CRM - Salesforce.com

[Phaceliacapital]

SAN FRANCISCO,  March 21, 2013  /PRNewswire/ -- Salesforce.com (NYSE: CRM), the

enterprise cloud computing (http://www.salesforce.com/cloudcomputing/) company,

announced today that its Board of Directors has approved a four-for-one (4:1)

split of the Company's common stock and that its stockholders have approved a

proportional increase in the number of authorized shares of salesforce.com

common stock from 400 million to 1.6 billion. 

 

And comments from our """investment guru""" Jim Cramer :D :

 

So what's changed? I think Salesforce.com's $170 stock is simply too treacherous to own, not because of how the company's doing, which is fabulously, but because of how poorly the security trades.

 

Yes, it is a reason that investors should no longer fear an unpredictable stock of what has become a very predictable company

 

Lol

 

I am still short with 2014 puts

[Guest fedcep]

I wouldn't sell calls, implied vol is very low, and you'd be short gamma.

 

Than it makes sense to buy puts. Didn't know imp vol was low. Thought it would be extremely high.

 

Sorry, just saw this. I agree. That's the position I have on.

[GrizzlyRock]

The slowing revenue guidance is emblematic of penetration and and growing competition (regardless of Benioff's assertion of their Gartner position as proof) may begin to cause guys to look at the true valuation metrics of the biz. When trading on revenue growth at any cost is over, its still up to CRM to transition the rev growth to earnings and free cash flow. I thought the cash generation was actually reasonable (something to watch anyways) but knowing Benioff he'll overpay for an acquisition shortly. Earnings continue to be dismal especially when you factor in stock comp.

 

"I don't get it - how can Salesforce not be worth more that 100x fake Non-GAAP earnings guidance ?!!?"

- Silicon Valley's Finest

 

Definitely not the "emperor has no clothes!" moment on Salesforce but we'll have to see how the sell side guys react.

 

CEO Benioff = Chearleading Exiting-stock Over-optimist!

 

I'll blame Friday for the punchy post.

[nkp007]

The slowing revenue guidance is emblematic of penetration and and growing competition (regardless of Benioff's assertion of their Gartner position as proof) may begin to cause guys to look at the true valuation metrics of the biz. When trading on revenue growth at any cost is over, its still up to CRM to transition the rev growth to earnings and free cash flow. I thought the cash generation was actually reasonable (something to watch anyways) but knowing Benioff he'll overpay for an acquisition shortly. Earnings continue to be dismal especially when you factor in stock comp.

 

"I don't get it - how can Salesforce not be worth more that 100x fake Non-GAAP earnings guidance ?!!?"

- Silicon Valley's Finest

 

Definitely not the "emperor has no clothes!" moment on Salesforce but we'll have to see how the sell side guys react.

 

CEO Benioff = Chearleading Exiting-stock Over-optimist!

 

I'll blame Friday for the punchy post.

 

I wish there were an asymmetric way to short this.

[ItsAValueTrap]

Um.... put options?

[Phaceliacapital]

http://seekingalpha.com/instablog/818827-brooklynvestor/1923281-marc-benioff-s-incredible-story?source=kizur

[Olmsted]

http://seekingalpha.com/instablog/818827-brooklynvestor/1923281-marc-benioff-s-incredible-story?source=kizur

 

Haha classic.

[Guest valueInv]

Boy o Boy:

 

http://techcrunch.com/2013/07/15/salesforce-com-takes-300m-loan-for-exacttarget-acquisition-cash-resources-getting-tight

[ItsAValueTrap]

So CRM is making record highs yet again.  Anybody buying puts?

 

On one hand, the valuation seems extreme on a price to sales ratio.  31B market cap for 3B in sales.  Of course, it's about what salesforce will earn a few or several years from now.

 

On the other hand, this doesn't seem like a great short.  The stock probably won't go to 0, and if it does collapse it might be a few or several years from now so your IRR isn't that great even if the short thesis does work out.

[Phaceliacapital]

I didn't add to my existing 2014 position, I agree with your remarks and expect my puts to expire otm, although the valuation is really out of this world

[enoch01]

So CRM is making record highs yet again.  Anybody buying puts?

 

On one hand, the valuation seems extreme on a price to sales ratio.  31B market cap for 3B in sales.  Of course, it's about what salesforce will earn a few or several years from now.

 

On the other hand, this doesn't seem like a great short.  The stock probably won't go to 0, and if it does collapse it might be a few or several years from now so your IRR isn't that great even if the short thesis does work out.

 

To me it seems like more and more people are saying its not a great short in spite of all its "issues".  I take this to mean the time to go short is getting closer.  But each time I checked it has been too expensive to short it for my taste.

[jschembs]

Can someone point me to a $3+ billion revenue business with 80% gross margins that can't generate operating profits?

 

Look at ORCL, SAP, and MSFT in their high growth phases - each were generating substantial operating margins in those periods.

