Foolish Forecast: salesforce Can Still Soar

Software-as-a-service pioneer salesforce.com (NYSE: CRM  ) reports its fiscal Q2 2009 earnings on Wednesday afternoon. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell or waffle? Thirty-one analysts follow salesforce: 16 rate the stock a buy, a baker's dozen say to hold, and two vote "sell."
  • Revenues. On average, they expect to see 48% sales growth, to $260.5 million.
  • Earnings. Profits could nearly triple to $0.08 per share.

What management says:
With business booming, and CEO Marc Benioff crowing over his company's generation of "more than a quarter billion dollars of operating cash in the last 12 months alone," salesforce upped its previous guidance to promise more than $1.06 billion in sales this year, and profits of $0.33 or $0.34 per share

What management does:
Bold words? Sure, but salesforce is delivering on them so far. Per-share profits octupled last quarter, and cash from operations more than doubled. Rolling gross margins have risen for four straight quarters; operating and net margins, for more than a year. The company overtook Oracle (Nasdaq: ORCL  ) in gross margins last quarter, and now leads it, Google, IBM (NYSE: IBM  ) , and Accenture (NYSE: ACN  ) .

Four down, one to go: Better watch your back, Microsoft (Nasdaq: MSFT  ) !

Margins

1/07

4/07

7/07

10/07

1/08

4/08

Gross

76.1%

75.9%

76.2%

76.5%

77.1%

78.0%

Operating

(0.7%)

(0.6%)

0.2%

1.1%

2.7%

4.3%

Net

0.1%

0.3%

0.9%

1.7%

2.5%

3.3%

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:
Few things excite investors more than watching a company add multiples to its margins, but remember that salesforce is building off of a very low base right now. More informative to Fools, may be its improvement in free cash flow.

salesforce generated just under $200 million in free cash flow over the past 12 months, about a 99% increase year over year. While that growth rate isn't sustainable ad infinitum, I suspect the pace will remain quite fast as the company's free cash flow converges with its net earnings under GAAP (just one-seventh the size of free cash flow).

To me, therefore, salesforce's projected growth rate of 43%, as quoted on Yahoo! Finance, does not seem unlikely. Nor is its valuation of 40 times free cash flow unreasonable given the projected growth rate.

What did we expect out of salesforce.com last quarter, and what did we get? Find out in:

Fool contributor Rich Smith does not own shares of any company named above. Microsoft and Accenture are Motley Fool Inside Value selections.  The Motley Fool's disclosure policy is available on-demand.


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