SALESFORCE.COM, INC.
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended
("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended ("Exchange Act"). Words such as "expects," "anticipates," "aims,"
"projects," "intends," "plans," "believes," "estimates," "seeks," "assumes,"
"may," "should," "could," "would," "foresees," "forecasts," "predicts,"
"targets," variations of such words and similar expressions are intended to
identify such forward-looking statements, which may consist of, among other
things, trend analyses and statements regarding future events, future financial
performance, anticipated growth and industry prospects. These forward-looking
statements are based on current expectations, estimates and forecasts, as well
as the beliefs and assumptions of our management, and are subject to risks and
uncertainties that are difficult to predict, including: the effect of general
economic and market conditions; the impact of geopolitical events; the impact of
foreign currency exchange rate and interest rate fluctuations on our results;
our business strategy and our plan to build our business, including our strategy
to be the leading provider of enterprise cloud computing applications and
platforms; the pace of change and innovation in enterprise cloud computing
services; the seasonal nature of our sales cycles; the competitive nature of the
market in which we participate; our international expansion strategy; the
demands on our personnel and infrastructure resulting from significant growth in
our customer base and operations, including as a result of acquisitions; our
service performance and security, including the resources and costs required to
avoid unanticipated downtime and prevent, detect and remediate potential
security breaches; the expenses associated with our data centers and third-party
infrastructure providers; additional data center capacity; real estate and
office facilities space; our operating results and cash flows; new services and
product features, including any efforts to expand our services beyond the CRM
market; our strategy of acquiring or making investments in complementary
businesses, joint ventures, services, technologies and intellectual property
rights; the performance and fair value of our investments in complementary
businesses through our strategic investment portfolio; our ability to realize
the benefits from strategic partnerships, joint ventures and investments; the
impact of future gains or losses from our strategic investment portfolio
including gains or losses from overall market conditions that may affect the
publicly traded companies within our strategic investment portfolio; our ability
to execute our business plans; our ability to successfully integrate acquired
businesses and technologies; our ability to continue to grow unearned revenue
and remaining performance obligation; our ability to protect our intellectual
property rights; our ability to develop our brands; our reliance on third-party
hardware, software and platform providers; our dependency on the development and
maintenance of the infrastructure of the Internet; the effect of evolving
domestic and foreign government regulations, including those related to the
provision of services on the Internet, those related to accessing the Internet,
and those addressing data privacy, cross-border data transfers and import and
export controls; the valuation of our deferred tax assets and the release of
related valuation allowances; the potential availability of additional tax
assets in the future; the impact of new accounting pronouncements and tax laws;
uncertainties affecting our ability to estimate our tax rate; uncertainties
regarding our tax obligations in connection with potential jurisdictional
transfers of intellectual property, including the tax rate, the timing of the
transfer and the value of such transferred intellectual property; the impact of
expensing stock options and other equity awards; the sufficiency of our capital
resources; factors related to our 2023 and 2028 senior notes, revolving credit
facility, 2021 term loan and loan associated with 50 Fremont; compliance with
our debt covenants and lease obligations; current and potential litigation
involving us; and the impact of climate change. These and other risks and
uncertainties may cause our actual results to differ materially and adversely
from those expressed in any forward-looking statements. Readers are directed to
risks and uncertainties identified below under "Risk Factors" and elsewhere in
this report for additional detail regarding factors that may cause actual
results to be different than those expressed in our forward-looking statements.
Except as required by law, we undertake no obligation to revise or update
publicly any forward-looking statements for any reason.
Overview
We are a global leader in customer relationship management ("CRM") technology
that enables companies to improve their relationships and interactions with
customers. We introduced our first CRM solution in 2000, and we have since
expanded our service offerings with new editions, features and platform
capabilities. Our core mission is to empower our customers of every size and
industry to connect with their customers in new ways through existing and
emerging technologies, including cloud, mobile, social, Internet of Things
("IoT"), advanced analytics and artificial intelligence ("AI").
Website references throughout this document are provided for convenience only,
and the content on the referenced websites is not incorporated by reference into
this report.
Highlights from the Third Quarter of Fiscal Year 2020.
•Revenue: Total third quarter revenue was $4.5 billion , an increase of 33
percent year-over-year.
•Loss per Share: Third quarter loss per share was $0.12 , as compared to diluted
earnings per share of $0.13 from a year ago.
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•Cash: Total cash, cash equivalents and marketable securities ended the third
quarter at $6.5 billion . Cash generated from operations for the third quarter
was $298 million , an increase of 108 percent year-over-year. Our cash flow from
operations is seasonal. Refer to "Seasonal Nature of Unearned Revenue, Accounts
Receivable and Operating Cash Flow" below.
•Remaining Performance Obligation: Remaining performance obligation ended the
third quarter at approximately $25.9 billion , an increase of 22 percent
year-over-year. Current remaining performance obligation ended the third quarter
at approximately $12.8 billion , an increase of 28 percent year-over-year.
•Acquisitions: On August 1, 2019 , we completed the acquisition of Tableau
Software, Inc. ("Tableau") for $14.8 billion in common stock issued, cash and
fair value of equity assumed. On October 1, 2019 , we completed the acquisition
of ClickSoftware Technologies Ltd. ("ClickSoftware") for $1.4 billion in cash,
common stock issued and fair value of equity assumed. The results of Tableau and
ClickSoftware have been included in our consolidated financial statements since
the date of each acquisition, respectively.
We regularly evaluate acquisitions or investment opportunities in complementary
businesses, joint ventures, services and technologies and intellectual property
rights in an effort to expand our service offerings through a disciplined and
thoughtful acquisition process. We expect to continue to make such investments
and acquisitions in the future and we plan to reinvest a significant portion of
our incremental revenue in future periods to grow our business and continue our
leadership role in the cloud computing industry. As part of our growth strategy,
we are delivering innovative solutions in new categories, including, e-commerce,
AI, IoT and collaborative productivity tools. We drive innovation organically
and to a lesser extent through acquisitions, such as our recent business
combination with Salesforce.org in June 2019 , Tableau in August 2019 and
ClickSoftware in October 2019 .
