Salesforce, Inc. — Form 10-K summary
Period clarification: The supplied filing is the fiscal 2012 Form 10-K for the year ended January 31, 2012, filed March 9, 2012. It is not a 2010 Q4 filing. Financial figures below are in U.S. dollars.
Business context and reporting period
Salesforce provides subscription-based enterprise cloud software, led by its Sales Cloud and Service Cloud offerings, alongside platforms and social, mobile, and professional services. Subscription and support revenue represented 94% of fiscal 2012 revenue. No customer accounted for 5% or more of revenue. The company reported one operating segment.
Key financial metrics
| Metric | FY2012 | FY2011 |
|---|---|---|
| Total revenue | $2.267 billion | $1.657 billion |
| Subscription and support revenue | $2.126 billion | $1.551 billion |
| Gross profit / margin | $1.778 billion / 78% | $1.333 billion / 80% |
| Operating income (loss) / margin | ($35.1 million) / (2%) | $97.5 million / 6% |
| Net income (loss) attributable to Salesforce | ($11.6 million) | $64.5 million |
| GAAP diluted EPS | ($0.09) | $0.47 |
| Cash from operating activities | $591.5 million | $459.1 million |
| Cash, cash equivalents and marketable securities at year-end | $1.447 billion | $1.408 billion |
At January 31, 2012, accounts receivable was $683.7 million and current and noncurrent deferred revenue totaled $1.380 billion. Unbilled deferred revenue exceeded $2.2 billion, but the filing cautions that it fluctuates with contract timing and is not a reliable standalone indicator of future revenue. Working capital was negative $651.2 million.
The company had $575 million principal amount of 0.75% convertible senior notes due 2015; their reported carrying amount was $496.1 million. They were classified as current at year-end because they were then convertible at holders’ option; Salesforce said they would be reclassified as noncurrent for the following quarter if the conversion conditions remained unmet. Total contractual obligations included $61.0 million of capital leases, $607.7 million of facilities operating leases, and $587.9 million of convertible notes including interest.
Changes versus the prior comparable year
- Revenue increased 37%; subscription and support revenue also rose 37%, primarily from new customers, upgrades, additional subscriptions, and improved renewals.
- Gross margin declined from 80% to 78%. Cost of revenue rose faster than revenue, including higher data-center delivery costs, depreciation and amortization, and acquired-intangible amortization.
- Operating results moved from $97.5 million of income to a $35.1 million loss as operating expenses grew 47%, led by marketing and sales investment. Marketing and sales expense increased to 52% of revenue from 48%.
- Operating cash flow rose by $132.4 million. Investing cash outflow was $489.7 million, versus $1.063 billion in FY2011, reflecting acquisitions, capital spending, and marketable-security activity.
- Cash and marketable securities rose modestly, while deferred revenue increased from $934.9 million to $1.380 billion. The balance sheet also showed increased goodwill, partly reflecting acquisitions.
Outlook, commentary, risks and unusual items
- Management gave no clear quantitative revenue or earnings guidance in the supplied filing text. It expected to reinvest a significant portion of incremental FY2013 revenue and anticipated continued increases in absolute research and development, marketing and sales, and general and administrative expenses. Management expected marketing and sales to remain the largest cost and a substantial share of revenue.
- Growth plans included adding sales and research staff, expanding data-center capacity and international activity, extending services, and pursuing further acquisitions. Management said existing cash, short-term investments, and operating cash flow should cover working-capital and capital-expenditure needs for the next 12 months, while noting possible future financing needs for acquisitions.
- GAAP results included $229.3 million of stock-based compensation and $67.3 million of acquired-intangible amortization. The company reported non-GAAP operating profit of $261.5 million and non-GAAP diluted EPS of $1.36; these exclude specified expenses and should be considered alongside, not instead of, GAAP results.
- Fiscal 2012 acquisitions included Radian6 ($336.6 million consideration), Assistly ($58.7 million), and Model Metrics ($66.7 million), as well as other acquisitions. Acquisition integration, valuation, goodwill, and amortization are relevant risks.
- A preliminary California wage-and-hour settlement was subject to court approval; the estimated expense was approximately $0.04 per diluted share and was recorded in FY2012. The company also anticipated an approximately $40 million tax payment in FY2013 related to the Radian6 transaction.
- Salesforce signed an 18-year lease for approximately 400,000 square feet at an estimated total cost of $209 million. Risks identified include service outages or security breaches, competition, customer renewals and spending, scaling costs, international and currency exposure, privacy regulation, acquisitions, litigation, and earthquake exposure in the San Francisco Bay Area.
- Management said current legal matters were not expected to have a material adverse impact overall, but an unfavorable resolution could materially affect a particular quarter. The financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers FY2012, not 2010 Q4.
- Review the drivers and sustainability of the 37% revenue growth, renewal trends, deferred revenue, and the more than $2.2 billion in unbilled deferred revenue.
- Assess whether operating-expense growth, stock compensation, acquisition amortization, and lower gross margin affect the path to sustained GAAP profitability; compare GAAP and non-GAAP reconciliations.
- Check the convertible notes’ conversion status and classification, maturity and potential dilution, alongside lease and other contractual commitments.
- Track acquisition integration and any changes to preliminary purchase accounting, the wage-and-hour settlement approval, and the Radian6-related tax payment.