Salesforce.com Up on EPS, Revs

Salesforce.com (CRM - Analyst Report) reported third quarter EPS of 34 cents, which exceeded the Zacks Consensus Estimate of 16 cents per share.

Revenue

Revenue for the third quarter was $330.5 million, an increase of 20.0% from $276.5 million reported in the year-ago quarter and an increase of 4.5% from $316.1 million reported in the second quarter of fiscal 2010. This exceeded the company’s guidance range of $323.0 million to $324.0 million. The increase in revenue can be attributed to improvement in new business demand and lower attrition rate experienced by the company.

Subscription & Support revenue of $306.9 million increased 21.0% from the year-ago quarter. Professional Services & Other revenue of $23.7 million increased 3.0% from the year-ago quarter. Geographically, the Americas contributed 70.0% of total third quarter 2010 revenue, growing 26.4% year-over-year. Europe contributed 18.0%, growing 13.0% year-over-year. Asia-Pacific contributed 12.0%, growing 33.2% year-over-year.
 
Customers
 
Net paying customers increased by 4,700 during the quarter, bringing the total to 67,900. This was an increase of 16,100 customers from the year-ago quarter. New business in the third quarter grew compared to the last year and the company claims that it is the best growth quarter of the year.
 
Operating Results
 
Gross margin was 80.2% in the third quarter as compared to 79.6% reported in the year-ago quarter. This minimal increase in gross margin is attributable to a mix shift between revenue lines, with the high-margin subscription revenue comprising more of the company’s total revenue than the low-margin professional services business. Average selling price per subscriber for each service addition continued to be stable.  Operating margin was 9.0% in the quarter, versus 6.0% in the year-ago quarter.
 
On a GAAP basis, fully diluted EPS for the third quarter was $0.16 compared to $0.08 in the year-ago quarter. Earnings per share have exceeded the company’s guidance of $0.15 to $0.16. Earnings per share on a GAAP basis include approximately $20.4 million in stock-based compensation expense and approximately $2.6 million in amortization of purchased intangibles related to previously announced acquisitions. On an adjusted basis, the EPS was $0.34.
 
Balance Sheet & Cash Flow
 
Salesforce.com generated $36.0 million in cash from operating activities in the third quarter of 2010 versus $45.9 million in the previous quarter. The company ended the quarter with $1070.0 million in cash and cash equivalents and marketable securities (both current and non-current) versus $1030.4 million in the previous quarter. Salesforce.com has no long-term debt. Deferred revenue for the quarter was $533.5 million, down from $549.0 million in the previous quarter.
 
Guidance
 
Management has provided guidance for the fourth quarter. Revenue for the fourth quarter is projected in the range of $340.0 million to $342.0 million, with the GAAP based EPS in the range of $0.14 to $0.15. The company has provided its full-year 2010 guidance and expects revenue to increase from its previous outlook. Revenue is now expected to be approximately $1.292 billion to $1.294 billion compared to its previous outlook of $1.27 billion to $1.28 billion. The company now expects GAAP based EPS to be in the range of approximately $0.62 to $0.63, compared to its previous outlook of $0.60 to $0.61. The company also expects fiscal year 2011 revenue to increase 15% to 16% from 2010 levels.

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