Remains My Favorite Short

| About:, Inc. (CRM)


Another incredible quarter of sales growth.

Another quarter where expenses grew even faster than sales.

Another pile of options exercised by management and the stock promptly sold.

The game goes on. Don't be left holding the bag when it stops. (NYSE:CRM) turned in another incredible quarter. Amazing is out and incredible is in.

Growth was incredible. Headcount grew by an incredible 38% to 14,200. Total operating expenses grew by an incredible 36% to $990 million. Operating loss grew by an incredible 25% to $55 million.

It was, well, incredible.

In absolute dollars, revenues rose by $334 million and expenses including costs of goods sold grew by $346 million. Not to worry, will make it up on volume. Incredible volume.

The order book seems to be rolling over despite the incredible growth. Deferred revenue and unbilled deferred revenue grew at 34% and 33% respectively, both below the rate of growth of revenues which reported as 37%. That portends slower growth ahead.

The balance sheet was an interesting read.

Click to enlarge


Deferred revenue dropped by a couple of hundred million to $2.3 billion and accounts receivable dropped by $675 million to $684 million from the January 31, 2014 fiscal year end. The company claimed operating cash flow was $473 million in the quarter and touted a 67% increase from prior year. Of that $677 million came from lower accounts receivables offset by a $186 million reduction in accounts payable, the plain fact is that the company did not really generate much of anything from sales of its SaaS products to its customers. did get $74 million by issuing stock to insiders which they promptly sold, a pattern that has typified executives' behavior for quite some time.

Investors should pay attention to the trends in deferred revenues and accounts receivable. receives much of its revenues for a given contract when the contract is signed, deposits the cash and books the amount received for services that extend beyond a current period to deferred revenues. When it invoices customers for an amount of what it calls "unbilled deferred revenue" (a euphemism for sales not yet invoiced) that amount is added to receivables and revenues recognized over the contract terms just as if the company had received payment up front. As the funds are received, receivables fall but the revenue recognition is not changed by the payment.

As a result, dropping receivables and declining balances of "unbilled revenues" are an indication that things are tightening up a bit and will eventually show up as lower sales growth or even a decline.

The charade has gone on for quite a few years and seems to have legs, so don't expect any change anytime soon. As long as Wall Street is okay bidding up the stock on the basis that one day the company might turn a profit, management are going to be content to continue to exercise options and dump stock to siphon as much money away from non-management shareholders as they can get away with without a shareholder revolt, and the rank and file shareholders will sit tight and let the game go one for as long as the share price is rising or at least stable.

In the final analysis, the whole exercise can only have a happy ending if at some point becomes a profitable enterprise able to pay its way by selling customers services for revenues that exceed the costs not only of providing the services but also of the marketing and sales organization that persuades those customers to buy in the first place. There is not much evidence that day is any closer now that it has been for the past few years.

One bad quarter and the institutional money will flee like rats from a sinking ship and retail investors will experience a sinking feeling of their own.

I am short the stock.

Disclosure: I am short CRM. 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.