Earnings preview: Salesforce.com

The company has seen rapid customer growth, which analysts think reflects market acceptance of enterprise cloud computing.

By Zacks.com Nov 17, 2011 11:55AM

By: Zacks Equity Research

 

Salesforce.com (CRM) is scheduled to announce its third-quarter results Thursday afternoon, and we see limited movement in analyst estimates to date.

 

Second Quarter Overview

Salesforce.com delivered decent second-quarter results, beating the Zacks Consensus Estimate on the bottom line. The quarter’s adjusted earnings came in at 6 cents per share, 3 cents ahead of our expectation.


The company reported revenue of $546 million, up 38.5% from a year earlier on robust demand for its products and broad-based revenue strength across all regions. As many as 6,300 paying customers were added during the quarter.


The year-over-year gross margin comparison suffered due to increased investment in its U.S. data centers and costs required to build a Japanese data center. Operating margin was also adversely affected by higher operating expenses on research and development to maintain the technology leadership. Increased headcount also added to costs.

 

Guidance

For the third quarter, Salesforce.com expects total revenue between $568 million and $570 million. The GAAP loss per share is expected between 6 cents and 5 cents, while non-GAAP diluted earnings per share are expected to be 30 cents to 31 cents.


For full-year 2012, Salesforce.com raised its revenue outlook to $2.22 billion to $2.23 billion from $2.15 billion to $2.17 billion. Diluted GAAP loss per share is expected in the range of 11 cents to 9 cents (previously 3 cents to 1 cent), while diluted non-GAAP EPS was reiterated in the range of $1.30 to $1.32.

 

Agreement of Analysts

The analysts continue to believe that Salesforce.com's rapid customer growth is a reflection of an increased adoption rate and market acceptance of enterprise cloud computing. They believe that add-ons such as Chatter should continue to offer a competitive advantage and position it well for future growth.


Moreover, they remain encouraged with the acquisition of Radian6 in May, as it will help the company to capitalize on the huge growth opportunity in media monitoring.

However, continuous R&D investments will remain a concern as it could rationalize margins to a certain extent.


Out of the 20 analysts providing estimates for the third quarter, only one made a downward revision in the last 30 days. For fiscal 2012, 22 analysts provided estimates and we noticed one upward and two downward movements in the last 30 days.


For fiscal 2013, there were 3 downward movements in the last 30 days. The downward movement was in the last 30 days voices a negative sentiment, indicating a possible margin contraction.

 

Magnitude of Estimate Revisions

The movement of the Zacks Consensus Estimate for the third quarter from 4 cents to 3 cents in the last 30 days is a slight negative. However, the estimate for fiscal 2012 remains unchanged at 19 cents in the last 30 days.

 

Recommendation

Our earnings expectation for the upcoming quarter is well below the guided numbers, reflecting the analysts’ concern regarding the contraction of margins at Salesforce. But Salesforce has topped the Zacks Consensus Estimate in the preceding four quarters, with the earnings surprise ranging from a 0% to 133.3%, averaging a positive surprise of 52.9%.


Salesforce’s cloud platform gives access to customers and third parties to develop applications. This is increasing the popularity of the platform and expanding the company’s total addressable market.

 

We believe that this trend creates a long-term growth story for Salesforce. We are also encouraged by the strategic alliance between Salesforce.com and Toyota Motors (TM), as it opens up opportunities in the evolving automotive vertical.


Though we are encouraged by the steady flow of customer additions and raised revenue outlook, margin contraction keeps us on the sidelines.

 

Moreover, large software vendors such as Microsoft (MSFT), Oracle (ORCL), and SAP (SAP) have recently released several new SaaS (software as a service), which along with the competing CRM (Customer Relationship Management) solutions, could lead to pricing pressure in the future.

 

Currently, Salesforce.com has a Zacks No. 4 Rank, implying a short-term Sell recommendation.


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Tags: CRM
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