Thursday, May 17, 2007 (NYSE:CRM): Growth becoming more expensive

Analysts are not too happy about's (NYSE:CRM) Q1 results:

- Morgan Stanley notes solid top line Q with upside to revenues but cash flow from operations was a little lighter than they anticipated and a significant increase in capitalized costs masked margin declines from their calculations. While the firm has readily acknowledged the significant growth of revenues, they remain concerned that the company is generating the growth at an increasing cost. They need to see better operating leverage - something that has yet to improve, and in fact may be weakening. Hence, they remain Underweight CRM shares.

- Cowen says they would not be surprised to see the stock trade off in the coming weeks following a decent, but not great quarter, in the face of high expectations and the looming specter of a full frontal assault by Oracle and Microsoft in the coming quarters. While most financial metrics were good, none were outstanding, and the company continues to be only marginally profitable on a GAAP basis. Despite a high level of predictability in the subs model, the firm believes heavy infrastructure investments intended to stimulate growth could have a negative impact on profitability and FCF should the competitive environment heat up, a scenario they consider highly likely. CRM trades at 38x Cowen's revised FCF forecast of $146M (+67%). Maintains Neutral.

Notablecalls: Well, it looks like growth is becoming more expensive for CRM. ORCL, MSFT and SAP have participated half-heartedly in the SAAS space so far but as Cowen notes, this may be changing soon. I don't think CRM's a core short here but it may see some downside over the next couple of days.

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