It's the season for Q3 2007 earnings releases on Wall Street. Ever the rule-breaker, on-demand software pioneer salesforce.com (NYSE:CRM) will once again skip ahead of the pack on Thursday. Its afternoon earnings release will deal with fiscal Q3 2008 results.

What analysts say:

  • Buy, sell, or waffle? Thirty-four analysts (including this one) follow salesforce.com. Seventeen of them rate the stock a buy, 14 more a hold, and three a sell.
  • Revenue. On average, they expect to see 47% sales growth to $190.6 million.
  • Earnings. Profits are predicted to fall by two-thirds to $0.02 per share. Ouch.

What management says:
Salesforce.com used the bully pulpit of its September "Dreamforce 2007" conference to trumpet yet another in a series of milestones at the company: The 900,000 paying subscribers mark (generally speaking, a "subscriber" is an employee for whom a salesforce.com "customer" such as Cisco (NASDAQ:CSCO) or Google (NASDAQ:GOOG), Merrill Lynch (NYSE:MER) or ADP (NYSE:ADP), is paying a license fee to use salesforce.com's software.)

But salesforce.com did not say at the conference whether any of the 100,000 customers that it added since reporting earnings just one month before brought with them the free cash flow growth that the company seems to have misplaced.

What management does:
Cash profits aside, the rapid ramp-up in salesforce.com's subscriber base does seem to be helping the company's margins. The gross margins lag those of rivals Oracle (NASDAQ:ORCL) and Microsoft (NASDAQ:MSFT) by just a few tens of basis points, and salesforce.com is closing the gap fast.

Margins

4/06

7/06

10/06

1/07

4/07

7/07

Gross

76.7%

76.1%

76.0%

76.1%

75.9%

76.2%

Operating

4.5%

2.6%

0.8%

(0.7%)

(0.6%)

0.2%

Net

6.8%

4.7%

1.3%

0.1%

0.3%

0.9%

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:
Talking about salesforce.com's monster gross margins and razor-thin net margin has never been nearly as much fun as talking about the company's valuation. So let's recap where we are on that point.

When I checked in on salesforce's P/E in last quarter's Foolish Forecast three months ago, it stood at the obscene level of 3,638. Today, at a mere 1,200 or so, the price is no longer obscene -- just insane. As time progresses, and as net margins crawl ever so slowly up out of the sub-1% basement, I expect we'll see salesforce's P/E progress through the following levels: "crazy," "overpriced," and "worth a flier."

Although its copious generation of free cash flow (assuming it starts growing again) makes the firm already worth a look, it won't ever fit the definition of "cheap" under conventional P/E analysis -- at least, not without a major business snafu that quickly craters the stock price. And if that comes to pass, you might not want to own salesforce.com at any price. But that's just my opinion. I could be wrong.

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:

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Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool's disclosure policy is available on demand.