Salesforce delivers solid quarter; Wall Street wanted more

Salesforce.com reported strong third quarter earnings and raised its sales outlook for the fourth quarter, but investors weren't impressed given the company merely met Wall Street expectations.

The company reported third quarter net income of $20.69 million, or 16 cents a share, on revenue of $330.5 million, up 20 percent from a year ago. Wall Street was expecting earnings of 16 cents a share on revenue of $324.4 million, according to Thomson Reuters.

Overall, Salesforce had a nice quarter to kick off its Dreamforce conference in San Francisco (statement). The rub: Many analysts were expecting Salesforce.com to beat estimates and raise its earnings outlook.

For instance, Cowen analyst Peter Goldmacher expected Salesforce to beat estimates. In a research note he said:

We continue to believe that Salesforce is well positioned to continue to beat and raise for the next two quarters given last year's significant investments in sales and marketing, solid execution, low balled numbers and easy comps which persist into next year.

Salesforce did raise the sales outlook for the current quarter, but its earnings projections were in line with expectations. The company projected fourth quarter sales to be $340 million to $342 million. Wall Street was expecting $334.5 million. Fourth quarter earnings were projected to be between 14 cents a share to 15 cents a share. Wall Street estimate: 15 cents a share.

The reaction:

For the year, Salesforce is projecting earnings of 62 cents a share to 63 cents a share on revenue of $1.29 billion. That outlook is better than the guidance given in August, but on par with Wall Street's outlook.

Salesforce said it expects to grow 15 percent to 16 percent for fiscal 2011.

By the numbers:

• Salesforce had 67,900 net paying customers, up 31 percent from a year ago.
• The company ended the quarter with $1.07 billion in cash.
• Deferred revenue was $545 million, up 16 percent from a year ago.
• The company had 3,814 employees as of Oct. 31.

Despite a solid quarter, some analysts expect some tough sledding ahead for Salesforce. Goldmacher said:

We continue to believe that Salesforce doesn't have the market dominance or a broad enough product lineup to compete in an intensifying pricing war against Oracle at the high end and Microsoft at the low end. Despite the occasional big deal win against Oracle, we believe enterprise buyers are more interested in a holistic approach to CRM that mandates a broader IT investment. We believe Microsoft's developer dominance at the low end of the market will help make a bundled Dynamics and Azure offering very appealing on price. While Salesforce has hitched its wagon to the 'cloud', we believe that the cloud is about far more than CRM and a proprietary development language. We believe the cloud is all about capacity utilization at scale to drive price performance. While we salute Salesforce's marketing prowess in creating awareness of the cloud, we don't believe it will be one of the ultimate winners.