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2021-09-13

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Salesforce: A Wonderful Company At A Reasonable Price

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{"i18n":{"language":"zh_CN"},"detailType":1,"isChannel":false,"data":{"magic":2,"id":886054800,"tweetId":"886054800","gmtCreate":1631540790200,"gmtModify":1631890134476,"author":{"id":3569323320302810,"idStr":"3569323320302810","authorId":3569323320302810,"authorIdStr":"3569323320302810","name":"Kimfatt","avatar":"https://static.tigerbbs.com/42c08b995a955b3c83a657bdc9c15fbe","vip":1,"userType":1,"introduction":"","boolIsFan":false,"boolIsHead":false,"crmLevel":7,"crmLevelSwitch":0,"individualDisplayBadges":[],"fanSize":3,"starInvestorFlag":false},"themes":[],"images":[],"coverImages":[],"extraTitle":"","html":"<html><head></head><body>Wow</body></html>","htmlText":"<html><head></head><body>Wow</body></html>","text":"Wow","highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"favoriteSize":0,"link":"https://laohu8.com/post/886054800","repostId":1164835747,"repostType":4,"repost":{"id":"1164835747","kind":"news","pubTimestamp":1631537883,"share":"https://www.laohu8.com/m/news/1164835747?lang=&edition=full","pubTime":"2021-09-13 20:58","market":"us","language":"en","title":"Salesforce: A Wonderful Company At A Reasonable Price","url":"https://stock-news.laohu8.com/highlight/detail?id=1164835747","media":"Seeking Alpha","summary":"Summary\n\nThe flexible approach at Salesforce is a competitive advantage as they help companies shift","content":"Summary\n<ul>\n <li>The flexible approach at Salesforce is a competitive advantage as they help companies shift to the cloud.</li>\n <li>The AppExchange ecosystem increases engagement and lowers attrition.</li>\n <li>Capex as a percentage of revenue fell from 7.3% in fiscal ‘14 to 3.3% in fiscal ‘21.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/665b6616888a5d8d7ba20ad02b7ee091\" tg-width=\"1536\" tg-height=\"1024\" width=\"100%\" height=\"auto\">Stephen Lam/Getty Images News\nIntroduction\nMy thesis is that Salesforce (CRM) is a wonderful company at a reasonable price. We are still in the early days as software continues shifting to the cloud. Much of the profitability for Salesforce is obfuscated by growth investments. In the 4Q20&nbsp;call, it was revealed that returns for shareholders reached 4,000% since going public in 2004.\nCEO Marc Benioff has said that the way to understand the future is to look at the past. Written in 2009,Behind the Cloudis an excellent resource that helps explain how Salesforce laid their foundation and it is cited throughout this article.\nSeeing as the fiscal year goes through January, I think of the fiscal year as being equal to the calendar year plus one for the first three quarters. The fourth quarter is an exception as it is the only quarter that closes within the calendar year. In other words, calendar '21 is fiscal '22 for the first three quarters.\nFlexibility\nSalesforce is flexible, both with the needs of their customers and their own needs. From the beginning, they recognized that it was time to adapt to a new world where buying software would be like buying products on Amazon without the need for upgrades and updates. Meanwhile rigid incumbents like Oracle (ORCL) and SAP (SAP) continued to develop software as if the internet didn't exist. Salesforce embraces APIs such that companies can adopt a wide array of technology options. They provide the right optionality for companies as the world moves to subscriptions and direct-to-consumer (\"D2C\") relationships. Salesforce is limber when it comes to looking at their own requirements such as their infrastructure needs.\nSalesforce makes it easy for companies to adopt the latest technology options. The importance of using APIs for integration was a giant step in their evolution per&nbsp;Behind the Cloud:\n<blockquote>\n We made a significant leap in the technology when we offered integration capabilities by providing an application programming interface (\"API\"), or a way for salesforce.com to communicate with other programs. This transformed our product and technology so that the data in salesforce.com were not isolated in Web silos, but could interact with other data that were behind the firewall or on other Web sites. The API, for example, allowed salesforce.com to interface with Google Maps, so salespeople could instantly access a map of where all their customers were located.\n</blockquote>\n<blockquote>\n [\n Behind the Cloud: Location: 1,881]\n</blockquote>\nAnswering a question at the September 2017 Deutsche Bank&nbsp;Conference, Product EVP Mike Rosenbaum notes that Tesla (TSLA) has a continual relationship with customers by providing software updates. He notes that this is the type of thinking companies need to embrace and that Salesforce helps companies be malleable such that they can maintain direct relationships with customers:\n<blockquote>\n You take for example a company like Dollar Shave Club where instead of selling razors, I'm going to sell a subscription model so that every period of time, you get some razors delivered to you. That's the idea, I think, is where you start to - I think, every company in the world, whether it's brand manufacturing or anyone, needs to start to think about their business model a little bit more like a subscription service. And I think that is the very, very powerful idea that is made possible by CRM systems like Salesforce. We make that -- we make the technology barrier to implementing a model like that go away, to a large degree.\n</blockquote>\nYears ago Salesforce started out with their own data centers in California, Virginia and Singapore but they kept an open mind and reevaluated infrastructure decisions as time went by. Rather than opening their own data centers in new markets like Canada and Australia, they opted to go with Amazon's (AMZN) AWS. In addition to the close relationship with AWS, a partnership with Google (GOOG) (GOOGL) was discussed at the November 2017 Investor Day. Having 3 parts to it, the Google partnership includes Google Analytics, G Suite and some infrastructure on Google Cloud Platform (\"GCP\").\nAppExchange Ecosystem\nAppExchange is the world's leading enterprise cloud ecosystem with over 3,000 apps and components. Per the&nbsp;faq, they have 117,000 customer reviews and 9 million installs. At the December 2020 Investor Day&nbsp;Presentation, President &amp; COO Bret Taylor said AppExchange is one of the main competitive advantages for Salesforce, noting the million-plus weekly active developers on Slack. Back in 2005 CEO Benioff pointed out that AppExchange was groundbreaking.Behind the Cloudtalks about the significance of becoming a platform noting that traditional software companies like Siebel and SAP didn't make the right types of capital investments to empower their partners:\n<blockquote>\n One of the most pivotal decisions we made as a company was to make our code available to let other companies build their own complementary online services. This idea to become a platform, or an operating system for the Internet (similar to how Windows is an operating system for PCs), offered a way to allow everyone to create applications online and gave us an opportunity to attract and&nbsp;\n retain more customers.\n</blockquote>\n<blockquote>\n [\n Behind the Cloud: Location: 1,895]\n</blockquote>\nVeeva (VEEV) helps life science companies shift to the cloud and their payments to Salesforce are part of their cost of revenues line on the income statement. They were an early Independent Software Vendor (\"ISV\") and they have grown over the years such that their market cap is now close to $50 billion. Per their filings, Veeva has a value-added reseller agreement with Salesforce for a cumulative $500 million from March 2014 to September 2025 which they will fulfill easily as there is only $57 million remaining.\nIt was simple to see the potential for AWS years ago when Netflix (NFLX) announced they were using them for their media content. The same thing is happening in banking as old thought processes are shifting and resources are being allocated to AppExchange banking leader nCino (NCNO). At a June 2018 Evercore ISI&nbsp;event, nCino Executive Director of Global Market Strategy Jim Baxley talked about the way banks are moving to the cloud seeing as they don't want to build their own data centers anymore and they don't want to have armies of developers.