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Jay Schembs, CFA  

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  •'s (CRM) CEO Marc Benioff on F1Q 2015 Results - Earnings Call Transcript [View article]
    CC old friend, I'm sure you'd like my thoughts on the conference call:

    1. Benioff seemed uncharacteristically reserved. He even allowed Block onto the call, which was a bit weird.
    2. Benioff appeared to be eating a sandwich between questions, but I was unable to ascertain as to whether it was Subway or Potbelly.
    3. No mention of the billions of transactions, but I'm sure they're still really phenomenal and interesting.
    4. Very blatant dodge of the Exact Target contribution question by Graham Smith. Perhaps his previous lawsuits while CFO at Nuance have caused him to temper his verbal responses.

    As an aside, ~25% operating cash flow growth for the year implies roughly 10% growth for the rest of the year. Hardly phenomenal, particularly when you consider the dilution that will occur each and every quarter along the way.

    Hope you're well!
    May 20, 2014. 11:23 PM | 3 Likes Like |Link to Comment
  • Salesforce +2.5% AH on FQ1 beat, solid revenue guidance [View news story]
    Eric, you make good points, and I agree the company certainly is not well analyzed under strict GAAP terms. However, Lares Capital also makes compelling points. You also omitted the fact that more than 100% of this quarter's operating cash flow came from liquidation of A/R. The company guided for fiscal year cash flow growth of ~25%, which implies only 10% growth for the rest of the year. When you consider that nearly all of these cash flows result from add-backs for stock comp, depreciation & amortization, and changes in working capital - all low quality sources of cash - this remains a highly speculative investment.
    May 20, 2014. 11:17 PM | 5 Likes Like |Link to Comment
  • These Numbers Show That Box CEO Aaron Levie Is A Genius [View article]
    Given all you've said, curious why you're long SFDC?
    Apr 22, 2014. 09:29 AM | Likes Like |Link to Comment
  • These Numbers Show That Box CEO Aaron Levie Is A Genius [View article]
    The presumption that a customer will be around 10, 5, or even next year is rather ambitious. First mover advantage to acquire market share makes sense if there's some sort of network effect or other way in which customers are locked in, but that's nowhere to be found in SAAS.
    Apr 17, 2014. 11:31 PM | 3 Likes Like |Link to Comment
  • Is Living On Borrowed Time [View article]
    Per Kelly Services' 10K, they have 1,100 employees at their HQ and 7,000 staff members in network branch offices. I'm sure they all need CRM licenses, including back office and accounting folks (you can always be selling, you know). So that's about 125 licenses per employee. Makes sense.
    Mar 13, 2014. 07:40 PM | 2 Likes Like |Link to Comment
  • Is Living On Borrowed Time [View article]
    I'm surprised no one has commented on the level of receivables. DSOs hit all-time highs for the FY ending 1/31/14 - 103.6 or 76.3 DSO, depending on whether you're averaging year over year or four quarters' worth of A/R, respectively. In either case, certainly could be a sign they're reaching for sales with looser credit terms.
    Mar 11, 2014. 07:57 PM | 2 Likes Like |Link to Comment
  • Beyond GAAP, Does Salesforce Look Much Better? [View article]
    Dammit CC, you're nothing if you're not brutally honest. I thought an EV/FCF of 70x for declining FCF per share essentially says amazing.
    Mar 8, 2014. 12:11 PM | 3 Likes Like |Link to Comment
  • Beyond GAAP, Does Salesforce Look Much Better? [View article]
    That's a financing cash activity, not part of operating cash flow - approximately $290 MM in FY2014.
    Mar 8, 2014. 11:53 AM | Likes Like |Link to Comment
  • Can't Tell You Where Its Revenues Come From [View article]
    Unfortunately, EDGAR's site (to the best of my knowledge) doesn't include correspondence between the SEC and the company in its filings feed, but instead posts them in a separate section, so it's much more difficult to know when/if these are available.

