Salesforce Revenue Forecast Falls Short on Cloud Competition

  • Oracle, other rivals move deeper into software maker’s turf
  • Shares drop as profit guidance also misses analysts’ estimates

The Big Takeaways From's Earnings Report Inc. forecast fiscal third-quarter revenue that may fall short of some analysts’ estimates, held back by steeper competition in the market for cloud-based software and services. The shares tumbled as much as 9.1 percent in late trading.

Key Points

  • Sales in the period that ends in October will be $2.11 billion to $2.12 billion, the San Francisco-based company said Wednesday in a statement. Analysts on average had estimated revenue of $2.13 billion, according to data complied by Bloomberg.
  • Excluding certain items, profit will be 20 cents to 21 cents a share, compared with projections for 24 cents.
  • Revenue in the second quarter, which ended July 31, gained 25 percent to $2.04 billion. That compares with an average estimate of $2.02 billion. Profit before certain costs was 24 cents a share, exceeding analysts’ average prediction of 22 cents.
  • Salesforce shares, which are little changed this year, fell less than 1 percent to $79.42 before the report at the close in New York. They dropped as low as $72.21 after the release.

Big Picture

Chief Executive Officer Marc Benioff is going up against bigger rivals as they push into his stronghold of internet-based business software, which has grown in popularity as customers seek to reduce spending on their own equipment and data centers. Longtime competitor Oracle Corp. recently reported cloud products made up about 8 percent of its total sales, a number that may expand after its acquisition of NetSuite Inc., while Microsoft Corp.’s commercial cloud revenue is also contributing a bigger share of that company’s revenue. Salesforce in turn has stepped up its dealmaking this year as it seeks to broaden its own offerings.

The Detail

  • The company raised its revenue forecast for the current fiscal year to $8.28 billion to $8.33 billion, from May guidance of $8.16 billion to $8.2 billion. On average, analysts project $8.31 billion. Profit for the year will be 93 cents to 95 cents a share, compared with an estimate of 95 cents.
  • Unbilled deferred revenue, a closely watched number that indicates the amount of business booked but not yet recognized, jumped 29 percent to about $8 billion at the end of the second quarter. 
  • Net income was $229.6 million, or 33 cents a share, compared with a loss of $852,000, or break-even per share, a year earlier.
  • The company will unveil Salesforce Einstein, an artificial intelligence platform for customer-relationship management, in October at the annual Dreamforce conference, Benioff said in the statement.
  • In the statement, Chief Financial Officer Mark Hawkins said foreign-exchange "headwinds" are affecting many financial metrics. Benioff noted revenue growth in the second quarter would have been 26 percent in constant currency.
  • Chief Operating Officer Keith Block said the company saw "softness" in the U.S. at the end of the quarter. Deals that weren’t completed by the end of the quarter are still in play, he said.
  • Amid questions about Salesforce’s acquisition strategy, Benioff said his team didn’t enter the year with M&A "on our forecast." But the company went after targets when opportunities popped up, he said, citing deals including Demandware, Quip and LinkedIn -- which eventually agreed to be purchased by Microsoft for $26 billion.

Executive Interview

  • "We want to be looking at acquiring companies that are really one of a kind," Block said. "Some of these acquisitions, they help us build out our CRM today, and others are laying down foundations for the future."
  • "Our strategy is pretty simple and clean," Block said.

Street Takeaways

  • "Looks like deals got pushed out," said Anurag Rana, an analyst at Bloomberg Intelligence. "Management claims that the pipeline is still strong and expect them to close next quarter or the quarter after that -- sounded more like execution issues."
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