Salesforce, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and six months ended July 31, 2011 (fiscal 2012 Q2), compared with the same periods in 2010. This differs from the request metadata of “2010 Q2.” Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.
Business context and performance
Salesforce provides subscription-based cloud computing applications, primarily CRM, and a platform for building and running business applications. Subscription and support represented 93% of quarterly revenue and 94% of six-month revenue.
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Total revenue | $546.0M, up 38% from $394.4M | $1,050.4M, up 36% from $771.2M |
| Subscription and support revenue | $509.3M, up 38% | $982.8M, up 37% |
| Professional services and other revenue | $36.7M, up 44% | $67.6M, up 31% |
| Gross profit and margin | $425.1M; 77.9% (about 80.3% prior year) | $826.4M; 78.7% (about 80.6% prior year) |
| Operating income (loss) | $(15.7)M; margin (2.9%), versus $29.7M income | $(18.6)M; margin (1.8%), versus $62.7M income |
| Net income (loss) attributable to Salesforce | $(4.3)M, or $(0.03) per share; prior year $14.7M, or $0.11 | $(3.7)M, or $(0.03) per share; prior year $32.5M, or $0.25 |
| Cash provided by operating activities | $82.9M, versus $76.1M | $222.5M, versus $219.3M |
| Capital expenditures | $45.1M | $72.4M |
Six-month operating cash flow less capital expenditures was approximately $150.1M. Cash, cash equivalents and marketable securities totaled $1.287B at July 31, 2011, down from $1.408B at January 31, 2011. Current assets were $1.115B and current liabilities $1.814B; current liabilities include $917.8M of deferred revenue and $484.1M carrying value of convertible notes.
Material changes and notable items
- Operating profitability declined into a loss despite strong revenue growth. Marketing and sales expense rose to 52% of revenue for the first six months, from 47%; R&D rose to 13% from 11%. Management attributed expense growth to hiring, stock compensation, infrastructure and acquisition-related costs.
- Stock-based compensation was $102.2M in the first six months, versus $53.1M a year earlier. A further $582.6M of compensation expense remained to be amortized over future service periods, assuming no forfeitures.
- Investing cash outflow was $242.6M for the six months, including $298.7M of net cash paid for business combinations, partly offset by marketable securities activity. Financing cash inflow was $48.4M.
- Salesforce acquired Radian6 in May for approximately $336.6M of total consideration, including $282.6M cash, $49.3M in shares and assumed options. The acquisition added $262.6M of goodwill; preliminary purchase accounting and tax estimates remained subject to refinement. Manymoon and another small business were also acquired during the period.
- The $575.0M principal amount of 0.75% convertible notes was holder-convertible following stock-price triggers and classified as current at July 31; the carrying value was $484.1M. The notes remained convertible for the quarter ending October 31, 2011. Conversion could require cash up to principal and cash and/or shares for any excess value.
- The six-month effective tax rate was 78%, affected by foreign tax differentials, nondeductible acquisition costs, credits and the Radian6 tax benefit; the filing notes that the small pretax loss magnifies the reported rate.
Outlook, risks and contingencies
- Management planned to reinvest a significant portion of incremental fiscal 2012 revenue in hiring, sales and marketing, R&D, data center capacity and international growth. It expected fiscal 2012 diluted EPS to be significantly below fiscal 2011; no specific EPS or revenue forecast is provided in the supplied filing text.
- Management expected marketing and sales to remain the largest expense and continue rising in absolute dollars. It anticipated G&A as a percentage of revenue would remain flat for the next several quarters.
- Management stated existing cash, short-term investments and operating cash flow should cover working capital and capital expenditure needs for the next 12 months, while noting future acquisitions or investments could require additional financing. The company had no bank line of credit.
- Principal risks include service outages, data-center disruption and security breaches; customer renewal and spending uncertainty; intense competition; acquisition integration and valuation risks; international, currency, tax and privacy regulation exposure; and volatility in operating results and stock price.
- A preliminary settlement of a California wage-and-hour case was subject to court approval, expected in late 2011 or early 2012. The estimated charge, approximately $0.04 per diluted share, was included in the six-month results. The company also disclosed routine litigation, including intellectual-property claims, and said an adverse outcome could affect a particular quarter.
- Lease commitments included $489.7M of future operating lease payments and $54.1M present value of capital lease obligations. A land-development agreement requires construction to begin by September 2014 or monetary penalties may apply. The company reported $10.6M in landlord letters of credit.
- Interest-rate sensitivity analysis estimated that a 100-basis-point rate change could change the market value of the fixed-income portfolio by approximately $22.6M. The company reported disclosure controls effective at a reasonable assurance level and no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether subscription growth and renewal trends continue to support reported revenue growth, given annual billing seasonality and revenue recognition over contract terms.
- Whether expense growth, particularly sales and marketing, stock compensation and acquired-technology amortization, continues to pressure margins and earnings.
- Radian6 integration, final purchase accounting and tax assumptions, and the realization of expected acquisition benefits.
- Potential conversion or settlement of the notes, including cash needs and share dilution, and the status of the wage-and-hour settlement.
- Cash generation relative to capital spending, acquisition activity, lease obligations and headquarters construction commitments.
- Exposure to service reliability, cybersecurity, foreign exchange, investment valuation, tax audits and litigation risks.