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CRM platform provider salesforce.com, Inc. (CRM - Analyst Report) reported wider-than-expected adjusted loss in the second-quarter of fiscal 2015.

Revenues

Salesforce’s revenues of $1.32 billion not only increased 37.8% from the year-ago quarter but also surpassed the Zacks Consensus Estimate of $1.29 billion. Reported revenues also beat management’s guided range of $1.285 billion to $1.290 billion. The year-over-year increase in revenue was primarily attributed to rapid adoption of the company’s cloud-based solutions, the ExactTarget acquisition and a favorable foreign exchange impact.

Also, higher demand for Salesforce ExactTarget Marketing Cloud platform, which is a part of the Salesforce1 Customer Platform, supported the year-over-year increase in revenues. During the quarter, Salesforce agreed to acquire “relationship-intelligence” company RelateIQ Inc. This acquisition will provide Salesforce the platform to build its marketing intelligence system.

During the quarter, the company’s cloud-based solutions were selected by a number of companies including Safeway and Fastweb.

Among its business segments, revenues from Subscription and Support increased 36.5% from the year-ago quarter to $1.23 billion. Professional Services and Other revenues increased 58.5% on a year-over-year basis to $85.9 million.

Geographically, the company witnessed revenue growth of 39% in the Americas while revenues from Europe and Asia increased 42% and 25%, respectively, on a year-over-year basis.

Operating Results

Salesforce’s adjusted gross profit (including stock-based compensation but excluding amortization expenses) came in at $1.03 billion, up 35.4% from the year-ago quarter. However, gross margin contracted 134 basis points (bps) to 78.3% from the year-ago quarter, primarily due to the acquisition of ExactTarget.

Adjusted operating expenses (including stock-based compensation but excluding amortization of acquisition-related intangibles) increased 32.9% from the year-ago quarter to $1.03 billion, primarily due to higher investments in research and development, marketing and sales and general and administrative activities. However, as a percentage of revenues, operating expenses contracted 287 bps from the year-ago quarter.

Salesforce reported adjusted operating income (including stock-based compensation but excluding amortization of acquisition-related intangibles) of $2.5 million, up from the year-ago loss of $12.8 million primarily due to higher revenue base and a drop in operating expenses as a percentage of revenues. The ExactTarget acquisition and higher operational efficiencies also impacted operating results.

Salesforce’s adjusted net loss, including stock-based compensation but excluding all one-time items on a proportionate tax basis, came in at $26.3 million compared to a net income of $71.3 million reported in the year-ago quarter.

Balance Sheet & Cash Flow

Salesforce exited the quarter with cash and cash equivalents and marketable securities of $844.6 million compared with $879.1 million in the previous quarter. Accounts receivable were $834.3 million compared with $684.2 million in the prior quarter.

Total deferred revenue in the quarter was $2.35 billion, which increased 31% on a year-over-year basis. Cash from operating activities was $245.9 million compared with $473.1 million in the prior quarter.

Guidance

For the third quarter of fiscal 2015, the company expects revenues in the range of $1.365 billion to $1.370 billion, reflecting a year-over-year increase of 27%, primarily due to the ExactTarget acquisition. The Zacks Consensus Estimate is pegged at $1.370 billion. The company expects non-GAAP earnings per share in the range of 12 cents to 13 cents for the third quarter. The Zacks Consensus Estimate (including stock-based compensation expenses) is pegged at a loss of 2 cents per share.

The company raised its full fiscal-year 2015 revenue guidance from the previous range of $5.30 billion–$5.34 billion to $5.340 billion–$5.370 billion (year-over-year increase of 31% to 32%). Salesforce also revised its non-GAAP earnings per share guidance from the range of 49 cents–51 cents to 50 cents–52 cents.  The Zacks Consensus Estimate is pegged at revenues of $5.336 billion and loss per share (including stock-based compensation expenses) of 6 cents.

Recommendation

Salesforce’s adjusted loss per share in fiscal second quarter 2015 was wider than the Zacks Consensus Estimate. Revenues however surpassed the consensus mark and increased on a year-over-year basis, primarily impacted by growth across all it business segments and Salesforce ExactTarget Marketing Cloud platform. The company provided a positive third-quarter revenue guidance and raised its fiscal 2015 guidance as well.

The higher number of deal wins was encouraging and so were the geographical contributions. We consider the rapid adoption of Salesforce1 Customer Platform to be a positive for the company. Overall, the company’s diverse cloud offerings and strong spending on digital marketing remain catalysts. Moreover, strategic acquisitions and the resultant synergies are expected to benefit in the long run.

Considering increasing customer adoption and satisfactory performances, market research firm Gartner acknowledged Salesforce as the leading social CRM solutions provider. We believe that the rapid adoption of Salesforce’ platforms demonstrates its growing opportunities in the ever-growing cloud computing segment.

Although, the company is growing reasonably in the cloud market, growth prospects have been rationalized to a considerable extent due to intensifying competition from International Business Machines (IBM - Analyst Report), Oracle Corporation (ORCL - Analyst Report) and SAP AG (SAP - Analyst Report). Moreover, currency fluctuations and an increase in investments for international expansions and data centers could impact near-term results.

Salesforce has a Zacks Rank #3 (Hold).
 

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