As a result of our aggressive growth plans and integration of our previously
acquired businesses, we have incurred significant expenses for equity awards and
amortization of purchased intangibles, which have reduced our operating income.
We periodically make changes to our sales organization to position us for
long-term growth, which has in the past and could again in the future result in
temporary disruptions to our sales productivity. In addition, we have
experienced, and may at times in the future experience, more variation from our
forecasted expectations of new business activity due to longer and less
predictable sales cycles and increasing complexity of our business, which
includes an expanded mix of products and various revenue models resulting from
acquisitions. While we do not expect any of these changes to have a material
adverse effect on our business or our ability to meet our near-term or long-term
revenue targets, slower growth in new business in a given period could
negatively affect our revenues in future periods, as well as remaining
performance obligation in current or future periods, particularly if experienced
on a sustained basis.
The expanding global scope of our business and the heightened volatility of
global markets expose us to the risk of fluctuations in foreign currency
markets. Fluctuations in foreign currency exchange rates negatively impacted our
revenue results for the nine months ended October 31, 2019 and had a minimal
impact on our remaining performance obligation as of October 31, 2019 . We expect
these fluctuations to continue in the future.
Sources of Revenues
We derive our revenues from two sources: subscription and support revenues and
related professional services. Subscription and support revenues accounted for
approximately 94 percent of our total revenues for the nine months ended October
31, 2019 .
Subscription and support revenues is primarily comprised of subscription fees
from customers accessing our enterprise cloud computing services (collectively,
"Cloud Services"). With the May 2018 acquisition of MuleSoft, Inc. ("Mulesoft")
and the August 2019 acquisition of Tableau, subscription and support revenues
also includes revenues associated with software licenses. Software license
revenues include fees from the sales of term, subscription and perpetual
licenses. Revenues from software licenses are generally recognized upfront when
the software is made available to the customer and revenues from the related
support is generally recognized ratably over the contract term. Revenue from
software licenses represent less than ten percent of total subscription and
support revenue for the three and nine months ended October 31, 2019 .
The revenue growth rates of each of our core service offerings, as described
below in the Results of Operations, fluctuate from quarter to quarter and over
time. Additionally, we manage the total balanced product portfolio to deliver
solutions to our customers, and as a result, the revenue result for each
offering is not necessarily indicative of the results to be expected for any
subsequent quarter. In addition, some of our Cloud Service offerings have
similar features and functions. For example, customers may use the Sales Cloud,
the Service Cloud or the Salesforce Platform to record account and contact
information, which are similar features across these service offerings.
Depending on a customer's actual and projected business requirements, more than
one service offering may satisfy the customer's current and future needs. We
record revenue based on the individual products ordered by a customer, not
according to the customer's business requirements and usage. In addition, as we
introduce new features and functions within each offering and refine our
allocation methodology for changes in our
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business, we do not expect it to be practical to adjust historical revenue
results by service offering for comparability. Accordingly, comparisons of
revenue performance by service offering over time may not be meaningful.
Seasonal Nature of Unearned Revenue, Accounts Receivable and Operating Cash Flow
Unearned revenue primarily consists of billings to customers for our
subscription service. Over 90 percent of the value of our billings to customers
is for our subscription and support service. We generally invoice our customers
in advance, in annual installments, and typical payment terms provide that our
customers pay us within 30 days of invoice. Amounts that have been invoiced are
recorded in accounts receivable and in unearned revenue or in revenue depending
on whether transfer of control to customers has occurred. In general, we collect
our billings in advance of the subscription service period. We typically issue
renewal invoices in advance of the renewal service period, and depending on
timing, the initial invoice for the subscription and services contract and the
subsequent renewal invoice may occur in different quarters. This may result in
an increase in unearned revenue and accounts receivable as the next billing
cycle approaches, as the corresponding unearned revenue decreases to zero. There
is a disproportionate weighting toward annual billings in the fourth quarter,
primarily as a result of large enterprise account buying patterns. Our fourth
quarter has historically been our strongest quarter for new business and
renewals. The year on year compounding effect of this seasonality in both
billing patterns and overall new and renewal business causes the value of
invoices that we generate in the fourth quarter for both new business and
renewals to increase as a proportion of our total annual billings. Accordingly,
because of this billing activity, our first quarter is typically our largest
collections and operating cash flow quarter. Conversely, our third quarter has
historically been our smallest operating cash flow quarter.
The sequential quarterly changes in accounts receivable and the related unearned
revenue and operating cash flow during the first quarter of our fiscal year are
not necessarily indicative of the billing activity that occurs for the following
quarters as displayed below (in millions):
October 31, July 31, April 30,
2019 2019 2019
Fiscal 2020
Accounts receivable, net $ 2,573 $ 2,332 $ 2,153
Unearned revenue 6,858 7,142 7,585
Net cash provided by operating activities for the
three months ended 298 436 1,965
January 31, October 31, July 31, April 30,
2019 2018 2018 2018
Fiscal 2019
Accounts receivable, net $ 4,924 $ 2,037 $ 1,980 $ 1,763
Unearned revenue 8,564 5,376 5,883 6,201
Net cash provided by operating activities
for the three months ended 1,331 143 458 1,466
January 31, October 31, July 31, April 30,
2018 2017 2017 2017
Fiscal 2018
Accounts receivable, net $ 3,921 $ 1,522 $ 1,572 $ 1,442
Unearned revenue 6,995 4,312 4,749 4,969
Net cash provided by operating activities
for the three months ended 1,052 125 331 1,230
The unearned revenue balance on our condensed consolidated balance sheets does
not represent the total contract value of annual or multi-year, non-cancelable
subscription agreements. Transaction price allocated to the remaining
performance obligation ("Remaining Performance Obligation") represents
contracted revenue that has not yet been recognized, which includes unearned
revenue and unbilled amounts that will be recognized as revenue in future
periods. Remaining Performance Obligation is not necessarily indicative of
future revenue growth and is influenced by several factors, including
seasonality, the timing of renewals, average contract terms, foreign currency
exchange rates and fluctuations in new business growth. Unbilled portions of the
Remaining Performance Obligation denominated in foreign currencies are revalued
each period based on the period end exchange rates. For multi-year subscription
agreements billed annually, the associated unbilled balance and corresponding
Remaining Performance Obligation is typically high at the beginning of the
contract period, zero just prior to renewal, and increases if the agreement is
renewed. Low Remaining Performance Obligation attributable to a particular
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subscription agreement is often associated with an impending renewal and may not
be an indicator of the likelihood of renewal or future revenue from such
customer.
