Salesforce Tops Revenue and EPS - Analyst Blog

Salesforce.com (CRM) reported third quarter fiscal 2011 adjusted net income of 20 cents per share, above the Zacks Consensus Estimate of 19 cents.

Revenues

Revenues in the quarter were $15.4 billion, an increase of 19.0% from $12.9 billion in the year-ago quarter. Results exceeded the company's guidance range of $408.0 million to $410.0 million. The company witnessed a robust demand for its products, along with broad-based revenue strength across geographical regions.

Going by segments, Subscription and Support revenues of $403.0 million escalated 31.0% from the year-ago quarter. Professional Services and Other revenues increased 10.0% from the year-earlier quarter to $26.0 million.

Geographically, the Americas contributed 68.0% to the total third quarter revenue, up 25.6% year over year. Europe contributed 18.0% and grew 25.8%. Asia-Pacific contributed 14.0%, and leaped 62.4%.

New customers increased sequentially by approximately 4,800 during the quarter. The number of net paying customers at the end of the third quarter was 87,200. Since October 31, 2009, the company has added 19,300 net paying customers, an increase of 28%.

Operating Results

Non-GAAP gross margin (including stock-based expenses) was 80.8% in the third quarter compared with 80.2% in the year-ago quarter. The increase in gross margin was attributable to a better sales mix and a strong demand for high end products.

Non-GAAP operating margin (including stock-based expenses) was 8.2% in the quarter versus 9.1% in the year-ago quarter. The decline in the operating margin was on account of increased investments to maintain the company's technology leadership. Increased headcount during the quarter could be another reason for the margin decline.

GAAP net income in the quarter was $21.0 million, or 15 cents per share, compared with $20.7 million or 16 cents in the comparable quarter last year.

Excluding special items, net income on a non-GAAP basis was $18.7 million or 20 cents per share, compared with $22.5 million or 17 cents per share in the year-earlier quarter.

 Balance Sheet & Cash Flow

Salesforce ended the quarter with cash, equivalents and short-term marketable securities of $769.8 million, down from $742.3 million in the prior quarter. Accounts receivable increased $30.3 million from the prior quarter to $258.8 million. Salesforce has no long-term debt. Total deferred revenue in the quarter was $672.4 million, down from $690.2 million in the previous quarter.

Cash from operating activities in the quarter was $74.0 million, compared with $76.1 million in the prior-year quarter. Capital expenditure reduced $10.4 billion from the year-earlier quarter to $20.8 million. Free cash flow surged $28.1 million year over year to $53.25 million.

Outlook

Salesforce has provided guidance for the fourth quarter and full year. Total revenue for the company's fourth quarter is projected to be in the range of approximately $447.0 million to $449.0 million. GAAP diluted EPS is expected to be in the range of approximately $0.06 to $0.07, while non-GAAP diluted EPS will likely be in the range of $0.27 to $0.28. EPS estimates assume a GAAP tax rate of 42%, and a non-GAAP tax rate of 38%.  All EPS estimates assume an average diluted share count of 140 million shares.

For full-year 2011, the company has raised its revenue outlook to $1.647– $1.649 billion from the previous guidance provided on August 19, 2010.  Diluted GAAP EPS is expected to be in the range of 46 cents to 47 cents, while diluted non-GAAP EPS is projected to be in the range of $1.18 to $1.19.  

Our Recommendation

Salesforce.com has reported decent third quarter fiscal 2011 results. It has provided an encouraging guidance for the fourth quarter and raised the full-year 2011 estimates based on improving fundamentals.

We, however, caution investors about tough competition in the CRM application and cloud computing market. IT spending is showing signs of revival and the company has slowly started reaping the benefits of the recovery.