• Revenue of $1.38 Billion, up 29% Year-Over-Year, 30% in Constant Currency
• Deferred Revenue of $2.22 Billion, up 28% Year-Over-Year, 31% in Constant Currency
• Unbilled Deferred Revenue of Approximately $5.40 Billion, up 29% Year-Over-Year
• Guides FY15 Revenue of Approximately $5.365 Billion to $5.370 Billion
• Initiates FY16 Revenue Guidance of Approximately $6.45 Billion to $6.50 Billion
SAN FRANCISCO – Nov. 19, 2014 – Salesforce (NYSE: CRM), the Customer Success Platform and world’s #1 CRM company, today announced results for its fiscal third quarter ended October 31, 2014.
"Salesforce continues to be the fastest growing top 10 software company, with constant currency revenue and deferred revenue growth of 30% or more year-over-year," said Marc Benioff, Chairman and CEO, Salesforce. "Given the tremendous response to our Customer Success Platform, I’m delighted to announce a fiscal 2016 revenue projection of $6.5 billion at the high end of the range."
Salesforce delivered the following results for its fiscal third quarter:
Revenue: Total Q3 revenue was $1.38 billion, an increase of 29% year-over-year, and 30% in constant currency. Subscription and support revenues were $1.29 billion, an increase of 28% year-over-year. Professional services and other revenues were $95 million, an increase of 33% year-over-year.
Earnings per Share: Q3 diluted GAAP loss per share was ($0.06), and diluted non-GAAP earnings per share was $0.14. The company’s non-GAAP results exclude the effects of $139 million in stock-based compensation expense, $35 million in amortization of purchased intangibles, $16 million in gains on sales of land and building improvements, $10 million in net non-cash interest expense related to the company’s convertible senior notes, including the related loss on conversions of our convertible 0.75% senior notes, due 2015, and are based on a projected long-term non-GAAP tax rate of 36.5%. GAAP EPS calculations are based on a basic share count of approximately 630 million shares. Non-GAAP EPS calculations are based on approximately 659 million diluted shares outstanding during the quarter, including approximately 18 million shares associated with the company’s convertible 0.75% senior notes due 2015.
Cash: Cash generated from operations for the fiscal third quarter was $123 million, a decrease of 11% year-over-year. Total cash, cash equivalents and marketable securities finished the quarter at $1.83 billion.
Deferred Revenue: Deferred revenue on the balance sheet as of October 31, 2014 was $2.22 billion, an increase of 28% year-over-year, and 31% in constant currency. Unbilled deferred revenue, representing business that is contracted but unbilled and off balance sheet, ended the third quarter at approximately $5.4 billion, up 29% year-over-year.
As of November 19, 2014, Salesforce is initiating revenue and EPS guidance for its fourth quarter of fiscal year 2015. In addition, the company is affirming its full fiscal year 2015 EPS guidance and raising its full fiscal year 2015 operating cash flow guidance previously provided on August 21, 2014. The company is also initiating revenue guidance for its fiscal year 2016.
Q4 FY15 Guidance: Revenue for the company’s fourth fiscal quarter is projected to be approximately $1.436 billion to $1.441 billion, an increase of 25% to 26% year-over-year.
GAAP loss per share is expected to be in the range of ($0.10) to ($0.09), while diluted non-GAAP EPS is expected to be in the range of $0.13 to $0.14. The non-GAAP estimate excludes the effects of stock-based compensation expense, expected to be approximately $151 million, amortization of purchased intangibles related to acquisitions, expected to be approximately $35 million, and net non-cash interest expense related to the convertible senior notes, including loss on conversions, expected to be approximately $8 million. EPS estimates assume a GAAP tax rate of approximately negative 24%, which reflects the estimated quarterly change in the tax valuation allowance, and a projected long-term non-GAAP tax rate of 36.5%. Note that the tax valuation allowance adds complexity, causing potential volatility in our forecasted GAAP tax rate. The GAAP EPS calculation assumes an average basic share count of approximately 636 million shares, and the non-GAAP EPS calculation assumes an average fully diluted share count of approximately 669 million shares.
