No. of Recommendations: 219
Salesforce.com (hereafter referred to as ticker CRM) is the first and only pure play Cloud company that has remained public (not acquired and not failed) for an extended period AND has matured into a Mega Cap company. Examining CRM’s long history may be useful not only for providing some insights and perspective for younger, public SaaS companies without long histories as public companies but also to foresee how much these smaller companies may one day be worth should they become dominant juggernauts. The current crop of SaaS companies currently valued in the range of $5-10B do not have long histories as public companies (usually less than 5 years) and during this period, the valuations of these companies have skyrocketed at rates above their revenue growth rates causing their valuation multiples to expand. Was this valuation expansion justified or was it a temporary “bubble”? This is not a question that I believe can be answered and the answer may be different from company to company. Time will tell. But I do hope to gain some perspective by looking at CRM as we will get a view of the company from the time it was a hypergrowth $50M revenue firm to how it is today as a $15B revenue, cash generating machine….and the 15+ years (around 60 quarters) in between. If the SaaS companies that we own now are star high school basketball players, we have the benefit of the complete record of Michael Jordan from elementary school, through high school and college, and on to becoming one of the most successful NBA stars. In this respect, CRM is really one of a kind. I originally wanted to examine several mature companies, but CRM is really one of a kind. It also took a long of time and effort to pull and enter 70+ quarters of data. Therefore, I think this will be more of a case study (with an N of one).

What is CRM?
CRM is a company that provides a customer relationship management system that enables companies to manage the relationships between their salesforces and their customers. CRM delivers their CRM solution through the Cloud and charges their customers on a recurring subscription basis. CRM was founded in 1999 and had their IPO on June 23, 2004. The company was valued at about $1.2B at its IPO and has grown to a $115B valuation today (October 21, 2019). The share price peaked at the end of April 2019 and is currently about 14% below that level (notice this is decline from the peak is much less than the decline in valuation of the smaller SaaS companies).

CRM’s Success
CRM really is an amazing success story. The shares went public at $11 ($2.75 split adjusted) on June 23, 2004. The trading range on the open market on the day of the IPO was between $3.69 and $4.33 (split adjusted). The return since then using today’s price of $144.55 is 3138% or 31x from the highest price on the opening day of trading; this amounts to a CAGR of 25.7%. Clearly, this is one of those homerun investments. If you could have bought during the 2008/2009 financial crisis the CAGR would have been much, much higher.

CRM’s Financials
I extracted several financial datapoints from each earnings press release (and from the S-1 for data prior to the IPO). For those of you who have not accessed data before, all the 10-Qs (quarterly reports) and 10-K (annual reports) are archived at the SEC’s web portal (SEC Edgar). I used the actual press releases (filed as 8-K), and to get the old ones that are no longer available at CRM’s investor relations page, you can find them at SEC Edgar. There are many 8-Ks as there are company press releases for announcements other than earnings releases; the 8-K for the earnings announcement press releases are usually easily identifiable because they are issued 1 or several days prior to the filling of the related 10-Q/10-K. So usually the 8-K that you want is the once immediately preceding the 10-Q/10-K.

As you will see below, CRM’s financials are pretty incredible by most measures. Before I post the data, I’d like to go over what data I extracted and why:

Revenue
Revenue, comprised of Subscription Revenue and Professional Services Revenue, is one of the most important metrics. This is because revenue is harder to manipulate than earnings so it gives us a good read on how the business is growing. We should all be familiar with these as we have been diligently tracking revenue for the SaaS stocks that we own. For CRM, subscription revenue was initially around 10-12% of total revenue until its annual revenue was around $1B. As a larger company, CRM’s subscription revenue was about 94% of the total revenue. This is very similar to many of our smaller SaaS companies. The Gross Margins on subscription revenue (spot checked GAAP FY2004, FY2006, and FY2008) were 91%, 87%, and 87% on total FY subscription revenue of $86M, $280M, and $680M respectively. I chose to look at these times in the history because the subscription revenues are in a similar range of subscription revenues to those of our smaller SaaS companies today. They look very comparable to me. The professional services revenue had negative margin during these years: FY2004: GAAP cost of $9.5M on $10.2M revenue, FY2006: GAAP cost of $35M on $29M of revenue, and FY2008: GAAP cost of $80M on $68M revenue. These professional services GMs are also in the ballpark when compared to our SaaS companies.
From the revenue numbers I calculated the year over year growth rates for total revenue and subscription revenue. I also calculated the TTM revenue growth rates.
Note: on 2/1/2018 CRM adopted the ASC606 accounting standard. The impact on revenue was not that big so I didn’t make any adjustments (i.e. entered ASC 606 for the 4/30/18 quarter and more recent quarters).

Earnings Release Date
I tracked the earnings release date for each release so that I can track the stock price starting the day after the announcement through the day of the next announcement.

