NEW YORK (AP) — Shares of Salesforce.com Inc. rose Friday after a strong earnings report that validated its approach of delivering software and services over the Internet rather than on individual computers. Some of the initial enthusiasm cooled, though, after investors factored in growth from a change in billing frequency.
THE SPARK: After the market closed on Thursday, Salesforce issued fourth-quarter results that exceeded Wall Street’s expectations. Although Salesforce reported a loss in the November-January period, it earned 43 cents per share after adjusting for dramatically higher expenses for employee stock compensation and a few other items unrelated to its ongoing business. That was 3 cents above the average estimate among analysts surveyed by FactSet.
More importantly to Wall Street, Salesforce’s revenue growth accelerated during the quarter. The company’s revenue totaled $632 million, up 38 percent from the prior year. That was better than the 36 percent year-over-year revenue increase in the fiscal third quarter. The revenue for the most recent quarter also exceeded the average analyst projection of $624 million.
Salesforce also reported a 48 percent increase in deferred revenue, at $1.38 billion. That largely reflects money paid by customers for work to be performed in the future. Salesforce got a boost from pushing customers to pay for services annually rather than quarterly and from some multi-year deals.
THE BIG PICTURE: Salesforce is one of the early proponents of providing business software applications over the Internet. The idea is that customers lease service for a recurring fee and can use applications on any device with an Internet connection. In the past, the notion represented a radical change from the more traditional — and expensive — approach of licensing and installing software on computers kept in the corporate customers’ own offices.
Gradually, though, companies have become more comfortable with allowing their software needs to be stored on remote servers. The main reason: They have realized it saves money, is more convenient and makes it easier to upgrade to new technology. The concept is becoming so popular that the geeky term used to describe it, “cloud computing,” is moving into the mainstream.
Salesforce’s revenue growth is a sign that it continues to win business from large customers, despite the fact that technology giants such as Oracle Corp and SAP AG are now pushing into cloud computing as well. Salesforce said it closed four times the number of seven-figure deals in the fourth quarter compared with a year earlier. In the current quarter, the company got its first nine-figure deal ever.
THE ANALYSIS: Curtis Shauger, an analyst at Caris & Co., said the solid flow of large deals should continue as more companies embrace cloud computing. The nine-figure deal “obviously provides an excellent start to what is typically a seasonally weak quarter.” Patrick Walravens of JMP Securities said cloud computing was not only growing rapidly but “exploding as major enterprises are accelerating their adoption.”
Rick Sherlund, an analyst at Nomura Securities, said that while the results were strong, some of the boost came from annual invoicing and multi-year deals. The company disclosed such factors, but Sherlund said “the market did not likely comprehend this benefit to billings in the early after-hours trading.”
SHARE ACTION: Shares increased $10.53, or 8 percent, to $142.30 in midday trading Friday. That’s lower than the nearly 10 percent gain in after-hours trading soon after the release of results. Over the past 52 weeks, the stock has traded from $109.22 to $160.12.