and operating cash flow would be sufficient for working capital, capital expenditures and debt repayment needs over the next 12 months. Adoption of the new revenue standard was still under assessment; the company anticipated a full-retrospective approach and noted possible changes to revenue timing and commission capitalization.
Most important facts for investors to verify
- Confirm the period: this is Q1 FY2018, ended April 30, 2017, notwithstanding the request’s “2016 Q1” label.
- Assess whether revenue growth can translate into improving operating profitability given the operating loss, lower gross margin and rising expenses.
- Review the upcoming April 2018 convertible-note maturity, conversion terms and available liquidity.
- Track cash flow alongside seasonal collections, deferred revenue and the $9.6 billion unbilled deferred revenue measure; management cautions that this measure fluctuates and is not a reliable standalone indicator of future revenue.
- Evaluate the scale of stock-based compensation, future lease and infrastructure commitments, and the valuation and impairment risk in strategic investments.