2011 1221 salesforce report

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2011 1221 salesforce report

  1. 1. Software Salesforce.com Downgrade To Underperform (3)December 12, 2011 A Change in Invoicing Terms Gives Us PauseAnalysts Conclusion: Downgrading CRM to Underperform from Neutral. Billings growthPeter Goldmacher is the primary metric that drives CRM and we believe normalized billings(415) 646-7206peter.goldmacher growth is slowing faster than expectations. In 3Q, CRM missed billings@cowen.com expectations. Mgmt repositioned other bookings related metrics as better metrics, yet is unwilling to provide regular details around these other metrics.Joe del Callar Recently, Salesforce.com has changed its renewal policy to annual payments(415) 646-7228joe.delcallar@cowen.com and is aggressively discouraging monthly payments. This change, which affects about 1/3rd of its contracts, could have a positive impact on billings in FY13 to the tune of an increase of an approx 10%-13% via the artificial one-time inflation of deferred revenue, but is likely a sign of longer-term pressure on the business. The average CRM customer pays $22K a year, and small customers prefer more favorable payment terms. We are concerned this change in payment terms could drive churn. We believe SFDC is in the early stages of growing pains and will be challenged to find the right mix of growth and margins near term. CRM trades at 5.8x EV/CY12 Revs of $2.9B (+32%). Why is Growth Slowing? We think there are three primary reasons growth is slowing. 1) Competition is catching up. Oracle is defending the enterprise, Microsoft is gaining traction in the mid market, and SugarCRM is gaining ground at the low end. 2) Massive investments in Sales have over stimulated the market beyond its natural growth rate. Next year normalized sales productivity will decline, making growth even harder absent extremely aggressive investments in sales and marketing at the expense of margin. 3) The company has lost focus. Managements obsession with the new new thing has distracted it from crisp execution in its core market, SFA. The push behind Collaboration, PaaS and Social Media Monitoring have taken sales into different and unproven categories with different buyers. Additionally, we remind investors that the companys platform was built over a decade ago and is likely in need of a rewrite at some point to take advantage of the latest technologies.CRM (12/09) $123.8 Revenue $MMMkt cap $17.6B FY 2011 2012E 2013EDil shares out 142.2MM Jan Actual Prior Current Prior CurrentAvg daily vol 1,999.4K Q1 376.8 —— 504.4A —— 678.152-wk range $103.4-160.1 Q2 394.4 —— 546.0A —— 710.3Dividend Nil Q3 429.1 —— 584.3A —— 745.7Dividend yield Nil Q4 456.9 —— 624.9 —— 769.0BV/sh $10.54 Year 1,657.1 —— 2,259.5 —— 2,903.1Net cash/sh $5.64 CY 2,118.6 —— 2,855.1 —— ——Debt/cap 24.8% EV/S —— —— 5.9x —— 5.8xROIC (LTM) 12.9%5-yr fwd NA OpEPS(a) $growth (Norm) FY 2011 2012E 2013E Jan Actual Prior Current Prior Current Q1 0.30 —— 0.28A —— 0.38 Q2 0.29 —— 0.30A —— 0.42 Q3 0.32 —— 0.34A —— 0.45S&P 500 1255.2 Q4 0.31 —— 0.40 —— 0.50 Year 1.22 —— 1.33 —— 1.76 CY 1.31 —— 1.72 —— —— P/E —— —— 72.0x —— 70.4x Consensus numbers courtesy of First Call and StreetAccount. (a)Pro forma EPS numbers cited exclude stock compensation, non-cash convertible debt costs, and amortization of intangibles.Please see addendum of this report for important disclosures. www.cowen.com
  2. 2. Salesforce.com Growth at a High Cost We believe that Salesforce.com put itself on the growth at any costs treadmill coming out of the downturn and renewed its commitment on the 1QFY12 earnings call when CEO Marc Benioff proclaimed ““We are clearly managing the business to maximize revenue growth as our number one priority.”” While we are big fans of growth, we are not fans of growth at any cost, especially in a finite market opportunity. We believe early success in a wide open market created a false sense of confidence in the corporate culture which resulted in questionable strategy decisions around investing heavily to penetrate the enterprise and build/buy into new product areas with minimal product/buyer adjacencies. However, billings growth has been impressive over the last few years and investors seemed to get comfortable with declining margins. Billings Growth and Margins, FY09 through 3Q12 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1Q09A 2Q09A 3Q09A 4Q09A 1Q10A 2Q10A 3Q10A 4Q10A 1Q11A 2Q11A 3Q11A 4Q11A 1Q12A 2Q12A 3Q12A Y/Y Billings Growth Operating Margin Source: Cowen and Company, Company Reports. We remained Neutral on the CRM throughout this blockbuster growth phase because there was no fundamental valuation metric we could get comfortable with and we felt like the underlying metrics (sales productivity/margins) indicated that the company would run into growing pains with little or no advanced warning with troubling consequences for the stock. The M&A strategy and currency provided modest tailwinds for sustained billings growth but now we believe that the company is at the point in the growth cycle where it has to behave against the best interests of its customers to continue to stimulate growth, hence the change in renewal policies. Our work indicates that the vast majority of CRM’’s installed base is small businesses which are very sensitive to changes in payment terms. The fact that CRM is actively encouraging smaller customers to pay annually instead of monthly to stimulate billings could have a pronounced impact on churn. We envision a scenario where billings growth reaccelerates, especially on seasonal 4Q strength and this change in billing dynamics, but because we are aware of what’’s driving this likely return to billings growth, we are comfortable with our conclusion that the business is under pressure and our rationale for downgrading the stock.2 December 12, 2011