Earnings release performance compared to guidance
I noted each time that CRM beat their revenue guidance and whether they raised their previous guidance. I was very surprised to see that CRM beat their revenue guidance in 59 of 60 quarters (98.3%)!!! I have to wonder if any company ever has ever beat guidance so consistently. In addition, their beats averaged only 2.1% over the top end of guidance with their biggest beat only being 7.0%. CRM sure had consistency and predictability, something that Wall Street really loves. Note: the one time they did not beat guidance was in Q1 2009 (in the dark depths of the financial crisis), and that miss was only by about $75K of $305M (miss of 0.025%....a little rounding error which is really a meet guidance rather than a guidance miss!). CRM only lowered previous guidance 2 times (also in 2009) but then they went on to beat this lowered guidance both times. CRM raised previous revenue guidance 58/60 times (these were all beat and raise quarters!!). Has there ever in history been a company growing at a high revenue growth rate that beat and raised every single time except twice during the worst financial crisis in history since the Great Depression? Absolutely amazing performance, consistency, and predictability! Wow!

Cash, Debt, and Deferred Revenue
I tracked cash, long term debt, and deferred revenue. Cash (subtracted from market cap) and debt (added to market cap) were used to adjust the market cap to arrive at Enterprise Value. There were acquisitions made by CRM along the way; I did not make any adjustments and the acquisitions were just embedded in the numbers that I used for this analysis. I also tracked deferred revenue but I haven’t really used these numbers for any additional calculations. For the 4/30/2018 quarter and more recent quarters, I entered Unearned Revenue instead of Deferred Revenue; the company began reporting this metric instead of Deferred Revenue; the differences were small so I did not try to make any adjustments. I will say that CRM’s deferred revenue has grown to a massive amount (more than $7B); in addition, RPO (Remaining Performance Obligation) has grown to more than $25B.

CFFO and FCF
I tracked Cash Flow from Operations and Capital Expenditures each quarter. From those figures I calculated Free Cash Flow (FCF) and TTM FCF. Since FCF varies widely from one quarter to the next, I think it is better to look at TTM FCF. As CRM’s growth rate slowed to the 20-35% range, I think that looking at EV/TTM FCF may be another metric to track; this valuation multiple may be more reliable than EV/TTM Sales for a mature company. Since our smaller SaaS companies may someday become mature juggernauts (hopefully), we can “forecast” what they might one day be worth on a EV/TTM FCF basis (and assigning a multiple on that ratio).

Outstanding Shares
I tracked the outstanding share count each quarter. I used the fully diluted values. The share counts were used to calculate market cap values which were used to calculated EV. Note: CRM has a 4:1 stock split in 2013. I accounted for this my multiplying the share count by 4 for the periods prior to the stock split.

Stock Price ranges
I downloaded (from Yahoo! Finance) the daily stock price history from 6/23/04 (IPO) through 10/18/19 (current). It only took about 10 seconds to get the daily stock prices for the entire 15 year period! Using the closing price each day, I noted the high and low price during each quarter to arrive at a range. I used the day following each earnings release date at the beginning date for each period and the day of the following earnings release date as the end date for each period. I used the day after the earnings release because earnings were reported after market close on the day of the release. CRM had a 4:1 stock split on 4/18/13. The downloaded share prices are split adjusted so I adjusted (multiplied by 4) the Outstanding Shares for all quarters prior to the share split date.

EV/TTM Sales ranges
I calculated the EV/Sales range for each period.

Here’s the data in tabular form. I did not show all of the data, and focused on the data that I thought is most relevant. There are lots of columns so you will need to click the “FORMAT FOR PRINTING” button so see all the columns.