Full Year FY15 Guidance: Revenue for the company’s full fiscal year 2015 is projected to be approximately $5.365 billion to $5.370 billion, an increase of 32% year-over-year.
GAAP loss per share is expected to be in the range of ($0.42) to ($0.41) while diluted non-GAAP EPS is expected to be in the range of $0.51 to $0.52. The non-GAAP estimate excludes the effects of stock-based compensation expense, expected to be approximately $564 million, amortization of purchased intangibles related to acquisitions, expected to be approximately $150 million, gains on sales of land and building improvements of approximately $16 million, and net non-cash interest expense related to the convertible senior notes, including loss on conversions, expected to be approximately $47 million. EPS estimates assume a GAAP tax rate of approximately negative 24%, which reflects the estimated annual change in the tax valuation allowance, and a projected long-term non-GAAP tax rate of 36.5%. Note that the tax valuation allowance adds complexity, causing potential volatility in our forecasted GAAP tax rate. The GAAP EPS calculation assumes an average basic share count of approximately 624 million shares, and the non-GAAP EPS calculation assumes an average fully diluted share count of approximately 656 million shares.
Operating cash flow growth for the company’s full fiscal year 2015 is projected to be approximately 27% to 28% year-over-year.
Full Year FY16 Guidance: Revenue for the company’s full fiscal year 2016 is projected to be approximately $6.45 to $6.50 billion, an increase of 20% to 21% year-over-year, which includes an FX headwind of approximately $125 million to $150 million. The company will provide its expectations for FY16 GAAP and non-GAAP EPS and operating cash flow when it announces its fourth quarter and full fiscal year 2015 results in February 2015.
The following is a per share reconciliation of GAAP EPS to diluted non-GAAP EPS guidance for the fourth quarter and full fiscal year:
Quarterly Conference Call
Salesforce will host a conference call at 2:00 p.m. (PT) / 5 p.m. (ET) to discuss its financial results with the investment community. A live audio webcast of the conference call, together with detailed financial information, can be accessed through the company's Investor Relations Web site: http://www.salesforce.com/investor. A live dial-in is available domestically at 866-901-SFDC or 866-901-7332 and internationally at 706-902-1764, passcode 25729060. A replay will be available at (800) 585-8367 or (855) 859-2056 until midnight (ET) Dec. 19, 2014.
Non-GAAP Financial Measures: This press release includes information about non-GAAP EPS and non-GAAP tax rates (collectively the “non-GAAP financial measures”). Non-GAAP EPS estimates exclude the impact of the following items: stock-based compensation, amortization of acquisition-related intangibles, the net amortization of debt discount on the company’s convertible senior notes, and gains/losses on conversions of the company’s convertible senior notes, gains/losses on sales of land and building improvements, as well as income tax adjustments. The purpose of the non-GAAP tax rate is to quantify the excluded tax adjustments and the tax consequences associated with the above excluded expense items. The company reports a projected long-term tax rate to eliminate the effects of non-recurring and period specific items which can vary in size and frequency. This projected long-term non-GAAP tax rate could be subject to change in the future for a variety of reasons, for example, significant changes in the company’s geographic earnings mix including acquisition activity, or fundamental tax law changes in major jurisdictions where the company operates. These non-GAAP financial measures are not measurements of financial performance prepared in accordance with U.S. generally accepted accounting principles. The method used to produce non-GAAP financial measures is not computed according to GAAP and may differ from the methods used by other companies. Non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with the company’s consolidated financial statements prepared in accordance with GAAP.
