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What Did Salesforce Buy in Buddy Media? Increasing Losses and Serious Cash Flow Drain

October 23, 2012 | About:
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Todd Sullivan

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Let’s go back a bit to the original deal:
Salesforce has entered an agreement to acquire social media marketing platform Buddy Media for approximately $689 million, the company has announced.

The price is lower than the recently reported $800 million figure, but still a formidable investment from the enterprise software giant, which is on a seemingly never-ending acquisition spree. Salesforce had acquired collaboration tool company Stypi in May 2012, as well as social media monitoring platform Radian6 in March 2011.

Under the terms of the agreement, Salesforce will buy Buddy Media for approximately $467 million in cash, $184 million in Salesforce common stock and $38 million in vested salesforce.com options and restricted stock units.
Both sides talked up the wonderfulness of the deal and how it was a boon to Salesforce (CRM).

Now, here is a post I wrote back in August of this year regarding the folks at Buddy Media and their dumping virtually every share of CRM stock they received in the acquisition. Even though they got more than $400 million in cash, they still elected to refrain from holding any shares of CRM as soon as their lockup ended.

Fast forward a few months and now we are getting some idea of what CRM shareholders actually got for their huge investment. In a word: losses

CRM released an amended 8k today and in it are year-over-year comps for Buddy Media for the first six months of both 2011 and 2012. The results are a bit ugly:

Losses are surging and the company is bleeding cash from operations:

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Note regarding cash flows: Focus on operating cash and not the aggregate cash flow numbers, Buddy Media sold $83 million in preferred stock in 2010 and 2011, so that will make the numbers look FAR better that the reality. Just looking at the ending cash balances will give one the impression cash is growing. It is, but not because the company is producing cash from operations. Those results continue to get worse. They just sold preferred stock.

Now would be the time to point out that the ($20 million) loss in the first six months of 2012 is largest than the ($14 million) loss for all of 2011.

But, and this is what CRM will focus on if Buddy Media results are mentioned on the earnings call, revenues increased. This is the same story with CRM: increasing revenues and increasing losses. I’ll go back to the analogy I have used countless times before: I can sell $1 for $0.75 and increase my revenues all day long. I’ll also increase my losses which is what we are seeing at CRM. The theory for the bulls seems to be that they will somehow sprinkle “profit pixie dust” on their financial results and magically begin to turn in profits.

I doubt this more every day as we are only now seeing both Oracle (ORCL) and IBM (IBM) make serious pushes into the cloud CRM space. If CRM has not been able to make any money when they essentially had the cloud CRM category to themselves, how the hell does anyone think they will be able to do it when two 10,000-lb. gorillas come running after them? They can’t go any lower on prices: Their financials pretty much tell us they are already there.

One could make the argument that both IBM and ORCL could make a serious push to undercut CRM on price to steal share as they both have ancillary products to buffer any hit to results they make take in doing that. CRM has no options.

Does this mean CRM is going under? Not by a mile. It does mean that the value of their stock is but a fraction of the current price. Price and value always eventually meet and the value of CRM stock is well under the triple-digit share price it trades at now. They can only buy revenue increases for so long until reality hits and people start to expect these goofy little things like profits. When that day comes, it will be dramatic.

About the author:

Todd Sullivan
GuruFocus - Stock Picks and Market Insight of Gurus

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Comments

SapientInvestor
SapientInvestor - 1 year ago
Correct me if I am wrong, but the deal closed in August 2012 so all those figures are actually prior to anything that will be reported in consolidated figures for Salesforce. It seems they may be using an accounting trick to book as much bad stuff as they can at Buddy Media before the acquisition (all it does is ultimately inflate goodwill) so that they can temporarily report better figures after the acquisition. 200% increase in operating expenses? Part of the reason why they may need to keep acquiring to keep the charade going. The whole thing reeks IMO.

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