Remaining Performance Obligation consisted of the following (in billions):
Current Noncurrent Total
As of October 31, 2019 $ 12.8 $ 13.1 $ 25.9 (1)
As of July 31, 2019 12.1 13.2 25.3 (2)
As of April 30, 2019 11.8 13.1 24.9
As of January 31, 2019 11.9 13.8 25.7
As of October 31, 2018 10.0 11.2 21.2
As of July 31, 2018 9.8 11.2 21.0
As of April 30, 2018 9.6 10.8 20.4
As of January 31, 2018 9.6 11.0 20.6
(1) Includes approximately $400 million and $550 million of Remaining
Performance Obligation related to the Salesforce.org business combination in
June 2019 and the Tableau acquisition in August 2019 , respectively.
(2) Includes approximately $350 million of Remaining Performance Obligation
related to the Salesforce.org business combination.
Cost of Revenues and Operating Expenses
Impact of Acquisitions
The comparability of our operating results is impacted by our recent
acquisitions, including the acquisition of Tableau in August 2019 . Expense
contributions from our recent acquisitions for each of the respective period
comparisons generally may not be separately identifiable due to the integration
of these businesses into our existing operations, or may be insignificant to our
results of operations during the periods presented.
Cost of Revenues
Cost of subscription and support revenues primarily consists of expenses related
to delivering our service and providing support, the costs of data center
capacity, depreciation or operating lease expense associated with computer
equipment and software, allocated overhead, amortization expense associated with
capitalized software related to our services and acquired developed technologies
and certain fees paid to various third parties for the use of their technology,
services and data. We allocate overhead such as IT infrastructure, rent, and
occupancy charges based on headcount. Employee benefit costs and taxes are
allocated based upon a percentage of total compensation expense. As such,
general overhead expenses are reflected in each cost of revenue and operating
expense category. Cost of professional services and other revenues consists
primarily of employee-related costs associated with these services, including
stock-based expenses, the cost of subcontractors, certain third-party fees and
allocated overhead. The cost of providing professional services is higher as a
percentage of the related revenue than for our enterprise cloud computing
subscription service due to the direct labor costs and costs of subcontractors.
We intend to continue to invest additional resources in our enterprise cloud
computing services. For example, we have invested in additional database
software and hardware and we plan to increase the capacity that we are able to
offer globally through data centers and third-party infrastructure providers. In
addition, we intend to continue to invest additional resources in enhancing our
trust and cyber security measures. As we acquire new businesses and
technologies, the amortization expense associated with the purchase of acquired
developed technology will be included in cost of revenues. Additionally, as we
enter into new contracts with third parties for the use of their technology,
services or data, or as our sales volume grows, the fees paid to use such
technology or services may increase. Finally, we expect the cost of professional
services to be approximately in line with revenues from professional services as
we believe this investment in professional services facilitates the adoption of
our service offerings. The timing of these additional expenses will affect our
cost of revenues, both in terms of absolute dollars and as a percentage of
revenues, in the affected periods.
Research and Development
Research and development expenses consist primarily of salaries and related
expenses, including stock-based expenses, the costs of our development and test
data center and allocated overhead. We continue to focus our research and
development efforts on adding new features and services, integrating acquired
technologies, increasing the functionality and security and enhancing the ease
of use of our enterprise cloud computing services. Our proprietary, scalable and
secure multi-tenant architecture enables us to provide our customers with a
service based on a single version of our application.
We expect that in the future, research and development expenses will increase in
absolute dollars and may increase as a percentage of total revenues as we invest
in adding employees and building the necessary system infrastructure required to
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support the development of new, and improve existing, technologies and the
integration of acquired businesses, technologies and all of our service
offerings.
Marketing and Sales
Marketing and sales expenses are our largest cost and consist primarily of
salaries and related expenses, including stock-based expenses, for our sales and
marketing staff, including commissions, as well as payments to partners,
marketing programs and allocated overhead. Marketing programs consist of
advertising, events, corporate communications, brand building and product
marketing activities.
We plan to continue to invest in marketing and sales by expanding our domestic
and international selling and marketing activities, building brand awareness,
attracting new customers, and sponsoring additional marketing events. The timing
of these marketing events, such as our annual and largest event, Dreamforce,
will affect our marketing costs in a particular quarter. In addition, as we
acquire new businesses and technologies, a component of the amortization expense
associated with this activity will be included in marketing and sales. We expect
that in the future, marketing and sales expenses will increase in absolute
dollars and continue to be our largest cost. We expect marketing and sales
expenses, excluding sales personnel expenses, to grow in line with or at a
slower rate than revenues and sales personnel expenses. These may increase as a
percentage of total revenues as we invest in additional sales personnel to focus
on adding new customers and increasing penetration within our existing customer
base.
