Salesforce.com's Revenue Growth Accelerates In Q3

Investor's Business Daily

Cloud software leader Salesforce.com late Monday posted mixed results for its fiscal Q3 and gave mixed guidance for the current quarter.

The company also announced a partnership with Hewlett-Packard (HPQ).

Salesforce.com (CRM) stock was down a fraction in after-hours trading after at first rising 1% on the report, which included the company's biggest revenue growth in the past six quarters.

In Monday's regular session, the stock rose as much as 1.8% to an all-time high — its fifth new high in the past eight trading days — before closing down 3%.

The No. 1 maker of customer relationship management software said revenue for the quarter ended Oct. 31 jumped 36% from the year-earlier quarter, to $1.08 billion. Analysts polled by Thomson Reuters had expected $1.05 billion.

Earnings per share minus items rose a penny to 9 cents, in line with analyst views.

For Q4, Salesforce sees EPS ex items of 5-6 cents, down from 13 cents. Analysts expected 7 cents.

But it sees revenue of $1.124 billion to $1.129 billion, up 35% at the midpoint, where analysts had expected $1.121 billion.

Expenses continue to outpace revenue. Q3 operating expenses jumped 38% to $906,000, led by a 50% hike in R&D spending.

But the big plus is the accelerating revenue growth as Salesforce.com transitions from the small-business market to selling to larger companies, says Brad Sills, an analyst for the Maxim Group. He says big companies are replacing older on-premise software systems in favor of software accessed as a service via the Internet cloud.

"We are in the early stages of an adoption cycle of cloud technology," Sills told IBD.

Salesforce.com remains the biggest SaaS cloud vendor, though rivals such as much bigger Oracle (ORCL), SAP (SAP) and Microsoft (MSFT) are fast expanding in that arena.

To accelerate growth and target bigger customers, Salesforce late Monday announced the pact with HP to jointly develop and market what they call Salesforce Superpod to large enterprise customers. Customers can get Salesforce's cloud software using HP's converged infrastructure — its server, storage and networking systems. HP will be the first Superpod customer.

Q3 was "an absolute monster quarter," Salesforce.com CEO Marc Benioff said on a conference call with analysts. Benioff is set to give the keynote speech Tuesday at the company's annual Dreamforce tech conference in San Francisco.

"I don't know any company who has delivered a $1 billion quarter and is growing at 36% in our enterprise software industry," he said.

The cloud is fast becoming necessary for companies, says Trip Chowdhry, an analyst for Global Equities Research. "Budgets for front-end IT (information technology) are growing at 60% (annually), and Salesforce.com is a beneficiary ," he said.

The company's marketing services business accounts for much of its spending growth.

The centerpiece of that effort is ExactTarget, an email marketing services company Salesforce bought in July for $2.5 billion.

ExactTarget produced $81 million in revenue in Q3, "well above what we expected," Salesforce CFO Graham Smith said on the call.

Melding ExactTarget with recent social media acquisitions Buddy Media and Radian6 is a key to future growth, says Sills.

"Companies want to buy all of these tools from one vendor and integrate it," he said.

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