\nDocuSign(NASDAQ:DOCU)&nbsp;COO Scott Olrich spoke about the relationship with Salesforce at DocuSign's March 2021 Virtual Financial Analyst&nbsp;Day. DocuSign Gen is a lightweight tool that allows reps to generate a contract from inside of Salesforce. The Salesforce sales team helps sell these products and there is a specialized version for quotes and billing.\nThe November 2017 Investor Day&nbsp;Presentation&nbsp;shows ISV with a revenue run rate of $310 million such that it was 17% of the Platform &amp; Other Revenue at that time:\n<img src=\"https://static.tigerbbs.com/382b79247454c56e777664f619f500b8\" tg-width=\"600\" tg-height=\"405\" width=\"100%\" height=\"auto\">Image Source: November 2017 Investor Day Presentation\nI value the AppExchange platform more for the way that it lowers attrition through increased innovation, utility and engagement than for the revenue it generates directly.\nSuccessful Acquisitions\nHaving a flexible and collaborative mindset, Salesforce has a history of giving subsidiaries the right environment to continue with innovation and revenue growth after being acquired. Other software giants have a more rigid mindset such that their acquisitions don't work out the right way. At the October 2006 Dreamforce Investor Summit, Worldwide Sales and Distribution President Jim Steele&nbsp;talked&nbsp;about the fact that Siebel's innovation stagnated after being acquired by Oracle.\nThe acquisitions of ExactTarget, ClickSoftware and Vlocity were very important for Salesforce despite the fact that there have been others at higher price tags. ExactTarget was acquired in 2013 to help Salesforce become number one in marketing. An August 2019 diginomica&nbsp;writeup&nbsp;notes that much of Salesforce's Field Service Lightning software was licensed and originally written by ClickSoftware developers. Bringing ClickSoftware in-house bolstered the Service and Platform offerings. Vlocity was built on the Salesforce platform and their acquisition was finalized in June 2020. They strengthen Salesforce's Service offering. At the September 2020 RBC&nbsp;Tour, Salesforce Industries Division CEO David Schmaier talked about Vlocity's approach noting that they serve regulated industries including communications, insurance, health, government, energy and media.\nA June 2021&nbsp;article&nbsp;from Fortune mentions the biggest acquisitions as follows:\nDemandware: Price: $2.8 billion - June 2016\nMulesoft: Price: $6.5 billion - March 2018\nTableau: Price: $15.7 billion - June 2019\nSlack: Price: $27.7 billion - December 2020 (deal announced)\nDemandware is the key part of Salesforce's Commerce offering while Tableau is essential for the Analytics offering and MuleSoft powers the Integration offering. The importance of Tableau and MuleSoft was made evident in the 1Q22&nbsp;cal&nbsp;lwhen it was revealed that Tableau was in 8 of the top 10 new deals and MuleSoft was in 5 of the 10.\nAt the June 2019 Tableau&nbsp;call, CEO Benioff talks about the fact that traditional enterprise software companies are unaccommodating when it comes to new technology. The reputation of flexibility at Salesforce is a big factor when it comes to acquisitions:\n<blockquote>\n There is a question of, well, gee, MuleSoft really is all about connecting to an ecosystem of data and connects to lots of different data sources like SAP, Microsoft and Amazon and Google and Workday and ServiceNow and so many companies, and how do you plan to address that? And it was kind of a shock to me actually because when I have the question, it was kind of like somehow people think that we wouldn't connect to those companies or wouldn't support all those companies or that we would do something to cut them off.\n</blockquote>\nThe November 2019 Investor Day&nbsp;Presentation&nbsp;notes the success of revenue growth with 3 prominent acquisitions. Acquired in July 2013 with annual revenue of $286 million, ExactTarget grew its revenue to $1,450 million in 6 years. Demandware was purchased in July 2016 and they had revenue of $227 million at the time which grew to $590 million in 3 years. MuleSoft was acquired in May 2018 when they had revenue of $284 million and this grew to $665 million in a short time.\nDisrupting Incumbents\nThe CRM market was fragmented before Salesforce entered the picture. Small companies often used ACT, medium sized companies used Microsoft (MSFT) and large companies went with Siebel, SAP or Peoplesoft.Behind the Cloudreveals that small, medium and large businesses have heterogeneous preferences and the dogma at the time was that they couldn't all be served by a single company:\n<blockquote>\n When we started salesforce.com, companies sold separate software systems to small, medium, and large companies. We wanted to change that and provide everyone with the same affordable and effective service. For as long as I can remember, people told us we couldn't serve all markets - they told us that it could not be done.\n</blockquote>\n<blockquote>\n [\n Behind the Cloud: Location: 1,643]\n</blockquote>\nSalesforce became a democratizing tool by using the internet to provide the same services to small companies that were only available to large enterprises in the past. Over time they began serving more of the large companies and this disrupted incumbents like Oracle and SAP. The September 2015 Investor Day&nbsp;Presentation&nbsp;shows that SAP had 14.3% CRM market share in FY11 followed by Oracle at 12.6% and Salesforce at 10.6%. It reveals that Salesforce passed both companies within a year or two of FY11 and had a comfortable lead by FY15. The December 2020 Investor Day Presentation shows Salesforce up to 19.8% CRM market share by 2020H1, well ahead of Oracle at just 5.3% and SAP at a mere 4.8%.\nAt the September 2006 Citigroup Global Technology&nbsp;Conference, CEO Benioff talks about SAP's obstinance:\n<blockquote>\n But SAP has not changed. They are basically just selling the same stuff that they had 10 years ago -- single-tenant architecture, license fees -- same business model, same technology model, running their business the same way. They talk about on-demand -- all on-demand to them is moving their database from one datacenter to another datacenter. It is not multitenancy. They don't even believe in multitenancy. They say they don't believe in multitenancy.\n</blockquote>\nUnlike incumbents who rely on maintenance contracts, Salesforce wanted to do away with packaged software and make things as easy as buying products on Amazon. This is well explained inBehind the Cloud:\n<blockquote>\n We wanted to take advantage of a new platform - the Internet - and deliver business applications cheaply through a Web site that was as easy to use as Amazon.com. We had to think out of the box. Literally, no more packaged software. And figuratively, as no one was then selling subscriptions for business applications and delivering them over the Web.\n</blockquote>\n<blockquote>\n [\n Behind the Cloud: Location: 3,702]\n</blockquote>\nCEO Benioff discusses inflexible thinking in the 2Q16callsaying that Oracle and SAP still sell old technology similar to the way that IBM still sells mainframes:\n<blockquote>\n And that's what you see with companies like Oracle and SAP. These are old technology bases that are meandering along like mainframes. And I think that is reflected exactly as you said, in their license revenue growth which has been poor. And in&nbsp;\n their movement to the cloud has been stunted because they don't want to shift those customers into new models, exactly why IBM lost the PC business because they were too afraid to let go of the mainframe. It's the past replaying itself, but instead of IBM you've got Oracle and SAP basically running the same playbook.\n</blockquote>\nPresident &amp; Chief Product Officer David Schmaier cites The Innovator's Dilemma at the September 2020 RBC Tour saying Salesforce is here to disrupt on-premise competitors:\n<blockquote>\n And the very simple way to sell against those vendors is it's faster to deploy, it's easier to use. And oh, by the way, if you look at the total cost of ownership, it actually costs less money, too. So even I can sell that. Let me think about that again. It's faster, it's easier and it costs less money. And it's constantly refreshed in the cloud. And so it's just way better than that old on-premise world. And so we like to find&nbsp;\n markets where we're disrupting legacy competitors is kind of the - I think that's the perfect storm. It doesn't mean we wouldn't go into a space where there is another cloud competitor, but it's easier and faster if that's not the case.