There's More to Than Meets the Eye

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Fellow Fool Tim Beyers took a quick look at the fourth-quarter earnings report from (NYSE: CRM  ) and came away a little nervous about the size of its stock-based compensation budget. To wit: "At $0.30 a share, more than 68% of's pre-tax, non-GAAP profit was a magic trick, the result of pretending that doling out options to management and staff costs shareholders nothing. That's tough to swallow."

I beg to differ, most respectfully. You see,'s stock-based tricks may look large in relation to earnings, but in the context of the much more important cash flows, it's next to nothing.

Accounting tricks are in abundance on this income statement, but $41.7 million of stock-based awards vanishes in the larger context. The move toward more long-term contracts is hiding a lot of incoming cash from the tax man and stuffing it into deferred revenue -- to the tune of $240 million in this quarter alone.

Looking outside the balance sheet, has about $1.5 billion of unbilled deferred revenue to collect in the future, and to account for mostly as on-sheet deferred sales. It'll take years before all of this trickles down to become GAAP revenue and then net income, but the contracts are there and the company has $935 million of deferred sales on the balance sheet as well.

Demand for's customer-relation management software is obviously spiking, which builds up both current revenue and all those deferred balances. Sales jumped 29% year-over-year to $457 million, non-GAAP earnings increased by 9% to $43.1 million or $0.31 per diluted share, and cash flow from operations soared 81% to $166 million.

Management says that they won significant new contracts in direct competition with Oracle (Nasdaq: ORCL  ) and Microsoft (Nasdaq: MSFT  ) , and had some particularly harsh words for Redmond: "Companies prefer our Sales Cloud over Microsoft CRM, which just is not kept pace with the social, mobile and open technologies the rest of the world has embraced and offers customers no competitive advantage." is headed for a great 2012, assuming that the tough talk is anything more than braggadocio. Guidance for the new year was rather timid in light of all the hidden resources we've seen here, but CEO Marc Benioff just calls it "the prudent route."

This wasn't the first time sandbags us all with "prudent" guidance, and it won't be the last. The stock isn't cheap after doubling over the last year and quadrupling in two years, but you could say the same thing about other leaders in growing technology areas like Tibco Software (Nasdaq: TIBX  ) or VMware (NYSE: VMW  ) . These enterprise software stocks have made a lot of money for a lot of happy shareholders lately.

Can the gravy train keep on rolling, or is there an abrupt stop coming up for Add the ticker to your watchlist to keep an eye on the situation.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Microsoft is a Motley Fool Inside Value recommendation. and VMware are Motley Fool Rule Breakers picks. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Microsoft, and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

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