Salesforce (CRM) Sees Storm Clouds on the Horizon

Last month, cloud-based business software maker Salesforce (CRM: Charts, News) posted disappointing third quarter earnings that caused shares to plunge. The company, one of the leading pioneers of "the cloud", posted non-GAAP third quarter earnings of 34 cents per share on revenue of $584 million - which both exceeded analysts' estimates of 31 cents per share on revenue of $571.4 million.

Moreover, earnings and revenue increased 6% and 36%, respectively, from the previous year. On the surface, its earnings were solid considering the shaky global macro environment during the third quarter, so what caused its shares to slip so badly - dropping 7% immediately after posting earnings? Nervous investors were concerned with the company's deferred revenue - its customer bookings - which increased 32% from the prior year quarter to $918 million, but actually declined 2% from its second quarter. Simply put, sequentially declining customer bookings signals weak bookings and an indicator that new business has become increasingly harder to attract. For the fourth quarter, Salesforce forecasts a non-GAAP EPS of 39 to 40 cents per share. For 2012, Salesforce estimates revenue of approximately $2.26 billion. Daily Chart
CEO Marc Benioff attempted to appease uneasy investors with a murky statement, stating, "The problem is that this is a metric that is rapidly evolving as we start to do more acquisitions, as there are fluctuations in invoice periods." Investors weren't calmed by Benioff's opaque statement, which seemed to be appealing to investors to sit tight in periods of economic uncertainty and higher expenditures. However, Benioff may be right to appeal to a long-term view of the company's future. After all, only 10% of corporate software is currently cloud-based, representing a large untapped market despite the noisy clashes between Silicon Valley heavyweights such as Google (GOOG: Charts, News), Oracle (ORCL: Charts, News), Hewlett-Packard (HPQ: Charts, News). Apple (AAPL: Charts, News), Amazon (AMZN: Charts, News) and IBM (IBM: Charts, News). Salesforce has always been focused on preaching the simplicity of a cloud-based workplace, claiming that all documents as well as applications can be accessed directly over the network with just a web browser. This message has appealed well to small, mid and large-sized businesses over the years. Salesforce's gained 6,300 customers since the first quarter, ending the third quarter with 104,000 customers. With these earnings, Salesforce reported that it would no longer provide quarter customer number updates, but would now provide them "on a periodic basis", perhaps to offset the cyclical nature of the company's flow of customers. Salesforce specializes in SaaS (software as a service), in which its applications can be shared and accessed over any computer with an Internet connection - much like a more advanced version of Google Docs. "Growth in the SaaS space is accelerating," stated Wunderlich Securities analyst Richard Baldry, "and despite being the largest player, they have been accelerating their growth rate and curry favor with investors. The company has also been attempting to follow in Facebook's footsteps with its social enterprise initiative, which uses social-media related services to enhance its cloud computing experience. Salesforce also offers an online collaboration service called Once of Salesforce's primary weaknesses is rising expenditures. For the third quarter, the company's capital expenses increased to $30.7 million from $20.7 million a year ago. Its operating expenses also rose drastically, from $287.5 to $412 million. The company is also facing cutthroat competition from Amazon - which has the largest cloud-based content network, Google - which has integrated its free cloud-based software into browsers and mobile operating systems, and Oracle - an IT powerhouse that it keen on using cloud-based networks to increase its margins. Despite its current weakness and massive forward P/E of 64, analysts remain bullish on the Salesforce's growth prospects, but everyday investors should have a high tolerance for market volatility and a long-term investment horizon if they plan to pick up some shares. Other News About CRM Salesforce Beats on Top Line Salesforce posts solid earnings but shares slide. CRM: "We would be buyers on weakness" Analysts remain bullish on Salesforce shares. Other Stocks in the News Apple Inc. Beats Blackberry At Own Game Despite its current rout, Apple is still keeping its adversaries at bay. Microsoft's Ballmer: Windows 8 Will Come to Phones Ballmer offers more arcane and confusing clues to the future of Windows 8 Copyright 2011 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA, Inc.) or its employees responsible.

Published on Dec 9, 2011
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.

Posted in ...