What Salesforce.com (NYSE:CRM) is doing here ought to be illegal. They are reporting GAAP EPS but headlining "non-GAAP" eps that excludes "stock based compensation." I know others do it also but it should be illegal for them to do it also. What they are telling us is that free shares, given to employees that dilute shareholders actually have no cost. Note: they do this with convertible bonds also but we'll save that for another time. This is wrong and a travesty.
Here is what is happening, by increasing the stock based comp each year and not reporting that in their "non-GAAP" numbers, they can show increasing profits there. In reality, that added expense, yes, it is an expense is causing GAAP earnings to crater to the point the company now expects a loss for 2012.
Stock based comp in FY 2010-11-12 has progressed from $90M to $117M to $238M (164% growth). Meanwhile GAAP EPS has cratered from $.63 to $.47 to the expected loss in FY 2012 of ($.03) to ($.01). But because of the shift from dollar comp to stock comp, CRM is able to show "non-GAAP" or as we'll call it "pretend earnings" growth of $1.22 in 2011 to estimates of $1.35-$1.38
Here is the only line you need to know from CRM's earnings release today "For the full fiscal year 2012, the company expects to report a GAAP net loss per share of approximately ($0.03) to ($0.01)." What did they report for FY 2011? For the full fiscal year 2011, GAAP diluted earnings per share decreased 25% year-over-year to $0.47.
The company knows what is going on also. Notice in Feb. 2010 how they tout GAAP EPS because it grew YOY but this years release ... geez.. it suddenly isn't worth headlining. Now all they want to talk about is "non-GAAP" (pretend) earnings. In fact, in the Feb 2010 earnings release, "non-GAAP" earnings are not even mentioned in conjunction with 2010 results because the company grew EPS YOY. That is until we talk about expectations for 2011 (they knew REAL eps would fall). But now that GAAP is falling, we gotta talk "non-GAAP. It is a shell game (bait and switch) folks ... plain and simple.
From Barron's "Q1 revenue came in at $504 million, yielding EPS of 28 cents. Analysts had been modeling $483 million in revenue and 27 cents in EPS." But, what did CRM really do in Q1? Q1 GAAP diluted earnings per share were breakeven. Shame on Barron's for reporting these numbers and not calling out what is going on. Shame on them ...
Full Year FY12 Guidance: Revenue for the company's full fiscal year 2012 is projected to be in the range of approximately $2.15 billion to approximately $2.17 billion. For the full fiscal year 2012, the company expects to report a GAAP net loss per share of approximately ($0.03) to ($0.01), while diluted non-GAAP EPS is expected to be approximately $1.30 to $1.32. All EPS estimates include a one-time tax benefit of $0.04, associated with the acquisition of Radian6. The non-GAAP estimate excludes the effects of stock-based compensation expense, expected to be approximately $238 million, amortization of purchased intangibles related to acquisitions, expected to be approximately $60 million, and non-cash interest expense related to the convertible senior notes, expected to be approximately $11 million. EPS estimates assume a GAAP tax rate of 113%, and a non-GAAP tax rate of 33%. For the purpose of the EPS calculation, assume an average basic share count of approximately 136 million shares, and an average diluted share count of approximately 145 million shares. Salesforce.com completed its previously announced acquisition of Radian6 on May 2, 2011, and these estimates include the forecasted operating results for Radian6 from that date forward. Radian6 estimates incorporate a preliminary purchase price allocation, and are therefore subject to change.
Let's flash back to last year and see what they predicted for what just ended:
Full Year FY11 Guidance: The company is raising its full fiscal year 2011 revenue guidance from the guidance previously provided on February 24, 2010. Revenue for the company's full fiscal year 2011 is projected to be in the range of approximately $1.545 billion to approximately $1.555 billion. For the company's full fiscal year 2011, fully diluted GAAP EPS is expected to be in the range of approximately $0.38 to approximately $0.40, while fully diluted non-GAAP EPS is expected to be in the range of approximately $1.13 to approximately $1.15. The non-GAAP estimate excludes the effects of stock-based compensation expense, expected to be approximately $117 million, amortization of purchased intangibles related to acquisitions, expected to be approximately $25 million, and non-cash interest expense related to the convertible senior notes, expected to be approximately $23 million. For purposes of the full fiscal year 2011 GAAP and non-GAAP EPS calculation, the company is expecting an average diluted share count of approximately 136 million shares.
Now, we have to also interject here for the full fiscal year 2010, GAAP diluted earnings per share rose 82% year-over-year to $0.63,
And, the year before
Full Year FY10: The company today is reducing the full year revenue guidance it provided on February 25, 2009, with revenue now expected to be approximately $1.25 billion to approximately $1.27 billion. The company is raising its earnings outlook for the full year, expecting GAAP diluted EPS to be in the range of approximately $0.59 to approximately $0.60. Stock based compensation expense is expected to be approximately $90 million, and amortization of purchased intangibles of previously announced acquisitions is currently expected to be approximately $9.3 million. For purposes of the full fiscal year 2010 GAAP EPS calculation, the company is expecting an average diluted shares count of approximately 127 million shares.
Bottom line? CRM seems to be intent on ratcheting stock comp up to offset a precipitous deterioration in GAAP earnings. Here are the stock based comp numbers from FY 2009-12. $77M, $90M, $117M, $238M or growth of 16%, 30%, 100%. You see? As the financial condition deteriorates, they offset that by shifting comp to stock based and that enables them to report increasing "non-GAAP" numbers. But when they expense that comp in GAAP earnings, results crater.
Yes, CRM is steadily increasing customers and increasing revenues. All that is great. But, increasingly less and less of that is making it to the bottom line and now we have a situation where a company with $2B in revenues is no longer profitable ... unless you believe "pretend" I mean "non-GAAP" earnings ...
Oh yea ... let's pretend they manage to make a penny vs the loss they expect this year. That would put the PE ratio at 14,700? We all know what happens to these high PE stocks ...