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, industry prospects and the anticipated impact
on our business of the ongoing COVID-19 pandemic and related public health
measures.
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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
impact of the COVID-19 pandemic, related public health measures and resulting
economic downturn and market volatility; our ability to maintain service
performance and security levels meeting the expectations of our customers, and
the resources and costs required to avoid unanticipated downtime and prevent,
detect and remediate performance degradation and security breaches; the expenses
associated with our data centers and third-party infrastructure providers; our
ability to secure and costs related to additional data center capacity; our
reliance on third-party hardware, software and platform providers; 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; current and potential litigation involving us or our
industry, including litigation involving acquired entities such as Tableau, and
the resolution or settlement thereof; regulatory developments and regulatory
investigations involving us or affecting our industry; our ability to
successfully introduce new services and product features, including any efforts
to expand our services beyond the CRM market; the success of our strategy of
acquiring or making investments in complementary businesses, joint ventures,
services, technologies and intellectual property rights; our ability to realize
the benefits from strategic partnerships, joint ventures and investments; our
ability to successfully integrate acquired businesses and technologies; our
ability to compete in the market in which we participate; the success of 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; our ability to execute our business plans; our ability to continue to
grow unearned revenue and remaining performance obligation; the pace of change
and innovation in enterprise cloud computing services; the seasonal nature of
our sales cycles; our ability to limit customer attrition and costs related to
those efforts; the success of 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
dependency on the development and maintenance of the infrastructure of the
Internet; our real estate and office facilities strategy and related costs and
uncertainties; fluctuations in, and our ability to predict, our operating
results and cash flows; the variability in our results arising from the
accounting for term license revenue products; the performance and fair value of
our investments in complementary businesses through our strategic investment
portfolio; 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 protect our intellectual property rights; our ability to develop
our brands; the impact of foreign currency exchange rate and interest rate
fluctuations on our results; 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;
uncertainties regarding the effect of general economic and market conditions;
the impact of geopolitical events; uncertainties regarding the impact of
expensing stock options and other equity awards; the sufficiency of our capital
resources; risks related to our 2023 and 2028 senior notes, revolving credit
facility and loan associated with 50 Fremont; our ability to comply with our
debt covenants and lease obligations; and the impact of climate change, natural
disasters and actual or threatened public health emergencies, including the
ongoing COVID-19 pandemic. 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 brings companies and customers together. Founded in 1999, we enable
companies of every size and industry to connect with their customers in new ways
through existing and emerging technologies, including cloud, mobile, social,
blockchain, voice and artificial intelligence ("AI"),
to transform their businesses.
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.
COVID-19 Impact
In December 2019 , the novel coronavirus and resulting disease ("COVID-19") was
first reported. After ongoing assessment of the rapid spread, number of cases
and countries affected, on March 11, 2020 , the World Health Organization
characterized COVID-19 as a pandemic. The COVID-19 pandemic has created
significant global economic uncertainty, adversely impacted the business of our
customers and partners, impacted our business and results of operations and
could further impact our results of operations and our cash flows in the future.
In response to the COVID-19 pandemic, we have been guided by our core values of
trust, customer success, innovation and equality. In the first fiscal quarter of
2021, we took actions in response to the pandemic that focused on maintaining
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business continuity, helping our employees, helping our customers and
communities, and preparing for the future and the long-term success of our
business.
Below is a summary of our response to and known impacts from the COVID-19
pandemic on our operational and financial performance as of and for the three
months ended April 30, 2020 :
•The sudden operational and economic impacts resulting from the COVID-19
pandemic affected some of our customers' financial willingness or ability to
pay. We supported certain customers who were experiencing distress as a result
of COVID-19 by providing them with some temporary financial flexibility, such as
payment delays. This resulted in a negative impact to our operating cash flows
during the quarter. While significant uncertainty remains as to the ongoing
economic and possible follow-on effects of the pandemic, including the impact on
our customers' ability or willingness to pay, we expect to collect the majority
of amounts deferred as of April 30, 2020 during the remainder of this fiscal
year.
•For approximately the first half of the quarter ended April 30, 2020 , our
incremental new business, which we define as orders for incremental applications
or subscriptions from new or existing customers, continued with the momentum
from the end of fiscal 2020 and was consistent with historical trends and
seasonality for the same period a year ago. However, since the second half of
March, as COVID-19 emerged as a global biological and economic crisis, we
experienced a decline in new business as compared to the same period a year ago.
We believe this was because customers were delaying or reducing their purchasing
decisions due to the financial impact and future uncertainty of the global
economic situation. In addition, the average contract duration for incremental
new business, as well as renewals signed, in the first fiscal quarter of 2021
was approximately three months shorter compared to historical averages.
