L.D. Salmanson

L.D. Salmanson
Contributor since: 2012
HBS MBAs don't write theses...
Very interesting analysis, and a great read. Thanks for sharing!
Funny, I remember that index.
There are many guides on Google for running a simple MC simulation - I use Oracle Crystal Ball, but I know there are other platforms.
Please do share your results - I expect little correlation.
Thank you for pointing that out. However, I am obviously calculating on FDB.
Again, I want to avoid this discussion, since it's not the terminal growth assumptions here that will skew the model (5%-7%, depending on event triggers), but rather the cost structure assumptions.
Do trust that I am proficient at building models.
I don't think it's a matter of critical mass, but rather not being able to win certain clients without certain parts of the platform. Clients prefer (or preferred at least) one-stop-shops.
Only if I agreed with the conclusion. If market cap was $300B we would clearly be having a different (and more entertaining) discussion.
I have learned not to share my models. I hope you respect and understand.
I will say that I only use models as a sanity check. I am a firm believer in top-down research and analysis, and while I have a tremendous amount of respect for different methodologies, must follow what works for me, and plays to my strengths. In that context, I'm looking for continued adoption by enterprise clients, and limited slip in margins. I am also tracking expense ratios as they pertain to different types of cost stream (such as hiring) - to the extent possible. I'm trying to isolate the various expenses, and identify the source of increase/decrease in spend rate.
I look at price targets on a longer term scale, so I would only feel comfortable discussing a 3-5 year range, in which I predict a 20%-30% increase. I believe down-side is somewhat limited for that same time period, somewhere in the 9%-14% range.
Again, models are subjective, and people put different weights on different metrics. This is my methodology.
Thank you for your comments, and for keeping up the discussion. I’ll try my best to respond:
1. Maybe “stellar” was not the best use of words, but I was trying to convey a feeling in the market of another good quarter. Your point (as was made earlier) is definitely spot on. I believe the story here is not of a reduced top line, but rather that of an increase in expenses, resulting in a reduced bottom line. In that sense, many investors consider this, still, a good quarter. Nonetheless, point accepted.
2. That’s a loaded question, but I will take a shot anyway (feel free to follow up on this point further). First, Amazon is generating far more attention than SF ever has! Amazon offers a huge suite of products, and is a massive IaaS. AWS is the natural choice for most developers. However, it’s not a platform, just an environment. Dreamforce 2012 was packed with teens, as are many other smaller events. The candidates for some of the venture opportunities are also far younger than I expected (I had the privilege of working with one such company, and met two others). I expect DF13 to be similar. While in itself not a strong indicator, together with others, it suggests to me an interest that extends the current development cycle.
3. Since enterprises have moved from securing devices to securing software packages, the ability to package SF in a secure manner through Good is very valuable. It could have been a partnership with Airwatch or someone else, but Good is definitely a strong partner!
4. Revenue, thank you for clarifying; 3-5 years.
5. I advise a couple of UK companies developing on the SF platform (among other platforms), and their client bases are very interesting. Both companies are early-stage, but are showing 20-30% increase in sales to large-enterprise clients (the majority of their market). A couple such integrators are the Nuage Group and Wipro – both have been hiring to keep up with SF integration demand (the Nuage group used to be a small group within 1080, but is now a major part of their business). I feel the sentiment in the developer community (for what it’s worth).
6. Clients, referring to potential clients of SF. Fair question, as I was not clear at all. I was referring mainly to the Sales cloud. Customer support is actually stagnating a bit, and is not gaining major ground vs. SAP or MS. Also ET adds to that trend, as many clients were already choosing ET’s marketing cloud over more traditional vendors.
7. I was actually referring to the PaaS competitors such as Sugar or Zoho – isolating SF from SAP, MS, and Oracle for a moment. In which case it’s more like 80% SF. But to your point, SF is definitely able to go head-to-head with SAP (and more importantly in my opinion, MS), even if currently market share is lower. If I recall correctly, that Gartner report predicted CRM to lead the pack by the end of 2013.
Thanks again for the comments.
Thank yo for your comment - good questions!
I think of it as an investment in infrastructure. Salesforce is building a menu of products, so to speak, that together form a cohesive platform that meets the needs of most enterprise clients. The menu is still missing some items (the ET purchase fills a rather large gap, despite its price tag), and the cost structure will be skewed towards larger expenses until the platform is complete. As a sanity check, I expect expense trends to slow down and start to reverse by Q2 2014. If that does not happen, I will need to revisit m model.
Thank you!
I don't think the purpose of the ET purchase was an increase in top line (there are surely better candidates in the market for that), but rather acquiring a certain client portfolio that could be leveraged throughout the SF platform. Specifically, marketing clouds are becoming a hot spending ticket at large enterprises.
The price was more a result of bidding against large rivals than anything else. However, I agree, as was stated before by a number of commentators, ET would surely want this deal to be in cash.