Q end Sub PS Rev TTM Rev %Beat RevGr SubGr TTMGr DefRev Cash Debt FCF FCFTTM PriceHi PriceLo EV/RLo EV/RHi EV/FCFL EV/FCFH FedLo FedHi Start End
Apr-02 8.8 0.5 9.4
Jul-02 11.3 0.6 11.9
Oct-02 12.9 1.3 14.2
Jan-03 14.6 0.9 15.6 51 127.5%
Apr-03 16.9 2 18.9 60.6 102.3% 92.1%
Jul-03 19.6 2 21.6 70.3 82.0% 73.8% 3.5
Oct-03 22.5 3 25.4 81.5 79.2% 73.8% 30 6.2
Jan-04 26.8 3.3 30.1 96 93.1% 83.1% 88.3% 50 36 4.8
Apr-04 31.1 3.7 34.8 112 84.2% 83.9% 84.9% 44 6.4 21 2.4 4.3 1.00% 1.50% 6/23 8/19
Jul-04 36 4.6 40.6 131 87.7% 83.8% 86.2% 173 0 14 32 3.13 5.49 9 16.8 37 69 1.50% 2.00% 8/20 11/17
Oct-04 41.5 4.9 46.4 152 3.0% 82.3% 84.5% 86.2% 74 185 0 12 38 3.27 4.5 8.8 12.6 35.6 50.9 2.00% 2.50% 11/18 2/17
Jan-05 49.4 5.2 54.6 176 4.5% 81.7% 84.2% 83.7% 96 206 0 15 48 3.5 4.23 8.1 10 30 37.1 2.50% 3.00% 2/18 5/18
Apr-05 58.2 6 64.2 206 7.0% 84.2% 87.0% 83.8% 105 217 0 9 50 4.43 6.13 9 12.8 36.8 52.7 3.00% 3.50% 5/19 8/17
Jul-05 65.6 6.3 71.9 237 2.8% 77.3% 82.2% 81.1% 117 233 0 11 46 4.78 7.09 8.5 13.1 43.6 67.3 3.50% 4.00% 8/18 11/16
Oct-05 74.4 8.3 82.7 273 3.3% 78.3% 79.4% 80.1% 127 257 0 19 54 7.19 10.66 11.5 17.6 58.7 89.4 4.00% 4.50% 11/17 2/22
Jan-06 82.4 8.6 91.1 310 1.2% 66.8% 66.9% 75.7% 169 297 0 34 73 7.54 9.95 10.8 14.6 46.3 62.3 4.50% 5.00% 2/23 5/17
Apr-06 94 10 105 350 3.6% 63.1% 62.4% 70.3% 182 298 0 10 74 5.46 7.76 6.6 9.8 31.6 46.6 5.00% 5.25% 5/18 8/16
Jul-06 107 11 118 397 3.6% 64.2% 62.5% 67.3% 203 334 0 27 90 8.21 11 9 12.3 39.6 54.4 5.25% 5.25% 8/17 11/15
Oct-06 118 12 130 444 1.6% 57.3% 59.2% 62.4% 219 371 0 22 92 9.01 12.47 8.9 12.7 43 61 5.25% 5.25% 11/16 2/21
Jan-07 132 12 144 497 1.6% 58.4% 60.2% 60.4% 284 413 0 31 89 10.27 11.86 9.2 10.7 51.3 59.9 5.25% 5.25% 2/22 5/16
Apr-07 148 15 162 555 3.4% 55.1% 56.3% 58.4% 296 448 0 21 100 9.72 12.18 7.6 9.8 42.3 54.2 5.25% 5.25% 5/17 8/15
Jul-07 160 17 177 613 2.1% 49.5% 50.0% 54.6% 322 497 0 25 98 9.86 14.27 7 10.5 44 65.9 4.50% 5.25% 8/16 11/15
Oct-07 176 16 193 676 2.0% 48.2% 48.9% 52.3% 341 571 0 43 119 11.97 16.25 7.8 10.9 44.4 62 3.00% 4.50% 11/16 2/27
Jan-08 197 20 217 749 4.3% 50.4% 48.8% 50.6% 481 670 0 72 161 13.88 17.54 8.3 10.7 38.5 49.8 2.00% 3.00% 2/28 5/21
Apr-08 225 22 248 834 5.4% 52.5% 52.6% 50.3% 470 751 0 60 200 15.59 18.61 8.4 10.2 35.1 42.7 2.00% 2.00% 5/22 8/20
Jul-08 240 23 263 920 1.6% 49.0% 49.8% 50.1% 480 823 0 40 215 5.49 14.5 2.1 7 9 30.1 1.00% 2.00% 8/21 11/20
Oct-08 253 23 276 1004 0.9% 43.4% 43.7% 48.5% 470 805 0 6 178 5.58 8.71 2 3.5 11.2 20 0.25% 1.00% 11/21 2/25
Jan-09 266 23 290 1077 1.6% 33.5% 35.4% 43.8% 594 883 0 63 169 6.83 11.23 2.3 4.4 15 27.9 0.25% 0.25% 2/26 5/21
Apr-09 282 23 305 1134 0.0% 23.1% 25.0% 36.0% 549 984 0 85 193 8.89 12.03 3.1 4.5 18 26.1 0.25% 0.25% 5/22 8/20
Jul-09 293 23 316 1187 1.0% 20.1% 22.4% 29.0% 549 1030 0 27 180 12.79 16.71 4.6 6.3 30.3 41.3 0.25% 0.25% 8/21 11/17
Oct-09 307 24 331 1241 2.0% 19.6% 21.1% 23.6% 545 1070 0 21 196 15.52 18.71 5.6 6.9 35.3 43.7 0.25% 0.25% 11/18 2/24
Jan-10 327 26 353 1305 3.2% 21.9% 23.0% 21.2% 704 1727 450 85 217 16.99 22.17 5.8 7.9 35 47.5 0.25% 0.25% 2/25 5/20
Apr-10 351 26 377 1376 2.7% 23.6% 24.5% 21.4% 665 1902 456 131 264 20.53 26.01 6.8 8.9 35.7 46.7 0.25% 0.25% 5/21 8/19
Jul-10 369 25 394 1455 3.0% 24.8% 25.7% 22.6% 683 1859 461 48 285 24.98 30.79 8.3 10.4 42.1 53 0.25% 0.25% 8/20 11/18
Oct-10 403 26 429 1553 4.7% 29.8% 31.3% 25.2% 695 1802 467 53 317 30.99 37.65 10.1 12.4 49.4 60.9 0.25% 0.25% 11/19 2/24
Jan-11 429 28 457 1657 1.8% 29.4% 30.9% 27.0% 935 1408 473 135 368 30 35.52 9.6 11.5 43.2 51.6 0.25% 0.25% 2/25 5/19
Apr-11 474 31 504 1785 4.6% 33.8% 35.0% 29.7% 915 1522 478 112 349 28.51 39.83 8.4 12 43.1 61.4 0.25% 0.25% 5/20 8/18
Jul-11 509 37 546 1936 3.4% 38.4% 38.0% 33.1% 935 1287 484 38 339 27.72 34.79 7.8 9.9 44.6 56.6 0.25% 0.25% 8/19 11/17