•The impact to revenue recognized ratably over time during the three months
ended April 30, 2020 was not material. Software licenses revenues recognized at
a point in time, which represent approximately five percent of total
subscription and support revenues (primarily from our MuleSoft and Tableau
products), were negatively impacted, in part due to lower new business and
shorter contract duration, as discussed above, which we believe is due to our
customers' uncertainty due to COVID-19.
•We offered our direct sales force a one-time partial minimum commission
guarantee that would pay the greater of actual commissions earned or a fixed
amount of their variable compensation that would have been otherwise paid if
incremental new business were not impacted. As these payments were not a cost to
obtain a revenue contract, the amounts were immediately expensed and reflected
in our results of operations. The total value of the commitment was
approximately $140 million .
•Due to social distancing and the cessation of travel, we cancelled our in
person customer and industry events, including Dreamforce, World Tours,
Connections, Basecamps and Salesforce.org's Higher Ed Summit, as well as
employee events, and plan to provide virtual-only experiences for the remainder
of 2020. As a result we were required to terminate or modify related contracts
resulting in the acceleration of expenses of approximately $65 million . If our
events were not modified or cancelled, these expenses would have been recognized
in the quarters for which the events were originally scheduled. In addition, we
have incurred incremental marketing expenses to support our virtual marketing
efforts in the absence of physical events.
•We directed our global workforce to work from home and cancelled all business
travel by our employees, resulting in a net benefit to operating expenses of
approximately $75 million . In addition, we continue to evaluate our office space
needs and as a result, we have decided to permanently exit certain spaces. As a
result, we have recorded approximately $25 million in estimated operating lease
right of use assets impairment.
•We recorded over $20 million in operating expenses for donations and relief to
members of the Salesforce ecosystem due to the ongoing COVID-19 pandemic.
•We recorded approximately $77 million in impairment charges related to our
strategic investment portfolio, which were primarily due to the impact of
COVID-19 on the portfolio investment companies.
In addition, authorities throughout the world have implemented numerous
preventative measures to contain or mitigate the outbreak of the virus, such as
travel bans and restrictions, limitations on business activity, quarantines,
work-from-home directives and shelter-in-place orders. These measures have
caused, are continuing to cause, and may in the future cause business slowdowns
or shutdowns in affected areas, both regionally and worldwide. These business
slowdowns and shutdowns have impacted and may in the future impact our business
and results of operations. For example, the extent and duration of these
measures could impact our ability to address cybersecurity incidents; have
resulted in increased internet demand, which could cause access issues; could
affect our ability to develop and support products and services; and could cause
issues with access to data centers.
As a result of the first quarter financial impacts of COVID-19 and our current
assumptions related to the extent to which the pandemic will affect our business
going forward, we expect our business in fiscal 2021 to continue to grow at
rates lower than planned prior to the COVID-19 pandemic. Specifically, as a
result of COVID-19, we expect slower growth in our new incremental business,
total revenues, remaining performance obligation ("RPO") and operating cash
flows. We do not yet know the impact this will have on our long-term revenue
growth.
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The ultimate extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration of the outbreak, the severity of the disease, responsive actions taken by public health officials, the impacts on our customers and our sales cycles, our ability to generate new business leads, the impacts on our customer, employee and industry events, and the effects on our vendors, all of which are uncertain and currently cannot be predicted. As a result, the extent to which the COVID-19 pandemic will continue to impact our financial condition or results of operations is uncertain. Due to our subscription based business model, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods. If the COVID-19 pandemic has a substantial impact on our employees', partners' or customers' productivity, our results of operations and overall financial performance may be harmed. In addition, the global macroeconomic effects of the COVID-19 pandemic and related impacts on our customers' business operations and their demand for our products and services may persist for an indefinite period, even after the COVID-19 pandemic has subsided. See the section entitled "Risk Factors" for further discussion of the impact and possible future impacts of the COVID-19 pandemic on our business. Highlights from the First Quarter of Fiscal Year 2021. •Revenue: Total first quarter revenue was$4.9 billion , an increase of 30 percent year-over-year. •Earnings per Share: First quarter diluted earnings per share was$0.11 , which benefited in part from gains on our strategic investment portfolio, as compared to diluted earnings per share of$0.49 from a year ago. •Cash: Total cash, cash equivalents and marketable securities ended the first quarter at$9.8 billion , an increase of 54 percent year-over-year. Cash provided by operations for the first quarter was$1.9 billion , a decrease of five percent year-over-year. •Remaining Performance Obligation: Remaining performance obligation ended the first quarter at approximately$29.3 billion , an increase of 18 percent year-over-year. Our remaining performance obligation includes approximately$450 million and$700 million related to the Salesforce.org business combination inJune 2019 and the Tableau acquisition inAugust 2019 , respectively. Current remaining performance obligation ended the first quarter at approximately$14.5 billion , an increase of 23 percent year-over-year. We continue to invest for future growth through focusing on multi-cloud adoption by our existing customers, growing our relationships with our enterprise customers, expanding internationally and expanding and strengthening our ecosystem of partners and independent software vendors ("ISVs"). In addition, even as we help respond to the urgent needs of the COVID-19 crisis, we are innovating and delivering new solutions to help our customers succeed such as Salesforce Care and work.com, a suite of applications built on our platform designed to help our customers re-open safely. We regularly evaluate acquisitions and 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 and to nurture the overall ecosystem for our offerings. 