  3. 3. Salesforce.com The following example shows how changing invoice duration from monthly to annual will drive billings growth. In this example we assume that the company is able to transition the contracts from annual to monthly invoicing only when the contract is up. This example shows the impact of the change on revenue, invoicing and cash collections, and the deferred revenue balance from twelve contracts due at different months of the year.The Impact of Changing Invoice Durations on Billings (Monthly to Annual) Monthly Invoicing Switch to Annual Invoicing Year 1 Year 2 Year 3 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Revenue Contract 1 (Renews Jan) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 Contract 2 (Renews Feb) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 Contract 3 (Renews Mar) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 Contract 4 (Renews Apr) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 Contract 5 (Renews May) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 Contract 6 (Renews Jun) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 Contract 7 (Renews Jul) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 Contract 8 (Renews Aug) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 Contract 9 (Renews Sep) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 Contract 10 (Renews Oct) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 Contract 11 (Renews Nov) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 Contract 12 (Renews Dec) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 Total $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 Quarterly Total $3,600 $3,600 $3,600 $3,600 $3,600 $3,600 $3,600 $3,600 $3,600 $3,600 $3,600 $3,600 Y/Y Growth 0% 0% 0% 0% 0% 0% 0% 0% Annual Total $14,400 $14,400 $14,400 Y/Y Growth 0% 0% Invoiced/Collection (Cash Flow) Contract 1 (Renews Jan) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,200 Contract 2 (Renews Feb) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,200 Contract 3 (Renews Mar) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,200 Contract 4 (Renews Apr) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,200 Contract 5 (Renews May) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,200 Contract 6 (Renews Jun) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,200 Contract 7 (Renews Jul) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,200 Contract 8 (Renews Aug) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,200 Contract 9 (Renews Sep) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,200 Contract 10 (Renews Oct) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,200 Contract 11 (Renews Nov) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,200 Contract 12 (Renews Dec) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,200 Total $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $2,300 $2,200 $2,100 $2,000 $1,900 $1,800 $1,700 $1,600 $1,500 $1,400 $1,300 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 Quarterly Total $3,600 $3,600 $3,600 $3,600 $6,600 $5,700 $4,800 $3,900 $3,600 $3,600 $3,600 $3,600 Y/Y Growth 83% 58% 33% 8% (45.5%) (36.8%) (25.0%) (7.7%) Annual Total $14,400 $21,000 $14,400 Y/Y Growth 46% (31.4%) Deferred Revenue Contract 1 (Renews Jan) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 Contract 2 (Renews Feb) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 Contract 3 (Renews Mar) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 Contract 4 (Renews Apr) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 Contract 5 (Renews May) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 Contract 6 (Renews Jun) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $1,200 $1,100 $1,000 $900 $800 $700 $600 Contract 7 (Renews Jul) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $1,200 $1,100 $1,000 $900 $800 $700 Contract 8 (Renews Aug) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $1,200 $1,100 $1,000 $900 $800 Contract 9 (Renews Sep) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $1,200 $1,100 $1,000 $900 Contract 10 (Renews Oct) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $1,200 $1,100 $1,000 Contract 11 (Renews Nov) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $1,200 $1,100 Contract 12 (Renews Dec) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $1,200 Balance $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $1,200 $2,300 $3,300 $4,200 $5,000 $5,700 $6,300 $6,800 $7,200 $7,500 $7,700 $7,800 $7,800 $7,800 $7,800 $7,800 $7,800 $7,800 $7,800 $7,800 $7,800 $7,800 $7,800 $7,800 $7,800 Quarter-Ending Balance $1,200 $1,200 $1,200 $1,200 $4,200 $6,300 $7,500 $7,800 $7,800 $7,800 $7,800 $7,800 Y/Y Growth 250% 425% 525% 550% 86% 24% 4% 0% Year-End Balance $1,200 $7,800 $7,800 Y/Y Growth 550% 0% Billings Quarterly Total $3,600 $3,600 $3,600 $3,600 $6,600 $5,700 $4,800 $3,900 $3,600 $3,600 $3,600 $3,600 Y/Y Growth 83% 58% 33% 8% (45.5%) (36.8%) (25.0%) (7.7%) Annual Total $14,400 $21,000 $14,400 Y/Y Growth 46% (31.4%) Source: Cowen and Company, Company Reports. We observe that the change in invoice duration grows billings primarily through an increase in the deferred revenue balance. We note that this increase in billings is accompanied by an increase in cash flow, as collections are brought forward. We also note that this increase in billings and cash flow is only temporary, and reverses to contraction once the one-time benefit of the increase in deferreds subsides. Furthermore, revenues are unaffected, which means that this change has no impact on margins or earnings. To be clear, management has stated that 2/3rd of the business is invoiced annually, so we are only talking about 1/3rd of the business at most. However, changing billings for 1/3rd of the business would definitely have an impact on the model. December 12, 2011 3
