salesforce.com Is a Winner -- Here's Why

Worldwide Invest Better Day 9/25/2012

With Worldwide Invest Better Day upon us, we here at The Motley Fool are profiling dozens of companies that might be worth investing in. Here's a closer look at salesforce.com (NYSE: CRM  ) , whose online business software has helped define the cloud computing movement.

History and overview
Founded by current CEO Marc Benioff and technology chief Parker Harris in 1999, Salesforce began as a protest against the difficultly of installing and maintaining software. To this day, the company logo is the word "software" encircled in red with a line drawn through it.

Source: Salesforce.

Benioff became the face of the movement, using his power as CEO to sponsor big parties and lavish marketing to taunt industry incumbents, notably Siebel Systems. The goal: promote an alternative vision in which the Internet would take over as the primary host for business software.

You probably know what's happened in the years since. Oracle (Nasdaq: ORCL  ) acquired Siebel in 2005 after years of struggling to beat Salesforce. And, of course, use of browser-based software has grown by leaps and bounds.

More than 4 million businesses now use Google's (Nasdaq: GOOG  ) productivity suite, Google Apps. Netflix (Nasdaq: NFLX  ) and close peer YouTube serve on-demand television to tens of millions of users. And Amazon.com (Nasdaq: AMZN  ) and Rackspace Hosting provide infrastructure for thousands of small businesses that exist almost entirely on the web.

Benioff may have been overly optimistic in his predictions, but he was right that the Internet would transform how we think of software. His own business has grown explosively as a result.

The business
What began as an online database for tracking prospects -- a practice commonly known as customer relationship management, or CRM -- today's Salesforce includes a wide range of services for managing customer service, marketing, collaboration, and human resources. The company has also gone global, as the tablebelow shows:

Geographic Segments

FY 2012

FY 2011

FY 2010

Americas

$1,540.3

$1,135.0

$923.8

Europe

$480.5

$291.8

$232.4

Asia-Pacific

$317.8

$230.3

$149.4

Total Revenue

$2,266.5

$1,657.1

$1,305.6

Source: S&P Capital IQ. Figures in millions.

Because Salesforce sells its software as a service that exists entirely online, customers sign long-term contracts and then pay fees for access. Most often, these fees are paid up-front -- at the beginning of the fiscal year -- and then recognized as revenue ratably, over the term of the contract.

Revenue that's been collected but has yet to be recognized because of these accounting rules is classified as "deferred." A healthy backlog of deferred revenue indicates strong customer sales:

Metric

Q2 2013

Q1 2013

Q4 2012

Q3 2012

Deferred Revenue

$1,337,184

$1,334,716

$1,380,295

$917,821

Full-Time Equivalent Headcount

8,765

8,335

7,785

6,953

Source: Salesforce press releases. Dollar figures in thousands.

Why mix in the headcount information? Salesforce reports its employee data in part, I think, to show where Benioff and his team are investing to achieve further growth. The plan seems to be working so far:

Metric

FY 2012

FY 2011

FY 2010

Revenue Growth

36.8%

26.9%

21.3%

Gross Margin

78.4%

80.5%

80.2%

Net Margin

(0.5%)

3.9%

6.2%

Cash / Debt

$777.9 / $557.1

$497.0 / $498.0

$1,242.0 / $463.7

Source: S&P Capital IQ. Dollar figures in millions.

Here are three other things you, as a potential investor, should take away from this data:

  1. Accelerating revenue growth suggests, even more than a decade later, we're still witnessing the early days of Salesforce growth cycle.
  2. Declining net margins are never a great sign, but in this case there's a reason for the sacrifice: Benioff and his team are spending to dominate the market for online business software.
  3. Debt may be up 20% over the past two fiscal years, but cash from operations -- i.e., the amount of cash generated from everyday activities -- more than doubled over the same period. Management isn't taking on more than the business can handle.

The Foolish takeaway
Think about how you invest your own resources. Do you buy what you need at a good price? Do you invest the excess in things that matter, whether for the benefit of yourself, your family, or a cause you care about? Are you careful not to pile up debts you can't pay off? Companies and management teams are subject to these very same tests. Salesforce.com’s team appears to be on the right track.

