Salesforce +2.5% AH on FQ1 beat, solid revenue guidance


Salesforce (CRM) expects FQ2 revenue of $1.285B-$1.29B and EPS of $0.11-$0.12 vs. a consensus of $1.27B and $0.12. FY15 (ends Jan. '15) guidance is for revenue of $5.3B-$5.34B and EPS of $0.49-$0.51 vs. a consensus of $5.29B and $0.50.

The deferred revenue balance rose 34% Y/Y in FQ1 to $2.32B after growing 35% in FQ4 and 34% in FQ3. Unbilled deferred revenue (contracted but not billed) rose 33% to $4.8B, an improvement from FQ4's 29% clip.

Spending remains heavy: GAAP sales/marketing spend +37% to $639.4M, R&D +43% to $188.4M, G&A +25% to $162.1M. Capex totaled $60.1M. Nonetheless, free cash flow rose 80% Y/Y to $413M, well above net income to $69.5M.

Americas revenue (71% of total) rose 39% Y/Y. EMEA grew 35%, and Asia-Pac 26%.

FQ1 results, PR

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Comments (13)
  • rkw29
    , contributor
    Comments (712) | Send Message
     
    What a shocker!! Just what I said and the same old story. A "beat" with wider losses. Of course the "losses" part of the equation keeps getting left out in all these articles.
    20 May 2014, 04:23 PM Reply Like
  • Eric Jhonsa
    , contributor
    Comments (1276) | Send Message
     
    For cloud software companies, free cash flow is a much more useful metric (wish I could bold/italicize that point) than either GAAP or non-GAAP income. The reason being that these companies get paid up-front for subscriptions that last a year or longer, but are only allowed to recognize the revenue in GAAP/non-GAAP results a quarter at a time.

     

    Thus, their revenue (on which GAAP/non-GAAP income is calculated) will inevitably under-count just how much money the companies are taking in when they're growing subscribers. Billings, which underpin FCF calculations), are a much more important figure.

     

    IMO anyone who buys or shorts Salesforce needs to value the company based on billings and FCF/share rather revenue and EPS (ditto for N, WDAY, NOW, etc.). On an FCF basis, the company is solidly profitable, albeit still richly valued.
    20 May 2014, 07:51 PM Reply Like
  • rkw29
    , contributor
    Comments (712) | Send Message
     
    The company is 15 years old. Not some new startup billing new customers. None of these "billings" over that time have turned a profit? Yes income from this kind of business model can be collected in the future, but not that far. At least catch up to the losses. Not INCREASE them.
    20 May 2014, 08:52 PM Reply Like
  • Eric Jhonsa
    , contributor
    Comments (1276) | Send Message
     
    Please reread what I wrote. Billings, not revenue, show how much money a cloud software company is bringing in. And free cash flow, not EPS, shows what its real profits are, as it highlights how much money is coming in vs. going out. Salesforce is clearly profitable on an FCF basis.
    20 May 2014, 08:57 PM Reply Like
  • Lares Capital
    , contributor
    Comments (438) | Send Message
     
    On cash flow basis Madoff investments were also profitable until 2008 for this very reason. He got money upfront and never paid anything back.

     

    Economically speaking, CRM is probably marginally profitable, after one normalized their FCF for negative working capital, stock compensation, and maintenance capex but the company should be trading at 4-5x its sales at most as its software peers, not current 8x.
    20 May 2014, 09:58 PM Reply Like
  • BrutalHonesty
    , contributor
    Comments (1145) | Send Message
     
    I would imagine there are expenses involved with completing the work under the long-term contracts for which they are paid upfront. If you are going to give them credit for the upfront payment shouldn't you also calculate a reserve which captures the cost to CRM for fulfilling their associated obligations?
    20 May 2014, 10:17 PM Reply Like
  • Eric Jhonsa
    , contributor
    Comments (1276) | Send Message
     
    Comparing Salesforce to a Ponzi scheme like Madoff's is like comparing Oracle or SAP's license sales to a Florida real estate fraud. Which is to say, there is no comparison. Salesforce is going to provide a service they've been paid for, and have a history of performing.

