We've written extensively about how Salesforce.com is able to beat its own revenue guidance every single quarter. To recap, the company collects the most/all of its license fees up front. Then, it recognizes the fees into revenue ratable over the life of its licensing contracts. There's nothing inherently wrong with this accounting, but it does serve to make revenue very predictable, and it artificially inflates cash flow so long as the business is growing. Since CRM can predict its revenues with a high degree of confidence in the future, it lowballs its guidance, manufactures a "beat," and claims that this is evidence of a robust business performing better than anyone imagined.
Last week, this story got more interesting. Salesforce.com salespeople have been sending out emails offering discounted pricing for customers who sign up between now and the end of the quarter. Now, for the long term health of the business, it's crazy to discount a service just to sell it before the end of a quarter. It shouldn't make any difference whether you sell your service before or after the end of the quarter, especially if you have to offer substantial discounts to make the sale before. However, as we've said time and time again, the long term health of the business isn't CRM management's concern. Rather, they're focused on keeping the reported figures one step ahead of increasingly lofty expectations.
We're cautious about reading too much into these promotional emails, but the fact that Salesforce hasn't sent out offers like this in recent quarters could be telling. Perhaps the company's new business has been weak this quarter, and it's doing whatever it can to engineer another "amazing" (CEO Benioff's favorite word) earnings report next month.
It can't be emphasized enough that this discounting policy is not in the long term interest of shareholders. It's better for the company to sell something at full price in a few weeks than at a discounted price today. Either CRM is trying to pull sales forward from the future, or competition is intensifying. Perhaps both factors are at work. However, there is no way to construe this sales tactic as being advantageous for shareholders.
This is yet another on a long list of reasons why Salesforce.com is our highest conviction short.
Disclosure: I am short CRM.