  4. 4. Salesforce.com The following shows the projected additive impact to billings growth assuming the company puts this invoicing change into effect beginning in FY13. We assume 67% of invoicing is annual, and vary assumptions of quarterly and monthly invoice based on the company’’s statements that roughly a quarter of invoicing is quarterly and the remainder is monthly or semi-annual. To be clear, if billings growth expectations prior to this change are 25%, then we believe this change could add 10%-13% additional growth, theoretically driving 35%-38% billings growth in FY13. This one- time spike in billings growth will then have the inverse impact on FY14 billings growth, compounded by a difficult comp. Additional Billings Growth Impact of Invoice Duration Change FY13 % Invoiced Quarterly 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30% 0% 10.8% 10.9% 11.0% 11.1% 11.3% 11.4% 11.5% 11.6% 11.8% 11.9% 12.0% 1% 11.0% 11.1% 11.2% 11.3% 11.5% 11.6% 11.7% 11.8% 12.0% 12.1% 12.2% % Invoiced Monthly 2% 11.2% 11.3% 11.4% 11.5% 11.7% 11.8% 11.9% 12.0% 12.2% 12.3% 12.4% 3% 11.4% 11.5% 11.6% 11.8% 11.9% 12.0% 12.1% 12.3% 12.4% 12.5% 12.6% 4% 11.6% 11.7% 11.8% 12.0% 12.1% 12.2% 12.3% 12.5% 12.6% 12.7% 5% 11.8% 11.9% 12.0% 12.2% 12.3% 12.4% 12.5% 12.7% 12.8% 6% 12.0% 12.1% 12.3% 12.4% 12.5% 12.6% 12.8% 12.9% 7% 12.2% 12.3% 12.5% 12.6% 12.7% 12.8% 13.0% 8% 12.4% 12.5% 12.7% 12.8% 12.9% 13.0% 9% 12.6% 12.8% 12.9% 13.0% 13.1% 10% 12.8% 13.0% 13.1% 13.2% FY14 % Invoiced Quarterly 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30% 0% (9.7%) (9.8%) (9.9%) (10.0%) (10.1%) (10.2%) (10.3%) (10.4%) (10.5%) (10.6%) (10.7%) 1% (9.9%) (10.0%) (10.1%) (10.2%) (10.3%) (10.4%) (10.5%) (10.6%) (10.7%) (10.8%) (10.9%) % Invoiced Monthly 2% (10.0%) (10.1%) (10.2%) (10.3%) (10.4%) (10.5%) (10.6%) (10.7%) (10.8%) (10.9%) (11.0%) 3% (10.2%) (10.3%) (10.4%) (10.5%) (10.6%) (10.7%) (10.8%) (10.9%) (11.0%) (11.1%) (11.2%) 4% (10.4%) (10.5%) (10.6%) (10.7%) (10.8%) (10.9%) (11.0%) (11.1%) (11.2%) (11.3%) 5% (10.5%) (10.6%) (10.7%) (10.8%) (10.9%) (11.0%) (11.1%) (11.2%) (11.3%) 6% (10.7%) (10.8%) (10.9%) (11.0%) (11.1%) (11.2%) (11.3%) (11.4%) 7% (10.9%) (11.0%) (11.1%) (11.2%) (11.3%) (11.4%) (11.5%) 8% (11.0%) (11.1%) (11.2%) (11.3%) (11.4%) (11.5%) 9% (11.2%) (11.3%) (11.4%) (11.5%) (11.6%) 10% (11.4%) (11.5%) (11.6%) (11.7%) Source: Cowen and Company, Company Reports.4 December 12, 2011
  5. 5. Salesforce.comThe Competitive LandscapeWhen Salesforce.com first pioneered SaaS exiting the rubble of Bubble One, thecompany was way out in front of the market with a tremendous value proposition:enterprise class software at small business prices. The most enduring trend intechnology is that as time passes, price points compress and addressable marketsexpand. Salesforce had years of unfettered opportunity in front of it because thecompetition was caught flat footed and marginally interested in Software as aService. However, the company succumbed to the temptation of selling big dealsinto the enterprise and created another sales division to sell large deals. We believethat Salesforce’’s efforts to sell into the enterprise have yet to be profitable.Fast forward ten years: Oracle and Microsoft are 100% engaged and CRM’’s open fieldrun is over. Additionally, open source provider SugarCRM is offering a compelling,lower cost alternative at the low end of the market. It is hard for us to imagine CRMenjoying a sustainable growth rate in the high-20%/low-30% range given the marketmaturity and change in competitive landscape. One other important point toconsider is the fact that the competition is pricing its products at about half ofCRM’’s price, and the average customer uses less than 20% of the functionality in theproduct thereby reducing switching costs, especially at the low end.OracleOracle has been selling CRM On Demand for around five years. If one definessuccess as generating material revenue from its On Demand products, than wewould not define Oracle’’s On Demand business as a success. However, if we definesuccess as keeping SFDC out of its Siebel installed base and defending itsmaintenance revenue by giving away a competitive product, then Oracle CRM OnDemand has been pretty successful.This is not to say that CRM hasn’’t sold some large and impressive enterprise deals,the point is the company hasn’’t made any money doing it. Oracle’’s acquisition ofRightNow presents another obstacle for CRM. Oracle’’s goal isn’’t to be the largestprovider of On Demand Customer Service software; it’’s to give clients good enoughtechnology to keep SFDC out of its installed base. We believe that SFDC’’s primaryproduct is SFA, which is little more than front end functionality for an enterpriseCRM deployment. We rarely hear of any large enterprises replacing Siebel with SFDCbecause Siebel is a much more robust product. Siebel implementations are highlycustomized and deeply integrated with a variety of ERP modules which makesreplacements, especially for a product with modest functionality, highly unlikely.Microsoft (Moskowitz, Outperform)Microsoft was late to the game with its cloud offerings, but Dynamics CRM, launchedin January 2011 is in the market and competing. Regardless of win rates, which haveroom for improvement, Microsoft is leveraging its installed base and showing up insales cycles. We believe the power of the Microsoft offering is its ability to sell theAzure platform. A properly formed IT strategy starts with a data strategy at thecore. Applications matter, but if data doesn’’t come first, the ability of multipleapplications to work together, share data and function at a high level are limited.Microsoft sells the .Net/Azure platform first and brings in the apps as customers askfor them. We believe this strategy leverages a huge installed base of Microsoft’’s coretechnology.December 12, 2011 5
