The divergence between Salesforce.com’s top and bottom lines is increasing, again raising the question of how long this pattern of rising losses can continue, despite its still soaring revenue increases.
For the year to January 31 2013, the cloud pure-play topped the $3bn revenue mark with a 35% yoy increase to $3.05bn (this compares to a 37% yoy increase in FY11-12 –see here). Its ever-expanding portfolio is maintaining high growth levels and increasing Salesforce.com’s ‘stickiness’. Periodic rebranding on the marketing front helps keep it in the headlines - its latest shift was from the ‘social enterprise’ to ‘customer companies’. But marketing and sales effort costs, as does general and admin and R&D, so operating expenses have jumped from $1.8bn to $2.5bn. The result is that net loss has soared from $11.6m to $270.5m. For Q4 revenue was up 32% yoy to $835m, but the net loss widened to $20.8m (vs. $4.08m).
There is no doubt that Salesforce.com’s offerings are in demand but it has set such high expectations in terms of expansion and new offerings that it has to move ever faster to meet them. And as the top cloud provider, it is a target for competitors, which increases the pressure to accelerate the pace of development. We expect its moves into the back office via its HR offerings will have consumed resources but will take time to pay back which will not help the bottom line. Increased focus on mobile - one of the drivers behind the ‘customer company’ marketing push - will also be taking its toll. Expansion by acquisition carries a cost of course, and this is an area where Salesforce.com is active. It is no surprise that there is more to come - CEO Marc Benioff has just confirmed that there will be no let up on the acquisition front.
Salesforce.com is generating enough cash and deferred revenue to support operations currently but it has to run ever faster. Maybe it is time to slow the pace a little.
Anthony Miller writes:
I can only suggest readers restore their sanity by taking another long look at my Great Companies vs Great Stocks post last month. Salesforce.com is now trading at some 90x forward earnings, as it sits on massive losses and prospects of slower growth (‘only’ 25-27%) in the current FY (FY14 to 31st Jan 2014). However, Benioff is predicting reduced losses of between $1.22 and $1.18 per share, compared to a loss of $1.92 per share for FY13, which I guess is the first ‘good’ sign we’ve seen for some time. But that is of course just a forecast.
So may I also remind readers of a basic fact of life and business: if you spend more than you earn, you will – eventually – run out of cash.