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Uh-oh. Billings were up just 29% in the fiscal third quarter completed in October, leading shares of (NYSE: CRM  ) lower by roughly 10% in early trading. The stock is down 9% as I write.

You know how much CEO Marc Benioff has talked up billings? Do you? It's (chokes, adjusts shirt) ... pretty much never. Salesforce doesn't report billings. Benioff hasn't even mentioned it in any of the last four earnings conference calls.

You know who has? A Jefferies & Co. analyst in the Q1 call in May, and then Citigroup and Bank of America's Merrill Lynch analysts last night. Billings is a term the Street tracks and cares about. Benioff and his team are managing to different metrics.

Last night, Chief Financial Officer Graham Smith said as much in response to a question about billings:

If you look at the trend of constant currency deferred revenue growth, Q1 is 33%; Q2, 33%; Q3 was 31%. That's why we have avoided, I think, talking about your calculation of billings. I think your number is a lot more volatile ... the deferred revenue is a number that goes on our balance sheet.

All of which means that if you're selling today, you're selling to the tune of a phantom miss of an imaginary target. Who says Wall Street lacks creativity? Pfffft.

And what of the metrics that do matter?
Overall revenue rose 36% to $584 million, well ahead of the $572 million consensus target tracked by S&P Capital IQ. Non-GAAP earnings rose 6% to $0.34 a share. Wall Street had been calling for $0.31 a share. The twin beats match results posted by cloud computing peer NetSuite (NYSE: N  ) two weeks ago.

More importantly, Salesforce issued its first guidance for fiscal 2013, and it's higher than most analysts expected. Benioff says his team will bring in $2.88 to $2.92 billion in revenue, up about 29% year over year. Analysts polled by S&P Capital IQ were calling for $2.91 billion as of this morning. Yahoo! Finance had fiscal 2013's tally at $2.79 billion. Either way, Salesforce is outperforming.

The underlying business also remains healthy. Salesforce has generated $265 million in free cash flow over the trailing 12 months after accounting for the effects of debt and working capital changes. The balance sheet shows more than $100 million in excess cash, and that's not including more than $650 million worth of long-term investments.

Investing for the longer haul
Look, I understand the skeptics who are selling because of valuation. Salesforce is an expensive stock. I also understand those who point to deteriorating margins and increasing competition from the likes of Oracle (Nasdaq: ORCL  ) . We know that Larry Ellison wants a slice of the pie Benioff and his team have been baking.

If you're spooked by Salesforce's triple-digit P/E ratio, please don't buy this stock. There are so many great dividend payers that there's no need to spend on a tech highflier. But if your concern is competition, I think it's your duty, as an investor, to ask yourself two questions:

  1. Is Salesforce making appropriate investments to grow its business?
  2. Are those investments paying off?

On the first question, Salesforce is investing in new space for people and data center equipment and starting and buying businesses that add to its platform. Chatter (developed) and Heroku (bought), notably.

Neither of these are principal revenue drivers for Salesforce right now, but Benioff did say that Verizon (NYSE: VZ  ) signed up for 80,000 Chatter accounts in Q3 to go along with 7,000 seats for a roll-up service the company calls Sales Cloud. Incremental revenue is being earned here.

And how are these efforts paying off? Revenue is rising but returns on capital have declined. I'd prefer both to be rising at once, but I also recognize the need for Salesforce to invest heavily for the purpose of winning customers and market share over the long term. It's a risky bet to be sure, but is it ill-fated?

That depends on whether you believe most business software will be installed, or live online. The major players in delivering installed business software -- I'm thinking of Microsoft (Nasdaq: MSFT  ) , Oracle, and SAP (NYSE: SAP  ) , principally -- account for more than $125 billion in revenue and $435 billion in market value as of this writing.

Salesforce, by comparison, accounts for about $2 billion in revenue and $15 billion in market cap. NetSuite's share is even smaller. That ratio is either going to shift dramatically as business-oriented cloud computing becomes the new standard, or Salesforce, NetSuite, and their peers will fade into irrelevance in a few short years. I'm betting on the former.

Not yet sure what to think about cloud computing? We can help. This free video explains the technology and its advantages and pitfalls. You'll come away smarter and with a current stock idea from our Motley Fool Rule Breakers scorecard. Click here to watch now -- it's 100% free.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Microsoft and Oracle. Motley Fool newsletter services have recommended buying shares of Microsoft and Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Motley Fool newsletter services have recommended shorting 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. The Motley Fool has a disclosure policy.

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