Salesforce Posts Loss in Q1 - Analyst Blog

CRM platform provider salesforce.com, Inc. CRM reported first-quarter fiscal 2015 adjusted loss (excluding amortization of purchased intangibles and amortization of debt but including stock-based compensation expenses) on a proportionate tax basis of 7 cents per share, which compared unfavorably with the Zacks Consensus Estimate of earnings of 10 cents per share.

Revenues

Salesforce's revenues of $1.23 billion not only increased 37.4% from the year-ago quarter but also surpassed the Zacks Consensus Estimate of $1.21 billion. Reported revenues also beat management's guided range of $1.205 billion to $1.210 billion. The year-over-year increase in revenue was primarily attributed to rapid adoption of the company's cloud-based solutions and a favorable foreign exchange impact.

Also, higher demand for Salesforce ExactTarget Marketing Cloud platform, which is a part of the Salesforce1 Customer Platform, supported the year-over-year increase in revenues. During the quarter, the company's cloud-based solutions were selected by a number of companies including Manulife, Meiji Yasuda Life Insurance and Sky Italia.

Among its business segments, revenues from Subscription and Support increased 36.2% from the year-ago quarter to $1.15 billion. Professional Services and Other revenues increased 57.6% on a year-over-year basis to $79.5 million.

Geographically, the company witnessed revenue growth of 39.0% in the Americas while revenues from Europe and Asia increased 42.0% and 21.0%, respectively, on a year-over-year basis.

Operating Results

Salesforce's adjusted gross profit (including stock-based compensation but excluding amortization expenses) came in at $963.1 million, up 36.6% from the year-ago quarter. However, gross margin contracted 46 basis points (bps) to 78.5% from the year-ago quarter, primarily due to the acquisition of ExactTarget.

Adjusted operating expenses (including stock-based compensation but excluding amortization of acquisition-related intangibles) increased 34.3% from the year-ago quarter to $974.8 million, primarily due to higher investments in research and development, marketing and sales and general and administrative activities. However, as a percentage of revenues, operating expenses contracted 184 bps from the year-ago quarter.

Nonetheless, the ExactTarget acquisition and higher costs impacted operating results. Salesforce reported adjusted operating loss (including stock-based compensation but excluding amortization of acquisition-related intangibles) of $11.7 million, down from the year-ago loss of $20.8 million primarily due to higher revenue base and a drop in operating expenses as a percentage of revenues.

Salesforce's adjusted net loss, including stock-based compensation but excluding all one-time items on a proportionate tax basis, came in at $42.8 million or 7 cents per share compared to a loss of $38.9 million or 6 cents per share reported in the year-ago quarter.

Balance Sheet & Cash Flow

Salesforce exited the quarter with cash and cash equivalents and marketable securities of $879.1 million compared with $838.8 million in the previous quarter. Accounts receivable were $684.2 million compared with $1.36 billion in the prior quarter.

Total deferred revenue in the quarter was $2.3 billion, which increased 34.0% on a year-over-year basis. Cash from operating activities was $473.1 million compared with $271.2 million in the prior quarter.

Guidance

For the second quarter of fiscal 2015, the company expects revenues in the range of $1.285 billion to $1.290 billion, reflecting a year-over-year increase of 34.0% to 35.0%. The Zacks Consensus Estimate is pegged at $1.273 billion .The company expects non-GAAP earnings per share in the range of 11 cents to 12 cents for the second quarter. The Zacks Consensus Estimate is pegged at a loss of 2 cents per share.

The company raised its full fiscal-year 2015 revenue guidance from the previous range of $5.25 billion–$5.30 billion to $5.30 billion–$5.34 billion (year-over-year increase of 30.0% to 31.0%). Salesforce also revised its non-GAAP earnings per share guidance from the range of 48 cents–50 cents to 49 cents–51 cents.  The Zacks Consensus Estimate is pegged at revenues of $5.291 billion and loss per share of 7 cents.

Recommendation

Salesforce's adjusted loss per share in fiscal first quarter 2015 compared unfavorably with the Zacks Consensus Estimate. Revenues however surpassed the consensus mark and increased on a year-over-year basis, primarily impacted by growth across all it business segments and Salesforce ExactTarget Marketing Cloud platform. The company provided a positive second-quarter revenues guidance and raised its fiscal 2015 guidance as well.

The higher number of deal wins was encouraging and so were the geographical contributions. We consider the rapid adoption of Salesforce1 Customer Platform to be a positive for the company. Overall, the company's diverse cloud offerings and strong spending on digital marketing remain the catalysts. Moreover, strategic acquisitions and the resultant synergies are expected to benefit in the long run.

Considering increasing customer adoption and satisfactory performances, market research firm Gartner acknowledged Salesforce as the leading social CRM solutions provider. Moreover, the research firm also stated that Salesforce recorded the fastest growth, breaking into the list of top 10 SaaS providers for the first time from the 12th position in 2013. We believe that the rapid adoption of Salesforce' platforms demonstrates its growing opportunities in the ever-growing cloud computing segment.

Although, the company is growing reasonably in the cloud market, growth prospects have been rationalized to a considerable extent due to intensifying competition from International Business Machines IBM, Oracle Corporation ORCL and SAP AG SAP. Moreover, continued weakness in Europe, currency headwinds and an increase in investments could pose challenges, going forward.

Salesforce has a Zacks Rank #3 (Hold).