Profit Falls at Salesforce.com

Stock compensation takes a bite out of results.
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Updated from 4:46 p.m. EST

Salesforce.com

(CRM) - Get Report

grew third-quarter revenue by 57%, but net income, weighed down by charges for stock options and amortization dropped sharply.

The company also raised quarterly guidance, but early reaction was somewhat negative. In after-hours trading, shares were off 91 cents, or 2%, to $41.48.

The San Francisco business software company posted a profit of $339,000, or break even on a per share basis, compared to a year-ago profit of $13 million, or 11 cents a share. Total revenue increased to $130 million, up from $82.6 million last year.

The charges for stock options and amortization reduced the company's profit by 6 cents a share. Excluding those costs, Salesforce would have returned a profit of 6 cents a share, a penny better than Wall Street was expecting. Analysts polled by Thomson First Call were looking for sales of $129 million.

Last year's net income line did not include the same charges, which means the year over year comparison is flawed. Even so, it appears that profitability was hurt by major increases in expenses; Marketing and sales increased from $37.9 million to $66.5 million, while total operating expenses jumped from $56.7 million to $98.8 million.

Operating expenses as a percentage of total revenue increased to 76% from 68.6%.

Salesforce CFO Steve Cakebread said in an interview that some $8 million of the increase in operating expenses was related to the cost of options; another large contributor to the expense line was an increase of between 700 to 800 new employees.

Moreover, the company is spending more money to develop its overseas presence, an investment that is slowly paying off. According to Cakebread, offshore sales have generally contributed about 20% of revenue; in the just-reported quarter that number increased to 22%.

Also making the comparison to last year's quarter somewhat difficult was a one-time tax-related benefit of $6.8 million a year ago.

Paying subscribers rose by a record 61,000 during the quarter, to a total of 556,000. Customers (companies employing subscribers) rose by about 2,300 to 27,100, a year over increase of 45% and a sequential rise of 9%.

The company raised guidance for the fourth quarter, saying that revenue should range from $140 to $142 million, while GAAP earnings per share will range from a loss of 2 cents to break even, including the cost of options. Wall Street was looking for a profit of 7 cents on sales of $142 million. Analysts estimates did not include the cost of options.

The company said that excluding items, EPS would be higher by 6 cents or 7 cents, which puts Salesforce roughly in line with expectations.

Salesforce has had a terrific run since mid-July, appreciating by 97% as of Monday, five times the gains of the Nasdaq.

The company develops software used to manage customer relationships, but unlike conventional vendors, it doesn't actually sell the software. Instead, it runs the software on its own servers, and offers the capabilities of it as a service to which customers subscribe. Most software vendors sell licenses for the use of their products.

CEO Marc Benioff said Salesforce and

IBM

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have agreed to a closer working relationship. Although he did not spell out the arrangement, he indicated that Salesforce will gain better access to IBM's extensive network of system integrators, essentially middlemen who sell and install other companies' technology to large businesses.

In the third quarter, Salesforce was able to double its presence at

Cisco Systems

(CSCO) - Get Report

to some 15,000 seats. Benioff noted that Cisco was a customer of the former Siebel Systems, now owned by

Oracle

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. "Oracle has had little success selling to Siebel software," he claimed.