The primary purpose of these non-GAAP measures is to provide supplemental information that may prove useful to investors who wish to consider the impact of certain non-cash items on the company’s operating performance. Non-cash stock-based compensation, amortization of acquisition-related intangible assets, the net amortization of debt discount on the company’s convertible senior notes, gains/losses on the sales of land and building improvements, and gains/losses on conversions of the company’s convertible senior notes, are being excluded from the company’s FY15 financial results because the decisions which gave rise to these expenses were not made to increase revenue in a particular period, but were made for the company’s long-term benefit over multiple periods. While strategic decisions, such as those related to the issuance of equity awards, resulting in stock-based compensation, the acquisitions of companies, real estate activity, or the issuance of convertible senior notes, are made to further the company’s long-term strategic objectives and impact the company’s statement of operations under GAAP measures, these items affect multiple periods and management is not able to change or affect these items in any particular period. As such, supplementing GAAP disclosure with non-GAAP disclosure using the non-GAAP measures provides management with an additional view of operational performance by excluding expenses that are not directly related to performance in any particular period, and management uses both GAAP and non-GAAP measures when planning, monitoring, and evaluating the company’s performance.
In addition, the majority of the company’s industry peers report non-GAAP operating results that exclude certain non-cash or non-recurring items, such as certain one-time charges. As significant unusual or discrete events occur, such as real estate activity, the results may be excluded in the period in which the events occur. Management believes that the provision of supplemental non-GAAP information will enable a more complete comparison of the company’s relative performance.
Specifically, management is excluding the following items from its non-GAAP EPS for Q3 and its non-GAAP estimates for Q4 and FY15:
• Stock-Based Expenses: The company’s compensation strategy includes the use of stock-based compensation to attract and retain employees and executives. It is principally aimed at aligning their interests with those of our stockholders and at long-term employee retention, rather than to motivate or reward operational performance for any particular period. Thus, stock-based compensation expense varies for reasons that are generally unrelated to operational decisions and performance in any particular period.
• Amortization of Purchased Intangibles: The company views amortization of acquisition-related intangible assets, such as the amortization of the cost associated with an acquired company’s research and development efforts, trade names, customer lists and customer relationships, as items arising from pre-acquisition activities determined at the time of an acquisition. While these intangible assets are continually evaluated for impairment, amortization of the cost of purchased intangibles is a static expense, one that is not typically affected by operations during any particular period.
• Amortization of Debt Discount: Under GAAP, certain convertible debt instruments that may be settled in cash (or other assets) on conversion are required to be separately accounted for as liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, for GAAP purposes we are required to recognize imputed interest expense on the company’s $575 million of convertible senior notes due 2015 that were issued in a private placement in January 2010 and the company’s $1.15 billion of convertible senior notes due 2018 that were issued in a private placement in March 2013. The imputed interest rates were approximately 5.9% for the convertible notes due 2015 and approximately 2.5% for the convertible notes due 2018, while the actual coupon interest rates of the notes were 0.75% and 0.25%, respectively. The difference between the imputed interest expense and the coupon interest expense, net of the interest amount capitalized, is excluded from management’s assessment of the company’s operating performance because management believes that this non-cash expense is not indicative of ongoing operating performance. Management believes that the exclusion of the non-cash interest expense provides investors an enhanced view of the company’s operational performance.
• Non-Cash Gains/Losses on Conversion of Debt: Upon settlement of the company’s convertible senior notes, we attribute the fair value of the consideration transferred to the liability and equity components of the convertible senior notes. The difference between the fair value of consideration attributed to the liability component and the carrying value of the liability as of settlement date is recorded as a non-cash gain or loss on the statement of operations. Management believes that the exclusion of the non-cash gain/loss provides investors an enhanced view of the company’s operational performance.
• Gain on sales of land and building improvements: The Company views the non-operating gains associated with the sales of the land and building improvements at Mission Bay to be a discrete item. Management believes that the exclusion of the gains provides investors an enhanced view of the Company’s operational performance.