General and Administrative
General and administrative expenses consist of salaries and related expenses,
including stock-based expenses, for finance and accounting, legal, internal
audit, human resources and management information systems personnel, legal
costs, security costs, professional fees, other corporate expenses such as
transaction costs for acquisitions and allocated overhead. We expect that in the
future, general and administrative expenses will increase in absolute dollars as
we invest in our infrastructure and we incur additional employee related costs,
professional fees and insurance costs related to the growth of our business and
international expansion. We expect general and administrative costs as a
percentage of total revenues to either remain flat or decrease for the next
several quarters. However, the timing of additional expenses in a particular
quarter, both in terms of absolute dollars and as a percentage of revenues, will
affect our general and administrative expenses.
Stock-Based Expenses
Our cost of revenues and operating expenses include stock-based expenses related
to equity plans for employees and non-employee directors. We recognize our
stock-based compensation as an expense in the statements of operations based on
their fair values and vesting periods. These charges have been significant in
the past and we expect that they will increase with an increase in our stock
price, as we acquire more companies, and as we hire more employees and seek to
retain existing employees.
Amortization of Purchased Intangible Assets Acquired Through Business
Combinations
Our cost of revenues, operating expenses and other expenses include amortization
of acquisition-related intangible assets, such as the amortization of the cost
associated with an acquired company's developed technology, trade names and
trademarks, and customer relationships. We expect this expense to fluctuate as
we acquire more businesses and intangible assets become fully amortized.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States . The preparation
of these consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
costs and expenses, and related disclosures. On an ongoing basis, we evaluate
our estimates and assumptions. Our actual results may differ from these
estimates under different assumptions or conditions.
We believe that of our significant accounting policies, which are described in
Note 1 "Summary of Business and Significant Accounting Policies" to our
condensed consolidated financial statements, the following accounting policies
and specific estimates involve a greater degree of judgment and complexity.
Accordingly, these are the policies and estimates we believe are the most
critical to aid in fully understanding and evaluating our consolidated financial
condition and results of operations:
•the fair value of assets acquired and liabilities assumed for business
combinations;
•the standalone selling price ("SSP") of performance obligations for revenue
contracts with multiple performance obligations;
•the average period of benefit associated with costs capitalized to obtain
revenue contracts;
•the recognition, measurement and valuation of current and deferred income taxes
and uncertain tax positions; and
•the valuation of privately held strategic investments.
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Recent Accounting Pronouncements
Effective on February 1, 2019 , we adopted the provisions and expanded disclosure
requirements described in Accounting Standards Update No. 2016-02, "Leases
(Topic 842)." Upon adoption, we recorded operating lease right-of-use ("ROU")
assets of approximately $2.9 billion and corresponding operating lease
liabilities of $3.1 billion on our condensed consolidated balance sheets.
See Note 1 "Summary of Business and Significant Accounting Policies" to the
condensed consolidated financial statements for our discussion about new
accounting pronouncements adopted and those pending.
Results of Operations
The following tables set forth selected data for each of the periods indicated
(in millions):
3 Three Months Ended October 31 , Nine Months Ended October 31 ,
% of Total % of Total % of Total % of Total
2019 Revenues 2018 Revenues 2019 Revenues 2018 Revenues
Revenues:
Subscription and support $ 4,239 94 % $ 3,168 93 % $ 11,480 94 % $ 9,038 93 %
Professional services and other 274 6 224 7 767 6 641 7
Total revenues 4,513 100 3,392 100 12,247 100 9,679 100
Cost of revenues (1)(2):
Subscription and support 870 19 676 20 2,275 19 1,887 20
Professional services and other 264 6 213 6 740 6 618 6
Total cost of revenues 1,134 25 889 26 3,015 25 2,505 26
Gross profit 3,379 75 2,503 74 9,232 75 7,174 74
Operating expenses (1)(2):
Research and development 774 17 481 14 1,935 16 1,368 14
Marketing and sales 2,063 46 1,588 47 5,584 45 4,421 46
General and administrative 477 11 342 10 1,214 10 987 10
Loss on settlement of
Salesforce.org reseller
agreement 0 0 0 0 166 1 0 0
Total operating expenses 3,314 74 2,411 71 8,899 72 6,776 70
Income from operations 65 1 92 3 333 3 398 4
Gains on strategic
investments, net 6 0 63 2 396 3 417 4
Other income (expense) (7) 0 (27) (1) (19) 0 (71) 0
Income before benefit from
(provision for) income taxes 64 1 128 4 710 6 744 8
Benefit from (provision for)
income taxes (173) (3) (23) (1) (336) (3) 4 0
Net income (loss) $ (109) (2) % $ 105 3 % $ 374 3 % $ 748 8 %
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Table of Contents (1) Amounts related to amortization of intangible assets acquired through business combinations, as follows (in millions):
Three Months Ended October 31, Nine Months Ended October 31,
% of Total % of Total % of Total % of Total
2019 Revenues 2018 Revenues 2019 Revenues 2018 Revenues
Cost of revenues $ 157 4 % $ 62 2 % $ 280 2 % $ 153 2 %
Marketing and sales 109 2 67 2 242 2 164 2
(2) Amounts related to stock-based expenses, as follows (in millions):
Three Months Ended October 31, Nine Months Ended October 31,
% of Total % of Total % of Total % of Total
2019 Revenues 2018 Revenues 2019 Revenues 2018 Revenues
Cost of revenues $ 54 1 % $ 42 1 % $ 143 1 % $ 119 1 %
Research and development 169 4 81 2 348 3 228 2
Marketing and sales 249 6 180 5 625 5 474 5
General and administrative 71 1 48 1 158 1 133 1
Impact of Acquisitions
The comparability of our operating results in the three and nine months ended
October 31, 2019 compared to the same periods of fiscal 2019 was impacted by our
recent acquisitions, including the acquisition of Tableau in August 2019 . In our
discussion of changes in our results of operations from the three and nine
months ended October 31, 2019 compared to the same periods of fiscal 2019, we
may quantitatively disclose the impact of our acquired products and services for
the one-year period subsequent to the acquisition date to the growth in certain
of our revenues where such discussions would be meaningful. Expense
contributions from our recent acquisitions for each of the respective period
comparisons generally were not separately identifiable due to the integration of
these businesses into our existing operations or were insignificant to our
results of operations during the periods presented.
