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Salesforce Slides on Outlook

Its quarter is solid, but analysts think the company may not live up to expectations.
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Updated from 5:19 p.m. EDT

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posted the solid second-quarter numbers Wall Street expected on Wednesday but failed to hit higher "whisper numbers."

The stock slipped sharply after hours, losing $2.46, or 11%, to $19.74 a share on the news.

Net income quadrupled to $5 million, or 4 cents a diluted share, compared with $1.1 million, or 1 cent a share, a year ago. Total revenue rose 77% to $71.9 million, while paying subscribers increased by 41,000 to 308,000 year over year and 15% sequentially.

The San Francisco-based software company added 1,400 new customers (companies employing the individual subscribers) and now has 16,900 customers.

Analysts polled by Thomson First Call were projecting a profit of 4 cents a share on sales of $71.6 million.

Salesforce leases and runs its customer relationship management software via the Web. Although its software is not as robust as conventional enterprise software sold by rival

Siebel Systems


and others, it has found a substantial niche in the market and is taking lower-end business off the tables of its competitors.

Salesforce has put substantial effort into building its enterprise business and is on the way to adding "mirroring" capabilities to its networks. With a data center on each coast, corporate information will be automatically copied to each center, and protected against a single point of failure.

Mirroring capability will make the company more attractive to enterprise customers who demand a high degree of security.

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In the last few months, the company has signed major clients including,


, which plans to deploy 5,000 subscribers over the next year,

Citizens Bank

, for 1,400 subscribers, and 5,000 subscribers at

Merrill Lynch


The $50 million used to build the data centers helped push gross margins down this quarter -- to 77% from 81% in the prior quarter -- as did a sharp increase in staff numbers.

Salesforce now employs 1,059 people, nearly double the total at this time last year. The company expects hiring to level off during the current quarter.

Prior to Wednesday's earnings announcement, Salesforce

was hit by a downgrade and negative activity on the options front, as investors sold calls and purchased puts, apparently on concerns that the company won't be able to live up to what one analyst called "sky-high expectations."

The company said it expects revenue in the third quarter to range from $78 million to $80 million. Diluted EPS will likely range from 2 cents to 4 cents a share.

Analysts were looking for a 4-cent profit on revenue of $80 million.

Salesforce also slightly raised revenue guidance for the fiscal year to a range of $298 million to $303 million; earlier, the company said to expect revenue of $297 million to $303 million.

Wall Street had been anticipating earnings of 17 cents a share on revenue of $305.4 million for the year.