Salesforce, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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” and “commitments,” and 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: our ability to maintain security levels and service performance that meet 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 additional data center capacity; our reliance on third-party hardware, software and platform providers; uncertainties regarding AI technologies and its integration into our product offerings; 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, cybersecurity, cross-border data transfers and import and export controls; current and potential litigation involving us or our industry, including litigation involving acquired entities, 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; the success of our strategy of acquiring or making investments in complementary businesses, joint ventures, services, technologies and intellectual property rights; our ability to complete, on a timely basis or at all, announced transactions; our ability to realize the benefits from acquisitions, strategic partnerships, joint ventures and investments, and successfully integrate acquired businesses and technologies; our ability to compete in the markets in which we participate; the success of our business strategy and our plan to build our business, including our strategy to be a 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 ability to preserve our workplace culture, including as a result of our decisions regarding our current and future office environments or remote work policies; 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 maintain and enhance 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 transfers and the value of such transferred intellectual property; uncertainties regarding the effect of general economic, business and market conditions, including inflationary pressures, general economic downturn or recession, market volatility, increasing interest rates, changes in monetary policy and the prospect of a shutdown of the U.S. federal government; the potential impact of financial institution instability; the impact of geopolitical events, including the war in Ukraine and the Israel-Hamas war; uncertainties regarding the impact of expensing stock options and other equity awards; the sufficiency of our capital resources; our ability to execute our share repurchase program; our ability to comply with our debt covenants and lease obligations; the impact of climate change, natural disasters and actual or threatened public health emergencies; expected benefits of and timing of completion of the restructuring plan and the expected costs and charges of the restructuring plan, including, among other things, the risk that the restructuring costs and charges may be greater than we anticipate, our restructuring efforts may adversely affect our internal programs and ability to recruit and retain skilled and motivated personnel, our restructuring efforts may be distracting to employees and management, our restructuring efforts may negatively impact our business operations and reputation with or ability to serve customers, and our restructuring efforts may not generate their intended benefits to the extent or as quickly as anticipated; and our ability to achieve our aspirations, goals and projections related to our environmental, social and governance (“ESG”) initiatives, including our ability to comply with evolving legal standards and federal and state regulations concerning ESG matters. These and other risks and uncertainties may cause our actual results or outcomes to differ materially and adversely from those expressed in our 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 or outcomes 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. 28 T a b l e o f C o n t e n t s Overview Salesforce, Inc. is a global leader in customer relationship management (“CRM”) technology that brings companies and customers together in the digital age. Founded in 1999, we enable companies of every size and industry to take advantage of powerful technologies to connect to their customers in a whole new way and help them transform their businesses around the customer in this digital-first world. Our Customer 360 platform unites sales, service, marketing, commerce and IT teams by connecting customer data across systems, apps and devices to create a complete view of customers. With this single source of customer truth, teams can be more responsive, productive and efficient, deliver intelligent, personalized experiences across every channel and increase productivity. With Slack, we provide a digital headquarters where companies, employees, governments and stakeholders can create success from anywhere. We are investing in generative artificial intelligence across all products that will change how our customers help their customers. We continue to focus on several key growth levers, including driving multiple service offering adoption, increasing our penetration with enterprise and international customers and expanding our industry-specific reach with more vertical software solutions. These growth levers often require a more sophisticated go-to-market approach and, as a result, we may incur additional costs upfront to obtain new customers and expand our relationships with existing customers, including additional sales and marketing expenses specific to subscription and support revenue. As a result, we have seen that customers with many of these characteristics drive higher annual revenues and have lower attrition rates than our company