Another quarter greets us with new and interesting results from Salesforce. The reason for the title? While, as required by regulation, Salesforce reported their quarterly results to the SEC, they failed to update their sheet of detailed financials on their web site. You can see their press release, of course, but this is full of those pesky non-GAAP measures, turning losses into profits, and I am keen to see the ‘Generally Accepted’ numbers.
It has been a month since their press release, so I thought I would help them out and update it here and do my usual review to see how things are faring for Captain Benioff and his crew.
My Conflict of Interest
First of all, let us clear the air on my personal circumstances. I work for a public Australian company called Oakton. We have a division called ‘Relationship Management’ which works with both Dynamics CRM (whose team I run in New South Wales) and Salesforce (which my colleague Juanita runs). We both report into the RM director and are jointly responsible for the success of the ‘RM’ division. Therefore, I have a strong interest in the continued success of both products.
Does this mean I am going to start talking up the awesome non-GAAP financial results of Salesforce and quietly forget the GAAP ones? Not at all. Just as I talk about the limitations of Dynamics CRM, I see no reason not to talk about the limitations of Salesforce. The biggest limitation I see with the product is with their financials and this is why it is a big focus in my Salesforce articles. I do occasionally talk about the product’s functionality but this is usually motivated when Salesforce put out some FUD about Dynamics CRM. Given I have little hands-on experience of the functionality of the product, when I do talk about the functionality of Salesforce I back it up with what I find online through YouTube videos and independent reports.
I have been characterised as a Salesforce hater in the past but this is simply not true. A few years ago I responded to this and stand by that position today. I have even offered advice to Salesforce on how to beat Microsoft in the past.
Will walking this tightrope affect my MVP status? I doubt it. Being an MVP does not mean being a voice for the public relations arm of Microsoft. It involves being passionate about how best to use the product and sharing this passion. Microsoft, I believe, are sufficiently mature in their approach to the market that my proximity to the ‘dark side’ will not be a problem. I am not the first Dynamics CRM MVP to work with both products and I doubt I will be the last.
Salesforce’s Quarterly Results
Here are the numbers.
| 2013 Q1 | 2013 Q2 | 2013 Q3 | 2013 Q4 | 2014 Q1 | |
| Revenue | 695,467 | 731,649 | 788,398 | 834,681 | 892,633 |
| Subscription Revenue | 655,220 | 687,493 | 740,600 | 785,495 | 842,221 |
| Revenue Cost | 151,551 | 162,418 | 186,248 | 183,362 | 208,994 |
| Operating Cost | 566,165 | 582,697 | 656,338 | 672,126 | 728,179 |
| Salesforce Income | -19,475 | -9,829 | -71,150 | -20,844 | -67,721 |
| Revenue Growth # yoy | 191,103 | 185,647 | 204,138 | 202,768 | 197,166 |
| Revenue Growth % yoy | 38% | 34% | 35% | 32% | 28% |
| Revenue Growth % mom | 10% | 5% | 8% | 6% | 7% |
| Total Cost % yoy | 42% | 33% | 42% | 34% | 31% |
| Staff | 8,335 | 8,765 | 9,319 | 9,801 | 10,283 |
| Staff Growth (yoy) | 51% | 38% | 34% | 26% | 23% |
| Margin | -2.80% | -1.34% | -9.02% | -2.50% | -7.59% |
The financial numbers are in thousands. I have these numbers going back to the start of 2008 (2009 Q1) but that would be tricky to show as a table. The previous five quarters show some of the trends though.
NB: A miscalculation in the revenue growth at the time of original writing has now been adjusted in the table above. Related commentary below has been lined through.
We see a consistent slowing of revenue growth, down to 27% 28% from 38% a year ago. For most quarters, cost growth outpaces revenue growth by 4%. For Salesforce to show a profit, revenue growth MUST eventually be greater than cost growth but this has not happened in any quarter in the past year.
