Analysts Predict Strong Earnings

Analysts are predicting strong earnings for thanks to solid customer growth and enterprise deals. is expected to come in on the high end of its guidance for its fiscal second quarter 2008 earnings report on Aug. 15, with a focus on the number of Customer Relationship Management users the company has added in the quarter, according to market analysts. The number and source of new users could show that the company is winning more customers and gaining broader acceptance of SAAS (Software as a Service) in the enterprise market sector, analysts indicated.

During its last earnings call in May, predicted flat earnings per share to one cent per share in its second quarter on sales between $171 million and $173 million. Analysts polled by Thomson Financial suggest will do a hair better than guidance, with anticipated earnings of 1 cent per share on $173.7 million in sales.

Daniel Cummins, an analyst at Banc of America Securities, said in an August 9 research note that he expects to add 66,000 subscribers for its second quarter and 3,300 customers, versus 2,500 last quarter and 2,300 in the same second quarter a year ago.

The growth may bode well for Salesforce.coms creep into enterprise accounts but perhaps not so well for the SMB [small and midsized business] sector, where the company primarily makes a buck.

"With recent price increases at the low end (Team Edition goes to $1,200 from $995 per five users per year) and high end (Enterprise Edition price was increased to $250 per user per month) we would not be surprised to see some churn in the small business sector," wrote Cummins. "We still believe the largest opportunity for Salesforce lies in the enterprise where demand continues to show strength."


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Cummins predicted small customer subscriptions would drop 18 percent for the second quarter from 29 percent last year, and large enterprises subscriptions to increase 44 percent versus 36 percent in the same year ago quarter.

Cowen and Company analyst Peter Goldmacher said in another research note that he expects to add 135,000 subscribers for the first half of the year. hasnt given an update on its subscriber numbers since the end of its last fiscal year—a number company officials hope to shy away from as moves to become more of a platform provider with its Apex programming language and development platform.

In terms of competition, Banc of Americas Cummins said that his quarterly checks with existing customers indicate is executing well on its plans—transitioning from a CRM application provider to a workflow hub for operational processes.

"Many companies are leveraging workflow capabilities in the Spring 07 Edition to enforce complex business process rules," wrote Cummins. "We believe this is an important trend that can make the product sticky over time."

Unlike traditional license customers who are locked into multi-year contracts with vendors, SAAS customers pay on a monthly subscription basis. If they dont like they service they have the ability to opt out on a month-by-month basis, making product "stickiness" a potential issue.

Several analysts also said that isnt expected to suffer any huge impacts from incumbent applications leaders SAP, Oracle and Microsoft as they forge inroads in the SAAS market. SAP already has an on demand CRM offering that doesnt seem to have a tremendous amount of traction, and the company is expected to release its on demand A1S suite for the midmarket later this year. In July, Microsoft undercut pricing for its CRM Live product that will be available later this year.

ThinkEquity analyst Michael Huang said in an Aug. 8 research note that Microsoft and Oracle arent ruffling Salesforce.coms feathers on the competitive front yet—despite market fears that they would.

"We believe that is the best way to play the rising preference for software as a service, and believe that increased appreciation of its platform will drive multiple expansions," he wrote.

Banc of Americas Cummins is more direct in his note: "We believe continued half-hearted participation in on-demand CRM by Oracle, Microsoft and SAP will continue to serve Salesforce.coms interest as the software-as-a-service sector leader," wrote Cummins. "We see these scale vendors various business model conflicts with on demand and with term pricing, as considerable strategic challenges," Cummins wrote.

On the flip side, Cummins said Microsofts hybrid approach could spur a new wave of adoption, but it would likely require years versus quarters to play out—and disrupt the market.

Despite the rosy outlook from analysts, the risks for, a decade-old company that has set a lofty goal of a million subscribers and a billion dollars in revenue in the near future, are clear.


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Roth Capital Partners analyst Nathan Schneiderman points to a laundry list of things that could go wrong in his research note, including effectively managing growth, competition, managing Wall Street expectations, potential pricing pressure and a rich valuation.

Cummins points additionally to the fact that penetration at large customers could run into headwinds for Salesforce and the companys Apex programming language—a bet-the-farm development effort at Salesforce — could take longer than expected to gain traction in the developer community.


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