Face Value. Yep, that's what Salesforce (CRM) CEO Marc Benioff has earned after delivering quarter after quarter after quarter of better-than-expected metrics. He's earned the right to be taken at face value when he explained his decision to take down his revenue forecast for the next quarter after nicely topping earnings estimates for the quarter just completed.
So, if you take Marc at face value, it means you need to buy -- not sell -- the stock of Salesforce ahead of not only the next quarter, but perhaps ahead of Dreamforce in early October.
But first, let's deal with why I think it's not right to sell, given the fact that this is a high price-to-earnings multiple stock that guided down for the next quarter. The classic growth investor handbook says that this is no different from a baseball player who keeps his bat on his shoulder for the 3-0 pitch. Don't deviate.
In other words, the probabilities say that you should dump Salesforce today and I do not like to go against the probabilities -- ever.
Let's set the facts up, so we all know where we are in the game. Salesforce did report a better-than-expected quarter on revenue and earnings.
It also guided up revenue for the full year, from $8.16 billion to $8.20 billion to $8.25 billion to $8.33 billion, the third time it has raised those numbers.
So, on the surface, nothing happened. Beaten quarter, raised year.
But the company left no doubt that the next quarter is, indeed, below expectations, with revenues expected now to come in at $2.11 billion to $2.12 billion vs. the hoped-for $2.13 billion and earnings at 20 to 21 cents vs. 24 cents.
In the world of Salesforce, which prides itself as an engine hitting on all 12 cylinders -- this is a BMW 760, not the usual 8-cylinder model -- this is a firing on an 11-cylinder quarter.
OK, so now we have to ask what caused the company to lower projections. This is where the face value analysis comes in. First, there were a lot of acquisitions this quarter, including Demandware, the customized e-commerce solution that should dovetail perfectly with Exact Target when it comes to marketing online, and Quip, which makes productivity-enhancing software. Acquisitions can be distracting at first, but you always have to risk that if there is a window to buy them. That's exactly what Benioff traced out to be me last night in my interview on CNBC. It's a moment in time, not lasting, where assets can be acquired that help next year, not next quarter, when combined with the rest of the operation.
Second, the currency hit was "brutal," to use the word Benioff chose, about $150 million less revenue than expected because of it. Now, you can say, wait, many of the currencies from overseas are actually weaker vs. the dollar, but here's something I didn't know: Salesforce rolls its European revenues through the U.K. So, the sharp decline in the pound really hurt them.
Finally, though, there's the real culprit: softness in the U.S. at the end of the quarter.
Wow.
Softness.
When I heard it, I went ashen. Not only have I not heard Salesforce ever talk about "the weather," meaning the backdrop that we all have to fight to make our numbers, but in the U.S.? The U.S. is one of the strongest markets in the world right now for technology. Every vertical Salesforce sells its software into is stronger.
Now, every little bit of word choice about this "weakness," the other word we heard on the call, has to be parsed. Every little bit, which is something in itself we never want to have to do with a stock that sells at a high multiple and is growing in the high-20s percentages on a lot of metrics and just delivered a $2-billion-in-sales quarter.
Benioff, when pushed, made it clear that the July disappointment was on Salesforce, not the economy. That's important because Marc's whole way of being is to NOT blame the economy. I felt relieved at that. He talked about being disappointed in his own company's execution. On the call, the operative term used by co-president Keith Block was "a bit of blocking and tackling."
In other words, the company did not close on all of the business it would have liked. That's why the stock's down almost 10%.
Now, let's deal with the future. Will investors believe that the issue was internal?
I think that many won't.
First, they will say that we have heard Oracle and SAP and Microsoft all stress cloud initiatives. Some of the faithful are going to say that things have just gotten too tough and competitive and it isn't that Salesforce wasn't able to close all the business it had, it's that it lost business to others. This kind of thinking always comes into play. Just the other day, when Palo Alto Networks (PANW) , the best-of-breed cybersecurity company guided down, I read a trenchant piece in TheStreet.com that it guided down because of a newly aggressive Cisco (CSCO) .
You simply can't pay as much for Palo Alto Networks if Cisco is in there battling for business, even as Palo Alto gave instances where it beat out Cisco. Frankly, when PANW CEO Mark McLaughlin brought up the wins vs. Cisco I gulped. I didn't even think Cisco was trying to take away that business. Now I know better.
Cisco didn't crow about it. In this case, you can bet that Oracle (ORCL) will, even if it is just one deal that Salesforce didn't close. So the stock of Salesforce will fall prey to the same kind of analysis, made more biting because Oracle will throw it in our faces.
Second, some fair-weather friends might simply conclude that Salesforce has gotten too big. Marc Benioff moved to Japan for a bit before taking off for his personal time in Hawaii this summer as he always does. I know Benioff works a lot when he is in Hawaii -- he's always working. But I am sure there will be some who say that without Benioff riding herd as he normally would, the company couldn't make the numbers and that's because the space has gotten so crowded there is no room for leisure. I think it is a harsh judgment. As someone known as a hard worker, trust me, no one works harder than Benioff.
Finally, there's the rash of M&A. When things are riding high, companies are applauded for doing deals. When things are not hitting on all cylinders, M&A is known to mask a slowdown. Now, for example, the failed pursuit for LinkedIn, the mobile social and cloud company that Microsoft MSFT bought, will be viewed by the cynical as, in retrospect, an attempt by Salesforce to smokescreen the weakness of the quarter.
I point blank disbelieve that. But if I can conjure up that thought and shoot it down as a straw man, believe me there will be people who will conjure and embrace.
So, to sum it up, where do I come out? I think that Benioff and some other executives may have taken their eye off the ball because of the distraction of the M&A, or because the company's too vast, or because there were a few deals that could have closed that just didn't have time to get done that will get done this quarter or the company would NOT have raised the revenue forecast for the year.
I think there are a slew of soon-to-be closed deals as well as a bunch of new business that we will hear about next quarter after tens of thousands of customers converge on Dreamforce, the biggest trade show on earth, in San Francisco at the beginning of October. That's when Benioff unveils his artificial intelligence product, Einstein, which does sound pretty darned revolutionary.
So, here's my bottom line: when a person with an exemplary record of beating the highest of expectations slips up and tells it like it is, blaming his team and more importantly himself for the miss, you give him the benefit of the doubt. You go against the probabilities and hold the stock. If it goes lower, you buy it. Salesforce and Benioff are the rare cases where you swing on 3-0 because it just might be the fat pitch you've been waiting for.
