Between the Lines

Salesforce.com: Worries emerge

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Salesforce.com on Friday was downgraded from a buy to a sell by UBS analyst Heather Bellini because software as a service companies are likely to face the same headwinds as larger applications vendors. Meanwhile, Salesforce.com is targeting larger enterprises and that means it faces a slower buying cycle. Bellini's downgrade, which also came as UBS downgraded the likes of Adobe and Symantec, touches on concerns that have been raised by Salesforce.com watchers in recent quarters. Those concerns include:

Deferring revenue growth is slowing and has disappointed for three quarters;
Salesforce.com is targeting large companies and increasingly facing the likes of Oracle and SAP.
And projecting IT spending is a dicey endeavor right now.

Also see: IBM: Salesforce.com’s new best friend?

In her research note, Bellini didn't say that Salesforce.com's business is unraveling, but did note that the company is looking just like most software vendors. And as Salesforce.com targets larger customers it will increasingly be subjected to the same trends as other vendors. As a result, Bellini lowered her price target to Salesforce.com to $44 from $82. Her actual earnings and revenue estimates didn't change much. She projects fiscal third quarter revenue of $264 million, down from $274 million and earnings a penny to 6 cents a share, compared to Wall Street's estimate of 7 cents a share. Bellini notes:

While the company’s F3Q09 does not end until the end of October, our checks thus far have revealed a mixed picture for Salesforce.com. Datapoints indicate that while business continued to progress relatively well during the quarter with pipelines providing six months of visibility, signs of potential softness have emerged as consultants have highlighted to us a slight drop in utilization rates. While this could be due to aggressive hiring plans, this is the first time we have heard of this in the market. Furthermore, our checks show that as SF.com continues to successfully penetrate the enterprise space, the decision making process has lengthened as it is typically made by committee. We have also heard of deal slippages in certain conversations. This, along with the instability in the financial markets hampering customer IT purchasing decisions, seems to suggest the macro environment is starting to weigh on the company’s financial results.

Thomas Weisel also cut its earnings estimates for Salesforce.com based on the company's reliance on financial services companies. For instance, Salesforce.com counts Merrill Lynch--now owned by Bank of America--and Citigroup, which just got edged out by Wells Fargo to buy Wachovia, as some of its largest customers.

posted by Larry Dignan
October 3, 2008 @ 5:48 am

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