Salesforce Slumps on Meager Dot-Com Era Profits

NEW YORK ( TheStreet) -- Investors who throw their nets into the market to fish for value, should pass on Salesforce ( CRM). That's not to say that the customer relationship company's valuation doesn't keep things interesting.

While Salesforce has done a remarkable job building itself into a dominant name in the software-as-a-service market, concerns about profitability and poor margin leverage remain. That's especially evident when compared to rivals Oracle ( ORCL) and IBM ( IBM).

What's more, with a forward P/E of 67, which is more than six times that of both Oracle and IBM, investors want to know what they're going to get for their money. Shares were falling 4.9% in mid-day trading on Monday to $40.27. Salesforce has slipped 3.5% this year compared to a 14% gain for the S&P 500 and a 13.5% advance for the Nasdaq Composite Index.

It's beginning to look as if Salesforce's top line growth, which has been impressive, is no longer the selling tool that it used to be for those looking to buy the stock.

OK Start to the Fiscal Year

For any other company, I would be happy with the results that Salesforce produced. On balance, though, this company is still generating gaudy growth numbers, including 28% and 29% surges in revenue and subscription revenue this quarter, respectively. The problem is, good growth (top line) numbers haven't trickled to the bottom line, which is what killed the dot-com era.

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What's more, this is a story about performance relative to expectations. To that end, I wasn't particularly impressed with numbers that arrived as expected. This is even though professional services and other revenue totaled $50 million and grew 25% year-over-year. After all, with a forward P/E that presumes excellence, it will take more than meeting the Street's long-term growth expectations to command respect.

Management also spoke favorably about its "billings" or "unbilled deferred revenue." These represent future billings under the company's subscription agreements that have not been invoiced. In other words, "billings" represents revenue that is contracted, but not yet invoiced and is off the balance sheet. This is an important metric in the software services/cloud subscription model that gauges the company's ability to generate recurring revenue.

In the quarter, billings grew 33% to $1.67 billion. While this number is indeed impressive and speaks to Salesforce's strong market-share growth, investors have to remember that this figure is not always "direct," since it includes existing customer renewals and longer invoice durations. Therefore, it doesn't reflect the company's organic billings growth.

Profitability Still a Question Mark

Again in this quarter, the bottom line lagged the top line. And it doesn't appear as if management cares a heck of a whole lot about shoring up this aspect of the business. The company posted a GAAP net loss per share of 12 cents. And on a non-GAAP basis, which includes the effect of $115 million in stock-based compensation, the company earned 10 cents per share.

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