Thank you for your comments!
These are all things I would like to see as well! However, I would argue that the company is still growing very rapidly, but that such growth in its core products is somewhat lost in the rhetoric. The tax rebate is exactly that - I one time item that I assume that most investors are backing out (I know I am).
It's funny, as it took me many years to see the value in CRM. It was only when I could witness the growth with my own eyes that I was convinced. I see this development continuing in full force, and it's funny that you brought up AMZN (another one of my long-term success stories), as I believe there is a lot of similarity in their models. I think CRM is building out a platform, a process that will take many years, but when completed, will position CRM as a dominant market leader with multiple monopolized revenue sources. I also dislike(d) both CEOs in a similar manner - nothing professional, just a personal disdain.
Great discussion - would love to follow up in another 18 months to see how things played out.
Thank you - good comments.
I don't tend to read analyst reports (sell-side or otherwise), and am well aware of the lowered guidance. In no way am I championing the company for meeting its (reduced) targets, rather, I'm championing their ability to capture a larger share in the enterprise market. I think that I specifically mentioned that the financials have not really changed, and that the market has learned to chill expectations regarding future earnings. My intent may have not come across in its entirety.
I tend to look at larger and longer-term trends. I look at how integrators are implementing Salesforce in large-enterprise clients, at the identity of such integrators (not small shops, but rather large firms), and finally, the development pipeline and interest of the developer community. Using these metrics (and you may obviously chose to use different ones), Salesforce still looks good to me. That's not to say that I don't have concerns, or that I will hold such opinion indefinitely, but I am still confident that the Salesforce growth story is continuing.
While there are many competitors in this space (and it is surely not a winner-take-all market), none are really comparable to Salesforce. As a reader mentioned to me in a private message, Microsoft Dynamics is becoming a big player in this space, and I would be looking in that direction for competition; surely not SAP, Oracle, or any of the smaller open-source platforms.
That being said, I agree with your premise of commoditization. This will be true, however, only for such products that are offered across the board, whereas more propriety platforms will still command higher premiums and margins - such as the social and marketing clouds.
Not sure how to respond... I'm a contrarian investor by every definition. I was contrarian when recommending CRM when it was in the 30's, and I'm contrarian today. I also believe in deep value, and look at asset pricing through very long-term shades - CRM looks good to me through those filters. That being said, I respect your opinion, and will be happy to follow up in 16 months, as I did today, and see how things played out.
Thank you for your comment, and I respect your opinion.
As a thought experiment - what would have convinced you except higher than expected earnings or EPS?
There's definitely some truth in your statements. However, I'm not sure I follow the entire story line to the end. I had a similar discussion last time around, and am confident that we will not see anything plummet.
A little late, but would love to see the model that you used.
Correct me if I'm mistaken, but weren't you rather vocal in criticizing my short recommendation at $15?
No need to be stingy, especially as my comment was misunderstood. This 'clown' has been doing very well for himself and his investors (feel free to look me up). I agreed that I should cover part of my position given market reactions, as I in fact did.
Market sentiment is a feeble thing :) I am happy that I covered part of my position, and happy (despite today's jump) that I am still short.
Agreed with regard to covering the short
While I don't agree with your direction, I tend to agree with the long call option for you. Take the tax loss, and build a position with more potential upside. Again, I wouldn't recommend either...
Not following you logic here... Didn't this exact type of thinking get you into this mess in the first place? What is the positive catalyst that you see igniting future growth? Surely it's not the current lineup, as by now all can see the inflated speculation surrounding unit sales has not lived up to the hype. BB seems to be loosing ground on every front (even their stronghold in services is taking massive hits on a weekly basis)... I've been shorting since that $15 mark you mentioned (and took a lot of flack for writing about it here when I started), and don't see any reason to stop now, forget go long...
The $5 floor that you are suggesting seems optimistic. BB's patent portfolio is worth far less than most imagine (see past sales for reference - especially Kodak during the fire sale), sales will continue to disappoint (both in advanced markets where BB is almost a distant memory, and advancing markets in which BB is loosing ground to Android every day), and all efforts to find a partner/suitor seem to have turned up short... Fro reference - my models were showing $5 six months ago, no I'm looking at $2-$4. Wait until they start bleeding cash...
If BB can reinvent itself in a complacently new market, as did Apple, then we can have a smarter discussion around such plans. However, BB is refreshing itself at best (belatedly and in a not very exciting manner if I might add). They would need to start selling iToasters successful for this analogy to make sense.
Maybe a 5-10 year plan would give them a chance, but there's no way that the market will let them last that long.
Wish you luck with the position either way! I actually love BB, so I find it hard to take joy in any of this... I really wish that they started this whole turnaround years earlier (I never understood that double CEO thing)... I think it's just too late at this point. Unlike many positions, I would love to be wrong on this!
Thank you sir! I hope it works out for you!
I told you that I would follow up after Q2 results - can we at least agree that my logic made sense, and that things seemed to play out as I predicted?