average. In addition to our focus on top line growth levers, we are also focused on reducing our operating expenses to improve our operating margin. For example, in January 2023, we announced a restructuring plan (the “Restructuring Plan”) intended to reduce operating costs, improve operating margins, and continue advancing our ongoing commitment to profitable growth. The Restructuring Plan included a reduction of our workforce by approximately ten percent and office space reductions within certain markets, both of which were largely complete as of the first quarter of fiscal 2024. In addition to the Restructuring Plan, we continue to focus on evaluating and operationalizing future programs to further our transformational efforts. We have started to see improvements in our operating expenses across all operating categories, with the most opportunity in sales a nd marketing expense and general and administrative expenses. Over the long term, we expect to see additional operating expense improvements while also continuing to invest for growth, innovate our service offerings, including our artificial intelligence service offerings, and expand our leadership role in the cloud computing industry. Highlights from the First Nine Months of Fiscal 2024 • Revenue: For the nine months ended October 31, 2023, revenue was $25.6 billion , an increase of 11 percent year-over-year. • Income from Operations: For the nine months ended October 31, 2023, income from operations was $3.4 billion as compared to $0.7 billion from a year ago. Operating margin, which represents income from operations as a percentage of total revenue, increased to approximately 13 percent for the nine months ended October 31, 2023 compared to approximately three percent for the same period in the prior year. • Earnings per Share: For the nine months ended October 31, 2023 , diluted earnings per share was $2.73 as compared to diluted earnings per share of $0.31 from a year ago. • Cash: Cash provided by operations for the nine months ended October 31, 2023 was $6.8 billion, an increase of 58 percent y ear-over-year. Total cash, cash equivalents and marketable securities as of October 31, 2023 was $11.9 billion. • Remaining Performance Obligation: Total remaining performance obligation, which represents all future revenue under contract yet to be recognized, as of October 31, 2023 was approximately $48.3 billion, an increase of 21 percent year-over-year . Current remaining performance obligation as of October 31, 2023 was approximately $23.9 billion , an increase of 14 percent year-over-year. • Share Repurchase Program: During the nine months ended October 31, 2023, we repurchased approximately 29 million shares of our common stock for approximately $6.0 billion. • Restructuring: For the nine months ended October 31, 2023, we incurred approximately $815 million in costs related to the Restructuring Plan. We continue to see the impact of macroeconomic factors and the more measured buying behavior of our customers on our business and our customers’ businesses in ways that are difficult to isolate and quantify. Throughout fiscal 2024, we continue to experience elongated sales cycles, additional deal approval layers, and deal compression. Slower growth in new and renewal business, particularly if sustained, impacts our remaining performance obligation, revenues and our ability to meet financial guidance and long-term targets. 29 T a b l e o f C o n t e n t s In addition, 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. Foreign currency fluctuations positively impacted revenues by approximately one percent in the three months ended October 31, 2023 and positively impacted our current remaining performance obligatio n by approximate ly one percent as of October 31, 2023 compared to what we would have reported as of October 31, 2022 using constant currency rates. During fiscal 2023, the United States Dollar strengthened significantly against certain foreign currencies in the markets in which we operate, particularly against the Euro, British Pound Sterling and Japanese Yen. The impact of foreign currency fluctuations could impact our near-term results and ability to accurately predict our future results and earnings. The impact of these fluctuations can also be compounded by the seasonality of our business in which our fourth quarter has historically been our strongest quarter for new business and renewals. Fiscal Year Our fiscal year ends on January 31. References to fiscal 2024, for example, refer to the fiscal year ending January 31, 2024. Operating Segments We operate as one segment. See Note 1 “Summary of Business and Significant Accounting Policies” to the condensed consolidated financial statements for a discussion about our segments. Sources of Revenues We derive our revenues from two sources: (1) subscription and support revenues and (2) professional services and other revenues. Subscription and support revenues accounted for approximately 93 percent of our total revenues for the nine months ended October 31, 2023. Subscription and support revenues include subscription fees from customers accessing our enterprise cloud computing services (collectively, “Cloud Services”), software license revenues from the sales of term and perpetual licenses, and support revenues from the sale of support and updates beyond the basic subscription fees or related to the sales of software licenses. Our Cloud Services allow customers to use our multi-tenant software without taking possession of the software. Revenue is generally recognized ratably over the contract term. Subscription and support