Salesforce.com Shows Strength

Salesforce.com (NYSE: CRM), the leading SaaS vendor, reported strong third quarter results on November 20 that beat Street estimates yet again in an increasingly gloomy economic environment: yesterday the National Bureau of Economic Research officially declared that the US has been in a recession since December 2007. Despite the challenging market conditions, Salesforce.com is set to cross the $1 billion revenue milestone. I believe the SaaS sector is relatively recession proof, and Salesforce.com’s performance this quarter is more evidence of the sector’s strength.

Revenue was up 43% y-o-y and 5% q-o-q to $276 million versus Street estimates of $273.5 million. Year-to-date revenue was $787.1 million. Net income was $10.12 million or $0.08 per share (up 60% y-o-y) versus Street estimates of $0.07 per share.

Subscription and support revenues were $253.4 million, up 44% y-o-y and 6% q-o-q. Professional services and other revenues were up 41% y-o-y and 1% q-o-q to $23.1 million. Total customers are up 36% to 51,800 with 4,100 new customer additions. The company’s churn rate continues to be less than 1% per month despite worsening economic conditions.

Deferred revenue, an important metric for gauging new business for SaaS companies, was up 38% but down 2% q-o-q to $470 million. The sequential decline was mainly due to the impact of the strengthening dollar. It is also due to the seasonality trend that the business has started displaying as discussed in the earnings call: Salesforce.com signs more business in Q4, which leads to a big deferred revenue balance in that quarter. Q1 is down sequentially while Q2 and Q3 are relatively flat.

This seasonality also affects cash flow. Cash from operations in the quarter was approximately $17 million, versus $52 million last year and $53 million in Q2. Total cash, cash equivalents and marketable securities at the end of the quarter was $805 million, down 2% q-o-q but up 22% y-o-y. The sequential decrease is attributed to the acquisition of InStranet, a provider of multi-channel knowledge applications, and to the purchase of shares in Salesforce.com’s Japanese majority-owned joint venture.

Gross margin was 80%, up slightly from last quarter and up 3 points from 77% last year, driven by better margins in the professional services business. Salesforce.com ended the quarter with 3,300 employees, up 270 over last quarter including 40 employees from InStranet. 

For the fourth quarter, Salesforce.com expects revenue in the range of $284 to $285 million. GAAP EPS is expected in the range of $0.06 to $0.07. Analysts expected EPS of $0.07 on revenue of $289 million.

For fiscal year 2010, Salesforce.com initiated revenue guidance in the range of $1.35 to $1.36 billion or 27% growth over 2009. The stock is currently trading around $27 with a market cap of about $3.3 billion. It hit a 52-week low of $20.82 on November 21 after the results were announced.

In the last few years, almost 600 SaaS companies have come into the market, including many that have sprung on the Force.com platform. Next year, I expect the acquisition spree of these companies to begin. The $800 million plus in cash and equivalent reserves will certainly help Salesforce.com pull together a wonderful portfolio of applications.

By the time we come out of the recession, Salesforce.com should look very solid.