\n</blockquote>\nDeclining Attrition\nThe November 2019 Investor Day Presentation shows that attrition has declined significantly from about 21% in FY10 to less than 10% in FY20:\n<img src=\"https://static.tigerbbs.com/019cb7b9807c53883ad0012c39d0c7c0\" tg-width=\"640\" tg-height=\"378\" width=\"100%\" height=\"auto\">Image Source: November 2019 Investor Day Presentation\nOne of the reasons for the declining attrition is that Salesforce is the first software company to provide CRM and other offerings in the cloud at scale. Another key factor is the AppExchange where increased innovation, utility and overall engagement lead to lower attrition. Acquisitions have led to today's multi-cloud environment which is also good for increasing engagement and lowering attrition.\nRevenue Growth\nDeclining attrition has made it much easier for Salesforce to increase revenue. Looking at the last 7 years, subscription and support revenue growth has been prodigious, going from about $5 billion in FY15 all the way up to around $20 billion by FY21. Note that the Platform and Other offering includes the Integration and Analytics offerings. Professional services and other revenue is not shown here and it was up to $1.3 billion by 2021:\n<img src=\"https://static.tigerbbs.com/bdadcd43083d7826f9a1abaf444ebfc1\" tg-width=\"640\" tg-height=\"390\" width=\"100%\" height=\"auto\">Image Source: author's spreadsheet from 10-K filings\nRevenue growth should continue as the total addressable market (\"TAM\") expands to $175 billion by fiscal '25 per the December 2020 Investor Day Presentation. Below we see key logos tied to offerings. Analytics has Tableau, Integration has MuleSoft, and Platform has Lightning from a slide in. Also, the Marketing offering favors the ExactTarget color scheme and Commerce offering favors the Demandware color scheme:\n<img src=\"https://static.tigerbbs.com/dbce8ec606b80ff1cdacdb4d7e0fa76a\" tg-width=\"640\" tg-height=\"458\" width=\"100%\" height=\"auto\">Image Source: December 2020 Investor Day\nValuation\nThe December 2020 Investor Day Presentation shows annual revenue reaching $50 billion or more by FY26 and I like to think about what the overall valuation will be at that point. CFO Hawkins notes that this $50 billion target includes Slack revenue but not revenue from any upcoming acquisitions. The numbers in the actual income statement and cash flow statement are a key consideration as well as the numbers that would be in place if the business was run for more of a steady-state environment with annual revenue growth in the low-single digits.\nIt's easier to articulate my FY26 thoughts by starting with current numbers and margins. We have the following margins forFY21:\nGAAP operating margin: 2.1%\nnon-GAAP operating margin: 17.7%\nunit economic margin: 39%[December 2020 estimate]\nI also think about the operating cash flow (\"OCF\") yield in a similar manner as the margins above. Per the September 2018 Investor Day&nbsp;Presentation, it has been fairly consistent over the years at about 25%, even with the dilutive effect of acquisitions:\n<img src=\"https://static.tigerbbs.com/16d5a744acc5b9127739e42a3a9be48e\" tg-width=\"600\" tg-height=\"319\" width=\"100%\" height=\"auto\">Image Source: September 2018 Investor Day Presentation\nFilings show that OCF Yield and OCF were 26% &amp; $3.4 billion in FY19, 25% &amp; $4.3 billion in FY20 and 23% and $4.8 billion in FY21 such that the OCF yield consistency continues.\nEach margin tells us something different. GAAP and non-GAAP operating margins are in the financial statements for any given year. The third type of margin is the unit economic margin which is based on subscription economics such that the lifetime of a customer is included over multiple fiscal years instead of just a single year. The income statement on the FY21&nbsp;10-K&nbsp;shows GAAP operating income directly and the numbers in footnotes [1] and [2] are used for non-GAAP operating income:\n<img src=\"https://static.tigerbbs.com/9d9174613e9191243a04e9ff17b354c8\" tg-width=\"600\" tg-height=\"827\" width=\"100%\" height=\"auto\">Image Source: FY21 10-K\nWe see that in FY21, the GAAP operating margin was 2.1% based on operating income of $455 million divided by revenue of $21.3 billion and the non-GAAP operating margin was 17.7% based on operating income of nearly $3.8 billion divided by revenue of $21.3 billion per the 4Q21&nbsp;release. The difference between GAAP and non-GAAP in FY21 is the $1.1 billion in business combination amortization and $2.2 billion in stock-based compensation. In other words, the release adds the stock-based compensation and business combination amortization from the income statement footnotes such that we have a clearer picture of the non-GAAP operating income:\n<img src=\"https://static.tigerbbs.com/f97cbc39fedfc59780629f59593ea000\" tg-width=\"640\" tg-height=\"560\" width=\"100%\" height=\"auto\">Image Source: 4Q21 release\nThe 3rd type of margin is from subscription unit economics. In this case, estimates are made about the lifetime value of customers spanning multiple fiscal years in the future. In other words, when we look at subscription unit economic margins, they are apples and oranges to the margins based on current fiscal filings as subscription economics contain the lifetime revenue and expenses over many years as opposed to any single fiscal year. The first part of subscription unit economics is the lifetime revenue value. Suppose we have a company whose first-year revenue is $1 with a high attrition rate of 50%. The lifetime revenue value starts out as follows:\nyear 1: $1.00\nyear 2: $0.50\nyear 3: $0.25\nAfter 3 years, we have $1.75 and if we keep going then eventually we get close to another $0.25. It's a geometric series that can be approximated as first-year revenue divided by attrition. $1 divided by 50% comes out to $2 of lifetime revenue.\nThe September 2015 Investor Day Presentation has a simple example without incremental annual recurring revenue (\"ARR\") that shows how near-term profitability can be sacrificed when thinking about lifetime unit margins. We have Acme Cloud which has $1 in first-year revenue, 25% attrition, a cost to book (\"CTB\") of $0.50 and a cost to serve (\"CTS\") of 75%. The lifetime revenue approaches first-year revenue divided by attrition or $1 divided by 25% which is $4. The CTS is 75% of this or $3. The unit income is lifetime revenue less CTB less CTS which comes to $0.50 and the lifetime unit margin is 12.5% or $0.50/$4. Acme has several options available. Option 1 is a proposal that lowers attrition 5% by increasing the CTS 2%. Option 2 is a proposal that targets enterprise customers who have a longer selling cycle and an elevated CTB but they also have a lower attrition rate. Both proposals are good in the long run as the lifetime unit margin goes up from 12.5% to 13% but both proposals put pressure on near-term margins:\n<img src=\"https://static.tigerbbs.com/8ddd473c926ef80d67285c81023b1e88\" tg-width=\"640\" tg-height=\"348\" width=\"100%\" height=\"auto\">Image Source: September 2015 Investor Day\nThe December 2020 Investor Day&nbsp;transcript&nbsp;reveals what SVP Evan Goldstein thinks about subscription economics including incremental ARR:\n<blockquote>\n Subscription economics relies on 3 metrics: attrition, cost to book and cost to serve. We calculate lifetime revenue by one divided by attrition. Our&nbsp;\n cost of book is our sales and marketing expenses&nbsp;divided by incremental ARR. And then our&nbsp;\n cost to serve is all the other expenses&nbsp;related to supporting that revenue divided by your lifetime revenue.