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Acquisition Costs Sink Salesforce (Update)

The stock trades lower after a new deal will take down full-year profit.
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Updated from 4:44 p.m. EDT


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second-quarter revenue topped the Street's estimate Wednesday, but shareholders seemed to take badly an acquisition's coming impact on future profit.

Revenue at the on-demand supplier of business software jumped 49% to $263.1 million, from $176.6 million in the same quarter of last year. The consensus estimate of analysts was for revenue of $260.6 million, according to Thomson Reuters.

The company attributed 5 percentage points of revenue growth to currency exchange.

Third-quarter income at the San Francisco-based company was $10 million, or 8 cents a share, vs. $3.7 million, or 3 cents a share, in the year-ago period. Analysts were looking for EPS of 8 cents.

Shares of Salesforce were down more than 7% to $60.40 in after-hours trading on news that an acquisition will lower full-year EPS by 5 cents.

Earlier Wednesday, Salesforce announced it had acquired call-center-software supplier


for $31.5 million.

Salesforce initially partnered with InStranet at the urging of services-oriented customers who needed "knowledge-management" capabilities, Chairman and CEO Marc Benioff said on the conference call.

InStranet's on-premise software allows call center agents to view specifics about customers' accounts when resolving problems. For example, a telecom company can automatically view the service contract and cell phone model sold to a specific customer.

"Our knowledge-based management was not where our customers wanted it," Benioff said. "They asked us to partner" with suppliers to integrate such software into Salesforce's multi-tenant, hosted software model.

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"We think we've picked up a real gem," Benioff said.

InStranet will continue to supply on-premise software to its current clients. "Most of our acquisitions ... have been on-premise software companies," Benioff said. "We're able to deploy that intellectual property ... into a service," he added.

In the third quarter, gross margin rose to 79.4%, vs. 76.5% one year ago.

Deferred revenue grew 49% to $480 million, from $322 million at the end of second quarter of last year.

Net new customers in the quarter were 4,100, bringing the total to 47,700, according to Salesforce.

For the third quarter, revenue will range between $273 million and $274 million. The company projected EPS of 6 cents or 7 cents, including the effect of the acquisition. Excluding the effect of InStranet, EPS will be 8 cents or 9 cents. Analysts were expecting a top line of $273.2 million and earnings of 9 cents a share.

Salesforce raised full-year guidance to a range of $1.07 billion to $1.075 billion, from a prior estimate of $1 billion. Excluding the effect of the acquisition, EPS will be 34 cents to 35 cents, a penny higher on each end of the range. The full-year earnings impact of the acquisition will be 5 cents a share, reducing full year EPS to 29 cents to 30 cents.

The strengthening dollar could have a "drag effect" on revenue and earnings in the second half of the year, CFO Graham Smith said.

Salesforce's on-demand software model is challenging traditional suppliers of on-premise software, such as


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, both of which recently debuted their own versions of on-demand CRM software.