Revenues.
Three Months Ended October 31, Variance
(in millions) 2019 2018 Dollars Percent
Subscription and support $ 4,239 $ 3,168 $ 1,071 34 %
Professional services and other 274 224 50 22
Total revenues $ 4,513 $ 3,392 $ 1,121 33 %
Nine Months Ended October 31, Variance
(in millions) 2019 2018 Dollars Percent
Subscription and support $ 11,480 $ 9,038 $ 2,442 27 %
Professional services and other 767 641 126 20
Total revenues $ 12,247 $ 9,679 $ 2,568 27 %
The increase in subscription and support revenues was primarily caused by
volume-driven increases from new business, which includes new customers,
upgrades, additional subscriptions from existing customers and acquisition
activity. Revenues from software licenses, which are recognized at a point in
time, represent approximately 7 percent and 4 percent of total subscription and
support revenues for the three and nine months ended October 31, 2019 ,
respectively.
The business combination with Salesforce.org in June 2019 contributed
approximately $80 million and $131 million to total subscription and support
revenues for the three and nine months ended October 31, 2019 , respectively. The
business combination with Tableau in August 2019 contributed approximately
$308 million to total subscription and support revenues in the three and nine
months ended October 31, 2019 . As required under U.S. GAAP, we recorded unearned
revenue related to acquired contracts from acquired entities at fair value on
the date of acquisition. As a result, we did not recognize certain revenues
related to these acquired contracts that the acquired entities would have
otherwise recorded as an independent entity.
We calculate our attrition rate as of the end of each month. Our attrition rate,
including the Marketing Cloud service offering but excluding our Commerce Cloud,
Integration Cloud, and recent acquisitions, was less than ten percent as of
October 31, 2019 . While it is difficult to predict, we expect our attrition rate
to remain consistent as we continue to expand our enterprise business and invest
in customer success and related programs.
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We continue to invest in a variety of customer programs and initiatives which,
along with increasing enterprise adoption, have helped keep our attrition rate
consistent as compared to the prior year. Consistent attrition rates play a role
in our ability to maintain growth in our subscription and support revenues.
Changes in the net price per user per month have not been a significant driver
of revenue growth for the periods presented. The increase in professional
services and other revenues was due primarily to the higher demand for services
from an increased number of customers.
Subscription and Support Revenue by Service Offering
Subscription and support revenues consisted of the following (in millions):
Three Months Ended October 31,
2019 2018 Variance Percent
Sales Cloud $ 1,168 $ 1,020 15%
Service Cloud 1,140 917 24%
Salesforce Platform and Other 1,287 742 73%
Marketing and Commerce Cloud 644 489 32%
Total $ 4,239 $ 3,168
Nine Months Ended October 31,
2019 2018 Variance Percent
Sales Cloud $ 3,371 $ 2,989 13%
Service Cloud 3,247 2,657 22%
Salesforce Platform and Other 3,041 2,029 50%
Marketing and Commerce Cloud 1,821 1,363 34%
Total $ 11,480 $ 9,038
Subscription and support revenues from the Community Cloud, Quip and our
Industry offerings were not significant in the three and nine months ended
October 31, 2019 and 2018. Quip revenue is included with Salesforce Platform and
Other in the table above. Our Industry Offerings and Community Cloud revenue are
included in either Sales Cloud, Service Cloud or Salesforce Platform and Other
depending on the primary service offering purchased. MuleSoft and Tableau
revenues are included in Salesforce Platform and Other.
Revenues by geography were as follows:
Three Months Ended
As a % of Total As a % of Total
(in millions) 2019 Revenues 2018 Revenues Growth rate
Americas $ 3,216 71 % $ 2,425 71 % 33 %
Europe 880 20 641 19 37
Asia Pacific 417 9 326 10 28
$ 4,513 100 % $ 3,392 100 % 33 %
Nine Months Ended October 31,
As a % of Total As a % of Total
(in millions) 2019 Revenues 2018 Revenues Growth rate
Americas $ 8,649 71 % $ 6,864 71 % 26 %
Europe 2,421 20 1,876 19 29
Asia Pacific 1,177 9 939 10 25
$ 12,247 100 % $ 9,679 100 % 27 %
Revenues by geography are determined based on the region of the Salesforce
contracting entity, which may be different than the region of the customer.
Americas revenue attributed to the United States was approximately 96 percent
during the three and nine months ended October 31, 2019 and 2018. The increase
in Americas revenues was the result of the increasing acceptance of our services
and the investment of additional sales resources.
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Revenues in Europe and Asia Pacific accounted for $1.3 billion , or 29 percent of
total revenues, for the three months ended October 31, 2019 , compared to $1.0
billion , or 29 percent of total revenues, during the same period a year ago, an
increase of $0.3 billion , or 34 percent. Revenues in Europe and Asia Pacific
accounted for $3.6 billion , or 29 percent of total revenues, for the nine months
ended October 31, 2019 , compared to $2.8 billion , or 29 percent of total
revenues, during the same period a year ago, an increase of $0.8 billion , or 28
percent. This increase in revenues outside of the Americas was the result of the
increasing acceptance of our services, our focus on marketing our services
internationally and the investment of additional sales resources. Foreign
currency fluctuations, particularly the weakening British Pound Sterling, had a
negative impact on revenues outside of the Americas of approximately $28 million
and $113 million in the three and nine months ended October 31, 2019 compared to
the three and nine months ended October 31, 2018 , respectively. We
expect foreign currency fluctuations to continue to negatively affect our
overall revenues outside of the Americas for the remaining three months of
fiscal 2020.
Cost of Revenues.
