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Why Salesforce.com Should Add Back Its Office Rent To Report Adjusted Earnings

Jul. 07, 2013 4:59 PM ETCRM
Michael Blair profile picture
Michael Blair's Blog
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Long/Short Equity, Contrarian, Deep Value

Seeking Alpha Analyst Since 2013

I retired as CEO of an Automotive Parts supplier, and manage an investment portfolio for myself and family. I have a BA in History from Royal Military College of Canada and an MBA from the University of Western Ontario. I have a graduate certificate in Advanced Valuation from NYU and graduate Diploma in Mining Law, Finance and Sustainability from Western University. My first career was as a fighter pilot in the RCAF, and, following my MBA I joined McKinsey & Company, Inc. leaving them for Canadian GE. I left CGE as a Vice President in 1984 and founded The Enfield Corporation Limited ("Enfield") which grew from 243 employees in 1984 to over 10,000 in 1989 when Enfield was taken over and I was replaced as CEO. In 1989, I acquired control of Algonquin Mercantile Corporation, renamed Automodular Corporation in the late 1990's when I turned it to focus exclusively on automotive parts sub-assembly. Along the way, Algonquin turned a few ageing drug stores into Pharmx Rexall Drug Stores Ltd., sold to Katz group in 1997 and today a major Canadian drug store chain. I have been a private investor since 1971 both directly and through a private company controlled by myself and members of my family.

Salesforce.com (CRM) assists investors to understand its economics by reporting "adjusted" earnings which, among other things, result from "adding back" to GAAP earnings expenses associated with management stock option compensation. Since these expenses are not paid in cash, CRM management does not think shareholders should consider them an expense. Management is granted options as an incentive, and it seems most members of management exercise their options and promptly sell their stock when they options come due. It is a neat trick, since options make up most of their compensation, at least in the case of the most senior executives of the company.

As a result, adjusted earnings have been positive while CRM has yet to earn a dime for shareholders taking into account every year since its IPO.

Management have done very well with this scheme, and most of the senior people have made millions. But what of landlords. They get paid in measly cash, enjoy no gains and the company is faced with the horrible situation that is must actually recognize the expense. The loss of value to both the company and to landlords must be material to both. So, in my view, the company should negotiate with landlords to pay their rent in stock!! This simple mechanism would have made the landlord incredibly rich and at the same increased CRM "adjusted earnings". The same could be applied to materials, supplies, commissions, equipment, and in fact to all the items CRM expenses. Why have any expenses at all, if you can avoid them by issuing new shares. As long as the share price goes up, every makes out.

I bet Bernie Madoff would buy into this one. I am short CRM.

Disclosure: I am short CRM.

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