Modest 1Q for SalesForce

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Salesforce.com Inc. (CRM) reported first quarter fiscal 2013 adjusted net loss of 2 cents per share, poorer than the Zacks Consensus break even estimate.

Revenues

Revenues in the quarter were $695.0 million, up 37.9% from $504.4 million in the year-ago quarter. However, reported revenues surpassed the company’s guidance range of $673 million to $678 million. The first quarter revenue was benefited from a continued decline in dollar attrition. The company has adopted a diverse business mix, and generated a substantial amount of its revenue (more than 40.0%) from non-Sales Cloud contracts.

Geographically, the company witnessed decent revenue growth in most of its geographical regions.Revenue in the American region grew by 43.0% to $485 million.Revenue in European region grew by $118.3 million, that's up 25.3% in dollars, and revenue in Asia was $92.2 million, an increase of 31.8% compared to the year ago quarter.

Operating Results

Gross profit on a GAAP basis was $543.9 million, up 35.5% year over year. Gross margin was 78.2%, down from 79.6% in the year-ago quarter. The gross margin declined as a result of higher cost of production and specially the cost related to subscription and support.

Operating expenses rose 40.1% year over year on the back of 45.2% rise in research and development expense, 45.3% increase in sales and marketing expense and 20.5% higher general administrative expense. The operating expense growth rate was much higher than that of revenue growth and this resulted in a higher operating loss on a GAAP basis.

Operating loss of $22.2 million during the quarter was wider than the year-ago quarter loss of $2.8 million. Operating loss margin was (3.2%) versus (0.6%) in the prior-year quarter. The lackluster operating performance was due to an increase in operating expense. The company was not able to exercise financial discipline.

GAAP net loss in the quarter was $19.5 million or 14 cents compared with a net income of $530.0 million or 0 cents in the comparable quarter last year.

Excluding special items but including stock-based compensation expense, adjusted net loss of 2 cents per share compared with 6 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Salesforce.com ended the quarter with cash, equivalents and short-term marketable securities of $710.4 million, up from $777.9 million in the prior quarter. Accounts receivable decreased to $371.4 million from $683.7 million in the prior quarter.. Salesforce.com has no long-term debt. Total deferred revenue in the quarter was $1257.4 million, up from $1291.6 million in the previous quarter.

Cash from operating activities was $213.2 million compared with $240.4 million in the prior quarter. Capital expenditure was $44.7 million.

Guidance

Revenue for the second quarter of fiscal 2013 is projected in the range of $724.0 million to $728.0 million. GAAP net loss per share is expected to be in the range of ($0.10) to ($0.09), while diluted non-GAAP EPS is expected to be in the range of 38 cents to 39 cents.

Revenue for fiscal 2013 is projected in the range of $2.97 billion to $3.00 billion. GAAP net loss per share is expected to be in the range of ($0.08) to ($0.45) while diluted non-GAAP EPS is expected to be in the range of $1.60 to $1.63.

Conclusion

Salesforce.com reported modest first quarter 2013 results, with revenue exceeding its guidance. The earnings guidance is mediocre, but cost increase may offset revenue growth to a certain extent. The company witnessed revenue increase across different geographical regions. We are positive about the company’s entire product line, but are apprehensive about the rise in R&D and subscription & support expenses, and also about the shrinkage in margins.

Although cloud computing has great growth potential, we however caution investors about strong competition in CRM application and cloud-computing areas. The company is facing tough competition from Google Inc. (GOOG) and MicrosoftCorp. (MSFT) are worthy of special mention, since they are making aggressive moves to win government clients at local, state and federal levels to deploy their online e-mail and other applications that fit into the cloud-computing space.

The company has a Zacks #2 Rank, implying a short-term Buy rating.

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