The Salesforce Anomaly: Record Earnings And Ongoing Losses

| About:, Inc. (CRM)

Enterprise cloud computing leader Salesforce (NYSE:CRM) reported record Non-GAAP earnings per share ($0.51) and a 7th consecutive GAAP loss per share (-$0.14) for the quarter ending January 2013. Revenues and gross profit were also a record. CEO and cloud visionary Marc Benioff saw Salesforce conclude a "spectacular finish to its fiscal year" and then a CRM stock pop of +7.55% the next day.

Along with the 7th consecutive quarterly GAAP net loss and loss per share, a 9th consecutive GAAP operating loss was reported. The cumulative GAAP operating losses during this period are now -$146.2 million and the cumulative net losses are -$282.5 million. A $157.4 million tax benefit at October 2012 results in a lesser cumulative net loss. No matter, CRM stock closed at an all-time high of $182.00.

As I reviewed in detail in a previous article, Why the Salesforce GAAP Vs. Non-GAAP Divergence?, the Non-GAAP earnings per share, the core operations, have been a consistent profit while GAAP losses per share have been occurring since the quarter ending July 2011. Hence the anomalous results to-date:

The year-over-year growth rate for total revenues of +32.1% just beat the expected +31.5% for the quarter ending January 2013. While still exceptional, the pace has been slowing. The initial estimates for April 2013 and July 2013 are +27.5% and +27.6%, respectively. Both revenues projections were raised slightly by analysts after the latest earnings report.

The year-over-year growth rate for Non-GAAP earnings per share was +18.6% and easily beat the projected contraction of -6.9% for the quarter ending January 2013. The initial estimates for April 2013 and July 2013 are a dip to +13.5% and a rebound to +29.7%, respectively.

GAAP gross margin of 78.0% reversed a downtrend and is a three-quarter high. The 15-quarter average is 79.2%. Recurring stock based expenses and amortization of purchased intangibles have been allocated to cost of revenues, reducing the gross margin, and to operating expenses, reducing the operating margin. Net margin is therefore negatively affected by both. Other GAAP expenses, one-time and recurring, have also been allocated. Both current operating and net margins continue negative at -2.49% and -2.50%, respectively.

Segment revenues consist of Subscription and Support (94%) and Professional Services & Other (6%). The proportion of these revenues vary little from quarter to quarter.

Regional revenues year over year have increased across the board, as indicated in the impressive rise in total revenues from the prior year (+32.1%). At January 2013, these were: Americas +33.7% (70% of total revenues), Europe +37.4% (18% of total revenues), and Asia Pacific +17.3% (12% of total revenues).

Deferred revenue (current and noncurrent) was an all-time high of $1.86 billion at the quarter ending January 2013. This was a strong, but slower, year-over-year increase of +35%. The quarter-over-quarter increase was an incredible +44%.

Salesforce generates cash, is liquid and capital is adequate. There are no dividends or stock repurchases. Instead, Salesforce authorizes and reserves stock for future insider incentives.

For the next quarter ending April 2013, management projects a GAAP loss per share of -$0.44 to -$0.42 and the analysts' average is -$0.42. A Non-GAAP earnings per share of +$0.40 to +$0.42 is estimated by management and the analysts' average is +$0.48. That is a substantial and potential divergence of $0.85+ between GAAP and Non-GAAP earnings (loss) per share for April 2013. The eight-quarter average for this GAAP and Non-GAAP divergence has been $0.62.

Even after this latest record Non-GAAP performance, I continue risk-averse about CRM stock. My unwillingness to join the Salesforce parade is not because of the cloud business model, which is a technology sector success story. My reluctance is because of both my lower-risk profile and a general uneasiness about the insider ransacking of company wealth. As a higher risk and faster trader, I would play this on the technical analysis side and dispense with the dismal fundamentals. Therefore, I consider CRM stock a technical, fast long (or short) trade as appropriate with volatility and not a fundamental, value investing buy and hold long trade.

I think the risk is, and has been since July 2011, that all Non-GAAP earnings, the core operating profit, are returned to insiders via stock incentives. This results in an ongoing GAAP loss, which more accurately reflects the outside shareholders' lack of participation in and reduction of the value of the CRM stock.

The insider enrichment plan and structure implemented by management and the Board of Directors leaves no ongoing or future company wealth available to outside shareholders. Accordingly, I do not see how there can be a positive valuation of outsider shareholdings other than their portion of what has not been extracted by insiders. If management intent is to continue taking all the earnings via stock incentives, there is no future earnings stream available for outside shareholders and then no future upside valuation.

Regardless, the market has spoken post-earnings and outsiders have stepped up to purchase CRM stock. Fast trade and realize gains while you can. The market is the final arbiter on this issue.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Application Software, Earnings
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