\n</blockquote>\nThere are 4 major income statement lines that get us down from revenue towards operating income and in most years, adding/subtracting investment income, interest expense and taxes from operating income gets us close to net income, the first figure in the cash flow statement. These 4 major income statement lines are cost of revenue or cost of goods sold (\"COGS\"), research and development (\"R&amp;D\"), marketing and sales (\"S&amp;M\") and general and administrative (\"G&amp;A\"). CTB is S&amp;M while the other income statement lines are CTS per the subscription economics slide below from the November 2017 Investor Day Presentation:\n<img src=\"https://static.tigerbbs.com/7e110ea12c4d73e5eb9a5d1f2d39698f\" tg-width=\"500\" tg-height=\"379\" width=\"100%\" height=\"auto\">Image Source: November 2017 Investor Day Presentation\nThis slide from the December 2020 Investor Day Presentation is another way of visualizing the same concept. CTB is made of S&amp;M and both these labels favor beige whereas the CTS label and its profit and loss (\"P&amp;L\") statement lines are more of an aquamarine color:\n<img src=\"https://static.tigerbbs.com/20a25e426effbd54221726fde4321e20\" tg-width=\"600\" tg-height=\"346\" width=\"100%\" height=\"auto\">Image Source: December 2020 Investor Day\nSVP Goldstein reveals that unit economics improved from FY17 to FY21 as declines in attrition more than offset the rise in CTB. CTS flattened and then declined as efficiencies in G&amp;A were found. CTB has increased as they are selling a wide variety of products and workflows in multiple countries such that the portfolio is now broader. This sophistication creates more engagement for customers and attrition falls as Salesforce becomes stickier. SVP Goldstein goes on to explain that unit lifetime economic margins have gone from the mid-30s all the way up to 40% now:\n<blockquote>\n When we started talking to you, we talked about mid-30s. Last year, we updated you that we'd be at about 40%. Now we expect FY '21 to have some slight pressure as it relates to the pandemic. We shared with you earlier this year, we expect attrition to increase, but we believe this will be transitory over time and expect to get back to 40%. However, our decisions to maximize for subscription economics has created some impact on the short-term income statement.\n</blockquote>\n<img src=\"https://static.tigerbbs.com/1c7fbc72952d7832066e0f2af720aed2\" tg-width=\"600\" tg-height=\"328\" width=\"100%\" height=\"auto\">Image Source: December 2020 Investor Day\nI don't think unit economic margins will stop at 40%. There should be more upside in the next 5 years. This is what SVP Goldstein said about the ceiling at the December 2020 Investor Day Presentation:\n<blockquote>\n We definitely think there's upside to that number, and it's about finding efficiencies in CTB, CTS and attrition. Obviously, in the short term, as I've mentioned in my presentation, we're focused on investing in CTB to sort of get every dollar of ARR, but there can potentially be upside as we think about those metrics.\n</blockquote>\nThe bridge between GAAP and non-GAAP margins is clear; acquisition based amortization and stock-based-compensation are straightforward. I don't have a clear bridge between non-GAAP margins and unit economic margins but we do know that both exclude the impact of stock-based compensation and acquisition amortization. It is definitely beneficial that the unit economic margin has been rising over the years. Net cash provided by operating activities on the cash flow statement has some similarities to non-GAAP operating income in that both can be calculated from existing financial statements and both do not subtract amortization and stock-based compensation from revenue. We know that some of the FY21 numbers between the revenue of $21.3 billion and the net cash provided by operating activities of $4.8 billion are tied to revenue growth investments. I often think about what the net cash provided by operating activities would be if revenue wasn't growing. Likewise, I think about what things will look like when revenue reaches $50 billion. Revenue should still be growing substantially at that point so the net cash provided by operating activities number on the cash flow statement will be different from the number we would see without revenue growth.\nEventually the landscape should change such that investing aggressively for annual revenue growth doesn't make as much sense. At that point S&amp;M as a percentage of revenue should decline and the operating margin should rise. A November 2020writeupquotes Morgan Stanley analyst Keith Weiss talking about this tradeoff, saying operating margins can get to 28% in 5 years and 33% in 10 years:\n<blockquote>\n \"The good news is our updated [software-as-a-service] X-ray suggests Salesforce currently has the unit economics to drive operating margins to 28% in 5 years (based on our growth estimates) and 33% in 10 years, as growth slows towards 10%,\" Weiss said.\n</blockquote>\nThe December 2020 Investor Day Presentation shows operating cash flow going from $1.6 billion in FY16 to what they then estimated to be $4.9 billion for FY21 which is a CAGR of over 25%. The actual operating cash flow number for FY21 turned out to be $4.8 billion. Cash flow discussions come in the 4Q calls and the growth has been enormous over the last 3 years. Capex as a percentage of revenue has fallen significantly over the years. The10-Kfor FY14 shows capex was 7.3% of revenue or $299 million/$4.07 billion. By FY21, the 10-K shows it was just 3.3% of revenue or $710 million/$21.25 billion.\n<img src=\"https://static.tigerbbs.com/9c846999744311d81026f0e7ffd240fc\" tg-width=\"640\" tg-height=\"641\" width=\"100%\" height=\"auto\">Image Source: FY21 10-K\nAt the December 2020 Wells Fargo TMT&nbsp;Conference, CFO Hawkins noted that their acquisitions tend to dilute margins because they often acquire companies that are just getting started such that they are losing money on the revenue that is generated. The key point is that Salesforce knows how to take these assets that are dilutive at first and grow their revenue in such a way that profits come in the long run:\n<blockquote>\n Our track record, our feedback on M&amp;A has been well. It's been good. Take a look at&nbsp;\n ExactTarget, take a look at Demandware, take a look at MuleSoft, take a look at Tableau, and you're going to -- I always tell people there's a test at the end, we need to perform. But when you look back on that, again, I want to underscore, why do I say that as the CFO? Well, in FY '14, we made 8.9% operating margin, where we just came off a $4 billion a year. Today, the guide is roughly $21 billion in a couple of weeks, and there'll be -- obviously, the next year, you're talking north of $25 billion. And what are we doing? Our operating margin this year, the guide is effectively 17.6%. Okay, progress, better, better never done. But here's the key point, you know the attributes of each of these assets that we took on board. They were smaller, right?\n They lost money, most of them. They are getting started.\n</blockquote>\nIn the 2Q22&nbsp;call, it was revealed that the FY22 operating cash flow guidance growth would be 21% to 22% were it not for the dilutive cash flow impact of Slack and Acumen. FY21 revenue was $21.3 billion. Getting to $50 billion in 4.5 years by FY26 implies a CAGR of a little over 20%. I think operating cash flow can grow at a CAGR of nearly 23% such that it goes from $4.8 billion to about $12 billion. If capex is 2.5% of revenue at that point then it should be around $1.25 billion such that FCF is around $10.75 billion.\nI treat stock-based compensation as a cash expense so my adjusted FCF number would normally be lower than this. However, growth investments in S&amp;M largely offset the stock-based compensation consideration. If the market values Salesforce at 35x FCF at this time then it should be worth about $375 billion. This is where I see things on the low end seeing as management can be circumspect with guidance. On the high end, I think revenue can be $55 billion in FY26 and operating cash flow can grow at a CAGR of nearly 27% to reach $14 billion. Capex could be as little as 2% of revenue for $1.1 billion such that FCF is $12.9 billion. 35x this amount is about $450 billion.