Wall Street Boos, but Salesforce Q2 Hits Record

Salesforce.com on Wednesday reported net income of close to $10 million in its second fiscal quarter 2008 ending July 31, more than double the 2007 quarter’s figure of about $3.7 million. Total revenues were $263 million, up 6 percent quarter over quarter, and 49 percent year over year.

The company is projecting revenue for the third fiscal quarter to be between $273 million to $274 million. It has raised the full year revenue guidance from between $1.06 billion and $1.065 billion it stated in May to between $1.07 and $1.075 billion.

The news, however, was not well received. At closing time, its shares were $59.80, down 8.4 percent from the previous close of $65.48. So why isn’t Wall Street happy? Because during its second quarter earnings call, Salesforce.com (NYSE: CRM) projected a slowdown in revenue growth in the third fiscal quarter to 42 percent.

Another issue for analysts was the problem of deferred revenue. Salesforce.com sells subscriptions to its products, and books the revenue quarter by quarter over the life of multi-year contracts. Wall Street considers the unpaid part of the revenue, which is deferred revenue, as an indication of the company’s future financial health.

But Salesforce.com doesn’t agree. “You can’t manage a business around deferred revenue numbers,” said Graham Smith, executive vice president and chief financial officer. “You have to focus on new bookings and customer success. The deferred revenue will be what it will be.”

Pointing out that the company’s guidance exceeded its initial figure by about $50 million, Smith said some of that additional money “was due to the big slug of deferred revenue in Q4.”

During the earnings call, company chairman and CEO Marc Benioff crowed about the success of the software as a service (SaaS) platform, bragged about the success of the company, and outlined its key strategies moving forward.

“Salesforce.com is the first ever SaaS company with an annual run rate of over $1 billion,” Benioff said. “It demonstrates that an important new model has taken hold as the future of software.”

The company is “now laying the groundwork for the future, to join the elite group of companies that have passed $2 billion in annual revenue,” Benioff said.

Turning to strategies for the future, Benioff said that the rapid development of the cloud as an application development and deployment paradigm is “amazing” and Salesforce.com wants to ride that paradigm into the future. Its Force.com platform as a service (PaaS) will be the foundation of this drive.

Salesforce.com also announced several large wins, promised more aggressive hiring and outlined a very optimistic outlook for the future.

The growing interest in cloud computing will “see PaaS becoming our next major offering and part of our customer base,” Benioff said. “Customers of all sizes and ISVs (independent software vendors) will build new applications on these cloud platforms, not on traditional stacks,” he added.

Other key directions

Salesforce.com will also ride the growing interest in using the iPhone in the enterprise. “We’re the exclusive CRM (customer relationship management) partner for the Apple iPhone 3G launched last month,” Benioff said.

Several Salesforce.com business applications already run on the iPhone. Customers are developing new mobile applications running natively on Force.com on the iPhone, Benioff said, adding that there have been “more than 40,000 downloads of Force.com for the iPhone in six weeks.”

Many new customers acquired in the second quarter, including include AT&T, Cap Gemini, Pioneer and Nikon, are “using applications or platform services outside our traditional sales force automation — marketing automation, partner relationship management (PRM), customer call centers and portals, content management, and in our mobile offerings,” Benioff said.

The largest PRM contract to date is VMware, which “plans to manage its global network of more than 75,000 subscribers,” Benioff said. Others using the PRM service are Sony, Harley-Davidson, Red Hat and Bell Mobility.

The Salesforce.com staff used what Benioff called the Trojan Horse strategy with Dell, where they “find a way to get into a company with one of our key pieces of technology and build relationships with them and eventually become the enterprise standard for technology with them,” Benioff said.

The rosy future

Salesforce.com hired 180 people during the second quarter for a total of 440 in the first half of fiscal year 2009, which ends January 1, 2009, almost twice the 230 people hired over the same period last year. That trend will continue. “Growth remains a priority, and we’ll continue aggressive hiring,” Smith said.

Looking to the future, Smith pointed out that revenue is up 69 percent in Europe and up 79 percent in Asia. International revenue is up 28 percent, compared to the 24 percent growth in the same period last year.

“This highly diversified revenue stream, together with its recurring nature, gives us high confidence in the future,” Smith said.

The purchase of InStranet helps. “With the InStranet acquisition, we feel really bullish about the second half,” Smith said.

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