Questions About Salesforce (CRM)

Of the many new stock positions Saul initiated in the last couple months, Salesforce interested me perhaps the most. for starters, I really like the macro tailwinds in place for cloud-based software companies like Salesforce. I’ve seen interviews with their CEO and was always impressed and so when Saul initiated a position I thought I would take a closer look.

I started by reading two recent Bert Hochfeld articles on the company he had written in recent months. The articles can be found at:…


I was a little puzzled though when he said you couldn’t really value the company based on traditional metrics. Now granted, I might be shy because that’s exactly what people about KMI when I bought it at $40 two years ago or so. When I looked over the numbers I also noticed the company’s stock-based comp was HUGE (though, as Bert points out, it is gradually shrinking) and that there are massive differences between their GAAP and non-GAAP earnings. Anyway, here are the basic numbers:

Revenue (millions)	Q1		Q2		Q3		Q4				
2015					1319		1384		1445	
2016			1511		1635		1712		1809
2017			1916

EPS (non-GAAP)	        Q1		Q2		Q3		Q4		
2015					0.13		0.14		0.14
2016			0.16		0.19		0.21		0.19
2017			0.24

Current (2017 Q1 Earnings):

Revenue Growth (millions)
2016 Q1 TTM Revenue = 5659
2017 Q1 TTM Revenue = 7072
Year Over Year Revenue Growth = 25%

EPS Growth (non-GAAP)
2016 Q1 TTM Earnings = 0.57
2017 Q1 TTM Earnings = 0.83
Year Over Year EPS Growth = 46%

P/E (Check Current Price) = 79.89/0.83 = 96.25

1YPEG = 96.25/46 = 2.1

Soooo, by these numbers, which is how I’ve been initially screening companies for the past year or so, would suggest CRM might not be the best place for investing dollars right now. Of course, as Bert says, the best way to value CRM is not through “traditional metrics”.

I guess what I’m asking is, can someone who is invested in Salesforce show me how they are valuing CRM to justify an investment with them?

Also, don’t the high stock-based comp numbers and difference between the GAAP and non-GAAP earnings scare anyone a bit? What about their sky high non-GAAP P/E?

I am seriously asking, because I’m sure I’m missing something, but this just doesn’t seem to be a company that Saul would usually invest in going by these numbers. Thanks.

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Hi Matt, I thought Bert’s articles were about answering that question. Maybe you might read back over the first one. He pointed out that if they get a large 5 year sale for $5 million, say, unfortunately, since they have a subscription model, they only get credit for 1/60th of that $5 million every month, even if the money is in the bank. That’s what deferred revenue is all about. And they also have a lot of unbilled deferred revenue, rock solid contracts with top companies like GE, let’s say, who aren’t going to default on their contract, but they only get paid by the month. Yet they have to declare their expenses such as sales and marketing, and R&D, as they rack them up. That means the accounting system is failing companies who use a subscription SaaS model, but there is nothing wrong with their business model, it’s the accounting system that hasn’t caught up. The sales are there. The money is there. The earnings are there. they just don’t get credit for them. On the other hand their future revenue is the most locked in you can imagine.

Hope this helps.



I would think there was a difference between:

  1. There is an expectation of continuing revenue since switching costs are high and, besides, the customer is happy; and
  2. Cases where there is an actual contract extending to some future date.
    Of course, the type 2 may also include the expectation of type 1 since one may expect the contract to be renewed.

But, in type 2, I would expect a balance sheet item for the unbilled portion of the contracts.

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I think Mr. Hochfeld and I have a different definition of “simple exercise”! Here is what he recommends doing at the end of that article to calculate real earnings, which he describes as a simple exercise:

There is a very simple exercise that I invite readers to do and see if it works out in terms of their own understanding. CRM for fiscal 2015 had reported revenues of $6.67 billion and a GAAP loss of $47 million. But I think we have determined that the revenue number presented seriously misrepresents the value of what CRM sold. In point of fact, the actual value of what CRM sold was not $6.67 billion, it was actually something like $8.1 billion, which represents both the monthly billings that CRM sent to its customers plus the amount of contracts signed that either have been paid for upfront or contracts for which the service will be paid for over time…

Let’s take the exercise a little further and see where that gets us in terms of “real” earnings. This company had a gross margin on subscriptions last year of 81%. For the sake of this exercise, let’s assume that the gross margins on the additional revenues were the same, surely a very, very conservative estimate. The company recorded a marketing expense of $3.239 million, which was 52% of subscription revenues. Much of that expense is really not variable, it is salaries and administrative costs, advertising and promotion and the like. The only variable part of S&M is sales commissions. I’m going to get wild and woolly here and suggest that incremental sales and marketing costs are going to be 20% of incremental revenues, which is about $480 million.

So, trying to look at this in a fashion that is similar to what would happen if the Salesforce solutions were sold and not leased would add $2.4 billion to revenue and perhaps as much as $940 million to cost. That would bring pre-tax GAAP profits to more than $1.5 billion for fiscal 2015. I’m not sure what the tax rate would have been on that, but for the sake of this discussion, let’s use a 35% tax rate. And that leaves a bit over $1 billion in after tax GAAP earnings, or about $1.50-plus in EPS.

It’s just a little too complicated and complex for my tastes. I’m not saying at all that it is a bad investment. It probably is a great one. It just isn’t for me.

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But, in type 2, I would expect a balance sheet item for the unbilled portion of the contracts.


You are correct. It’s called unearned income and it shows up as a liability on the balance sheet. CRM received the cash (debit asset) and the credit would go to the liabilities i.e. it’s yet to be earned therefore it’s not technically CRM’s until the economic transaction is completed (that month of service is completed).

Saul is partially correct. CRM takes the hit for the SG&A expenses up front. However, the costs associated with the monthly CRM revenue (the unearned revenue amount we’ll be moving to revenue) are ‘matched’ up to the revenue. Also called COGS.

I’m an accountant for a small IT firm who’s business is identical to CRM’s. That’s how it works. More and more companies are moving their software to the cloud which frees them from having to maintain IT infrastructure and some headcount.

First time posting on this board. I don’t invest in the companies mentioned here but I thoroughly enjoy reading all of your posts.



First time posting on this board. I don’t invest in the companies mentioned here but I thoroughly enjoy reading all of your posts. Ben

Welcome to the board, Ben. Hope you post some more.