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 business and growth strategy, we are delivering innovative solutions in new categories, including analytics and integration. We drive innovation organically and to a lesser extent through acquisitions. 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 and increased enterprise solution selling activities. While we do not expect any of these changes to have a material adverse effect on our business, we experienced slower growth in new business in the quarter than we originally planned, primarily due to the impacts of COVID-19. 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, including as a result of COVID-19, expose us to the risk of fluctuations in foreign currency markets. Fluctuations in foreign currency exchange rates had a modest adverse impact on our revenue results for the three months endedApril 30, 2020 and had a minimal impact on our remaining performance obligation as ofApril 30, 2020 . We expect these fluctuations to continue in the future. Fiscal Year 33 -------------------------------------------------------------------------------- Table of Content s Our fiscal year ends onJanuary 31 . References to fiscal 2021, for example, refer to the fiscal year endingJanuary 31, 2021 . Operating Segments We operate as one segment. See Note 1 "Summary of Business and Significant Accounting Policies" to the condensed consolidated financial statements for our discussion about segments. 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 three months endedApril 30, 2020 . Subscription and support revenues are primarily comprised of subscription fees from customers accessing our enterprise cloud computing services (collectively, "Cloud Services"). With theMay 2018 acquisition ofMuleSoft and theAugust 2019 acquisition of Tableau, subscription and support revenues also include revenues associated with software licenses. Software license revenues include fees from the sales of term 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 are generally recognized ratably over the contract term. Changes in average contract duration can impact revenues recognized upfront. For example, software licenses revenues recognized upfront (primarily from ourMuleSoft and Tableau products) were negatively impacted for the three months endedApril 30, 2020 , in part due to shorter contract duration than historical averages as a result of COVID-19. Revenues from software licenses represent less than ten percent of total subscription and support revenue for the three months endedApril 30, 2020 . The revenue growth rates of each of our core service offerings, as described below in "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 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. 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 impact of COVID-19, including the impact on our customers' ability or willingness to pay, our ability to collect, and the temporary financial flexibility offered to some customers, has affected and may continue to affect trends related to the seasonal nature of unearned revenue, accounts receivable and operating cash flow. 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). 34
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The first quarter fiscal 2021 results reflected in the tables above include the
impact of the Salesforce.org business combination in June 2019 and the Tableau
acquisition in August 2019 , respectively.
Remaining Performance Obligation
Our remaining performance obligation represents all future revenue under
contract that has not yet been recognized as revenue and includes unearned
revenue and unbilled amounts. Our current remaining performance obligation
represents future revenue under contract that is expected to be recognized as
revenue in the next 12 months.
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 are typically high at the beginning of the
contract period, zero just prior to renewal, and increase if the agreement is
renewed. Low remaining performance obligation attributable to a particular
subscription agreement is often associated with an impending renewal but may not
be an indicator of the likelihood of renewal or future revenue from such
customer. Changes in average contract duration can impact remaining performance
obligation. For example, if customers were to reduce the length of their
subscription agreement due to the uncertainty around COVID-19, this would
negatively impact remaining performance obligation.
Remaining performance obligation consisted of the following (in billions):
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(1) Includes approximately $450 million and $700 million of remaining
performance obligation related to Salesforce.org business combination in June
2019 and the Tableau acquisition in August 2019 , respectively.
(2) Includes approximately $450 million and $650 million of remaining
performance obligation related to the Salesforce.org business combination in
June 2019 and the Tableau acquisition in August 2019 , respectively.
(3) 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.
(4) Includes approximately $350 million of remaining performance obligation
related to the Salesforce.org business combination in June 2019 .
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 by expense type from our recent acquisitions 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, including the costs of data
center capacity, certain fees paid to various third parties for the use of their
technology, services and data and employee-related costs such as salaries and
benefits.
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 and certain third-party fees.
Research and Development
Research and development expenses consist primarily of salaries and related
expenses, including stock-based expenses and allocated overhead.
Marketing and Sales
Marketing and sales expenses make up the majority of our operating expenses and
consist primarily of salaries and related expenses, including stock-based
expenses and commissions, for our sales and marketing staff, 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.