revenues also include revenues associated with term and perpetual software licenses that provide the customer with a right to use the software as it exists when made available. Revenues from software licenses are generally recognized at the point in time when the software is made available to the customer. Revenue from support and updates is recognized as such support and updates are provided, which is generally ratably over the contract term. Changes in contract duration for multi-year licenses can impact the amount of revenues recognized upfront. Revenues from software licenses represent less than ten percent of total subscription and support revenue for the nine months ended October 31, 2023. The revenue growth rates of each of our 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 our Sales, Service or Platform service offerings 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. 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. Beg inning in the first quarter of fiscal 2024, we included Mulesoft and Tableau in our attrition calculation. As of October 31, 2023, our attrition rate, excluding Slack, was approximately 8.0 percent. We continue to maintain 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. 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 30 T a b l e o f C o n t e n t s 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. Generally, our third quarter has historically been our smallest operating cash flow quarter . Unearned revenues, accounts receivable and operating cash flow may also be impacted by acquisitions. For example, operating cash flows may be adversely impacted by acquisitions due to transaction costs, financing costs such as interest expense and lower operating cash flows from the acquired entity. 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. Remaining performance obligation is also impacted by acquisitions. 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 contract duration or the timing of delivery of professional services can impact remaining performance obligation as well as the allocation between current and non-current remaining performance obligation. Cost of Revenues and Operating Expenses 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, employee-related costs such as salaries and benefits, and allocated overhead. Our cost of subscription and support revenues also includes amortization of acquisition-related intangible assets, such as the amortization of the cost associated with an acquired company’s research and development efforts. Also included in the cost of subscription and support revenues are expenses incurred supporting the free user base of Slack, including third-party hosting costs and employee-related costs, including stock-based compensation expense, specific to customer experience and technical operations. Cost of professional services and other revenues consists primarily of employee-related costs associated with these services, including stock-based compensation expense, the cost of subcontractors, certain third-party fees and allocated overhead. We believe that our professional services organization facilitates the adoption of our service offerings, helps us to secure larger subscription revenue contracts and supports our customers’ success. The cost of professional services may exceed revenues from professional services in future fiscal periods. Research and Development Research and development expenses consist primarily of salaries and related expenses, including stock-based compensation expense for our engineering staff associated with product development 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 compensation expense 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. We capitalize certain costs to obtain customer contracts, such as commissions, and amortize these costs on a straight-line basis. As such, the timing of expense recognition for these commissions is not consistent with the timing of the associated cash payment. Our marketing and sales expenses include amortization of acquisition-related intangible assets, such as the amortization of the cost associated with an acquired company’s trade names, customer lists and customer relationships. General and Administrative General and administrative expenses consist primarily of salaries and related expenses, including stock-based compensation expense, for finance and accounting, legal, internal audit, human resources and management information systems personnel, professional services fees and allocated overhead. 31 T a b l e o f C o n t e n t s We allocate overhead such as information technology 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, these types of expenses are reflected in each cost of revenue and operating expense category. Restructuring Restructuring, related to the Restructuring Plan, consist primarily of charges related to employee transition, severance payments, employee benefits and stock-based compensation as well as exit charges associated with office space reductions. The actions associated with the employee restructuring under the Restructuring Plan are expected to be substantially complete by the end of our fiscal 2024, subject to local law and consultation requirements. The actions associated with the real estate restructuring under the Restructuring Plan are expected to be fully complete in fiscal 2026. Restructuring excludes allocated overhead. 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 valuation of privately held strategic investments; • the recognition, measurement and valuation of current and deferred income taxes and uncertain tax positions; and • the average period of benefit associated with costs capitalized to obtain revenue contracts. 