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Shares of Salesforece.com (NYSE:CRM) bounced up in after-hours trading after the company returned to profitability, although being driven by a tax valuation allowance.

The continued aggressive revenue growth rates and modest non-GAAP earnings guidance causes enthusiasm within the investment community as shares re-test their all time highs.

Yet I'm worried about the valuation, the aggressive non-GAAP accounting and aggressive public relations effort made by the firm.

I remain on the sidelines with a slightly bearish stance.

Second Quarter Results

Salesforce.com generated second quarter revenues of $957 million, up 31% on the year before. Revenues came in ahead of consensus estimates of $937.8 million.

The company reported GAAP earnings of $76.6 million which compares to a $9.8 million loss last year. Consensus estimates for GAAP losses stood at $90 million. The bottom line was boosted by a $129 million release of tax valuation allowances related to the ExactTarget acquisition. This ensured that GAAP earnings surpassed non-GAAP earnings for the quarter.

GAAP earnings per share came in at $0.12, while non-GAAP earnings came in at $0.09 per share. This was ahead of consensus estimates of $0.07 per share.

Non-GAAP earnings evaporate if one takes into account the quarterly $110 million in stock-based compensation. Although this does not result in cash outflows, it certainly causes dilution for shareholders.

Looking Into The Results

Revenue growth was driven by a 31.2% increase in subscription and support revenues totaling $902.8 million. Professional services revenues rose by 22.9% to $54.2 million.

Deferred revenues rose by 34% to $1.79 billion, partially driven by the acquisition of ExactTarget. Unbilled deferred revenue was up by 36% to $3.80 billion.

Gross margins fell by 55 basis points to 77.2% of total revenues. The costs for professional services kept rising, as cost for this service is now greater than revenues being generated with the activities. Gross margins fell on the back of the ExactTarget acquisition and a signed agreement with Oracle (NYSE:ORCL) during the past quarter.

At the same time, selling, general and administrative expenses rose by 180 basis points to 81.4% of total revenues. Cost increases in research and development and general administrative expenses outweighed the relative fall in marketing and sales expenditures.

As such operating losses tripled to $39.9 million, coming in at 4.2% of total sales. The tax benefit was the sole reason Salesforce.com was able to report GAAP earnings of $76.6 million, or GAAP earnings of $0.12 per share.

Looking Ahead To The Remainder Of The Year

Salesforce.com sees third quarter revenues between $1.05 and $1.055 billion. Non-GAAP earnings are seen between $0.08 and $0.09 per share, while GAAP losses are expected to come in between $0.18 and $0.19 per share. The discrepancy between GAAP and non-GAAP earnings is mostly driven by an expected $139 million in stock based compensation.

Analysts were looking for non-GAAP earnings of $0.07 per share on revenues of $1.043 billion.

Full year revenues are now seen between $4.00 and $4.025 billion. Non-GAAP earnings are seen between $0.32 and $0.34 per share. GAAP losses are seen between $0.42 and $0.44 per share on the back of $511 million in expected stock-based compensation expenses.

The full year guidance is in line with consensus estimates.

Valuation

Salesforce.com ended the second quarter with $930 million in cash, equivalents and marketable securities. The company operates with $300 million in regular debt and $1.57 billion in convertible debt, for a net debt position of almost $1 billion.

Revenues for the first six months of the year came in at $1.85 billion, up 30% on the year before. Thanks to the tax valuation allowance, Salesforce.com managed to report GAAP earnings of $8.9 million, compared to a $29.3 million loss last year.

Trading around $47 per share, the market values Salesforce.com at around $28 billion. This values the company's assets around 7 times guided annual revenues.

Salesforce.com does not pay a dividend at the moment.

Some Historical Perspective

Long-term investors are grateful to Marc Benioff as shares have ten-folded over the past decade. Shares have risen from $4 in 2003 to highs of around $20 in 2008.

Shares sold off to $5 later that year amidst the financial crisis but have steadily risen to all-time highs of $47 earlier this year Shares are re-testing these all time highs at the moment following the earnings report.

Between the calendar year of 2009 and 2012, the company increased its annual revenues by a cumulative 133% to $3.05 billion. An $80 million profit evaporated into a $270 million loss last year.

Investment Thesis

So far Salesforce.com has done it again. The company's upbeat comments continue to spark enthusiasm among the investment community which has sent shares to fresh all time highs.

Investors were cautious following the $2.5 billion acquisition of e-mail marketing provider ExactTarget last month. The company continues to focus on marketing tools alongside customer-management software, all driven by the cloud opportunities. Benioff also commented that larger acquisitions like that of ExactTarget were needed as small deals didn't bring in much revenue.

The company continues to bet on the future outlook that IT budgets will flow toward Chief Marketing Officers, away from Chief Technology Officers. The company focuses on sales cloud, marketing cloud, service cloud as well as the overall platform and will more aggressively market to larger enterprises.

As such the company sees enormous potential to upgrade services with existing customers. Salesforce.com is benefiting that unlike Oracle and SAP (NYSE:SAP) the company has a much better performance in the cloud, social marketing tools and the mobile environment.

The growth is impressive, especially for a company the size of Salesforce.com. Still I'm a bit worried about the valuation at 7 times annual revenues, or $28 billion in total. I'm worried about the possibility to transform these revenues into cold cash for shareholders.

Non-GAAP earnings are seen around $200 million, valuing the business at an incredible 140 times annual earnings. This excludes $500 million in annual stock based compensation expenses, which is not a cash outflow, but actually does dilute shareholders' interest. Otherwise losses are seen around $250 million per annum.

For now Benioff has proved me wrong, but I think the high valuation in combination with aggressive accounting, a focus on non GAAP earnings vs. GAAP earnings, and a strong public relations effort boost the current prospects too much.

I remain cautious and stay on the sidelines with a bearish stance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Salesforce.com: Aggressive Accounting And Public Relations Remain A Worry

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