Salesforce.com (CRM)

Third Quarter 2009 Earnings Announcement

Salesforce.com, Inc. is expected to announce fiscal 2009 third quarter earnings on November 20, 2008. For the third quarter, Salesforce.com expects revenue in the range of $273.0 million to $274.0 million. Including dilution from the InStranet acquisition, estimated to be $0.02 for the third quarter, the company expects GAAP fully diluted EPS in the range of $0.06 to $0.07. Excluding the effect of the InStranet acquisition, the company's EPS outlook is $0.08 to $0.09. During the quarter, stock based compensation expense is expected to be approximately $20.0 million and the expense associated with amortization of purchased intangible, including that associated with the acquisition of InStranet, is expected to be $2.0 million. For the purpose of Q3 GAAP fully diluted EPS calculation, the company is expecting an average diluted share count of approximately 127 million shares, and a GAAP tax rate of 48.0%.

Second Quarter 2009 Earnings

On August 20, 2008, Salesforce.com announced result for the second quarter of fiscal year 2009, ended July 31, 2008. Revenue for the quarter was $263.1 million, an increase of 49.0% from $176.6 million reported in the year-ago quarter and an increase of 6.2% from $247.6 million reported in the first quarter of fiscal 2009. This was ahead of our revenue estimate of $258.9 million as well as the company's guidance. On a GAAP basis, fully diluted EPS was $0.08 compared to $0.03 in the year-ago quarter and $0.08 in the previous quarter. EPS were in line with our estimate of $0.08 and at the high-end of the company's guidance. GAAP gross margin of 79.4% was up 290 basis points year-over-year and 10 basis points from the previous quarter. GAAP operating margin of 6.1% was up 420 basis points year-over-year and down 10 basis points from the first quarter of 2009.

Subscription & support revenue of $239.7 million increased 49.8% from the year-ago quarter and was up 6.4% from the previous quarter. Professional services & other revenue of $23.4 million increased 40.9% from the year-ago quarter and were up 4.8% from the previous quarter. Net paying customers increased sequentially by 4,100 during the quarter, bringing the total to 47,700. This was an increase of 12,400 from the year-ago quarter. During the quarter, the company signed more than 250 new partner relationship management transactions. Geographically, International contributed 28.3% of total Q2 2009 revenue. Of this business, Europe contributed 18.8% of total Q2 2009 revenue and grew 69.3% year-over-year and 9.3% quarter-over-quarter. Asia-Pacific contributed 9.5% of total Q2 2009 revenue and grew 78.7% year-over-year and 4.4% quarter-over-quarter. The Americas contributed 71.7% of total Q2 2009 revenue, and grew 41.4% year-over-year and 5.7% quarter-over-quarter. Second quarter of 2009 benefited from the weakening of dollar, which contributed roughly 5 points in revenue growth.

Salesforce.com generated $53.1 million in cash from operating activities in the second quarter versus $83.8 million in the previous quarter. Free cash flow was $40.0 million versus $59.6 million in the previous quarter. The company ended the quarter with $578.3 million in cash and cash equivalents and marketable securities versus $495.1 million in the previous quarter. Deferred revenue on the balance sheet at the quarter-end was $479.5 million, an increase of 49.0% on a year-over-year basis and an increase of 2.0% from the previous quarter.

For the full year 2009, Salesforce.com raised its guidance, which it last updated on May 21st. Revenue is now expected to be in the $1.070 billion to $1.075 billion range versus previous guidance of $1.060 to $1.065 billion range. Including dilution from the InStranet acquisition, estimated at $0.05 for the full year, the company now expects fiscal FY09 GAAP fully diluted EPS in the range of $0.29 to $0.30. Excluding the effect of the InStranet acquisition, the company's EPS outlook has improved to $0.34 to $0.35, from its prior guidance of $0.33 to $0.34. GAAP results include the impact of stock based compensation, which is expected to be approximately $83 million and the expense associated with the amortization of purchased intangibles, including that associated with InStranet, is expected to be approximately $6.6 million. For the purpose of 2009 GAAP fully diluted EPS calculation, the company is expecting an average diluted share count of approximately 126 million shares, and a GAAP tax rate of 48%. CRM plans to continue to invest in its sales, marketing, and development capacity together with the infrastructure necessary to optimize growth and extend industry leadership. Apart from the InStranet acquisition, the company has also factored the following into its guidance. By moving its Dreamforce event from Q3 to Q4 this year, the company expects to move approximately $0.01 of EPS (net cost after sponsorships and registration fees) from Q4 to Q3 this year as opposed to prior years. Also, with the recent strengthening of the US dollar, the company expects to have a drag effect on its revenue growth and to a lesser extent on profit growth in the second half of the year.

Product News

On November 3, 2008, Salesforce.com announced its cloud computing approach with Salesforce CRM Winter '09, which marks the 27th generation of Salesforce CRM. With more than 50 new features, Salesforce CRM Winter '09 enables companies of all sizes to manage their customer interactions across sales, marketing, and customer service. Cloud computing's unique model has enabled Salesforce CRM to easily and securely connect separate Salesforce CRM deployments, allowing companies to share sales leads, contacts, and company information, without the need for complex integration software. With Salesforce Winter '09, salesforce.com announced the free exchange of data between every company in its network. With Salesforce CRM Winter '09, customers can now use Salesforce CRM's content management capability with Google Apps, the leading online productivity suite.

The company also unveiled Force.com Sites, a new capability of the Force.com platform that will allow customers to run their Web sites in Salesforce.com's cloud. Force.com Sites will give customers the power to publish Force.com data and applications to any Web site, extending their reach to new users on intranets, external Web sites, and online communities. Like all salesforce.com services, Force.com Sites runs entirely in the cloud without the cost and complexity of traditional software. With Force.com Sites, salesforce.com customers can now take the more than 85,000 custom applications that they have built on the Force.com platform and extend them to their external communities and users. Force.com Sites are currently available in developer preview, and is scheduled to become generally available in calendar year 2009.

