Salesforce: End of Year, End of Hope

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I am a bit behind in my Salesforce analysis due to recent distracting events so it is time to catch up. I did the actual analysis a while ago but neglected to write it up, so here it is. I have purposely ignored the more recent first quarter results, put out a few days ago, to minimise my bias in reviewing these. I will review these next month.

Alas, Salesforce continues to lose money and their financial situation worsened slightly this quarter. No doubt Marc will be hailing it as the best quarter ever but numbers do not lie.

The Late News

So what did Salesforce get up to in their last financial quarter?

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Old Money and Stocks

How did Salesforce fare in the markets up to the end of February?

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We can see that while, in the previous quarter, Salesforce sank into the sixties, the stock price did bounce back to the low eighties (and now sits around the mid-eighties). The biggest jump occurred at the end of 2016. I have no idea why.

Insider Trades

Fortunately, I recorded the Insider Trades when I did my analysis so I have the numbers.

 

2016 Q4

2017 Q1

2017 Q2

2017 Q3

2017 Q4

Insider Sales

4.90%

4.80%

4.80%

4.70%

4.70%

Institutional Sales

5.87%

5.75%

5.68%

5.58%

5.49%

Shares Held by all insider and 5% owners

       

6.27%

As we can see, every quarter ‘insiders’ (such as those on the board, the CEO etc.) sell a bit less than 5% of their holdings every quarter. Institutions (banks, pension funds etc.) are also selling out at a slightly higher rate each quarter.

Yahoo also gave us a new statistic for the end of year of the total shares held by the insiders. The likes of Marc Benioff and all his board buddies hold little more than 6% of the total stock of the company. Every quarter these people say how well Salesforce is doing and yet they own so little of the stock. We know they are constantly selling stock but, perhaps, they are receiving free stock and therefore keeping their ownership stable. This new value will tell us over time.

Numbers of Note

Flattening Transaction Growth

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The number of server transactions is still growing but the rate of growth has flattened to around 25% year on year.

It is interesting that revenue is now at a similar growth rate.

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As I have mentioned before, while revenue growth has remained around 25% year on year every quarter for the last two years, transaction growth used to be a lot larger. In my mind, these two should go in lock-step; as new users come on board, transactions go up and revenues increase. I am keen to see if this will finally start to happen.

Salesforce is Too Costly

As we can see above, the cost of making Salesforce is growing faster than the money it can be sold for. This means the profitability of Salesforce will continue to deteriorate. The moving averages have also crossed now, confirming the worrying trend.

In fact, if we look at the cost growth, it is the highest it has been for over two years; Marc is falling into bad habits again.

More Money Printing

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The growth of stock-based expense, the paying of employees in shares is growing at a higher rate than it has in the last four years. I will explore this more, in the future, when I do this year’s Lemonade Stand analysis but Salesforce is yet again getting drunk on printing their own money via shares.

The GAAP/Non-GAAP Difference

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For the end of the year, Marc really cranked up the accounting acrobatics and rhetoric, clocking up a difference of 11 (13 Non-GAAPs to 2 GAAPs). Does Marc realise his GAAP numbers point to a deteriorating set of finances and, therefore, he is dazzling the crowds with something other than brilliance? Almost certainly.

Earnings Call Buzz Word Bingo

 

2016 Q4

2017 Q1

2017 Q2

2017 Q3

2017 Q4

Number of words

2163

1997

2511

2505

3317

Customers/Customer

5

27

17

20

26

Revenue

14

10

19

18

31

Cloud

8

6

16

12

14

Platform(s)

4

5

5

9

4

Growth

12

7

9

10

15

Operating

11

8

6

3

18

Software

4

1

3

3

7

Salesforce/Salesforce’s

     

20

18

The stalwarts of Customers, Revenue and Cloud remain but, as we can see, at five quarters with less than ten mentions, Platform(s) and Software are no longer of interest to Marc and the team.

My guess is, rather than talking about the specifics of what Salesforce offers, he is selling hope, focussing on his Non-GAAP financials and the promise of what CRM software can do for a business.

Looking into the Future

As the next quarter results have come out, I will not predict what they say but I had predicted the last quarter for Salesforce would end with $2.3b in revenue and a break-even for profit. I was on the money for the revenue ($2.29b) but Salesforce sadly made a loss of just over $50m in the last quarter. Better luck next time, Salesforce.

Conclusions

Other than the bouncing back of the share price, from my perspective, it is another lacklustre quarter for Salesforce. Costs are growing fast, rhetoric is up and the insiders/institutions continue to sell their stock.

Next month I will revisit with the numbers that just came out to see if things have improved or worsened.

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