Salesforce, Inc. — Form 10-Q Summary
Reporting period: Quarter ended April 30, 2012 (the first quarter of fiscal 2013; fiscal year ends January 31). The request metadata says “2011 Q1,” but the filing itself reports 2012 results and compares them with the quarter ended April 30, 2011. Amounts below are in U.S. dollars.
Business context and key financial metrics
Salesforce provides enterprise cloud computing and social enterprise services. Subscription and support revenue accounted for 94% of quarterly revenue. No customer represented 5% or more of revenue.
| Metric | Quarter ended Apr. 30, 2012 | Prior-year quarter |
|---|---|---|
| Total revenue | $695.5 million | $504.4 million |
| Subscription and support revenue | $655.2 million | $473.5 million |
| Professional services and other revenue | $40.2 million | $30.9 million |
| Gross profit / gross margin | $543.9 million / 78% | $401.3 million / 80% |
| Operating loss | $22.2 million / (3)% of revenue | $2.8 million / (1)% |
| Net income (loss) | $(19.5) million; $(0.14) per diluted share | $0.5 million; $0.00 per diluted share |
| Cash from operating activities | $213.2 million | $139.5 million |
| Cash and cash equivalents at period end | $440.8 million | $664.6 million |
At April 30, cash, cash equivalents and marketable securities totaled $1.657 billion, versus $1.447 billion at January 31, 2012. Current assets were $1.323 billion and current liabilities $1.677 billion. Deferred revenue, current and noncurrent, was $1.335 billion; unbilled deferred revenue was approximately $2.7 billion. These balances reflect subscription billings and future billings under non-cancelable agreements and are not equivalent to recognized revenue.
Convertible senior notes had a net carrying value of $502.3 million and principal of approximately $574.9 million. The notes carry a 0.75% coupon and mature in January 2015. Long-term lease liabilities and other were $47.8 million; present value of capital lease obligations was $60.2 million. Operating lease minimum payments totaled $653.4 million. Management said existing cash, short-term investments 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 rose 38%, led by 38% growth in subscription and support revenue. Management attributed growth to new customers, upgrades, additional subscriptions and improved renewals.
- Gross margin fell to 78% from 80%. Cost of revenue increased to 22% of revenue from 20%, partly due to employee costs, service delivery and data-center capacity, depreciation and acquired-intangible amortization.
- Operating expenses rose 40% to $566.2 million. Marketing and sales increased 45% to $369.8 million and reached 53% of revenue; research and development increased 45% to $94.8 million. The company reported higher headcount across these functions.
- GAAP operating loss widened to $22.2 million from $2.8 million, and the company moved from slight net income to a $19.5 million net loss. Interest expense increased to $6.4 million from $3.7 million; investment income declined to $4.5 million from $8.1 million.
- Operating cash flow increased to $213.2 million, while cash and equivalents declined by $166.5 million during the quarter, primarily reflecting investment purchases and other investing outflows. Investing activities used $475.0 million, including $48.9 million for business combinations and $44.7 million in capital expenditures.
Outlook, management commentary, risks and unusual items
- Management plans to reinvest a significant portion of incremental fiscal 2013 revenue in growth, including sales and marketing, research and development, data-center capacity, international expansion and acquisitions. It expects marketing and sales to remain a substantial cost and increase in absolute dollars. No specific revenue or earnings guidance is provided in the supplied filing text.
- Subscription revenue is recognized over contract terms, typically 12–24 months. Fourth-quarter billings and renewals are seasonally strong; management cautions that deferred revenue and unbilled deferred revenue fluctuate and are not reliable standalone indicators of future revenue.
- Stock-based compensation was $81.3 million for the quarter; $888.1 million remained to be amortized over future periods, subject to forfeitures. Management expects compensation expense to continue and notes it may increase with hiring and stock-price changes. GAAP results are materially affected by this non-cash expense and acquisition-related amortization; the company also presented non-GAAP measures, which are not substitutes for GAAP results.
- The company acquired Rypple for approximately $50.6 million on February 1, 2012; acquired goodwill was $45.6 million. Its results were not material to date. Purchase accounting remained preliminary.
- The company suspended pre-construction activity on its San Francisco property during the quarter. The carrying value of the land, improvements and parking rights was $321.1 million; future facility needs and options for the property were under evaluation.
- The convertible notes became eligible for holder conversion for the quarter ending July 31, 2012, following the share-price condition being met. The filing says they would be reclassified as a current liability while convertible; conversion could also affect share dilution and liquidity.
- Key risks include service outages or security breaches, reliance on third-party data centers and technology, competition, renewal and customer-spending uncertainty, international and currency exposure, acquisition integration, regulatory and privacy changes, and litigation. Management did not expect current legal matters to materially affect consolidated results, cash flows or financial position, but an adverse resolution could affect a particular quarter.
- Interest-rate sensitivity: an immediate 100-basis-point change could change the investment portfolio’s market value by approximately $18.4 million. Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the period being analyzed: this is the quarter ended April 30, 2012, not 2011 Q1.
- Track whether revenue growth can continue while gross margin and GAAP operating profitability recover from the quarter’s deterioration.
- Assess cash generation against acquisition spending, capital expenditures, lease commitments and the potential current classification or conversion of the notes.
- Review renewal trends and billing seasonality alongside deferred revenue and unbilled deferred revenue, rather than treating either balance as a direct revenue forecast.
- Monitor stock-based compensation, acquisition amortization and dilution, and distinguish GAAP performance from management’s non-GAAP presentation.
- Follow the San Francisco property decision, Rypple integration and the company’s ability to expand data-center capacity without impairing service reliability.