Salesforce.com - Shares Fall In After-Hours Trading On Weak Profit Guidance

| About: Salesforce.com, Inc. (CRM)

Shares of Salesforce.com (CRM) are trading with losses of up to 6% in after hours trading on Thursday. The fast growing cloud computing and social enterprise company reported its second quarter results.

Second Quarter Results

Salesforce.com reported second quarter revenues of its fiscal year of 2013 of $732 million, up 34% on the year. Subscription and support revenues rose 35% to $687 million, while professional service revenues advanced 20% to $44 million. On average, analysts expected the company to report revenues of $728.2 million.

The company reported a GAAP net loss of $9.8 million, or $0.07 per share. Last year, the company lost $4.3 million, or $0.03 per share. Non-GAAP earnings, which exclude among others, stock based compensation and amortization of intangibles, came in at $0.42 per share. Non-GAAP earnings came in ahead of analysts consensus of $0.39 per share.

The company reported a 43% increase in "deferred" revenue to $1.34 billion. Unbilled deferred revenues only rose by a mere $100 million to $2.8 billion.

CEO and Chairman Marc Benioff commented on the results:

"Our second quarter revenue growth was outstanding at 34% in dollars and 37% in constant currency. Salesforce.com's social enterprise strategy is enabling companies to connect with customers, partner, and employees in completely new ways - and it's creating new opportunities for their growth and ours."

Segmental Information

The Americas remain the most important geographic area for the company. Revenues rose 38% on the year to $508.0 million. Noticeable was the strong revenue growth in Europe. Revenues grew 40% on the year to $124.6 million. In comparison, year-on-year growth in the first quarter came in at 33% for the continent. Asia-Pacific revenues were up 28% to $99.1 million.

Outlook

For the third quarter of its fiscal 2013, Salesforce.com anticipates revenues of $773-$777 million, up 32-33% on the year. On a GAAP basis, it expects to lose between $0.26-$0.27 per share, while non-GAAP earnings are expected to come in between $0.31-$0.32.

The non-GAAP earnings outlook fell short of analysts expectations of $0.34 per share, while revenues came in slightly ahead of the $772 million consensus.

For the full year of its fiscal 2013, the company anticipates revenues of $3.025-$3.035 billion, up 33-34% on the year. GAAP net losses are expected to come in between $0.72 and $0.75 per share. Non-GAAP earnings are anticipated at $1.48-$1.51 per share. For the full year, Salesforce.com expects to spend $382 million in stock-based compensation. Furthermore, amortization expenses of intangibles related to past acquisitions are expected to come in at $95 million.

Valuation

Salesforce.com ended its second quarter with $1.8 billion in cash, equivalents and marketable securities. The company operates without any meaningful debt. It does however have roughly $0.5 billion in convertible notes outstanding. For the first six months of 2012, Salesforce.com generated revenues of $1.34 billion. It net lost $29 million, or $0.21 per share.

Factoring in a 6% decline in after hours trading, the market values the firm at $19 billion. Excluding the net cash position of $1.8 billion, this values the operating assets at roughly $17 billion. Based on the company's full year outlook, Salesforce.com is valued at 5.6 times annual revenues, and almost 100 times non-GAAP earnings. On a GAAP basis, the company is expected to lose a lot of money.

Investment Thesis

Year to date, shares of Salesforce.com trade with gains of almost 40%. Shares drifted from $100 at the start of the year to peak at $160 during spring. Shares hit a low of $120 during the summer months, but recovered, now trading around the $140 mark.

Over the past five years, shares have risen over 250%. The company aggressively grew its revenues from $1.1 billion for 2008 to an expected $3.0 billion in 2012. At the same time, profitability remained under pressure. Salesforce.com earned $43 million in 2008, or $0.35 per share. For 2012, it is expected to lose roughly $100 million or $0.72-$0.75 per share, on a GAAP basis.

While the growth is impressive, it is in large part the result of a string of acquisitions. In 2012 alone, Salesforce.com acquired Stypi, Buddy Media, ChoicePass, Thinkfuse and GoInstant. The $689 million acquisition of Buddy Media was the largest in the company's history. Furthermore, valuations of acquisition targets are driven up as financially stronger competitors, Oracle (ORCL) and SAP AG (SAP), have announced their ambitions in the cloud-based industry.

In May, I already took a look at the prospects of Salesforce.com. Trading around the $133 level at the time, I concluded that I saw more room towards the downside than the upside. I remain skeptical of the valuation despite the impressive revenue growth figures. A premium revenue multiple and lack of operating profits, make me wary.

Today, I reiterate my stance seeing room for a correction towards $100 per share. The weak guidance and lack of GAAP earnings improvement is worrying.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.