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 and any such differences may be material to our financial statements. Additionally, refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2023 for further discussion with respect to these policies and estimates. 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. 32 T a b l e o f C o n t e n t s 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, 2023 % of Total Revenues 2022 % of Total Revenues 2023 % of Total Revenues 2022 % of Total Revenues Revenues: Subscription and support $ 8,141 93 % $ 7,233 92 % $ 23,789 93 % $ 21,232 92 % Professional services and other 579 7 604 8 1,781 7 1,736 8 Total revenues 8,720 100 7,837 100 25,570 100 22,968 100 Cost of revenues (1)(2): Subscription and support 1,571 18 1,451 19 4,596 18 4,381 19 Professional services and other 584 7 637 8 1,797 7 1,879 8 Total cost of revenues 2,155 25 2,088 27 6,393 25 6,260 27 Gross profit 6,565 75 5,749 73 19,177 75 16,708 73 Operating expenses (1)(2): Research and development 1,204 14 1,280 16 3,631 14 3,927 17 Marketing and sales 3,173 36 3,345 43 9,440 37 10,141 44 General and administrative 632 7 664 8 1,902 8 1,967 9 Restructuring 55 1 0 0 815 3 0 0 Total operating expenses 5,064 58 5,289 67 15,788 62 16,035 70 Income from operations 1,501 17 460 6 3,389 13 673 3 Gains (losses) on strategic investments, net (72) (1) 23 0 (242) (1) 75 0 Other income (expense) 58 1 (8) 0 158 1 (121) 0 Income before provision for income taxes 1,487 17 475 6 3,305 13 627 3 Provision for income taxes (263) (3) (265) (3) (615) (2) (321) (2) Net income $ 1,224 14 % $ 210 3 % $ 2,690 11 % $ 306 1 % (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, 2023 % of Total Revenues 2022 % of Total Revenues 2023 % of Total Revenues 2022 % of Total Revenues Cost of revenues $ 245 3 % $ 250 3 % $ 743 3 % $ 785 3 % Marketing and sales 223 2 224 3 668 3 693 3 (2) Amounts related to stock-based compensation expense, as follows (in millions): Three Months Ended October 31, Nine Months Ended October 31, 2023 % of Total Revenues 2022 % of Total Revenues 2023 % of Total Revenues 2022 % of Total Revenues Cost of revenues $ 109 1 % $ 130 2 % $ 324 1 % $ 372 2 % Research and development 238 3 287 4 735 3 863 4 Marketing and sales 275 3 330 4 815 3 947 4 General and administrative 71 1 96 1 223 1 288 1 Restructuring 0 0 0 0 16 0 0 0 33 T a b l e o f C o n t e n t s 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 October 31, 2023 January 31, 2023 Cash, cash equivalents and marketable securities $ 11,863 $ 12,508 Unearned revenue 12,564 17,376 Remaining performance obligation 48.3 48.6 Principal due on our outstanding debt obligations (1) 9,500 10,682 (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. Revenues Three Months Ended October 31, Variance (in millions) 2023 2022 Dollars Percent Subscription and support $ 8,141 $ 7,233 $ 908 13 % Professional services and other 579 604 (25) (4) Total revenues $ 8,720 $ 7,837 $ 883 11 % Nine Months Ended October 31, Variance (in millions) 2023 2022 Dollars Percent Subscription and support $ 23,789 $ 21,232 $ 2,557 12 % Professional services and other 1,781 1,736 45 3 Total revenues $ 25,570 $ 22,968 $ 2,602 11 % The increase in s ubscription and support revenues for the three and nine months ended October 31, 2023 was primarily caused by volume-driven increases from new business, which includes new customers, upgrades, and additional subscriptions from existing customers. Pricing was not a significant driver of the increase in revenues for either period. Revenues from term and perpetual software licenses, which are recognized at a point in time, represented approximately six percent of total subscription and support revenues for the three and nine months ended October 31, 2023 and five percent the three and nine months ended October 31, 2022. Subscription and support revenues accounted for approximately 93 percent of our total revenues for the three and nine months ended October 31, 2023 and 92 percent for the three and nine months ended October 31, 2022. The increase in professional services and other revenues for the nine months ended October 31, 2023 was due primarily to the higher demand for services from an increased number of customers. In the third quarter of fiscal 2024, we continued to see measured demand for larger, multi-year transformation engagements and, in some cases, delayed projects. The decrease in professional services and other revenues for the three months ended October 31, 2023 was due to this decreased demand from cautious customers and longer engagements. These trends may continue in the near term. Subscription and Support Revenues by Service Offering Subscription and support revenues consisted of the following (in millions): Three Months Ended October 31, 2023 As a % of Total Subscription and Support Revenues 2022 As a % of Total Subscription and Support Revenues Growth Rate Sales $ 1,906 23 % $ 1,717 24 % 11 % Service 2,074 26 1,856 26 12 Platform and Other 1,686 21 1,513 20 11 Marketing and Commerce 1,230 15 1,129 16 9 Data (1) 1,245 15 1,018 14 22 Total $ 8,141 100 % $ 7,233 100 % 13 % (1) Data is comprised of revenue from Analytics, which includes Tableau, and Integration, which includes Mulesoft. 