Salesforce (CRM) Surges on Larger Deals and Robust Sales

Shares of Salesforce (CRM: Charts, News) rallied more than 10% last Friday after the company reported improved first quarter earnings. The cloud-based service provider posted an adjusted profit of 37 cents per share on revenue of $695.5 million. This topped analysts' expectations for 34 cents per share on revenue of $678 million.

Without the adjustments for stock-based compensation and amortization, Salesforce actually posted a loss of 14 cents per share, or $19.5 million, compared with break-even earnings of $530,000 a year earlier. Salesforce followed up its strong earnings with an optimistic outlook for the current quarter and the full fiscal year, which also topped estimates.

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This marks a sharp recovery from its 14% plunge on May 10, after Cisco (CSCO: Charts, News) stated that its corporate customers were reluctant to spend more and that larger deals were stalling. Investors took this as a hint that Salesforce, which shares a similar customer base, would post poor first quarter earnings. Prior to its earnings, Salesforce investors had also expressed concern that the company's hiring pace was outpacing its revenue growth.

In the second quarter, Salesforce expects to post a loss between 9 and 10 cents per share, along with adjusted earnings of 38 to 39 cents per share, on revenue between $724 and $728 million. Analysts had expected adjusted earnings of 38 cents per share on revenue of $713.78 million. For the full year, the company expects to post a loss between 45 to 48 cents per share and adjusted earnings of $1.60 to $1.63 per share. It expects revenue between $2.97 billion to $3 billion. Analysts currently expect full year adjusted earnings of $1.61 per share on revenue of $2.95 billion. Salesforce notably added a new line item called "unbilled deferred revenue", a non-GAAP metric which counts contracts not yet booked as sales. This forward-looking metric rose to $2.7 billion from $2.2 billion in the previous quarter.

In other words, Salesforce exceeded all expectations. CEO Marc Benioff stated, " continues to be the fastest growing software company of its size. Last year we became the first enterprise cloud computing company to achieve $2 billion in revenue, and we're now poised to deliver the first ever $3 billion year in fiscal 2013." Benioff noted that Salesforce is selling higher-priced software licenses that allow customers to access a wider range of its cloud-based products.

Benioff also took a swipe at rival SAP, whose customer base Salesforce has steadily eroded. Benioff criticized SAP's lack of innovation or accretive acquisitions. "If the newest and most exciting thing at SAP is the acquisition of (cloud-based human capital management company) SuccessFactors, then God help SAP. That was a sub-$1 billion company that makes human performance-management software that you log into once a year."

The company is also adding software that allows companies to run marketing campaigns on Facebook FB and other social media sites, as well as sales tracking programs for managing human resources. Many companies have adopted Salesforce's internal social networking tool Chatter and social media monitoring system Radian 6 to improve their integration with the growing social network.

Salesforce's customer-support business was its fastest growing segment, outpacing its larger customer relationship business. "You're just going to see this incredible tear of that (customer-support) business," Benioff noted.

Larger deals, such as a $100 million deal with an insurance provider signed last quarter, have helped lift sales. Analysts remained optimistic regarding Salesforce's future deals. "More mega-deals are being lined up for later in the fiscal year and the quantity and size could surprise people," stated Mark Murphy from Piper Jaffray & Co. Murphy rates Salesforce shares as "overweight".

Salesforce still trades with a high forward multiple of 70.7 times earnings, with a 5-year PEG ratio of 3.0. This has kept investors at bay, out of fear of volatility, but if Salesforce's numbers keep improving throughout the year, then its stock price may grow into its oversized P/E ratio.

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Published on May 22, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

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