Salesforce.com (CRM) is scheduled to announce its first quarter 2012 results on May 19, 2011. The modest revision in estimates reflects some key changes in the company’s future business prospects.
Fourth Quarter Recap
The company reported encouraging fourth quarter 2011 results, with adjusted earnings per share (EPS) of 12 cents, on par with the Zacks Consensus Estimate. Fourth quarter earnings surpassed last year's result.
Salesforce reported revenues of $456.9 million, up 29.0% from $354.0 million in the year-ago quarter. It also surpassed the company’s guided range of $447.0 million to $449.0 million, aided by robust demand for its products coupled with broad-based revenue strength across all geographic regions.
Subscription and Support revenues of $428.5 million escalated 30.9% from the year-ago quarter. Professional Services and Other revenues increased 6.0% to $28.3 million.
The company also added approximately 5,100 new customers during the quarter. The number of net paying customers at the end of the fourth quarter was 92,300. During fiscal 2011, Salesforce.com added 19,800 net paying customers compared with 19,300 in the prior year.
Gross profit on a GAAP basis was $364.6 million, up 27.5% year over year, while non-GAAP gross profit came in at $373.8 million, up 28.2% from the year-ago quarter.
Agreement of Analysts
Out of the thirteen analysts providing estimates for the first quarter of 2012, none revised their estimates in the last thirty days. Out of the sixteen analysts providing estimates for fiscal 2012, two analysts have revised their estimates downward in the last thirty days while no one moved in the opposite direction. For fiscal 2013, only one analyst made a downward revision while nobody moved in the opposite direction over the last thirty days.
Some analysts believe that customer relationship management has evolved as a worldwide social phenomenon given the easy access to social media like Twitter and Facebook. Moreover, the advancement in technology in this space enables monitoring of conversations or topics occurring across different social media sites, as well as communication with customers and other constituents via social channels. The company seeks to capitalize on this emerging domain through its newly launched Chatter product, thereby facilitating enhanced communication for end users and driving profitability going forward.
This new business model adopted by Salesforce.com has been facilitated by the acquisition of Radian6 for approximately $326 million. The deal enables Salesforce.com users to manage customer relationships via social channels.
Some analysts note that the company’s sales cloud is doing well. Analysts also believe that large publicly traded technology, networking and storage companies are gradually replacing Oracle Corp’s (ORCL) customer relationship management software, Siebel with solutions provided by Salesforce.com.
On the flipside, switching from customized on-premise software to an on-demand solution can be difficult for the company, as it involves huge expenses that in turn will likely deter new customers. Furthermore, being the market leader, it is more difficult for Salesforce.com to gain market share, because new entrants are more likely to resort to aggressive pricing in an effort to take away share. Moreover, the competition in the cloud computing space has reached a stage where players may get involved in pricing wars, leading to margin contraction.
Magnitude of Estimate Revisions
Since the fourth quarter earnings release, the magnitude of revisions has been substantial. Overall, estimates for the upcoming quarter have declined from 19 cents to 5 cents, over a period of 90 days. However, estimates remained unchanged over the past 30 days.
For fiscal 2012, estimates have plunged from 87 cents to 31 cents over the last 90 days. However, estimates have dipped by a penny in the last 30 days. For 2013, estimates have plummeted from $1.30 to 75 cents over the last 90 days, while inching down a penny in the last 30 days.
Recommendation
Salesforce.com is witnessing growth in the social and business networking segment.
We, however, remain cautious regarding strong competition in the CRM application and cloud-computing areas. The company faces stiff competition from Google Inc. (GOOG) and Microsoft Corp. (MSFT) as they are also vying for government contracts at local, state and federal levels.
Currently, Salesforce.com has a Zacks #3 Rank, implying a short-term Hold recommendation.
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