Salesforce: Newton’s First Law

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I thought I would test my own mettle this time around and predict the financial results of this quarter before they were announced. Let us see how I fared and how Salesforce fared.

The Numbers

As usual, all numbers are taken from Salesforce’s web site or, in the case of historical cash and accounts payable numbers, from the official filings of Salesforce to the SEC.

 

2014 Q1

2014 Q2

2014 Q3

2014 Q4

2015 Q1

Revenue

892,633

957,094

1,076,034

1,145,242

1,226,772

Subscription Revenue

842,221

902,844

1,004,476

1,075,001

1,147,306

Revenue Cost

208,994

217,717

268,187

273,530

292,305

Operating Cost

728,179

779,234

905,778

975,458

989,808

Salesforce Income

-67,721

76,603

-124,434

-103,746

-96,911

Revenue Growth # yoy

197,166

225,445

287,636

310,561

334,139

Revenue Growth % yoy

28%

31%

36%

37%

37%

Revenue Growth % mom

7%

7%

12%

6%

7%

Total Cost % yoy

31%

34%

39%

46%

37%

Staff

10,283

12,571

12,770

13,312

14,239

Staff Growth (yoy)

23%

43%

37%

36%

38%

Margin

-7.59%

8.00%

-11.56%

-9.06%

-7.90%

Growth Difference

-2%

-3%

-3%

-9%

1%

Cash

1,927,990

579,881

651,750

781,635

827,891

Accounts Receivable

502,609

599,543

604,045

1,360,837

684,155

The standout for me is the comparison of the Revenue Growth, year on year and the Total Cost, year on year. For the past four years, every quarter, costs have grown quicker than revenue, except for one quarter where revenue edged ahead by 1%. So, for both to be at 37% is progress. I want to see this happen for three quarters before I pop the champagne corks but it is a good sign.

Another positive sign is that cash is higher than the previous quarter and that money owed to them (Accounts Receivable) has significantly decreased. More of this later.

Unfortunately, before we get too carried away, they did make a loss of 97 million dollars this quarter, 44% of the loss for the entire previous year or, just shy of half the amount; they managed to lose in one quarter what took half a year, last year.

My Predictions

The day before announcement, I predicted, via twitter, the following numbers:

  • Revenue: $1.2-1.25b (at $1.23b, I was right on the money)
  • Operating Costs: $1b (about 1% off)
  • Revenue Costs: $280m (about 4% off)
  • Profit: -$100m (about 3% off)
  • Staff: 14k (about 2% off)

Overall, I am quite happy with my efforts. For the next quarter, I predict:

  • Revenue: $1.28b
  • Operating Costs: $1.06b
  • Revenue Costs: $310m
  • Profit: -$50m
  • Staff: 17k

Looking To The Future

For the next quarter, Salesforce predict revenue of between $1.285b and $1.290b (more optimistic than I am). GAAP loss per share is expected to be -$0.12 to -$0.13 per share on 618 million shares. Multiplying together, this gives a loss of -$77m. I am a little more optimistic for the loss, but it is hard to predict.

For the year, Salesforce expects revenue to be $5.30b to $5.34b and loss is expected to be between -$0.47 and -$0.49 per share on 622 million shares, giving us a total loss of just shy $300m. Their total loss for last year was a bit over $200m so profits are still heading in the wrong direction, according to their prediction.

Revenue and Cost Growth

This is a similar story to the previous results but costs have been tempered to be equal to revenue growth.

image

Cost growth is the green line, revenue growth is the red line. For increasing profits (or, in our case, decreasing losses) the red line needs to be above the green line which, in recent years, has been rare indeed and really has not happened in the past four years.

This quarter, the two lines have come together at 37% year on year growth. This has happened before and the green line has ‘bounced’ rather than break through the red but perhaps next quarter will be different. Based on Salesforce’s predictions for the end of the year though, I am guessing not.