34 T a b l e o f C o n t e n t s Nine Months Ended October 31, 2023 As a % of Total Subscription and Support Revenues 2022 As a % of Total Subscription and Support Revenues Growth Rate Sales $ 5,611 24 % $ 5,044 24 % 11 % Service 6,087 26 5,445 26 12 Platform and Other 4,891 20 4,410 20 11 Marketing and Commerce 3,638 15 3,339 16 9 Data (1) 3,562 15 2,994 14 19 Total $ 23,789 100 % $ 21,232 100 % 12 % (1) Data is comprised of revenue from Analytics, which includes Tableau, and Integration, which includes Mulesoft. Our Industry Offerings revenue is included in one of the above service offerings depending on the primary service purchased. Data subscription and support revenues include revenues from term software licenses, which are recognized at the point in time when the software is made available to the customer. Therefore, we expect Data to experience greater volatility in revenues period to period compared to our other service offerings. Additionally, as we transition customers within the Data offering from perpetual and term software licenses to subscription based services, revenue associated with such customers will generally be recognized ratably over the contract term, which we expect may result in potentially less revenue in the period the customer transitions but potentially increasing revenues over the remaining term. Revenues by Geography Three Months Ended October 31, (in millions) 2023 As a % of Total Revenues 2022 As a % of Total Revenues Growth rate Americas $ 5,862 67 % $ 5,361 68 % 9 % Europe 1,998 23 1,745 23 14 Asia Pacific 860 10 731 9 18 $ 8,720 100 % $ 7,837 100 % 11 % Nine Months Ended October 31, (in millions) 2023 As a % of Total Revenues 2022 As a % of Total Revenues Growth rate Americas $ 17,113 67 % $ 15,593 68 % 10 % Europe 5,923 23 5,228 23 13 Asia Pacific 2,534 10 2,147 9 18 $ 25,570 100 % $ 22,968 100 % 11 % Revenues by geography are determined based on the region of our 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 from previous periods. 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. Total revenue during the three months ended October 31, 2023 was positively impacted by foreign currency fluctuations of approximately one percent compa red to the three months ended October 31, 2022. Cost of Revenues Three Months Ended October 31, Variance (in millions) 2023 As a % of Total Revenues 2022 As a % of Total Revenues Dollars Subscription and support $ 1,571 18 % $ 1,451 19 % $ 120 Professional services and other 584 7 637 8 (53) Total cost of revenues $ 2,155 25 % $ 2,088 27 % $ 67 35 T a b l e o f C o n t e n t s Nine Months Ended October 31, Variance (in millions) 2023 As a % of Total Revenues 2022 As a % of Total Revenues Dollars Subscription and support $ 4,596 18 % $ 4,381 19 % $ 215 Professional services and other 1,797 7 1,879 8 (82) Total cost of revenues $ 6,393 25 % $ 6,260 27 % $ 133 For the three and nine months ended October 31, 2023, the increase in cost of revenues in absolute dollars was primarily due to an increase in service delivery costs which were partially offset by third-party expenses and amortization of purchased intangibles. We have increased our headcount associated with our data centers, customer support and professional services by one percent since October 31, 2022 to meet the higher demand for services from our customers. Cost of revenue as a percentage of total revenue during the three and nine months ended October 31, 2023 decreased by two percent from the same periods a year ago as a result of a decrease in absolute dollars related to third-party expenses, amortization of purchased intangibles and stock-based compensation expense, which was primarily a result of the workforce reductions associated with the Restructuring Plan. 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 continue to evolve our security measures. The timing of these expenses may adversely affect our cost of revenues as a percentage of revenues in the near term due to fluctuations in demand for our service offerings. Operating Expenses Three Months Ended October 31, Variance (in millions) 2023 As a % of Total Revenues 2022 As a % of Total Revenues Dollars Research and development $ 1,204 14 % $ 1,280 16 % $ (76) Marketing and sales 3,173 36 3,345 43 (172) General and administrative 632 7 664 8 (32) Restructuring 55 1 0 0 55 Total operating expenses $ 5,064 58 % $ 5,289 67 % $ (225) Nine Months Ended October 31, Variance (in millions) 2023 As a % of Total Revenues 2022 As a % of Total Revenues Dollars Research and development $ 3,631 14 % $ 3,927 17 % $ (296) Marketing and sales 9,440 37 10,141 44 (701) General and administrative 1,902 8 1,967 9 (65) Restructuring 815 3 0 0 815 Total operating expenses $ 15,788 62 % $ 16,035 70 % $ (247) For the three and nine months ended October 31, 2023, the decrease in research and development expenses in absolute dollars and as a percentage of revenue was primarily due to a decrease in employee-related costs, including stock-based compensation expense. Our research and development headcount decreased by four percent since October 31, 2022 due, in part, to the Restructuring Plan and our hiring pause that began in the second quarter of fiscal 2023. We expect that research and development expenses will likely remain consistent or increase as a percentage of revenues in the near term. We continue to invest in technology to support the development of new, and improve existing, technologies, including our artificial intelligence technologies, and the integration of acquired technologies combined with our anticipated revenue growth in line with these incremental expenses. For the three and nine months ended October 31, 2023, the decrease in marketing and sales expenses in absolute dollars and as a percentage of revenue was primarily due to a decrease in employee-related costs, including stock-based