Salesforce, Inc. Form 10-Q Summary
Reporting period: The filing covers the unaudited three months ended April 30, 2010 (Salesforce fiscal 2011 first quarter), compared with the three months ended April 30, 2009. This differs from the “2009 Q1” period in the request metadata.
Business context and financial performance
Salesforce provides subscription-based cloud CRM applications and a platform for business applications. Subscription and support revenue represented 93% of quarterly revenue.
| Metric | Q1 FY2011 | Q1 FY2010 |
|---|---|---|
| Revenue | $376.8 million | $304.9 million |
| Gross profit / gross margin | $305.2 million / 81% | $243.1 million / 80% |
| Operating income / margin | $33.1 million / 9% | $30.1 million / 10% |
| Net income attributable to Salesforce | $17.7 million | $18.4 million |
| Diluted earnings per share | $0.13 | $0.15 |
| Cash provided by operating activities | $143.2 million | $98.0 million |
- Revenue rose 24% year over year. Subscription and support revenue increased 24% to $350.7 million; professional services and other revenue increased 13% to $26.1 million.
- International revenue grew 39% to $117.5 million, or 31% of revenue; favorable currency movements contributed $4.4 million year over year.
- Operating expenses increased 28% to $272.2 million. Marketing and sales expense rose to $175.9 million, or 47% of revenue; R&D was $40.1 million and general and administrative expense was $56.2 million.
- Stock-based compensation was $26.5 million for the quarter; $266.8 million remained to be expensed over future periods.
Cash, liquidity, debt and balance sheet
- At April 30, 2010, cash and cash equivalents were $690.8 million, marketable securities were $1.211 billion, and accounts receivable were $183.6 million. Cash, cash equivalents and marketable securities totaled $1.902 billion.
- Operating cash flow was $143.2 million. Investing activities used $509.4 million, primarily reflecting purchases of marketable securities and capital expenditures; financing activities provided $44.9 million. Cash and cash equivalents declined $320.5 million during the quarter.
- Total liabilities were $1.340 billion. The company had $575 million principal amount of 0.75% convertible senior notes due 2015, carried at $455.6 million net of debt discount. Quarterly interest expense was $7.1 million, largely due to the notes’ noncash discount amortization.
- Current deferred revenue was $647.5 million; total current and noncurrent deferred revenue was $664.5 million, down from $704.3 million at January 31, 2010. The filing notes that first-quarter deferred revenue and receivables are affected by the seasonal concentration of annual billings in the fourth quarter.
- Management said existing cash, short-term investments and operating cash flow should meet working-capital and capital-expenditure needs for the next 12 months. The company had no bank line of credit.
Changes, outlook and notable developments
- Revenue growth reflected new customers, increased subscriptions and upgrades among existing customers. Operating costs rose with headcount, sales investment, and product and infrastructure development; operating margin declined from 10% to 9%.
- Management expects to continue investing in sales and marketing, R&D, personnel and data-center capacity. It said marketing and sales costs are expected to remain a substantial share of revenue and the largest cost; professional-services costs were expected to exceed related revenue during fiscal 2011.
- No specific revenue or earnings guidance was provided. Management described growth, renewals, customer adoption, competition, service performance and economic conditions as important uncertainties, and cautioned that quarterly results may fluctuate.
- On May 7, 2010, after quarter-end, Salesforce completed its acquisition of Jigsaw for approximately $142 million in cash plus a performance-based earn-out of up to $14.2 million. Initial purchase accounting was incomplete at filing.
- On May 18, 2010, after quarter-end, Microsoft sued Salesforce alleging infringement of nine patents and seeking damages and injunctive relief. Salesforce said it intended to defend the case and did not then expect a material adverse effect on financial condition, while noting possible material effects on a particular quarter’s net income or cash flows.
- Interest-rate sensitivity analysis estimated that an immediate 100-basis-point rate change could change the market value of the investment portfolio by approximately $35 million. The company also cited foreign-exchange exposure.
- Other material risks include service outages or security breaches, customer nonrenewals, economic weakness, competition, international and regulatory risks, acquisition integration, and potential dilution or cash obligations related to convertible notes and warrants.
Important facts for investors to verify
- Confirm the period: the filing reports the quarter ended April 30, 2010, not a 2009 quarter.
- Track subscription growth, deferred revenue, renewals and billings, taking account of the company’s seasonal billing pattern.
- Assess whether expense growth and stock-based compensation affect operating-margin and earnings trends.
- Review the Jigsaw acquisition’s final purchase accounting, integration and earn-out exposure.
- Monitor developments in the Microsoft patent litigation and any resulting financial or operational exposure.
- Review the convertible notes’ cash repayment, conversion, dilution and hedge-counterparty risks alongside available liquidity.