\nLooking at the 2Q22 balance sheet in the 10-Q&nbsp;filing, the enterprise value is about $1.7 billion more than the market cap due to $10.6 billion in long-term debt, $2.9 billion in long-term leases, $0.7 billion in short-term leases and $1.3 billion in Slack notes, partially offset by $6.3 billion in cash and equivalents plus $3.4 billion in marketable securities plus $4.1 billion in strategic investments. But we are using a FCF framework for valuation where debt and leases are already accounted for as they lower FCF. In FY21, interest expense was the primary component of the $64 million \"other expense\" line. And in the cash flow statement we see that FY21 operating cash flow was lowered by $830 million due to operating lease liabilities. I just look at the market cap for the valuation framework. The 2Q22 10-Q says there were approximately 979 million shares outstanding as of August 25, 2021. The September 10th share price was $257.20 implying a market cap of nearly $252 billion.\nAgain, today's market cap is almost $255 billion. If it grows to $375 billion in 4 and a half years at the end of FY26 then the 4.5 year CAGR is almost 9%. If it grows to $450 billion in 4 and a half years at the end of FY26 then the CAGR is a little over 13%. If there were no dilution then I think we'd see an outcome somewhere in between such that the stock has a CAGR between 9% and 13% over the next 4 and a half years. There will be some dilution so the CAGR range could be a bit lower, especially if the dilution comes from acquisitions that fail to speed up the $50 billion revenue target.","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Salesforce: A Wonderful Company At A Reasonable Price</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nSalesforce: A Wonderful Company At A Reasonable Price\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-09-13 20:58 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4454848-salesforce-a-wonderful-company-at-a-reasonable-price>Seeking Alpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nThe flexible approach at Salesforce is a competitive advantage as they help companies shift to the cloud.\nThe AppExchange ecosystem increases engagement and lowers attrition.\nCapex as a ...\n\n<a href=\"https://seekingalpha.com/article/4454848-salesforce-a-wonderful-company-at-a-reasonable-price\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"CRM":"赛富时"},"source_url":"https://seekingalpha.com/article/4454848-salesforce-a-wonderful-company-at-a-reasonable-price","is_english":true,"share_image_url":"https://static.laohu8.com/e9f99090a1c2ed51c021029395664489","article_id":"1164835747","content_text":"Summary\n\nThe flexible approach at Salesforce is a competitive advantage as they help companies shift to the cloud.\nThe AppExchange ecosystem increases engagement and lowers attrition.\nCapex as a percentage of revenue fell from 7.3% in fiscal ‘14 to 3.3% in fiscal ‘21.\n\nStephen Lam/Getty Images News\nIntroduction\nMy thesis is that Salesforce (CRM) is a wonderful company at a reasonable price. We are still in the early days as software continues shifting to the cloud. Much of the profitability for Salesforce is obfuscated by growth investments. In the 4Q20 call, it was revealed that returns for shareholders reached 4,000% since going public in 2004.\nCEO Marc Benioff has said that the way to understand the future is to look at the past. Written in 2009,Behind the Cloudis an excellent resource that helps explain how Salesforce laid their foundation and it is cited throughout this article.\nSeeing as the fiscal year goes through January, I think of the fiscal year as being equal to the calendar year plus one for the first three quarters. The fourth quarter is an exception as it is the only quarter that closes within the calendar year. In other words, calendar '21 is fiscal '22 for the first three quarters.\nFlexibility\nSalesforce is flexible, both with the needs of their customers and their own needs. From the beginning, they recognized that it was time to adapt to a new world where buying software would be like buying products on Amazon without the need for upgrades and updates. Meanwhile rigid incumbents like Oracle (ORCL) and SAP (SAP) continued to develop software as if the internet didn't exist. Salesforce embraces APIs such that companies can adopt a wide array of technology options. They provide the right optionality for companies as the world moves to subscriptions and direct-to-consumer (\"D2C\") relationships. Salesforce is limber when it comes to looking at their own requirements such as their infrastructure needs.\nSalesforce makes it easy for companies to adopt the latest technology options. The importance of using APIs for integration was a giant step in their evolution per Behind the Cloud:\n\n We made a significant leap in the technology when we offered integration capabilities by providing an application programming interface (\"API\"), or a way for salesforce.com to communicate with other programs. This transformed our product and technology so that the data in salesforce.com were not isolated in Web silos, but could interact with other data that were behind the firewall or on other Web sites. The API, for example, allowed salesforce.com to interface with Google Maps, so salespeople could instantly access a map of where all their customers were located.\n\n\n [\n Behind the Cloud: Location: 1,881]\n\nAnswering a question at the September 2017 Deutsche Bank Conference, Product EVP Mike Rosenbaum notes that Tesla (TSLA) has a continual relationship with customers by providing software updates. He notes that this is the type of thinking companies need to embrace and that Salesforce helps companies be malleable such that they can maintain direct relationships with customers:\n\n You take for example a company like Dollar Shave Club where instead of selling razors, I'm going to sell a subscription model so that every period of time, you get some razors delivered to you. That's the idea, I think, is where you start to - I think, every company in the world, whether it's brand manufacturing or anyone, needs to start to think about their business model a little bit more like a subscription service. And I think that is the very, very powerful idea that is made possible by CRM systems like Salesforce. We make that -- we make the technology barrier to implementing a model like that go away, to a large degree.\n\nYears ago Salesforce started out with their own data centers in California, Virginia and Singapore but they kept an open mind and reevaluated infrastructure decisions as time went by. Rather than opening their own data centers in new markets like Canada and Australia, they opted to go with Amazon's (AMZN) AWS. In addition to the close relationship with AWS, a partnership with Google (GOOG) (GOOGL) was discussed at the November 2017 Investor Day. Having 3 parts to it, the Google partnership includes Google Analytics, G Suite and some infrastructure on Google Cloud Platform (\"GCP\").\nAppExchange Ecosystem\nAppExchange is the world's leading enterprise cloud ecosystem with over 3,000 apps and components. Per the faq, they have 117,000 customer reviews and 9 million installs. At the December 2020 Investor Day Presentation, President & COO Bret Taylor said AppExchange is one of the main competitive advantages for Salesforce, noting the million-plus weekly active developers on Slack. Back in 2005 CEO Benioff pointed out that AppExchange was groundbreaking.Behind the Cloudtalks about the significance of becoming a platform noting that traditional software companies like Siebel and SAP didn't make the right types of capital investments to empower their partners:\n\n One of the most pivotal decisions we made as a company was to make our code available to let other companies build their own complementary online services. This idea to become a platform, or an operating system for the Internet (similar to how Windows is an operating system for PCs), offered a way to allow everyone to create applications online and gave us an opportunity to attract and \n retain more customers.\n\n\n [\n Behind the Cloud: Location: 1,895]\n\nVeeva (VEEV) helps life science companies shift to the cloud and their payments to Salesforce are part of their cost of revenues line on the income statement. They were an early Independent Software Vendor (\"ISV\") and they have grown over the years such that their market cap is now close to $50 billion. Per their filings, Veeva has a value-added reseller agreement with Salesforce for a cumulative $500 million from March 2014 to September 2025 which they will fulfill easily as there is only $57 million remaining.