compensation expense. Our marketing and sales headcount decreased by 18 percent since October 31, 2022 due, in part, to the Restructuring Plan and our hiring pause that began in second quarter of fiscal 2023. We expect that marketing and sales expenses may decrease as a percentage of revenues in the near term as we continue to focus on leveraging our self-serve and partner-led channels and increasing our sales productivity. For the three and nine months ended October 31, 2023, the decrease in general and administrative expenses in absolute dollars and as a percentage of revenue was primarily due to a decrease in employee-related costs, including stock-based 36 T a b l e o f C o n t e n t s compensation expense. Our general and administrative headcount decreased by 20 percent since October 31, 2022 due, in part, to the Restructuring Plan and our hiring pause that began i n the second quarter of fiscal 2023. We expect that general and administrative expenses may decrease as a percentage of revenues in the near term as we continue to invest in process efficiency initiatives. In the three months ended October 31, 2023, approximately $55 million of costs were incurred related to the Restructuring Plan, of which approximately $47 million was related to employee transition costs, severance payments, employee benefits and stock-based compensation expense and approximately $8 million was related to exit charges associated with office space reductions. In the nine months ended October 31, 2023, approximately $815 million of costs were incurred related to the Restructuring Plan, of which approximately $436 million was related to employee transition, severance payments, employee benefits and stock-based compensation expense and approximately $379 million was related to exit charges associated with office space reductions. As of the first quarter of fiscal 2024, we largely completed the ten percent reduction of our workforce and office space reductions within certain markets, as contemplated by the Restructuring Plan. We expect to incur approximately $60 million to $100 million in additional charges in connection with the Restructuring Plan in the fourth quarter of fiscal 2024. Other Income and Expense Three Months Ended October 31, Variance (in millions) 2023 2022 Dollars Gains (losses) on strategic investments, net $ (72) $ 23 $ (95) Other income (expense) 58 (8) 66 Nine Months Ended October 31, Variance (in millions) 2023 2022 Dollars Gains (losses) on strategic investments, net $ (242) $ 75 $ (317) Other income (expense) 158 (121) 279 Gains (losses) 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, impairments and other adjustments. Our strategic investment portfolio continues to be affected by challenging market conditions for companies in which we hold private equity or debt investments as well as high public equity market volatility. For the three months ended October 31, 2023, our strategic investment portfolio losses were primarily driven by impairments on privately held equity investments o f $98 million . For the nine months ended October 31, 2023 our strategic investment portfolio losses were primarily driven by impairments on privately held equity investments of $355 million, partially offset by unrealized gains on privately held equity securities of $65 million and realized gains on sales of securities of $48 million. Other income (expense) primarily consists of interest expense on our debt as well as our finance leases offset by investment income. Interest expense was $70 million and $75 million for the three months ended October 31, 2023 and 2022, respectively, and $213 million and $224 million for the nine months ended October 31, 2023 and 2022, respectively. Benefit From (Provision For) Income Taxes Three Months Ended October 31, Variance (in millions) 2023 2022 Dollars Benefit from (provision for) income taxes $ (263) $ (265) $ 2 Effective tax rate 18 % 56 % Nine Months Ended October 31, Variance (in millions) 2023 2022 Dollars Benefit from (provision for) income taxes $ (615) $ (321) $ (294) Effective tax rate 19 % 51 % We recorded a tax provision of $263 million on pretax income of $1.5 billion for the three months ended October 31, 2023, and a tax provision of $615 million on pretax income of $3.3 billion for the nine months ended October 31, 2023. Higher pretax income increased our tax provision this fiscal year. However, our tax provision for the three months ended October 31, 2023 was offset by discrete tax benefits, resulting in an insignificant period over period variance. 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, including, for example, acquisitions, changes to our operating structure, and other macroeconomic factors. 37 T a b l e o f C o n t e n t s We recorded a tax provision of $265 million on pretax income of $475 million for the three months ended October 31, 2022, and a tax provision of $321 million on pretax income of $627 million for the nine months ended October 31, 2022. The majority of our year-to-date tax provision was related to taxes from profitable jurisdictions outside of the United States which included withholding taxes. The provision from the Tax Cuts and Jobs Act of 2017 that requires capitalization and amortization of research and development costs became effective in fiscal 2023. This requirement continues to unfavorably impact our tax provision and cash taxes. Liquidity and Capital Resources At October 31, 2023, our principal sources of liquidity were cash, cash equivalents and marketable securities totaling $11.9 billion and accounts receivable of $4.9 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 