Salesforce's Deferred Revenue Debacle

| About:, Inc. (CRM)

Following a beat and raise quarter last night for online software vendor Salesforce’s (NYSE:CRM), the rewards are not what you might expect, the shares down $12.05, or 18.5%, at $53.25 by Thursday's market close. The company’s forecast for profit of 34 cents to 35 cents for the current quarter, excluding its cost to acquire privately held Instranet, was unimpressive to the Street, but the main worry is that the company’s deferred revenue balance, meaning, sales for which its received payment but which has not been recorded as revenue on the income statement, at the end of last quarter signals new business signings may be slipping.

  • In a note to clients, Wedbush Morgan analyst Michael Nemeroff, who has a “Hold” rating and who on Monday tried to strike a positive tone while emphasizing the high P/E on the stock (95x next year’s profit per share, roughly), today writes that “We advise investors to stay on the sidelines given our concerns regarding Salesforce’s potentially weak bookings growth.” Salesforce doesn’t given a measure of its new business signings, notes Nemeroff, but “investors could extrapolate that bookings have been weak given lower than expected deferred revenue growth.” The 2Q total deferred revenue o $479.5 million was “slightly below 4Q08 total deferred revenue of $480.9 million.” (Salesforce’s deferred revenue rose $140 million in 4Q of last year, so that’s become a sort of benchmark for analysts.) Nemeroff thinks Salesforce may be pushing customers to sign more multi-year subscription contracts by lower prices, which could be hitting deferred revenue.
  • Citigroup’s Brent Thill likewise notes that the $9 million rise in deferred revenue was below his $36 million increase estimate. He concludes, “Bookings have come in below high expectations. Thus, stock could linger until meomentum returns. Thill lowered his price target to $70 from $80. He has a “Hold” rating on the stock.
  • In contrast, Brendan Barnicle with Pacific Crest says the focus should be on backlog, meaning, the portion of new orders that are not yet collected, pointing to future collections and, hence, future deferred revenue. “Backlog, along with deferred revenue, grew 60% in Q2, meaning the off-balance sheet component grew much faster than deferred revenue.” At the same time, Barnicle says Salesforce will see more ups and downs from quarter to quarter in new business. “ is experiencing greater seasonality as it closes larger deals, which have also lead to higher backlog.” He maintains an “Outperform” rating on the shares and an $80 price target.
  • Likewise, Broadpoint Capital’s Bradley Whitt writes that the Street seems to have been expecting books growth of 40% sequentially, whereas by his calculation, bookings of $272 million were up 15% sequentially. In other words, the Street just had it wrong. Whitt maintains his “Buy” rating on the shares while lowering his target to $73 from $78.