Salesforce.com Inc. (CRM) reported second quarter fiscal 2012 adjusted net income of 6 cents per share, which was modestly ahead of the Zacks Consensus Estimate of 3 cents. The adjusted figure excludes amortization of intangibles and a debt discount, but includes stock-based compensation. The earnings beat came from solid top-line growth, partially offset by higher operating costs.
Revenues
Revenues in the quarter were $546.0 million, up 38.5% from $394.4 million in the year-ago quarter. Results exceeded the company’s own guidance range of $526.0 million to $528.0 million. Salesforce.com enjoyed robust demand for its products, along with broad-based revenue strength across all regions.
Segment wise, Subscription and Support revenues of $509.3 million escalated 38.0% from the year-ago quarter. Professional Services and Other revenues jumped 44.5% from the year-earlier quarter to $36.7 million.
Geographically, on a year-over-year basis, revenues in the Americas improved 33.6% to $366.9 million, contributing 67.2% to the total; Europe shot up 55.7% to $102.1 million, contributing 18.7%; and the Asia-Pacific grew 42.2% to $77.0 million, contributing 14.1%.
As many as 6,300 paying customers were added since the prior quarter. The number of net paying customers at the end of the second quarter was 104,000.
Operating Results
Gross profit on a GAAP basis was $425.1 million, up 34.3% year over year, while on a non-GAAP basis was $445.8 million, up 37.7%. The non-GAAP figure excludes amortization of purchased intangibles and stock-based compensation.
GAAP gross margin was 77.9%, down from 80.3% in the year-ago quarter. Non-GAAP gross margin was 81.6%, compared with 82.1% in the year-ago quarter. The gross margin deterioration was due to higher investments in its U.S. data centers, costs required to build out the Japan data center and acquisition costs.
Operating expenses rose 53.7% and 48.1% year over year, on a GAAP and non-GAAP basis, respectively. The growth rate was much higher than that of the quarter’s revenue, which resulted in an operating loss on a GAAP basis.
Operating loss, on a GAAP basis, was $15.7 million, compared to operating income of $29.7 million in the year-ago quarter. Operating income on a non-GAAP basis was $57.5 million, down from $61.4 million in the year-ago quarter.
GAAP operating margin was (2.9%) versus 7.5% in the prior-year quarter. Non-GAAP operating margin was 10.5%, compared with 15.6% in the year-ago quarter. The decline in the operating margin was due to increased R&D investments to maintain the company’s technology leadership. Increased headcount also added to costs.
GAAP net loss in the quarter was $4.3 million or 3 cents compared with a net income of $14.7 million or 11 cents in the comparable quarter last year.
Excluding special items, net income on a non-GAAP basis was $43.1 million or 30 cents per share, compared with $38.7 million or 29 cents in the year-earlier quarter. However, non-GAAP net income including stock-based compensation expense was $9.1 million or 6 cents per share, compared with $21.6 million or 16 cents.
Balance Sheet & Cash Flow
Salesforce.com ended the quarter with cash, equivalents and short-term marketable securities of $577.4 million, down from $763.8 million in the prior quarter. Accounts receivable increased $71.6 million from the prior quarter to $342.4 million. Salesforce.com has no long-term debt. Total deferred revenue in the quarter was $935.3 million, up from $915.1 million in the previous quarter.
Cash from operating activities was $82.9 million, compared with $139.5 million in the prior quarter. Capital expenditure increased $17.8 billion from the previous quarter to $45.1 million. Free cash flow dropped $74.3 million from the prior quarter to $37.9 million.
Guidance
Salesforce.com has provided guidance for the third quarter and fiscal 2012. For the third quarter of 2012, total revenue is expected in the range of $568.0 million to $570.0 million. GAAP loss per share is expected at between 6 cents and 5 cents, while non-GAAP diluted earnings per share are expected in the range of 30 cents to 31 cents.
For full-year 2012, Salesforce.com raised its revenue outlook to $2.22–$2.23 billion from $2.15–$2.17 billion. Diluted GAAP loss per share is expected in the range of 11 cents to 9 cents (previously 3 cents to 1 cent), while diluted non-GAAP EPS is projected in the range of $1.30 to $1.32 (reiterated).
For both the third quarter and fiscal year, Salesforce.com assumes an average diluted share count of 145 million.
The non-GAAP EPS guidance for the third quarter and fiscal 2012 exceeded the Zacks Consensus Estimates of 2 cents and 23 cents, respectively.
Our Take
Salesforce.com reported decent second quarter 2012 results. It also provided an encouraging revenue guidance for both the quarter and fiscal year based on strong demand for its business software and customer additions. But the earnings guidance was gloomy, indicating that costs will offset revenue growth.
Though the analysts are positive about the company’s entire product line (Sales Cloud, Service Cloud, Platform, and Collaboration), they are also concerned about continuous R&D investments as it would rationalize the margins to some extent. However, they find Chatter a key driver of Salesforce.com’s enterprise license agreements.
We, however, caution investors about strong competition in CRM application and cloud-computing areas. Google Inc. (GOOG) and Microsoft Corp. (MSFT) are worthy of special mention, since they have been fighting to win government clients at local, state and federal levels to use their online e-mail and other applications that fit into the cloud-computing space. But the acquisition of Radian6 (in May) could provide additional support that will come from huge growth opportunity in the media monitoring market.
Currently, Salesforce.com has a Zacks #3 Rank, implying a short-term Hold recommendation.
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