'Tis the season for first-quarter 2007 earnings releases on Wall Street. Ever the rule breaker, on-demand software pioneer Salesforce.com (NYSE:CRM) will once again skip ahead of the pack tomorrow. Its afternoon earnings release will discuss fiscal Q1 2008 results.

What analysts say:

  • Buy, sell, or waffle? Thirty-one analysts follow the firm, with ratings that break down as follows: fourteen buys, 13 holds, and four sells.
  • Revenue. On average, they expect to see 51% sales growth to $157.8 million.
  • Earnings. Profits are predicted to double to $0.08 per share.

What management says:
Early last month, Salesforce.com elevated William Dewes to the post of "principal accounting officer" (apparently not the same thing as CFO -- Steve Cakebread retains that post -- or chief accounting officer, which Dewes currently crews). Dewes came to Salesforce.com about 18 months ago, after previously handling the books first at Nuance Communications (NASDAQ:NUAN), then Hyperion Solutions (now part of Salesforce.com rival Oracle (NASDAQ:ORCL)).

Prior to that, we see the usual slew of Form 4 filings with the SEC describing stock sales by company insiders, which followed the 8-K filing describing last quarter's earnings news. Reviewing the firm's fiscal 2007 results back in February, CEO Marc Benioff exulted at how Salesforce.com closed out the year with a fourth quarter "remarkable for its strength across all business segments, products, and geographies." Remarkable indeed -- year over year, the firm grew its customer base by 10% and its revenue 58%, and yet managed to make essentially no GAAP profits for either the quarter or the year, netting $0.00 per share in both periods.

What management does:
Over the last 18 months, GAAP accounting has not been at all kind to the company. With the exception of a fleeting uptick in the rolling operating margin in July, and (what will hopefully turn out to be more than) an uptick in the rolling gross last quarter, it's been one long string of quarters showing profit margin declines at each of the gross, operating, and net levels.

Margin

10/05

1/06

4/06

7/06

10/06

1/07

Gross

79.1%

77.9%

77.1%

76.9%

76.9%

77.2%

Operating

7.6%

7.5%

7.4%

7.5%

7.3%

7.2%

Net

9.5%

9.2%

6.8%

4.7%

1.3%

0.1%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
Yet Salesforce.com's stock is up 38% over the past year. There must be some reason people are buying, right? Well, in fact, there is: "free cash flow." That's cash profits, as opposed to accounting profits.

While operating costs -- and in particular, stock-option expensing -- are eating up all of Salesforce.com's accounting profits under GAAP accounting, the firm is nonetheless bringing in the greenbacks. Last year, operating cash flow grew 16% in comparison with fiscal 2006, while capital expenditures actually declined 6%. Result: Free cash flow grew 23% year over year.

Now, I don't know that 23% growth in cash profits justifies a price-to-free cash flow ratio of 56. (In fact, I rather suspect it doesn't.) But it's a start, and it's a far sight from the firm's P/E ratio of 10,857.50, which tends to grab all the headlines.

Need more literature before closing the deal on this "sales" pitch? Find it in:

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Fool contributor Rich Smith does not own shares of any company named above. The Fool's disclosure policy isn't selling anything.