Salesforce, Inc. — Form 10-Q Summary
Period clarification: The filing covers the quarter ended July 31, 2015 (Salesforce fiscal Q2 2016), not 2014 Q2 as stated in the request metadata. Amounts below are in U.S. dollars.
Business context and reporting period
Salesforce provides subscription-based enterprise cloud computing services, primarily CRM. Subscription and support represented 93% of revenue for the six months ended July 31, 2015. The filing reports one operating segment.
Financial performance and liquidity
| Metric | Three months ended July 31, 2015 | Six months ended July 31, 2015 | Comparable 2014 period |
|---|---|---|---|
| Total revenue | $1.635 billion; +24% | $3.146 billion; +24% | $1.319 billion quarterly; $2.545 billion six months |
| Subscription and support revenue | $1.521 billion; +23% | $2.927 billion; +23% | $1.233 billion quarterly; $2.380 billion six months |
| Gross profit / margin | $1.229 billion / 75% | $2.359 billion / 75% | Quarterly margin 77%; six-month margin 76% |
| Operating income (loss) / margin | $19.8 million / 1% | $50.9 million / 2% | Quarterly loss $33.4 million; six-month loss $88.8 million |
| GAAP net income (loss) | $(0.9) million | $3.2 million | Quarterly loss $61.1 million; six-month loss $158.0 million |
| Operating cash flow | $304.4 million | $1.035 billion | $245.9 million quarterly; $719.0 million six months |
Non-GAAP net income was $128.3 million for the quarter and $236.6 million for the six months, versus $85.7 million and $155.2 million, respectively, in 2014; non-GAAP diluted EPS was $0.19 and $0.35. These company-defined measures exclude items including stock compensation and acquired-intangible amortization; they are not substitutes for GAAP results.
- Cash and liquidity: Cash and equivalents were $1.089 billion; marketable securities totaled $977.6 million, for approximately $2.067 billion combined. Accounts receivable was $1.068 billion. Current assets were $2.917 billion versus current liabilities of $4.113 billion, including $3.015 billion of current deferred revenue.
- Cash flows: Six-month investing outflow was $769.9 million, principally reflecting the 50 Fremont purchase, strategic investments and capital spending. Financing outflow was $84.0 million, including repayment of the $300 million revolver borrowing and capital-lease payments.
- Debt and commitments: The company had $1.15 billion principal amount of 0.25% convertible notes due 2018, carried at $1.083 billion net, and a $198.8 million loan assumed with 50 Fremont, bearing 3.75% and due 2023. No revolver borrowings remained under the $650 million facility. Capital-lease obligations had a $515.6 million present value; operating-lease minimum payments totaled $2.169 billion.
- Deferred revenue: Current and noncurrent deferred revenue totaled $3.035 billion at July 31. Unbilled deferred revenue, a non-GAAP measure, was approximately $6.2 billion, up from $5.7 billion at January 31; management cautions that it fluctuates with contract and renewal timing and is not a reliable standalone predictor of future revenue.
Material changes versus the prior comparable period
- Quarterly revenue grew 24% reported and 28% in constant currency; six-month revenue also grew 24%. Growth was attributed mainly to new customers, upgrades and additional subscriptions, rather than material changes in net price per user.
- Service Cloud grew 40% in quarterly subscription revenue, Salesforce1 Platform and Other 36%, Marketing Cloud 29%, and Sales Cloud 10%.
- Quarterly gross margin declined to 75% from 77%, as cost of revenue rose to 25% of revenue from 23%, with higher service-delivery costs and data-center investment among the cited drivers. Sales and marketing remained the largest expense at 49% of revenue, down from 51%.
- Six-month GAAP operating income included a one-time, noncash $36.6 million gain from terminating the lease on 50 Fremont after acquiring the building for $637.6 million. The quarter ended July 31 did not include this gain.
- The company increased strategic investments substantially; privately held investment cost was $449.7 million at July 31, compared with $158.0 million at January 31. These investments are illiquid and valuation gains on cost-method holdings are not recorded in the financial statements.
Outlook, management commentary and risks
- No specific numeric revenue or earnings guidance is provided in the filing text. Management said it would continue investing in sales and marketing, R&D, data-center capacity, infrastructure and acquisitions; it expected these expenses to increase in absolute dollars. Management also stated GAAP losses may continue absent one-time gains.
- Management expected cash, cash equivalents, short-term marketable securities and operating cash flow to meet working-capital, capital-expenditure and debt-repayment needs for the next 12 months. Attrition was approximately 9% as of July 31, excluding Marketing Cloud; management expected it to remain consistent.
- Foreign exchange was a notable headwind: the stronger U.S. dollar reduced international revenue by $49.0 million in the quarter and $100.7 million for the six months versus 2014. Management expected continued currency pressure in fiscal 2016.
- Key risks include service availability and cybersecurity, data privacy and regulatory requirements, competition, customer renewals and attrition, execution and integration of acquisitions, currency movements, and the possibility of impairment or loss on strategic investments. A 100-basis-point interest-rate move was estimated to change fixed-income portfolio market value by approximately $12.3 million.
- Legal matters include a July 2015 derivative action alleging excessive director compensation and a patent-infringement claim received from a large technology company; no litigation had been filed on the patent claim as of the filing. Management did not expect current matters to materially affect overall financial position, though an adverse resolution could affect a particular quarter.
- The filing notes a possible decrease of up to approximately $31 million in unrecognized tax benefits over the next 12 months as certain examinations conclude. Adoption of the new revenue standard was planned for fiscal 2019; its financial impact had not yet been determined.
Important facts for investors to verify
- Reconcile GAAP profitability with non-GAAP results, particularly the impact of stock-based compensation, acquired-intangible amortization and the 50 Fremont gain.
- Track revenue growth, constant-currency performance, deferred revenue and unbilled deferred revenue while accounting for seasonality and billing timing.
- Assess whether gross-margin pressure and rising infrastructure, sales and R&D costs remain consistent with management’s growth investment plans.
- Monitor cash generation against acquisition spending, strategic investments, property purchases, lease commitments and debt obligations.
- Review valuation and impairment exposure in privately held strategic investments, as well as foreign-exchange, service-security, privacy and litigation developments.