 

Something doesn't add up for me vis-a-vis CRM. Anyone with a forensic accounting bent know how easy it would be for a company to book sales discounts as marketing expenses and drop those down from either a contra revenue account or COGS into operating expenses? That's one explanation in my mind that carries weight as to how CRM can generate such substantial revenue at high gross margins while not generating operating profits. Benioff is so focused on top line growth that it wouldn't surprise me if they bent the rules to maintain gross revenue targets.

 

Benioff touts the wonderful opportunities ahead for the marketing cloud and their "platform," yet they do not break revenue out by segment, which leads me to believe they're largely still a one-trick CRM pony. CRM software is highly competitive, and the SAAS model IMO is much more subject to disruption by competitive software offerings, as the implementation/switching costs are so much lower than traditional on-premise software. Competition is growing in their core SAAS CRM market as well, with Goldman recently investing in Sugar CRM (which was also adopted by IBM as their CRM platform).

 

Short CRM is my largest position currently, so my views need to be taken with a grain of salt. I've attached, however, a thorough dive into CRM's ROIC from Cowen, which shows a business consistently generating returns fall below their cost of capital. I must say I was shocked to see this type of analytical work from a sell-side report.

2013-09-11_CRM_Cowen.pdf

[Guest wellmont]

i think it's going to be a great short someday. but not with me trying to do it while massive global money printing going on.

[Hoodlum]

I have been monitoring CRM as a possible short for a couple of months.  I shorted them a couple of years ago with some nice profit.  Still not in yet this time around but monitoring it closely.

 

Most of the recent upswing is related to new revenue from their recent puchase of ExactTarget ($2.5B all in cash).  What I find interesting is that their last purchase required debt financing so even their target companies don't want their stock.  Organic growth is slowing and it will become more difficult to finance future aquisitions to keep the growth story going.  Their expenses are still rising faster than revenue with increased marketing and debt costs.  Their employee stock options will be over 10% of equity this year.

[nkp007]

This company has turned me off to shorting. Lots of lessons learned.

 

I still believe it's worth far, far less. Public markets will eventually agree.

[writser]

Short CRM is my largest position currently, so my views need to be taken with a grain of salt. I've attached, however, a thorough dive into CRM's ROIC from Cowen, which shows a business consistently generating returns fall below their cost of capital. I must say I was shocked to see this type of analytical work from a sell-side report.

 

Your largest position or your largest short position? I'm short a couple of hyped tech stocks as well, but keep the positions very small. Wouldn't dare putting 10% of my portfolio in a CRM short.  These positions tend to explode.

[ItsAValueTrap]

Can someone point me to a $3+ billion revenue business with 80% gross margins that can't generate operating profits?

While this doesn't answer your question directly, some tech companies do manage to make huge gains despite looking expensive.  Paypal (taken over by eBay) and Vmware (when vmware was purchased by EMC) are some examples.  The CRM product is legitimately a very good product (arguably the best in its field) so I'm not excited about shorting CRM.

 

as the implementation/switching costs are so much lower than traditional on-premise software

I don't think it makes a huge difference whether it's SaaS or traditional.

 

Switching costs are somewhat high since these CRM products are complicated and often require specialists or consultants to install and integrate the software with the company's other software and the company's business practices.  There is a huge learning curve for employees to get familiar with the new software.

 

What we're really concerned about is (A) whether Salesforce is gaining or losing customers and (B) how well it is retaining its existing customers. 

 

*I am short CRM (via put options)

[jschembs]

VMW is a great comp, growing at similar rates in the same era. Since FY2004 (one month difference in fiscal year ends):

 

VMW's EBIT margin has averaged 18% (high of 24.2% in 2005, low of 10.8% in 2009) while growing revenue from $220 MM in 2004 to $4.6 BN in 2012 (46% CAGR)

 

CRM's EBIT margin has averaged 3.5% (high of 8.8% in 2010, low of -1.5% last year) while growing revenue from $176 MM in 2004 to $3.1 BN in 2012 (43% CAGR)

 

My argument here isn't that CRM is a valuation short (which it certainly is, but that's another discussion, I think there's a fundamental problem with their business model.

[VAL9000]

Can someone point me to a $3+ billion revenue business with 80% gross margins that can't generate operating profits?

While this doesn't answer your question directly, some tech companies do manage to make huge gains despite looking expensive.  Paypal (taken over by eBay) and Vmware (when vmware was purchased by EMC) are some examples.  The CRM product is legitimately a very good product (arguably the best in its field) so I'm not excited about shorting CRM.

 

as the implementation/switching costs are so much lower than traditional on-premise software

I don't think it makes a huge difference whether it's SaaS or traditional.

 

Switching costs are somewhat high since these CRM products are complicated and often require specialists or consultants to install and integrate the software with the company's other software and the company's business practices.  There is a huge learning curve for employees to get familiar with the new software.

