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Updated from 5:03 p.m. EST

Upstart software provider

(CRM) - Get, inc. Report

was taking its lumps after hours Wednesday on news that its preliminary guidance for fiscal 2006 is weaker than expected.

In postclose trading, shares of the San Francisco-based company were off $1.14, or 5.5%, to $19.70 after closing the day with a gain of 25 cents to $20.84.

Salesforce reported that its third-quarter revenue increased by 82%, and that EPS was a penny better than Wall Street had expected.

But net income fell to $2.2 million, or 2 cents a share, from $3.8 million, or 4 cents a share. (The year-ago quarter included a $4.3 million gain.) And the company's estimate of EPS in fiscal 2006 was 3 cents to 5 cents a share below expectations.

Sales in the latest quarter were $46.4 million.

Analysts polled by Thomson First Call were expecting sales of $45.5 million and a one-cent profit in the just-reported October quarter.

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In a call with analysts, Salesforce CEO Marc Benioff said that although greater profitability is important, the company is now focused on expanding its business. "We want more subscribers, this is our entire consciousness," he said.

Indeed, the company continues to grow its customer base rapidly. In the third quarter, Salesforce added 10,000 subscribers in October alone, and 27,000 in the quarter as a whole, an increase of 81%, year over year. In Salesforce speak, subscribers are individuals whose company pays for them to use a Salesforce product; customers are the companies at which they work. Net customers increased 62% to 12,500.

The company also spends richly to win new customers. Sales and marketing expenses were $24.9 million, or nearly 54% of revenue and R&D cost the company an additional $2.5 million. "We are hiring developers aggressively," said Benioff.

Salesforce raised its guidance for the balance of fiscal 2005. Revenue is expected to range from $172 million to about $174 million, compared with previous guidance of $165 million to $170 million. EPS will range from 4 cents to 5 cents, compared to the earlier estimate of 2 cents to 4 cents.

Wall Street was expecting a 4-cent profit on sales of $173 million.

But Wall Street was not happy with the company's guidance for 2006 -- EPS of 10 cents to 12 cents on sales ranging from $275 million to $285 million. Analysts were expecting sales of 15 cents on sales of $278.48 million. CFO Steve Cakebread said the estimates were "a first take" and they would be updated by the time the company next reports earnings.

Claiming that it will "abolish software," Salesforce leases business applications by the month to customers and generally hosts the software on its own servers. Since going public in late June, Salesforce shares have appreciated by 20%, while those of rival

Siebel Systems


are off 13%. In the same period the Goldman Sachs software index rose by 8% and the Nasdaq added 3%.