The beauty of software companies is their ability to scale, untethered to the drudgery and expense of human labor, or much in the way of plant and equipment for that matter, selling the same bundles of code over and over again.
Little wonder, then, these companies trade at an exalted price to sales valuation.
CRM Price / Sales Ratio TTM data by YCharts
Add in the fashionable word "cloud" – it means the software resides on the seller's server, not the customer's – and you might as well stop reading the financials and start shopping for a yacht.
CRM data by YCharts
Or at least that's the ideal. As we've written repeatedly, economies of scale somehow seem to have eluded the cloud computing company Salesforce.com (CRM), where sales and marketing costs over time have risen faster than revenue and now account for about 50% of revenue. Customers, it seems, are putting up one hell of a fight, even though we're certain Salesforce software is absolutely fabulous.
Salesforce stock seems to trade entirely on revenue growth. And so, it's not surprising that it periodically makes acquisitions. As we wrote recently, buying its Mini-Me, ExactTarget (ET), for $2.5 billion, will boost sales but dilute non-GAAP earnings per share (Salesforce hasn't any GAAP earnings per share).
The two companies — in their love of non-GAAP accounting (let's not talk about soaring stock-based compensation expense, or the pesky amortization of intangible assets like goodwill taken on in pricey acquisitions); in their ability to continually push up sales and stock price despite substantial net losses — are remarkably similar.
Which has us wanting to dial up Salesforce CEO Marc Benioff, who we hear throws one hell of a party, and suggest he buy Concur Technologies (CNQR). Concur, too, has an outsized ardor for non-GAAP accounting. We noted previously that one frustrated short seller had taken to counting the number of uses of the term "non-GAAP" in Salesforce earnings releases: 32 by our count for the first-quarter release. Concur lapped the field, using "non-GAAP" some 81 times in its release for the second quarter ended March 31.
One can't blame Steve Singh, CEO of Concur, for dreaming: a non-GAAP, pre-tax profit for the first six months of fiscal 2013 of $30.8 million sure beats a loss of $19.7 million for the period, when taking into account GAAP (generally accepted accounting principles) rules.
But where Singh's Concur really fits the Salesforce mold is in expanding costs faster than revenue, exhibiting dis-economies of scale in an industry that is supposed to enjoy widening profit margins alongside growth. And we're not talking start-up growth pains, folks. Concur has been around since 1994.
CNQR Revenue TTM data by YCharts
CRM Revenue TTM data by YCharts
Concur's fiscal year revenue from 2008 to 2012, a five-year period, grew an impressive 104% to $439.8 million. To get there, however, Concur larded up its employee rolls by 158%, to 2,400. It spent its way to a 193% rise in sales and marketing expense, to $175.5 million. And it saw sales and marketing expense as a percentage of sales hit about 40%, from 28% five years earlier.
With a record like that, why isn't Singh running IBM (IBM)?
Oh, Concur's software automates the corporate travel and entertainment function, from making travel reservations to paying vendors to filing the dreaded expense reports. From the cloud, no less. Salesforce automates the sales function and allows your team to communicate a lot. ExactTarget automates digital marketing – stuff like those annoying emails and texts you've been getting.
Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at editor@ycharts.com. You can also request a demonstration of YCharts Platinum.
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