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Salesforce.com: Up in the Cloud, the Margins Suck

Salesforce.com (CRM), the cloud-based, customer relationship management software outfit, opened for business before the first dot-com crash, survived, and has continued on much like a start-up, its revenues growing rapidly but profits – not so much.

CRM Stock Chart by YCharts

The top line is mesmerizing, isn’t it? And that has given Salesforce.com a market cap of $15 billion.

CRM Stock Chart by YCharts

That’s $10 of CRM stock price for every dollar of sales the company rings up. And a p/e ratio of over 200, roughly eight times the rate of revenue growth. Talk about up in the clouds.

Mark Benioff, co-founder and CEO, who happens to be a billionaire thanks to his roughly 10% stake, understandably likes to talk about revenue growth. “We’re delighted today to raise our full fiscal year 2011 revenue guidance,” Benioff said in announcing second quarter results, with revenue up 25%. He called the projection of about $1.6 billion in revenue an “exciting new milestone.”

Less exciting was the bottom line for the second quarter, 11 cents a share, down (yes, down) from 17 cents a year earlier. And the full-year projection he made at the time, 43-to-45 cents, also down from 63 cents for the year ended January 31.

Cloud-based software (on our servers, not yours) and CRM functions (sharing sales leads and all sorts of stuff across an organization, the way teenagers trash talk their friends on Facebook) sounds like an easy sell: cheaper than installed software; shared information that boosts productivity. But it turns out to be really expensive, if not difficult, to sell.

Salesforce.com’s sales and marketing expense has run roughly 50% of sales in recent years. So, it spent $534 million telemarketing and pounding the pavement in fiscal 2009, and that produced sales of $1.08 billion. Exhausting. The sales crew got a little more productive in fiscal 2010, ended January 31, when they consumed just 46% of revenue to get the job done. Through two quarters of fiscal 2011, the spending was 47%.

So, it has gotten a little better, but selling this stuff is trench warfare. And the guys in the opposing trenches? Microsoft (MSFT), Oracle (ORCL) and SAP (SAP).

Salesforce.com sells the service via subscription, typically 12-to-24 months. One would hope that renewals become a mere formality, that pricing firms up and that the net income line on that initial chart we showed you starts to move toward to revenue line, instead of away from it. Not like this:

CRM Stock Chart by YCharts

In the meantime, Benioff, diversifying his personal assets, has a program to sell 10,000 shares of his holdings each trading day, it appears. Wouldn’t you?

He’s riding one of the great momentum stocks of our day. Knowing when to hop off is crucial.

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