Oct-11 549 35 584 2091 2.5% 36.2% 36.3% 34.6% 918 1297 490 94 379 24.37 33.06 6.2 8.6 34.4 47.4 0.25% 0.25% 11/18 2/23
Jan-12 594 38 632 2267 1.3% 38.3% 38.7% 36.8% 1380 1447 496 196 440 33.45 39.89 8 9.6 41 49.3 0.25% 0.25% 2/24 5/17
Apr-12 655 40 695 2458 2.6% 37.9% 38.4% 37.7% 1335 1657 502 168 496 30.34 37.65 6.7 8.5 33.4 42 0.25% 0.25% 5/18 8/23
Jul-12 687 44 732 2643 0.5% 34.0% 35.0% 36.5% 1337 1804 509 107 565 34.92 39.86 7.2 8.3 33.8 38.9 0.25% 0.25% 8/24 11/20
Oct-12 741 48 788 2847 1.5% 34.9% 34.9% 36.1% 1292 1416 515 55 526 39.09 44.52 7.9 9.1 42.9 49.1 0.25% 0.25% 11/21 2/28
Jan-13 785 49 835 3050 0.6% 32.1% 32.2% 34.6% 1863 1758 521 231 561 40.32 47.01 7.7 9 41.8 49.1 0.25% 0.25% 3/1 5/23
Apr-13 842 50 893 3247 0.6% 28.4% 28.5% 32.1% 1733 3079 1725 229 622 36.75 45.69 6.6 8.3 34.6 43.6 0.25% 0.25% 5/24 8/29
Jul-13 903 54 957 3473 2.3% 30.8% 31.3% 31.4% 1790 930 2025 81 596 48.47 57.31 9 10.6 52.7 61.9 0.25% 0.25% 8/30 11/18
Oct-13 1004 72 1076 3760 2.0% 36.5% 35.6% 32.1% 1735 1085 2017 65 606 50.98 66.22 8.9 11.5 55.4 71.5 0.25% 0.25% 11/19 2/27
Jan-14 1075 70 1145 4071 1.4% 37.2% 36.9% 33.5% 2522 1321 2004 201 576 49.13 63.68 8 10.3 56.6 73 0.25% 0.25% 2/28 5/20
Apr-14 1147 79 1227 4405 1.4% 37.4% 36.2% 35.7% 2325 1530 1712 413 760 50.19 59.2 7.4 8.7 43 50.7 0.25% 0.25% 5/21 8/21
Jul-14 1233 86 1319 4767 2.2% 37.8% 36.5% 37.3% 2353 1672 1691 174 854 52.72 64.45 7.2 8.8 40 48.9 0.25% 0.25% 8/22 11/19
Oct-14 1289 95 1384 5074 1.0% 28.6% 28.3% 34.9% 2224 1827 1632 49 838 53.79 63.74 6.9 8.2 42 49.9 0.25% 0.25% 11/20 2/25
Jan-15 1345 99 1445 5374 0.3% 26.1% 25.1% 32.0% 3321 1890 1450 247 883 63.68 74.65 7.6 8.9 46.2 54.2 0.25% 0.25% 2/26 5/20
Apr-15 1405 106 1511 5658 0.4% 23.2% 22.5% 28.4% 3057 1922 1350 660 1130 67.82 75.71 7.9 8.8 39.4 44 0.25% 0.25% 5/21 8/20
Jul-15 1521 113 1635 5974 2.2% 24.0% 23.4% 25.3% 3035 2067 1350 240 1195 65.17 79.41 7.2 8.8 36.1 44.1 0.25% 0.25% 8/21 11/18
Oct-15 1596 116 1712 6302 0.7% 23.7% 23.9% 24.2% 2847 2301 1350 38 1184 54.05 82.14 5.7 8.7 30.1 46.2 0.25% 0.25% 11/19 2/24
Jan-16 1683 127 1809 6667 1.0% 25.3% 25.1% 24.1% 4292 2725 1350 391 1328 67.75 77.87 6.7 7.8 33.8 39 0.25% 0.25% 2/25 5/18
Apr-16 1775 141 1917 7073 1.1% 26.8% 26.3% 25.0% 4007 3715 1350 968 1636 76.07 83.77 7.1 7.8 30.5 33.7 0.25% 0.25% 5/19 8/31
Jul-16 1886 151 2037 7475 1.1% 24.6% 24.0% 25.1% 3824 1720 1850 155 1551 68.42 76.55 6.4 7.1 30.8 34.4 0.25% 0.25% 9/1 11/17
Oct-16 1984 161 2145 7907 6.6% 25.3% 24.3% 25.5% 3495 1751 1850 14 1527 68.41 82.18 6.1 7.3 31.6 38 0.25% 0.75% 11/18 2/28
Jan-17 2111 183 2294 8392 0.7% 26.8% 25.4% 25.9% 5543 2209 2050 562 1698 81.52 89.8 6.9 7.6 34 37.5 0.75% 1.00% 3/1 5/18
Apr-17 2201 187 2388 8863 1.6% 24.6% 24.0% 25.3% 5043 3220 1850 1073 1804 86 92.95 6.8 7.4 33.6 36.4 1.00% 1.25% 5/19 8/22
Jul-17 2368 193 2562 9388 1.7% 25.8% 25.6% 25.6% 4819 3501 1850 203 1852 92.34 108.8 7 8.3 35.5 42 1.25% 1.25% 8/23 11/21
Oct-17 2486 194 2680 9923 1.1% 24.9% 25.3% 25.5% 4392 3529 1850 15 1853 99.85 116.65 7.3 8.5 38.9 45.6 1.25% 1.50% 11/22 2/28
Jan-18 2655 196 2851 10480 1.4% 24.3% 25.8% 24.9% 7095 4522 1727 914 2204 112.88 130.63 7.8 9.1 37.1 43.2 1.50% 1.75% 3/1 5/29
Apr-18 2810 196 3006 11098 2.4% 25.9% 27.7% 25.2% 6201 7159 3200 1344 2475 129.3 154.8 8.4 10.2 37.8 45.6 1.75% 2.00% 5/30 8/29
Jul-18 3060 221 3281 11818 1.6% 28.1% 29.2% 25.9% 5883 3427 3700 288 2560 120.67 160.43 7.9 10.5 36.6 48.6 2.00% 2.25% 8/30 11/27
Oct-18 3168 224 3392 12530 0.8% 26.6% 27.4% 26.3% 5376 3450 3699 7 2553 121.33 164.53 7.6 10.3 37.4 50.7 2.25% 2.50% 11/28 3/4
Jan-19 3375 228 3603 13282 1.2% 26.4% 27.1% 26.7% 8564 4342 3198 1164 2803 145.1 166.95 8.5 9.8 40.3 46.4 2.50% 2.50% 3/5 6/4
Apr-19 3496 241 3737 14013 1.5% 24.3% 24.4% 26.3% 7585 6379 3197 1806 3265 139.72 161.27 7.7 8.9 33 38.2 2.25% 2.50% 6/5 8/22
Jul-19 3745 252 3997 14729 1.2% 21.8% 22.4% 24.6% 7142 6042 2996 258 3235 8/23


