Salesforce, Inc. 10-Q

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to financial market risks, including changes in foreign currency exchange rates, interest rates and equity investment risks. This exposure has increased due to recent financial market movements and changes to our expectations of near-term possible movements caused by the impact of the macroeconomic environment as discussed in more detail below. Foreign Currency Exchange Risk We primarily conduct our business in the following locations: the United States, Europe, Canada, Latin America, Asia Pacific and Japan. The expanding global scope of our business exposes us to the risk of fluctuations in foreign currency markets, including emerging markets. This exposure is the result of selling in multiple currencies, operating in countries where the functional currency is the local currency and growth in our international investments, including data center expansion, costs associated with third-party infrastructure providers and additional headcount in foreign countries. Specifically, our results of operations and cash flows are subject to fluctuations in the following currencies: the Euro, British Pound Sterling, Japanese Yen, Canadian Dollar, Australian Dollar and Brazilian Real against the United States Dollar (“USD”). These exposures may change over time as business practices evolve and economic conditions change. Changes in foreign currency exchange rates could have an adverse impact on our financial results and cash flows. Foreign Currency Transaction Risk Our foreign currency exposures typically arise from selling annual and multi-year subscriptions in multiple currencies, customer accounts receivable, intercompany transfer pricing arrangements and other intercompany transactions. Our foreign currency management objective is to minimize the effect of fluctuations in foreign exchange rates on selected assets or liabilities without exposing us to additional risk associated with transactions that could be regarded as speculative. We pursue our objective by utilizing foreign currency forward contracts to offset foreign exchange risk. Our foreign currency forward contracts are generally short-term in duration. We neither use these foreign currency forward contracts for trading purposes nor do we currently designate these forward contracts as hedging instruments under the relevant accounting and financial reporting guidelines. Accordingly, we record the fair values of these contracts as of the end of our reporting period to our condensed consolidated balance sheets with changes in fair values recorded to our condensed consolidated statements of operations. Given the short duration of the forward contracts, the amount recorded is not significant. Our ultimate realized gain or loss with respect to foreign currency exposures will generally depend on the size and type of cross-currency transactions that we enter into, the currency exchange rates associated with these exposures and changes in those rates, the net realized gain or loss on our foreign currency forward contracts and other factors. Foreign Currency Translation Risk Fluctuations in foreign currencies impact the amount of total assets, liabilities, revenues, operating expenses and cash flows that we repor t for our foreign subsidiaries upon the translation of these amounts into USD. Total revenue during the three months ended October 31, 2023, was positively impacted by approximately one percent compared to the three months ended October 31, 2022. In addition, fluctuations in USD against international currencies positively impacted our current remaining performance obligation by approximately one percent as of October 31, 2023 compared to what we would have reported as of October 31, 2022 using constant currency rates. Interest Rate Sensitivity We had cash, cash equivalents and marketable securities totaling $11.9 billion as of October 31, 2023. This amount was invested primarily in money market funds, time deposits, corporate notes and bonds, government securities and other debt securities with credit ratings of at least BBB or better. The cash, cash equivalents and marketable securities are held for general corporate purposes, including acquisitions of, or investments in, complementary businesses, services or technologies, working capital and capital expenditures. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes. Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed-rate securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our debt securities as “available for sale,” no gains or losses are recognized in our condensed consolidated statement of operations due to changes in interest rates. Gains or losses recognized in our condensed consolidated statement of operations are limited to those related to either the sale of securities prior to maturity or expected credit losses. Our fixed-income portfolio is also subject to interest rate risk. An immediate increase or decrease in interest rates of 100 basis points at October 31, 2023 could result in a $65 million market value reduction or increase of the same amount. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur. Fluctuations 41 T a b l e o f C o n t e n t s in the value of our investment securities caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive income (loss), net, and are realized only if we sell the underlying securities. At January 31, 2023, we had cash, cash equivalents and marketable securities totaling $12.5 billion. Changes in interest rates of 100 basis points would have resulted in market value changes of $56 million. Market Risk and Market Interest Risk We deposit our cash with multiple financial institutions. Debt We maintain debt obligations that are subject to market interest risk, as follows (in millions): Instrument Maturity Date Principal Outstanding as of October 31, 2023 Interest Terms Contractual Interest Rate 2024 Senior Notes July 2024 $ 1,000 Fixed 0.625% Credit Facility December 2025 0 Floating N/A 2028 Senior Notes April 2028 1,500 Fixed 3.70 2028 Senior Sustainability Notes July 2028 1,000 Fixed 1.50 2031 Senior Notes July 2031 1,500 Fixed 1.95 2041 Senior Notes July 2041 1,250 Fixed 2.70 2051 Senior Notes July 2051 2,000 Fixed 2.90 2061 Senior Notes July 2061 1,250 Fixed 3.05 The borrowings under our Credit Facility bear interest, at our option, at a base rate plus a spread of 0.00% to 0.125% or an adjusted benchmark rate plus a spread of 0.50% to 1.125%, in each case with such spread being determined based on our credit rating. We are also obligated to pay an ongoing commitment fee on undrawn amounts. As of October 31, 2023, there was no outstanding borrowing amount under the Credit Facility. The bank counterparties to our derivative contracts potentially expose us to credit-related losses in the event of their nonperformance. To mitigate that risk, we only contract with counterparties who meet the minimum requirements under our counterparty risk assessment process. We monitor ratings, credit spreads and potential downgrades on at least a quarterly basis. Based on our ongoing assessment of counterparty risk, we adjust our exposure to various counterparties. We generally enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. However, we do not have any master netting arrangements in place with collateral features. Strategic Investments As of October 31, 2023, our strategic investment portfolio consisted of investments in over 400 companies with a combined carrying value of $4.8 billion, including two privately held investments with carrying values that were individually greater than five percent of the total strategic investments portfolio and represented 16 percent of the portfolio in aggregate. The following table sets forth additional information regarding active equity investments within our strategic investment portfolio as of October 31, 2023 and excludes exited investments (in millions): Investment Type Capital Invested Unrealized Gains (Cumulative) Unrealized Losses (Cumulative) Carrying Value as of October 31, 2023 Publicly held equity securities $ 1 $ 2 $ 0 $ 3 Privately held equity securities 3,956 1,228 (482) 4,702 Total equity securities $ 3,957 $ 1,230 $ (482) $ 4,705 Fluctuations in the value of our privately held equity securities are only recorded when there is an observable transaction for a same or similar security of the same issuer, or in the event of impairment. We anticipate additional volatility in our condensed consolidated statement of operations due to these events, as well as changes in the market prices of our publicly held equity securities. These fluctuations could be material depending on market conditions and events. While historically our strategic investment portfolio has had a positive impact on our financial results, we have had periods where our investment portfolio has recorded net losses and may have losses again in future periods, which may adversely impact our financial results, particularly in periods with economic uncertainty, inflation, volatile public equity markets or unsettled global market conditions. Our investments in privately held equity securities are in various classes of equity with varying rights and preferences. 42 T a b l e o f C o n t e n t s The particular securities we hold, and their rights and preferences relative to other securities within the capital structure, may impact the magnitude by which our investment value moves in relation to movement in the total enterprise value of the company. As a result, the value of our investment in a specific company may move by more or less than a change in that company’s overall value. Our largest privately held equity securities represent 34 percent of our total strategic investments as of October 31, 2023. If the enterprise value of the companies in which we hold those securities decreased by ten percent, the carrying value of our investment portfolio would have declined by approximatel y $95 million. We continually evaluate our investments in privately held and publicly traded companies. In certain cases, our ability to sell these investments may be impacted by contractual obligations to hold the securities for a set period of time after a public offering. In addition, the financial success of our investment in any company is typically dependent on a liquidity event, such as a public offering, acquisition or other favorable market event reflecting appreciation to the cost of our initial investment. All of our investments, particularly those in privately held companies, are therefore subject to a risk of partial or total loss of invested capital. 43 T a b l e o f C o n t e n t s