's Cash Flow Shows The Real Decline In Momentum

| About:, Inc. (CRM)

If you are looking for 'awesome, terrific, fantastic' superlatives for the first quarter of Salesforce's 2013 fiscal year, you need go no further than the call transcript. No doubt the sell side brokers will echo Benioff's gusto today.

I bring a different angle: the decline in momentum is evidenced by their cash flow. In the January 2012 quarter they booked a couple of huge deals. This is best seen by the jump in deferred revenue and the debtors for the period (462m and 365m respectively). In other words a few big deals boosted both numbers at the end of January, and this clearly impressed the market.

However the cash flow for April tells a very different story.

On a sequential basis, their version of cash flow fell from 240m in Jan to 213m in April; quite a reduction, of 12% in itself. They include shares issued to staff as part of operating cash flow. Being rather Buffetian in this regard I exclude it.

So isolating shares issued and the related tax effect, the table below illustrates the sequential cash momentum.

2,012 2,011 2,012
Operating activities:
Net income (loss) $ - 19,475 530 - 4,078
Adjustments to reconcile net income
cash provided by operating activities:
Depreciation and amortization 49,441 29,593 45,901
Amortization of debt 4,669 2,255 3,877
Amortization of deferred commissions 36,246 24,675 30,742
Expenses related to stock-based awards 81,266 47,558 70,100
Excess tax benefits from employee stock plans - 11,043 - 2,034 4,994
Changes in assets and liabilities:
Accounts receivable, net 312,660 156,127 - 365,099
Deferred commissions - 32,118 - 20,504 - 86,947
Prepaid expenses and other current assets - 20,349 - 9,383 - 777
Other assets 1,755 - 2,713 2,816
Accounts payable - 13,505 - 1,137 3,716
- 130,755 - 65,641 72,628
Deferred revenue - 45,580 - 19,808 462,474
Net cash provided by operating activities 213,212 139,518 240,347
Exclude back stock based awards and related tax benefit 70,223 45,524 75,094
REAL OPERATING CASHFLOW 142,989 93,994 165,253

So on my operating cash flow, the sequential momentum was down 14%. However look closely where the large positive emanated from: a massive liquidation of debtors, generating 312m in cash.

Now this shouldn't per se be problematic, as it may reflect effective working capital management. However, consider it with the change in deferred revenue: the overall balance actually shrank from January to April, which is a stark contrast to April 2011 (see below).

START OF QTR CURRENT 1,291,622 905,055
NON-CURRENT 88,673 12,766
1,380,295 917,821
CURRENT 1,257,369 1,291,622
NON-CURRENT 77,347 88,673
1,334,716 1,380,295

I confirmed this source of cash for the quarter through their balance sheet: debtor days fell from 395 days in the Jan12 quarter to 195 days in April. A remarkable achievement yes, but it masks the underlying weakness in new business.

This led my suspicions to the underlying billings rate, which is the revenue plus the change in the deferred revenue balance. On a year on year basis, Jan12 was impressive- the billings grew by 57%. Alas momentum fell precipitously in the just-disclosed April quarter: it fell to 34%! Yes still growing, but at an alarmingly lower rate!

Conclusion: The company is clearly a very impressive one, leading the charge in cloud computing. But cash flow doesn't lie, and although they have masked the decline in momentum with excellent debtor collections, the wide-eyed optimism of bull investors will soon be revealed. This is one of the most overvalued hype-stocks on the market today.

Disclosure: I am short CRM.

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