 

What we're really concerned about is (A) whether Salesforce is gaining or losing customers and (B) how well it is retaining its existing customers. 

 

*I am short CRM (via put options)

 

The switching costs are higher for SalesForce but not because of the implementation effort.  It's because the platform allows for integrated products to be built that extend from the CRM core solution. Now instead of replacing just CRM you have to replace both CRM and Marketing Automation (assuming you adopt both as a customer).  Presumably all of the significant acquisitions that SalesForce makes are integrated into the common cloud platform.  This is a competitive advantage over because the integration costs are much more competitive than those for Vendor A CRM + Vendor B Marketing Automation.

 

My value investor rationale says this is a good short but my entrepreneurial gut says don't bet against a winner.  A question for the shorts: how many customers are leaving SalesForce in the face of this competition?  Or another way to ask this is...  Are these contracts annuities... Or perpetuities?

 

Good luck to all I will continue to observe.

[GrizzlyRock]

Let's invert: the longs are looking at quality SAAS business model, consistent revenue growth, market share in a fairly sticky product business, 1st mover advantage in CRM software, and the ability of Salesforce.com to reduce their selling expenses (currently ~40% of revenue) in the future and thus generate FCF.

 

CRM as a business was exceptional  being the first to put forth a solid CRM system via SAAS model (thus in terms of driving a high EBITDA multiple and high customer retention).  So the underlying product is useful to customers and sticky.  This is true. 

 

The question is FCF generation.  When a dominant software company (say ORCL or MSFT) dominates their industry they begin gushing cash. Yet we haven't seen this with CRM even though much of their (bloated) sales staff is paid in "free money" equity.  Why is that?  Why can't CRM generate cash?  Oracle trades at 11x unlevered FCF, MSFT trades at 11.5x unlevered cash flow while CRM trades at 38x unlevered FCF. Is CRM's growth curve that emphatic with the big dog enterprise software players getting into the market?

 

The shorts are looking at unsustainable growth rate of revenue growth, questionable accounting, management selling stock hand over fist, low ROIC.  Said another way: In an upside case CRM will do ~$1.2 billion in FCF in FY2015, thus its trading at~25x FCF or a 4% FCF yield in an upside case?  Does this makes sense?

[ItsAValueTrap]

Maybe I am crazy but I don't think that SaaS is that important.  SaaS has been around for a while and I think it's overhyped.

 

Look at email software:

Hotmail - SaaS

Gmail - SaaS

Outlook - Traditional application

 

Because the Internet is more prevalent nowadays, SaaS is more viable and widespread than in the past.  But I don't think it makes such a big difference to a product's competitiveness.  Both approaches seem to be valid and legitimate for the same product niches.  (Obviously there are technical advantages to both approaches.)

 

Though at the end of the day, I think that most of us would agree that Salesforce has very, very good software.

[VAL9000]

The question is FCF generation.  When a dominant software company (say ORCL or MSFT) dominates their industry they begin gushing cash. Yet we haven't seen this with CRM even though much of their (bloated) sales staff is paid in "free money" equity.  Why is that?  Why can't CRM generate cash?  Oracle trades at 11x unlevered FCF, MSFT trades at 11.5x unlevered cash flow while CRM trades at 38x unlevered FCF. Is CRM's growth curve that emphatic with the big dog enterprise software players getting into the market?

 

Well if you want to compare CRM to MSFT or ORCL then you need to compare all of the metrics.

MSFT puts 26% of revenue to SG&A, growth rate ~ 8% per annum (past 3 years)

ORCL puts 24% of revenue to SG&A, growth rate ~ 12% per annum (past 3 years)

CRM puts 69% of revenue to SG&A, growth rate ~ 33% per annum (past 3 years)

CRM gets a bit more juice for its investment, but that's alright.

 

Let's plug those numbers back in to the FCF figure.  If you assume CRM invests just 25% of revenue in sales, they would add ~900mm in after-tax net income, which presumably would stack right on top of current FCF.  That brings the FCF multiple to 18x.

 

Is CRM's cash flow generation worth ~60% more than MSFT and ORCL?  It's not that far off the mark if you consider the subscription model vs. the software license model.

 

[jschembs]

Chanos discloses a long WDAY position as a hedge against an unnamed cloud company that is an "accounting nightmare." He dodged the question a few weeks ago as to whether he was short CRM, but I strongly suspect that's it.

[Guest valueInv]

Chanos discloses a long WDAY position as a hedge against an unnamed cloud company that is an "accounting nightmare." He dodged the question a few weeks ago as to whether he was short CRM, but I strongly suspect that's it.

 

Do you have a link to the accounting problems at crm?

[jschembs]

1. Persistent usage of non-GAAP financials in investor communications and PR

2. Substantial management judgment involved in purchase accounting related to acquisitions

3. Goodwill and intangible assets now comprise more than 55% of total assets

4. Operating cash flow largely comprised of share-based compensation and increasing operating liabilities