When Salesforce.com Inc reported its third quarter results it dazzled with its usual array of figures showing rising revenue, rising numbers of subscribers and a rising run rate, but lost its sparkle when it came to profitability, showing higher operating costs dragging down already modest earnings.
The good news was that the company posted record revenue of $310m for the quarter ending October 31, 2006, a 57% year on year increase. Subscription and support revenues grew 59% to $118m, with professional services and other revenues heading up to $12m, representing a 40 per cent year on year increase.
The company said its annual revenue run rate exceeded $500m. The customer base rose by 2,300 to 27,100 and the number of subscribers rose by 61,000 to 556,000.
CEO Marc Benioff was predictably bullish about the results. Our third quarter was our most spectacular quarter ever. As we predicted, we became the first on-demand company to exceed the $0.5bn annual revenue run-rate. At this new level, salesforce.com has become one of the 40 largest software companies in the world today, he said.
Based on its performance Salesforce.com raised guidance for the fourth quarter and the full year, saying it now anticipates revenue for the year of between $493m to $495m, up from previous guidance of $488m to $493m. Looking further forward it expects revenue for 2008 to be between $700m to $710m, which is higher than analysts’ expectations.
However, neither the earnings per share nor the net income for the latest quarter were as impressive.
A major hike in operating costs resulted in a net income of just $339,000 against $13.1m last year and breakeven on the EPS, against analyst’s expectations of $0.05 per share on revenue of $129m. The EPS for Q3 2005 was $0.11 per share. Operating costs were driven up by $10.2m in stock-based compensation and approximately $0.6m in amortization of purchased intangibles related to an acquisition.
Commenting on the rise in operating costs, principle financial officer Steve Cakebread said: GAAP operating expenses finished the quarter at 76% of revenue. While our GAAP operating margin declined roughly 8 points from last year, the comparison is not meaningful because of the more than $8m in incremental stock-based compensation expense due to the implementation of FAS-123R.
As far as net profit was concerned, he said the $339,000 figure was the company’s best result for the year.
According to Benioff, the competitive situation is improving from Salesforce.com’s perspective, in part because of what he described as the disappearance of Siebel Systems. However, as he also undermined Siebel’s on demand position the impact may not be as significant as suggested, Our information is that Siebel on demand had approximately less than the number of subscribers after four or five years of being in business now than we have in total for this quarter. That is the 61,000 net paying subscribers exceeds what Siebel has been able to do.
As far as Microsoft was concerned he noted that: Microsoft CRM 3.0 has been out there now for a while. This quarter was significant for us because we are starting to replace existing Microsoft CRM 3.0 implementations, and I hope that we will be able to give you actual account names soon. These accounts have tried to implement all this huge octopus of software but was not able to do that.
Any putative SAP threat was also dismissed. With SAP on demand, their two customers that they announced on launch in February… our information is neither one has been able to get it to run, so we feel very good about our overall competitive situation in terms of proven customer success, as well as the diversity and scale of our customer base, he said.