On-demand CRM player salesforce.com faces a class action suit filed in the United States District Court for the Northern District of California, by holders of its stock prior to its IPO on the NYSE on June 21.
Salesforce.com was not available for comment by the time we went to press. The class action is being represented by the law firm of Weiss & Yourman of Los Angeles.
Salesforce.com went public on June 21, in a much-anticipated IPO that saw its stock price increase to $17.20 on the first day of trading, up from the offering price of $11.00 per share. The complaint alleges that salesforce.com and certain of its officers violated the Securities Act and the Securities Exchange Act by making false and misleading statements to the investing public regarding its business and prospects, causing the stock price to trade at artificially inflated levels during the Class Period. At the same time, defendants sold off more than $117m worth of their personal shares, the class action alleges.
Defendants concealed from the public that Salesforce.com was expecting earnings to decline in FY2005 and that there was a clear trend in the Company’s diluted earnings per share, which investors would normally price into the Company’s IPO price, the complaint alleges. The Company also failed to disclose that the trend in diluted EPS had started to decline itself prior to the IPO, resulting in the stock trading at inflated prices during the Class Period, it adds.
Salesforce.com has had something of a turbulent time on the NYSE since its listing. On the day after its first analyst day, July 21, at which it outlined its plans and gave more details of its projected sales, profits and operating margins, analysts took fright and its stock slumped 27.15% to $11.70. The company had told attendees that it expected net income of break-even to $0.03 a share on revenue of between $160m and $165m. Analysts polled by Reuters had been predicting earnings of $0.06 a share on revenue of $175m.
The company’s revenue forecast shows it expects to triple sales this year, but that was not enough to placate the market analysts, who said they were expecting richer margins, and hence higher profits, for the remainder of the fiscal year. During that analyst day salesforce.com insisted that it had not been able to give analysts clearer guidance as it had been under an enforced quiet period prior to its IPO.
The company also argued that its business model, which see it renting software in a hosted manner rather than selling client-side software licenses, is more predictable than most of its competitors because there is no up-front licensing fee, just ongoing monthly payments ($71 per user per month on average).
Salesforce.com has grown fast since its foundation in March 2000, announcing at its recent analyst day that it now has over 10,700 customers and expects fiscal 2004 sales of around $165m. Hosted CRM competition comes from the likes of Salesnet and Salesjunction.com, as well as more traditional enterprise applications vendors who are increasingly peddling hybrid client and clientless offerings. Much of salesforce.com’s ascendancy thus far must be put down to co-founder and CEO Marc Benioff, who formerly reported to Larry Ellison at Oracle.