Three Months Ended October 31, Variance
(in millions) 2019 2018 Dollars
Subscription and support $ 870 $ 676 $ 194
Professional services and other 264 213 51
Total cost of revenues $ 1,134 $ 889 $ 245
Percent of total revenues 25 % 26 %
Nine Months Ended October 31, Variance
(in millions) 2019 2018 Dollars
Subscription and support $ 2,275 $ 1,887 $ 388
Professional services and other 740 618 122
Total cost of revenues $ 3,015 $ 2,505 $ 510
Percent of total revenues 25 % 26 %
For the three months endedOctober 31, 2019 , the increase in cost of revenues was primarily due to an increase of$77 million in employee-related costs, an increase of$12 million in stock-based expenses, an increase of$53 million in service delivery costs, primarily due to our efforts to increase data center capacity, an increase of amortization of purchased intangible assets of$95 million and an increase in allocated overhead. For the nine months endedOctober 31, 2019 , the increase in cost of revenues was primarily due to an increase of$149 million in employee-related costs, an increase of$24 million in stock-based expenses, an increase of$150 million in service delivery costs, primarily due to our efforts to increase data center capacity, an increase of amortization of purchased intangible assets of$127 million and an increase in allocated overhead. We have increased our headcount by 27 percent sinceOctober 31, 2018 to meet the higher demand for services from our customers, and our recent acquisitions also contributed to this increase. We intend to continue to invest additional resources in our enterprise cloud computing services and data center capacity to allow us to scale with our customers and continuously evolve our security measures. We also plan to add employees in our professional services group to facilitate the adoption of our services. The timing of these expenses will affect our cost of revenues, both in terms of absolute dollars and as a percentage of revenues, in future periods. Our professional services and other gross margin was positive$10 million and positive$27 million during the three and nine months endedOctober 31, 2019 , respectively, and positive$11 million and positive$23 million during the three and nine months endedOctober 31, 2018 , respectively. We expect the cost of professional services to be approximately in line with revenues from professional services in future fiscal quarters. We believe that this investment in professional services facilitates the adoption of our service offerings. 46 --------------------------------------------------------------------------------
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Operating Expenses.
Three Months Ended October 31, Variance
(in millions) 2019 2018 DollarsResearch and development $ 774$ 481 $ 293 Marketing and sales 2,063 1,588 475 General and administrative 477 342 135 Total operating expenses$ 3,314 $ 2,411 $ 903 Percent of total revenues 74 % 71 % Nine Months Ended October 31, Variance (in millions) 2019 2018 Dollars Research and development$ 1,935 $ 1,368 $ 567 Marketing and sales 5,584 4,421 1,163 General and administrative 1,214 987 227 Loss on settlement of Salesforce.org reseller agreement 166 0 166 Total operating expenses$ 8,899 $ 6,776 $ 2,123 Percent of total revenues 72 % 70 % For the three months endedOctober 31, 2019 , the increase in research and development expenses was primarily due to an increase of approximately$172 million in employee-related costs, an increase of$88 million in stock-based expenses, an increase in our development and test data center costs and allocated overhead. For the nine months endedOctober 31, 2019 , the increase in research and development expenses was primarily due to an increase of approximately$369 million in employee-related costs, an increase of$120 million in stock-based expenses, an increase in our development and test data center costs and allocated overhead. We increased our research and development headcount by 55 percent sinceOctober 31, 2018 in order to improve and extend our service offerings, develop new technologies, and integrate acquired companies. In addition, our recent acquisitions also contributed to this increase in headcount. We expect that research and development expenses will increase in absolute dollars and may increase as a percentage of revenues in future periods as we continue to invest in additional employees and technology to support the development of new, and improve existing, technologies and the integration of acquired technologies. For the three months endedOctober 31, 2019 , the increase in marketing and sales expenses was primarily due to an increase of$320 million in employee-related costs and amortization of deferred commissions, an increase of$69 million in stock-based expenses, an increase in amortization of purchased intangible assets of$42 million and allocated overhead. For the nine months endedOctober 31, 2019 , the increase in marketing and sales expenses was primarily due to an increase of$754 million in employee-related costs and amortization of deferred commissions, an increase of$151 million in stock-based expenses, an increase in amortization of purchased intangible assets of$78 million , and allocated overhead. Our marketing and sales headcount increased by 38 percent sinceOctober 31, 2018 , primarily attributable to hiring additional sales personnel to focus on adding new customers and increasing penetration within our existing customer base. In addition, our recent acquisitions also contributed to this increase in headcount. We expect that marketing and sales expenses will increase in absolute dollars and may increase as a percentage of revenues in future periods as we continue to hire additional sales personnel. For the three and nine months endedOctober 31, 2019 , the increases in general and administrative expenses were primarily due to an increase in employee-related costs. Our general and administrative headcount increased by 40 percent sinceOctober 31, 2018 as we added personnel to support our growth, and our recent acquisitions also contributed to this increase. We also incurred transaction costs associated with our acquisition of Tableau of approximately$40 million of which approximately$30 million was incurred during the three months endedOctober 31, 2019 . As a result of theJune 2019 Salesforce.org business combination, the Company effectively settled all existing agreements between the Company and Salesforce.org and, as part of business combination accounting, accordingly recorded a one-time, non-cash operating expense charge of approximately$166 million related to the effective settlement of the reseller agreement. 47 --------------------------------------------------------------------------------
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Other income and expense.
Three Months Ended October 31, Variance
(in millions) 2019 2018 Dollars
Gains on strategic investments, net $ 6 $ 63 $ (57)
Other expense (7) (27) 20
Nine Months Ended October 31, Variance
(in millions) 2019 2018 Dollars
Gains on strategic investments, net $ 396 $ 417 $ (21)
Other expense (19) (71) 52
Gains on strategic investments, net consists primarily of mark-to-market
adjustments related to our publicly held equity securities, observable price
adjustments related to our privately held equity securities and other
adjustments. During the three months ended October 31, 2019 , we recognized a
realized gain of $39 million related to the acquisition of ClickSoftware and we
sold our investments in three publicly traded companies resulting in a realized
loss of $32 million . In addition, we recorded unrealized gains on privately held
equity securities of $77 million , primarily driven by one investment, and
realized gains of $14 million , offset by unrealized losses recognized on
publicly traded securities of $84 million , primarily driven by one investment.