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General and Administrative
General and administrative expenses consist primarily of salaries and related
expenses, including stock-based expenses, for finance and accounting, legal,
internal audit, human resources and management information systems personnel and
professional services fees.
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 condensed 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, including impairment
considerations.
During the quarter, uncertainty around the impact of COVID-19 resulted in a
higher level of judgment related to our estimates and assumptions concerning
variable consideration related to revenue recognition, allowances for credit
losses, impairment of strategic investments, contract termination costs related
to customer and employee events and impairment of operating lease right of use
assets. As of the date of issuance of the financial statements, we are not aware
of any specific event or circumstance that would require us to update our
estimates, judgments, or revise the carrying value of our assets or liabilities.
These estimates may change, as new events occur and additional information is
obtained, and such changes will be recognized in the condensed consolidated
financial statements as soon as they become known. Actual results could differ
from these estimates, including as a result of the COVID-19 pandemic, and any
such differences may be material to our financial statements.
Recent Accounting Pronouncements
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.
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Results of Operations
The following tables set forth selected data for each of the periods indicated
(in millions):
1 Three Months Ended April 30,
% of Total % of Total
2020 Revenues 2019 Revenues
Revenues:
Subscription and support $ 4,575 94 % $ 3,496 94 %
Professional services and other 290 6 241 6
Total revenues 4,865 100 3,737 100
Cost of revenues (1)(2):
Subscription and support 966 20 678 18
Professional services and other 288 6 236 6
Total cost of revenues 1,254 26 914 24
Gross profit 3,611 74 2,823 76
Operating expenses (1)(2):
Research and development 859 18 554 15
Marketing and sales 2,390 49 1,697 45
General and administrative 502 10 362 10
Total operating expenses 3,751 77 2,613 70
Income (loss) from operations (140) (3) 210 6
Gains on strategic investments, net 192 4 281 7
Other expense (5) 0 (9) 0
Income before benefit from (provision for) income taxes 47 1 482 13
Benefit from (provision for) income taxes 52 1 (90) (3) Net income $ 99 2 %$ 392 10 %
(1) Amounts related to amortization of intangible assets acquired through business combinations, as follows (in millions):
Three Months Ended April 30,
% of Total % of Total
2020 Revenues 2019 Revenues
Cost of revenues $ 159 3 % $ 61 2 %
Marketing and sales 112 2 % 68 2
(2) Amounts related to stock-based expenses, as follows (in millions):
Three Months Ended April 30,
% of Total % of Total
2020 Revenues 2019 Revenues
Cost of revenues $ 52 1 % $ 43 1 %
Research and development 166 3 81 2
Marketing and sales 223 5 177 5
General and administrative 63 1 42 1
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The following table sets forth selected balance sheet data and other metrics for each of the periods indicated (in millions, except remaining performance obligation, which is presented in billions):
As of April 30, As of January 31,
2020 2020
Cash, cash equivalents and marketable securities $ 9,802 $ 7,947
Unearned revenue 9,112 10,662
Remaining performance obligation 29.3 30.8
Principal due on our outstanding debt obligations (1) 2,693 2,694
(1) Amounts do not include operating or financing lease obligations.
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.
Impact of Acquisitions
The comparability of our operating results for the three months ended April 30,
2020 compared to the same period of fiscal 2020 was impacted by our business
combination and acquisitions in the current and prior year, including the
acquisition of Tableau in the prior year, which was our largest acquisition to
date. In our discussion of changes in our results of operations for the three
months ended April 30, 2020 compared to the same period of fiscal 2020, we may
quantitatively disclose the impact of our acquired products and services for the
one-year period subsequent to the acquisition date on 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 April 30, Variance
(in millions) 2020 2019 Dollars Percent
Subscription and support $ 4,575 $ 3,496 $ 1,079 31 %
Professional services and other 290 241 49 20
Total revenues $ 4,865 $ 3,737 $ 1,128 30
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. Pricing was not a significant driver of the increase in revenues for
the period. Revenues from term and perpetual software licenses, which are
recognized at a point in time, represent approximately five percent of total
subscription and support revenues for the three months ended April 30, 2020 .
Subscription and support revenues accounted for approximately 94 percent of our
total revenues for both the three months ended April 30, 2020 and 2019.
Additionally, subscription and support revenues increased by approximately $46
million as a result of one more day (February 29, 2020 ) in the three months
ended April 30, 2020 compared to the same period a year ago.
The business combination with Salesforce.org in June 2019 and acquisition of
Tableau in August 2019 contributed approximately $104 million and $273 million
to total subscription and support revenues in the three months ended April 30,
2020 , respectively. As a result of our business combination activity, 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.
