Response to Gigaom Coverage on CRM

Read this and just had to comment……….

 

From Gigaom

Exact Target, to put it crudely, is an email-based marketing platform, one whose usage has been on an upswing as consumer brands have turned to the internet for the marketing efforts. ExactTarget has big-name customers including folks like Coca-Cola. It also adds more structure to Salesforce’s ambiguous sounding marketing cloud.

Acquisition and date Amount
Sendia, April 2006 $15,000,000
Kieden, Aug. 2006 undisclosed
Kenlet, Jan. 2007 undisclosed
Koral, March 2007 undisclosed
Instranet, Aug. 2008 $31,500,000
GroupSwim, Dec. 2009 undisclosed
Informavores, Dec. 2009 undisclosed
Jigsaw Data Corp., April 2010 $142,000,000
Sitemasher, June 2010 undisclosed
Activa Live Chat, Sept. 2010 undisclosed
Heroku, Dec. 2010 $250,000,000
Etacts, Dec. 2010 undisclosed
Dimdim, Jan, 2011 $31,000,000
Manymoon, Feb. 2011 undisclosed
Radian6, March 2011 $340,000,000
Navajo Security, Aug. 2011 undisclosed
Assistly, Sept. 2011 $50,000,000
Model Metrics, Nov. 2011 undisclosed
Rypple, Dec. 2011 undisclosed
Stypi, May 2012 undisclosed
Buddy Media, May 2012 $689,000,000
ChoicePass, June 2012 undisclosed
Thinkfuse, June 2012 undisclosed
GoInstant, July 2012 $70,000,000
Clipboard, May 2013 $12,000,000
ExactTarget, June 2013 $2,500,000,000

On paper, all of CEO Benioff’s moves make sense. Cloud infrastructure is the future of software. Social is a core and vital need for companies and marketing is becoming crucial and strategic necessity in our increasingly distraction-infested world. Bringing it all together with mobile — another area of focus for Salesforce — makes perfect sense. It is a good strategy to take especially as some of the older (software) guard starts to slip. Exact Target brings in enough muscle into the company to go toe-to-toe with Oracle which acquired RightNowEloqua andVitrue.

Will it work?

The question is whether Salesforce actually make all these disparate pieces start to work together and make a gourmet dish called profitsfrom all these ingredients. Many on Wall Street are skeptical, though some of it is because of Benioff’s bombastic “I am always right” style.

The doubters have a reason: the marketing cloud, which until recently was only Radian6 and Buddy Media, only was about 3 percent of company’s revenue — around $100 million. The other businesses, such as Data.com — which consists of the 2010 Jigsaw acquisition – are said to bring in about a $100 million. It isn’t clear how much (or how little) the company makes from Heroku and then there is Work.com, its new business that is an amalgamation of Rypple, Choicepass and other assets. Those are rounding errors for a company that is going to bring in $4 billion this year.

That said, for now, Benioff has enough to standup in front of the world and promise what a friend of mine calls “future bliss.”

 

Um, having listened to $CRM ‘s earnings calls and winced at the analysts who cover it rush to outdo each other in the “who can be as effusive as humaly possible to anything $CRM does”  competition, I laughed at the “many on Wall St are skeptical comment. This is especially so watching $GS and $BAC “analysts” rush into defend the stock price after the deal with price targets calling for >50% upside.  If that is skepticism, I’d hate to see optimism.

For those of us few who actually are skeptical, it has nothing to do with Benioff’s “bombastic “I am always right” style.” No, that has zero to do with it.  We would be skeptical because of the accounting games they are playing, slowing sales (despite changing how they are accounted for to goose them), margins falling, $500M in insider stock sales, 3 years of consecutive losses, organic growth slowing etc etc etc.  I would bet if the author actually polled those of us who are skeptical on the company Benioff’s personality would come after those reasons and the “analysts” whose commentary on earnings calls could be replaced with ox flatulence with little degradation to the insightfulness of the questions they ask.

Personally, I am shocked that anyone, given the acquisition history of this company can put finger to keyboard and say “Benioff has enough to standup in front of the world and promise what a friend of mine calls “future bliss.””

Just look at the last two deals they did. They spent over $1B dollars for Radian6 and Buddy Media and have only managed to squeeze $100M of revenue out of them.  What is omitted from this article is that the dismal return is the good news. The bad news is that neither has yet to develop into a profit center (that does still matter, right?).

So, based on that we are supposed to just assume the $2.5B deal for ExactTarget is going to be the magic panacea for the company? Why? Boil it down… they paid $3.5B for losses….

I will say one thing, the 10X revenues $CRM paid for Radian6 and Buddy Media does make the 8x revenues they paid for ExactTarget look like a bargain. For those wondering, yes, of course, ExactTarget is also a money losing operation (losing ~$20M each yr for the last 3 yrs).   In fact $CRM has also lost increasing amounts of money for the last three years and given their write down of tax assets last year, it is safe to assume we have at least a few more in front of us (they’ve already admitted GAAP losses for FY ’14). In fact, there is a very real and by that I mean likely chance that when FY’ 15 rolls around, $CRM, in its entire existence, despite  by then near $20B in revenues (maybe more) will have not only  not made a single penny but will have lost over $500M……….just think about that. Even more interestingly is that the $500M will be much less than the dollar amount of stock sales insiders have made from FY ’11 to then. That number will probably be well over $700M.

I have said it before and will say it again, I can walk out to my street corner and sell $1bills for $.85 and increase my “revenues” every single day. But at the end of the day, I am still losing money. Further, I can move my operation to the “cloud” and sell billions of dollar bills for $.85 each and still lose money albeit in a very modern and stylish fashion.

Being a “cloud company” that loses money is no different than a candy company that does….. both are an unprofitable business. Being a cloud company that overspends for acquisitions that lose money is no different than a food maker who does the same, they are both lousy at making acquisitions.

Bulls will always chime in “you just do not understand where $CRM is doing and where they are going”. Here is the thing. Financial reporting makes things pretty understandable.   When you play accounting games and still have terrible results, it is clear “what they are doing” isn’t working.  Further when you write off tax assets it is clear “where they are going”  is actually easy…nowhere.  When your company essentially has a market to itself and can’t make money, how the hell do you expect them to do it now that $ORCL, $MSFT and IBM have woken up and start making a major push into it?

Let’s be honest, Benioff created something. He is an evangelist (a very good one) and he has the tech world hooked.  But, that does not mean we should suspend all irrational analysis of his company. Why doesn’t Wall St require a company with$4B in revenue to make at least a dime…..a nickle? Why does he get a pass in the media even after a string of deals for over $1B that contribute virtually nothing?  On what planet do companies with thousands of customers and now large competitors wake up one day and say “now we make a profit” and are able to accomplish that live on?  If Hershey ($HSY), a company with a $19B market cap and > $600M in earnings (what? those exist?) saw execs dump  >$500m in stock over a 3 year period and promised more this year ($CRM has), does anyone else think that would be news? Do we not think it would affect the stock price and commentary on the company?

At the end of the day, price and value always meet…always. I do not pretend to know “when” it will happen, but it always does. Reality and rational analysis eventually rule valuation. Irrational prices, whether they be too high or too low always eventually find their  proper level.

$CRM could see its stock price cut almost in half and I’d still wonder why people would want to buy it.




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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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