Cash and Accounts Receivable

In the previous quarter, I was concerned with what appeared to be a blowout in Accounts Receivable (money owed to Salesforce from customers). Fortunately, this has come down and cash (reserves for a rainy day) have increased slightly. Overall, total current assets are about the same as the previous quarter. Using the filings by Salesforce to the SEC, let us look at the historical values for cash and accounts receivable.

image

Not surprisingly, Accounts Receivable has little bumps towards the end of the year, which coincides with the US financial year. My guess is credit terms become a little more generous as the year ends to close a few extra deals before the Christmas break. The ‘blowout’ in the previous quarter was simply the latest end of year bump.

A trend which interests me is, up until 2012 Q4, cash was always above accounts receivable. After that time, the two seem to be running side by side. Cash, in my opinion, is a better asset to have than customer credit (accounts receivable) so it will be interesting to see how these two trend in the future.

Earnings Call Buzzword Bingo

As before, the rule is the words on the list have had 10 or more mentions in the past five periods. No words added to the list but ‘Enterprise’ has dropped off.

  2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1
Number of words 2800 3500 3700 3700 2400
Customers/Customer 32 40 39 25 22
Revenue 32 37 37 29 19
Cloud 16 23 31 14 15
ExactTarget 0 24 21 15 7
Platform(s) 12 19 21 12 10
Service 12 14 19 13 13
Sales 9 14 16 4 6
Growth 13 12 14 12 9
Marketing 0 12 12 11 5
Cash 10 10 10 16 10
Mobile 16 11 7 5 2
Operating 9 9 7 10 11
Social 10 9 6 3 2
EPS 7 10 5 6 6
Salesforce1 0 0 0 11 6

The transcript used is the portion before questions and the Salesforce team were less verbose this time going from around 3700 words right down to 2400 words.

Customer(s) and Revenue still top the list and, Mobile and Social continue to drop.

No words are significantly more prominent but a few are getting less attention. Marketing seems to be of less interest, along with product plugs (ExactTarget and Salesforce1). There was a direct question asked during the call about how profitable ExactTarget had been in the quarter but the Salesforce executive refused to answer. It is possible the ExactTarget acquisition is not producing fruit as quickly as would be liked or perhaps integrating it with Radian6 and Buddy Media is proving more troublesome than initially thought. I expect time will tell.

A similar situation may be happening with Salesforce1, given the drop in mentions of Salesforce1 and Mobile.

Google Trends

image

“Dynamics CRM” is the blue line and “Salesforce.com” is the red line. Dynamics CRM continues to be the more popular search term worldwide and appears to be breaking away.

Geographically, the highest countries remain the same as last quarter.

Insider and Institutional Sales

Again, the trends remain the same for share sales. Institutional sales appear to be tapering though.

 

2014 Q2

2014 Q3

2014 Q4

2015 Q1

Insider Sales

0.50%

0.50%

0.50%

0.50%

Institutional Sales

3%

2.75%

2.72%

2.71%

Still no one buying despite the average analyst rating being more of a buy than a sell. It is lucky the institutions are freeing up all these shares so others can follow the recommendations and buy the shares.

Conclusions

Newton’s First Law states: “An object either remains at rest or continues to move at a constant velocity, unless acted upon by a force”. In other words, Salesforce continues on its trajectory with little changing, based on their own predictions for the year. It will take an impulsive force for things to change and it is clear, based on the exuberance of the executive, this force will not come from within.

The institutional sales will slowly apply a force to the Salesforce share price, as will shareholder sentiment. Also, if there is a takeover of Salesforce through merger/acquisition, the new owners (say Google or Oracle) will apply their own pressure to the Salesforce body. With the share price having a lot of optimism built in, it is unlikely to be a takeover target in the near future so this is unlikely to be an applied force any time soon. As for the shareholder sentiment, no one can predict this.

While not having the drama of a telenovela, I enjoy watching Salesforce, like watching a comet move gracefully across the sky. Some comets cross the skies for millennia, others burn out or crash and, for me, the excitement is seeing which Salesforce will be. Whatever the outcome, I find my gaze fixed and will file my report next quarter on this radiant body.

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