The headings are as follows:

* Date (month-year) : closing date of each quarter
* Sub: Subscription Revenue
* PS: Professional Services Revenue
* Rev: Total Revenue
* TTM Rev: Trailing 12 Months Revenue
* %Beat: Percentage Beat over the most recent (1 quarter prior) top end of range guidance
* RevGr: Year over year total revenue growth
* SubGr: Year over year subscription revenue growth
* TTMGr: Full year over prior full year total revenue growth
* Cash: Cash and cash equivalents
* Debt: long term debt
* FCF: Free Cash Flow (CFFO less CapEx as stated in the State of Cashflows)
* TTMFCF: Trailing 12 Months FCF
* PriceHi: Highest closing stock price during the period
* PriceLo: Lowest closing stock price during the period
* EV/RLo: Lowest EV/TTM Sales during the period
* EV/RHi: Highest EV/TTM Sales during the period
* EV/FCFL: Lowest EV/TTM FCF during the period
* EV/FCFH: Highest EV/TTM FCF during the period
* FedLo: Lowest Fed Funds interest rate during the period
* FedHi: Highest Fed Funds interest rate during the period
* Start: First day of the period
* End: Last day of the period

Discussion and Analysis

CRM definitely qualifies as a company that is comparable to our SaaS companies.

Revenue Growth
Let’s start with growth. CRM started as a hyper growth company. It was growing revenue very fast prior to the IPO (data not in the above table):


FY Rev (M) Growth
2001 $ 5.4
2002 $22.4 315%
2003 $51.0 128%
2004 $96.0 88%


After the IPO when CRM was about a $150M revenue company (half the size of our typical SaaS company), the revenue growth was in the high 80s. This lasted for about a year, followed by 18 months in the 60-70s, followed by 2 years in the 50s, six months in the 40s. It then rapidly dropped to the 20s and stayed there for 2 years before reaccelerating to the mid 30s for 2 years. Finally, it settled to about 25% growth and has been there for the past 4 ½ years. In looking at this history, the obvious question that comes to mind is how long can we expect our $300M-ish companies to remain in hyper growth mode? When will their growth rate slow down?

