The enterprise cloud computing leader Salesforce (CRM) reports quarter-ending January 2013 earnings on Thursday, Feb. 28, after market close. CEO and cloud visionary Marc Benioff is expected to report non-GAAP earnings per share on higher revenues. The non-GAAP EPS is projected to increase from the prior quarter but decrease from the prior year.
The seventh consecutive quarterly GAAP net loss and therefore loss per share is projected. GAAP operating losses began earlier than the net losses, in January 2011 vs. July 2011. Therefore, this upcoming quarterly report will most likely be the ninth consecutive GAAP operating loss.
The year over-year-growth rate for total revenues is expected to be +31.5% for the quarter ending January 2013. While still exceptional, the pace has been slowing. Last quarter was +34.9%. The initial estimate for April 2013 is +27.4%.
- Estimated QE January 2013 Total Revenues (GAAP and non-GAAP)
- Analyst Estimates: $831M avg, 40 analysts
- Prior Quarter: $788M = +5.4% QoQ
- Prior Year: $632M = +31.5% YoY
The year-over-year growth rate for Non-GAAP earnings per share is a projected contraction of -6.9% for the quarter ending January 2013. This would be the second consecutive quarter of contraction. Last quarter was -2.9%. The initial estimate for April 2013 is a rebound to +13.5%.
- Estimated QE January 2013 Earnings per Share (non-GAAP)
- Analyst Estimates: $0.40 avg, 41 analysts
- Prior Quarter: $0.33 = +21.2% QoQ
- Prior Year: $0.43 = -6.9% YoY
- Management Outlook: $0.38 to $0.40
As I reviewed in detail in a previous article, "Why The Salesforce GAAP Vs. Non-GAAP Divergence?" the non-GAAP earnings per share, the core operations, has been consistent while GAAP losses per share have been occurring since the quarter ending July 2011. The quarter ending January 2013 estimate is management's outlook midpoint: an estimated non-GAAP earnings per share of +$0.39 and an estimated GAAP loss per share of -$0.24.
GAAP gross margin has been in a downtrend and was a multi-year, if not all-time, low of 76.4% last quarter. The 14-quarter average is 79.2%. Recurring stock-based expenses and amortization of purchased intangibles have been allocated to cost of revenues, reducing the gross margin, and to operating expenses, reducing the operating margin. Net margin is therefore negatively affected by both. Other GAAP expenses, one-time and recurring, have also been allocated.
Segment revenues consist of Subscription and Support (94%) and Professional Services and Other (6%). The proportion of these revenues vary little from quarter to quarter. Regional revenues year-over-year have increased across the board, as indicated in the impressive rise in total revenues from the prior year (+34.9%). At October 2012, these were: Americas +37.8%, Europe +28.8%, and Asia-Pacific +27.8%.
Deferred revenue (current and noncurrent) was $1.29 billion at the quarter ending October 2012, which was a strong year-over-year increase of +40.7%. However, this was a small decrease quarter-over-quarter of -3.4%. Deferred revenue peaked at an all-time high of $1.38 billion in January 2012. So unless Salesforce can top their own record, another quarterly sequential decrease would occur for January 2013.
Salesforce generates cash, is liquid, and capital is adequate. There are no dividends or stock repurchases. Instead, Salesforce authorizes and reserves stock for future insider incentives.
I am risk-averse about CRM stock, but not because of earnings prospects which are good. That is, I think the risk is, and has been since July 2011, that all non-GAAP earnings, the core operating profit, are returned to insiders via stock incentives. This results in an ongoing GAAP loss which more accurately reflects the outside shareholders' reduction in the value of the CRM stock.
The insider enrichment plan and structure implemented by management and the Board of Directors leaves no ongoing or future company wealth available to outside shareholders. Accordingly, I do not see how there can be a positive valuation of outsider shareholdings other than their portion of what has not been extracted by insiders. If management intent is to continue taking all the earnings via stock incentives, there is no future earnings stream available for outside shareholders and then no future upside valuation.
Regardless, as long as the market, the outsiders, are willing to purchase CRM stock at current prices or even future higher prices, the market has spoken, CRM stock can rise. The market is the final arbiter on this issue. Ready, willing, and able outside buyers have stepped up, and must continue to, to purchase the insiders' holdings and maintain the market price of CRM stock.
To be somewhat positive on CRM stock valuation, there is the possible upside that Salesforce could be sold. This would then enable outside shareholders to perhaps realize their dwindling share of the company wealth accumulated. Originally, the ultimate goal and purpose of a corporation was to maximize shareholder wealth. What has occurred at Salesforce in recent years are efforts to maximize insider shareholder wealth with no regard to and to the exclusion of outside shareholders.