Thursday, February 28, 2008

Salesforce Blast Off

Salesforce (CRM) announced profitability and at the time of writing was up around 16%over yesterdays close. Given a PE ratio that is north of 600 that’s pretty gutsy. While there are obvious improvements in this enterprise why did the stock rocket up on this press release. Market expectations were not blown away by that much if at all. A PE north of 600 and some guys still want to pile into this one. OK lets take a look at what the executives said.

The hyperbole starts right at the beginning. The press release headlines this statement “First Ever On-Demand Software Company to Exceed $850 Million Annual Revenue Run Rate”

The press release starts with a quote from the chief honcho which follows “"Our fourth quarter and full-year results show that businesses are selecting the Platform-as-a-Service and cloud computing over failed client-server alternatives," said Marc Benioff, chairman and CEO, "There's only one way to describe both the consolidation of the industry and the growing number of companies choosing innovation, not infrastructure: The End of Software."
FY 09 EPS guidance is now $0.32 to $0.33. Given a 600 PE that means a share value of around $200.

Yes revenues are increasing. But management is very quiet about what is happening with the cost structure. One would assume that costs could be leveraged and margins would improve. Year over year revenues are up some 50%. Total expenses are up 46%. The synergies of scale are not becoming apparent.

Check out the insider sales during Feb. I am always suspicious when senior officer unload so close to earnings announcements.

Management needs to explain this problem. They have been around for nine years and should be farther ahead in leveraging costs.