Surprising Source Of CRM's Cash Flow Growth

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 |  About: Salesforce.com, Inc. (CRM)
by: Between The Lines

When was the last time you chatted about "Excess tax benefits from employee stock plans" in a discussion about "the cloud?" Well, that obscure item contributed nearly half of CRM's cash flow growth in FY2012.

Whenever I read Salesforce.com's (NYSE:CRM) financial statements, I wonder why I aced accounting in school. They do so many things in such strange ways that it is nearly impossible to go through them all. One thing that bears often growl about is the stock-comp expense, which cost CRM $229M on the income statement of the just reported FY. But, of course, growth investors long ago capitulated in not considering this a "real" expense. For this and other reasons, CRM's Income Statement is almost meaningless without a variety of asterisks, so we head to the Cash Flow Statement.

On the Cash Flow Statement, stock-comp expense is added back in the "Operations" section. The line item is called "Expenses related to stock-based awards." Adding it back to "Cash Flow" makes sense. CRM didn't actually hand out cash, after all. But, I'm not here to talk about "Expenses related to stock-based awards." I'm here to talk about its niece, "Excess tax benefits from employee stock plans," which is the next line item.

I'll discuss the origin of "Excess tax benefits from employee stock plans" in a future piece. I'll also discuss how this item was rearranged by Statement 123(R) 6 or 7 years ago in a future piece. Today, we'll look at how important this relatively obscure line item has been to CRM's cash flow and, more specifically, to FY2012's "operating cash flow growth" (aka "CFFO"). Why is CFFO important? Many investors focus on CFFO growth when thinking about the "right" PE for CRM. In fact, right near the top of its press release, CRM trumpeted "Full Year Operating Cash Flow of $592 Million, up 29% Year-Over-Year."

CRM is a "growth" company. But what exactly is growing and by how much? Revenues grew 38% last quarter. Organic revenue grew 30% to 35%. Total Deferred Revenues grew 48%. CFFO (our interest) grew 45% & it grew 29% last FY. But what made CFFO grow?

It turns out that one of the most improved items in CRM's CFFO from FY2011 to FY2012 was "Expenses related to stock-based awards." The first table shows that while "Expenses related to stock-based awards" nearly doubled from FY11 to FY12, the offsetting "Excess tax benefits" item actually cost less CFFO in FY12 than in FY11. In FY11 it lowered CRM's CFFO by $36M but in FY12 it lowered it by only $6M. This item has gone from being a 71% offset in FY09 to being only a 3% offset in FY12. CRM would have to explain why this occurred. What is key here is that CFFO, the single most critical line item in all of CRM's financial statements for many investors, has been growing due to shrinkage of an item that is far from "operating."

FY09

FY2010

FY2011

FY2012

Expenses related to stock-based awards

$77

$89

$120

$229

Excess tax benefits from employee stock plans

-$55

-$52

-$36

-$6

excess tax benefit % of Expense

-71%

-58%

-30%

-3%

Click to enlarge

To show the impact on CRM's reported Y/Y CFFO growth, the next three tables calculate the "excess tax benefits" item using the previous year's percentage. So, for FY12, instead of "excess tax benefits" being -3% of "Expenses related to stock-based awards," we set it to -30%, which is the reported number for FY11. Similarly, the second table sets FY2011's "excess tax benefits" being -58%, which is the reported number for FY11. We then do likewise for FY10 vs FY09.

FY2011

FY2012

Expenses related to stock-based awards

$120

$229

Cashflow from Excess tax benefits @ -30%

-$36

-$69

Reported CFFO

$459

$592

CFFO w/ -30% Excess tax benefits

$459

$529

Reported CFFO Growth

29%

CFFO Growth w/ constant "Excess Tax" %

15%

Click to enlarge

There is the most important result. CRM reported FY2012 CFFO growth of 29%, but it would have reported only 15% growth if it had not been able to lower the "Excess tax benefits from employee stock plans" to only -3% of the total expense from -30% in FY2011.

FY2010

FY2011

Expenses related to stock-based awards

$89

$120

Cashflow from Excess tax benefits @ -58%

-$52

-$70

Reported CFFO

$271

$459

CFFO w/ -58% Excess tax benefits

$271

$425

Reported CFFO Growth

69%

CFFO Growth w/ constant "Excess Tax" %

57%

Click to enlarge

We see that FY2011 CFFO growth would have been 57% instead of the 69% reported if the "Excess tax benefits" had remained at -58% instead of falling to -30%. The impact is not as large as in FY2012 partly because falling from -30% to -3% is a bigger percentage plunge than is falling from -58% to -30%.

FY2009

FY2010

Expenses related to stock-based awards

$77

$89

Cashflow from Excess tax benefits @ -71%

-$55

-$63

Reported CFFO

$230

$271

CFFO w/ -71% Excess tax benefits

$230

$259

Reported CFFO Growth

18%

CFFO Growth w/ constant "Excess Tax" %

13%

Click to enlarge

Again, FY2010 CFFO growth would have been 13% instead of the 18% reported if the "Excess tax benefits" had remained at -71% instead of falling to -58%.

Aside from the unexpected origin of so much CFFO growth, the actionable concern about this is that, at -3%, the "Excess tax benefits" cannot fall much further. I am not sure what strategy CRM has used to effect this change. Do they give options to different people? Do they give options using different fine print? Whatever it is, there is almost no more CFFO gain to be had. In fact, there is only $6M more gain to be had in FY2013 since this line item cost $6M of CFFO in FY2012.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.