CRM: Report fQ4 After the Bell, We Preview & Offer Defensive Structures for Nervous Longs

by Dan February 23, 2012 11:57 am • Commentary

CRM ($129.70)

Event: company reports fiscal Q4 after the bell.  The options market is implying about a 9% move which is rich to the 4 qtr avg move of about 6% and the 8 qtr average move of about 8.3%.  When the stock has moved on earnings in the last 2 years it has really moved, with the 4 largest being 10%, 8% 18% and 17%.

Price Action / Sentiment: Stock is up a whopping 26.5% ytd, and oddly trading at the almost exact level where it was trading in Nov when the company reported their Q3 that disappointed investors.

-Short interest sits at almost 12% which is not insignificant for a company with a $17billion market cap.

-Wall street analysts remain overwhelmingly positive on the stock with 32 Buys, 6 Holds and only 4 Sells.  SEE Broker Previews Below   

Technicals:  The one year chart is fairly telling and shows massive resistance at the 130 level with upside to 140 on the least bit of good news.  Currently the stock is sitting right on it’s 200 day moving average which given the potential for movement following the earnings event shouldn’t really offer any meaningful support.

[caption id="attachment_9017" align="aligncenter" width="300" caption="1 yr CRM chart from Bloomberg LP"][/caption]


MY VIEW: I know I probably sound like a bit of a broken record here, but with the stock up almost 27% ytd, it appears that the “easy” money has been made in the name on a near term basis especially when you consider the potential for volatility following the earnings event.

-Last quarter oddly the stock was trading right around the same level and the stock had a significant move lower (read my Nov trade here) on disappointing results, at the point the stock had spent the previous  month basing in fairly tight range.  I bring this up because when the stock broke down, it actually broke a significant double bottom that was in place since the Aug/Oct market lows.  The Next Support ranges are 120 and then again that $110 level from the summer/fall.

-While I don’t short stocks solely on valuation (see CS commentary below), I also steer away from owning them even for short periods.  I mention this because stocks like CRM are always priced for perfection and on the slightest disappointment  fast money pukes their longs with a vengeance (as evidenced by the Q3 response).   That said the least bit of unexpected good news with short interest this high the stock could test the 140 level fairly easily.

Please check back this afternoon as the trades below are for those who are long and worried, but I will post a directional trade that I am going to do into the print.  IN some ways I would love to see the stock rally a few bucks into the bell and buy a $10 wide Put Spread or fly.


IF I were long heading into the event and wanted to protect ytd gains you could consider stock replacement or Collars.

CRM ($129.70)  Sell the Feb24th wkly 140 call at 1.80 to Buy the Feb24th wkly 125/115 Put Spread for 2.60….Package Costs .80

Break-Even on Feb 24th Exp:

Profits: have gains in the stock btwn 130.50 (current stock price 129.70plus  premium paid for structure of .80) and 140, make up to 9.50.  Max gain of 9.50 if stock above 140.00, your long stock would be called away (up 8%, shy of the 9% implied move.

Losses btwn 130.50 and 125 (current stock price 129.70 plus  premium paid for structure of .80), so up to 5.50 but have protection of 9.20 btwn 125 and and 115 and then no protection below that.  (115 would be down about 11% a couple % above the implied move).

Trade Rationale: I chose tomo expiration because my belief would be that if you are long and don’t want to sell but want some protection in the event of a downward move, but also the potential for participation in the even of a rally, then this structure gives u “optionality” of digesting the news and the price action and gives fairly reasonable risk reward.


OR Consider Stock Replacement: Sell Long stock and Replace with Call Spread of Call FLY.

CRM $129.70 Buy March 2nd wkly 135/145/155 Call fly for 1.90

-Buy 1 March 2nd 135 call for 3.90

-Sell 1 March 2nd 145 calls for a total of 2.30 (1.15 each)

-Buy 1 March 2nd 155 call for .30

Break-Even On March 2nd Expiration:

Profits bwtn 136.90 and 145 of up to 8.10, max gain of 8.10 at 145, the profit trails off btwn 145 and 153.10

Losses of up to 1.90 btwn 135 and 136.90 and btwn 153.10 and 155 with max loss of 190 below 135 and above 155.

Trade Rationale: I chose March 2nd expiration (wkly) for the Call Fly as the stock has a tendcy to move for a week or so in the direction if the intial move and the vol compression after the event should give this structure some edge in the event of a upward move less than expected.  Again this is a way to get cheap long exposure with defined risk basically inline with the implied move.  This could also be used as an outright bullish bet but I am not advocating that view as I would much rather take a shot on a put fly with a similar payout after the stocks monster run ytd.



