10-QPeriod: Q3 FY2006

Salesforce, Inc. Quarterly Report for Q3 Ended Oct 31, 2005

Filed November 18, 2005For Securities:CRM

Summary

Salesforce, Inc. (CRM) reported strong top-line growth in its third-quarter fiscal year 2006 results, with total revenues increasing by 78% year-over-year to $82.7 million. This growth was primarily driven by a significant increase in paying subscribers, which rose from approximately 195,000 in the prior year's comparable quarter to around 351,000. The company also demonstrated improved profitability, with operating income rising to $6.4 million from $1.8 million in the prior year's third quarter, reflecting a higher gross profit margin of 76% compared to 81% last year. Notably, the company recorded a significant income tax benefit of $5.1 million, which included a $6.8 million reduction in its valuation allowance for deferred tax assets, a positive sign of improving financial health and future profitability. Financially, Salesforce maintained a healthy balance sheet, with cash, cash equivalents, and marketable securities reaching $256.9 million. The company generated robust operating cash flow of $24.6 million for the quarter. Deferred revenue also saw a substantial increase, growing to $127.1 million from $74.2 million in the prior year, indicating strong future revenue potential. While operating expenses increased in absolute terms due to investments in sales, marketing, R&D, and infrastructure to support growth, the company managed these expenses effectively, with marketing and sales as a percentage of revenue decreasing to 46% from 54% year-over-year. Investors should note the ongoing legal proceedings, though the company believes they are without merit.

Key Highlights

  • 1Total revenues surged 78% year-over-year to $82.7 million for the third quarter ended October 31, 2005.
  • 2The number of paying subscribers increased significantly to approximately 351,000, up from 195,000 in the prior year's comparable period.
  • 3Operating income improved substantially to $6.4 million, compared to $1.8 million in the same quarter last year.
  • 4The company recorded a $5.1 million income tax benefit, including a $6.8 million reduction in its deferred tax asset valuation allowance, indicating improved profitability outlook.
  • 5Cash, cash equivalents, and marketable securities stood at a healthy $256.9 million as of October 31, 2005.
  • 6Deferred revenue grew to $127.1 million, signifying strong future revenue streams.
  • 7Despite increased operating expenses for growth initiatives, key operating expense categories as a percentage of revenue generally decreased or remained stable, demonstrating improving operational leverage.

Frequently Asked Questions

Salesforce reported a strong 78% year-over-year revenue increase to $82.7 million for the third quarter ended October 31, 2005. This growth is primarily attributed to a significant increase in the number of paying subscribers, which grew from approximately 195,000 to 351,000 over the same period.

Profitability is improving. Operating income increased to $6.4 million for the quarter, up from $1.8 million in the prior year's third quarter. This improvement is supported by strong revenue growth and an increase in gross profit margin to 76%. Additionally, the company recognized a significant income tax benefit due to a reduction in its valuation allowance for deferred tax assets.

Salesforce maintains a solid financial position with $256.9 million in cash, cash equivalents, and marketable securities as of October 31, 2005. The substantial increase in deferred revenue to $127.1 million indicates a strong pipeline of future recognized revenue.

Yes, Salesforce is involved in a consolidated securities class action lawsuit related to allegations of failing to disclose a declining trend in revenues and earnings, and a shareholder derivative action alleging breach of fiduciary duty by certain officers and directors. The company believes these lawsuits are without merit and intends to defend them vigorously. Management does not believe the resolution of these matters will have a material adverse impact, but this could change depending on the outcome.