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Summary

  • A Securities & Exchange Commission review was disclosed on March 4 where Salesforce admitted limited visibility into their own business.
  • Asked to describe the growth of each of their four core service offerings, Salesforce could not provide details.
  • Asked to identify revenue growth separately due to new customers, upgrades, and additional subscriptions, Salesforce says it does not have the data.
  • In reporting 33% revenue growth last year "due almost entirely" to new customers and existing customers, Salesforce omits that 19% of that growth came from a single acquisition.

As an enterprise software company that helps more than 100,000 customers understand their business better, one would hope that Salesforce.com (NYSE:CRM) would have some insight into their own business. Responding to an SEC review, Salesforce says they cannot tell what products are growing sales, or whether those sales are coming from new customers, upgrades, or additional subscriptions to existing customers. Perhaps it is not a coincidence that their CFO announced his retirement Feb. 28.

No one can deny Salesforce's success, growing by a reported 33% to more than $4 billion of revenue in the year ending January 31st 2014. Yet the company lost more than $200 million and spent more than $2 billion on acquisitions, so investors could be forgiven for wondering if the company's systems are up to the task.

Salesforce admits that they "...do not have financial systems and controls in place to be able to accurately quantify the percentage of our total revenue derived from subscriptions to the Sales Cloud or any other core service offering..."

Salesforce also noted that its 38% growth for the year under review "...was due to new customers, upgrades, and additional subscriptions from existing customers and improved renewal rates..." Yet, when the SEC asked Salesforce to provide the contribution of each factor to the company's growth, Salesforce admits that they "...do not separately quantify or monitor the separate impact of these enumerated factors." In other words, growth must come from these factors, because they cannot think of anywhere else revenue growth could have come from. One can forgive the SEC for failing to point out the fallacy of Salesforce claiming that revenue grew due to an improved renewal rate; in other words Salesforce said growth came from losing fewer customers.

But there is another source of growth. In Salesforce's 10-K that was released today (March 5), they provide nearly identical language describing that their growth was "...due almost entirely..." to these same factors. Yet the ExactTarget acquisition footnote says $194 million of consolidated revenue came from the acquisition. This means that only 27% of Salesforce's growth was due to new customers, upgrades, and additional subscriptions, not 33%.

After the Enron and Worldcom scandals, the Sarbanes-Oxley Act of 2002 requires that the SEC review the financial statements of each public company at least every three years. The purpose of these reviews is to protect investors by ensuring issuers disclose meaningful information to investors, as required by the securities laws. In many cases, these reviews are completed silently, and no comments or requests are issued. In some cases, the SEC asks for minor clarifications. But in many cases the SEC asks for truly useful information that investors should want and have. The results of these reviews can often highlight the shaky foundations of a company's reporting and financial controls.

Clearly Salesforce is a phenomenal success, and investors should remember that a quality business and quality financial reporting need not go hand in hand. But an enterprise software company should be embarrassed if it is incapable of basic analysis of its own sales data.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in CRM over 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 Can't Tell You Where Its Revenues Come From