Making Sense Of’s Cash Flow From Operations Figure

CRM: Salesforce logo
Salesforce (NYSE: CRM) is one of the most well-known cloud CRM companies, and has grown considerably over the years through several targeted acquisitions. While this has driven revenue growth, the risk in the company has also expanded significantly. In our opinion, is no longer the cash-generating enterprise it used to be. Notably, the company has been relying on large non-cash items to offset lukewarm cash profits.

Trefis details various components of’s operating cash flows in an interactive dashboard. The company’s subscription-driven business model has allowed the company to convert over 25% of its revenue into cash from operations over the last 3 years. While the contribution of cash profits to cash from operations (CFO) has grown and the contribution of non-cash items has declined over recent years, non-cash items still contribute nearly 82% to cash from operations.’s key non-cash contributors are:

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1. Changes in deferred revenue:

  • Deferred revenue (often referred to as customer advances) is the cash received for which services are yet to be delivered. Deferred revenue is recognized as revenue once the services are delivered.
  • Deferred revenue typically arises in subscription environments where revenue is recognized per the schedule of the consumption of the subscription, while the cash is received upfront. We note that deferred revenue is a GAAP item and helps ensure revenue certainty for companies selling subscription. Thus, deferred revenue is a way of pulling forward the cash flow that would have come with service delivery.
  • Simply put, companies with bulging deferred revenue balances have increasing certainty of future revenues and are thus able to pull forward cash flows.
  • In Salesforce’s case, nearly half of the cash flow from operations occur due to this borrowing from the future.
  • While Salesforce has been able to reduce this number from over 55% to under 45%, the contribution still remains high.

2. ESOPs expense:

  • Employee stock plan expenses are recorded for planned vesting of company’s stock to employees.
  • ESOPs are known to be great tool to retain and reward salespeople to help exceed their targets. Especially in subscription driven offerings, ESOPs become very important given long-term contracts necessitate salespeople to manage their relationships with customers over the long term to ensure incremental consumption and timely payments.
  • While seen as an excellent tool to create long term wealth, ESOPs essentially help companies delay expenses (for issuance of stock to employees) and thus are recognized as a non-cash expense. As a result, ESOPs are added back to arrive at the CFO.
  • In case of Salesforce, ESOPs have grown at a CAGR of 25% over 2017-19 from $820 million to $1.3 billion.
  • In addition to the ballooning future liability, ESOPs have contributed nearly 37% of the cash flow from operations in the last three years.

Why This Matters

  • Salesforce’s contributors to cash from operations present a potentially dangerous mix: On one hand the company is borrowing cash from the future and on the other hand it is deferring the expenses used to get these revenue contracts out in the future.
  • While Marc Benioff has proven himself to be an excellent CEO, the significantly high non-cash components add a layer of complexity in understanding how well the company is generating cash – especially since accounting rules allow some flexibility in how these components are reported
  • Additionally, Salesforce has been aggressively pursuing large acquisitions (Mulesoft, Tableau etc). We believe that the added integration risk could put pressure on the execution bandwidth that the company has by eating into the cash generated by its business


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