Has anyone grown faster than Microsoft and Oracle?
Amazingly CRM has grown faster than Microsoft, Oracle and SAP in the race to $2 billion at the respective stages of their corporate life. As can be seen below it took CRM 12 years to get to $2 billion compared to Microsoft which took 16 years. During this fiscal year CRM have a $4 billion revenue run rate target on the way to their long term $10 billion dream.
Source: CRM investor day
The cloud has the advantage of being lower cost. No extra hardware is required to be bought and no need to employ IT staff to manage the systems. Accessing software through the cloud also means everyone has the access to the same version and support. Another benefit is the ability to pay by subscription, a pay as you go model rather than an upfront perpetual license. This is much more attractive for smaller businesses and has increased the market opportunity for software.
A platform in the cloud?
CRM is the leader in sales software. Potential upside for CRM is in growth as a platform. As the pioneer in cloud computing they are allowing third parties to build applications on their platform force.com utilizing CRM's database, security and user interface expertise. CRM have more than 1 million developers on this platform, and over 3 million apps have already been developed. CRM is pioneering platform as a service.
Valuation in the cloud
Great story but isn't this in the shareprice with a price multiple of 84x next years earnings? Well it is not as expensive if you look at the cash. The great thing with software as a service is that it provides investors with high visibility as revenue is recognised over the term of the subscription rather than lumpy upfront sales. However the issue is in the accounting. Billing software as a service means CRM can only recognise revenue when the software has been used for the month. As result there is a timing mismatch expenses are fully expensed now but the future revenue from the subscription is not recognised as revenue.
CRM's customer churn is in the low teens assuming this means 13% customers tend to subscribe for nearly 8 years this is not recognised in revenue. Luckily for CRM when a customer signs up for a year they pay upfront given the model we think cash is a better indicator than profits. For example Free cash flow per share in FY 2012 was $440 million or $3.25 per share vs Diluted EPS of $(0.09) per share. I have a preference for cash over accounting profits, businesses run on cash not profits.