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SAN FRANCISCO -- Although (CRM) - Get Salesforce Inc. Report is feeling the economy's pinch, it should weather recessionary trends better than most tech companies.

The San Francisco-based developer of subscription software will report third-quarter results Nov. 20. Analysts expect year-over-year revenue growth of 42% to $273.6 million and earnings of 7 cents a share -- two pennies better than the same quarter of 2007, when revenue growth was 48%.

For the fiscal year, analysts project a top line of $1.1 billion and EPS of 30 cents, according to Thomson Reuters.

IDC cut its 2009 worldwide IT growth forecast Wednesday by more than half, to 2.6%, and its U.S. projection to 0.9%, from a prior forecast of 4.2%.

Despite compressed revenue estimates for most of the tech sector, sell-side analysts project Salesforce to show earnings growth of 90% on top-line growth of 27% for the next fiscal year. The consensus estimate calls for EPS of 57 cents on revenue of $1.4 billion in fiscal 2010, which begins in February.

Macroeconomic turmoil is rapidly changing forecasts, Gartner analysts say. "The software markets are in pretty good shape vis-a-vis the rest of the market, although I expect our next forecast will be more cautious," says analyst Sharon Mertz.

Web-hosting software companies such as Salesforce may face slower growth like the traditional vendors they seek to replace. But it is more likely to benefit from frozen IT budgets because selling subscriptions requires less upfront money, says Gartner analyst Michael Maoz.

Growth estimates for hosted CRM are still quite strong. Mertz still projects 20.8% revenue growth for 2008 for all Web-hosted CRM software, of which Salesforce is the leader. The category will take in $1.7 billion to $1.8 billion this year, she says.

Salesforce will account for about 61% of that.

But don't expect software vendors to come off unscathed by the recession. As corporations shed employees, fewer software subscriptions will be needed. Estimates for total 2009 hosted CRM revenue are "up in the air," Mertz says.

Users of legacy on-premise -- or traditional -- software make up the biggest market for on-demand software companies. And they are more likely to delay contract decisions than those already paying subscriptions elsewhere, particularly in the U.S. For companies paying low maintenance fees on traditional software, "this may not be the time to commit to a whole new set of expenses," Maoz says.

But subscribers to competing CRM software whose contracts are up will be forced into a decision. It's difficult to predict what will happen with contract lengths, Maoz says.

Several analysts suggest that clients are pressuring Salesforce for shorter terms and discounts. Mertz says if Salesforce is discounting on price, it does so in order to land new customers to which it can sell more services later.

Salesforce's clients "appear to be purchasing in six-month increments," rather than at a year at a time, and are buying fewer seats, RBC Capital analyst Robert Breza wrote in recent note. If the trends bear out, it will put pressure on the company's cash flow, he added.

And as Salesforce encounters aggressive contract negotiations, investors should expect "lumpy" deferred revenue from quarter to quarter. That will, in turn, put pressure on subsequent quarters' recognized revenue, according to Breza.

Third-quarter deferred revenue could be down sequentially because of some deceleration in bookings and a strengthening dollar, Citigroup analyst Brent Thill notes. But deferred revenue should still be up 34% year over year, he said.

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Widespread corporate layoffs can also affect Salesforce's seat counts. "Due to macro events, we believe many customers may be reducing their subscriber count upon renewal due to company-specific layoffs limiting subscriber growth," Breza states.

Reflecting lower projections for IT spending, sell-side analysts have trimmed Salesforce's estimates and target prices this week. On Wednesday, JMP Securities analyst Patrick Walravens dropped his one-year target price to $40 from $60. And Thursday, Kaufman Brothers analyst Karl Keirstead dropped his target to $32 from $40.

Salesforce's consensus one-year target now stands at $42, from $44.50 a few days ago and $74 in August. Shares have fallen 58% year to date.

The stock isn't cheap. Software-as-a-service stocks command a premium. Whereas


(ORCL) - Get Oracle Corporation Report

trades at just over 10 times calendar 2009 earnings, Salesforce fetches 43 times next year's earnings at Wednesday's closing price of $24.33. SaaS CRM competitor

RightNow Technologies


carries a comparable P/E of 49.

Traditional vendors, eyeing Salesforce's revenue ramp and SaaS' higher growth rates, have expanded into hosted CRM software.


(MSFT) - Get Microsoft Corporation Report

released its hosted Dynamics CRM service early this year. The Redmond, Wash. company has sold one million licenses, "but they still have their hands full" integrating online CRM with other Microsoft products, Maoz says.

And Oracle acquired Siebel's on-demand software in 2006, but downplayed it until this year. This week, Oracle upgraded the subscription software and said it has landed a new banking customer.

In on-demand CRM software, Oracle is "more aggressive even than two quarters ago," says Maoz. And last quarter, Oracle "became more visible in sales deals."

However, Maoz sees little overlap with Salesforce, which focuses on small and medium-sized businesses, Maoz says. Oracle is more likely to "stay out of the way of Salesforce" by moving "upstream," where it sells a broad range of on-premise software, supplying CRM On Demand just to remote offices of its clients, he adds.