    Thanks again for your work in reviewing these disclosures.
    Mar 7, 2014. 11:27 AM | 3 Likes Like |Link to Comment
  • Can't Tell You Where Its Revenues Come From [View article]
    These letters were released to the SEC website two days ago.
    Mar 6, 2014. 09:55 PM | 3 Likes Like |Link to Comment
  • Can't Tell You Where Its Revenues Come From [View article]
    Reed Hastings at NFLX was close prior to their 2011 implosion. NFLX added insult to injury by using cash to repurchase shares during that time. Admirable capital allocators right there.
    Mar 6, 2014. 05:28 PM | 7 Likes Like |Link to Comment
  • Can't Tell You Where Its Revenues Come From [View article]
    This is a gem from their June 18, 2013 response letter:

    "We respectfully advise the Staff that we do not believe the individual performance of our four core service offerings, Sales Cloud, Service Cloud, Marketing Cloud and the Salesforce Platform, are key variables to understanding and evaluating our historical results and the future prospects of our business."

    That is so patently false. Understanding each of those is vital to investors - particularly the Platform, which Benioff speaks of in terms of billions (of transactions) to illustrate its purported rapid growth. I imagine investors might also have a passing interest in the Marketing Cloud after they plowed $2.5 billion to acquire ExactTarget. Something is so fishy here.
    Mar 6, 2014. 05:18 PM | 11 Likes Like |Link to Comment
  • Baseline Scenario: Tanks Post Earnings [View article]
    "The higher the stock price goes, the higher the GAAP non-cash expenses that must be recorded."

    I don't think this is correct. My understanding of FAS 123 is that stock comp expense is set based upon the calculated value of the option packages at grant date. They don't reset based upon subsequent stock price performance.

    Therefore, the substantial increases in stock comp expense are solely due to substantial increases in stock option grants, not the increase in CRM's stock price.
    Feb 20, 2014. 10:50 PM | 1 Like Like |Link to Comment
  • Shares Not Cheap [View article]
    Couple of nits in your valuation assumptions:
    (1) your calculated firm value is $27.6 BN, plus a "balance sheet impact," which I take to mean net debt, of $220 MM (implying net cash on the balance sheet), for an equity value of $27.8 BN. Most recent 10Q shows $704 MM in cash/short-term securities and $2.46 BN of funded debt, which is a net debt position of $1.76 BN. This should net against the $27.6 BN to arrive at a calculated equity value of $25.84 BN.
    (2) your diluted shares are off by about 15%; again, from recent 10Q (page 56), diluted S/O were 640 MM.
    $25.84 BN equity value / 640 diluted shares = $40.38.
    I think the stock is worth about $25, so I'm not going to argue about your other assumptions, but just wanted to clarify the methodology.
    Jan 27, 2014. 05:50 PM | Likes Like |Link to Comment
  • Analysts Rate A Buy. They Should Be Ashamed Of Themselves [View article]
    Fair enough, Matt. Valuation isn't even the driver of my bearishness. CRM is a relative value among SAAS/social media/web 2.0 names these days. I just wanted to point out the difficulties CRM will face in "growing into its valuation."

    For me, the red flags are (a) how such an amazing company in the heyday of its market position cannot generate an ROIC that comes anywhere near its cost of capital (don't pull out the "they're reinvesting in the future" line a la AMZN - no leading software company has consistently generated operating losses and inferior ROIC 15 years into their existence), (b) a CFO previously accused of fraud at NUAN in the early 2000s, (c) a CEO who consistently is making extravagant prognostications about the future while avoiding frank discussions about current performance, (d) persistent, and never ending shareholder dilution, (e) increasingly large and uneconomic acquisitions to mask slowing revenue growth, and (f) accounting questions pertaining to (e) above and (more speculative) revenue recognition policies.
    Jan 24, 2014. 08:19 AM | 6 Likes Like |Link to Comment