November 20, 2008
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Richard Adhikari

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Despite the worldwide economic malaise, which has resulted in major vendors being unwilling to issue guidance during their recent earnings calls, Salesforce.com is confident about the future.

It should be. The software-as-a-service (SaaS) leader reported net income of $10.1 million, or 8 cents per share, for the quarter ended Oct. 31, up from $6.5 million, or 5 cents per share, in the 2007 quarter. Analysts polled by Thomson Reuters expected profit of 7 cents per share.

Salesforce.com (NYSE: CRM) had record revenues of $276.5 million in the third quarter of fiscal 2009. Analysts had expected revenue of $273.6 million. This was up 43 percent year over year (YoY) and up five percent over second-quarter figures. Operating margin nearly doubled YoY, to six percent.

Salesforce.com gave positive guidance for the fourth fiscal quarter as well for fiscal 2010. It projects revenue for the fourth quarter to be between $284 million and $285 million, and earnings to be six cents to seven cents per share.

For fiscal 2010, it projects revenue to be $1.35 billion to $1.36 billion, but this, and EPS figures, will be updated in the next earnings call in February.

"Our annual revenue run rate now exceeds $1.1 billion, and was $787 million in the first nine months, exceeding all the revenue for last year," said Salesforce.com chairman and CEO Marc Benioff on a conference call with financial analysts.

He credited this strong revenue performance and solid expense management for raising the EPS, pointing out that earnings hit the eight-cent mark despite Salesforce.com having to absorb roughly two cents per share to cover the purchase of Instranet. Salesforce.com acquired Instranet in August for $31.5 million.

Benioff was sanguine about Salesforce.com's future. "We believe Salesforce can take market share," he said, adding that this is driven by the predictability of long term revenue from customers on long term contracts, an attrition rate of less than one percent a month, and the equal division of its customer base between small, medium and large businesses.

Growing in strength

Other factors Benioff cited are a strong presence both locally and internationally and a growing product line that goes beyond sales force automation. That growing product line includes Web and cloud hosting, and backup and recovery services.

Benioff showed a flash of his usual feistiness when pointing out that the current economic conditions make it difficult for traditional enterprise software companies, which require heavy upfront investments.

"In a telling sign of the times, one of our competitors just announced zero percent financing for its megasoftware," he said. "Nothing speaks more to the troubles of traditional enterprise software vendors than a model usually employed by auto dealers."

He was referring to Microsoft (NASDAQ: MSFT), which last week announced that it is offering zero percent financing for new customers of its Dynamics ERP and CRM applications.

Graham Smith, Salesforce.com's executive vice president and chief financial officer, addressed some trends that might be troubling. For one thing, an increasing proportion of the company's invoicing is taking part in the fourth quarter and that quarter sees more orders with annual billing cycles than other quarters, he said. This will skew the financial results, he warned.

"You'll have a spike on Q4 revenue but there will be a sequentially down Q1 followed by a relatively flat Q2 and Q3," Smith said.

Another troubling issue is the dollar's strength. Deferred revenue for the quarter was about $470 billion, 38 percent up YoY and down two percent from the third quarter. "That included a reduction of almost $50 million caused by the US dollar's remarkable rise against the Euro in Q2, offset by a small rise of $1 million from its strength against the Yen," Smith explained. The strengthening dollar also cost Salesforce.com $9 million in operating cash flow, Smith said.

Asia continues to be the company's fastest growing region, with revenue up by 65 percent, Smith said. "We'll continue to make investments in our international sales capacity because we believe we're only scratching the surface," he said.

TAGS: Microsoft, Salesforce.com, SaaS, CRM, Dynamics

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