\nIt was simple to see the potential for AWS years ago when Netflix (NFLX) announced they were using them for their media content. The same thing is happening in banking as old thought processes are shifting and resources are being allocated to AppExchange banking leader nCino (NCNO). At a June 2018 Evercore ISI event, nCino Executive Director of Global Market Strategy Jim Baxley talked about the way banks are moving to the cloud seeing as they don't want to build their own data centers anymore and they don't want to have armies of developers.\nDocuSign(NASDAQ:DOCU) COO Scott Olrich spoke about the relationship with Salesforce at DocuSign's March 2021 Virtual Financial Analyst Day. DocuSign Gen is a lightweight tool that allows reps to generate a contract from inside of Salesforce. The Salesforce sales team helps sell these products and there is a specialized version for quotes and billing.\nThe November 2017 Investor Day Presentation shows ISV with a revenue run rate of $310 million such that it was 17% of the Platform & Other Revenue at that time:\nImage Source: November 2017 Investor Day Presentation\nI value the AppExchange platform more for the way that it lowers attrition through increased innovation, utility and engagement than for the revenue it generates directly.\nSuccessful Acquisitions\nHaving a flexible and collaborative mindset, Salesforce has a history of giving subsidiaries the right environment to continue with innovation and revenue growth after being acquired. Other software giants have a more rigid mindset such that their acquisitions don't work out the right way. At the October 2006 Dreamforce Investor Summit, Worldwide Sales and Distribution President Jim Steele talked about the fact that Siebel's innovation stagnated after being acquired by Oracle.\nThe acquisitions of ExactTarget, ClickSoftware and Vlocity were very important for Salesforce despite the fact that there have been others at higher price tags. ExactTarget was acquired in 2013 to help Salesforce become number one in marketing. An August 2019 diginomica writeup notes that much of Salesforce's Field Service Lightning software was licensed and originally written by ClickSoftware developers. Bringing ClickSoftware in-house bolstered the Service and Platform offerings. Vlocity was built on the Salesforce platform and their acquisition was finalized in June 2020. They strengthen Salesforce's Service offering. At the September 2020 RBC Tour, Salesforce Industries Division CEO David Schmaier talked about Vlocity's approach noting that they serve regulated industries including communications, insurance, health, government, energy and media.\nA June 2021 article from Fortune mentions the biggest acquisitions as follows:\nDemandware: Price: $2.8 billion - June 2016\nMulesoft: Price: $6.5 billion - March 2018\nTableau: Price: $15.7 billion - June 2019\nSlack: Price: $27.7 billion - December 2020 (deal announced)\nDemandware is the key part of Salesforce's Commerce offering while Tableau is essential for the Analytics offering and MuleSoft powers the Integration offering. The importance of Tableau and MuleSoft was made evident in the 1Q22 cal lwhen it was revealed that Tableau was in 8 of the top 10 new deals and MuleSoft was in 5 of the 10.\nAt the June 2019 Tableau call, CEO Benioff talks about the fact that traditional enterprise software companies are unaccommodating when it comes to new technology. The reputation of flexibility at Salesforce is a big factor when it comes to acquisitions:\n\n There is a question of, well, gee, MuleSoft really is all about connecting to an ecosystem of data and connects to lots of different data sources like SAP, Microsoft and Amazon and Google and Workday and ServiceNow and so many companies, and how do you plan to address that? And it was kind of a shock to me actually because when I have the question, it was kind of like somehow people think that we wouldn't connect to those companies or wouldn't support all those companies or that we would do something to cut them off.\n\nThe November 2019 Investor Day Presentation notes the success of revenue growth with 3 prominent acquisitions. Acquired in July 2013 with annual revenue of $286 million, ExactTarget grew its revenue to $1,450 million in 6 years. Demandware was purchased in July 2016 and they had revenue of $227 million at the time which grew to $590 million in 3 years. MuleSoft was acquired in May 2018 when they had revenue of $284 million and this grew to $665 million in a short time.\nDisrupting Incumbents\nThe CRM market was fragmented before Salesforce entered the picture. Small companies often used ACT, medium sized companies used Microsoft (MSFT) and large companies went with Siebel, SAP or Peoplesoft.Behind the Cloudreveals that small, medium and large businesses have heterogeneous preferences and the dogma at the time was that they couldn't all be served by a single company:\n\n When we started salesforce.com, companies sold separate software systems to small, medium, and large companies. We wanted to change that and provide everyone with the same affordable and effective service. For as long as I can remember, people told us we couldn't serve all markets - they told us that it could not be done.\n\n\n [\n Behind the Cloud: Location: 1,643]\n\nSalesforce became a democratizing tool by using the internet to provide the same services to small companies that were only available to large enterprises in the past. Over time they began serving more of the large companies and this disrupted incumbents like Oracle and SAP. The September 2015 Investor Day Presentation shows that SAP had 14.3% CRM market share in FY11 followed by Oracle at 12.6% and Salesforce at 10.6%. It reveals that Salesforce passed both companies within a year or two of FY11 and had a comfortable lead by FY15. The December 2020 Investor Day Presentation shows Salesforce up to 19.8% CRM market share by 2020H1, well ahead of Oracle at just 5.3% and SAP at a mere 4.8%.\nAt the September 2006 Citigroup Global Technology Conference, CEO Benioff talks about SAP's obstinance:\n\n But SAP has not changed. They are basically just selling the same stuff that they had 10 years ago -- single-tenant architecture, license fees -- same business model, same technology model, running their business the same way. They talk about on-demand -- all on-demand to them is moving their database from one datacenter to another datacenter. It is not multitenancy. They don't even believe in multitenancy. They say they don't believe in multitenancy.\n\nUnlike incumbents who rely on maintenance contracts, Salesforce wanted to do away with packaged software and make things as easy as buying products on Amazon. This is well explained inBehind the Cloud:\n\n We wanted to take advantage of a new platform - the Internet - and deliver business applications cheaply through a Web site that was as easy to use as Amazon.com. We had to think out of the box. Literally, no more packaged software. And figuratively, as no one was then selling subscriptions for business applications and delivering them over the Web.\n\n\n [\n Behind the Cloud: Location: 3,702]\n\nCEO Benioff discusses inflexible thinking in the 2Q16callsaying that Oracle and SAP still sell old technology similar to the way that IBM still sells mainframes:\n\n And that's what you see with companies like Oracle and SAP. These are old technology bases that are meandering along like mainframes. And I think that is reflected exactly as you said, in their license revenue growth which has been poor. And in \n their movement to the cloud has been stunted because they don't want to shift those customers into new models, exactly why IBM lost the PC business because they were too afraid to let go of the mainframe. It's the past replaying itself, but instead of IBM you've got Oracle and SAP basically running the same playbook.