Our growth in revenues is also impacted by attrition. Attrition represents the
reduction or loss of the annualized value of our contracts with customers. We
calculate our attrition rate at a point in time on a trailing twelve-month basis
as of the end of each month. As of April 30, 2020 , our attrition rate, excluding
Integration Cloud, Salesforce.org and Tableau, was less than nine percent. Our
attrition rate for the three months ended April 30, 2020 benefited, in part,
from the ongoing shift in our business mix to enterprise and international
markets which have longer customer contract term durations. In general, we
exclude service offerings from acquisitions from our attrition calculation until
they are fully integrated into our customer success organization. While it is
difficult to predict, we expect our attrition rate to remain consistent in the
near term due to the timing of renewals, as the fourth quarter is the largest
quarter for renewals, and the diversity of size, industry and geography within
the customer base, but it may increase over time as a result of COVID-19.
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
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maintain growth in our subscription and support revenues. 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 April 30,
2020 2019 Variance Percent
Sales Cloud $ 1,245 $ 1,073 16%
Service Cloud 1,252 1,020 23%
Salesforce Platform and Other 1,364 842 62%
Marketing and Commerce Cloud 714 561 27%
Total $ 4,575 $ 3,496
Our Industry Offerings revenue is included in either Sales Cloud, Service Cloud
or Salesforce Platform and Other depending on the primary service offering
purchased. Integration and Analytics revenues are included in Salesforce
Platform and Other. The acquisition of Tableau in August 2019 contributed
approximately $273 million to Salesforce Platform and Other during the three
months ended April 30, 2020 . The revenue growth rates of each of our core
service offerings have been and may be impacted by COVID-19 in the future,
depending on our customer's actual and projected business needs. For example, we
experienced increased demand for our Commerce Cloud offering for the three
months ended April 30, 2020 when compared to prior periods.
Revenues by geography were as follows:
Three Months Ended
As a % of Total As a % of Total
(in millions) 2020 Revenues 2019 Revenues Growth Rate
Americas $ 3,370 69 % $ 2,617 70 % 29 %
Europe 1,034 21 755 20 37
Asia Pacific 461 10 365 10 26
Total $ 4,865 100 % $ 3,737 100 %
Revenues by geography are determined based on the region of the Salesforce
contracting entity, which may be different than the region of the customer. The
increase in Americas revenues was the result of the increasing acceptance of our
services and the investment of additional sales resources. The 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 investment
in additional international resources. Revenues in the Americas and Europe also
benefited from our acquisition of Tableau in August 2019 . Foreign currency
fluctuations, primarily the strengthening British Pound Sterling, had a negative
impact on revenues outside of the Americas of approximately $34 million in the
three months ended April 30, 2020 compared to a negative impact of approximately
$60 million during the three months ended April 30, 2019 .
Cost of Revenues.
Three Months Ended April 30, Variance
(in millions) 2020 2019 Dollars
Subscription and support $ 966 $ 678 $ 288
Professional services and other 288 236 52
Total cost of revenues $ 1,254 $ 914 $ 340
Percent of total revenues 26 % 24 %
For the three months endedApril 30, 2020 , the increase in cost of revenues was primarily due to an increase of$90 million in employee-related costs, an increase of$9 million in stock-based expenses, an increase of$80 million in service delivery costs, primarily due to our efforts to increase data center capacity and an increase of amortization of purchased intangible assets of$98 million . Service delivery costs associated with our perpetual and term software licenses are lower than service delivery costs associated with our cloud service offerings and as a result, our subscription and support gross margin in the three months endedApril 30, 2020 benefited, in part, due to this shift in our business mix. 40 -------------------------------------------------------------------------------- Table of Content s We have increased our headcount by 36 percent sinceApril 30, 2019 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$2 million during the three months endedApril 30, 2020 and positive$5 million during fiscal 2019. 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. Operating Expenses. Three Months Ended April 30, Variance (in millions) 2020 2019 Dollars Research and development $ 859$ 554 $ 305 Marketing and sales 2,390 1,697 693 General and administrative 502 362 140 Total operating expenses$ 3,751 $ 2,613 $ 1,138 Percent of total revenues 77 % 70 % For the three months endedApril 30, 2020 , the increase in research and development expenses was primarily due to an increase of approximately$182 million in employee-related costs, an increase of$85 million in stock-based expenses, an increase in our development and test data center costs and allocated overhead. Our research and development headcount increased by 47 percent sinceApril 30, 2019 in order to improve and extend our service offerings, develop new technologies, and integrate acquired companies. 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 endedApril 30, 2020 , the increase in marketing and sales expenses was primarily due to an increase of$494 million in employee-related costs and amortization of deferred commissions, an increase of$46 million in stock-based expenses, an increase in amortization of purchased intangible assets of$44 million , and allocated overhead. Marketing and sales expenses for the three months endedApril 30, 2020 were also negatively impacted by the one-time partial minimum commission guarantee offered to our direct sales force and the cancellation of our in-person events. Our marketing and sales headcount increased by 34 percent sinceApril 30, 2019 , primarily attributable to hiring additional sales personnel to focus on adding new customers and increasing penetration within our existing customer base. 