The company also announced a new offering, Force.com for Amazon Web Services, to extend the power of cloud computing to a wider number of enterprises. With Force.com for Amazon Web Services (AWS), enterprises, ISVs and developers can build powerful new business applications and run them entirely in the cloud, leveraging both the database, logic and user interface features of Force.com and the storage and computing capabilities of Amazon S3 and Amazon EC2 services. Through Force.com for AWS, developers can access these services from within the Force.com platform to build applications that seamlessly span both clouds. The capabilities made possible through Force.com for AWS will accelerate the creation and adoption of new kinds of applications in the enterprise that take full advantage of cloud computing.

In addition, Salesforce.com introduced Force.com for Facebook to foster a global development community for Facebook's 120 million users and Salesforce.com's 100,000 developers. The move makes Facebook an 'enterprise-friendly' platform for global enterprises and individual entrepreneurs worldwide and puts salesforce.com at the forefront of business applications for social computing.

All these products were announced by Salesforce.com at its sixth annual Dreamforce Conference at Moscone Center in San Francisco.

Partnership

On November 3, 2008, Salesforce.com and Glovia International, a subsidiary of Fujitsu Limited and a leading provider of extended ERP solutions for engineer-to-order and high volume manufacturers, announced the availability of glovia.com Order Management on Force.com. Built on Salesforce.com's Force.com platform, glovia.com Order Management provides complete visibility into all sales orders and quotes as well as into the inventory, fulfillment, and invoicing required for completing transactions. With glovia.com Order Management on Force.com, customers can now harness the power of cloud computing to deploy ERP applications to manage and run their businesses.

Customer Wins

On September 29, 2008, Salesforce.com announced that Vetrazzo has joined the growing number of companies using custom Force.com applications to run their business in the cloud. In less than six months, Vetrazzo designed and deployed applications on the Force.com platform, including enterprise resource planning (ERP), order management, inventory management, document management, and more.

On September 15, 2008, Salesforce.com announced that CNS Response, Inc. has joined the growing number of companies successfully leveraging Force.com to build custom applications to dramatically improve their business. CNS Response, a bioinformatics company, is the first company to provide personalized medication guidance to psychiatrists and other physicians based on the patient's own brain function and the company's empirical database of 13,000 patient treatment episodes. Utilizing a platform of 74 EEG biomarkers taken from standard EEG measurements, Referenced-EEG (rEEG) reports are provided to physicians as a service much akin to the pathology laboratory services for assisting other physicians. Using Force.com, it took the company less than four months to design and deploy a custom application that reduces data processing time from three days to less than 24 hours, and also provides physicians with secure access to patient test results, regardless of location.

On September 11, 2008, Salesforce.com announced that Siemens PLM Software, a business unit of the Siemens Industry Automation Division and a leading global provider of product lifecycle management (PLM) software and services, is using Salesforce Partners to increase its channel partners' productivity and profitability with a custom branded partner sales portal. In addition to rolling out Salesforce Partners to more than 1,200 partner sales representatives, Siemens PLM Software also deployed Salesforce SFA for more than 1,000 internal sales staff, and now has a single, centralized global solution which helps it to effectively manage both direct and indirect sales.

On August 4, 2008, Salesforce.com announced that Tides Center, a sector-leading nonprofit that provides back-office services to over 200 socially innovative projects across the country, has completely transformed its business using donated and discounted licenses of Salesforce CRM and Force.com as part of salesforce.com's 1% Product Donation Program. Using the Force.com Platform-as-a-Service, Tides Center built a set of custom, Software-as-a-Service applications to improve services to its projects by streamlining processes, reducing redundancies, eliminating paperwork, and minimizing data entry error. Salesforce.com partner CASA Customer Solutions helped design and deploy the Force.com applications for Tides Center.

Acquisition

On August 20, 2008, Salesforce.com announced the acquisition of InStranet, a provider of knowledge management technology for business to consumer (B2C) call centers. The acquisition will add Dimensions technology to Salesforce CRM Customer Service and Support, enabling customers and call center agents around the world to quickly find the answer they need at the first attempt, and drastically reduce the number of calls to call center agents. This addition will accelerates the momentum of Salesforce CRM Customer Service and Support in the growing customer service and support market, which is currently estimated at $3.4 billion by Gartner. The acquisition closed on August 4th, for approximately $31.5 million, which includes the assumption of $4.2 million in cash on InStranet's balance sheet. This acquisition did not have any impact on Salesforce.com's results for the second quarter of fiscal year 2009. The company anticipates almost no revenue to be recognized from InStranet in the second half. InStranet will be dilutive to third quarter EPS by about two cents, approximately five cents for the full year and neutral for fiscal 2010.

KEY POINTS

According to IDC, the on-demand application services market is expected to grow 41.0% through 2011, while the total software market is forecasted to grow only 8.0% over the same period. Moreover, Gartner expects 25.0% of new business software to be delivered on-demand by 2011, up from 5.0% in 2005.

Salesforce.com holds the leading position in Customer Relationship Management (CRM) and has leveraged this position into other hosted applications with its AppExchange, helping it drive increased revenue from its customer base.

Subscribers continue to grow at rapid levels, at over 69% rate during fiscal 2008, as the company is able to sign increasingly large deals with its customers. Salesforce.com now has seven customers with over 10,000 subscribers

The acquisition of InStranet gives CRM a position in the call center market and accelerates the momentum of Salesforce CRM Customer Service and Support in the growing customer service and support market, which is currently estimated to be $3.4 billion by Gartner.

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