Salesforce.com (CRM) is the 8th largest computer software company on the globe. It has grown quite a bit this year and these recent numbers were phenomenal. The company does most of its business in the Americas where it generated $2.1 billion, 37% higher than the year before. Europe is its second-biggest market coming in at $531 million in revenue and then the Asia-Pacific region at $315 million.
If I am interested in investing in this company, how would I know if it's still good investment or if I missed the boat because of its recent growth spurt? There are a number of ways to observe the company to answer this question. If I am going to invest in this company, I am wondering if it can continue to generate revenue like it has been. The growth numbers look impressive but there are some figures in the company that we can look at that will help us understand customer loyalty. Salesforce does an incredible job at this, and this is why it will continue to generate revenue and increase its base.
Let's take a look at some figures which prove that the company's customers continue to become more intertwined with its service and this is creating longer-term contracts as well as putting more revenue on the books.
This chart shows the company's data center transaction volume which is now pushing about 100 billion transactions per quarter. As you can see, this represents 47% year-over-year growth in transactional volume.
The most important figure to see here is that just fewer than 40% of those transactions are API calls. A transaction to Salesforce is defined as a page view or an API call. And API call is when the company's service is talking to another application or service. This is a deep integration into the company's business/service and as the company becomes more enterprise, API growth should take place even more.
What is so significant about these figures?
There is no better show of success than through customer actions. When an investor can see transactions growing faster than revenue, it is a really good sign. Customers are getting more and more value out of the service that Salesforce provides and is using the company more and more.
The total objects inside the service that Salesforce provides to its clients have also grown 64% year-over-year. This is customization that clients are bringing to the service, and this is also significant. Of the total objects inside the service, 66% of that is customized for clients.
Attrition Rates Dropping
The more a client customizes its services, the more value they find in it and the more they use it. Customization drives usage which leads to long-term customer loyalty and revenue. By nature, this leads to a lower attrition rate for the company.
Attrition refers to a decrease in numbers; in this case, Salesforce had 17 straight quarters of lower attrition. The company stated that its attrition rate is presently in the "low double digits" and they are looking to push it under 10% and get into the single digits.
Enterprise Sector Leads Customer Loyalty
The attrition business for the enterprise sector of Salesforce is doing much better than the commercial segment. This is understandable because small businesses tend to fail more than larger, more established businesses. The company hopes to drive the attrition rate in the enterprise sector even lower than it is.
For every dollar of attrition, the company adds more than two dollars of new business from its existing customers. For a company that is a growing, these numbers are important. Not only is it important to continue to lower the attrition rates, it is also very important to drive growth from its base. It is always good to see new business coming into the base and less and less attrition going out.
Sizeable Future Revenue is on the Books
Deferred revenue is business that the company has booked and invoiced. There is $1.735 billion in deferred revenue that is on the books. That is a 34% increase year over year, and that is healthy. The most noticeable thing is the consistency in deferred revenue. Even though I mentioned the company had this 34% increase year-over-year, it has been consistently at that level for the last four quarters. Since deferred revenue is the main driver of future revenue, this shows how healthy the company's revenue base is.
The company also has booked business that has not yet been invoiced. Salesforce calls this "Off-balance Sheet Backlog." This last quarter, the company had $4.2 billion that has yet to be invoiced, and that number has been steadily growing quarter by quarter. One of the reasons for this increase is because the company now has increased its average enterprise contract length more than two years. Large clientele are interested in developing a more long-term relationship with the company which is increasing its revenue base as well as off-balance backlog invoicing.
Add the $1.735 billion deferred invoicing together with the $4.2 billion of off-balance backlog, and you have almost $6 billion in future revenue already generated.
Large Cap Growth comes at a Cost
Salesforce has chosen to grow because they see the opportunity to invest in, and be a dominant player in computing and customer care. This has brought gross margin down and there were two primary reasons for this:
The acquisition of ET is having an impact on the company's overall gross margins. ET has a larger "service mix" than Salesforce. Since service mix has a lower margin, that's going to have an effect on the company's overall gross margins also.
The company signed an agreement with Oracle (ORCL) earlier this year for the company's infrastructure which will also raise its (COS) through 2013 and into 2014. As investors look over the company's quarterly results, one should expect to see continued pressure on those gross margin numbers.
Starting in the company's full-year of 2016, it should see gross margins improving thereafter. Operating margins have also declined, but this is something you would expect when a company is growing like Salesforce. The company is investing heavily in its workforce, software, engineering… etc.
Cash Flow and Cash Flow Growth
Strong cash flow is one of the driving success stories of the company over the last five years. It has had 33% year-over-year growth in operating cash. If you look at the cash flow yield (dark blue), you will see how that number has been relatively consistent through the years.
The light blue line shows the company's capital spending percentage and you have seen how it has kicked up this year.
As I have stated earlier, as the company continues to grow and with higher number of employees, the investment to work with those employees in real estate is one of the reasons for this increase as it continues to invest in its workforce.
Even though Salesforce has grown quite a bit this year, the financial figures as well as the proof of increased usage by customers is telling me this company will continue to grow and is lacking in long-term contract revenue. I am convinced that this company will still be a promising long-term value investment and investors should possibly look for an entry point on the dip.