Care to learn more? There's plenty of source material freely available on the web:

 

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Google, Netflix, Rackspace Hosting, and Salesforce at the time of publication. He also had a long-term call options position in Netflix. Check out Tim's web home, portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Amazon.com, Oracle, Google, and Netflix. Motley Fool newsletter services have recommended buying shares of Amazon.com, Salesforce, Rackspace Hosting, Netflix, and Google. Motley Fool newsletter services have recommended creating a bear put ladder position in Netflix. Motley Fool newsletter services have recommended shorting Salesforce. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 25, 2012, at 9:35 AM, zoningfool wrote:

    Top-line growth is still occurring in double-digits, but 'accelerating'? Not so fast. While there has been a rebound since growth rates bottomed-out in FY2010, top-line growth rates have been steadily declining (unsurprisingly given 1. the law of small numbers and 2. the typical maturity characteristics of the S-curve).

    growth rate

    FY revenues

    2001

    2002 312.3%

    2003 127.5%

    2004 88.3%

    2005 83.7%

    2006 75.7%

    2007 60.4%

    2008 50.6%

    2009 43.8%

    2010 21.3%

    2011 26.9%

    2012 36.8%

    So 2012's top line growth is considerably less (approximately one-tenth) of what it was ten years ago in Salesforce's early days. So while the top-line has been showing some uptick in the past 2 year, it has been steadily declining over the years.

    If you want to label the last 2 years as 'accelerating growth' then that's a matter of semantics--I'd call it an uptick after bottoming-out in 2010 BUT at what cost did this 'acceleration' (aka uptick) come? Both net margins and-- worse -operating margins are not only declining as revenue increases, but are now NEGATIVE. That means the company is buying its top-line growth (no doubt, at least in part, so Benioff can continue to pitch his 'growth story') by essentially giving away the product below cost. Any company can get 'sales' if it gives the product away at a loss. It might make customers happy, but investors? Not so much.

    net

    FY income

    2001 -31,671

    2002 -28,609

    2003 -9,716

    2004 3,514

    2005 7,346

    2006 28,474

    2007 481

    2008 18,356

    2009 43,428

    2010 80,719

    2011 64,474

    2012 -11,572

    net

    FY margin

    2001 -582.7%

    2002 -127.7%

    2003 -19.1%

    2004 3.7%

    2005 4.2%

    2006 9.2%

    2007 0.1%

    2008 2.5%

    2009 4.0%

    2010 6.2%

    2011 3.9%

    2012 -0.5%

    operating

    FY income

    2001 -33,600

    2002 -29,525

    2003 -10,500

    2004 3,718

    2005 6,520

    2006 20,102

    2007 -3,598

    2008 20,309

    2009 63,742

    2010 115,272

    2011 97,497

    2012 -35,085

    operating

    FY margin

    2001 -618.2%

    2002 -131.8%

    2003 -20.6%

    2004 3.9%

    2005 3.7%

    2006 6.5%

    2007 -0.7%

    2008 2.7%

    2009 5.9%

    2010 8.8%

    2011 5.9%

    2012 -1.5%

    Here is the picture on a quarterly basis:

    operating income

    Apr-10 $33,050

    Jul-10 29,682

    Oct-10 35,156

    Jan-11 -391

    Apr-11 -2,803

    Jul-11 -15,748

    Oct-11 -10,157

    Jan-12 -6,337

    Apr-12 -22,249

    Jul-12 -13,466

    operating

    margin

    Apr-10 8.8%

    Jul-10 7.5%

    Oct-10 8.2%

    Jan-11 -0.1%

    Apr-11 -0.6%

    Jul-11 -2.9%

    Oct-11 -1.7%

    Jan-12 -1.0%

    Apr-12 -3.2%

    Jul-12 -1.8%

    As far as operating cash flow--most of that is a result of adding back stock-based compensation, which Salesforce has been increasing its use of. Stock-based compensation was just over 1% of revenues in 2006. It now stands at 12% of revenues in the most recent quarter, over 10% in the most recently-reported fiscal year.

    stock-based compensation

    as % of

    FY revenues

    2006 1.1%

    2007 7.9%

    2008 7.4%

    2009 7.2%

    2010 6.8%

    2011 7.3%

    2012 10.1%

    stock-based compensation

    as % of revenue (quarterly)

    Oct-09 6%

    Jan-10 7%

    Apr-10 7%

    Jul-10 7%

    Oct-10 6%

    Jan-11 9%

    Apr-11 9%

    Jul-11 10%

    Oct-11 10%

    Jan-12 11%

    Apr-12 12%

    Jul-12 12%

    Had Salesforce been handing out paychecks as compensation instead of stock options, operating cash flow would have been considerably less. That is something that needs to be considered when judging the financial health of the company--especially given the fact that the company has been incurring operating losses for 7 consecutive quarters.

    I wouldn't be so quick to buy-into Benioff's narrative. He's buying the growth by selling his cloud offerings at a loss. That's a fact.

  • Report this Comment On September 25, 2012, at 9:12 PM, bradhodson wrote:

    @zoningfool thanks for the info.

    This growth is great on the surface, but Salesforce is almost cheating its way to keep surviving in a market where their product is becoming outdated and unusable... fast.

    Salesforce might still be the household name in CRM still, but smaller outfits like JobNimbus (http://www.jobnimbus.com) are infinitely more usable and are starting to take over especially in the SMB.

    I'd also be hesitant to invest.

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