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 months endedApril 30, 2020 , the increase in general and administrative expenses was primarily due to an increase in employee-related costs. General and administrative expenses for the three months endedApril 30, 2020 were also negatively impacted by our donations to members of our ecosystem and community, including the donation of personal protective equipment. Our general and administrative headcount increased by 43 percent sinceApril 30, 2019 as we added personnel to support our growth, and our recent acquisitions also contributed to this increase. While not material to date, we may experience increasing credit loss risks from accounts receivable in future periods depending on the duration or degree of economic slowdown caused by the COVID-19 pandemic, and our actual experience in the future may differ from our past experiences or current assessments. Other income and expense. Three Months Ended April 30, Variance (in millions) 2020 2019 Dollars Gains on strategic investments, net $ 192$ 281 $ (89) Other expense (5) (9) 4 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. Net gains recognized during the three months endedApril 30, 2020 , were primarily driven by realized gains recognized on publicly held equity securities of$231 million and unrealized gains recognized on privately held securities of$30 million , offset by 41 -------------------------------------------------------------------------------- Table of Content s impairments of$77 million , due to changes in the macroeconomic climate and difficulties investee companies experienced raising funding. A significant change in the liquidity or financial positions of our investees, including arising from prolonged effects of COVID-19 and related public health measures on the global economic landscape could have a material impact on our future financial position, results of operations and cash flows. For example, impairment costs increased$49 million during the three months endedApril 30, 2020 compared to the same period a year ago, primarily as a result of COVID-19 and the corresponding economic downturn. 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$29 million and$35 million for the three months endedApril 30, 2020 and 2019, respectively. Investment income increased$2 million in the three months endedApril 30, 2020 compared to the same period a year ago due to higher interest income across our portfolio, which is primarily a result of the larger cash equivalents and marketable securities balances. Benefit from (provision for) income taxes. Three Months Ended April 30, Variance (in millions) 2020 2019 Dollars Benefit from (provision for) income taxes$ 52 $ (90) $ 142 Effective tax rate (111) % 19 % During the three months endedApril 30, 2020 , we recognized a tax benefit of$52 million on a pretax income of$47 million . Our tax provision decreased from the same period a year ago primarily due to smaller quarter-to-date pre-tax income. Our effective tax rate may fluctuate due to changes in our domestic and foreign earnings or material discrete tax items or a combination of these factors resulting from transactions or events, for example, acquisitions, changes to our operating structure, or COVID-19. Liquidity and Capital Resources AtApril 30, 2020 , our principal sources of liquidity were cash, cash equivalents and marketable securities totaling$9.8 billion and accounts receivable of$3.1 billion . Our cash equivalents and marketable securities are comprised primarily of corporate notes and obligations,U.S. treasury securities,U.S. agency obligations, asset backed securities, foreign government obligations, mortgage backed obligations, covered bonds, time deposits, money market mutual funds and municipal securities. Our revolving loan credit agreement, which provides$1.0 billion unsecured financing ("Credit Facility") as ofApril 30, 2020 , also serves as a source of liquidity. As ofApril 30, 2020 , our remaining performance obligation was$29.3 billion . Our remaining performance obligation represents contracted revenue that has not yet been recognized and includes unearned revenue, which has been invoiced and is recorded on the balance sheet, and unbilled amounts that are not recorded on the balance sheet, that will be recognized as revenue in future periods. Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and other risks detailed in Part II, Item 1A titled "Risk Factors." We believe our existing cash, cash equivalents, marketable securities, cash provided by operating activities and, if necessary, our borrowing capacity under our Credit Facility and unbilled amounts related to contracted non-cancelable subscription agreements, which is not reflected on the balance sheet, will be sufficient to meet our working capital, capital expenditure and debt repayment needs over the next 12 months. In the future, we may enter into arrangements to acquire or invest in complementary businesses, services and technologies, and intellectual property rights. To facilitate these acquisitions or investments, we may seek additional equity or debt financing, which may not be available on terms favorable to us or at all, impacting our ability to complete subsequent acquisitions or investments. Cash Flows For the three months endedApril 30, 2020 and 2019 our cash flows were as follows (in millions): 1 Three Months Ended April 30, 2020 2019 Net cash provided by operating activities$ 1,859 $ 1,965 Net cash used in investing activities (437) (726) Net cash provided by financing activities 209 207 42 -------------------------------------------------------------------------------- Table of Content s Operating Activities The net cash provided by operating activities during the three months endedApril 30, 2020 was primarily related to net income of$99 million , adjusted for non-cash items of$658 million of depreciation and amortization,$504 