  6. 6. Salesforce.com In contrast, SFDC starts with the apps sale and then tries to convince people to use its platform. We view this strategy as flawed at its core, exacerbated by a number of missteps starting with SFDC trying to convince customers to use a proprietary programming language (anyone remember Apex?) and culminating in the $212M acquisition of Heroku. We have yet to find any evidence of market traction for SFDC’’s attempt at PaaS. SugarCRM SugarCRM has been the open source leader in CRM since its inception. Given its reliance on the open source community and third party distribution, the company’’s go to market strategy has taken a very long time to demonstrate momentum. However, under new leadership over the course of the last few years, the company’’s growth metrics have accelerated and SugarCRM is a player in the market for CRM, especially at the low end. Sugar has almost a million active users (about one third of the size of SFDC) and we believe that average customer has less than 20 users. If CRM’’s change in pricing terms causes disruption at the low end of the market, we believe SugarCRM as a low cost competitor is well positioned to benefit. Pricing of Competing CRM Suites CRM Offering Monthly ASP per User Salesforce.com Professional $65 Enterprise $125 Unlimited $250 Microsoft Dynamics CRM $44 SugarCRM Professional $30 Corporate $45 Enterprise $60 Ultimate $100 Source: Cowen and Company, Company Reports. Anecdotal evidence suggests Oracle CRM On Demand price is $75 per user per month6 December 12, 2011
  7. 7. Salesforce.com Why Productivity Matters We define productivity as current quarter billings growth over year ago quarter marketing spend. We use year ago marketing spend to normalize for seasonality and give a rep a year to get productive, although we doubt management is as patient as we are. Our forecasts for productivity indicated that diminishing returns would soon turn into declining returns. This happened in 3Q. 4Q might see a return to sales productivity given seasonal strength, but normalized productivity will be negative in FY13. This matters because when productivity goes negative, each additional rep will generate less revenue than his predecessor, and the lack of productivity will have a negative impact on margins. With sales representing 2/3rds of OpEx, there is little room elsewhere to trim costs. This poses a dilemma for management: do we continue to drive growth and start losing money, or do we slow down on hiring and give up on growth?Billings and Growth (FY07-FY13, Cowen Estimates) $8,000 80% 60% 55% $7,000 60% $6,000 33% 33% 40% 26% 28% 19% 18% $5,000 20% Billings ($M) Growth (%) 3% 2% (1%) $4,000 (11%) 0% (16%) (16%) $3,000 (20%) $2,000 (40%) $3,212 $2,504 $1,000 $1,888 (60%) $1,190 $1,416 $946 $612 $0 (80%) FY07A FY08A FY09A FY10A FY11A FY12E FY13E Billings Billings Growth Productivity Growth Source: Cowen and Company, Company Reports. We believe SFDC will have to make some hard decisions in the coming quarters as this dynamic manifests itself in the model. We would be much more supportive of the business if the company would scale back on its enterprise ambitions (which we believe loses a lot of money) and focus on the low end where we believe the bulk of the market opportunity is. December 12, 2011 7
  8. 8. Salesforce.com Too Many Products, Too Few Synergies Salesforce’’s product offerings have expanded well beyond its core SFA product into some adjacent markets, but mostly into tangential and unrelated markets. We still believe the core SFA product generates the bulk of the revenue for the business, and management understands that it can’’t be a one trick pony, so it’’s aggressively bought and built into other new and interesting markets like collaboration, social, and PaaS. However, these new and interesting markets haven’’t created synergies for the business because the user and the buyer aren’’t necessarily natural extensions of the SFA market. At present, the company still has one sales force to sell all its products. We fear a scenario where management creates incremental or overlapping sales forces because the expense of building out a substantive new delivery model could turn SFDC, a $2.5B business, unprofitable. Salesforce.com’’s Smorgasbord of Products, Users and Buyers Product User Buyer Sales Sales Sales Service Support Support Chatter Any employee IT Data.com Sales Sales Radian6 Sales, Support, Marketing Sales, Support, Marketing Force.com IT IT Database.com IT IT Heroku IT IT Source: Cowen and Company, Company Reports. We think it is worth mentioning that we view the PaaS business inside SFDC as the least likely to succeed. Most of SFDC’’s products have one thing in common: the customer is a business user. In contrast, its PaaS product is sold into IT/Development. We think that Salesforce.com’’s delivery model of bypassing IT to sell directly into the business has alienated IT, the buyer for its PaaS product. We believe IT has no qualms about rejecting SFDC’’s PaaS offerings in favor of other more widely adopted technologies, especially because CRM’’s sales group deliberately tried to end run around IT.8 December 12, 2011
  9. 9. Salesforce.comOther Things to ConsiderOld TechnologyOne more caveat for investors to consider is that the CRM platform is over 12 yearsold and built on old technology. If CRM is going to try and grow and adapt theproduct to future growth opportunities and reduce its operating costs, we believe itis entirely reasonable to expect the company to engage in a costly project to rewriteall of its products in contemporary technologies.We don’’t view this as imminent. The company migrated away from Sun to Dellhardware in 2009. We also note that its Oracle database backbone handles about200B transactions per year, while the Oracle-based backbone of Adobe’’s Omniturehandles 14T transaction per year, so despite the cost disadvantage of running onOracle, the limits of CRM’’s platform may not be reached in the immediate future.Build Out of New Headquarters is an FCF OverhangWhether or not the land deal the