credit agreement (the “Revolving Loan Credit Agreement”), which as of October 31, 2023, provides the ability to borrow up to $3.0 billion in unsecured financing (the “Credit Facility”), also serves as a source of liquidity. Cash from operations could continue to be affected by various risks and uncertainties, including, but not limited to, the risks detailed in Part II, Item 1A, “Risk Factors.” We believe our existing cash, cash equivalents, marketable securities, cash provided by operating activities, unbilled amounts related to contracted non-cancelable subscription agreements, which are not reflected on the balance sheet, and, if necessary, our borrowing capacity under our Credit Facility will be sufficient to meet our working capital, capital expenditure and debt maintenance 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 and nine months ended October 31, 2023 and 2022 our cash flows were as follows (in millions): 3 Three Months Ended October 31, Nine Months Ended October 31, 2023 2022 2023 2022 Net cash provided by operating activities $ 1,532 $ 313 $ 6,831 $ 4,323 Net cash provided by (used in) investing activities (54) 533 (859) (2,301) Net cash used in financing activities (1,765) (1,678) (6,531) (1,341) Operating Activities The net cash provided by operating activities during the nine months ended October 31, 2023 was primarily comprised of net income of $2.7 billion, adjusted for non-cash items including $3.0 billion of depreciation and amortization and $2.1 billion of stock-based compensation expense. Cash provided by operating activities can be significantly impacted by factors such as growth in new business, timing of cash receipts from customers, vendor payment terms and timing of payments to vendors. Cash provided by operating activities during the nine months ended October 31, 2023 was further benefited by the change in accounts receivable, net of $5.9 billion due to cash collections and was partially offset by the change in unearned revenue of $4.8 billion and the change in accounts payable and accrued expenses and other liabilities of $1.6 billion . As our business continues to grow, and assuming our expenses remain in line with or less than our revenue growth, we expect to continue to see growth in net cash provided by operating activities. The net cash provided by operating activities during the nine months ended October 31, 2022 was primarily comprised of net income of $306 million, adjusted for non-cash items including $2.8 billion of depreciation and amortization and $2.5 billion related to stock-based compensation expense. Cash provided by operating activities can be significantly impacted by factors such as growth in new business, timing of cash receipts from customers, vendor payment terms and timing of payments to vendors. Cash provided by operating activities during the nine months ended October 31, 2022 was further benefited by the change in accounts receivable, net of $5.5 billion due to cash collections and partially offset by the change in unearned revenue of $4.4 billion and the change in accounts payable, accrued expenses and other liabilities of $1.2 billion. Investing Activities The net cash used in investing activities during the nine months ended October 31, 2023 was primarily related to capital expenditures of $589 million and net outflows from strategic investment activity of $288 million, partially offset by cash inflows related to marketable securities activity of $100 million. 38 T a b l e o f C o n t e n t s The net cash used in investing activities during the nine months ended October 31, 2022 was primarily related to net outflows from marketable securities activity of $1.0 billion, cash consideration for acquisitions of approximately $439 million and net outflows from strategic investment activity of $294 million. Financing Activities Net cash used in financing activities during the nine months ended October 31, 2023 consisted primarily of $5.9 billion from repurchases of common stock and $1.2 billion related to repayments of debt, partially offset by $1.1 billion from proceeds from equity plans. Net cash used in financing activities during the nine months ended October 31, 2022 consisted primarily of $1.7 billion from repurchases of common stock partially offset by $688 million from proceeds from equity plans. Debt As of October 31, 2023, we had senior unsecured debt outstanding, with maturities starting in July 2024 and extending through July 2061 with a total carrying value of $9.4 billion, of which $1.0 billion was related to the 2024 Senior Notes due in the next 12 months. We were in compliance with all debt covenants as of October 31, 2023. In December 2020, we entered into the Revolving Loan Credit Agreement, which provides for a $3.0 billion unsecured revolving Credit Facility that matures in December 2025. There were no outstanding borrowings under the Credit Facility as of October 31, 2023. We may use the proceeds of future borrowings under the Credit Facility for general corporate purposes, which may include, without limitation, financing the consideration for, fees, costs and expenses related to any acquisition. In April 2022 and May 2023, we amended the Revolving Loan Credit Agreement to reflect certain immaterial administrative changes. We do not have any special purpose entities and we do not engage in off-balance sheet financing arrangements. Share Repurchase Program In August 2022, the Board of Directors authorized a program to repurchase up to $10.0 billion of our common stock (the “Share Repurchase Program”). The Share Repurchase Program