\n\nPresident & Chief Product Officer David Schmaier cites The Innovator's Dilemma at the September 2020 RBC Tour saying Salesforce is here to disrupt on-premise competitors:\n\n And the very simple way to sell against those vendors is it's faster to deploy, it's easier to use. And oh, by the way, if you look at the total cost of ownership, it actually costs less money, too. So even I can sell that. Let me think about that again. It's faster, it's easier and it costs less money. And it's constantly refreshed in the cloud. And so it's just way better than that old on-premise world. And so we like to find \n markets where we're disrupting legacy competitors is kind of the - I think that's the perfect storm. It doesn't mean we wouldn't go into a space where there is another cloud competitor, but it's easier and faster if that's not the case.\n\nDeclining Attrition\nThe November 2019 Investor Day Presentation shows that attrition has declined significantly from about 21% in FY10 to less than 10% in FY20:\nImage Source: November 2019 Investor Day Presentation\nOne of the reasons for the declining attrition is that Salesforce is the first software company to provide CRM and other offerings in the cloud at scale. Another key factor is the AppExchange where increased innovation, utility and overall engagement lead to lower attrition. Acquisitions have led to today's multi-cloud environment which is also good for increasing engagement and lowering attrition.\nRevenue Growth\nDeclining attrition has made it much easier for Salesforce to increase revenue. Looking at the last 7 years, subscription and support revenue growth has been prodigious, going from about $5 billion in FY15 all the way up to around $20 billion by FY21. Note that the Platform and Other offering includes the Integration and Analytics offerings. Professional services and other revenue is not shown here and it was up to $1.3 billion by 2021:\nImage Source: author's spreadsheet from 10-K filings\nRevenue growth should continue as the total addressable market (\"TAM\") expands to $175 billion by fiscal '25 per the December 2020 Investor Day Presentation. Below we see key logos tied to offerings. Analytics has Tableau, Integration has MuleSoft, and Platform has Lightning from a slide in. Also, the Marketing offering favors the ExactTarget color scheme and Commerce offering favors the Demandware color scheme:\nImage Source: December 2020 Investor Day\nValuation\nThe December 2020 Investor Day Presentation shows annual revenue reaching $50 billion or more by FY26 and I like to think about what the overall valuation will be at that point. CFO Hawkins notes that this $50 billion target includes Slack revenue but not revenue from any upcoming acquisitions. The numbers in the actual income statement and cash flow statement are a key consideration as well as the numbers that would be in place if the business was run for more of a steady-state environment with annual revenue growth in the low-single digits.\nIt's easier to articulate my FY26 thoughts by starting with current numbers and margins. We have the following margins forFY21:\nGAAP operating margin: 2.1%\nnon-GAAP operating margin: 17.7%\nunit economic margin: 39%[December 2020 estimate]\nI also think about the operating cash flow (\"OCF\") yield in a similar manner as the margins above. Per the September 2018 Investor Day Presentation, it has been fairly consistent over the years at about 25%, even with the dilutive effect of acquisitions:\nImage Source: September 2018 Investor Day Presentation\nFilings show that OCF Yield and OCF were 26% & $3.4 billion in FY19, 25% & $4.3 billion in FY20 and 23% and $4.8 billion in FY21 such that the OCF yield consistency continues.\nEach margin tells us something different. GAAP and non-GAAP operating margins are in the financial statements for any given year. The third type of margin is the unit economic margin which is based on subscription economics such that the lifetime of a customer is included over multiple fiscal years instead of just a single year. The income statement on the FY21 10-K shows GAAP operating income directly and the numbers in footnotes [1] and [2] are used for non-GAAP operating income:\nImage Source: FY21 10-K\nWe see that in FY21, the GAAP operating margin was 2.1% based on operating income of $455 million divided by revenue of $21.3 billion and the non-GAAP operating margin was 17.7% based on operating income of nearly $3.8 billion divided by revenue of $21.3 billion per the 4Q21 release. The difference between GAAP and non-GAAP in FY21 is the $1.1 billion in business combination amortization and $2.2 billion in stock-based compensation. In other words, the release adds the stock-based compensation and business combination amortization from the income statement footnotes such that we have a clearer picture of the non-GAAP operating income:\nImage Source: 4Q21 release\nThe 3rd type of margin is from subscription unit economics. In this case, estimates are made about the lifetime value of customers spanning multiple fiscal years in the future. In other words, when we look at subscription unit economic margins, they are apples and oranges to the margins based on current fiscal filings as subscription economics contain the lifetime revenue and expenses over many years as opposed to any single fiscal year. The first part of subscription unit economics is the lifetime revenue value. Suppose we have a company whose first-year revenue is $1 with a high attrition rate of 50%. The lifetime revenue value starts out as follows:\nyear 1: $1.00\nyear 2: $0.50\nyear 3: $0.25\nAfter 3 years, we have $1.75 and if we keep going then eventually we get close to another $0.25. It's a geometric series that can be approximated as first-year revenue divided by attrition. $1 divided by 50% comes out to $2 of lifetime revenue.\nThe September 2015 Investor Day Presentation has a simple example without incremental annual recurring revenue (\"ARR\") that shows how near-term profitability can be sacrificed when thinking about lifetime unit margins. We have Acme Cloud which has $1 in first-year revenue, 25% attrition, a cost to book (\"CTB\") of $0.50 and a cost to serve (\"CTS\") of 75%. The lifetime revenue approaches first-year revenue divided by attrition or $1 divided by 25% which is $4. The CTS is 75% of this or $3. The unit income is lifetime revenue less CTB less CTS which comes to $0.50 and the lifetime unit margin is 12.5% or $0.50/$4. Acme has several options available. Option 1 is a proposal that lowers attrition 5% by increasing the CTS 2%. Option 2 is a proposal that targets enterprise customers who have a longer selling cycle and an elevated CTB but they also have a lower attrition rate. Both proposals are good in the long run as the lifetime unit margin goes up from 12.5% to 13% but both proposals put pressure on near-term margins:\nImage Source: September 2015 Investor Day\nThe December 2020 Investor Day transcript reveals what SVP Evan Goldstein thinks about subscription economics including incremental ARR:\n\n Subscription economics relies on 3 metrics: attrition, cost to book and cost to serve. We calculate lifetime revenue by one divided by attrition. Our \n cost of book is our sales and marketing expenses divided by incremental ARR. And then our \n cost to serve is all the other expenses related to supporting that revenue divided by your lifetime revenue.\n\nThere are 4 major income statement lines that get us down from revenue towards operating income and in most years, adding/subtracting investment income, interest expense and taxes from operating income gets us close to net income, the first figure in the cash flow statement. These 4 major income statement lines are cost of revenue or cost of goods sold (\"COGS\"), research and development (\"R&D\"), marketing and sales (\"S&M\") and general and administrative (\"G&A\"). CTB is S&M while the other income statement lines are CTS per the subscription economics slide below from the November 2017 Investor Day Presentation:\nImage Source: November 2017 Investor Day Presentation\nThis slide from the December 2020 Investor Day Presentation is another way of visualizing the same concept. CTB is made of S&M and both these labels favor beige whereas the CTS label and its profit and loss (\"P&L\") statement lines are more of an aquamarine color:\nImage Source: December 2020 Investor Day\nSVP Goldstein reveals that unit economics improved from FY17 to FY21 as declines in attrition more than offset the rise in CTB. CTS flattened and then declined as efficiencies in G&A were found. CTB has increased as they are selling a wide variety of products and workflows in multiple countries such that the portfolio is now broader. This sophistication creates more engagement for customers and attrition falls as Salesforce becomes stickier. SVP Goldstein goes on to explain that unit lifetime economic margins have gone from the mid-30s all the way up to 40% now:\n\n When we started talking to you, we talked about mid-30s. Last year, we updated you that we'd be at about 40%. Now we expect FY '21 to have some slight pressure as it relates to the pandemic. We shared with you earlier this year, we expect attrition to increase, but we believe this will be transitory over time and expect to get back to 40%. However, our decisions to maximize for subscription economics has created some impact on the short-term income statement.