Net gains recognized in the nine months ended October 31, 2019 were primarily
driven by unrealized gains on privately held equity securities of $199 million ,
primarily driven by two investments, and unrealized gains recognized on publicly
traded securities of $132 million , primarily driven by one investment.
Other expense primarily consists of interest expense on our debt as well as our
operating and finance leases offset by investment income. Interest expense was
$32 million and $40 million for the three months ended October 31, 2019 and
2018, respectively, and $101 million and $113 million for the nine months ended
October 31, 2019 and 2018, respectively. Investment income increased
approximately $19 million and $48 million in the three and nine months ended
October 31, 2019 , respectively, compared to the same periods a year ago due to
higher interest income across our portfolio, which is primarily a result of the
larger investable balance.
Benefit from (provision for) income taxes.
Three Months Ended October 31, Variance
(in millions) 2019 2018 Dollars
Provision for income taxes $ (173) $ (23) $ (150)
Effective tax rate 270 % 18 %
Nine Months Ended October 31, Variance
(in millions) 2019 2018 Dollars
Benefit from (provision for) income taxes $ (336) $ 4 $ (340)
Effective tax rate 47 % (1) %
We recognized a tax provision of $173 million on a pretax income of $64 million
for the three months ended October 31, 2019 . Our tax provision was primarily
related to income taxes in profitable jurisdictions outside of the United
States . In addition, recent acquisitions changed our quarterly earnings and
based on our approach to compute interim tax provision by applying the estimated
annual effective tax rate to year-to-date pretax income or loss, we recorded
higher quarterly income tax provision. We recognized a tax provision of $336
million on a pretax income of $710 million for the nine months ended October 31,
2019 .
In fiscal 2019, we recorded a tax provision of $23 million on a pretax income of
$128 million for the three months ended October 31, 2018 and a tax benefit of $4
million on a pretax income of $744 million for the nine months ended October 31,
2018 . Included in the tax benefit for both reporting periods was a discrete tax
benefit of $140 million from a partial release of the valuation allowance in
connection with the acquisition of MuleSoft . The net deferred tax liability from
the acquisition of MuleSoft provided a source of additional income to support
the realizability of the Company's pre-existing deferred tax assets and as a
result, the Company released a portion of its valuation allowance. The tax
benefit associated with the release of the valuation allowance was partially
offset by income taxes in profitable jurisdictions outside of the United States .
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Liquidity and Capital Resources
At October 31, 2019 , our principal sources of liquidity were cash, cash
equivalents and marketable securities totaling $6.5 billion and accounts
receivable of $2.6 billion . Our cash, cash equivalents and marketable securities
are comprised primarily of corporate notes and obligations, U.S. treasury
securities, asset backed securities, foreign government obligations, mortgage
backed obligations, time deposits, money market mutual funds and municipal
securities.
As of October 31, 2019 , our remaining performance obligation was $25.9 billion .
Our remaining performance obligation represents contracted revenue that has not
yet been recognized and includes unearned revenue, which has been invoiced and
is recorded on the balance sheet, and unbilled amounts that are not recorded on
the balance sheet, that will be recognized as revenue in future periods.
We believe our existing cash, cash equivalents, marketable securities, cash
provided by operating activities and, if necessary, our borrowing capacity under
our Credit Facility and unbilled amounts related to contracted non-cancelable
subscription agreements, which is not reflected on the balance sheet, will be
sufficient to meet our working capital, capital expenditure and debt repayment
needs over the next 12 months.
In the future, we may enter into arrangements to acquire or invest in
complementary businesses, services and technologies, and intellectual property
rights. To facilitate these acquisitions or investments, we may seek additional
equity or debt financing, which may not be available on terms favorable to us or
at all, impacting our ability to complete subsequent acquisitions or
investments.
The adoption of the new lease accounting standard (Topic 842) has not impacted
the cost of or limit our borrowing capacity from third party lenders.
Cash Flows
For the three and nine months ended October 31, 2019 and 2018, our cash flows
were as follows (in millions):
Nine Months Ended
3 Three Months Ended October 31, October 31,
2019 2018 2019 2018
Net cash provided by operating
activities $ 298 $ 143 $ 2,699 $ 2,067
Net cash provided by (used in) investing
activities 63 (545) (1,515) (4,930)
Net cash provided by financing
activities 15 182 39 2,396
Cash provided by operating activities has historically been affected by the
amount of net income adjusted for non-cash expense items such as depreciation
and amortization; amortization of purchased intangibles from business
combinations; the expense associated with stock-based awards; net gains on
strategic investments; the timing of employee related costs including
commissions and bonus payments; the timing of payments against accounts payable,
accrued expenses and other current liabilities; the timing of our semi-annual
interest payments related to our senior notes; the timing of collections from
our customers, which is our largest source of operating cash flows; the timing
of business combination activity and the related integration and transaction
costs; and changes in working capital accounts.
Our working capital accounts include accounts receivable, costs capitalized to
obtain revenue contracts, prepaid assets and other current assets. Claims
against working capital include accounts payable, accrued expenses and other
liabilities, operating lease liabilities, current and unearned revenue. Our
working capital may be impacted by factors in future periods such as billings to
customers for subscriptions and support services, and the subsequent collection
of those billings, certain amounts and timing of which are seasonal. Our working
capital in some quarters may be impacted by adverse foreign currency exchange
rate movements and this impact may increase as our working capital balances
increase in our foreign subsidiaries. Our billings are also influenced by new
business linearity within the quarters and across the quarters.
