Salesforce.com Inc. (CRM) is scheduled to announce its third quarter fiscal 2012 results on November 17, 2011, and we see limited movement in analyst estimates to date.
Second Quarter Overview
Salesforce.com delivered decent second quarter 2012 results, beating the Zacks Consensus Estimate on the bottom line. The quarter’s adjusted earnings came in at 6 cents per share, 3 cents ahead of our expectation.
Salesforce.com reported revenue of $546.0 million, which increased 38.5% from the year-ago quarter on robust demand for its products and broad-based revenue strength across all regions. As many as 6,300 paying customers were added during the quarter.
The year-over-year gross margin comparison suffered due to increased investment in its U.S. data centers and costs required to build the Japan data center. Operating margin was also adversely affected by higher operating expenses on research and development to maintain the technology leadership. Increased headcount also added to costs.
Guidance
Salesforce.com has provided guidance for the third quarter and for fiscal 2012. For the third quarter of 2012, total revenue is expected to be in the range of $568.0 million to $570.0 million. The GAAP loss per share is expected to be between 6 cents and 5 cents, while non-GAAP diluted earnings per share are expected to be 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).
Agreement of Analysts
The analysts continue to believe that Salesforce.com's rapid customer growth is a reflection of an increased adoption rate and market acceptance of enterprise cloud computing. They believe that add-ons such as Chatter should continue to offer a competitive advantage and position it well for future growth.
Moreover, they remain encouraged with the acquisition of Radian6 in May, as it will help the company to capitalize on the huge growth opportunity in media monitoring.
However, continuous R&D investments will remain a concern as it could rationalize margins to a certain extent.
Out of the 20 analysts providing estimates for the third quarter, only one made a downward revision in the last 30 days. For fiscal 2012, 22 analysts provided estimates and we noticed one upward and two downward movements in the last 30 days.
For fiscal 2013, there were 3 downward movements in the last 30 days. The downward movement was in the last 30 days voices a negative sentiment, indicating a possible margin contraction.
Magnitude of Estimate Revisions
The movement of the Zacks Consensus Estimate for the third quarter from 4 cents to 3 cents in the last 30 days is a slight negative. However, the estimate for fiscal 2012 remains unchanged at 19 cents in the last 30 days.
Recommendation
Our earnings expectation for the upcoming quarter is well below the guided numbers, reflecting the analysts’ concern regarding the contraction of margins at Salesforce. But Salesforce has topped the Zacks Consensus Estimate in the preceding four quarters, with the earnings surprise ranging from a 0.00% to 133.33%, averaging a positive surprise of 52.86%.
Salesforce’s cloud platform gives access to customers and third parties to develop applications. This is increasing the popularity of the platform and expanding the company’s total addressable market.
We believe that this trend creates a long-term growth story for Salesforce. We are also encouraged by the strategic alliance between Salesforce.com and Toyota Motors Corp. (TM), as it opens up opportunities in the evolving automotive vertical.
Though we are encouraged by the steady flow of customer additions and raised revenue outlook, margin contraction keeps us on the sidelines.
Moreover, large software vendors such as Microsoft Corp. (MSFT), Oracle Corp. (ORCL), and SAP AG (SAP) have recently released several new SaaS (software as a service), which along with the competing CRM (Customer Relationship Management) solutions, could lead to pricing pressure in the future.
Currently, Salesforce.com has a Zacks #4 Rank, implying a short-term Sell recommendation.
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