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Big Problems Under the Surface at Salesforce.com

September 04, 2011 | About:
matsandalex

matsandalex

9 followers
Salesforce (CRM) reported strong revenue growth and Wall Street applauded it's market share increases. However, if one digs beneath the surface, the numbers are getting worse at CRM.

Firstly, the good news. CRM added 6,300 net new customers this quarter. The company now boasts over 104,000 users. The user growth translated to 40% revenue growth this quarter.

The company also revised it's revenue forecast higher for FY2012. They now expect$2.22 billion – $2.23 billion in revenues which means that revenue growth rates should continue to shine.

Now for the bad news that has led some Saleforce.com bears to proclaim that the company is similar to the now defunct Pets.com.

First of all there was a a sequential 41% plunge in operating cash flow. Another serious issue is the fact that there was a 26% sequential jump in accounts receivables. The sequential revenue growth is only 8% meaning that receivables are growing at over 300% of actual revenues. In other words, what is the quality of the revenue growth at CRM? Are they simply signing up soon to be defunct solar companies and fad social media companies?

Of course, the big gripe with CRM is the stock-based compensation which is up 105% year-over-year, three times annual revenue growth. Perhaps more concerning is that stock based compensation has rocketed 79% from last quarter.

To make matters worse, expenses rose sharply and R&D and sales & marketing expenses, which continue to increase led to a net loss of $4.2 million in the quarter.

The company is also antagonizing software giants such as SAP (SAP), Oracle (ORCL), Microsoft (MSFT) and IBM (IBM). At a conference last week, CEO Benioff compared these companies to old Arab dictatorships.

"[In the Arab revolution] you didn't see signs saying 'Thank you Microsoft.' You didn't see signs saying 'thank you IBM.' ... We've seen Mubarak fall, Qaddafi fall. Not so long from now we'll hear about a corporate spring, an enterprise spring. When will the first corporate CEO fall for the same reason -- because customers are rising up, they're not listening to their employees, they're not paying attention."

I am doubtful that Mr. Benioff and his company will be able to escape the slowdown in enterprise spending that is starting to drag down the tech giants despite his bombastic remarks.


Rating: 3.4/5 (14 votes)

Comments

Adib Motiwala
Adib Motiwala - 2 years ago
The A/R issue, low cash flow, high option issuance has been present for a while. Wait, even the EPS is coming down. Yet, the stock holds on at an insane valuation.How about 100x + EBITDA or 9x Sales!

Eventually the stock will correct to its true worth...when is anyone's guess...
batbeer2
Batbeer2 premium member - 2 years ago
I don't like Salesforce ....

but paying management with highly overrated shares is not a bad thing from an owners perspective is it ? Especially if you don't have the cash.
kfh227
Kfh227 premium member - 2 years ago


Batbeer,

Where do the shares come from? I don't actually know. Are they newly issued shares (diluting shareholders) or are they bought int eh open market (shareholders in effect paying for them)?

Don't know hte first thing about saleforce but I know enough that I am going to look over their numbers quickly. might be a good opportunity to buy some put options.
kfh227
Kfh227 premium member - 2 years ago
OK, I spent my two minutes. This is a financially strong company that is not shareholder friendly. It is also overvalued due to percevied extreme growth prospects Grossly overvalued.

In terms of value, if you back total equity out of market cap, you are left with $15.2B. That is about 43 times the last 12 months of FCF. That is just rediculous.

Adib Motiwala
Adib Motiwala - 2 years ago
Check the growth of Receivables v/s Sales
kfh227
Kfh227 premium member - 2 years ago


Check the growth of Receivables v/s Sales

What exactly am I suppose to notice?
Adib Motiwala
Adib Motiwala - 2 years ago
Growth in A/R over sales. Sales up $40 m over last quarter. A/R up $70m.

Cash from Ops = $462 mm (ttm). Capex $408 mm.

Market Cap $16.5 billion. Do the math on the valuation...

SapientInvestor
SapientInvestor - 2 years ago
They also said they would no longer be reporting the growth in number of users. Why the change? This one has red flags all over it.
kfh227
Kfh227 premium member - 2 years ago
Adib,

So, FCF should be adjusted?

All I know from my experiences with the past is that the past is not an indicator of the future. When a company is priced for perfection, the pains that can be had when perfection ceases can be painful.
Adib Motiwala
Adib Motiwala - 2 years ago
I agree its priced beyond perfection :)
kfh227
Kfh227 premium member - 2 years ago
Adib,

Oh, your just trying to say that even with super-optimistic growth, it is still overvalued?

Adib Motiwala
Adib Motiwala - 2 years ago
Yes.
ORCL Lover
ORCL Lover - 2 years ago
Looks like an ORCL love fest here. 45,000 screaming partners and customers of CRM can't all be drinking the koolaid. Benioff is a rock star with as rabid a fan base as Metalica and Will.i.am. He's not afraid to spend ahead to position CRM as the defacto ORCL of the Cloud. Enterprise Spring is upon us and CRM will be well positioned. You'll be making a huge mistake to short this stock.
Adib Motiwala
Adib Motiwala - 2 years ago
I am not shorting it.
kfh227
Kfh227 premium member - 2 years ago
I'm not shorting it either. Just no stupid enough to buy it.

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