Earnings Scorecard: Salesforce.com

Following Salesforce.com’s (CRM) third quarter 2011 results on May 20, there have been moderate estimate revisions by the analysts covering the stock.

Third Quarter Highlights

Salesforce reported first quarter 2012 adjusted net income of 6 cents per share, a penny ahead of the Zacks Consensus Estimate but below the net income of 17 cents reported in the year-ago quarter.

Salesforce reported revenues of $504.4 million in the third quarter, up 33.9% from $376.8 million in the year-ago quarter. Results exceeded the company’s guided range of $480.0 million to $482.0 million and the Zacks Consensus Estimate of $483.0 million. Salesforce witnessed robust demand for its products, along with broad-based revenue strength across all regions.

Geographically, on a year-over-year basis, revenues in the Americas improved 31.1% to $340.0 million and contributed 67.4% to total revenue, Europe shot up 41.3% to $94.4 million (contributed 18.7%) and the Asia-Pacific grew 38.0% to $70.0 million, (contributed 13.9%).

The company generated cash from operating activities of $139.5 million compared with $165.8 million in the prior quarter. Capital expenditure decreased $3.3 billion from the previous quarter to $27.3 million.

Free cash flow increased $58.9 million from the prior quarter to $112.2 million. The company’s cash, equivalents and short-term marketable securities balance was $763.8 million, up from $497.0 million in the prior quarter.

Salesforce.com has provided guidance for the second quarter and fiscal 2012. For the second quarter of 2012, total revenue is expected in the range of $526.0 million to $528.0 million. GAAP loss per share is expected at between 1 cent and break-even; while non-GAAP diluted earnings per share (EPS) is expected in the range of 29 cents to 30 cents.

For full-year 2012, Salesforce.com raised its revenue outlook to $2.15–$2.17 billion from $2.03–$2.05 billion. Diluted GAAP EPS is expected in the band of negative 3 cents to negative 1 cent (previously 8 cents to 11 cents), while diluted non-GAAP EPS is projected in the range of $1.30 to $1.32 (previous expectation was $1.35 to $1.38).

Agreement of Analysts

Over the last 30 days, 7 of the 13 analysts covering the stock have raised their estimates for the second quarter, while 6 analysts made downward revisions.

For fiscal 2012, 11 of the 15 analysts lowered their estimates while two moved in the opposite direction. For fiscal 2013, 7 out of the 14 analysts have moved their estimates upward in the last thirty days, while 6 have reduced their estimates during the same period.

Some analysts were encouraged by CRM’s eighth consecutive quarter of billings acceleration, especially considering the disaster in Japan. They have pointed to the accelerated adoption of its products across all geographies. Going forward, based on strong business trends and an improving economic backdrop, management increased its full-year guidance.

The analysts believe that the tragic earthquake in Japan failed to impact CRM’s business considerably, as its business-unit performed well and nearly achieved the company’s original targets. Additionally, one of the largest quarterly transactions was from Japan. Looking forward, CRM highlighted that it has factored in some softness for this region for the remainder of the year.

Moreover, some analysts also believe that the companyrecently introduced the Salesforce Chatter platform, which is the enterprise social collaboration application platform following its Salesforce 2 platform. We believe that free add-on offerings like Chatter will enable Salesforce to differentiate its core offerings and make them more attractive for customers. This is expected to generate additional business volume.

The Chatter platform is testimony of Salesforce’s increasing opportunities in the ever-growing cloud computing segment. This new business model adopted by Salesforce.com has been facilitated by the acquisition of Radian6 for approximately $326.0 million.

Magnitude

The second quarter Zacks Consensus EPS Estimate remained flat at 4 cents, over the last 30 days. For fiscal 2012, the Zacks Consensus EPS Estimate is 24 cents, down 7 cents estimated 30 days ago. For fiscal year 2013, the estimate has moved down to 70 cents from 75 cents over the last 30 days.

Our Recommendation

Salesforce.com reported decent first quarter 2012 results. It also provided an encouraging guidance for the second quarter and full-year 2012 based on strong demand for its business software and customer additions. However, it faces strong competition in the application and cloud-computing areas from companies like Google Inc. (GOOG) and Microsoft Corp. (MSFT) for securing government contracts at local, state and federal levels to use their online e-mail and other applications. We reiterate our Neutral rating on Salesforce.com shares.

The company has a Zacks Rank of #3 (short-term Hold recommendation).

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