Salesforce Strategy Paying Off

Updated from Nov. 16

Salesforce.com(CRM) grew its top line by a torrid 78% during the third quarter, but margins and the bottom line won't grow very fast in the near future, as the on-demand software vendor continues to spend heavily to win market share.

"We're in a market share war," says CEO Marc Benioff. "We need to invest and invest heavily," he said in an interview after his company's earnings announcement.

That strategy appears to be just fine with Wall Street; in recent trading shares of the upstart, on-demand software vendor were up $1.66, or 6%, to $28.59.

The San Francisco-based company said late Wednesday that it earned a profit of $13.1 million, or 11 cents a share, in the third quarter, compared with $2.15 million, or 2 cents a share, in the October quarter of last year. Revenue was $82.7 million vs. $46.3 million.

Excluding a one-time tax benefit of 6 cents a share, Salesforce earned a 5-cent profit. On the same basis, analysts polled by Thomson First Call were looking for a profit of 4 cents a share on sales of $80.45 million.

The company's heavy investments in technology and marketing are clearly winning customers. During the quarter, the Salesforce added 1,800 customers, and 43,000 subscribers, representing sequential increases of 11% and 14%, respectively. "Customers" refers to companies at which Salesforce software is used; subscribers are employees of those companies who pay to use the software.

A year ago, Salesforce had 11,100 customers and 168,000 subscribers; today it has 18,700 customers and 351,000 paying subscribers.

Of particular note, the large Northern California technology company signed in the second quarter turns out to Symantec(SYMC), where deployment nearly doubled to 3,900 users in the quarter, the company said.

Cash from operations in the October quarter was $24.6 million, a year-over-year increase of 87% and 75%, sequentially. But gross margins declined by 5% year over year to 76%, due primarily to heavy spending in technology, including the construction of two new data centers, and R&D.