Gross Margins
As I wrote above, CRM had GMs on subscription revenue of 91%, 87%, and 87% in FYs 2004, 2006, and 2008. I just checked their 7/31/2019 quarter and their GM (on subscription revenue) is still 81% (more than a decade later). These are GAAP GM so their non-GAAP (excluding share based compensation) will be even higher. Based on CRM being able to maintain pricing power over a 20 year period shows that there is little pricing pressure due to competition. This is very encouraging as it demonstrates that it is possible for a SaaS company to deliver a service and as long as that service keeps customers happy they will stick with you. Is this due to the SaaS model or is it due to CRM continually adding new features and improvements to keep the customers happy? Or both? Or is the switching cost just too high so customers don’t switch? Whatever the answer(s), we can see that a SaaS company can avoid disruption over an extended period. High growth and high margins, while they are said to attract competitors, did not lead to a dampening of CRMs business. Which of our SaaS companies will also be impervious to competitive pressures?

Of our companies, only AYX (91%) has higher margins than CRM. OKTA (83%), ZM (82%), ZS (81%), SMAR (81%), ESTC (80%), CRWD (76%), MDB (75%), DDOG (75%), TWLO (55%) all have lower margins than CRM did in its hyper growth period. The GM of a company is really important because it sets a limit on how much net margin and FCF margin a company can earn. Ultimately a company will be valued based on its ability to generate free cash flow; high GM business have a big advantage and higher GM businesses (all else being equal) should be valued higher than lower GM businesses. Aside from AYX, CRM was better on a GM basis than all our other SaaS companies.

Free Cash Flow
Ultimately, a company will be valued on FCF and FCF growth. Many of our SaaS are FCF negative and people have said that they want the company to invest everything the make back into growth so it’s ok. But don’t we want to see the company making progress toward profitability? I think so, and I give higher allocation to companies that are FCF positive or at least improving quarter to quarter. CRM, at the time it went IPO in 2004, is really quite different from the similarly sized SaaS companies of today. As a $110M TTM Revenue company, CRM generated $23.6M in FCF!!! This is 23.3% of revenue with a revenue growth rate of 85%! Our best SaaS (or Saas-like in AYX’s case) companies in this regard are AYX and ZS (but now growing the 50s and not the 80s!). And CRM then was about 1/3 of the size of AYX and ZS!! ZS’s TTM revenue is $302M and its FCF is $29.3M so 9.7% of TTM revenue. AYX’s TTM revenue is $310M and its FCF is $19.6M so 6.3% of TTM revenue. And these are the best. ESTC had negative $35.5M FCF on $305M TTM revenue. MDB had negative $33.4M FCF on $346M TTM revenue. OKTA had $12.9M FCF on $487M TTM revenue so 2.6%. In Q4 FY 2006 CRM had $310M TTM revenue and $72.5M TTM FCF so 23.4%. In the most recent quarter, CRM had $14.7B in TTM revenue and $3.2B in TTM FCF so 21.7%. So all along since CRM was public as a $110M hyper growth company all the way through to today, CRM has been printing cash at a rate greater than 20% of revenue (well, there were some quarter as low as 16%). So somehow CRM managed hyper growth while ALSO generating cash. Why can’t our SaaS companies BOTH grow fast AND generate cash? Some are starting to but for those that aren’t yet, will they ever? This is a major criterion for me when I choose my allocations. This is a very important reason why AYX and ZS are big positions and ESTC isn’t.

Valuation and Valuation Ranges

Date TTMRev Growth RatioL RatioL RateL RateH
Apr-03 60.6 102.30%
Jul-03 70.3 82.00%
Oct-03 81.5 79.20%
Jan-04 96 93.10%
Apr-04 112 84.20% IPO IPO 1.00% 1.50%
Jul-04 131 87.70% 9 16.8 1.50% 2.00%
Oct-04 152 82.30% 8.8 12.6 2.00% 2.50%
Jan-05 176 81.70% 8.1 10 2.50% 3.00%
Apr-05 206 84.20% 9 12.8 3.00% 3.50%
Jul-05 237 77.30% 8.5 13.1 3.50% 4.00%
Oct-05 273 78.30% 11.5 17.6 4.00% 4.50%
Jan-06 310 66.80% 10.8 14.6 4.50% 5.00%
Apr-06 350 63.10% 6.6 9.8 5.00% 5.25%
Jul-06 397 64.20% 9 12.3 5.25% 5.25%
Oct-06 444 57.30% 8.9 12.7 5.25% 5.25%
Jan-07 497 58.40% 9.2 10.7 5.25% 5.25%
Apr-07 555 55.10% 7.6 9.8 5.25% 5.25%
Jul-07 613 49.50% 7 10.5 4.50% 5.25%
Oct-07 676 48.20% 7.8 10.9 3.00% 4.50%
Jan-08 749 50.40% 8.3 10.7 2.00% 3.00%
Apr-08 834 52.50% 8.4 10.2 2.00% 2.00%
Jul-08 920 49.00% 2.1 7 1.00% 2.00%
Oct-08 1004 43.40% 2 3.5 0.25% 1.00%


