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Salesforce Paid Even Larger Premium for Slack Than Previously Reported

New accounting change will also increase costs and reduce FY23 operating income by hundreds of basis points.

August 26, 2022

Salesforce (CRM) paid an even larger premium for Slack than previously reported.

The deal closed in July 2021. Originally, goodwill accounted for 78.2% of the $27.1 billion transaction. In its latest quarterly filing, Salesforce increased the goodwill paid for Slack by $249 million, or 1.2%.

The update, though immaterial, reveals Salesforce paid an even larger premium for Slack than originally communicated to investors.

Goodwill now comprises 79.1% of the acquisition price.

Separately, Salesfore disclosed a subtly but potentially important change in a useful life estimate that will increase D&A expense going forward. In the latest filing, Salesforce disclosed it will now depreciate its computers, equipment, and software over 3-5 years, faster than the previous treatment of 3-9 years.

The company currently carries $3.37 billion in property and equipment on its balance sheet. Per the latest annual report, computers, equipment, and software accounted for 48.1% or property and equipment. Using the same ratio, Salesforce currently has approximately $1.62 billion in computers, equipment, and software on the balance sheet.

Using the midpoint of the new useful life estimate, annual depreciation expense for computers, equipment, and software is now approximately $405 million, or 50% higher than the estimated $270 million in annual depreciation expense under the previous estimate.

Though relatively small as a percentage of revenue, the change will have a significant impact on Salesforce’s GAAP earnings due to the company’s thin margins. The $135 million in added depreciation expense is the equivalent of 9.3% of the company’s FY22 net income.

Based on the company’s current guidance— a GAAP operating margin of 3.8%— the change is approximately 11.2% of Salesforce’s FY23 operating income forecast of $1.2 billion. Based on the company’s non-GAAP guidance, the change is the equivalent of 2.1% of Salesforce’s $6.47 billion in adjusted operating income.

Related: MSFT, ADBE

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