As may be apparent from my previous article, I am not a big fan of this company. Salesforce.com (CRM) is scheduled to release earnings this coming Thursday after the market close. Let us try to make a prediction on whether those earnings will be received with disappointment or jubilation.
Thus far Salesforce.com has impressed with revenue growth. It has disappointed with profit growth, which is actually a profit decline. So the question is really what drives investors more. Revenue or profits?
In order to determine what we can expect, it is first prudent to look at the last earnings report, more in particular the guidance for this quarter.
Q3 FY12 Guidance: Revenue for the company’s third fiscal quarter is projected to be in the range of approximately $568 million to approximately $570 million. For the third fiscal quarter, the company expects to report a GAAP net loss per share of approximately($0.06) to ($0.05), while diluted non-GAAP EPS is expected to be approximately $0.30 to $0.31.
Looking at the reporting history of Salesforce.com, it is rather safe to assume that the company will exceed the revenue target for this quarter. I would not be surprised if revenue will be close to 600 million. After all, CEO Marc Benioff has said that he sees a "strong business environment" and does not expect America to go into another recession, which by the way I don't think he can judge based on his own experience only. It goes without saying that any figure equal or below the guidance of 570 million will be seen as a revenue miss.
Revenue was higher than guided in the previous quarter. Guidance was 528 million, actual revenue came in at 546 million. Thus, we can expect this quarter revenue will also be higher than guided. After all, Benioff is not likely to give a guidance target that he cannot meet.
Now how about profits? Will that revenue growth translate to higher profits? In this regard, Salesforce.com has a less impressive track record, to put it mildly. Last quarter the company swung from break-even to a GAAP net loss of 3 cents, which caused the P/E to jump from 300 to over 600. And as we can see from the last guidance there is no quick improvement in sight. For this quarter the company expects to report a GAAP net loss per share of approximately $0.06 to $0.05, which amounts to a loss that is twice as big as in the previous quarter. As a matter of fact, the actual loss should be bigger still, as since this last guidance, the company acquired tiny service company Assistly. Hidden in the press release, I could find this statement:
The acquisition is expected to have no material impact to salesforce.com's revenue in the third quarter and fiscal year ending January 31, 2012. Including an expected one-time investment gain related to the transaction, salesforce.com expects no material impact to its projected fiscal third quarter non-GAAP EPS. For the fiscal year ending January 31, 2012, the acquisition of Assistly is expected to reduce non-GAAP EPS by approximately ($0.02) to approximately $1.28 to $1.30.
The financial impact of the acquisition on a GAAP basis cannot be estimated until the allocation of the purchase price is completed following the closing of the acquisition. However, salesforce.com currently expects that the dilutive impact of the acquisition to EPS will be significantly greater [emphasis mine] on a GAAP basis than a non-GAAP basis.
I cannot interpret this as anything other than a profit warning. An underpublished profit warning, but nevertheless, a profit warning. It is therefore safe to assume that the actual GAAP net loss for this quarter will be at least 8 cents. Mind you, we are talking about a stock that has a price/sales ratio of 8. This means that investors are paying 8 dollars for each dollar revenue. With such a valuation, you would expect that the company is at least making a profit on that 1 dollar revenue, but no, it makes losses that are projected to increase, with no tangible promise of improvement for the foreseeable future.
As an investor I have always learned that the value of a company is ultimately determined by its earnings; in other words, its capacity to make money for its shareholders. But this wisdom does not seem to apply anymore for Salesforce.com. Maybe things have changed? Maybe I am overlooking something? Maybe I just don't understand that in the coming years the revenue growth at the cost of bleeding profits will translate in huge earnings per share?
It certainly looks like that, because when I look at the forward P/E listed on the financial websites like Yahoo Finance, it appears to take away any worries. At 70 it is much less than the trailing P/E of 600, implying that profits will increase hugely over the next 12 months. But will they really?
Well, the decisive answer to that is: No, they will not! We just saw that the loss per share will increase for the current quarter and the company has projected the loss for the full year as follows:
For the full fiscal year 2012, the company expects to report a GAAP net loss per share of approximately ($0.11) to ($0.09), while diluted non-GAAP EPS is expected to be approximately $1.30 to $1.32.
A GAAP net loss of at least 9 cents per share? Then how the heck can the forward P/E be around 70? Well, the answer is it is not. That forward P/E is based on the NON GAAP results that Salesforce.com is promoting and are apparently adopted by the financial websites.
However, when the actual P/E is calculated in the future, the P/E is not based on NON GAAP results, but on GAAP results. Those GAAP results are losses. Actually, I say that this forecast of the P/E based on NON GAAP results is nothing short of deceit.
But I can't be the only one to see that, can I? Marc Benioff and his CFO Graham Smith know this too, don't they? You bet they do, which is probably the reason that Smith and his collegues have been selling for millions of shares over the last few months.
The truth of the matter is there is no P/E at all in 12 months. Not one of 600, not one of 12000, and certainly not one of 70. You can't have a Price/Earnings ratio if there are no GAAP earnings, because the actual P/E is always calculated from GAAP earnings. If those GAAP earnings are negative, the P/E is listed as N/A (Not Applicable). That is what it will be in 12 months, and most likely already after next earnings report.
You see, the P/E is based on the last 4 quarters. With a GAAP EPS loss of 3 cents in the previous quarter, and a projected loss of at least 6 cents this quarter, the total earnings over last 4 quarters is already negative. Where analysts are currently expressing concern over the high multiple, they will soon have no multiple to discuss at all. They will have to discuss the losses and speculate about when profits will return. They will have to speculate because Benioff and his management are not giving any timeframe.
Am I really a one-eye in the land of the blind? I am afraid so, because anyone will see soon that what I have been pointing out here is going to be proven true.
Therefore, I am expecting that Salesforce.com is going to follow the path of other momentum bubble stocks that could not live up to expectations, breaking down more than 50%. Examples include Opentable (OPEN) , Netflix (NFLX), Green Mountain Coffee Roasters (GMCR) and Travelzoo (TZOO). From a valuation point of view, these stocks were all less overvalued than Salesforce.com, even at their peaks. You only have to look at the charts to see what downside is possible. Which is why I am short CRM.
Disclosure: I am short CRM.