, inc. (NYSE:CRM) is a key company for CRM and cloud computing.


A report today from MKM Partners for Q2 earnings results indicates that the buy rating and $165 12-month price target in front of 2QFY13 is still good, and they have high expectations for a strong 2HFY13.  Here are further details on this report.

Expect solid results for 2QFY13 which puts the focus on bookings. Cloud Bellwether reports a forecast revenue of $730 billion (+33.7%y/y), and non-GAAP EPS OF $0.39, with the consensus $728.5 million/$0.39).

Expect firm tone to 3QFY13 and Balance of FY13. With the strong trends across cloud and more healthy momentum across the key, inc. (NYSE:CRM) clouds, they expect management to maintain a positive outlook.  They predict 3Q13 will bring a revenue of $770.16 million(+31.9% y/y) and EPS of $0.32 vs. consensus of $771.3 million and $0.34.

Post-Quarter Catalyst for Dreamforce.  The momentum of the stock post-earnings to stay bullish heading into Dreamforce with a new revenue that generates opportunities.

Other key areas of focus include the following:

  • Subscription & support revenue: MKM estimate is $683.7 million (+34.3% y/y)
  • Deferred revenue: MKM estimate is $1.348 billion. Our estimate is slightly higher than guidance for flat q/q deferred revenue of $1.335 billion. Foreign exchange movements could clip our estimate by a percentage point, but we believe our forecast is achievable.
  •   Bookings: MKM estimate is $743.3 million (+31.3% y/y) vs. guidance of approximately 28%-29%. We believe consensus/whisper is for bookings in low thirties. An in line or lower result will likely be viewed as a disappointment given the recent rallying in shares.
  • Off-balance sheet backlog: No guidance, but a key metric to watch as the measure is affected by large, multi-year deals. We look for $100 million+ q/q increase from $2.7 billion in 1QFY13. is benefiting from increasing platform penetration within its installed base, as customers expand beyond Sales Cloud to Service Cloud, Marketing Cloud, Platform Cloud, etc.
  • Operating margins: MKM estimate is 12.4% vs. 10.5% in 2QFY12. This is less of a focus than free cash margin given SAAS model, as margins once again will be under pressure going forward, given the diluted impact from the Buddy Media acquisition, which closed early in 3QFY13. For FY13 we forecast operating margin of 11.4%, which would represent the third consecutive year of margin declines and reflects’s aggressive acquisition and platform build-out in support of growth and market share.While has proven its ability to grow the top line, it has yet to show any commitment to operating leverage as growth remains the top strategic priority. This lack of operating leverage, in our view, remains an issue for some investors.


And MKM’s main thesis on, inc. (NYSE:CRM) is listed below:

We maintain our Buy rating on, inc. (NYSE:CRM) and $165 12-month price target, which represents an EV/FCF multiple of 31.2x our CY13 FCF estimate of $744 million, a multiple roughly in-line with our growth expectation. While we would like to see more operating leverage and fewer diluted deals, we also recognize that is in a unique position to emerge over the next several years as a dominant technology vendor for the rapidly approaching cloud era as it looks to become a key front-office application platform for sales, service, collaboration, and marketing. This will require investments (acquisitions, headcount and infrastructure) that are likely to impact margins over the short term. Our longer-term bull case is predicated on the view that, which now has over 100,000 customers, will be able to increasingly monetize those, as well as new customers, through extended and integrated platform and service offerings, thus driving increasing share of IT software spending (approximately 1% of $300 billion+ globally), and sustained growth in excess of 25%-30% over the next few years. Early evidence can be seen by the fact that over 40% of bookings are from products other than the core Sales Cloud and by the growing number of strategic eight and nine figure deals. We also note that competitors such as Oracle Corporation (NASDAQ:ORCL) and Microsoft Corporation (NASDAQ:MSFT) have begun to mimic’s strategy to embrace the social enterprise through recent acquisitions, suggesting that competitors have been placed at a disadvantage by and its cloud-based vision for enterprise software.

Salesforce is a great company, but investors should proceed with caution on a company with such a high valuation.