Wall Street Beat: Salesforce, HP, M&A in the spotlight

Salesforce sales were strong but nevertheless gave investors cause for concern this week, while HP remains a stock market darling.

Salesforce.com gave IT investors cause for concern this week, even though it announced record second-quarter results, while Hewlett-Packard's star shone again despite reporting a slowdown in its printing business.

The companies' earnings results point to a key lesson learned in the current U.S. economic downturn: global, diversified companies tend to do well and capture support from IT investors.

Revenue at Salesforce rose 49 percent from the year-earlier quarter, to US$263.1 million, beating the consensus estimate of analysts of $260.6 million, according to Thomson Reuters. Net income jumped to $10 million, or $0.08 a share, from $3.74 million.

Salesforce is often seen as a bellwether for the SaaS (software-as-a-service) market, since it was one of the first companies to jump into hosted software, and now claims to be the first to achieve an annual revenue run rate of $1 billion. While the quarterly results were strong, investors are reacting badly to the earnings announcement.

Salesforce shares plummeted Thursday, declining by $11.59 to $53.74 in late afternoon trading.

Salesforce's net income missed the analysts' expectation by $0.01, according to Thomson Reuters. But more worrisome was the company's deferred revenue figure, which grew by only 2 percent, sequentially, in the quarter, compared to the 9 percent or 10 percent that is typical of the company. This decline suggests bookings are slowing down, and caused analyst Mark Murphy of Piper Jaffray to downgrade his rating on Salesforce to "neutral" from "buy."

Most of Salesforce's customers are in the U.S. small and medium-size business market -- precisely the type of companies that have been hit badly by the U.S. downturn. In addition, Oracle and Microsoft are ramping up hosted software efforts, putting additional pressure on Salesforce.

In addition, Salesforce's $31.5 million acquisition of InstraNet for call-center technology will dilute earnings. Salesforce is on many analysts' short lists of companies with potential to be acquired. In a software sector report this week, Citigroup said: "Buyers with strong balance sheets are actively looking for consolidation candidates." It included Salesforce on its list of "potential targets with dominant franchises in their respective markets or otherwise attractive assets."

Meanwhile, HP, which reported quarterly results Tuesday, continues to be a market darling. A speedbump in printing earnings and the prospects of absorbing services company EDS -- bound to be a complex undertaking -- does not seem to bother investors at all. HP shares jumped $2.47 to close at $46.16 Wednesday and continued to rise Thursday.

Revenue for the July quarter rose 10 percent to $28 billion in the quarter, while net income increased 20 percent to $2.5 billion, or $0.80 per share. Income and sales beat analyst forecasts. Though revenue growth from its key printing division was slow -- up only 3 percent for the quarter -- and commercial printer sales were down 5 percent, sales for its software unit were up 29 percent. Software has traditionally been a weak spot for HP. A fast-growing software division combined with a strengthened services arm will only serve to reinforce HP's position as the largest tech vendor in the world.

On the macroeconomic front, the big news from HP was that sales outside the U.S. drove growth: HP garnered 68 percent of its revenue from outside the U.S., while growth was exceptionally high in the so-called BRIC developing markets -- Brazil, Russia, China and India.

Despite concerns about the U.S. downturn, however, the slowdown does not appear to be affecting the tech sector as badly as other areas of the economy. "The U.S.-led economic downturn shows no sign of causing a recession in IT spending," said Jim Tully, vice president at Gartner, in a forecast issued this week. The consulting company said worldwide IT spending will exceed $3.4 trillion in 2008, an increase of 8 percent from 2007. Though much of that growth is due to the decline in value of the dollar, fundamentals in the sector remain strong. "Emerging regions, replacement of obsolete systems and some technology shifts are driving growth," Tully said.

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