I’ve selected the time period in the above table because it encompasses the period when CRM was growing revenue at rates that we like to see in our SaaS companies. On the low end the EV/TTM revenue ratio was usually around 8 and on the high end the ratio was mostly 12 for a 50%+ grower and around 10 for a 40-50% grower. When I first looked at these figures, I was somewhat surprised that they never ever spiked to levels that we have seen in the recent past for our SaaS. CRM was a better company then than ANY of our current SaaS companies. What does this all mean? Well, I think it provides some historical perspective. Yes, perhaps the multiples awarded a decade ago before it was proven that a SaaS company can become a Mega Cap juggernaut, the market was unwilling to award the high multiples that we have seen recently. Perhaps the multiples back then were lower than they should have been and maybe the range has permanently shifted upward. I would say that’s probably the case. Another difference between today and back then was the interest rate environment. The above table shows the high and low of the Fed Funds rate (short term interest rate). A high and/or rising interest rate environment is less favorable to growth stocks and growth stock valuations because future cash flows are discounted more. So in today’s interest rate environment, the multiples deserve to be a bit higher than during the 2004-2007 period. Nevertheless, the ranges of the past could be retested. Who knows. However, if the underlying businesses perform like CRM did then even the highest multiples of back then are screaming buys. The key it to try to pick the companies that will become the CRM’s of the future.

Let’s look at the EV/TTM FCF multiples.


Q end TTMRev RevGr TTM/FCF FCF/Rev EV/FCFL EV/FCFH FedL FedH
Apr-02
Jul-02
Oct-02
Jan-03 51
Apr-03 60.6 102.3%
Jul-03 70.3 82.0%
Oct-03 81.5 79.2%
Jan-04 96 93.1%
Apr-04 112 84.2% 21 19% 1.00% 1.50%
Jul-04 131 87.7% 32 24% 37 69 1.50% 2.00%
Oct-04 152 82.3% 38 25% 35.6 50.9 2.00% 2.50%
Jan-05 176 81.7% 48 27% 30 37.1 2.50% 3.00%
Apr-05 206 84.2% 50 24% 36.8 52.7 3.00% 3.50%
Jul-05 237 77.3% 46 20% 43.6 67.3 3.50% 4.00%
Oct-05 273 78.3% 54 20% 58.7 89.4 4.00% 4.50%
Jan-06 310 66.8% 73 23% 46.3 62.3 4.50% 5.00%
Apr-06 350 63.1% 74 21% 31.6 46.6 5.00% 5.25%
Jul-06 397 64.2% 90 23% 39.6 54.4 5.25% 5.25%
Oct-06 444 57.3% 92 21% 43 61 5.25% 5.25%
Jan-07 497 58.4% 89 18% 51.3 59.9 5.25% 5.25%
Apr-07 555 55.1% 100 18% 42.3 54.2 5.25% 5.25%
Jul-07 613 49.5% 98 16% 44 65.9 4.50% 5.25%
Oct-07 676 48.2% 119 18% 44.4 62 3.00% 4.50%
Jan-08 749 50.4% 161 21% 38.5 49.8 2.00% 3.00%
Apr-08 834 52.5% 200 24% 35.1 42.7 2.00% 2.00%
Jul-08 920 49.0% 215 23% 9 30.1 1.00% 2.00%
Oct-08 1004 43.4% 178 18% 11.2 20 0.25% 1.00%
Jan-09 1077 33.5% 169 16% 15 27.9 0.25% 0.25%
Apr-09 1134 23.1% 193 17% 18 26.1 0.25% 0.25%
Jul-09 1187 20.1% 180 15% 30.3 41.3 0.25% 0.25%
Oct-09 1241 19.6% 196 16% 35.3 43.7 0.25% 0.25%
Jan-10 1305 21.9% 217 17% 35 47.5 0.25% 0.25%
Apr-10 1376 23.6% 264 19% 35.7 46.7 0.25% 0.25%
Jul-10 1455 24.8% 285 20% 42.1 53 0.25% 0.25%
Oct-10 1553 29.8% 317 20% 49.4 60.9 0.25% 0.25%
Jan-11 1657 29.4% 368 22% 43.2 51.6 0.25% 0.25%
Apr-11 1785 33.8% 349 20% 43.1 61.4 0.25% 0.25%
Jul-11 1936 38.4% 339 17% 44.6 56.6 0.25% 0.25%
Oct-11 2091 36.2% 379 18% 34.4 47.4 0.25% 0.25%
Jan-12 2267 38.3% 440 19% 41 49.3 0.25% 0.25%
Apr-12 2458 37.9% 496 20% 33.4 42 0.25% 0.25%
Jul-12 2643 34.0% 565 21% 33.8 38.9 0.25% 0.25%
Oct-12 2847 34.9% 526 18% 42.9 49.1 0.25% 0.25%
Jan-13 3050 32.1% 561 18% 41.8 49.1 0.25% 0.25%
Apr-13 3247 28.4% 622 19% 34.6 43.6 0.25% 0.25%
Jul-13 3473 30.8% 596 17% 52.7 61.9 0.25% 0.25%
Oct-13 3760 36.5% 606 16% 55.4 71.5 0.25% 0.25%
Jan-14 4071 37.2% 576 14% 56.6 73 0.25% 0.25%
Apr-14 4405 37.4% 760 17% 43 50.7 0.25% 0.25%
Jul-14 4767 37.8% 854 18% 40 48.9 0.25% 0.25%
Oct-14 5074 28.6% 838 17% 42 49.9 0.25% 0.25%
Jan-15 5374 26.1% 883 16% 46.2 54.2 0.25% 0.25%
Apr-15 5658 23.2% 1130 20% 39.4 44 0.25% 0.25%
Jul-15 5974 24.0% 1195 20% 36.1 44.1 0.25% 0.25%
Oct-15 6302 23.7% 1184 19% 30.1 46.2 0.25% 0.25%
Jan-16 6667 25.3% 1328 20% 33.8 39 0.25% 0.25%
Apr-16 7073 26.8% 1636 23% 30.5 33.7 0.25% 0.25%
Jul-16 7475 24.6% 1551 21% 30.8 34.4 0.25% 0.25%
Oct-16 7907 25.3% 1527 19% 31.6 38 0.25% 0.75%
Jan-17 8392 26.8% 1698 20% 34 37.5 0.75% 1.00%
Apr-17 8863 24.6% 1804 20% 33.6 36.4 1.00% 1.25%
Jul-17 9388 25.8% 1852 20% 35.5 42 1.25% 1.25%
Oct-17 9923 24.9% 1853 19% 38.9 45.6 1.25% 1.50%
Jan-18 10480 24.3% 2204 21% 37.1 43.2 1.50% 1.75%
Apr-18 11098 25.9% 2475 22% 37.8 45.6 1.75% 2.00%
Jul-18 11818 28.1% 2560 22% 36.6 48.6 2.00% 2.25%
Oct-18 12530 26.6% 2553 20% 37.4 50.7 2.25% 2.50%
Jan-19 13282 26.4% 2803 21% 40.3 46.4 2.50% 2.50%
Apr-19 14013 24.3% 3265 23% 33 38.2 2.25% 2.50%


