As has been the case for some time, margins weren't any better, as the company shed 160 basis points year over year in non-GAAP gross margins. Likewise, operating margins were below Street estimates by roughly 70 basis points and down 1% year over year. While I've always wanted to like this company, the operating-margin performance, which has suffered due to Salesforce's aggressive growth plans, gnaws at me in ways reminiscent of the dot-com era.

Along similar lines, the fact that the company insists on paying its executives via stock-based compensation, continues to eat into Salesforce's profitability. Granted, it's not unusual for growth companies to adopt this form of compensation. But it's not 1998, either-- although the company's name fits perfectly in that era. At some point, investors need to demand for better bottom line performance.

Fending Off the Competition

Although Salesforce enjoys a good chunk of the SaaS and cloud market today, rivals are not letting off the pedal. Aside from IBM and Oracle, names such as Red Hat ( RHT) and Microsoft ( MSFT) have been making significant capital investments to position themselves for the opportunities ahead. Microsoft can become a true threat, once Office Live is fully embraced.

Microsoft will have an advantage from the standpoint that customers will resist the urge to jump on a different platform, if Microsoft can sell the benefits of seamless Saas/cloud integration with Windows and Office. Salesforce will eventually find that it has to spend more on sales and marketing, plus other acquisitions, in order to preserve the market share that it currently has. This only adds more margin pressure on an already feeble situation.

Bottom Line

Without question, Salesforce.com has to improve its deficits in profitability, if it truly wants to keep the bears in hibernation. As "the cloud" and "big data" markets become more defined, this is only going to heighten the demands on Salesforce.com to perform. Unfortunately, performance now must include the bottom line as the market seems no longer impressed with the company's revenue growth. Accordingly, the stock remains expensive and absent better margin leverage, it doesn't make sense to own it here.

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