On Tuesday after-hours, Salesforce (NYSE: CRM) revealed to the world its record-breaking second-quarter earnings, and boy did Wall Street like what it saw. Shares soared more than 26% on Wednesday to mark the company’s best-ever day as a public company, eclipsing unusually large moves made by the likes of Netflix and Facebook.
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Salesforce Q2 earnings
Before diving straight into the negatives, it is worth acknowledging briefly just how impressive Salesforce’s quarter was:
- Salesforce reported second-quarter net income of $2.63 billion, or $2.85 a share.
- Revenue came in at $5.15 billion, up from $4 billion in the year-ago quarter.
- Adjusted earnings — excluding a $2 billion tax benefit — were $1.44 a share, compared with $0.66 a share in the year-ago period.
- Analyst forecasts had been EPS of $0.67 on revenue of $4.9 billion, while Salesforce’s own estimates were EPS of $0.66 to $0.67 on revenue of $4.89 billion.
Guidance was also optimistic with the company providing an updated annual forecast for revenue in the range of $20.7 billion to $20.8 billion, after previously forecasting $20 billion in sales. For Q3, it expects adjusted earnings of $0.73 to $0.74 a share on revenue of $5.24 billion to $5.25 billion, while analysts had forecast adjusted earnings of $0.76 a share on revenue of $5.02 billion.
What about its Dow inclusion?
Though largely symbolic, the recently-announced stock split by Apple (NASDAQ: AAPL) opened the door for Salesforce to become the first-ever cloud-software entry into the Dow Jones Industrial Average (NYSEARCA: DIA) on Monday. This is due to the Dow basing its weighting on the price-per-share of each stock and does not account for changes in market capitalization, meaning that Apple’s weighting will fall from more than 12% to less than 3% in the index. Because of this, the 30-company index will see its tech-sector weighting fall, prompting its decision to rejig its membership, with Salesforce coming in and Exxon Mobil going out.
This news, combined with record earnings, was more than enough to create a perfect storm of investor optimism and record trading levels for the stock.
Some trouble for Salesforce
Though all of this might suggest otherwise, it’s not all sunshine and rainbows at Salesforce. A sour taste was left in the mouth of many when the company’s record highs coincided with its announcement that 2% of the workforce would be let go — roughly 1,000 employees.
“We’re reallocating resources to position the company for continued growth,” a spokesperson confirmed. “This includes continuing to hire and redirecting some employees to fuel our strategic areas, and eliminating some positions that no longer map to our business priorities.”
Some solace can be taken in the knowledge that employees affected will have 60 days to find a new job within the company and access to internal resources in order to do so, while those who are not relocated will receive severance pay and benefits up to six months.
There is also the issue that the company’s 30% rally so far this week could also impact its inclusion in the Dow Jones. Its now $272 share price and rapid acceleration could quickly make Salesforce’s stock too influential, too fast, in the popular index, depending on other company movements. According to Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices:
“That is what’s called the nightmare scenario. What would we do if any [component of the Dow] takes over?”
Dow officials will monitor the situation over the coming weeks and may be forced to quell the company’s rapid rise in a bid to manage its weighting once included.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.
Editor at MyWallSt
Jamie is the Content Editor here at MyWallSt. His favorite stock is Apple, which is also the first stock he ever bought. Jamie is not only a big fan of its products, but he believes that the tech giant has a whole lot more to give the world, and hasn't even scraped the surface of its potential.