Salesforce.com: $22 Billion Market Cap, No Profits, Nice Place to Work, Especially for CEO Benioff
It has been some months since we’ve written about Salesforce.com (CRM), the magical cloud-computing company whose stock has risen ever higher, even as its financial results have deteriorated.
We’ve got a lot to say, so two key take-away points up-top: If your kid can score a job at Salesforce.com, tell her/him to take it – by all accounts it’s a great place to work; and if the company’s larger-than-life CEO Marc Benioff (he stands 6-foot-5 and weighs in at about 300 pounds, we’ve read) invites you to a party, do go – it’ll probably be a humdinger. As is this stock chart, with Salesforce.com shares up 55% YTD.
Oh, and this: isn’t it sweet the way American companies (Salesforce.com among them) love to talk about non-GAAP results? Fish that got away. Putts that rimmed out. Girls we almost dated in college. It’s fun imagining what might have been. And if you can get your compensation aligned with non-GAAP results, stripping out the stuff that makes business so damned hard these days, as Benioff has in part, well, that’s really great.
Salesforce.com filed an 8-K a few days ago to disclose that Benioff (and other top executives) had gotten a raise for fiscal 2014, which starts February 1, 2013. His salary will be $1.2 million and his target bonus $1.8 million, up from $1 million and $1.5 million, respectively. Not bad for a guy running a money-losing company.
Even better for Benioff: bonuses at Salesforce.com have been based, in part, on non-GAAP operating income. What’s that, you ask?
For the nine months ended October 31, for instance, non-GAAP operating profit was $249.1 million. Nice work, Mr. Benioff. Sadly, when one adds back in the expense of handing out gobs of stock options ($272 million) and the expense of amortizing costly acquisitions’ goodwill and other intangibles ($67 million), that non-GAAP profit for nine months becomes a GAAP operating loss of $89 million. The net loss (we’re talking GAAP again) was $249.6 million, on revenue of $2.22 billion.
I’m trying to recall if I’ve even seen a non-GAAP figure in a corporate disclosure that didn’t make results look better. If you know of any, send them along. But really, stock options are an actual expense, even if there’s no immediate cash outlay, and goodwill and other intangibles, carried at their optimistic values, just lead to disappointment and finger-pointing later on. It’s a GAAP (generally accepted accounting principles) world we live in, and thank goodness, or every fast-stepping company with a public listing would be creating their own version of reality.
Salesforce.com only grudgingly acknowledges this fact, mentioning in the most recent 10-K, “The requirement to expense stock-based awards will continue to materially reduce our reported results of operations.” They’re making us do it.
While we’re on the subject of compensation, let’s deal with Benioff’s equity grants. They make up the great bulk of his fiscal 2012 total compensation of $17.7 million. Bully, you say, let’s align his interests with those of the other shareholders. Please. Benioff owns about 10 million shares of Salesforce.com outright, valued at roughly $1.57 billion. Trust me, he’s aligned, and as we’ve written before, such equity-endowed managers hardly need any paycheck at all to be enticed into the office – their freaking net worth is at stake. They’d work for nothing.
Salesforce.com’s compensation is no crazier than arrangements at scores of other big companies, of course. But it’s always nice to give credit where it’s due. As of the most recent proxy, the compensation committee members of the Salesforce.com board were Craig Ramsey, committee chair, a veteran of many software concerns including Oracle (ORCL) (where Benioff cut his teeth); Craig Conway, former CEO of PeopleSoft; and Shirley Young, a former General Motors (GM) executive. Consultants at Compensia Inc. advise the board on these matters. Well done, all.
Salesforce.com’s stock isn’t an outright oddity – others, notably Amazon, (AMZN) rise up and up even as the bottom line craters – but it’s curious. It’s ascent is evidence that investors love revenue growth and a good story more than just about anything.
You can see the revenue rising. The story? Cloud computing – the software sits on someone else’s server, instead of yours, essentially, and with Salesforce.com tools we can all talk to each other a lot – is taking over the world. Fair enough.
But you’d think something that is so inevitable would fly off the shelves. Not quite. Salesforce.com spends a sum equal to more than 50% of revenues on sales and marketing expense, and the percentage has kept rising, if slowly –- to 53% for the nine months ended Oct. 31, from 52% for all of fiscal 2012, ended January 31 – suggesting that customers didn’t get the memo. They’re resisting, or perhaps Benioff’s sales and marketing approach is sub-optimal.
Indeed, Salesforce.com exhibits the opposite of an economy of scale. The last sale looks like the hardest one, not the easiest. Salesforce.com people –there were 7,785 at January 31, 2012, up from 5,306 a year earlier – pound the pavement, beat the phones, and by all accounts are well paid for their labors. But buyers must be playing hard to get. Benioff also spends on advertising: $80.3 million in fiscal 2012, up from $61.4 million a year earlier.
As we’ve noted before, the inefficiency of the sales team wouldn’t be so galling if Benioff was mastering cost control elsewhere. But that’s not the case. Also, defying one’s expectation of economies of scale (or simply frugality) are research and development costs, rising to 13% of sales in fiscal 2012, from 10% two years earlier. And, folks, that’s on a 74% revenue increase over that two-year period. General and administrative costs have also defied expectations of economics of scale, hanging in at 15% of revenue. Let’s not turn Medicare over to Benioff, eh?
Piling up some losses, as we all know, also can give a company so-called deferred tax assets – loss carryforwards and such – to shield future profits from taxes. To take advantage of those deals, however, you gotta have profits. At some point. In the most recent quarter, ended October 31, weighing its history of losses and its prospects, Salesforce.com wrote off $149.1 million of those deferred tax assets as unlikely to be used, contributing to the quarterly and nine-month loss. It made no projection of when its results would be profitable, but the charge itself was discouraging if you’re an investor hoping for earnings.
From the latest 10-Q: “We have incurred net losses in each fiscal quarter since July 31, 2011. In addition, we expect out costs to increase as a result of decisions made for our long-term benefit, such as equity awards and business combinations. If our revenue does not grow to offset these expected increased costs, we will not be able to return to profitability and we may continue to incur net losses, on a U.S. GAAP basis.”
But not to worry. Plenty of investors apparently care only for revenue growth and the cool story about cloud computing. And they have carried Salesforce.com stock higher and higher. Do you think that will continue?
Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times.
Filed under: Company Analysis