I seriously doubt anything will ever quell the heated arguments over Salesfore.com (NYSE:CRM), it's future prospects, and its valuation, but the company's fiscal second quarter earnings are likely to give the bulls a little extra ammo for the time being. Salesforce.com remains an expensive stock with questionable operating leverage, but it also remains a share gainer in a large market. Moreover, while stocks like Salesforce.com and Workday (Nasdaq: WDAY) aren't my cup of tea at all as an investor, I know better than to play chicken with a freight train.
Reacceleration In Q2
Salesforce.com showed evidence of a business reacceleration in its fiscal second quarter results, with numbers that came in ahead of expectations at multiple levels.
Reported revenue rose 31% for the quarter, slightly above the average estimate for the quarter. Subscription revenue remains the bulk of reported revenue, and the growth rates of 31%/7% (yoy and sequential) were accordingly in line. While reported billings growth came in at 38%, the “adjusted organic” number appeared to be in the high 20%'s, but it's worth noting that no two analysts or investors seem to calculate this number in an identical way. Either way, though, it appears that there are multiple underlying signs of improving momentum. 
Margin leverage is still a relevant topic, though. Non-GAAP gross margin slipped a half-point, while non-GAAP operating income improved only by single digits on both an annual and sequential basis. While the non-GAAP operating margin contracted about two and a half points from last year, it was still three points higher than Wall Street analysts expected.
Market Versus Market Share
Workday and Salesforce.com address different parts of the enterprise software market, but both are broadly exposed to IT spending from larger enterprises. To that end, the strong billings growth at both could be seen as a sign of improving IT spending – a positive sign for other enterprise software vendors like IBM (NYSE:IBM), Oracle (Nasdaq:ORCL), and Microsoft (Nasdaq:MSFT).
On the other hand, a big part of the argument for the SaaS approach of SAP and Salesforce.com is a substantial reduction in total lifetime ownership costs. To that end, it's at least credible that the strength here is simply a result of gaining more share from traditional on premise vendors and/or taking a bigger part of a smaller spending pie.
More On The Way?
With the recent large acquisition of ExactTarget, I would think that Salesforce.com is out of the large M&A game for a little while. Given how the Street reacted to that deal, that's likely a positive for the stock.
But that doesn't mean that there won't be events to watch. Dreamforce and ET Connections should be out in the fall, and analysts will certainly be watching to see how these are received. I'm also curious to see what happens in terms of hiring as the year goes on. The link between sales reps and sales growth is not one to one, but I'm curious if Salesforce.com will need to drive improved productivity to address a tougher hiring environment and improve its operating leverage.
The Bottom Line
Salesforce.com has been an expensive stock for quite some time, and remains so today. It's not as expensive as Workday, but then it's much larger and not growing as quickly. In both cases, talking about conventional discounted cash flow valuations feels largely pointless. The Street continues to show that it is happy to pay for growth and the ability to significantly disrupt large software markets. As long as the growth momentum continues, that can work. While there's probably a day of reckoning at some point in terms of valuation, I'm not willing to predict when that will be, nor put my own money at stake on it.
Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.

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