     

    Oracle or SAP will sell an on-premise license that's used for years, and recognize all of the revenue up-front. Salesforce will sell a subscription that's used for years, but only recognize a small percentage of the revenue up-front (in spite of collecting all of it). I hope you can see how that leads Salesforce's revenue to be understated relative to the amount of money that's actually coming into the company.

     

    Agree the dilution from equity compensation should be accounted for, but Salesforce is still more than marginally profitable afterwards. Even if one directly backs out equity compensation (not the only way to expense it), FCF was $280M in the last quarter.
    20 May 2014, 11:00 PM Reply Like
  • Jay Schembs, CFA
    , contributor
    Comments (148) | Send Message
     
    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.
    20 May 2014, 11:17 PM Reply Like
  • Eric Jhonsa
    , contributor
    Comments (1276) | Send Message
     
    Fair point about A/R liquidation giving a cash flow boost. That said, Salesforce's cash flows are by no means entirely the result of accounting tricks and quirks. The company's core business ops are clearly taking in more money than they're spending.

     

    My point, of course, isn't to say that Salesforce is a buy (or a sell). Like many cloud software names, I think its multiples are still a little steep. I'm just pointing out how the GAAP numbers that many shorts like to focus on paint an incomplete picture for the company and its peers.
    21 May 2014, 10:06 AM Reply Like
  • Doyle3000
    , contributor
    Comments (1977) | Send Message
     
    "The company's core business ops are clearly taking in more money than they're spending"

     

    If that were the case, they'd show a GAAP profit. They appear to be spending about $100mm more than they're taking in.

     

    I understand that P/E doesn't always matter in these growth companies but it's looking like the street is starting to say it matters. That quarter they just announced would've created a 10% hike in share price in 2011, 2012 or 2013. The party is coming to an end.
    22 May 2014, 09:00 AM Reply Like
  • Christopher Speetzen
    , contributor
    Comments (596) | Send Message
     
    I'm curious if somebody can explain why a company like CRM is allowed to use "Non-GAAP" earnings? Seems to me stock-based compensation should definitely be a factor when judging a company (especially when is a recurring quarterly item, not a special one-time item).

     

    Even if you use the Non-GAAP earnings of $0.11 for the quarter, how do you come up with a $53 stock price?

     

    Seriously, I don't understand it and would appreciate any guidance. Thank you SA community.
    20 May 2014, 04:52 PM Reply Like
  • rkw29
    , contributor
    Comments (712) | Send Message
     
    It is speculation an hype that gets you a 33 Billion Dollar Market Cap without ever making a profit. People following the herd because they are afraid to miss out. A stock is only worth what people are willing to pay for it. The Cloud SaaS space is just like the tech bubble of 2000. People are making wild predictions about this space that it will be the "Next big thing". If you think Salesforce Valuation is high based on revenues and profits (or lack of), look at the other small cap SaaS space competitors. Workday, NetSuite, Service Now. Also the easy money created by the Fed has increased Margin stock trading to a record high. Basically buying stock with borrowed cheap money and pumping up momentum stocks like CRM.
    As for the non-GAAP issue, any company can report non-GAAP and many do if it makes their numbers look better. Ignore it. Especially for a company that has been in business as long as Salesforce. It may be a helpful tool for putting a valuation on a new company growing fast but Salesforce is 15 years old. To me, GAAP is what matters. I know it is hard since most financial sites show the Non-GAAP numbers and pretty much bury the GAAP numbers. You have to watch what you read.
    20 May 2014, 05:27 PM Reply Like
  • Doyle3000
    , contributor
    Comments (1977) | Send Message
     
    And once again CRM brags about selling $1 bills for $1.10 and then paying its management about $0.30 in stock based compensation as a reward. But not counting that expense.

     

    Don't know if anyone noticed but they are now LOSING almost $100mm per quarter. That's right folks, they are on pace to lose $400,000,000.00 this year in GAAP accounting. FYI GAAP stands for "Generally Accepted Accounting Principles" i.e. credible financial reporting

     

    Anyone buying a stock that is on pace to lose this much money is an idiot and deserves the inevitable huge losses
    20 May 2014, 07:24 PM Reply Like
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