million of expenses related to employee stock plans and$247 million of amortization of costs capitalized to obtain revenue contracts, and change in accounts receivable, net of$3.1 billion , offset by change in unearned revenue of$1.6 billion . Cash provided by operating activities during the three months endedApril 30, 2020 was negatively impacted by providing temporary financial flexibility to customers most affected by COVID-19. In addition, our operating cash flows were negatively impacted by the partial minimum commission guarantee as these cash outflows were not offset by corresponding cash inflows from customer receipts. The net cash provided by operating activities during the three months endedApril 30, 2019 was primarily related to net income of$392 million , adjusted for non-cash items such as$437 million related to depreciation and amortization and$343 million of expenses related to employee stock plans, and change in accounts receivable, net of$2.8 billion , offset by change in unearned revenue of$1.0 billion . Investing Activities The net cash used in investing activities during the three months endedApril 30, 2020 was primarily related to the purchases of marketable securities of$834 million and was offset by sales and maturities of marketable securities of$564 million . In addition, we paid approximately$150 million of cash consideration related to the purchase of 450 Mission, which is reflected in capital expenditures, and approximately$103 million of cash consideration for business combinations, net of cash acquired during the three months endedApril 30, 2020 . The net cash used in investing activities during the three months endedApril 30, 2019 was primarily related to the purchases of marketable securities of$734 million . Financing Activities Net cash provided by financing activities during the three months endedApril 30, 2020 consisted primarily of$258 million from proceeds from equity plans offset by principal payments on financing obligations of$48 million . Net cash provided by financing activities during the three months endedApril 30, 2019 consisted primarily of$219 million from proceeds from equity plans. Debt As ofApril 30, 2020 , we had senior unsecured debt outstanding due in 2023 and 2028 with a total carrying value of$2.5 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$192 million . We were in compliance with all debt covenants as ofApril 30, 2020 . We maintain a$1.0 billion Credit Facility that matures inApril 2023 . There were no outstanding borrowings under the Credit Facility as ofApril 30, 2020 . We may use the proceeds of future borrowings under the Credit Facility for refinancing other indebtedness, working capital, capital expenditures and other general corporate purposes, including permitted acquisitions. 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. AtApril 30, 2020 , the future non-cancelable minimum payments under these commitments were approximately$4.1 billion . As ofApril 30, 2020 , we have additional operating leases that have not yet commenced totaling$2.4 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 1 to 18 years. During fiscal 2021 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. While we continue to make investments in our infrastructure including offices, information technology and data centers to provide capacity for the growth of our business, however our strategy may change related to these investments and we may slow the pace of our investments due to COVID-19. 43 -------------------------------------------------------------------------------- Table of Content s Other Future Obligations InJune 2020 , we acquired all outstanding stock ofVlocity, Inc. ("Vlocity"), a leading provider of industry-specific cloud and mobile software for approximately$1.2 billion , which consisted of cash and the assumption of outstanding equity awards held byVlocity employees. InOctober 2019 , we acquired ClickSoftware for approximately$1.4 billion . In the event that we fully integrate the operations and assets of ClickSoftware, as well as other acquired Israeli based entities 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. Our tax provision for fiscal 2020 reflected the estimated incremental tax costs associated with the integration of ClickSoftware's operations and assets. The timing and amount of the cash payment, if any, is uncertain and would be based upon a number of factors, including our integration plans, valuations related to intercompany transactions, the tax rate in effect at the time, potential negotiations with the taxing authorities and potential litigation. Environmental, Social, Governance We believe the business of business is to make the world a better place for all of our stakeholders, including our stockholders, customers, employees, partners, the planet and the communities in which we work and live. To this end, we are proud to have signed and to support the Business Roundtable's Statement on the Purpose of a Corporation, which affirms the essential role corporations can play in improving our society, a belief that Salesforce has long held and long incorporated into our business practices, to make sure we are doing well and doing good. In addition, delivering innovative solutions to our customers is core to our mission and, as a technology company, we have developed solutions on the Salesforce Platform that enable our customers and stakeholders to manage and affect environmental, social and governance ("ESG") matters that are meaningful to them. All of these goals align with our long-term growth strategy and financial and operational priorities. We also believe that transparently disclosing the goals and relevant metrics related to our ESG programs will allow our stakeholders to be informed on our progress. 