Salesforce, Inc. Form 10-Q Summary
Period clarification: The request identifies 2017 Q1, but the supplied filing covers the three months ended April 30, 2018 (Salesforce fiscal 2019 Q1), with comparison to the three months ended April 30, 2017. Dollar amounts are in millions unless stated otherwise.
Business context and reporting period
Salesforce provides cloud-based enterprise software, primarily CRM, through subscription services and professional services. It reports as one operating segment. Subscription and support generated 93% of quarterly revenue. Comparative 2017 figures were adjusted for the retrospective adoption of revenue standard Topic 606.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 | Change / context |
|---|---|---|---|
| Total revenue | $3,006 | $2,397 | +25% |
| Subscription and support revenue | $2,810 | $2,209 | +27% |
| Professional services and other | $196 | $188 | +4% |
| Gross profit / margin | $2,239 / 74% | $1,746 / 73% | Margin improved about 1 percentage point |
| Operating income / margin | $191 / 6% | $4 / less than 1% | Improved substantially |
| Net income | $344 | $1 | Includes a large strategic-investment gain |
| Diluted EPS | $0.46 | $0.00 | 2017 amount rounded as reported |
| Operating cash flow | $1,466 | $1,230 | Up $236 |
| Capital expenditures | $122 | $157 | Lower year over year |
At April 30, 2018, cash and cash equivalents were $5,922 and marketable securities were $1,237, or $7.2 billion combined. Accounts receivable was $1,763 and unearned revenue was $6,201. Total assets were $22,963; total liabilities were $11,903; and stockholders’ equity was $11,060. Debt carrying value was $3,175, including $3,172 noncurrent debt. The company reported compliance with its debt covenants and had no borrowings under its $1.0 billion revolving facility.
Material changes versus the prior comparable period
- Revenue growth was led by subscription sales, primarily volume-driven increases from new customers, upgrades and additional subscriptions. Management said net price per user was not a significant growth driver.
- Among core subscription offerings, reported growth was Sales Cloud 16%, Service Cloud 29%, Salesforce Platform and Other 36%, and Marketing and Commerce Cloud 41%.
- International revenue increased 43% to $905, representing 30% of revenue, versus 26% a year earlier. Management attributed part of the dollar increase to stronger foreign currencies.
- Net income included $211 of net gains on strategic investments, principally unrealized gains associated with publicly traded investments and IPOs. This was up from $3 a year earlier and materially boosted reported earnings.
- Operating expenses rose $306 to $2,048, while falling as a share of revenue from 73% to 68%. Marketing and sales remained the largest expense at $1,329, or 44% of revenue.
- Cash rose $3,379 from January 31, mainly reflecting $2.5 billion of debt issuance. Financing cash flow also included about $1.0 billion of principal repayment on the matured convertible notes.
- Topic 606 had no material impact on reported revenue, but changed recognition for certain variable consideration and expanded capitalization of contract acquisition costs. The company said the standard’s adoption had no impact on operating cash flow.
Outlook, commentary, risks and unusual items
- Management gave no specific numerical revenue or earnings guidance in the supplied filing. It said it remained focused on improving operating margins in fiscal 2019 and beyond, while continuing to invest in sales, R&D, data-center capacity and international growth.
- Management expected marketing and sales to remain a substantial portion of revenue, R&D expense to rise in absolute dollars and interest expense to increase following the new senior notes. Professional-services costs were expected to remain approximately in line with related revenue.
- In May 2018, after quarter-end, Salesforce completed its acquisition of MuleSoft for estimated consideration of approximately $6.5 billion: $4.9 billion cash, $1.2 billion common stock and $0.4 billion assumed awards. The filing says cash paid was approximately $4.9 billion, including $500 million proceeds from a term loan funded in May. The acquisition was funded in part by debt raised before the quarter ended.
- During April, Salesforce acquired CloudCraze for preliminary consideration of approximately $190 million; the acquisition’s results were not material to the quarter.
- Key risks discussed include cybersecurity and service availability, evolving privacy and cross-border data regulations (including the EU GDPR effective May 2018), competition, customer retention, foreign-exchange exposure, integration of acquisitions, strategic-investment valuation volatility, and substantial debt and lease commitments.
- Unusual items include $211 million of reported strategic-investment gains; $11 million of bridge-facility costs and approximately $5 million of interest on the new notes in the quarter; and about $25 million of total MuleSoft-related transaction and financing costs recognized for the quarter.
- The company reported a $41 million tax provision on $385 million pretax income, an 11% effective tax rate, primarily related to profitable foreign jurisdictions. Its analysis of the U.S. Tax Cuts and Jobs Act remained provisional. Current legal matters were not expected by management to have a material adverse effect, though outcomes were described as uncertain; a previously settled TCPA matter remained subject to final court approval.
Important facts for investors to verify
- Separate recurring operating performance from the $211 million investment gain when assessing net income and earnings growth.
- Review the MuleSoft acquisition’s final purchase accounting, funding mix, integration progress and effects on future margins, debt and share count.
- Track subscription growth, remaining transaction price ($20.4 billion at April 30), unearned revenue, renewal trends and attrition; management reported attrition below 10% as of quarter-end, excluding Commerce Cloud.
- Assess the sustainability of operating-margin improvement against planned hiring, sales investment, data-center spending, stock compensation and acquired-intangible amortization.
- Monitor debt service, lease and infrastructure commitments, foreign-exchange movements, investment portfolio valuation changes, tax uncertainties and privacy/security compliance risks.