Salesforce Beats on Top Line - Analyst Blog

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Salesforce.com Inc. ( CRM ) reported third quarter fiscal 2012 adjusted net income of 8 cents per share, surpassing the Zacks Consensus Estimate of 3 cents. The adjusted figure excludes amortization of intangibles and debt discount, but includes stock-based compensation. The earnings outperformance came from solid top-line growth, partially offset by higher operating costs.

Revenues

Revenues in the quarter were $584.3 million, up 36.2% from $429.1 million in the year-ago quarter. Results exceeded the company's own guidance range of $568.0 million to $570.0 million. Salesforce enjoyed robust demand for its products, along with broad-based revenue strength.


Segment wise, Subscription and Support revenues of $549.2 million escalated 36.3% from the year-ago quarter. Professional Services and Other revenues increased 34.2% from the year-earlier quarter to $35.1 million.

Geographically, on a year-over-year basis, revenues in the Americas improved 35.8% to $397.1 million, contributing 72.7% to the total; Europe shot up 35.8% to $103.9 million, contributing 19.0%; and Asia-Pacific grew 38.6% to $83.3 million, contributing 15.3%.

Operating Results

Gross profit on a GAAP basis was $455.7 million, up 31.3% year over year. GAAP gross margin was 78.0%, down from 80.9% in the year-ago quarter. The gross margin deterioration was due to higher investments in its U.S. data centers as well as costs required to build the Japan data center and for acquisitions.

Operating expenses rose 49.4% year over year due to a 60.8% rise in research and development expense, 51.9% increase in sales and marketing expense and 33.2% higher general administrative expense. The total growth rate was much higher than that of the quarter's revenue, which resulted in an operating loss on a GAAP basis.

GAAP operating loss was $10.2 million, compared to operating income of $35.2 million in the year-ago quarter. GAAP operating margin was (1.7%) versus 8.2% in the prior-year quarter. The lackluster operating performance was due to increased R&D investments to maintain the company's technology leadership. Increased headcount also added to costs.

GAAP net loss in the quarter was $3.8 million or 3 cents compared with a net income of $21.1 million or 15 cents in the comparable quarter last year.

Excluding special items but including stock-based compensation expense, adjusted net income was $10.4 million or 8 cents per share, compared with $28.1 million or 20 cents.

Balance Sheet & Cash Flow

Salesforce.com ended the quarter with cash, equivalents and short-term marketable securities of $645.9 million, up from $577.4 million in the prior quarter. Accounts receivable decreased $30.1 million from the prior quarter to $312.3 million. Salesforce.com has no long-term debt. Total deferred revenue in the quarter was $917.9 million, down from $935.3 million in the previous quarter.

Cash from operating activities was $128.7 million, compared with $82.9 million in the prior quarter. Capital expenditure was $34.7 million. Free cash flow was $94.0 million.

Guidance

Salesforce.com has provided guidance for the fourth quarter and fiscal 2012. For the fourth quarter of 2012, total revenue is expected in the range of $620.0 million to $624.0 million. GAAP loss per share is expected at between 6 cents and 5 cents, while non-GAAP diluted earnings per share are expected in the range of 39 cents to 40 cents.

For full-year 2012, Salesforce.com raised its revenue outlook to $2.255-$2.259 billion from $2.22-$2.23 billion. Diluted GAAP loss per share is expected in the range of 12 cents to 11 cents (previously 11 cents to 9 cent), while diluted non-GAAP EPS is projected in the range of $1.32 to $1.33 (previously $1.30 to $1.32).

For both the fourth quarter and fiscal year, Salesforce.com assumes an average diluted share count of 144 million and 143 million, respectively.

The non-GAAP EPS guidance for the fourth quarter and fiscal 2012 exceeded the Zacks Consensus Estimates of 6 cents and 19 cents, respectively.

Our Take

Salesforce.com reported decent third quarter 2012 results. It also provided encouraging revenue guidance for both the quarter and fiscal year based on strong demand for its business software and customer additions. But the earnings guidance was gloomy, indicating that costs will offset revenue growth.

We are positive about the company's entire product line (Sales Cloud, Service Cloud, Platform, and Collaboration), but are concerned about continuous R&D investments as it would rationalize the margins to some extent. However, we also find Chatter a key driver of Salesforce.com's enterprise license agreements.

We, however, caution investors about strong competition in CRM application and cloud-computing areas. Google Inc. ( GOOG ) and Microsoft Corp. ( MSFT ) are worthy of special mention, since they have been fighting to win government clients at local, state and federal levels to use their online e-mail and other applications that fit into the cloud-computing space. But the acquisition of Radian6 (in May) could provide additional support from the huge growth opportunity in the media monitoring market.

Currently, Salesforce.com has a Zacks #4 Rank, implying a short-term Sell recommendation.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: CRM , GOOG , MSFT

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