CRM results

Salesforce (CRM) reported earnings and sold off after hours on conservative guidance, but it seemed okay to me.

Revenue was up 25% to $2.04 billion
Earnings were 24 cents, up from 19 cents. (Nonsense GAAP earnings were 33 cents).
Cash from operations was $251 million, but total cash was down a little because of a large acquisition of Demandware.

The key though to why this company is misunderstood is that they have all this deferred revenue that the accounting system keeps them from counting yet towards earnings. They have both

deferred revenue of $3.8 billion (up 26% yoy)

unbilled deferred revenue of $8.0 billion (up 29% yoy, which is under firm contract but not yet billed).

Now think about that: they have total deferred revenue, billed and unbilled, of $11.8 billion, while their reported revenue for the quarter was just $2.0 billion. That means that they have almost SIX TIMES as much in total deferred revenue that they haven’t been allowed to count yet, as the revenue that they WERE allowed to count for the quarter. And this was a record quarter for reported revenue (as all their quarters are), not a small quarter. Twelve month trailing revenue is $7.5 billion, and their total deferred revenue is more than one and a half times that.

They have four clouds. Their legacy cloud, which is biggest is growing slowly, while the smaller more rapidly growing clouds will continue to reduce its importance.


Sales Cloud (legacy) 	37% of revenue 	growing 13%
Service Cloud 		28% of revenue	growing 29%
App Cloud & other	17% of revenue	growing 43%		
Marketing Cloud	        10% of revenue	growing 28%

They raised full year guidance.

Conference Call – They were extremely positive.

Salesforce continues to be the fastest growing top ten software company in the world, and last week Forbes ranked us as one of the most innovative companies in the world for the sixth year in a row, and has named Salesforce as The Innovator of the Decade.

Salesforce Einstein is AI for everyone. It’s going to democratize artificial intelligence. It’s going to make every company and every employee smarter, faster and more productive.
At our Dreamforce conference you will see how we are delivering Salesforce Einstein, and we are going to have some great new products like Sales Cloud Einstein, and Service Cloud Einstein, Marketing Cloud Einstein. We are going to have our Analytics Cloud Einstein, and many other AI capabilities in all of our clouds and our customers will be able to build their own AI capabilities using Einstein extensions and Heroku. This is going to be a huge differentiator and growth driver going forward as it puts us well ahead of our CRM competition once again. Salesforce Einstein is also a perfect example of how we have been able to combine organic innovation with some amazing acquisitions.

A few deals slipped at the end of the quarter. As far as these deals that slipped, in my experience some of these deals will close in the next quarter or the next quarter, or the next quarter. None of these deals are going away. None of these deals have been lost.

Looks okay to me. I added a tiny bit in the pre-market.

Saul

For Knowledgebase for this board,
please go to Post #17774, 17775 and 17776.
We had to post it in three parts this time.

A link to the Knowledgebase is also at the top of the Announcements column
on the right side of every page on this board

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Agreed Saul - looked good. Nothing to get worried about for me in this.
Ant

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If anyone is interested, Jim Cramer interviewed Salesforce’s CEO on his Mad Money program immediately after Salesforce posted results yesterday. you can watch the interview at the link: http://video.cnbc.com/gallery/?video=3000547514

Matt
MasterCard (MA), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

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And Bert Hochfeld gives his opinion on the latest quarter’s results:

The fact is that many investors had become habituated to the spectacular, to the ascent to the mountain top — and this quarter was mainly spent on the other side of that mountain top.

Salesforce remains the strongest software company competing for the dollars of users. But that doesn’t mean that every quarter is going to be described by superlatives. Maybe investors after the past several quarters just thought that owning these shares was about the same as partying in Paris after the war. Owning CRM was sort of like life in the cool sophisticated Paris with its cafes and night life. It could only be fun. But this quarter was not fun — it was basically mundane and investors were not prepared for mundane.

