Salesforce.com Plunges on Guidance: What Wall Street's Saying

NEW YORK (TheStreet) - Investors shied away from Salesforce.com (CRM) after the cloud software company forecast that earnings and revenue for the fourth quarter would be lower than Wall Street expected.

Salesforce.com said on Wednesday that it expects fourth quarter revenue to range between $1.436 billion and $1.441 billion. Analysts, according to Thomson Reuters, expected revenue of $1.444 billion. The company a expects GAAP loss between 9 cents and 10 cents a share and adjusted earnings to range between 13 cents and 14 cents a share. Analysts expect the company to earn an adjusted 14 cents a share.

The San Francisco-based company on Wednesday reported non-GAAP third-quarter earnings of 14 cents a share, topping analysts' estimates by 1 cent. Revenue increased 27.8% from last year to $1.38 billion. Analysts were looking for revenue of $1.37 billion.

Shares were down 5% to $58.60 as the market opened. Here's what analysts said.

Richard Davis, Canaccord Genuity (Buy, $70 PT)

Salesforce management was quite explicit telling analysts to adjust their forecasts for the strong dollar. Some did, others didn't, so the headlines were not spectacular, and the stock slid after hours. We view this as a pre-Holiday shopping gift and would buy CRM shares at a price that short-term and algo traders have temporarily disrupted. Salesforce, by a large margin, remains our favorite large-cap growth stock, and we saw nothing in the quarter to alter that opinion. Reiterate BUY.

Raimo Lenschow, Barclays (Overweight, $67 PT)

Salesforce.com reported Q3 FY15 results better than consensus on the top line, with revenue of $1.38bn coming in above expectations of $1.37bn. Billings of $1.26bn on a reported basis was light of consensus estimates though we highlight in this note that adjusting for FX headwinds to both revenue and deferred revenue, the result was essentially in line with estimates. Backlog growth (28% y/y) remains healthy, reflecting the company's continued growth at scale by cross-selling new products into its large installed base and success with enterprise deals. We think shares may have a slight negative bias after the quarter due to investors' view of the FX impact, though we continue to view Salesforce as the more attractive SaaS name for longer term investors due to the company's overall TAM [total addressable market], solid execution, and improving cash flow metrics.

Joel P. Fishbein, Jr., BMO Capital Markets (Outperform, $73 PT)

Guidance was slightly ahead of our expectations coming in relatively in line with consensus despite a currency headwind. Execution was strong with a record 3Q for seven- and eight-figure deals and double the number of eight-figure deals year over year. Across product segments Platform and Service continue stellar growth of 40% each, multi-cloud deals are driving productivity improvements, and a commitment to continued margin expansion remains in place. Looking ahead we see several opportunities that could put upward pressure on already best-in-class growth rates: the release of vertical specific products, benefits for recent investments internationally, very strong initial Wave traction with new and existing customers, and increased penetration in enterprise accounts.

Brendan Barnicle, Pacific Crest Securities (Outperform, $74 PT)

Despite FX headwinds, CRM posted upside to revenue and EPS estimates. Billings missed expectations on a USD basis, but grew by 27% in constant currency, better than consensus of 26.3%. At a $6 billion run-rate, 27% y/y growth is impressive. We view any weakness as a buying opportunity.

"We rate SALESFORCE.COM INC (CRM) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, good cash flow from operations and increase in stock price during the past year. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and generally higher debt management risk."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • CRM's revenue growth has slightly outpaced the industry average of 28.1%. Since the same quarter one year prior, revenues rose by 37.8%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Net operating cash flow has increased to $245.89 million or 34.23% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 12.01%.
  • Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Despite the fact that it has already risen in the past year, there is currently no conclusive evidence that warrants the purchase or sale of this stock.
  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Software industry and the overall market, SALESFORCE.COM INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Software industry. The net income has significantly decreased by 179.7% when compared to the same quarter one year ago, falling from $76.60 million to -$61.09 million.

 

-Written by Laurie Kulikowski in New York.

Follow @LKulikowski

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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