Staff growth has also significantly slowed over the past twelve months. The highest yearly growth rate ever for Salesforce was in 2013 Q1. This has now fallen from 51% to 23%, less than half the growth rate. This was Salesforce’s staff growth rate about three years ago.
Margins are still in the negative and will remain so until cost growth is brought under control, relative to revenue growth, as previously mentioned.
To see which direction margins are trending, we need to look beyond the five quarters.
While the recent quarters have been erratic, the overall direction is clear.
Earnings Call Buzzword Bingo
I have changed the format this time, just to make things a bit simpler for me. Instead of using the buzzwords from the previous year, I am simply using the past four quarters, like I did above with the financials.
| 2014 Q1 Keywords (total words: 2800) | 2013 Q4 Keywords (total words: 3800) | 2013 Q3 Keywords (total words: 3000) | 2013 Q2 Keywords (total words: 3200) | 2013 Q1 Keywords (total words: 3200) |
| revenue (32 times) | revenue (45 times) | revenue (38 times) | revenue (39 times) | revenue (38 times) |
| mobile (16 times) | customers (23 times) | cloud (20 times) | social (21 times) | social (32 times) |
| cloud (16 times) | cloud (22 times) | growth (17 times) | cloud (20 times) | cloud (23 times) |
| customers (16 times) | customer (17 times) | customers (13 times) | growth (19 times) | enterprise (21 times) |
| customer (16 times) | growth (17 times) | social (13 times) | cash (17 times) | customers (17 times) |
| growth (13 times) | service (16 times) | marketing (10 times) | operating (17 times) | sales (14 times) |
| service (12 times) | enterprise (15 times) | service (9 times) | service (15 times) | cash (13 times) |
| cash (10 times) | cash (13 times) | cash (9 times) | enterprise (10 times) | service (11 times) |
| social (10 times) | marketing (9 times) | sales (9 times) | customers (9 times) | customer (11 times) |
| sales (9 times) | social (9 times) | customer (8 times) | dreamforce (9 times) | growth (11 times) |
| operating (9 times) | sales (8 times) | enterprise (7 times) | marketing (8 times) | operating (10 times) |
| eps (7 times) | margins (7 times) | mobile (7 times) | sales (8 times) | eps (8 times) |
Back to the usual 3,000 words between Marc and the CFO.
In terms of phrases of two or more words occurring ten times or more, we have:
- deferred revenue (12 times)
- non gaap (11 times)
That is, Salesforce continues to focus on the revenue not yet on the books and the analysis of those books which is their own unique methodology.
Here is a graph for some of the more consistent single word trends.
‘Revenue’ is consistently the focus, ‘social’ and ‘enterprise’ are ‘so yesterday’, ‘sales’ and ‘cloud’ are consistently mentioned. The other feature of note is mobility appears to be a new focus for Salesforce.
Insider Sales
Insiders sold off another 2% of their shares, according to Yahoo, in the past six months, making it roughly 10% of their shares for the past year.
Conclusions
I am not sure why Salesforce is yet to update their detailed financials. While the news, from a profitability perspective, is not great, it is certainly not disastrous enough to hide it. It is, essentially, more of the same from Benioff and his CFO. My assumption is they are too busy to update the detailed financials, rather than actively obfuscating.
With the purchase of ExactTarget I expect ‘marketing’ will become a prominent feature of the transcripts, possibly replacing ‘social’. This has not happened this quarter but perhaps in the next one. The new emergence of ‘mobile’ is interesting. Salesforce is quite strong in their mobility offering so, if this is a future focus, this will be a strong competitive edge for them.
Overall, other than the prominence of ‘mobile’ in the transcript, nothing too unusual. Profitability is still elusive and revenues and staff numbers continue to grow at a slowing pace. Again, my hope is their profitability begins to turn around. There is room for more than one CRM player in the market and it is good for there to be a player like Salesforce to keep Microsoft ‘frosty’.
Roll on the next quarter.
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