Earnings Preview: Salesforce.com

Zacks

Salesforce.com Inc. (CRM) is scheduled to announce its second quarter 2013 results on August 23, 2012, after the closing bell. We see limited movement in analyst estimates over the past 30 days.

First Quarter Overview

Salesforce.com reported mixed first quarter 2013 numbers, with adjusted loss per share of 2 cents missing the Zacks Consensus break-even estimate. Despite solid revenue growth, higher expenses led to the miss.

Revenue grew 37.9% from the year-ago quarter to $695.0 million. The reported revenue was above the company’s guidance range of $673 million to $678 million. Currency tailwinds, solid geographical contribution and favorable business mix aided the revenue improvement. During the quarter, CRM delivered 54 billion transactions, an increase of 72% from a year ago. The company also mentioned that more than 2 million applications were built on Force.com and Heroku platforms.

Despite a 35.5% increase in gross profit, unfavorable mix, costs associated with recent acquisitions and some data center investments led to a 140 basis point margin contraction. Total operating expenses were also on the rise (40.1% year on year), backed by higher research and development (R&D) investments and headcount.

Second Quarter & Fiscal 2013 Outlook

For the second quarter, total revenue is expected to be in the range of $724.0 million to $728.0 million. GAAP loss per share is expected to be between $0.10 and $0.09, while non-GAAP diluted earnings per share (EPS) are expected to lie in the $0.38 to $0.39 range.

For full-year 2013, Salesforce.com raised its revenue outlook to $2.97–$3.00 billion from $2.92–$2.95 billion. Diluted GAAP loss per share is expected to be in the range of $0.45 to $0.08 (previously $0.55 to $0.51), while diluted non-GAAP EPS is projected to be in the range of $1.60 to $1.63 (previously $1.58 to $1.62).

Moreover, the company expects to continue investing in new technologies and in key international markets, and expand through acquisitions. Salesforce continues to aggressively hire people and intends to expand sales distribution/engineering through fiscal 2013. The company also has plans to increase headcount in the R&D and selling and marketing (S&M) division.

Agreement of Analysts

Analysts appear divided about their expectations for the upcoming quarter.

Some are positive about the new products launched by the company, such as Force.com, Data.com and believe that the heavy investments in new products will convert to market share gains. Another new offering, Social Enterprise Vision also looks promising, as it possesses the ability to compete with offerings from major players including Microsoft Corp. (MSFT), Twitter, Facebook (FB) and LinkedIn (LNKD).

Other analysts expect revenue to slow down as some companies are using their own internal systems and hence reducing their IT spending. Salesforce.com is also facing severe competition from its peers including Oracle Corp. (ORCL), SAP AG (SAP) and Microsoft.

Despite the mixed sentiment among analysts, estimate revisions were limited. Out of the 17 estimates available for the second quarter, only 1 was raised and no downward revisions were made in the last 30 days. But, among the 20 estimates for fiscal 2013, there were 2 upward and 3 downward revisions in the last 30 days.

Magnitude of Estimate Revisions

The magnitude of revisions has been minimal since the company reported its first quarter results. The Zacks Consensus Estimate for the upcoming quarter remained unchanged at 4 cents, while the estimate for fiscal 2013 moved down 2 cents to 0 cents over the last 30 days. However, estimates remained unchanged for the quarter and dropped 10.3% for fiscal 2013 in the last 90 days. The estimate revision for fiscal 2013 reflects currency headwinds and EPS dilution from the Buddy Media acquisition.

Recommendation

We believe that the deal growth momentum and new product launches are positives for the upcoming quarter. But currency headwinds, increasing expenses and stiff competition from its peers keep us concerned.

Though we are encouraged by Salesforce’s growth prospects in the cloud, the entry of tech giants such as Dell Inc. (DELL) and Hewlett-Packard Co. (HPQ) into the cloud space would further increase competition, going forward.

Currently, Salesforce.com has a Zacks #3 Rank, implying a short-term Hold rating.

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