Broker Previews:

Credit Suisse who rates the shares Neutral with a $134 12 month price target had what I thought was a fairly concise and straight forward, but also fairly Bullish preview for one of the few analysts who has a Hold on the stock:

What’s The Call?

■ We believe that is positioned to report January quarter results above consensus estimates—driven by continued demand from enterprises refreshing legacy CRM applications, good Service Cloud traction, as well as strong macro trends in the SFA segment at this point in the economic cycle (with companies looking for tools to help boost revenue growth and improve productivity).
■ Additionally, our checks suggest that continues to make progress in cross-selling and Chatter offerings.

What’s Consensus Missing?

■ While its SFA application continues to maintain the leadership position, has been investing in non-SFA applications, including Service Cloud,,, and Chatter. Although some of these cross-sell opportunities could potentially lift ASPs (e.g.,, we also anticipate lower attrition rates as compared to previous quarters due to the bundling of new incremental modules (e.g., Chatter).

What’s The Stock Thesis?
■ While we remain positive on’s long-term outlook and growth opportunity in the SaaS and PaaS markets, valuation remains our primary hurdle from turning more positive on the stock.
■ To get past the company’s high valuation relative to our current growth estimates, our confidence would have to increase in’s ability to expand its revenue streams beyond the core SFA application market (e.g., Chatter,, Service Cloud, Marketing Cloud, etc.) while still effectively managing margins in order to drive a sustainable cash flow growth rate approaching 30% or more.
■ That said, we are increasingly impressed by Service Cloud’s growing traction, and our checks suggest that the industry could be standing at the beginning of a multi-year e-commerce, service, marketing, and call center replacement and expansion cycle.

What’s The Impact To The Model?

■ For the January quarter, we forecast revenue of $622.6 million and EPS of $0.40, compared to consensus expectations of $622.9 million and EPS of $0.40.
■ We estimate ending deferred revenue of $1,223.8 billion (versus consensus of approximately $1,209.7 million) and billings of $928.6 million (versus consensus of approximately $915.1 million).
■ We forecast cash flow from operations of $176.5 million compared to consensus estimates of $166.1 million.

What’s Valuation?

■ currently trades at a NTM enterprise value to unlevered free cash flow multiple of 38.9, which represents a premium to the company’s 5-year average multiple of 32.4. Additionally, currently trades at a 279.8% premium to the software sector on a NTM unlevered free cash flow multiple basis, compared to its historical average premium of 183.4% over the past 5 years.


Morgan Stanley who rates the shares a Buy with a $150 12 month price target had the following quarterly preview in a note to clients dated Feb 21st, 2012:

Larger deals and broader use cases should result in stronger billings growth in Q4, putting concerns from last quarter to rest, as backlog should impress and help propel the stock higher.

Conclusion: We expect CRM to report a strong Q4, paced by accelerating large-deal activity, solid SFA,
newer offerings and better sales productivity. Our +32% YoY reported billings est. would represent acceleration from +29% in Q3 and looks low given our favorable checks and the implication for new billings growth of only +23% YoY, which seems low. CRM will also give its backlog and we would view a number at or above $2.1B (+40%) positively, which should help drive sustainable 30% billings growth.

Lastly, we believe that CRM will commit to margins expanding, and believe a baseline of 50-100 bps of FY13 expansion would be a positive Billings Estimates Look Achievable: Our total billings growth est. of +32% YoY is in-line with consensus /CRM’s implied guidance and encompasses new billings +23% YoY and renewal billings +37% YoY. While our total billings est. is moderately above normal seasonality at +62% QoQ v. +60% the past four years, the timing of Dreamforce, very strong large deal activity, sales hiring at 40%+ and continued outperformance of emerging areas like Radian 6 and should drive upside. CRM should be able to grow billings 30%+ in FY13, but has its toughest billings comp in Q1 (+44%, +37% cc ), so billings will likely decelerate while Q1 FCF will be impacted by a Radian 6 related tax payment and we are lowering our Q1 FCF est by $15M to $151M. Q1 will be transitional, but the strong growth for FY13 and accelerating annual cashflow should fuel the stock.

Checks Strong: Partners were constructive, with most reporting better than expected results and a continued shift towards big deals. We believe CRM signed several of its largest ever contracts in Q4, including several north of $20M and a number of 20K+ seat deals. As CRM continues to become more strategic, these deals will persist. While Sales cloud continues to be the anchor, accelerating Service cloud activity has been a  key driver in all our checks.