• Income Tax Effects and Adjustments: During fiscal 2014, the Company’s non-GAAP tax provision excludes the tax effects of expense items described above and certain tax items not directly related to the current fiscal year’s ordinary operating results. Examples of such tax items include, but are not limited to, changes in the valuation allowance related to deferred tax assets, certain acquisition-related costs and unusual or infrequently occurring items. Management believes the exclusion of these income tax adjustments provides investors with useful supplemental information about the Company’s operational performance. During fiscal 2015, the Company began to compute and utilize a fixed long-term projected non-GAAP tax rate in order to provide better consistency across the interim reporting periods by eliminating the effects of non-recurring and period-specific items such as changes in the tax valuation allowance and tax effects of acquisitions-related costs, since each of these can vary in size and frequency. When projecting this long-term rate, the Company evaluated a three-year financial projection that excludes the impact of the following non-cash items: Stock-Based Expenses, Amortization of Purchased Intangibles, Amortization of Debt Discount, Gains/Losses on the sales of land and building improvements, and Gains/Losses on Conversions of Debt. The projected rate also assumes no new acquisitions in the three-year period, and takes into account other factors including the Company’s current tax structure, its existing tax positions in various jurisdictions and key legislation in major jurisdictions where the Company operates. The non-GAAP tax rate for fiscal 2015 is 36.5%. The Company intends to re-evaluate this long-term rate on an annual basis or if any significant events that may materially affect this long-term rate occur. This long-term rate could be subject to change for a variety of reasons, for example, significant changes in the geographic earnings mix including acquisition activity, or fundamental tax law changes in major jurisdictions where the Company operates.
"Safe harbor" statement under the Private Securities Litigation Reform Act of 1995: This press release contains forward-looking statements about our financial results, which may include expected GAAP and non-GAAP financial and other operating and non-operating results, including revenue, net income (loss), EPS, expected revenue run rate, expected tax rates, stock-based compensation expenses, amortization of purchased intangibles and debt discount, non-cash interest expense and gains/losses on the conversions of debt, gains/losses on the sales of land and building improvements, shares outstanding, and changes in deferred tax asset valuation allowances. The achievement or success of the matters covered by such forward-looking statements involves risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, the company’s results could differ materially from the results expressed or implied by the forward-looking statements we make.
The risks and uncertainties referred to above include - but are not limited to - risks associated with possible fluctuations in the company’s financial and operating results; the company’s rate of growth and anticipated revenue run rate, including the company’s ability to convert deferred revenue and unbilled deferred revenue into revenue and, as appropriate, cash flow, and the continued growth and ability to maintain deferred revenue and unbilled deferred revenue; errors, interruptions or delays in the company’s service or the company’s Web hosting; breaches of the company’s security measures; the financial impact of any previous and future acquisitions; the nature of the company’s business model; the company’s ability to continue to release, and gain customer acceptance of, new and improved versions of the company’s service; successful customer deployment and utilization of the company’s existing and future services; changes in the company’s sales cycle; competition; various financial aspects of the company’s subscription model; unexpected increases in attrition or decreases in new business; the company’s ability to realize benefits from strategic partnerships; the emerging markets in which the company operates; unique aspects of entering or expanding in international markets, the company’s ability to hire, retain and motivate employees and manage the company’s growth; changes in the company’s customer base; technological developments; regulatory developments; litigation related to intellectual property and other matters, and any related claims, negotiations and settlements; unanticipated changes in the company’s effective tax rate; factors affecting the company’s outstanding convertible notes and revolving credit facility; fluctuations in the number of shares we have outstanding and the price of such shares; foreign currency exchange rates; collection of receivables; interest rates; factors affecting our deferred tax assets and ability to value and utilize them, including the timing of when we once again achieve profitability on a pre-tax basis; the potential negative impact of indirect tax exposure; the risks and expenses associated with the company’s real estate and office facilities space; and general developments in the economy, financial markets, and credit markets.
Further information on these and other factors that could affect the company’s financial results is included in the reports on Forms 10-K, 10-Q and 8-K and in other filings we make with the Securities and Exchange Commission from time to time. These documents are available on the SEC Filings section of the Investor Information section of the company’s website at www.salesforce.com/investor.
Salesforce.com, inc. assumes no obligation and does not intend to update these forward-looking statements, except as required by law.
Any unreleased services or features referenced in this or other press releases or public statements are not currently available and may not be delivered on time or at all. Customers who purchase salesforce.com applications should make their purchase decisions based upon features that are currently available. Salesforce.com has headquarters in San Francisco, with offices in Europe and Asia, and trades on the New York Stock Exchange under the ticker symbol “CRM.” For more information please visit http://salesforce.com, or call 1-800-NO-SOFTWARE.