Salesforce, Inc. — Form 10-Q Summary
Period clarification: The request metadata says “2013 Q2,” but the filing is for the quarter and six months ended July 31, 2014 (fiscal 2015 Q2). Comparisons below are year over year against the periods ended July 31, 2013. Dollar amounts are U.S. dollars.
Business context and reporting period
Salesforce provides enterprise cloud-computing services, primarily subscription-based CRM and related applications. Subscription and support generated 93% of quarterly revenue and 94% of six-month revenue. The company reports one operating segment.
Financial performance
| Metric | Three months ended July 31, 2014 | Six months ended July 31, 2014 | Year-over-year comparison |
|---|---|---|---|
| Revenue | $1.319 billion | $2.545 billion | Up 38% in both periods; six-month constant-currency growth was 37% |
| Subscription and support revenue | $1.233 billion | $2.380 billion | Up 37% and 36%, respectively |
| Gross profit / margin | $1.011 billion / 76.7% | $1.945 billion / 76.4% | Margin was about 77% and 76%, versus 77% in each prior-year period |
| Operating loss / margin | $33.4 million / 2.5% | $88.8 million / 3.5% | Prior-year losses were $39.9 million and $84.4 million |
| Net income (loss) | $(61.1) million | $(158.0) million | Prior-year income was $76.6 million and $8.9 million |
| Operating cash flow | $245.9 million | $719.0 million | Six-month amount rose from $466.4 million |
| Investing / financing cash flow | Not presented as a separate quarterly summary here | $(496.8) million / $(226.1) million | Prior-year six-month investing outflow was $2.075 billion; financing inflow was $1.449 billion |
Quarterly GAAP diluted loss per share was $0.10; six-month loss per share was $0.26. The prior-year periods included a $128.8 million tax benefit from a partial release of the tax valuation allowance, which substantially affects the net-income comparison. For Q2, non-GAAP net income was $85.7 million and non-GAAP diluted EPS was $0.13, versus $56.3 million and $0.09 a year earlier; these company-defined non-GAAP measures exclude specified expenses and adjustments.
At July 31, cash and cash equivalents were $774.7 million and marketable securities were $897.0 million, totaling approximately $1.672 billion. Accounts receivable was $834.3 million. Current liabilities were $3.503 billion, including $2.317 billion of current deferred revenue; deferred revenue is generally billed or collected in advance and is not equivalent to total contract value. Unbilled deferred revenue was approximately $5.0 billion, up from $4.5 billion at January 31, 2014; management cautions that fluctuations are not a reliable indicator of future revenue.
Total liabilities were $5.703 billion. Debt included $271.3 million principal of 0.75% convertible notes due January 2015, $1.15 billion principal of 0.25% convertible notes due April 2018, and a $270.0 million term loan. The term loan was current on its covenants. Capital-lease obligations had a $544.6 million present value. The filing also disclosed $2.115 billion of minimum operating-lease payments and a $335.8 million financing obligation for a building under construction.
Material changes versus prior comparable periods
- Revenue grew 38% in Q2 and the first half, driven mainly by new customers, upgrades and additional subscriptions, with ExactTarget acquisition contributions and lower attrition also contributing. Management said pricing was not a significant growth driver.
- Operating costs rose with hiring, customer-service and data-center capacity, sales and marketing investment, and acquisition-related amortization. Marketing and sales remained 51% of revenue in both six-month periods; gross margin was broadly stable.
- Six-month operating cash flow increased by $252.6 million, primarily due to favorable working-capital changes, including lower accounts receivable. Financing cash flow shifted to an outflow, mainly reflecting repayment of $297.6 million of 0.75% notes and capital-lease and term-loan payments.
- The remaining 0.75% notes were convertible; Salesforce had received additional conversion notices for $89.6 million principal by the filing date. The company expected to repay that principal in cash and deliver most excess conversion value in shares.
Outlook, commentary, risks and unusual items
- Management expects continued investment in sales and marketing, R&D, data centers, international expansion and integration of acquired technologies. It expects marketing and sales to remain a substantial cost and R&D expense to rise in dollars and potentially as a share of revenue. The company cautioned that GAAP net losses may continue. No specific revenue or earnings guidance for the next period is stated in the supplied filing text.
- Management expected attrition to remain in the 9%–10% range; its calculation excluded ExactTarget offerings. It said existing cash, cash equivalents, short-term securities and operating cash flow should be sufficient for working capital, capital expenditures and debt repayment needs over the next 12 months.
- On August 1, 2014, after quarter-end, Salesforce acquired RelateIQ for an estimated $340.2 million, principally in stock. It also sold approximately 3.7 acres of San Francisco land after quarter-end for $72.5 million and expected to recognize a $7.8 million gain; sale of the remaining 1.5 acres was subject to closing conditions.
- Major risks include service interruption or security breaches, competition, customer renewal and attrition, acquisition integration, privacy and regulatory requirements, international and currency exposure, and execution of substantial infrastructure and lease commitments. The company reported ordinary-course litigation, including intellectual-property claims, and said resolution of current matters was not expected to materially harm results, cash flows or financial position, while acknowledging an unfavorable outcome could affect a particular period.
- Interest-rate sensitivity: management estimated that a 100-basis-point rate move could change the market value of its fixed-income portfolio by approximately $14.1 million. The company also noted exposure to variable rates on the term loan and foreign-exchange movements.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers Q2 FY2015, not 2013 Q2.
- Assess revenue growth and renewal trends alongside deferred revenue and unbilled deferred revenue, recognizing their billing seasonality and limitations as indicators.
- Review GAAP losses, stock-based compensation ($273.5 million for the six months), acquisition-related amortization and the assumptions behind non-GAAP adjustments.
- Track cash generation, upcoming 0.75% note repayments/conversions, potential share issuance, and total debt, capital leases and long-term lease commitments.
- Monitor RelateIQ integration, land-sale closings and gain recognition, and the company’s ability to fund planned growth while sustaining margins and service reliability.