Salesforce.com Earnings: Was it Really that Good?

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First Impression:

salesforce.com, inc. (NYSE:CRM) posted impressive fourth quarter results that were ahead of consensus on all metrics highlighted by deferred revenue that exceeded consensus by $103M. salesforce.com, inc. (NYSE:CRM)’s revenue and EPS guidance for Q1/14 was just slightly below at the mid-point while guidance for FY/14 revenue was slightly ahead as expected while initial FY/14 EPS guidance was in line. The stock is up 3.5% at the time of this writing.

Salesforce.com Earnings: Was it Really that Good?

salesforce.com, inc. (NYSE:CRM) Fourth Quarter Results:

  • Revenue of $834.7M (32.1% y/y, 5.9% q/q) compared to consensus of $830.9 million and guidance of $825M to $830M.
  • EPS of $0.51 compared to consensus of $0.40 and guidance of $0.38 to $0.40. Approximately $0.06 in EPS upside was due to a lower tax rate.
  • Deferred revenue of $1,863M (44% q/q) compared to consensus of $1,760M.
  • Bookings of $1,341.6M (23% y/y) compared to consensus of $1,300M.
  • Unbilled revenue came in at $3.5B compared to $3.0B last quarter.
  • CFO was $282M compared to consensus of $251M.
  • DSOs of 94-days compared.

Q1/14 and FY/14 Guidance:

  • First quarter revenue and EPS are expected to be $884.5M/$0.41 at the mid-point compared to consensus of $886.0M/$0.42.
  • The company expects FY/14 revenue of $3.845B at the mid-point compared to consensus of $3.857B and previous mid-point guidance of $3.825B. FY/14 EPS guidance was provided for the first time and is expected to be $1.95 at the mid-point compared to consensus of $1.96.

salesforce.com, inc. (NYSE:CRM)’s operating cash flow of $281M was below street estimates. EPS of $0.51 was well ahead of estimates of $0.40 with lower sales and marketing the driver. This could be a sign of increasing leverage in the business or instead that the company was overly conservative in the prior takedown of targets around the BuddyMedia acquisition.

Strong top-line growth – Reported billings growth of 28% was ahead of street 19%. Clean organic billings grew an impressive 44%, significant acceleration from last quarter’s 30% and well above street estimates even after cutting through the many adjustments (currency, pre-payments, invoice duration, M&A). Additionally, Citigroup’s deferred commission math suggests new business grew 44% and off balance sheet backlog grew 59%.

Profitability peeking through again – Operating cash flow of $281M. CRM turned in over 100bps better operating margins than  street estimates. Lower sales and marketing spend was the driver.

When Will This Prodigal Son Return? A Deep Dive on Profitability Concerns, CRM’s model has significant leverage. EPS of While some believe CRM is disproving margin critics, management hinted that a possible Marketing Cloud acquisition could set back margins.

Some were much more skeptical about the results. Todd Sullivan noted that insiders sold $24 million of stock four days before earnings.

Paulo Santos posts the following on SeekingAlpha:

Salesforce.com’s share dilution is not only keeping up with its reported growth, but instead is racing ahead of it. By every conceivable measure something is wrong with this picture. Not only has stock-based compensation gone from 7.2% of revenues to 13.1% as estimated from Salesforce’s guidance, but more amazingly, Salesforce guided diluted shares for FY2014 so high that it implies the issuance of 8.1% of the existing diluted shares in a single year. This too is accelerating from 3.6% of the diluted shares issued during FY2012, the first year where we can calculate the chance in non-GAAP diluted shares.

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