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Summary

  • Top-line revenue growth remains impressive.
  • As the company spends an annualized $37,000 per employee in stock-based compensation.
  • Phony non-GAAP earnings are not that relevant as GAAP losses continue to widen.

Salesforce.com (NYSE:CRM) managed to deliver a set of first-quarter results which pleased the market as both revenues and non-GAAP earnings came in slightly ahead of consensus estimates.

The social and enterprise cloud computing company reported solid top-line growth and modest non-GAAP earnings, enough to please the market.

First Quarter Headlines

Salesforce.com reported first-quarter revenues of $1.23 billion which was 37% up compared to last year.

On a GAAP basis the company reported widening losses of $96.9 million as GAAP losses per share increased from $0.12 to $0.16 per share.

Of course the company and investment community focuses more on non-GAAP earnings metrics. On this metric earnings came in at $0.11 per share. The difference is of course largely explained by stock-based compensation which totaled $131 million over the past quarter, $44 million in amortization charges and various other small charges.

Looking Into The Operations

Main subscription and support revenues rose by an impressive 36% to $1.15 billion while professional services and other revenues were up by 58% to $79 million.

The backlog for future revenues appears solid as well with deferred revenue increasing by 34% to $2.32 billion. Gross margins were under a little pressure but at 76% were still very healthy.

The problem is that operating costs total 81% of revenue as the company spends fifty-two cents on every dollar of revenue being recognized on marketing and sales efforts.

Outlook

Salesforce.com furthermore updated the market with a second-quarter and full-year outlook.

For the current second quarter Salesforce.com foresees GAAP losses between $0.12 and $0.13 per share while non-GAAP earnings are estimated around $0.11-$0.12 per share. These ¨earnings¨ are to be realized on revenues of $1.285-$1.290 billion which would represent a 34-35% annual growth rate.

Full-year revenues are now seen up 30-31% to $5.30-$5.34 billion. While the company foresees GAAP losses between $0.47 and $0.49 per share, non-GAAP earnings are anticipated to come in between $0.49 and $0.51 per share.

Investors are happy with the full-year outlook after the company previously anticipated non-GAAP earnings of $0.48-$0.50 per share on revenues of $5.25-$5.30 billion.

Valuation

Salesforce.com ended the quarter with $1.53 billion in cash and equivalents. The company has $278 million in ¨normal¨ debt while it has $1.33 billion in convertible debt outstanding. This results in a very modest net debt position.

At $53 per share, Salesforce.com's equity is valued at roughly $32.4 billion. This values the business at some 6 times anticipated revenues for this year.

The company is not paying a dividend at the moment, yet the widespread use of stock-based compensation diluted the shareholder base by roughly 4% over the past annum.

Implications For ¨Investors¨

During the quarter, Salesforce.com ¨spend¨ $131 million in stock-based compensation which is a non-cash expense as the company continues to issue new shares to please, attract and maintain its employees.

With 14,200 being employed at the moment, this amounts to roughly $9,200 per worker for a period of three months. That is right, the average employee receives nearly $37,000 per annum at current rates in stock-based compensation on top of their salaries. This is not just a one-time extra, but really a substantial portion of their salary which is not accounted for as such under the phony non-GAAP earnings metrics.

No one is doubting Salesforce.com's impressive top-line growth as it is conquering a new social and enterprise cloud market. Yet for several years the company is reporting big losses after being profitable in the years before. CEO Benioff continues to focus on growth, although the company will keep a close eye on improving its margins.

Despite concerns for margins, the company remains committed to achieve its $10 billion sales target, aided by acquisitions like last year's $2.5 billion deal to acquire ExactTarget. Benioff furthermore stresses that margin expansion is difficult when you are running a subscription model while showing rapid growth.

Despite the top-line success I remain unconvinced about the company's latest performance while a $30 billion plus valuation continues to push up already high expectations. The continued excessive use of stock-based compensation and focus on non-GAAP earnings which are achieved through phony accounting don't match my prudent principles.

Source: Salesforce.com - Same Story, Solid Top-Line Revenue Growth Combined With Widening Losses