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Salesforce.com Inc. (CRM - Analyst Report) reported second quarter fiscal 2013 adjusted earnings per share (EPS) of 5 cents, a penny ahead of the Zacks Consensus Estimate of 4 cents. Despite the marginal beat, shares plunged 5.09% in after-hours trading, mainly reflecting a weak third quarter guidance.

Revenues

Revenues in the quarter were $731.6 million, up 34.0% from $546.0 million in the year-ago quarter. The quarter’s result was above the company’s guidance range of $724.0 million to $728.0 million and Zacks Consensus Estimate of $728.0 million.

Geographically, the company witnessed decent revenue growth in all of its operating regions. Revenue in the American region grew 38.4% to $508.0 million. Revenue from the European region was $124.6 million, up 22.1% from the year-ago quarter. Asia contributed $99.0 million to revenue, an increase of 28.6% compared with the year-ago quarter.

Second quarter revenue benefited strong demand for its product lines. Some of the notable customers for Salesforce’s Sales Cloud, Service Cloud, Work.com and Chatter were Nestlé, Burberry Group plc, Office Depot Inc. (ODP - Analyst Report), Ashland Inc. (ASH - Snapshot Report), Cigna Corp. (CI - Analyst Report), and Levi's.

Operating Results

Reported gross profit grew 33.9% year over year to $569.2 million. Gross margin was 77.8%, down 10 basis points from the year-ago quarter.

Total operating expenses rose 32.2% year over year on the back of 35.5% rise in research and development expense (R&D), 34.3% increase in sales and marketing expense and 22.1% rise general administrative expense. Continuous organic headcount increase and addition from recent acquisitions drove operating expenses higher.

Operating loss of $13.5 million during the quarter was narrower than the year-ago quarter loss of $15.7 million. Operating loss margin was 1.8% versus 2.9% in the prior-year quarter.

GAAP net loss in the quarter was $9.8 million or 7 cents compared with $4.3 million or 3 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expense, adjusted net income was 5 cents per share compared with 6 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Salesforce.com ended the quarter with cash, equivalents and short-term marketable securities of $1.1 billion, up from $710.4 million in the prior quarter. Accounts receivable increased to $446.9 million from $371.4 million in the prior quarter. Salesforce.com has no long-term debt. Total deferred revenue in the quarter was $1.34 billion, up from $1.29 billion in the previous quarter.

Cash from operating activities was $136.2 million compared with $213.2 million in the prior quarter. Capital expenditure was $29.3 million.

Guidance

Revenue for the third quarter of fiscal 2013 is projected in the range of $773.0 million to $777.0 million. GAAP net loss per share is expected to be in the range of 27 to 26 cents, while diluted non-GAAP EPS is expected to be in the range of 31 cents to 32 cents. The non-GAAP EPS guidance came short of Street’s expectation.

Revenue for fiscal 2013 is projected in the range of $3.025 billion to $3.035 billion (previously $2.97 billion to $3.00 billion), representing a year-over-year growth of 33.0-34.0%. GAAP net loss per share is expected to be in the range of 75 cents to 72 cents (previously a loss of 8 cents to 45 cents), while diluted non-GAAP EPS is expected to be in the range of $1.48 to $1.51 (previously $1.45 to $1.49, considering a dilution from Buddy Media acquisition in June 2012).

Conclusion

Salesforce.com reported modest second quarter 2013 results, with EPS and revenue exceeding Zacks Consensus Estimates. But the continuous reporting of GAAP loss is concerning. The third quarter guidance, too, failed to boost investor sentiment.

The quarter’s positives were solid geographical contributions, continuous business wins and raised outlook for fiscal 2013. But the rise in R&D investments and margin contractions concerns us.

There is no doubt about Salesforce’s cloud leadership. But the company faces tough competition from Google Inc. , Microsoft Corp. (MSFT - Analyst Report), SAP AG (SAP - Analyst Report) and Oracle Corp. (ORCL - Analyst Report). However, the company’s growing exposure in the social networking domain with Radian 6 (acquired in March 2012) is encouraging as it could prove to be a long-term catalyst.

Currently, Salesforce.com has a Zacks #3 Rank, implying a short-term Hold rating.

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