Why Salesforce shares fell after earnings despite revenue growth
Shares plunged at the end of February despite Salesforce (CRM) beating Street estimates with its results for the fiscal fourth quarter ended January 31, 2014. An increase in the company’s top line growth failed to impress investors due to a worsening bottom line. Revenue was up 37% year-over-year to $1.15 billion, benefiting in part from the acquisition of ExactTarget that closed in July 2013. Full fiscal year 2014 revenue was $4.07 billion, an increase of 33% year-over-year. However, the cloud computing company posted a net loss of $116.6 million, or $0.19 per share for the fourth quarter of fiscal 2014, compared with a prior-year loss of $20.8 million or $0.04 a share. The company also announced that chief financial officer Graham Smith will be retiring in March 2015.
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Salesforce has yet to generate a profit since fiscal 2011, although revenue increased more than 30% year-over -year. The company’s fourth quarter loss widened as marketing expenses surged 47% to $639.8 million. Profitability has remained a concern amid growing competition from Microsoft (MSFT), SAP (SAP), Oracle (ORCL), Netsuite (N), and IBM (IBM), which have been bolstering their cloud and mobile offerings. Another concern is SaaS companies such as Workday (WDAY), ServiceNow (NOW), and new entrants such as Nimble, Insightly, and Zoho.
Salesforce’s annual filing indicates that marketing and sales costs were 53% of its total revenues for fiscal 2014 and 53% for fiscal 2013, and it expects the costs to continue to represent a substantial portion of total revenues in the future as it seeks to add and manage more paying customers and build greater brand awareness. The GAAP results for the quarter also included the effects of $137 million in stock-based compensation expense, $47 million in amortization of purchased intangibles, and $13 million in net non-cash interest expense related to the company’s convertible senior notes. The stock-based compensation for fiscal 2014 was $503 million.
Analysts believe the company’s revenue has increased due to acquisitions and growth has slowed down if you exclude the benefit from ExactTarget.
The guidance for the company’s first fiscal quarter and full year 2015 also indicated a GAAP loss per share in the range of -$0.23 to -$0.22 and -$0.53 to -$0.51, respectively. Revenue is projected in the range of $1.205 billion to $1.210 billion, an increase of 35% to 36% year-over-year for the first quarter. For the full fiscal year 2015, revenue is projected to be in the range of $5.25 billion to $5.30 billion, an increase of 29% to 30% year-over-year.
Customer attrition rates have declined
In terms of revenue sources, subscription and support revenues were $1.08 billion—an increase of 37% year-over-year. Professional services and other revenues were $70 million, an increase of 43% year-over-year. The majority of the subscription and support revenues derived from subscriptions to Sales Cloud. The increase in subscription and support revenues was due almost entirely to volume-driven increases from new customers, upgrades, and additional subscriptions from existing customers and a decline in attrition rates compared to a year ago. The company said it has invested in a variety of customer programs and initiatives, which, along with longer contract durations and increasing enterprise adoption, has helped reduce attrition rates. The increase in professional services and other revenues was due primarily to the higher demand for services from an increased number of customers.
Deferred revenue on the balance sheet as of January 31, 2014, was $2.52 billion—an increase of 35% year-over-year, benefitting in part from the acquisition of ExactTarget. Unbilled deferred revenue, representing business that’s contracted but unbilled and off the balance sheet, ended the fourth quarter at approximately $4.50 billion—up 29% year-over-year. Deferred revenue primarily consists of billings to customers for subscription service. Over 90% of the value of the company’s billings to customers is for its subscription and support service.
In response to an SEC investigation on revenue from each product, Salesforce said it doesn’t provide a breakdown of its revenue from different products. Salesforce said in the filing, “We respectfully note that we currently do not have financial systems and controls in place to be able to accurately quantify the percentage of our total revenue derived from subscriptions to the Sales Cloud or any other core service offering in any particular fiscal period.”
The company added, “We currently intend to implement financial reporting systems that will enable us to quantify our cloud-specific revenue before the end of fiscal 2015 (which ends January 31, 2015). Once such information is available, we will provide appropriate disclosures of cloud-specific revenue and related trends on a going forward basis.” The SEC has closed the investigation, according to a disclosure from Salesforce.
According to analyst Joel Fishbein of BMO Capital, cited by allsalesforce.com, while the sales cloud will bring in roughly two-thirds of revenue, marketing (worth about $100 million in 2013 before acquisitions) and service clouds (about $475 million in 2013) could each account for $1 billion in sales each year within two years. Fishbein claimed that Salesforce could book about $10 billion in recurring revenue by its 2019 fiscal year.