\n\nImage Source: December 2020 Investor Day\nI don't think unit economic margins will stop at 40%. There should be more upside in the next 5 years. This is what SVP Goldstein said about the ceiling at the December 2020 Investor Day Presentation:\n\n We definitely think there's upside to that number, and it's about finding efficiencies in CTB, CTS and attrition. Obviously, in the short term, as I've mentioned in my presentation, we're focused on investing in CTB to sort of get every dollar of ARR, but there can potentially be upside as we think about those metrics.\n\nThe bridge between GAAP and non-GAAP margins is clear; acquisition based amortization and stock-based-compensation are straightforward. I don't have a clear bridge between non-GAAP margins and unit economic margins but we do know that both exclude the impact of stock-based compensation and acquisition amortization. It is definitely beneficial that the unit economic margin has been rising over the years. Net cash provided by operating activities on the cash flow statement has some similarities to non-GAAP operating income in that both can be calculated from existing financial statements and both do not subtract amortization and stock-based compensation from revenue. We know that some of the FY21 numbers between the revenue of $21.3 billion and the net cash provided by operating activities of $4.8 billion are tied to revenue growth investments. I often think about what the net cash provided by operating activities would be if revenue wasn't growing. Likewise, I think about what things will look like when revenue reaches $50 billion. Revenue should still be growing substantially at that point so the net cash provided by operating activities number on the cash flow statement will be different from the number we would see without revenue growth.\nEventually the landscape should change such that investing aggressively for annual revenue growth doesn't make as much sense. At that point S&M as a percentage of revenue should decline and the operating margin should rise. A November 2020writeupquotes Morgan Stanley analyst Keith Weiss talking about this tradeoff, saying operating margins can get to 28% in 5 years and 33% in 10 years:\n\n \"The good news is our updated [software-as-a-service] X-ray suggests Salesforce currently has the unit economics to drive operating margins to 28% in 5 years (based on our growth estimates) and 33% in 10 years, as growth slows towards 10%,\" Weiss said.\n\nThe December 2020 Investor Day Presentation shows operating cash flow going from $1.6 billion in FY16 to what they then estimated to be $4.9 billion for FY21 which is a CAGR of over 25%. The actual operating cash flow number for FY21 turned out to be $4.8 billion. Cash flow discussions come in the 4Q calls and the growth has been enormous over the last 3 years. Capex as a percentage of revenue has fallen significantly over the years. The10-Kfor FY14 shows capex was 7.3% of revenue or $299 million/$4.07 billion. By FY21, the 10-K shows it was just 3.3% of revenue or $710 million/$21.25 billion.\nImage Source: FY21 10-K\nAt the December 2020 Wells Fargo TMT Conference, CFO Hawkins noted that their acquisitions tend to dilute margins because they often acquire companies that are just getting started such that they are losing money on the revenue that is generated. The key point is that Salesforce knows how to take these assets that are dilutive at first and grow their revenue in such a way that profits come in the long run:\n\n Our track record, our feedback on M&A has been well. It's been good. Take a look at \n ExactTarget, take a look at Demandware, take a look at MuleSoft, take a look at Tableau, and you're going to -- I always tell people there's a test at the end, we need to perform. But when you look back on that, again, I want to underscore, why do I say that as the CFO? Well, in FY '14, we made 8.9% operating margin, where we just came off a $4 billion a year. Today, the guide is roughly $21 billion in a couple of weeks, and there'll be -- obviously, the next year, you're talking north of $25 billion. And what are we doing? Our operating margin this year, the guide is effectively 17.6%. Okay, progress, better, better never done. But here's the key point, you know the attributes of each of these assets that we took on board. They were smaller, right?\n They lost money, most of them. They are getting started.\n\nIn the 2Q22 call, it was revealed that the FY22 operating cash flow guidance growth would be 21% to 22% were it not for the dilutive cash flow impact of Slack and Acumen. FY21 revenue was $21.3 billion. Getting to $50 billion in 4.5 years by FY26 implies a CAGR of a little over 20%. I think operating cash flow can grow at a CAGR of nearly 23% such that it goes from $4.8 billion to about $12 billion. If capex is 2.5% of revenue at that point then it should be around $1.25 billion such that FCF is around $10.75 billion.\nI treat stock-based compensation as a cash expense so my adjusted FCF number would normally be lower than this. However, growth investments in S&M largely offset the stock-based compensation consideration. If the market values Salesforce at 35x FCF at this time then it should be worth about $375 billion. This is where I see things on the low end seeing as management can be circumspect with guidance. On the high end, I think revenue can be $55 billion in FY26 and operating cash flow can grow at a CAGR of nearly 27% to reach $14 billion. Capex could be as little as 2% of revenue for $1.1 billion such that FCF is $12.9 billion. 35x this amount is about $450 billion.\nLooking at the 2Q22 balance sheet in the 10-Q filing, the enterprise value is about $1.7 billion more than the market cap due to $10.6 billion in long-term debt, $2.9 billion in long-term leases, $0.7 billion in short-term leases and $1.3 billion in Slack notes, partially offset by $6.3 billion in cash and equivalents plus $3.4 billion in marketable securities plus $4.1 billion in strategic investments. But we are using a FCF framework for valuation where debt and leases are already accounted for as they lower FCF. In FY21, interest expense was the primary component of the $64 million \"other expense\" line. And in the cash flow statement we see that FY21 operating cash flow was lowered by $830 million due to operating lease liabilities. I just look at the market cap for the valuation framework. The 2Q22 10-Q says there were approximately 979 million shares outstanding as of August 25, 2021. The September 10th share price was $257.20 implying a market cap of nearly $252 billion.\nAgain, today's market cap is almost $255 billion. If it grows to $375 billion in 4 and a half years at the end of FY26 then the 4.5 year CAGR is almost 9%. If it grows to $450 billion in 4 and a half years at the end of FY26 then the CAGR is a little over 13%. If there were no dilution then I think we'd see an outcome somewhere in between such that the stock has a CAGR between 9% and 13% over the next 4 and a half years. There will be some dilution so the CAGR range could be a bit lower, especially if the dilution comes from acquisitions that fail to speed up the $50 billion revenue target.","news_type":1},"isVote":1,"tweetType":1,"viewCount":308,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":[],"verified":2,"subType":0,"readableState":1,"langContent":"EN","currentLanguage":"EN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"andRepostAutoSelectedFlag":false,"upFlag":false,"length":3,"xxTargetLangEnum":"ORIG"},"commentList":[],"isCommentEnd":true,"isTiger":false,"isWeiXinMini":false,"url":"/m/post/886054800"}