company did for its future headquarters should beor should not be classified as a capital expenditure (we do, they do not), it is $280Mcash unavailable to investors that should be taken into consideration when valuingthe firm. While the cash may be recovered if the firm decided not to continue withits headquarters, an additional significant outlay may still be forthcoming if thecompany decides to proceed with an HQ build out.Amortization of Commissions Inflates Margins vs. PeersSFDC defers its sales commissions cost and then amortizes it over the life of theassociated contract. While this is probably the proper interpretation of the costmatching principle applied to amortized revenue, it is not the norm and boosts itsmargins relative to its subscription peers, such as Ariba, that expense sales costs upfront.The following shows CRM’’s reported pro forma operating margin, and the samemargin when adjusted for the deferral and amortization of commission expenses.December 12, 2011 9
  10. 10. Salesforce.comAmortized Commissions Overstate Margins 25% 25% 20% 20% 16.5% 13.8% 14.3% 15% 15% 15.1% 13.4% 10.9% 11.9% 10% 10% 10.6% 5% 5% 0% 0% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 FY09 FY10 FY11 FY12 YTD Operating margin, as reported Operating margin, adjusted Operating margin, as reported Operating margin, adjusted Source: Cowen and Company, Company Reports. This treatment of commissions has increased margins anywhere between 40 bps and 240 bps over the last several years. This treatment has boosted margins 30 bps so far this year, and this is likely to increase given that the disparity is historically greatest in 4Q. It is important to note that if billings slow, the company still has to expense previous commissions which would have a negative impact on margins. Fewer Metrics to Measure the Business Management has been increasingly reticent in providing operational metrics for the business. Since 2005, the company has stopped reporting its customer count and subscriber metrics on a regular basis. Salesforce.com’’s Operating Metrics, 2005 vs. Today Metric 2005 Today Off Balance Sheet Backlog Annual, Generally Qualitative Annual, Generally Qualitative Customers Quarterly Milestones only (e.g., over 200K customers) Subscribers Quarterly Milestones only (e.g., over 4M subscribers) Headcount Quarterly Quarterly Source: Cowen and Company, Company Reports. Insiders are Diversifying The rate at which insiders are selling shares has increased. 10 December 12, 2011
  11. 11. Salesforce.comAmortized Commissions Overstate Margins $160 140,000 $140 120,000 $120 100,000 $100 Shares Sold Share Price 80,000 $80 60,000 $60 40,000 $40 $20 20,000 $0 0 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Share Price Insider Shares Sold Source: Cowen and Company, Company Reports. December 12, 2011 11
  12. 12. Salesforce.comProductivity in Terms of Billings/Prior Year Revenue FY08A FY09A 1Q10A 2Q10A 3Q10A 4Q10A FY10A 1Q11A 2Q11A 3Q11A 4Q11A FY11A 1Q12A 2Q12A 3Q12A 4Q12E FY12E 1Q13E 2Q13E 3Q13E 4Q13E FY13E Total Billings $945.5 $1,189.9 $260.3 $315.7 $327.0 $513.0 $1,415.9 $337.0 $412.9 $440.6 $697.3 $1,887.7 $484.6 $566.1 $566.8 $886.9 $2,504.4 $636.5 $725.6 $703.6 $1,146.8 $3,212.5 / Prior Year Pro Forma S&M Spend $351.1 $498.4 $128.3 $136.9 $143.1 $157.1 $565.5 $163.7 $170.1 $188.6 $213.3 $735.6 $230.7 $255.9 $275.4 $294.1 $1,056.1 $327.4 $342.0 $355.8 $362.8 $1,388.0 = Sales Productivity $4.03 $3.39 $2.27 $2.59 $2.57 $3.81 $2.84 $2.63 $3.02 $3.08 $4.44 $3.34 $2.96 $3.33 $3.01 $4.16 $3.40 $2.76 $2.84 $2.55 $3.90 $3.04 Y/Y Analysis Total Billings 54.5% 25.8% 9.8% 15.9% 22.7% 23.9% 19.0% 29.5% 30.8% 34.8% 35.9% 33.3% 43.8% 37.1% 28.6% 27.2% 32.7% 31.4% 28.2% 24.1% 29.3% 28.3% Prior Year Pro Forma S&M Spend 49.7% 42.0% 12.0% 12.2% 12.5% 16.8% 13.5% 27.5% 24.2% 31.8% 35.7% 30.1% 41.0% 50.4% 46.1% 37.9% 43.6% 41.9% 33.7% 29.2% 23.4% 31.4% Sales Productivity (1.4%) (15.9%) (25.0%) (20.2%) (13.3%) (9.0%) (16.2%) 15.6% 16.6% 19.8% 16.4% 17.5% 12.7% 10.4% (2.4%) (6.3%) 2.0% (6.8%) (14.8%) (15.0%) (6.2%) (10.7%) Source: Cowen and Company, Company Reports.Productivity Metric Y/Y Growth 25.0% 20.0% 15.0% Cowen Estimate 10.0% 5.0% 0.0% (5.0%) (10.0%) (15.0%) (20.0%) (25.0%) 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 E E E E E 12 13 13 13 13 1Q 2Q 3Q 4Q 3Q 4Q 1Q 2Q 1Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Source: Cowen and Company, Company Reports. 12 December 12, 2011
  13. 13. Salesforce.comApplication Software Company Valuation ($M, except per share data) As of 12/09/11 PF CY12E Stock Market PF CY12E PE / Ent. PF CY12E CY12E EBITDA EV/ Growth CY12 FCF CY12 Op Ticker Rating FYE Price Value EPS P/E Growth Growth Value Rev EV/Rev Growth FCFF EV/FCFF Growth EBITDA Yield Margin Adobe Systems ADBE NC Dec $28.04 $13,765 $2.46 11x 8% 1.5x $12,562 $4,359 2.9x 5% $1,304 10x N/A $1,902 7x 11 % 9.5 % 37.4 % JDA Software Grp JDAS NC Dec $33.35 $1,419 $2.65 13x 19 % 0.6x $1,365 $745 1.8x 10 % N/A NM N/A $200 7x 10 % N/A 24.1 % Manhattan Assoc. MANH NC Dec $45.33 $938 $2.38 19x 7% 2.9x $837 $368 2.3x 11 % $53 16x (3%) $84 10x 15 % 5.7 % 21.0 % Microsoft * MSFT 1 Jun $25.70 $216,193 $2.89 9x 9% 1.0x $170,151 $77,741 2.2x 8% $27,274 6x 11 % $33,286 5x 11 % 12.6 % 37.9 % MicroStrategy MSTR NC Dec $121.47 $1,610 $3.41 36x 87 % 0.4x $1,423 $642 2.2x 14 % $87 16x 12 % $65 22x 79 % 5.4 % 6.7 % Oracle ORCL 2 May $31.69 $163,806 $2.55 12x 10 % 1.2x $146,935 $39,893 3.7x 8% $13,122 11x 10 % $19,316 8x 11 % 8.0 % 46.9 % QADA 1 Jan $11.39 12x QAD ** $183 $0.95 10 % 1.3x $124 $256 0.5x 5% $26 5x 12 % $28 4x 9% 14.2 % 9.0 % QADB 1 Jan $10.88 11x SAP + SAP 3 Dec $58.78 $69,889 $3.99 15x 10 % 1.5x $68,004 $20,589 3.3x 9% $4,697 14x 3% $7,305 9x 4% 6.7 % 31.5 % Perpetual license vendors Median 13x 10 % 1.2x 2.2x 9% 13x 10 % 8x 11 % 7.4 % 24.1 % High 36x 87 % 2.9x 3.7x 14 % 16x 12 % 22x 79 % 14.2 % 46.9 % Low 9x 7% 0.4x 0.5x 5% 5x (3%) 4x 4% 5.4 % 6.7 % Ariba ARBA 1 Sep $34.76 $3,395 $0.99 35x 18 % 1.9x $3,162 $542 5.8x 17 % $62 51x 11 % $131 24x 35 % 1.8 % 20.1 % Aspen Technology AZPN 1 Jun $18.66 $1,755 $0.03 NM NM NM $1,660 $271 6.1x 38 % $88 19x 27 % $7 NM NM 5.0 % (0.3%) Concur Tech CNQR NC Sep $53.20 $2,878 $0.90 59x 11 % 5.5x $2,561 $462 5.5x 26 % $44 58x 0% $109 24x 14 % 1.5 % 18.7 % Constant Contact CTCT 1 Dec $25.10 $763 $0.92 27x 37 % 0.7x $637 $251 2.5x 18 % $22 29x 12 % $47 14x 32 % 2.9 % 12.0 % DealerTrack TRAK 1 Dec $27.74 $1,179 $1.09 25x 12 % 2.1x $1,114 $388 2.9x 12 % $48 23x (44%) $86 13x 16 % 4.1 % 18.8 % Intuit INTU 1 Jul $53.27 $15,981 $3.08 17x 15 % 1.1x $15,429 $4,393 3.5x 10 % $859 18x 12 % $1,626 9x 9% 5.4 % 33.2 % Kenexa KNXA 1 Dec $27.98 $779 $1.06 26x 29 % 0.9x $687 $331 2.1x 15 % $30 23x 20 % $61 11x 30 % 3.8 % 12.1 % NetSuite N NC Dec $47.73 $3,240 $0.21 NM 42 % NM $3,118 $295 10.6x 25 % $32 97x 30 % $25 NM 8% 1.0 % 6.0 % Red Hat * RHT 2 Feb $49.70 $9,584 $1.14 44x 13 % 3.3x $8,647 $1,253 6.9x 19 % $320 27x 11 % $368 24x 20 % 3.3 % 25.6 % RightNow Tech RNOW NC Dec $42.75 $1,413 $0.83 52x 38 % 1.3x $1,347 $269 5.0x 18 % $29 47x 95 % $57 23x 53 % 2.0 % 14.7 % Salesforce.com CRM 3 Jan $123.88 $17,612 $1.61 77x 22 % 3.5x $16,810 $2,905 5.8x 32 % $404 42x 17 % $540 31x 38 % 2.3 % 12.7 % SoundBite Comm SDBT 1 Dec $2.24 $37 ($0.01) NM NM NM $9 $43 0.2x 5% ($1) NM NM $1 NM NM N/A (0.3%) SuccessFactors SFSF NC Dec $39.87 $3,357 $0.12 NM NM NM $3,109 $418 7.4x 26 % $38 82x 107 % $20 NM (7%) 1.1 % 3.3 % Taleo TLEO NC Dec $42.24 $1,753 $1.13 37x 10 % 3.6x $1,642 $379 4.3x 17 % $46 36x 96 % $76 22x 1% 2.6 % 14.3 % Subscription vendors Median 36x 18 % 2.0x 5.3x 18 % 36x 17 % 23x 18 % 2.6 % 13.5 % High 77x 42 % 5.5x 10.6x 38 % 97x 107 % 31x 53 % 5.4 % 33.2 % Low 17x 10 % 0.7x 0.2x 5% 18x (44%) 9x (7%) 1.0 % (0.3%) All apps Median 26x 14 % 1.3x 3.5x 15 % 23x 12 % 13x 14 % 3.8 % 14.7 % High 77x 87 % 5.5x 10.6x 38 % 97x 107 % 31x 79 % 14.2 % 46.9 % Low 9x 7% 0.4x 0.2x 5% 5x (44%) 4x (7%) 1.0 % (0.3%) Rating system: 1 = Outperform, 2 = Neutral, 3 = Underperform, NC = not covered by Cowen. Restd = Restricted. Estimates are current First Call Consensus estimates when available, Cowen ests provided otherwise. * Covered by Gregg Moskowitz; ests from First Call Consensus ** QAD figures are for the composite of QAD Class A and QAD Class B shares where applicable + SAP financials converted at a rate of $1.3370/Euro Source: Cowen and Company, Company Reports, First Call Consensus Estimates. QAD estimates are Cowen estimates. December 12, 2011 13
  14. 14. Salesforce.comPro Forma P&L ($M, except per share data) FY10A FY11A 1Q12A 2Q12A 3Q12A 4Q12E FY12E 1Q13E 2Q13E 3Q13E 4Q13E FY13E Apr-11 Jul-11 Nov-11 Jan-12 Apr-12 Jul-12 Nov-12 Jan-13 Sub and support revenues $1,209.5 $1,551.1 $473.5 $509.3 $549.2 $584.9 $2,116.9 $628.2 $659.9 $695.1 $718.5 $2,701.7 % of total revs 92.6% 93.6% 93.9% 93.3% 94.0% 93.6% 93.7% 92.6% 92.9% 93.2% 93.4% 93.1% Profl services & other revenues 96.1 106.0 30.9 36.7 35.1 40.0 142.7 49.9 50.4 50.6 50.5 201.4 % of total revs 7.4% 6.4% 6.1% 6.7% 6.0% 6.4% 6.3% 7.4% 7.1% 6.8% 6.6% 6.9% Total revenues $1,305.6 $1,657.1 $504.4 $546.0 $584.3 $624.9 $2,259.5 $678.1 $710.3 $745.7 $769.0 $2,903.1 Cost of sub and support revs $138.6 $180.6 $62.5 $68.4 $74.7 $76.3 $281.9 $82.9 $88.6 $93.5 $94.2 $359.2 % of sub and support revs 11.5% 11.6% 13.2% 13.4% 13.6% 13.0% 13.3% 13.2% 13.4% 13.5% 13.1% 13.3% Cost of profl services 98.8 115.6 27.8 31.8 32.3 34.0 125.8 33.5 33.7 34.7 35.2 137.1 % of profl svc and other revs 102.7% 109.0% 90.2% 86.5% 92.0% 85.0% 88.2% 67.1% 66.9% 68.6% 69.7% 68.1% Total cost of revs $237.3 $296.2 $90.3 $100.2 $107.0 $110.3 $407.7 $116.4 $122.3 $128.2 $129.4 $496.3 Gross profit $1,068.2 $1,360.9 $414.0 $445.8 $477.3 $514.6 $1,851.8 $561.7 $588.0 $617.5 $639.6 $2,406.8 Gross margin 81.8% 82.1% 82.1% 81.7% 81.7% 82.3% 82.0% 82.8% 82.8% 82.8% 83.2% 82.9% Research and development $118.8 $169.0 $57.5 $62.2 $63.9 $66.4 $249.9 $70.9 $71.5 $73.4 $74.2 $290.0 % of revs 9.1% 10.2% 11.4% 11.4% 10.9% 10.6% 11.1% 10.5% 10.1% 9.8% 9.6% 10.0% Marketing and sales 565.5 735.6 230.7 255.9 275.4 294.1 1,056.1 327.4 342.0 355.8 362.8 1,388.0 % of revs 43.3% 44.4% 45.7% 46.9% 47.1% 47.1% 46.7% 48.3% 48.1% 47.7% 47.2% 47.8% General and administrative 168.6 218.8 70.8 70.2 72.7 73.9 287.7 78.3 78.7 81.5 82.3 320.8 % of revs 12.9% 13.2% 14.0% 12.9% 12.4% 11.8% 12.7% 11.5% 11.1% 10.9% 10.7% 11.1% Total operating expenses $852.8 $1,123.3 $359.0 $388.3 $412.0 $434.4 $1,593.7 $476.6 $492.2 $510.7 $519.3 $1,998.8 % of revs 65.3% 67.8% 71.2% 71.1% 70.5% 69.5% 70.5% 70.3% 69.3% 68.5% 67.5% 68.9% Pro forma operating income $215.4 $237.6 $55.1 $57.5 $65.3 $80.2 $258.1 $85.1 $95.8 $106.8 $120.3 $408.0 Operating margin 16.5% 14.3% 10.9% 10.5% 11.2% 12.8% 11.4% 12.5% 13.5% 14.3% 15.6% 14.1% Pro forma adjustments $100.1 $140.1 $57.9 $73.3 $75.4 $97.0 $303.6 $73.8 $73.6 $74.6 $101.1 $323.1 One time gains (charges) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 GAAP operating income $115.3 $97.5 ($2.8) ($15.7) ($10.2) ($16.8) ($45.5) $11.3 $22.2 $32.2 $19.2 $84.9 GAAP operating margin 8.8% 5.9% -0.6% -2.9% -1.7% -2.7% -2.0% 1.7% 3.1% 4.3% 2.5% 2.9% EBITDA ** $265.4 $309.1 $83.4 $95.5 $105.9 $122.4 $407.2 $127.3 $138.6 $150.5 $164.0 $580.4 EBITDA margin 20.3% 18.7% 16.5% 17.5% 18.1% 19.6% 18.0% 18.8% 19.5% 20.2% 21.3% 20.0% Net interest income/(expense) 29.1 31.9 7.1 4.0 4.0 7.1 22.2 7.2 7.2 7.2 7.2 28.8 Other income (1.3) (6.0) (0.8) (3.2) 0.0 0.0 (4.0) 0.0 0.0 0.0 0.0 0.1 Pretax income $143.1 $123.4 $3.5 ($15.0) ($6.1) ($9.7) ($27.3) $18.5 $29.4 $39.4 $26.4 $113.8 GAAP tax 57.7 34.6 0.3 (13.4) (5.1) (7.2) (25.5) 6.3 10.6 14.7 9.5 41.1 GAAP Tax rate 40.5% 33.2% 32.1% 75.9% 57.6% 58.1% 66.8% 40.3% 40.0% 40.1% 40.0% 40.1% Minority interest (4.0) (5.2) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 GAAP net income $80.7 $64.5 $0.5 ($4.3) ($3.8) ($5.2) ($12.7) $9.3 $15.9 $21.9 $14.2 $61.4 Net margin 6.2% 3.9% 0.1% (0.8%) (0.6%) (0.8%) (0.6%) 1.4% 2.2% 2.9% 1.9% 2.1% GAAP EPS $0.63 $0.48 $0.00 ($0.03) ($0.03) ($0.04) ($0.09) $0.06 $0.11 $0.15 $0.09 $0.41 Pro forma pretax income 243.3 263.5 61.4 58.3 69.3 87.3 276.3 92.3 103.0 114.0 127.5 436.9 Pro forma tax 92.3 92.1 21.5 15.2 20.3 29.7 86.7 36.9 41.2 45.6 51.0 174.7 Tax rate 37.9% 35.0% 35.1% 26.1% 29.3% 34.0% 31.4% 40.0% 40.0% 40.0% 40.0% 40.0% Pro forma net income $147.0 $166.1 $39.9 $43.1 $49.0 $57.6 $189.6 $55.4 $61.8 $68.4 $76.5 $262.2 Net margin 11.3% 10.0% 7.9% 7.9% 8.4% 9.2% 8.4% 8.2% 8.7% 9.2% 10.0% 9.0% Fully-diluted shares out 128.1 135.6 141.1 143.5 142.2 144.4 142.5 145.5 148.5 150.9 153.9 149.4 Pro forma EPS * $1.15 $1.22 $0.28 $0.30 $0.34 $0.40 $1.33 $0.38 $0.42 $0.45 $0.50 $1.76 Y/Y Analysis Sub and support revenues 22.8% 28.2% 35.0% 38.0% 36.3% 36.5% 36.5% 32.7% 29.6% 26.6% 22.8% 27.6% Profl services & other revenues 4.2% 10.3% 18.2% 44.5% 34.2% 41.2% 34.6% 61.7% 37.2% 44.2% 26.3% 41.2% Total revenues 21.3% 26.9% 33.8% 38.4% 36.2% 36.8% 36.4% 34.4% 30.1% 27.6% 23.1% 28.5% Cost of sub and support revs 19.4% 30.3% 59.0% 63.2% 57.0% 47.1% 56.1% 32.6% 29.5% 25.2% 23.5% 27.4% Cost of profl services 5.7% 17.0% 1.1% 10.3% 15.0% 9.0% 8.9% 20.4% 6.1% 7.6% 3.5% 8.9% Total cost of revs 13.3% 24.8% 35.2% 41.6% 41.5% 32.8% 37.7% 28.9% 22.1% 19.9% 17.3% 21.7% Gross profit 23.2% 27.4% 33.6% 37.8% 35.0% 37.7% 36.1% 35.7% 31.9% 29.4% 24.3% 30.0% Research and development 32.4% 42.3% 59.5% 60.0% 47.4% 30.8% 47.9% 23.4% 14.9% 15.0% 11.7% 16.0% Marketing and sales 13.5% 30.1% 41.0% 50.4% 46.1% 37.9% 43.6% 41.9% 33.7% 29.2% 23.4% 31.4% General and administrative 29.5% 29.8% 46.7% 31.8% 30.8% 19.9% 31.5% 10.6% 12.1% 12.1% 11.4% 11.5% Total operating expenses 18.7% 31.7% 44.8% 48.1% 43.3% 33.4% 41.9% 32.8% 26.8% 23.9% 19.5% 25.4% Pro forma operating income 44.5% 10.3% (11.2%) (6.3%) (1.1%) 66.4% 8.6% 54.5% 66.5% 63.6% 50.0% 58.1% EBITDA ** 49.8% 16.5% 10.2% 22.4% 25.0% 73.0% 31.7% 52.6% 45.2% 42.2% 33.9% 42.5% Pretax income 67.2% (13.8%) (90.5%) (142.9%) (113.9%) (242.3%) (122.1%) 423.6% NM NM NM NM Pro forma net income 74.4% 13.0% (0.1%) 11.2% 10.5% 33.8% 14.2% 39.0% 43.5% 39.6% 32.8% 38.3% Pro forma EPS * 70.5% 6.7% (6.4%) 4.0% 6.5% 29.9% 8.7% 34.8% 38.7% 31.6% 24.6% 31.9% Q/Q Analysis Sub and support revenues 10.5% 7.6% 7.8% 6.5% 7.4% 5.0% 5.3% 3.4% Profl services & other revenues 8.9% 19.0% (4.5%) 14.0% 24.8% 1.0% 0.4% (0.2%) Total revenues 10.4% 8.3% 7.0% 7.0% 8.5% 4.7% 5.0% 3.1% Cost of sub and support revs 20.5% 9.4% 9.2% 2.1% 8.7% 6.9% 5.5% 0.7% Cost of profl services (10.8%) 14.2% 1.6% 5.4% (1.5%) 0.6% 3.0% 1.4% Total cost of revs 8.8% 10.9% 6.8% 3.1% 5.5% 5.1% 4.8% 0.9% Gross profit 10.8% 7.7% 7.1% 7.8% 9.2% 4.7% 5.0% 3.6% Research and development 13.2% 8.3% 2.6% 4.0% 6.8% 0.8% 2.7% 1.1% Marketing and sales 8.2% 10.9% 7.6% 6.8% 11.3% 4.5% 4.0% 2.0% General and administrative 14.9% (0.8%) 3.6% 1.6% 6.0% 0.5% 3.6% 1.0% Total operating expenses 10.2% 8.2% 6.1% 5.4% 9.7% 3.3% 3.8% 1.7% Pro forma operating income 14.3% 4.4% 13.5% 22.9% 6.1% 12.6% 11.5% 12.6% EBITDA ** 17.9% 14.4% 10.9% 15.7% 4.0% 8.9% 8.6% 9.0% Pretax income (48.0%) NM NM NM NM 58.8% 34.0% (33.0%) Pro forma net income (7.4%) 8.0% 13.8% 17.6% (3.8%) 11.5% 10.7% 11.8% Pro forma EPS * (7.9%) 6.2% 14.8% 15.8% (4.5%) 9.3% 8.9% 9.7% * - Pro forma EPS excludes revenue writedown, stock compensation, one-time gains and charges, and amortization of intangibles. ** - EBITDA excludes stock compensation. Source: Cowen and Company, Company Report. 14 December 12, 2011
  15. 15. Salesforce.comBalance Sheet ($M) 4Q10A 4Q11A 1Q12A 2Q12A 3Q12A Jan-10 Jan-11 Apr-11 Jul-11 Nov-11 Cash and equivalents $1,011.3 $424.3 $664.6 $449.8 $503.0 Short-term marketable securities 230.7 72.7 99.2 127.6 142.9 Accounts receivable, net 321.0 426.9 270.8 342.4 312.3 Deferred commissions (LT+ST) 75.5 67.8 112.4 113.7 120.4 Deferred income taxes 40.1 27.5 23.8 33.9 38.8 Prepaid expenses and other current assets 55.7 55.7 63.9 95.0 79.4 Total current assets $1,734.3 $1,074.9 $1,234.8 $1,162.4 $1,196.9 Marketable securities, noncurrent $485.1 $910.6 $758.4 $709.3 $650.8 Fixed assets, net 89.7 387.2 446.3 470.1 504.8 Deferred income taxes, noncurrent 27.6 48.8 47.4 64.2 70.9 Capitalized software, net 34.8 41.2 124.7 198.3 199.4 Goodwill 49.0 396.1 406.9 671.6 732.1 Other assets, net 39.8 104.4 109.6 145.5 156.4 Total assets $2,460.2 $2,963.2 $3,128.1 $3,421.3 $3,511.3 Accounts payable $14.8 $18.1 $17.0 $22.3 $28.3 Accrued expenses and other current liabilities 194.7 345.1 296.0 389.9 409.2 Income taxes payable 8.4 Deferred revenue 690.2 913.2 893.9 917.8 905.1 Current debt 478.4 484.1 490.1 Total current liabilities $908.1 $1,276.5 $1,685.2 $1,814.1 $1,832.6 Debt 450.2 472.5 Income taxes payable, noncurrent 17.6 18.5 20.3 34.8 30.2 Long-term lease liabilities and other 13.5 25.5 49.1 46.1 52.6 Deferred revenue, noncurrent 14.2 21.7 21.2 17.5 12.8 Total liabilities $1,403.5 $1,814.7 $1,775.8 $1,912.4 $1,928.1 Minority interest 12.9 96.6 90.8 84.8 Shareholders (deficit) equity 1,056.7 1,276.5 1,255.6 1,418.1 1,498.4 Total liabilities and shareholders equity $2,460.2 $2,963.2 $3,128.1 $3,421.3 $3,511.3 Source: Cowen and Company, Company Report. December 12, 2011 15
