Shares of Salesforce.com (CRM) have gotten a major boost on Friday after the customer relationship systems company reported excellent results. Net income was $21.2 million which was more than double the $10 million of net income from the quarter a year ago. On a per share basis, EPS came in at 17 cents, versus estimates of 15 cents. The earnings growth was actually driven by increased revenue, as opposed to so many companies right now who are beating estimates by trimming costs. For Salesforce, Sales grew by 20% to $316.1 million, and new customers signed were especially strong growing 32%. This is incredibly important to CRM, who sells its services on a recurring or subscription basis. When a company can show this kind of growth, it shows they may be onto something special, especially when all other companies dependant on corporate IT spending are struggling mightily.
Salesforce is a pioneer in the Software as a Service industry or SaaS, which is an area that many analysts believe has huge growth potential. Some established software firms such as Oracle (ORCL) and Microsoft (MSFT) are starting to foray into this space because of the huge growth potential. The model for SaaS businesses is much more geared towards on-demand software generally provided through the internet, as opposed to software that resides on a licensed computer. The recent performance of Salesforce suggests that the SaaS model may be just a starting to take hold. Even though management refrained from predicting an improvement to business IT spending for the rest of the year, they did feel confident enough to slightly raise guidance for fiscal 2010 to EPS of 60 to 61 on revenue of $1.27 to $1.28 billion.
Wall Street has looked favorably on the results and the stock has risen by 17% at the midway point. Analysts at Piper Jaffray (PJC) have upgraded the stock to “Overweight” following the results, and they lifted their price target from $47 to $65. They stated that Salesforce remains the best long term play for, “one of the largest-ever shifts in technology, from on-premise to Cloud-based On Demand systems.” However, analysts at Goldman Sachs (GS) are less enthusiastic. Although they did raise their price target from $32 to $35, they remain concerned that Salesforce is valued too richly; about twice as expensive as the software industry as a whole.
Opinions vary widely on the future of Salesforce and other key players in the SaaS industry. At Ockham, we love to see this kind of growth in an otherwise inhospitable market, and this quarter’s performance has encouraged us to reiterate our Undervalued rating on Salesforce.com. It is refreshing to see real growth right now, not just bottom line growth through massive cost cutting and layoffs. Salesforce is in the right business at the right time, and we think that its prospects will only get brighter if the stabilization in demand can actually start to show growth. We expect the on-demand SaaS industry will continue to outperform old fashioned software sales. They are one of the hottest stocks in all of technology right now, and that is not a fluke.
