Salesforce, Inc. — Form 10-Q Summary
Period note: The request identifies 2013 Q3, but the supplied filing is for the quarter ended October 31, 2014 (Salesforce fiscal 2015 Q3), with nine-month comparisons to October 31, 2013. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions.
Business context and reporting period
Salesforce provides enterprise cloud-computing services, principally subscription-based CRM applications and related professional services. Subscription and support represented 93% of revenue in the first nine months. The company reports one operating segment. The quarter and nine-month results are unaudited.
Key financial metrics
| Metric | Three months ended Oct. 31, 2014 | Three months ended Oct. 31, 2013 | Nine months ended Oct. 31, 2014 | Nine months ended Oct. 31, 2013 |
|---|---|---|---|---|
| Revenue | $1,383.7M | $1,076.0M | $3,929.0M | $2,925.8M |
| Gross profit / margin | $1,050.4M / 76% | $807.8M / 75% | $2,995.6M / 76% | $2,230.9M / 76% |
| Operating loss / margin | $(22.0)M / (2)% | $(97.9)M / (9)% | $(110.8)M / (3)% | $(182.3)M / (6)% |
| Net loss | $(38.9)M | $(124.4)M | $(196.9)M | $(115.6)M |
| Basic and diluted loss per share | $(0.06) | $(0.21) | $(0.32) | $(0.19) |
| Cash from operations | $122.5M | $137.9M | $841.5M | $604.2M |
- Quarterly revenue grew 29% year over year (30% constant currency); nine-month revenue grew 34% (34% constant currency). Subscription and support revenue rose 28% for the quarter and 33% for nine months.
- Quarterly gross margin improved one percentage point; nine-month gross margin was unchanged. Operating losses narrowed, though GAAP net loss for nine months increased, reflecting a substantially lower tax benefit than in the prior year.
- Stock-based expense was $139.5M in the quarter and $413.0M for nine months. Nine-month amortization of purchased intangibles was $115.0M. Management also reported non-GAAP operating profit of $152.9M for the quarter and $417.1M for nine months; these measures exclude specified costs and should be considered alongside GAAP results.
Financial position, debt and liquidity
- At October 31, 2014, cash and cash equivalents were $846.3M, marketable securities totaled $981.0M, and restricted cash was $114.9M. Cash, cash equivalents and marketable securities totaled approximately $1.8B, excluding restricted cash; accounts receivable was $794.6M.
- Total assets were $9.41B and total liabilities were $5.62B. Current liabilities included $2.19B of deferred revenue. Current assets were $2.44B versus current liabilities of $3.31B; deferred revenue is largely advance customer billings, not conventional debt.
- Debt carrying amounts included $179.8M of 0.75% convertible notes due January 2015, $1.06B of 0.25% convertible notes due April 2018, and $300M drawn on a $650M revolving facility due 2019. The 0.75% notes were convertible at holders’ option at quarter-end. Salesforce repaid its $300M term loan in October using proceeds from the revolver and other funds. It reported covenant compliance at October 31.
- Operating cash flow for nine months rose to $841.5M from $604.2M, primarily due to favorable working-capital changes, including lower accounts receivable. Investing used $553.1M and financing used $206.2M. Capital lease obligations had a $572.7M present value; additional lease and facility commitments are discussed below.
- Unbilled deferred revenue was approximately $5.4B, up from $4.5B at January 31, 2014. Management cautions that this balance fluctuates with contract timing and renewal cycles and is not a reliable standalone indicator of future revenue.
Material changes, outlook and unusual items
- Growth was driven primarily by new customers, upgrades and additional subscriptions from existing customers; ExactTarget, acquired in July 2013, also contributed to nine-month growth. RelateIQ was acquired in August 2014 for approximately $340.2M, primarily in Salesforce shares; its results were not material to date.
- Operating margin improved as revenue growth outpaced expense growth. Marketing and sales remained the largest operating expense, at 52% of quarterly revenue. Headcount was up 26% in cost of revenue, 23% in research and development, and 22% in marketing and sales compared with a year earlier.
- Quarterly results included a $15.6M gain from sales of San Francisco land and building improvements. Nine-month results also included a $10.2M loss on conversions of 0.75% convertible notes. The nine-month tax provision was $37.3M, versus a $119.2M tax benefit in the prior-year period, when an acquisition-related valuation-allowance release materially affected taxes.
- Management said it would continue investing in data centers, product development, international expansion, hiring and acquisitions, and remained focused on improving operating margins. It expected GAAP losses could continue and marketing and sales to remain a substantial expense. Attrition was between 9% and 10%, consistent with January 2014; management expected it to remain in that range. The filing provides no specific numerical full-year revenue or earnings guidance.
- After quarter-end, Salesforce agreed to purchase the 50 Fremont Street property for approximately $640M, expected to close in fiscal 2016 Q1, subject to customary conditions. It also disclosed a 15.5-year office lease with approximately $560M in payments beginning in fiscal 2018, and a separate financing obligation associated with a leased facility totaling approximately $335.8M.
- Risks include service outages or security breaches, acquisition integration, intense competition, privacy and regulatory requirements, international and foreign-exchange exposure, growth and expense execution, customer renewals, and substantial debt and long-term lease commitments. The company disclosed ordinary-course legal matters, including intellectual-property claims; management did not expect current matters to have a material adverse effect, but noted an unfavorable outcome could affect a particular quarter. Management reported disclosure controls effective at a reasonable-assurance level and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied 10-Q is fiscal 2015 Q3, not 2013 Q3.
- Track GAAP losses, operating-margin progress, and the scale and persistence of stock-based compensation and acquired-intangible amortization.
- Assess subscription growth, attrition, deferred revenue and unbilled deferred revenue with the filing’s seasonality and contract-timing caveats in mind.
- Review the January 2015 convertible-note maturity, revolver borrowing and remaining availability, covenant terms, and potential dilution or cash needs from note conversions.
- Evaluate funding and execution implications of the property purchase, office leases, data-center investment and capital lease commitments.
- Monitor acquisition integration, service reliability and security, litigation developments, and tax exposure across jurisdictions.