You think? Or maybe I was being humble, and showing you that I made the same mistake not too long ago... You could have at least read it before attacking...
You are right - an iPhone 5 (JBn obviously), as well as a Bold as my work phone and an S3 I was given to test Android APPs. I am definitely not an iPhone fan (even after JB) - and I am very vocal about it. I'm also not completely happy with the Android environment: the S3 is an incredible device, but I still don't feel that it works as "tight" (I wish I had a better word) as I want - still my top choice for the time being. W8 phones are a cute toy for now, but definitely not something I would use unless dog-fed - maybe in the future, as I like the Win8 environment on the desktop, and can see future value in better integration. I'll spare you my thoughts on the Bold - except to say that it is rather old now, and the app ecosystem is less than ideal - not reflective of the potential future obviously.
I definitely don't recall calling iOS (6 or any other version) "secure," and if I'm not mistaken, I said "...BlackBerry's network is far more robust than most of the large carriers, and is far more secure as well." Apple has been doing a lot on the back-end, and is far from the security joke you are describing - Box for example run their OneCloud platform on Apple servers. That being said, device security is clearly flawed on iOS (not that this latest lock-screen workaround was needed to tell us this). Just one of the many reasons I'm not an Apple fan (together with a closed-environment, bad revenue sharing on the exchange, and high price premiums for not-that-impressive design and hardware - to name a few).
However, to say that " BB will show the world another dimension in computer and cell phone security" is giving them way too much credit. I credit BBRY with having the most secure platform (and despite some down-time incidents, pretty reliable) - I actually said it outright - but the added value for a CTO or similar manager is far less than what you are describing. Apple, Google, and Microsoft, as well as Good, MobileIron, and AirWatch, all have very strong security policies, which, some would argue, are on par or superior to BBRY. I personally don't agree, but I would just like to point out that the difference is not as great as you may think.
oneinfiniteloop - Great dialogue, thanks!
I'll start with your last question - I don't advise institutional clients on public equities, and wouldn't be writing my opinions here if I was - while that may not be illegal, it is surely unethical and a bad strategic move. I am a Principal at Greencrest Capital, and invest in private equities for institutional clients (mostly late-stage growth in the TMT space). My investments in public equities are either for my personal portfolio(s) or for my family fund - and I disclose such things either way. Frankly, I would tell my clients to calm down and wait until we can get some more clarity. Now is a really bad time to invest: If it's a turnaround story, will it really matter if you got in at $14 or $20? and if things take a turn for the worst, you would have no exposure, or could short the downfall. I wouldn't be acting now, but that's just me.
With regard to WebOS (please do send the link if you happen to come across) - It's hard to pinpoint what exactly went wrong. That may be one of the reasons, and I bet we can find a few more if we think together (i.e really bad partners). I bet this will be a case study in business schools shortly. I wasn't trying to present myself as an expert on WebOS (nor am I) - just wanted to make the point that smart people don't get it right all the time - I think we can agree on that.
I would be highly surprised if BBRY goes bankrupt, but if things don't turn out well, than divestitures or M&A are the future, and it will be the end of BBRY in its current form... Watsa and Chou are both very intelligent investors, and I have nothing but respect for their work. However, they have both been wrong many times, and could be just as wrong here. I specifically recall him buying Office Depot while I was successfully shorting. I learn a lot from their work (and I would love to be as successful), but that doesn't mean we always agree, nor do I think they agree among themselves always. I have to be true to my analysis, surely so long as it has served me well.
Obviously not, and your attempt to attack me personally is again pointless, and does nothing to advance an intelligent discussion regarding BBRY.
SA editors "strongly pressured" (read: required) me to issue a specific recommendation. So, instead of saying something like "BBRY will either be worth $6-$10 in 18 months if things go wrong, or $50+ if they can turn things around," to say Short or Long. Given that choice, and I appreciate that that is not necessarily the case (nor do I have any vested interest here wither way), I am short. I therefore added the final paragraph - with my target of $6-$10, assuming the short thesis plays out.
AGAIN, happy to have a real discussion on anything I wrote, but if your next comment is similarly irrelevant to the topic I will ignore - would love to have a discussion, but this is tiring.
That seems to be the sense I have been getting from developers - I actually have not been involved with anyone developing for BB10, so I can't really say firsthand how that's been performing outside of synthetic benchmarks. Also, my background is not in hardware, so translating efficiency of a better kernel is really at the edge of my technical knowledge. I'm definitely a fan of the OS - maybe not so much of the UI, but that can be ported :)
Valid point. I can send you a link to some estimates, but who knows how accurate they are. Read some if the channel check reports from analysts, and you'll see where I'm coming from. Either way, as someone already pointed out, Q1 numbers (even if I had accurate data) would not be that meaningful... I'm more interested in the Q2 and Q3 results - after the US launch. Valid point either way - thanks.