does not have a fixed expiration date and does not obligate us to acquire any specific number of shares. In February 2023, the Board of Directors authorized an additional $10.0 billion in repurchases under the Share Repurchase Program, for an aggregate total authorization of $20.0 billion. During the nine months ended October 31, 2023 and 2022, we repurchased approximately 29 million and 11 million shares of our common stock for approximately $6.0 billion and $1.7 billion at an average cost of $201.95 and $152.66 per share, respectively. All repurchases were made in open market transactions. As of October 31, 2023, we were authorized to purchase a remaining $10.0 billion of the Company’s common stock under the Share Repurchase Program. Subsequent to October 31, 2023, we have paid approximately $0.5 billion through November 27, 2023 for additional shares under the Share Repurchase Program. The Inflation Reduction Act introduced a new one percent excise tax imposed on certain stock repurchases made after December 31, 2022. The excise tax is assessed on an annual fiscal year basis, reported and paid in the subsequent year. It may apply to our stock repurchases this year and could be impacted by factors including the Company’s share price. In the event of an excise tax for fiscal 2024, next year’s financing cash flows could be impacted. 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. As of October 31, 2023, the future non-cancelable minimum payments under these commitments were approximately $4.8 billion, with payments of $1.0 billion due in the next 12 months and $3.8 billion due thereafter. As of October 31, 2023, we have additional operating leases that have not yet commenced totaling $84 million. In addition to our leasing arrangements, we have other contractual commitments associated with agreements that are enforceable and legally binding, including those with infrastructure service providers. As of October 31, 2023, our total commitments under these agreements were approximately $17.5 billion, of which payments of $1.3 billion are due in the next 12 months and $16.2 billion are due thereafter. We generally expect to satisfy these commitments with cash on hand and cash provided by operating activities. During the three months ended October 31, 2023 and in future quarters, we have made, and expect to continue to make, additional investments in our infrastructure to scale our operations to 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, as well as investments with infrastructure service providers, to provide capacity for the growth of our business, our strategy may continue to change related to these investments and we may slow the pace of our investments. 39 T a b l e o f C o n t e n t s Other Future Obligations Our overall acquisition strategy may evolve to require integration and business operation changes that may result in incremental income tax costs. The timing and amount of a tax 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. Additionally, as we utilize our remaining net operating loss and tax credits carryforward, we expect an increase in cash taxes. The Inflation Reduction Act introduced new provisions, including a 15 percent corporate alternative minimum tax for certain large corporations that have at least an average of $1 billion adjusted financial statement income over a consecutive three-tax-year period. While we do not anticipate this change to be significant, it could impact our consolidated financial position. We continue to monitor and analyze new information, interpretation and guidance. Additionally, as of October 31, 2023, we expect approximate ly $60 million to $100 million in future cash payments related to the Restructuring Plan, primarily related to workforce costs such as severance payments. We generally expect to satisfy these commitments with cash on hand and cash provided by operating activities. Environmental, Social, and 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. We believe that values drive value, and that effectively managing our priority ESG topics will help create long-term value for our investors. We also believe that transparently disclosing the goals and relevant metrics related to our ESG programs will allow our stakeholders to be informed about our progress. Our ESG disclosures include our annual stakeholder impact report, our Task Force on Climate-Related Financial Disclosures (“TCFD”) report, Sustainability Bond report and others as required by local regulations. The disclosures are informed by an internal ESG prioritization assessment last refreshed in fiscal 2022, which assessed topics based on their potential impact to both our own enterprise value creation and the environment and society more broadly. The assessment gathered input from a number of our key internal and external stakeholders, such as investors, customers, suppliers, our employees and executives, non-governmental organizations and sector organizations. Our ESG disclosures are also informed by relevant topics identified through third-party ESG reporting organizations, frameworks and standards, such as the TCFD. More information on our key ESG programs, goals and commitments, and key metrics can be found in our annual Stakeholder Impact Report, https://salesforce.com/stakeholder-impact-report. 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. While we believe that our ESG goals align with our long-term growth strategy and financial and operational priorities, they are aspirational and may change, and there is no guarantee or promise that they will be met. 40 T a b l e o f C o n t e n t s