salesforce.com Is a Winner -- Here's Why

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Worldwide Invest Better Day 9/25/2012

With Worldwide Invest Better Day upon us, we here at The Motley Fool are profiling dozens of companies that might be worth investing in. Here's a closer look at salesforce.com (NYS: CRM) , whose online business software has helped define the cloud computing movement.

History and overview
Founded by current CEO Marc Benioff and technology chief Parker Harris in 1999, Salesforce began as a protest against the difficultly of installing and maintaining software. To this day, the company logo is the word "software" encircled in red with a line drawn through it.


Source: Salesforce.

Benioff became the face of the movement, using his power as CEO to sponsor big parties and lavish marketing to taunt industry incumbents, notably Siebel Systems. The goal: promote an alternative vision in which the Internet would take over as the primary host for business software.

You probably know what's happened in the years since. Oracle (NAS: ORCL) acquired Siebel in 2005 after years of struggling to beat Salesforce. And, of course, use of browser-based software has grown by leaps and bounds.

More than 4 million businesses now use Google's (NAS: GOOG) productivity suite, Google Apps. Netflix (NAS: NFLX) and close peer YouTube serve on-demand television to tens of millions of users. And Amazon.com (NAS: AMZN) and Rackspace Hosting provide infrastructure for thousands of small businesses that exist almost entirely on the web.

Benioff may have been overly optimistic in his predictions, but he was right that the Internet would transform how we think of software. His own business has grown explosively as a result.

The business
What began as an online database for tracking prospects -- a practice commonly known as customer relationship management, or CRM -- today's Salesforce includes a wide range of services for managing customer service, marketing, collaboration, and human resources. The company has also gone global, as the tablebelow shows:

Geographic Segments

FY 2012

FY 2011

FY 2010

Americas

$1,540.3

$1,135.0

$923.8

Europe

$480.5

$291.8

$232.4

Asia-Pacific

$317.8

$230.3

$149.4

Total Revenue

$2,266.5

$1,657.1

$1,305.6

Source: S&P Capital IQ. Figures in millions.

Because Salesforce sells its software as a service that exists entirely online, customers sign long-term contracts and then pay fees for access. Most often, these fees are paid up-front -- at the beginning of the fiscal year -- and then recognized as revenue ratably, over the term of the contract.

Revenue that's been collected but has yet to be recognized because of these accounting rules is classified as "deferred." A healthy backlog of deferred revenue indicates strong customer sales:

Metric

Q2 2013

Q1 2013

Q4 2012

Q3 2012

Deferred Revenue

$1,337,184

$1,334,716

$1,380,295

$917,821

Full-Time Equivalent Headcount

8,765

8,335

7,785

6,953

Source: Salesforce press releases. Dollar figures in thousands.

Why mix in the headcount information? Salesforce reports its employee data in part, I think, to show where Benioff and his team are investing to achieve further growth. The plan seems to be working so far:

Metric

FY 2012

FY 2011

FY 2010

Revenue Growth

36.8%

26.9%

21.3%

Gross Margin

78.4%

80.5%

80.2%

Net Margin

(0.5%)

3.9%

6.2%

Cash / Debt

$777.9 / $557.1

$497.0 / $498.0

$1,242.0 / $463.7

Source: S&P Capital IQ. Dollar figures in millions.

Here are three other things you, as a potential investor, should take away from this data:

  1. Accelerating revenue growth suggests, even more than a decade later, we're still witnessing the early days of Salesforce growth cycle.
  2. Declining net margins are never a great sign, but in this case there's a reason for the sacrifice: Benioff and his team are spending to dominate the market for online business software.
  3. Debt may be up 20% over the past two fiscal years, but cash from operations -- i.e., the amount of cash generated from everyday activities -- more than doubled over the same period. Management isn't taking on more than the business can handle.

The Foolish takeaway
Think about how you invest your own resources. Do you buy what you need at a good price? Do you invest the excess in things that matter, whether for the benefit of yourself, your family, or a cause you care about? Are you careful not to pile up debts you can't pay off? Companies and management teams are subject to these very same tests. Salesforce.com's team appears to be on the right track.

Care to learn more? There's plenty of source material freely available on the web:

 

The article salesforce.com Is a Winner -- Here's Why originally appeared on Fool.com.

Fool contributor Tim Beyers is a member of theMotley Fool Rule Breakersstock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Google, Netflix, Rackspace Hosting, and Salesforce at the time of publication. He also had a long-term call options position in Netflix. Check out Tim's web home, portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.The Motley Fool owns shares of Amazon.com, Oracle, Google, and Netflix. Motley Fool newsletter services have recommended buying shares of Amazon.com, Salesforce, Rackspace Hosting, Netflix, and Google. Motley Fool newsletter services have recommended creating a bear put ladder position in Netflix. Motley Fool newsletter services have recommended shorting Salesforce. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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