That said, it is my opinion that this is the time to step up and buy the shares understanding that the company hit a speed bump and that over time there will be others. Growth will re-accelerate and the valuation metrics, while certainly not a bargain are as low as they have been since tech wreck back in February.

Read the entire piece at http://seekingalpha.com/article/4003717-salesforce-com-defin…

Matt
MasterCard (MA), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

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The key though to why this company is misunderstood is that they have all this deferred revenue that the accounting system keeps them from counting yet towards earnings.
…
SIX TIMES as much in total deferred revenue that they haven’t been allowed to count yet, as the revenue that they WERE allowed to count for the quarter.

The reason is they have not earned that revenue. As simple as that. They have a contract to provide a service for certain fixed price but they have not provided the service and earned the revenue.

Supposing if CRM books all of that revenue today, what happens to subsequent months revenue where they have to provide the service? Isn’t not the fundamental difference between “perpetual” licensing vs SaaS op-ex model?

Backlog is common in service, engineering, construction or even housing. So what is it great about CRM having a backlog?

Why you think market is ignoring or misunderstanding that?

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Wall Street is fully cognizant of the great business model of CRM, as well as its deferred income cash flow benefits. That is why CRM gets such a premium valuation.

The Street is just reevaluating CRM as its growth slows, and it moves from a rapid growth Rule Breaker, into a dominating slower but grinding down the market and its competitors, Rule Maker company.

It is a transitional period. All the great companies went through it at some point. Hyper growth cannot last forever.

VEEV is a company that the Street feared might be reaching that point as its own CRM business matures to slower mid teen growth.

Market beating returns will not be found assuming the Street doesn’t understand the underlying finances of the company. Rather, what the Street does is underestimate the long-term competitive advantages of a company.

Tinker

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This deferred revenue number grows with every contract they sign for their products, so it is not surprising at all that it grows at a similar rate as new revenue?

Do they communicate the lengths of contracts or the average length of the contracts for the deferred revenues? Because that average length better not shorten, and it would shorten at the same time that current revenue growth slows, right? Failure to sell new services in the present is a “hit” to both current and future revenues growth at the same time.

It’s not the same as backlog, which represents new projects to start when you have resources available. And at the same time, deferred revenue represents revenue that you don’t have to put any more “work” into to keep receiving it.

-Another Rob

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Wall Street is fully cognizant of the great business model of CRM…That is why CRM gets such a premium valuation.

Market beating returns will not be found assuming the Street doesn’t understand the underlying finances of the company. Rather, what the Street does is underestimate the long-term competitive advantages of a company.

Tinker,

I’m very bullish on CRM and VEEV, and own both, and I don’t think you’re saying anything to the contrary, but your sentiment on…for lack of other words, underestimating the market, is well-taken.

We should never assume that the market is stupid. There is always a reason behind valuations, even when they aren’t immediately intuitive. It’s just that sometimes that reason may not apply to our thesis. Maybe it has to do with risks that we disagree with (LGIH). Maybe it has to do with recent one-time headwinds (CRM). Maybe there is pressure on retail, and even fast-growing businesses trade lower (SKX). As you point out well, a lot of times the valuation is simply based on the short term as opposed to the long term.

Thanks,
Bear

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And at the same time, deferred revenue represents revenue that you don’t have to put any more “work” into to keep receiving it.

Not entirely correct. There are expenses associated with “providing” the service, for ex: support staff, Data Center costs, etc.

It’s not the same as backlog, which represents new projects to start when you have resources available.

Not correct either.

This deferred revenue number grows with every contract they sign for their products, so it is not surprising at all that it grows at a similar rate as new revenue?

Actually, revenue should grow faster than deferred revenue in most cases (maybe all). We sign 3 and 5 year contracts to provide services all the time and we are paid payment up front for the entire contract. So it is quite possible to receive 500,000 today but recognize the revenue 100k over 5 years. So don’t think that they are receiving cash when they recognize the revenue.

Deferred revenue is actually a liability on the balance sheet