Tic-tac-toe, investors want to know: Will software-on-demand provider Salesforce.com (NYSE:CRM) make it three in a row for earnings beats when it reports its fiscal Q4 and full-year 2006 numbers Wednesday afternoon?

What analysts say:

  • Buy, sell, or waffle? Thirty-one analysts follow Salesforce.com. Fifteen say to buy it, 12 more to hold it, and four counsel selling.
  • Revenues. On average, analysts will be looking for 57% sales growth to $142.9 million.
  • Earnings. Profits are predicted to rise 40% to $0.07 per share.

What management says:
Hmm. It would appear that the continuing wave of corporate takeovers is making executives nervous. Salesforce.com is the second company I'll be writing about today that's instituted a "golden parachute" policy for its execs in the past three months. Specifically, the firm announced in January that in the event of a takeover, followed or preceded by any of nine named executives leaving the company (voluntarily or otherwise), said executives would receive severance benefits ranging from 12 to 18 months' worth of salary and bonuses, plus immediate vesting of between half and all of their unvested stock options.

Two things worth noting here: First, CEO Marc Benioff, who was certainly in a position to demand a parachute if he wanted it, is not accepting one. Second, CFO Steve Cakebread did accept a parachute, which is interesting for two reasons: first, he's still at the company despite our expectation that he would depart last year; and second, his apparent interest in donning a parachute at all suggests that he isn't planning on leaving the company anytime soon.

What management does:
One reason the executive team may be nervous was foreshadowed by the numbers you saw above: 57% sales growth, but only 40% profits growth. Most companies would kill for the chance to grow their profits 40%, I expect. But at Salesforce.com, the number tells us margins must be slipping, if profits growth lags sales growth by so much. And indeed, the table below shows a steady slide in gross margins; a bumpier, but still downward trend in operating margins; and a pretty dramatic falloff in the net.

Margins

7/05

10/05

1/06

4/06

7/06

10/06

Gross

80.4%

79.1%

77.9%

77.1%

76.9%

76.9%

Operating

7.0%

7.6%

7.5%

7.4%

7.5%

7.3%

Net

6.4%

9.5%

9.2%

6.8%

4.7%

1.3%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Now, when you see a dramatic tumble in net margins like that, you probably assume that a one-time charge in there somewhere is skewing the results. Good instincts, by the way. That is indeed often the case -- but not this time. At Salesforce.com, the rolling net margins are falling off a cliff for two reasons. One is good; the other, not so much.

The good reason is that Salesforce.com continues to spend freely on research and development to keep its growth engine going. Over the last two quarters, R&D spending is up 68% year over year, outpacing even the firm's torrid rate of sales growth.

The bad reason is that since Salesforce.com began expensing stock options, they've eaten up literally all of its operating profits in each of the last three quarters. If this was the case in the fourth quarter of 2006 as well, then I fear we could see not just net but operating margins go negative on Wednesday.

Competitors:

  • Accenture (NYSE:ACN)
  • Amdocs (NYSE:DOX)
  • BearingPoint (NYSE:BE)
  • IBM (NYSE:IBM)
  • Microsoft (NASDAQ:MSFT)
  • Oracle (NASDAQ:ORCL)

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Fool contributor Rich Smith does not own shares of any company named above. Accenture and Microsoft are both Inside Value newsletter recommendations. The Fool's disclosure policy never jumps without a 'chute.