Salesforce.com Inc. is about to give investors their first glimpse into how the largest acquisition in the company’s history is affecting results.
Salesforce CRM, +0.86% is scheduled to report fiscal second-quarter earnings after markets close on Wednesday. On May 2, the second day of the quarter, Salesforce closed on its $6.5 billion acquisition of MuleSoft, which uses application programming interfaces, or APIs, to help companies access or unlock data across legacy and mobile systems.
MuleSoft, which diluted company earnings, figured heavily in Salesforce’s outlook boost for the year in its last earnings report. Of the $415 million increase in Salesforce’s revenue outlook for the year, $315 million was slated to come from MuleSoft, and analysts have been using their checks to keep tabs on that contribution.
Opinion: Salesforce buys a mule, but pays for a horse
Mulesoft’s contribution is expected to dominate earnings, but will also be a focus at Salesforce’s annual Dreamforce convention in late September. The gigantic conference is scheduled to take over downtown San Francisco on Sept. 24-28.
In a recent note, Stifel analyst Tom Roderick, who has a buy rating and a $175 target price, called Wednesday’s upcoming earnings report a “Nice, Light Pre-Dreamforce Snack.”
“In the latest installment of Dreamforce, we think the company will tout its Digital Transformation story, with the MuleSoft integration cloud front and center,” Roderick said. “As organizations of all verticals continue to move workloads into the cloud, Salesforce now has a leading technology in its bag to facilitate the transfer of data from on-premise to cloud-based environments.”
Roderick said his checks indicate the acquisition has been “extremely positive thus far,” and that MuleSoft sales have exceeded early expectations.
What to expectEarnings: Salesforce, on average, is expected to post adjusted earnings of 47 cents a share, according to the 38 analysts surveyed by FactSet, down from the 53 cents a share expected at the beginning of the quarter. Salesforce forecast earnings of 46 cents to 47 cents a share. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of 50 cents a share.
Revenue: Wall Street expects revenue of $3.23 billion from Salesforce, according to 35 analysts polled by FactSet. That’s up from the $3.1 billion forecast at the beginning of the quarter. Salesforce predicted revenue of $3.22 billion to $3.23 billion. Estimize expects revenue of $3.25 billion.
Stock movement: Shares rallied following Salesforce’s previous earnings report, when the company broke $3 billion in quarterly sales for the first time and raised the full-year outlook. Shares are up nearly 21% since Salesforce’s late May earnings report, compared with a 7.7% rise in the S&P 500 index SPX, +0.03% and an 8.6% gain in the tech-heavy Nasdaq Composite Index COMP, +0.15%
What analysts are saying: Of the 43 analysts who cover Salesforce, 37 have buy or overweight ratings, six have hold ratings and none have sell or underweight ratings, with an average price target of $156.59, or 2.4% above Wednesday’s close.
Morgan Stanley analyst Keith Weiss, who has an overweight rating and a $178 price target, said the MuleSoft acquisition extends Salesforce’s “overall value proposition into a broader hybrid (public and private) cloud environment required for most larger enterprises.”
Jefferies analyst John DiFucci, who has a buy rating and a $168 price target, said he expects Salesforce to meet or exceed consensus billings growth. Billings are expected to rise to $2.88 billion, according to analysts polled by FactSet, up from $2.34 billion in the year-ago period, or by a little more than 23%.
While enterprise checks are strong, DiFucci noted that Microsoft Corp.’s MSFT, +0.60% lower priced Dynamics 365 remains Salesforce’s biggest competitive threat “at least among small and midmarket customers.”
“Previously there were few alternatives, but Microsoft now finally offers a true [Software-as-a-Service] solution that is not as functionally robust salesforce.com’s, but may be good enough for this market segment, which is much more price-sensitive than the enterprise market,” DiFucci said.
Cowen analyst J. Derrick Wood, who has an outperform rating and a $165 price target, had a different take on Microsoft according to his surveys.
“Competition from Microsoft Dynamics declined significantly vs. 1Q,” Wood said. “38% of respondents indicated that Microsoft Dynamics is becoming more competitive in CRM deals (vs. 79% last quarter, 62% in 4Q18, and 36% in 2Q18).”
Recently, Synergy Research Group reported that the enterprise SaaS market stands at $20 billion in quarterly revenue and is growing by 32% a year.
“Microsoft has a world-wide market share of over 17% and is now the leading SaaS vendor by some distance, having overtaken Salesforce nine quarters ago,” Synergy Research said in a statement.
“Thanks primarily to its leadership in the high-growth collaboration segment, Microsoft’s annual revenue growth is running at 45%, far surpassing overall market growth. Salesforce remains the dominant player in CRM, but this segment is relatively low growth compared to other SaaS segments, enabling Microsoft to pull ahead in the overall SaaS market.”
