Reports…….Starting To Tip

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By Todd Sullivan of Value Plays

This continues this post from earlier this week. Read this first as the reasoning still hold and I don’t want to repeat it all.

The deferred revenue drop QoQ is what people are stuck on as it is the first sequential drop. This goes to point #6 I made in the prior post. The low hanging fruit for $CRM seems to be taken. That means as they go for these larger more complex deals, there will be considerable pricing, timing and costs pressures. It also means less predictable revenue streams. To that end the mid-point of next years revenue guidance implies YOY growth of 26% vs the 36% growth we are seeing now. John DiFucci, of J.P. Morgan, said “There are clear signs that growth is waning…”. He also pointed out new business signings growth during the Q fell to 12%, which was after five-straight quarters of growth of 55% or higher.

Dow Jones Reported:

Benioff ticked off a series of big deals during the quarter with such companies as General Electric Co. (GE) and Verizon Communications Inc. (VZ), saying the rapid hiring was necessary to deliver service to big enterprises and sell to the next big enterprise. Employment at grew 46% over the year to more than 7,000.

Now, remember earlier this week we noted from $CRM’s most recent 10Q (6/30):

As we target more of our sales efforts at larger enterprise customers, we will face greater costs, longer sales cycles and less predictability in completing some of our sales. In this market segment, the customer’s decision to use our service may be an enterprise-wide decision and, if so, these types of sales would require us to provide greater levels of education regarding the use and benefits of our service, as well as education regarding privacy and data protection laws and regulations to prospective customers with international operations. In addition, larger customers may demand more customization, integration services and features. As a result of these factors, these sales opportunities may require us to devote greater sales support and professional services resources to individual customers, driving up costs and time required to complete sales and diverting our own sales and professional services resources to a smaller number of larger transactions, while potentially requiring us to delay revenue recognition on some of these transactions until the technical or implementation requirements have been met.

This is in effect what we are seeing in Q3. Since $CRM is ONLY giving revenue guidance, we will assume these costs increases are going to continue as Beniof is defending them and at no time has said there are any plans to control costs. With $ORCL entering the game, one has to assume there will now be more pricing pressure on$CRM. That all ads up to continuing margin compression and operating losses. Should sales stumble, things will go south fast as cost reductions always trail top line decreases.

Check out this interview from last night. Now, Cramer is getting so guff for being “too soft” on Benioff. Eh, not so sure I agree. He has to walk the line between asking tough questions and bludgeoning Benioff. After all, he does want him back on the show and I get the impression if Cramer hammered him, Beniof would not come back. For me the tell was at the end of the video.


Cramer “Are you seeing a definitive slowdown in bookings?” ….. Benioff: “We had a great quarter” …… Um… super, but , why don’t you answer the question he asked? Cramer asked it twice…..same non specific answer….

Check this out from the Q&A:

Kash G. Rangan – BofA Merrill Lynch, Research Division

I was just looking to get a little bit more clarity on the deferred revenue commentary, Graham. I think if you look at the billings calculation, the way we do it on Street, that’s been well above 30% the last 4 quarters — 5 quarters actually. And is there something of a change with respect to contract durations or invoicing terms that represents a new way in which we should be thinking about the so-called billings growth rate? Or is there something of a temporary nature that explains why the billings may have been lower than what people’s expectations were? And also if you could clarify, I think you said 30% growth in Q4. I wasn’t sure if you meant revenue or deferred revenue growth rate. That’s it for me.

Marc Benioff

Yes, I think that when you look at what is the best predictor of our future revenues, we’re able to really take a strong look at our guidance. And you’ve seen for this year, that we’ve really been right on that in terms of where we’re going as an organization. And as we look to other metrics in our balance sheet like deferred revenue, the problem is that, that’s a metric that’s rapidly evolving as we start to do more acquisitions, as there are fluctuations in invoicing periods, currency changes. But at the end of the day, our best predictor of where our revenue is going is our guidance. And when we get down to the deferred revenue, it’s not a metric that we manage internally. It’s really only a metric that we report at the end of the quarter.

Seems reasonable…..right? I mean due to the new deals, I guess deferred revenue is becoming less important? Although, whenever I see a metric normally followed A few moments later, check out this exchange:

Adam H. Holt – Morgan Stanley, Research Division

Terrific. As you look into the fiscal ’13 guidance, what would you expect that the contribution of acquisitions to be? And do you think that cash flow will grow in line with revenue next year? Or how do you view the cash flow growth rate relative to revenue?

Graham V. Smith

So Adam, we traditionally haven’t broken out those numbers. And clearly at this point in the year, as you know from previous years, we don’t give any other guidance than just the first blush revenue. We haven’t finished our operating model for next year. We haven’t finished a lot of the detailed plans and therefore clearly, haven’t finished our cash flow guidance either. So I’m afraid I’m just going to pass on that for the moment.

Wait a minute, 45 seconds ago Benioff said “…as we look to other metrics in our balance sheet like deferred revenue, the problem is that, that’s a metric that’s rapidly evolving as we start to do more acquisitions, as there are fluctuations in invoicing periods…”. Essentially they said deferred revenue was not becoming a reliable metric because of the effects of acquisitions but then here they admit they haven’t even dug down deep enough into next year to make that assumption. Sounds like more deflection?

Another thing. Whenever I hear someone use the words “amazing”, “spectacular” etc, etc.. repeatedly (and I mean ad nauseum), I get suspicious. For instance, Benioff uses “amazing” in back to back sentences right off the bat:

I am absolutely delighted to share these amazing third quarter results, and I’ll begin by briefly reviewing some of our financial highlights from the quarter. First, revenue of $584 million rose by amazingly 36%

Revenue, revenue, revenue. That is all we hear about. Here is my issue with that. If I went to the local grocery store with a stack of $1 bills and sold them for $.80 each day after day, my “revenue” would continue to increase each day. But, in doing so I would be recognizing operating losses. That is essentially what $CRM is doing as they have had a operating loss in 5 straight quarters now. That operating loss would be magnified exponentially if they accounted for commissions and “capitalized software costs” like the rest if their industry does rather than spreading them out over years. Eventually, you have to have operating profits….you just have to.

I’ll even grant $CRM should trade on a PE based on their “non GAAP” EPS they now like to report. Well, at $1.30 that is a $26 stock at a 20X PE. Note: The rest of their industry trades based on GAAP PE and does so around the same 20X PE but we’ll play the game here.

Good company? Yes. Great products? Yes. Are shares grossly over valued? Yes. Are cracks starting to appear in the story? Yes. I am not negative on the company because they are a criminal enterprise. I do think they are overly aggressive on their accounting, do a bit of a tap dance on the earnings calls and are focusing investors on metrics that in the long run do not justify the current share price. It would also be nice if management was not cashing in options 2 years early and dumping every share (a sign even they think the share price is too high?) like the CFO did the day before earnings came out. I also think the switch between reporting GAAP to non-GAAP earnings as soon as GAAP turned negative doesn’t quite pass the smell test (notice the focus from Benioff on GAAP in this earnings call two years ago). As a mater of fact, on that call, there is ZERO mention of non-GAAP EPS…..probably because GAAP was still positive.

As I said I covered my short last might for a ~$13/share gain. I still think this is a short. I just did not want to be holding into the earnings call/TV appearance in case something was announced. Since it wasn’t, I will again look to short seeing how this performs today or over the next few days. Since nothing dramatic was announced negatively, shares may drift here for a while. I am sure those entities with >$150 price targets are going to come out with reasoning to reiterate it and that may bump shares. If it happens, I’ll be there…..shorting

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