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 theSustainability Accounting Standards Board ("SASB") by the end of fiscal 2021. A summary of the key ESG topics that are most important to our stakeholders and the success of our business, along with key goals for each topic, can be found in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2020 , filed with theSecurities and Exchange Commission (the "SEC") onMarch 5, 2020 . We also published our annual Stakeholder Impact Report inMay 2020 , which includes a table of detailed metrics and indicators that highlights the key goals of our ESG programs, provides year over year trends and references SASB, The Global Reporting Initiative ("GRI"), and the Ten Principles of the United Nations Global Compact ("UNGC"). In the current fiscal year our ESG highlights as ofApril 30, 2020 include the following: •COVID-19 Response. We mobilized to support our employees, our customers, and our communities in response to the COVID-19 pandemic in a number of ways. In addition, to ensure business continuity and to mitigate the impact on our business operations, from the beginning we performed impact assessments, contingency planning and frequent leadership updates, including with our Board of Directors. Examples of some of the actions we took include investing in our employees, customers and communities and preparing for the future, which we believe will benefit our company and our stakeholders over the long-term: •Protecting our workforce. In an effort to protect the safety and well-being of our employees we closed our offices around the world and provided an allowance for employees to use for equipment to advance their ability to work from home. We have provided regular communication and updates to employees, including through company-wide video calls led by senior management, with participation of Board members and guest experts in psychology and other medical fields. We launched a daily "B-Well Together" company-wide video program, that was subsequently opened to the public, also featuring physical and mental health experts and other informative and inspiring speakers. In addition, we have continued to pay all of our hourly and salaried workers and support staff and announced a 90 day no significant layoff pledge inMarch 2020 . •Innovation and customer support. To support our customers we launched Salesforce Care, a suite of free rapid response solutions to help companies navigate COVID-19, including solutions designed to support response to the pandemic in the healthcare industry, solutions designed to support companies with employee and customer support during the pandemic, and other solutions designed to support social community engagement, philanthropy, and small businesses. We also launched the Tableau COVID-19 Data Hub, to help organizations around the world see and understand data about the pandemic. To further support small businesses, we created the Salesforce Care Small Business Grants program which supports small businesses as they work to replenish materials, pay salaries, or adapt their business models. We are also providing our technology to companies to support their own philanthropic efforts. For example, together with our partner 44
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Table of Content sUnited Way , we are offering free access to Philanthropy Cloud for a limited time to companies to enable their employees to give back to their communities. •Supporting our communities. We have taken action to help address the Personal Protective Equipment ("PPE") shortage facing medical personnel. During the three months endedApril 30, 2020 , we sourced millions of units of Personal Protective Equipment for doctors, nurses and first responders inthe United States and other countries. •Integrated philanthropy. Together with theSalesforce Foundation , a 501(c)(3) nonprofit organization, since inception we have given approximately$353 million to charitable organizations, logged more than five million employee volunteer hours around the world and provided more than 51,000 nonprofit and higher education organizations with the use of our service offerings for free or at a discount. •Managing and recruiting a diverse and skilled workforce - We continued our investment in programs designed to enhance employee success and create a safe, healthy and engaging working environment. •V2MOM. We completed our annual organizational alignment exercise and released our corporate V2MOM, an internal management tool used by all employees which incorporates our vision, values, methods, obstacles, and measures for fiscal 2021. All employees are expected to complete their own annual V2MOM which aligns with the corporate V2MOM. We also have created a COVID-19 V2MOM and have taken steps to review and adjust our employee V2MOMs as a result of COVID-19. •Equal pay for equal work. As a result of our commitment to ensure everyone is paid equally for equal work we made$2.1 million in adjustments to employee compensation inMarch 2020 to address unexplained differences in pay. ThroughApril 30, 2020 , we have spent more than$12 million supporting these efforts. •Protecting our Planet - We continued to make progress on our environmental goals, which we believe contributes to the long-term benefit of our company and our stockholders. •Science-Based Targets. We published progress towards achieving our science-based targets and 100 percent renewable energy commitments. In fiscal 2020, we procured electricity from renewable energy resources equivalent to 63 percent of what we used globally. We also achieved a 13 percent absolute reduction in Scope 1 and 2 emissions relative to fiscal 2019 marking progress toward our goal of achieving a 50 percent reduction by fiscal 2031. In addition, 15 percent of our targeted upstream suppliers now set their own science-based targets. •1t.org. InJanuary 2020 , theWorld Economic Forum ("WEF") and certain partners, including Salesforce, launched 1t.org with a goal to conserve, restore and grow one trillion trees within this decade. To achieve this goal, Salesforce intends to contribute our technology to WEFs Uplink, a new digital platform to bring stakeholders together to advance theUnited Nations' Sustainable Development Goals . We have also made a commitment to support and mobilize the conservation and restoration of 100 million trees over the next decade.
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