Salesforce Slides as Soft Forecast Hangs Over Solid Second Quarter Earnings

By: Martin Baccardax

Salesforce shares were indicated lower in pre-market trading Thursday after the business software market posted stronger-than-expected earnings for the three months ending in July but issued a tepid forecast for current quarter earnings.

Not good enough, apparently.

Salesforce Inc. (CRM – Get Report) shares were indicated lower in pre-market trading Thursday after the business software market posted stronger-than-expected earnings for the three months ending in July but issued a tepid forecast for current quarter earnings, as its boosts spending in order to maintain it market share over rivals such as Microsoft Inc. (MSFT – Get Report) and Oracle Inc. (ORCL – Get Report) .

Salesforce said it sees fiscal third quarter revenues of around $3.36 billion but noted that ongoing increases in marketing and research and development costs would likely bring its bottom line in at a range of 49 cents to 50 cents a share, a figure that missed Street forecasts of around 54 cents a share. Operating expenses in the second quarter rose 27% to $2.32 billion, the company said, a figure that dented earnings, which came in at an adjusted 57 cents a share, ahead of 47 cent consensus, as sales rose 27% to $3.28 billion.

“I think the success of our Sales Cloud and our Service Cloud our marketing plan is pretty amazing,” CEO Keith Block told investors on a conference call late Wednesday. “The Sales Cloud growth is now $1 billion plus run rate, which is unprecedented marketplace. We’ve obviously seen great success with Service Cloud and Marketing Cloud. But all of this really speaks to our culture of innovation, whether it’s our organic innovation or our cloud innovation.”

“We are long gone from the days of focusing on single clouds. We are out there driving solutions, driving digital transformation and multi-cloud solutions and that’s why you see the great result that we’ve seen in the quarter,” Block added.

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Action Alerts Plus holding Salesforce shares were marked 3.58% lower from their Wednesday close in pre-market trading, indicating an opening bell price of $149.26 each, a move that would still leave it with a year-to-date gain of around 46%

The Action Alerts PLUS research team, however, cautioned investors not to be fooled by the pre-market decline in Salesforce shares, noting that the solid first quarter, as well as a boost for full-year earnings guidance by 21 cents (to a range of $2.50 to $2.52) should soon offset the negative tenor of the current quarter forecast.

“This was a good quarter from Salesforce and they are still the leaders in customer relationship management, the largest and fastest growing category (that CRM is growing twice the rate of) in enterprise software according to Block,” the research team said. “Yes, the adjusted earnings per share guidance was light compared analyst expectations, but Salesforce’s operations remain fundamentally sound and the company is now working off two straight quarters of large bottom line beats.”