Salesforce, Inc. — Form 10-Q Summary
Period clarification: The filing covers the quarter ended October 31, 2009, Salesforce’s fiscal third quarter of fiscal 2010, and the nine months then ended. This differs from the request metadata’s “2008 Q3.” Financial figures below are in millions of U.S. dollars unless otherwise stated.
Business context and reporting period
Salesforce provides subscription-based customer relationship management services and a platform for building and running business applications. It reported approximately 67,900 customers worldwide and operates as one reportable segment. The interim statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended Oct. 31, 2009 | Year-over-year comparison | Nine months ended Oct. 31, 2009 | Year-over-year comparison |
|---|---|---|---|---|
| Total revenue | $330.5 | Up 20% | $951.5 | Up 21% |
| Subscription and support revenue | $306.9 | Up 21% | $882.1 | Up 23% |
| Professional services and other revenue | $23.7 | Up 3% | $69.5 | Up 1% |
| Gross profit / gross margin | $265.0 / 80% | Margin unchanged | $761.7 / 80% | Margin up from 79% |
| Operating income / margin | $30.1 / 9% | Up from $16.1 / 6% | $89.8 / 9% | Up from $47.7 / 6% |
| Net income attributable to Salesforce | $20.7 | Up from $10.1 | $60.3 | Up from $29.7 |
| Diluted EPS | $0.16 | Up from $0.08 | $0.48 | Up from $0.24 |
| Cash from operating activities | $35.5 | Up from $17.1 | $179.4 | Up from $154.0 |
- For the nine months, operating cash flow benefited primarily from customer-base growth, billings, and collections. Investing activities used $473.6 million, largely reflecting purchases of marketable securities, capital expenditures, and a $4.5 million acquisition. Financing activities provided $59.5 million.
- Cash, cash equivalents, and marketable securities totaled $1.070 billion at October 31, 2009, compared with $882.6 million at January 31, 2009. Cash and cash equivalents alone were $242.9 million, down from $483.8 million at fiscal year-end; marketable securities increased to $827.2 million.
- Current assets were $762.9 million and current liabilities $726.5 million. Deferred revenue, current and noncurrent, totaled $545.4 million, versus $594.0 million at January 31, 2009 and $469.5 million a year earlier.
- The filing reports no bank line of credit. Capital lease obligations had a present value of $17.8 million; future minimum operating lease payments totaled $291.5 million. The company said available liquidity and operating cash flow should meet working-capital and capital-expenditure needs for the next 12 months.
Material changes versus the prior comparable period
- Revenue growth slowed: management said fiscal 2010 growth was expected to be significantly below fiscal 2009’s 44%; nine-month growth was 21%, versus 48% in the comparable prior-year period.
- Subscription and support continued to dominate revenue at 93% for the quarter and nine-month period. Professional services revenue grew only 3% for the quarter and 1% year to date.
- Operating margin improved to 9% from 6% in both reported comparisons. Marketing and sales declined to 46% of revenue from 49%, while research and development rose to 10% from 9% for the nine months.
- Nine-month net income attributable to Salesforce more than doubled, and diluted EPS doubled. The nine-month effective tax rate fell to 42% from 47%.
- International revenue represented 30% of quarterly revenue, up from 28%; Europe and Asia Pacific revenue grew 28% in the quarter. Currency movements increased quarterly revenue by $4.3 million but reduced nine-month revenue by $8.3 million versus the prior year.
Outlook, management commentary, and risks
- Management reported improved demand and slightly stronger new business and renewal rates in the quarter than in the first half of fiscal 2010. However, initial deployment sizes remained smaller, sales cycles longer, and nine-month renewal rates below prior years, with some customers not renewing or reducing subscriptions.
- Management expected fiscal 2010 operating income as a percentage of revenue and EPS to improve versus fiscal 2009, citing revenue growth and cost management. No specific full-year revenue or EPS guidance figure is provided in the supplied filing text.
- The company planned to invest in data-center capacity, domestic and international sales and marketing, distribution channels, infrastructure, and product development. It opened a Singapore data center and expected its annual cost to be significant. Professional-services costs exceeded related revenue by $3.7 million year to date; management expected that to continue in the fourth quarter as an investment in customer adoption.
- Key business risks include recession-driven spending constraints, weaker renewals or customer reductions, competition, longer enterprise sales cycles, service availability and security, dependence on third-party hosting and technology, international and foreign-exchange exposure, and execution of growth investments. Subscription revenue is recognized over contract terms, so changes in bookings or renewals may affect later periods.
- The company’s investment in the Reserve Primary Fund had an estimated fair value of $6.2 million against $7.4 million invested; ultimate recovery is uncertain. A separate patent-infringement allegation had not resulted in litigation as of the filing; the company said it could affect a particular quarter’s income or cash flows, although it did not expect a material effect on financial condition.
- Other notable items: stock-based compensation was $62.9 million for the nine months, with $200.4 million remaining to be expensed; a privately held company was acquired for $4.5 million in cash. Management stated disclosure controls were effective and there had been no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm the period: this is the quarter ended October 31, 2009 (fiscal Q3 2010), not 2008 Q3.
- Track new business, subscription renewals, customer seat reductions, and deferred revenue for evidence that demand is recovering or weakening.
- Assess whether margin gains and the stated outlook persist as Salesforce increases hiring and spending on data centers, sales, and product development.
- Review liquidity and portfolio risk, particularly the uncertain Reserve Fund recovery, alongside lease commitments and capital-lease obligations.
- Monitor stock-based compensation and dilution, the patent claim, and the potential effects of international, tax, security, and service-continuity risks.