As described above in "Seasonal Nature of Unearned Revenue, Accounts Receivable
and Operating Cash Flow," our fourth quarter has historically been our strongest
quarter for new business and renewals and, correspondingly, the first quarter
has historically been the strongest for cash collections. The year on year
compounding effect of this seasonality in both billing patterns and overall
business causes both the value of invoices that we generate in the fourth
quarter and cash collections in the first quarter to increase as a proportion of
our total annual billings. The operating cash flow benefit of increased billing
activity generally occurs in the subsequent quarter when we collect from our
customers. As a result, our first quarter is our largest collections and
operating cash flow quarter. Conversely, our third quarter has historically been
our smallest operating cash flow quarter.
Our net operating cash flow for the three months ended October 31, 2019 was
negatively impacted by approximately $90 million of transaction costs incurred
by Tableau. These transactions costs were paid after the transaction closed.
The net cash used in investing activities during the nine months ended October
31, 2019 was primarily related to the purchases of marketable securities of $1.9
billion and was offset by sales and maturities of marketable securities of $1.4
billion .
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In addition, we paid approximately $1.1 billion of cash consideration for
business combinations during the nine months ended October 31, 2019 , which was
offset by approximately $644 million of cash and cash equivalents acquired in
connection with the acquisition of Tableau, as well as approximately $110
million of cash and cash equivalents acquired in connection with other
acquisitions. The net cash used in investing activities during the nine months
ended October 31, 2018 was primarily related to the acquisition of Mulesoft ,
Datorama and CloudCraze for $5.1 billion and was offset by sales and maturities
of marketable securities of $1.5 billion .
Net cash provided by financing activities during the nine months ended October
31, 2019 consisted primarily of $550 million from proceeds from equity plans
offset by repayments of debt of $352 million and principal payments on financing
obligations of $159 million . Net cash provided by financing activities during
the nine months ended October 31, 2018 consisted primarily of $3.0 billion from
proceeds from issuance of debt to fund the acquisition of Mulesoft and $568
million from proceeds from equity plans offset by $1.0 billion in repayments of
debt.
Debt
As of October 31, 2019 , we had senior unsecured debt outstanding due in 2021,
2023 and 2028 with a total carrying value of $2.6 billion . In addition, we had
senior secured notes outstanding related to our loan on 50 Fremont due in 2023
with a total carrying value of $194 million and $150 million remaining on the
2021 Term Loan. We were in compliance with all debt covenants as of October 31,
2019 . In November 2019 , the Company repaid the remaining $150 million of the
2021 Term Loan.
We do not have any special purpose entities and we do not engage in off-balance
sheet financing arrangements.
Contractual Obligations
Our principal commitments consist of obligations under leases for office space,
co-location data center facilities and our development and test data center, as
well as leases for computer equipment, software, furniture and fixtures,
excluding all secured and unsecured debt. At October 31, 2019 , the future
non-cancelable minimum payments under these commitments were approximately
$4.2 billion .
As of October 31, 2019 , we have additional operating leases that have not yet
commenced totaling $2.5 billion . These operating leases include agreements for
office facilities to be constructed and will commence between fiscal year 2021
and fiscal year 2025 with lease terms of one to 21 years.
During fiscal 2020 and in future fiscal years, we have made and expect to
continue to make additional investments in our infrastructure to scale our
operations, increase productivity and enhance our security measures. We plan to
upgrade or replace various internal systems to scale with our overall growth.
Additionally, we expect capital expenditures to be higher in absolute dollars
and remain consistent as a percentage of total revenues in future periods as a
result of such investments and continued office build-outs, other leasehold
improvements and data center investments.
Other Future Obligations
In October 2019 , we acquired ClickSoftware Technologies Ltd. ("ClickSoftware")
for approximately $1.4 billion . In the event that we fully integrate the
operations and assets of ClickSoftware into our operations, we may be subject to
a potential one-time income tax charge based on an assumed Israeli statutory tax
rate of 23 percent applied to the value of any transferred intangibles.
In November 2019 , we entered into an agreement to purchase two real estate
assets in San Francisco, California for approximately $150 million . The
transaction is expected to close in the fourth quarter of fiscal 2020 or the
first quarter of fiscal 2021, subject to customary closing conditions.
Environmental, Social and Governance
We believe the business of business is improving the state of the world for all
of our stakeholders, including our stockholders, customers, partners, employees,
community, environment and society. We are committed to creating a sustainable,
low-carbon future by delivering a carbon neutral cloud, operating as a net-zero
greenhouse gas emissions company and by working to achieve our goal of 100
percent renewable energy for our global operations by fiscal 2022. We also
believe consistent, comparable and reliable disclosures around climate-related
risks and opportunities are important. To this end, we are working to align with
the recommendations of the Financial Stability Board's ("FSB") Task Force on
Climate-related Financial Disclosures ("TCFD") and of the Sustainability
Accounting Standards Board ("SASB"). In addition, we have spearheaded human
capital management initiatives to drive equality in four key areas: equal
rights, equal pay, equal education and equal opportunity. We also pioneered and
have inspired other companies to adopt our 1-1-1 integrated philanthropy model,
which leverages one percent of a company's equity, employee time and product to
help improve communities around the world. We publish an annual stakeholder
impact report on our website detailing our overall strategy relating to
environmental, social and governance ("ESG") programs as well as our efforts in
these areas.
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We leverage a number of communications channels and strategic content to better
serve and engage our many stakeholders. Our sustainability website,
www.salesforce.com/company/sustainability, provides information regarding our
environmental and other sustainability efforts, including our annual impact
reports and our environmental policy. At our equality portal,
www.salesforce.com/company/equality, our stakeholders can gain insights on our
approach to equality, see our company profile by gender, and review our most
recent Employer Information Report, which provides a snapshot in time of our
U.S. demographics based on categories prescribed by the federal government. In
addition, stakeholders can learn about equality through one of our many free
Trailheads. Our annual proxy statement, available on the Investor Relations
website, www.investor.salesforce.com, or www.sec.gov, provides additional
details on our corporate governance practices, including our board composition.
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