Salesforce earnings: Software outage and resulting rebates could hit outlook

Salesforce.com Inc.’s outlook will be closely watched when it reports results from a seasonally weak quarter on Tuesday, with a large service outage expected to trim some of the results from the current period.

is expected to show it powered through one of its seasonally weaker quarters with solid results when it reports earnings but analysts say the customer relationship management software company will have to address its outlook and a large service outage that occurred recently.

Salesforce CRM, -2.73%  is scheduled to report first-quarter results after the market close on Tuesday, nearly three weeks after the company experienced a major outage on May 17. While the outage only lasted a few hours, some customers were affected for days.

“Discussions with some customers indicate that the outage resulted in disrupted service for three days (Friday, Saturday, and Sunday),” said Jefferies analyst John DiFucci, who has a buy rating and $189 price target, in a recent note.

“We also note that salesforce.com provided credits to these customers for three days of subscription revenue,” DiFucci said. “This could potentially impact up to 3% of subscription revenues for the upcoming fiscal second quarter (assuming three days of subscription revenue).”

Also expect executives to revisit the acquisition of Salesforce.org, which is expected to result in a $200 million profit hit in the second quarter. Salesforce stock has slipped over the quarter amid that acquisition news, leading some analysts to believe there is investor fatigue with regard to growth software vendors.

What to expect

Earnings: Of the 37 analysts surveyed by FactSet, Salesforce on average is expected to post adjusted earnings of 61 cents a share, down from the 74 cents a share reported in the year-ago quarter. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of 64 cents a share.

Revenue: Wall Street expects revenue of $3.69 billion from Salesforce, according to 33 analysts polled by FactSet. That’s up from the $3 billion reported in the year-ago quarter. Estimize expects revenue of $3.71 billion.

Stock movement: Salesforce shares have declined 4.5% since their previous earnings report. In comparison, the S&P 500 index SPX, -1.32%  has declined 1.5% over that period, the Nasdaq Composite Index COMP, -1.51%  has declined 1.7%, and the iShares Expanded Tech-Software Sector ETF IGV, -1.65%  has advanced 1%.

What analysts are saying

Jefferies’s DiFucci said a comparison to the year-ago quarter may be tough given “some large deals” last year, but that customers still appeared satisfied with Salesforce’s services.

“Our Partner Survey suggests solid contribution (at least from the midmarket), while outages may weigh at least on F2Q guidance (though those numbers look reasonable too),” DiFucci said. “Investors seem nervous, but we believe the pipeline remains robust and CRM remains well positioned to achieve its long-term financial goals.”

“Our partner survey – which consisted of 63 respondents to 21 questions this quarter—were just slightly below the very strong indications in the previous two quarters,” DiFucci said. “For instance, the percentage of partners that exceeded their plans minus the percentage that fell short declined to 17% net positive from 22% in the prior period and 24% two quarters ago. However, this is still significantly higher than negative 3% in the year-ago quarter.”

See also: Salesforce acquisition mixes complex transactions with a big write-off

JMP analyst Patrick Walravens, who has an outperform rating and a $178 price target, said his checks found that Salesforce’s business momentum was solid in the first quarter.

On the positive side, Walravens said the company is moving well into the financial services and insurance industries and maintains its dominant position in the market. On the other hand, some partners Walravens checked said the company’s Marketing Cloud was “OK, not great” and that some partners felt that “the innovation has slowed for a long time.”

Monness Crespi Hardt analyst Brian White, who has a buy rating and a target price of $195, said Salesforce and other cloud vendors are likely to weather broader market volatility.

“In a volatile market environment driven by growing trade tensions with China and now decisively spilling over into parts of the tech world, we believe SaaS vendors such as Salesforce remain attractive with a subscription-based model and strong secular cloud trends,” White said.

Read: These 15 tech stocks are backed by the quarter’s best sales figures

Wedbush analyst Steve Koenig, who has an outperform rating and a $192 target, said shares of Salesforce “have become somewhat controversial over the last 90 days” because of the weak first-quarter guidance and fears about a slowing in the company’s Sales Cloud business.

“Although our integrator checks were anecdotal, our contacts aren’t seeing any slowdown with Sales Cloud, MuleSoft activity appears to be ramping, and the company has ‘enormous’ deals in the works,” Koenig said. “On the negative side, significant shelfware can make for a hard sell at renewal time, and Microsoft MSFT, -1.63%  is making some inroads in the [small and medium-size business] space (although not much in the enterprise space, per our checks).”

Of the 42 analysts who cover Salesforce, 39 have buy or overweight ratings, three have hold ratings and none have sell or underweight ratings, with an average price target of $182.66.

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