Foolish Forecast: Salesforce.com Stops Slumping?

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Software-as-a-Service pioneer salesforce.com (NYSE: CRM) has had a rough time so far this year. With its stock down 13% since the dawn of 2008, this Google (Nasdaq: GOOG) partner company has been hit twice as hard as the broader S&P 500.

This week, salesforce.com gets a chance to pull out of its slump. If the firm hits its fourth-quarter results out of the park Wednesday afternoon, chances are that we'll see much the same reaction among investors that greeted last quarter's news. But what are the chances that will happen?

What analysts say:

• Buy, sell, or waffle? Thirty-one analysts follow salesforce.com. Seventeen of them still rate the stock a buy, 10 more a hold, and four a sell.
• Revenue. On average, they expect to see 45% quarterly sales growth to $209.1 million.
• Earnings. But profits are predicted to fall 43% to $0.04 per share.

What management says:
Perhaps unfortunately for shareholders, management isn't quite as optimistic about the quarter as are the analysts. Laying out guidance for Q4 as part of last quarter's earnings report, CEO Marc Benioff told us to expect about $207 million in revenue. While admitting that $0.04 per share is possible, he also left open the possibility of $0.03 per share. Thus, salesforce.com must beat its own revenue guidance and max out its earnings prediction just to satisfy Wall Street -- much less deliver an upside surprise.

Looking farther out, Benioff tells us to expect a little more than $1 billion in revenue during the current year (fiscal 2009, according to salesforce.com's calendar), for year-over-year growth of about 37%. Management plans to update us on its earnings expectations on Wednesday.

What management does:
Rolling gross margins continue to climb at salesforce.com, posting back-to-back improvements over the last two quarters, and operating and net margins are rising as well. The company still falls short of the gross margins posted by rivals Oracle (Nasdaq: ORCL) and Microsoft (Nasdaq: MSFT), but not by much.

Margins	7/06	10/06	1/07	4/07	7/07	10/07
Gross	76.1%	76.0%	76.1%	75.9%	76.2%	76.5%
Operating	2.6%	0.8%	(0.7%)	(0.6%)	0.2%	1.1%
Net	4.7%	1.3%	0.1%	0.3%	0.9%	1.7%

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:
I'm not sure whether I've mentioned this before, but just to be safe, let me draw your attention to one bit of trivia about salesforce.com's performance: Notice anything funny about the numbers in the table above?

Look closely, and you'll see that the operating and net margins are "upside down." Meaning, the company nets more profit than it generates from its operations. The reason for this is that salesforce.com generates more than one-third of its profits not from selling software-as-a-service, but from interest on the cash in its bank account. At last report, that cash stash amounted to $374 million.

Apart from its trivia value, this fact bears mentioning because, with the Fed slashing interest rates, we can expect salesforce.com's interest income to fall over time as well. That means operations will have to pick up more of the slack in order to keep net margins growing. So far, management has done well in making that happen. Let's hope for more of the same on Wednesday.

Is it time to grab salesforce.com by the horns, or is this stock ripe for bear-baiting? Watch two of our top Fools duke it out in:

• Dueling Fools: Salesforce.com
• Dueling Fools: Salesforce.com Bull
• Dueling Fools: Salesforce.com Bear