CRM consistently delivered FCF of around 20% of revenue. One can value the company on a multiple of FCF. However, faster growing FCF should be more valuable than slower growing FCF, particularly when the percentage FCF of revenue is remaining constant. As a 50%+ grower, CRM was often trading in the range of 40-60 (with 30 the low and 89 the high) multiple of TTM FCF. As a mature 25% grower, CRM most often traded in a FCF/Revenue ratio range between 35-45 (but as low as 30 and as high as 54).

Let’s take AYX as an example since they have offered investors a guide to their long term FCF margin. They said that they expect to generate between 30-35% FCF margin. See slide 22 of their latest investor presentation. That would be really incredible if they manage that, and it would certainly be the best of all of our companies. It could be this high because the GMs are >90% and there is no zero/low margin professional services revenue dragging things down. By comparison CRM has FCF margins of about 20% and the market assigned the following multiples to CRM (to recap):

50% grower, 16-21% FCF margin: 45-60 multiple
25% grower, 19-23% FCF margin: 30-51 multiple

Recall that CRM’s business performance has been HIGHLY consistent and predictable with 59/60 revenue beats and the beats only averaging about 2%. Management sure has had a great handle on their business. SaaS model recurring revenue will make things more predictable. The markets reward such consistency and predictability.

Assuming that AYX attains its FCF margin in 5 years and averages growth of 50% but slows to 40% at the end of that time period, AYX would have the following TTM revenue (starting with $310M now): $2.35B x 0.35 = $824 FCF. Now a 40% grower deserves a higher multiple than a 25% grower so let’s assign a FCF multiple range of 45 to 70 and assume a 6% per year share dilution. On the low side, we get a $37B market cap, and, on the high side, we get a $57.7B market cap. The share count after a 6%/year dilution is 91.7M shares so the price per share range is $403 (low) and $629 (high) representing a CAGR between 34% and 47% over the 5 year period. That seems pretty incredible, but it would be in line with CRM’s valuation range assuming that AYX delivers on its projections and our predictions and assuming that the market (correctly) awards a higher multiple to a faster grower.

Now we can run similar scenarios for all of our companies. But for those companies like ESTC and MDB which are not yet FCF positive and not even moving toward that it becomes more difficult (with more assumptions) to get to mega cap juggernaut status.

I hope that this analysis has been helpful. I am hoping that it will generate some good discussion.

Chris

PS: I started adding back some leverage for the past 3 days. Added 2022 leaps to my already large AYX and ZS positions. Even if the stocks were to drop another 20% from here I believe that this drop would be temporary and in the long run as others have said even today’s prices will likely be bargains in the long run.
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