Salesforce wavers on lower guidance

  • Salesforce beat expectations for the quarter.
  • The contribution from MuleSoft was higher than executives had expected.
  • Guidance for the fiscal third quarter was below expectations.
Marc Benioff, CEO of SalesForce at the World Economic Forum in Davos Switzerland.
David A. Grogan | CNBC
Marc Benioff, CEO of SalesForce at the World Economic Forum in Davos Switzerland.

Salesforce shares fell 4 percent Wednesday after the company reported better-than-expected revenue for the second quarter of its 2019 fiscal year, which ended on July 31.

Here's how Salesforce performed:

  • Earnings: 53 cents per share, excluding certain items, vs. 47 cents per share as expected by analysts, according to Thomson Reuters. (Salesforce reported 71 cents per share, excluding certain items, but that includes an 18-cent benefit from "partial release of the tax valuation allowance as a result of the MuleSoft acquisition.")
  • Revenue: $3.28 billion, vs. $3.23 billion as expected by analysts, according to Thomson Reuters.

Overall, Salesforce's revenue was up 27 percent year over year, according to a statement. The biggest product category, Sales Cloud for keeping track of relationships with customers, generated just over $1 billion in revenue, up 12.7 percent year over year and up 4 percent sequentially.

The biggest growth came in Salesforce's Platform and Other category, which includes the AppExchange marketplace, the Heroku cloud platform and the Quip productivity software. It brought in $712 million, which was up almost 54 percent year to year.

With respect to guidance, Salesforce says it's expecting to bring in 49 to 50 cents in earnings per share, excluding certain items, on $3.355 to 3.365 billion in revenue in the fiscal third quarter. Analysts had been looking for third-quarter guidance of 54 cents in earnings per share, excluding certain items, on $3.35 billion in revenue, according to Thomson Reuters.

For the full fiscal year, Salesforce's guidance calls for $2.50 to $2.52 in earnings per share, excluding certain items, on $13.125 to 13.175 billion in revenue. Analysts polled by Thomson Reuters were looking for full-year guidance of $2.32 in earnings per share, excluding certain items, on $13.13 billion in revenue.

In the fiscal second quarter the company closed its acquisition of MuleSoft and introduced new Einstein artificial intelligence features for its Service Cloud product. Einstein is now performing more than 3 billion predictions and insights, up from 2 billion one quarter ago, co-CEO Marc Benioff told analysts on a conference call with analysts on Wednesday. Benioff did not specify how much revenue Einstein is bringing in.

Some analysts were optimistic about MuleSoft's impact on Salesforce in the weeks leading up to the earnings report. "Our checks are ... very positive on MuleSoft momentum with nearly all partners reporting that 'this business is on fire,'" PiperJaffray analysts led by Alex Zukin wrote in an Aug. 14 note to clients. "On large accounts we believe inclusion of Integration Cloud in large ELAs [enterprise license agreements] is helping the company meaningfully expand pricing by reducing discounting."

In Wednesday's statement, Salesforce said it ended the fiscal second quarter with a $21 billion remaining performance obligation, which means future revenue that's under contract but hasn't been recognized. Of that sum, around $200 million, or less than 1 percent, is related to MuleSoft.

MuleSoft delivered $122 million in revenue in the quarter when taking into consideration purchase accounting adjustments, chief financial officer Mark Hawkins said on the conference call. The contributed was higher than expected because of a higher mix of license revenue, Hawkins said.

"The MuleSoft acquisition has become table stakes for digital transformation, and it's in every conversation we have with senior executives," newly appointed Salesforce co-CEO Keith Block said on the earnings call.

Benioff said on the call that the company is establishing an officer of ethical and humane use to try to ensure that technology is used to help people. The move comes after some employees signed a petition that asked Salesforce to stop working with U.S. Customs and Border Protection, as BuzzFeed reported. Employees at other technology companies, like Amazon and Microsoft, have also protested against government agencies using some of their products.

"Now, here at Salesforce, we have determined that this ethical and humane use of technology, especially within the context of the fourth industrial revolution, must be clearly addressed -- not only by us, but by our entire industry," Benioff said. "Our industry has reached an inflection point that must be supported by a strong set of guiding values. We all know that, and we see that every single day. We know that technology is not inherently good or bad. It's what we do with it that matters."

Salesforce stock is up 51 percent since the beginning of 2018.

Correction: A previous version of this story compared Salesforce's EPS number with a Thomson Reuters estimate that was not directly comparable.