It has been 16 months since I wrote about Salesforce (CRM) and laid out my thesis for being long, and after another stellar quarter, it seems appropriate to revisit this thesis. Is Salesforce still exciting? When I first wrote about Salesforce in April 2012, shares of the company were trading at an all-time high of almost $39 per share, and I questioned whether it could continue to grow and meet its forecasts. I surmised that the answer is yes, and explained how I saw the market evolving before my very eyes. My opinion has changed dramatically since last April, and given the current circumstances, I believe a revisit is in order.
I'm still long CRM. At the time this is being written, Salesforce shares are trading at roughly $50 per share, representing a ~28% return in 16 months, and I believe there is much room to grow. As I mentioned, things have changed drastically. Whereas Salesforce was barely being adopted by enterprise clients a year ago, today many of those clients have either partially or fully adopted Salesforce-based solutions. We can see this trend in a number of places. First, large enterprise clients tend to follow full-year billing cycles, and this trend typically gives Salesforce a larger fourth quarter. Revenues for Q4 2013 were roughly $2.7 billion, a 40% increase from Q4 2012. Unbilled, deferred revenue was approximately $3.5 billion for FY13, approximately $1.3 billion higher than FY12. Longer contractual commitments by enterprise customers is contributing to this figure. A second place where this is evident is the client lists of some of the large Salesforce integrators. Whereas their client lists were once a collection of small- and mid-market players, today they sport mega brands and enterprises. As a matter of fact, the largest integrators of Salesforce are actually Accenture (ACN) and Deloitte, a strong indicator of the maturing nature of the market. Finally, Keith Block, formerly a vocal sales executive with Oracle (ORCL), is a great example of the type of hires that indicate this direction, as well as the deal with Oracle that followed (or coincided with) this hiring. The deal allows Salesforce to use Oracle's software and Exadata computers, and allows Oracle to use Salesforce's customer-management software. Salesforce is maturing.
Moreover, once a siloed platform, Salesforce has quickly evolved into a hotbed of innovation for third-party developers, and it has spurred an active market of integrators for support. The number of useful packages on the Salesforce platform is simply staggering and impressive. Simply put, developers are using the core platform in ways that the company never imagined, and Salesforce is enjoying a huge boost in interest from the professional community. There are many examples of this type of innovation such as new geo-location services or specific integrations packages. However, I am most impressed with the level of interest from the younger - i.e. teen - developer community. I am sure that Dreamforce 2013 will be massive!
Salesforce is actively developing this market both through direct investments and supported events, is becoming an ongoing developing partner, and is constantly rolling out further support tools. Clearly it is committed to building out this platform for many years. The partnership with Good Technology announced this week is also very significant, as it will allow for the development of secure and productive mobile enterprise solutions on the Salesforce platform.
What about the financials? Have they changed? Well, no. Essentially, the market has already chilled its expectations with regard to future guidance, and I expect this trend to continue. Lowered EPS numbers are concerning, however. 31% YoY growth in top line will continue to spark my expectations as well as that of many other investors. Recall that Salesforce's core platform, should it be spun off as a separate entity, is profitable. It is only after we consider the costs of developing additional business lines which will make the company competitive for many years to come that the company turns into the red. Revenue for the period ending October is around $1.05 - $1.06 billion, and profit will be in the 8 to 9 cents range. Operating cash is also up 34%, to $183 million. Unlike last earnings report, guidance is higher for next year, and the company is raising its forecast to $4-$4.03 billion, partially due to the recently completed ExactTarget acquisition which is expected to add another $140+ million to the top line, as well as the addition of a few very large enterprise clients. The purchase of ExactTarget shows how aggressive the company is getting in the Marketing Cloud space. However, it's probably worth noting that Salesforce took a $300 million loan to finance part of that purchase, potentially indicating less of an appetite for external growth. Does this mean anything? Probably not. The company has continued along its rapid expansion path, and will continue to do so in the foreseeable future.
I have a lot of faith in that future market. I see it continuing to develop and I see the amount of money being made by companies with which I am involved by supporting the Salesforce platform. The dichotomy between large-scale, enterprise solutions, and self-serve platforms has become even more pronounced. The vast majority of new clients are shying away from the likes of SAP (SAP), Oracle, or Microsoft (MSFT), and, to reiterate, so are many traditional enterprise clients. If the competition in this space, companies like SugarCRM, or ZohoCRM, were gaining significant ground (I don't view Workday (WDAY) as a direct competitor), I might be more cautious. However, this is not the case, and although alternative platforms are becoming more popular, Salesforce enjoys a virtual monopoly.
As I stated in the onset, I'm still long CRM. I believe that Salesforce will continue to surprise traditional investors, and will continue to be a leading enterprise cloud services provider for many years to come.