Salesforce Revenue Up, EPS Slips (CRM) reported second quarter fiscal 2011 adjusted net income per share of 16 cents, which surpassed the Zacks Consensus Estimate by 2 cents. The adjusted earnings per share excluded amortization of purchased intangibles and debt discounts as well as the associated tax impact, but included stock-based compensation expenses.


Revenues in the quarter were $394.0 million, an increase of 25.0% from $316.1 million in the year-ago quarter. Results exceeded the company’s guidance range of $381.0 million to $383.0 million and the Zacks Consensus Estimate of $384.0 million. The company witnessed strong demand for its products, specifically cloud-based products and favorable currency conversion. The revenue strength was broad-based across geographical regions.

Going by segments, Subscription and Support revenues of $369.0 million increased 25.7% from the year-ago quarter. Professional Services and Other revenues increased 12.4% from the year-earlier quarter to $25.4 million.

Geographically, the Americas contributed 70.0% to the total second quarter revenue, growing 21.5% year over year. Europe contributed 17.0% and grew 17.0% year over year. Asia-Pacific contributed 13.0%, growing 58.9% year over year.

New customers increased approximately 5,100 during the quarter, of which 4,600 were the result of organic growth and 500 were via the acquisition of Jigsaw Data Corporation. The total number of customers at the end of the reported quarter reached approximately 82,400.

Operating Results

Non-GAAP gross margin (including stock-based expenses) was 81.3% in the second quarter compared to 80.7% in the year-ago quarter. The increase in gross margin could be credited to a mix shift away from professional services to Subscription and Support.

Non-GAAP operating margin (including stock-based expenses) was 8.8% in the quarter versus 10.1% in the year-ago quarter. The decline in the operating margin was on account of increased investments to maintain the company’s technology leadership. Increased headcount during the quarter could be another reason for the margin decline.

GAAP net income in the quarter was $14.7 million, or 11 cents per share, compared to $21.2 million, or 17 cents in the comparable period last year.

Excluding stock-based compensation and other special items, net income on a non-GAAP basis was $38.7 million or 29 cents per share, compared to $36.3 million or 29 cents per share in the year-earlier period.

However, including stock-based compensation, the adjusted earnings per share (EPS) in the quarter were 16 cents, down from 18 cents in the year-earlier quarter.

Balance Sheet & Cash Flow

Salesforce ended the quarter with cash, equivalents and short-term marketable securities of $742.3 million, down from $951.7 million in the prior quarter. Accounts receivable increased $44.9 million from the prior quarter to $228.5 million. Salesforce has no long-term debt. Total deferred revenue in the quarter was $683.0 million, up from $664.6 million in the previous quarter.

Cash from operating activities in the quarter was $76.1 million, compared to $45.9 million in the prior-year quarter. Capital expenditure reduced $9.2 million from the year-earlier quarter to $27.8 million. Free cash flow surged $21.1 million year over year to $48.3 million.


Salesforce has provided guidance for the third quarter and full year. Revenues for the third quarter are expected in the range of $408.0 million to $410.0 million. GAAP-based EPS is expected to be in the range of 14 cents to 15 cents, while non-GAAP EPS is expected in the range of 30 cents to 31 cents.

For full-year 2011, Salesforce raised its guidance based on strong second quarter results and significant new business generated during the quarter. Salesforce now expects revenues in the range of $1.59 to $1.60 billion (up from the previous guidance range of $1.55–$1.56 billion). The company expects GAAP based EPS in the range of approximately 43 cents to 45 cents (previously 38 cents to 40 cents), while non-GAAP EPS is expected in the range of $1.15 to $1.17 (previously 1.13 to $1.15).

Management expects the GAAP tax rate to be roughly 41% and non-GAAP tax rate to be around 38% for both the third quarter and full year.

Our Recommendation has reported decent second quarter fiscal 2011 results. It has provided an encouraging guidance for the third quarter and raised the full-year 2011 expectations based on improving fundamentals.

We, however, caution investors about strong competitors in the CRM application and cloud computing areas. IT spending is showing signs of revival and the company has slowly started reaping its benefits.

Consequently, the stock currently carries a Zacks #3 Rank, implying a short-term Hold recommendation.

SALESFORCE.COM (CRM): Free Stock Analysis Report

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