  16. 16. Salesforce.comCash Flow ($M) FY10A FY11A 1Q12A 2Q12A 3Q12A 4Q12E FY12E FY13E Apr-11 Jul-11 Nov-11 Jan-12 Net income $80.7 $64.4 $0.5 ($4.3) ($3.8) ($5.2) ($12.7) $61.4 Minority interest 4.0 5.3 0.0 0.0 Depreciation and amortization 53.2 75.7 29.6 40.2 41.6 43.8 155.2 180.1 Loss (gain) on investment 0.0 0.0 0.0 0.0 Amort of debt discount 0.7 19.6 2.3 2.1 2.1 2.7 9.2 11.3 Amort of deferred commissions 63.9 80.2 24.7 24.9 26.9 29.1 105.6 129.9 Change in def income tax valu. allow. 0.0 0.0 0.0 0.0 Expense of stock-based comp 88.9 120.4 47.6 54.6 57.0 79.0 238.2 244.3 Tax benefits from stock option (51.5) (36.0) (2.0) (2.1) (6.9) (26.9) (37.9) (97.7) Changes in assets and liabilities Accounts receivable ($54.5) ($102.5) $156.1 ($66.1) $30.1 ($203.0) ($82.8) ($146.8) Deferred commissions (82.3) (121.2) (20.5) (26.1) (33.6) (61.8) (142.0) (155.7) Prepd exp & other curr assets (3.9) 2.0 (9.4) (9.6) 9.0 3.2 (6.7) (17.6) Other assets (1.4) (9.8) (2.7) (1.9) 4.7 0.0 0.1 0.0 Accounts payable (1.6) 1.2 (1.1) 4.1 5.9 (4.7) 4.3 3.6 Accrued exp and other curr liab 64.5 128.4 (65.6) 47.6 13.1 62.9 57.9 94.0 Income taxes 0.0 3.6 0.0 0.0 Deferred revenue 110.3 227.7 (19.8) 19.5 (17.4) 262.0 244.2 309.4 Changes in assets and liabilities 31.1 129.4 36.9 (32.5) 11.8 58.7 74.9 86.9 Cash flow from operations $270.9 $459.1 $139.5 $82.9 $128.7 $181.2 $532.4 $616.2 Capital expenditures (53.9) (373.3) (28.3) (50.5) (41.3) (44.2) (164.3) (206.0) Business combination, net of cash acquired (12.0) (403.3) (13.3) (285.3) (66.1) (364.8) 0.0 Purchase of subsidiary stock 0.0 (16.9) (5.4) (7.8) (21.5) (34.7) 0.0 Change in marketable securities (312.7) (270.3) 126.5 21.7 39.2 187.3 0.0 Investing cash flow ($378.6) ($1,063.8) $79.4 ($321.9) ($89.8) ($44.2) ($376.6) ($206.0) Proceeds from (purchase of) stock 0.0 (170.7) 0.0 0.0 Proceeds from option exercises 93.9 160.4 32.3 42.3 15.8 0.0 90.4 0.0 Tax benefits from employee stock plans 51.5 36.0 2.0 2.1 6.9 26.9 37.9 97.7 Borrowings 440.6 0.0 0.0 0.0 Principal pmts on capital lease (8.1) (10.4) (3.6) (10.5) 0.0 (14.1) 0.0 Sub stock offering/warrants/contingencies 59.3 0.0 (2.8) (13.4) (7.7) 0.0 (23.9) 0.0 Financing cash flow $637.2 $15.3 $28.0 $20.4 $15.0 $26.9 $90.2 $97.7 Effects of forex rates (2.0) 2.4 (6.5) 3.8 (0.7) (3.5) 0.0 Net change in cash and equivalents $527.5 ($587.0) $240.3 ($214.8) $53.2 $163.9 $242.6 $507.9 Cash and equivalents BOP 483.8 1,011.3 424.3 664.6 449.8 503.0 424.3 666.9 Cash and equivalents EOP $1,011.3 $424.3 $664.6 $449.8 $503.0 $666.9 $666.9 $1,174.8 Marketable securites $230.7 $72.7 $99.2 $127.6 $142.9 $142.9 $142.9 $142.9 Cash & marketable securities 1,242.0 497.0 763.8 577.4 645.8 809.8 809.8 1,317.7 Free cash flow to equity (FCFE) $217.0 $85.7 $111.2 $32.5 $87.4 $137.0 $368.1 $410.2 Y/Y Change 28.8% -60.5% -15.1% -32.7% 111.8% NM 329.2% 11.5% Free cash flow to firm (FCFF) $217.0 $85.7 $111.2 $32.5 $87.4 $137.0 $368.1 $410.2 Y/Y Change 28.8% -60.5% -15.1% -32.7% 111.8% NM 329.2% 11.5% CY FCFE $96.7 $344.5 $406.7 N/A Y/Y Change -54.6% 256.3% 18.0% N/A CY FCFF $96.7 $344.5 $406.7 N/A Y/Y Change -54.6% 256.3% 18.0% N/A COWEN SUMMARY: (a) Cash Flow from Operations $270.9 $459.1 $139.5 $82.9 $128.7 $181.2 $532.4 $616.2 Capital Spending (53.9) (373.3) (28.3) (50.5) (41.3) (44.2) (164.3) (206.0) Owners Cash Flow $217.0 $85.7 $111.2 $32.5 $87.4 $137.0 $368.1 $410.2 Financing $637.2 $15.3 $28.0 $20.4 $15.0 $26.9 $90.2 $97.7 Non-Recurring Items (326.7) (957.6) 101.2 (267.7) (49.2) 0.0 (215.7) 0.0 Beginning Cash $483.8 $1,011.3 $424.3 $664.6 $449.8 $503.0 $424.3 $666.9 Change in Cash 527.5 (856.5) 240.3 (214.8) 53.2 163.9 242.6 507.9 Ending Cash $1,011.3 $154.8 $664.6 $449.8 $503.0 $666.9 $666.9 $1,174.8 Ending Cash Equivalents 230.7 72.7 99.2 127.6 142.9 142.9 142.9 142.9 Ending Cash & Equivalents $1,242.0 $227.5 $763.8 $577.4 $645.8 $809.8 $809.8 $1,317.7 (a) Excludes non-recurring items Source: Cowen and Company, Company Report. 16 December 12, 2011
  17. 17. Salesforce.com Addendum STOCKS MENTIONED IN IMPORTANT DISCLOSURESTicker Company NameARBA AribaAZPN Aspen TechnologyCRM Salesforce.comCTCT Constant ContactINTU IntuitKNXA KenexaMSFT MicrosoftORCL OracleQADA QAD - AQADB QAD - BRHT Red HatSAP SAP AG (ADR)SDBT SoundBite CommunicationsTRAK DealerTrack Holdings ANALYST CERTIFICATIONEach author of this research report hereby certifies that (i) the views expressed in the research report accurately reflecthis or her personal views about any and all of the subject securities or issuers, and (ii) no part of his or her compensationwas, is, or will be related, directly or indirectly, to the specific recommendations or views expressed in this report. IMPORTANT DISCLOSURESCowen and Company, LLC and or its affiliates make a market in the stock of ARBA, AZPN, CRM, CTCT, INTU, KNXA, MSFT,ORCL, QADA, QADB, RHT, SAP, SDBT, TRAK securities.Cowen and Company, LLC and/or its affiliates managed or co-managed a public offering of KNXA within the past twelvemonths.Cowen and Company, LLC and/or its affiliates received in the past 12 months compensation for investment bankingservices from KNXA.KNXA is or was in the past 12 months a client of Cowen and Company, LLC; during the past 12 months, Cowen andCompany, LLC provided IB services.QADA, QADB is or was in the past 12 months a client of Cowen and Company, LLC; during the past 12 months, Cowen andCompany, LLC provided Non IB services.Cowen and Company, LLC has received compensation in the past 12 months for products or services other thaninvestment banking from QADA, QADB.KNXA has been client(s) of Cowen and Company, LLC in the past 12 months.Cowen and Company, LLC compensates research analysts for activities and services intended to benefit the firmsinvestor clients. Individual compensation determinations for research analysts, including the author(s) of this report, arebased on a variety of factors, including the overall profitability of the firm and the total revenue derived from all sources,including revenues from investment banking. Cowen and Company, LLC does not compensate research analysts based onspecific investment banking transactions. DISCLAIMERThis research is for our clients only. Our research is disseminated primarily electronically and, in some cases, in printedform. Research distributed electronically is available simultaneously to all Cowen and Company, LLC clients. Allpublished research, including required disclosures, can be obtained on the Firm’’s client website,www.cowenresearch.com. December 12, 2011 17

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