Salesforce Revenue Rises but Outlook Disappoints -- 2nd Update

By Rachael King 

Salesforce.com Inc. is preparing for growth through acquisitions, as it branches into new areas such as e-commerce and artificial intelligence. But first it must digest some recent deals.

Wednesday, the business-software maker posted a 25% increase in second-quarter revenue and swung to a profit, boosted by a gain related to income taxes.

But Salesforce offered a disappointing forecast for the current quarter, sending its shares down 6.5% after hours.

"We did see some softness at the end of the quarter, primarily in the U.S.," said Keith Block, the company's chief operating officer, in an interview.

Still, Mr. Block said Salesforce raised its revenue forecast for the year ending January 2017 to $8.28 billion to $8.33 billion, from $8.16 billion to $8.20.

Mr. Block said the company's pipelines and customer win rates are strong and the products are well positioned. "All those things together give us optimism for the second half," he said.

Factoring into the raised guidance for the year is Salesforce's $2.8 billion acquisition of e-commerce company Demandware Inc., which closed in July. The acquisition, Salesforce.com's largest to date, adds e-commerce to the company's portfolio of online sales and marketing services.

The company will need to broaden the range of products it sells with Demandware and other acquisitions if it hopes to capitalize on inroads it has made selling to large corporations. Potential customers now see the company as a strategic partner, said John DiFucci, managing director at Jefferies, in an interview last week.

"All of a sudden, two quarters ago, we really started to see some really strong enterprise momentum," he said. That momentum seems to have slowed a bit as the annual contract value of new subscriptions appears to have dipped, according to a Jefferies report.

One way Salesforce hopes to propel growth over the next decade is through the use of artificial intelligence to make its services smarter. The company is starting an effort called Einstein to add machine learning, deep learning and natural language processing to its services. The company plans to reveal more about its plans at its annual Dreamforce conference in October.

For example, with artificial intelligence, Salesforce.com hopes to be able to help its customers understand which sales prospects are the best opportunities. Also, the company hopes to better attract developers who would like to build on top of a platform that has intelligence built into it.

For the period ending July 31, Salesforce reported revenue of $2.04 billion, compared with $1.63 billion in the same period a year earlier.

Net income totaled $229.6 million, or 33 cents a share, compared with a loss of $852,000, or break-even on a per-share basis. The bottom line was boosted by a $266 million release of a tax-valuation allowance as a result of the Demandware deal. Excluding that gain and other expenses, Salesforce said it would have earned 24 cents a share.

Analysts polled by Thomson Reuters had expected revenue of $2.02 billion, and earnings per share excluding the gains and expense of 24 cents a share.

Write to Rachael King at [e-mail]

(END) Dow Jones Newswires

August 31, 2016 18:44 ET (22:44 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.