As has been customary with Salesforce.com (CRM), each time it makes an acquisition it takes the chance to lower its estimates going forward. At some point one could even ask himself why make acquisitions if most of what they serve for is to guide down estimates.
Salesforce.com's acquisition of ExactTarget (ET) is no different. Once again, under the guise of an acquisition, what we see is lowered guidance. While guiding earnings estimates lower could somehow be understood because of tangible and intangible acquisition costs, this time the guide down also affected revenues substantially.
In this article I will concern myself mostly with the revenue guidance. First, let's take a look at the existing Salesforce.com revenue consensus estimates before the acquisition (Source: Yahoo Finance):
As we can see, FY2014, ending in January 2014, was at $3.87 billion.
Now the same for ExactTarget (Source: Yahoo Finance):
This shows a CY2013 revenue estimate of $378.4 million. At the Salesforce.com acquisition price of $2.5 billion, and minus $0.1 billion in cash, Salesforce.com is thus paying 6.3 times estimated 2013 revenues.
Revenue guidance for FY2014
Taking into account a late FQ2 close for the deal, Salesforce.com guided its new FY2014 revenue expectations as follows:
Full Year FY14 Guidance: Revenue for the company's full fiscal year 2014 is projected to be in the range of $3.955 to $4.0 billion, an increase of 30% to 31% year-over-year.
Now, between the end of FQ2 (July 2013) and the end of FY2014 we have six months of additional revenues from ExactTarget. ExactTarget is on a (growing) monthly revenue rate of approximately $31.5 million, so six months would be an additional $189.2 million in revenues from the acquisition alone.
This would mean that Salesforce.com's previous $3.87 consensus revenue estimate ought to go up to $4.06 billion. Yet, Salesforce.com guided towards a range of $3.955 to $4 billion, with a midpoint of $3.98 or $81.7 million below where the simple addition of ExactTarget ought to place it.
Since the market's consensus was near the top end of the previous guidance, perhaps we can say that the reduction is just around $60 million, but it still constitutes lowered guidance. Salesforce.com seems to explain this lowered guidance in its acquisition press release:
FY14 Revenue: The acquisition is expected to increase total revenue by $120 to $125 million. This estimate reflects an approximately $65 to $70 million reduction relating to fair value adjustments to billed deferred revenue and unbilled backlog, adjustments related to the combined customer base, and inter-company revenue elimination.
The explanation points towards part of ExactTarget's revenues coming from Salesforce.com. But then that means that Salesforce.com is not really paying 6.3 times revenues, but some larger number. After all, $65-$70 million is nearly 20% of ExactTarget's revenue base, and this is just for six months, meaning it's more like 30-40% of ExactTarget's yearly revenue! This in turn is strange when we take into account that ExactTarget says it has no customer over 5% of its revenues, as stated in its 10-K:
In each of 2012, 2011 and 2010 no single client represented more than 5% of our revenue, and our largest ten clients accounted for less than 20% of our revenue in the aggregate.
Once again Salesforce.com is taking the opportunity to lower its own earnings and revenue expectations while doing an acquisition.
The lowered revenues are seemingly blamed o inter-company revenue elimination but the company being acquired did not list any large enough customers to account for the discrepancy.