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Krause Fund Research Spring 2016
Tech (Beta) Recommendation: HOLD
Analysts Trevor Heimke [email protected] Max Neumann [email protected] Ryan Crockett [email protected] Nick Payne [email protected]
Company Overview Salesforce.com Inc., (NYSE:CRM) is a provider of enterprise cloud computing solutions that includes apps and platform services, as well as professional services. They service businesses of all sizes and process billions of transactions daily in real time. Marc Benioff and Parker Harris founded Salesforce 17 years ago. Benioff remains the Chairman and CEO while Harris is the Executive VP of Technology. The business is headquartered in San Francisco, California, U.S. and currently has over 16,000 employees. In the past 5 years their stock price has risen from around $30 to the current $75. Their revenue has increased year after year, and they currently are the third largest market share of their industry in 2007, to now the leading market share in their industry. Salesforce offers six core products that include sales, customer service, marketing, community management, analytics, and a cloud for app development. Salesforce aims to gain even more market share going forward due to the increasing importance of CRM while remaining the most innovative software company in the world.
Stock Performance Highlights 52 week High $82.90 52 week Low $52.60 Beta Value 1.42 Average Daily Volume 4.55 m Share Highlights Market Capitalization $52.11 b Shares Outstanding 670.93 m Book Value per share $75.73 EPS (2015) $-0.42 P/S Ratio 6.8 Gross Profit Margin 76.01% Company Performance Highlights ROA 2% ROE -7% Sales $5373586 Financial Ratios Current Ratio 0.81 Debt to Equity 1.69
Salesforce.com Inc. (NYSE: CRM)
April 18th, 2016
Current Price $75.73 Target Price $79.78
Salesforce Exhibits Continued Growth
Salesforce will continue its fast growth and remain the industry pioneer in cloud computing solutions for year’s to come. Cash is expected to grow by over 55% in the next 3 years, as well as net income becoming positive and growing by over 5% in 3 years time. Earnings per share are expected to turn positive and rise by over 100% in 2 years and remain positive from there on after. Sales are expected to grow by over 19% in the next year as Salesforce continues its expansion and increased market share, which is well above its competitors and the S&P 500 average. An increased amount of companies are using data analytics and cloud computing, which gives more growth potential to Salesforce in a fast growing industry that is flush with new customers. There are expectations of 34% rise in earnings for 2016, which is nearly seven times higher than the expected earnings for the S&P 500. Our target price of nearly $83 exceeds their current stock price and the average target price of numerous other analysts is around $90 One-Year Stock Performance
(Source: Yahoo Finance)
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Economic Outlook
Real Gross Domestic Product
Real Gross Domestic Product for the United States experienced an increase at an annualized rate of 2.4 percent in 2015 after the third revised estimate. After these revisions, we have increased at the same rate as 2014.1This increase signals a healthy economy, but plateauing from the previous year hints at near future uncertainty and should be handled with caution. Salesforce is growing at an extremely fast rate. As a top company in its industry, GDP growth is a fair indicator of the direction Salesforce’s growth will trend. Corporate profits decreased by 159.6 billion in Q4 of 2015, compared to a 33 billion decrease in Q3 of the same year.2
The Personal Consumption Expenditures index slowed down to a 1.1 Q4 increase in comparison to an increase of 2.2 percent in the previous quarter.3 The deceleration in PCE is likely heavily contributed to the slowdown of GDP growth. PCE is necessary to monitor for the rough estimates of disposable income of consumers. According to the Federal Reserve, PCE inflation is expected to rise significantly in 2016. This is most likely attributable to the plans to gradually increase interest rates and the proposed inflation target of 2%. 4
Another factor that could drastically affect the Real GDP is the impact of the presidential candidacy. The Treasury Department in April of 2016 implemented tighter restrictions on corporate taxation rules. Details in this imposed change mean tax inversions have less benefits towards earnings stripping and make accessing foreign profits more difficult.5 New regulations are expected to lower corporate profits for
international conglomerates, negatively effecting GDP.
The capital markets started the year off with substantial volatility. Significant positive correlations with oil prices in combination with the poor economic strategizing announcement from the Federal Reserve are likely reasons for this. Near the end of Q1, the markets have gained momentum and oil stagnation has smoothed. We anticipate at least one rate increase this year, rising to .75% and a supporting short term GDP growth of 2.2% in 2016. In the longer horizon, we expect the U.S. to increase GDP growth to an annualized rate of 2.6%, contingent on the implied independence between capital markets and oil prices.
Consumer Confidence & Sentiment Index
Consumer confidence is a survey put out by the Conference Board that measures the attitudes consumers have towards the economy. Surveyors answer questions about their current and potential future income, employment, and business conditions as a whole. Consumer sentiment is a survey conducted by The University of Michigan. This survey is very similar to the confidence survey, where both numbers are generally very similar to the other. This survey has questions geared toward the attitudes of the individuals towards the economy, and the strength of consumer spending. For Q1 in 2016, U of Michigan’s Consumer Sentiment stayed between the 91 – 95 range, slowly declining. April CSI came in at 89.7, which is lower than the expected 91, but is still a healthy number considering the recent political and macroeconomic growth conditions. 6 We want to keep a close watch on consumer confidence numbers to know what we can expect in revenues from Google Network Members. As confidence remains higher, inclinations to spend more money leads to higher online traffic, and a greater likeliness businesses will continue utilizing their web services. Minor fluctuations in Consumer Confidence could have a
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small effect on Salesforce, however it would be nothing significant. If consumers began to feel less confident, some may stop utilizing the service, but we feel that the customers’ information already stored on the cloud based service would be too important to give up.
Reports of a slowing in wage gains, inflationary adjusted income weakening, and political uncertainties as it pertains to the economy are contributing to the lower CSI readings. Previous consumer survey data remained extremely high despite more uncertain economic conditions, making this sub-90 rating partially admissible. Non- recessionary years average at a rating of 87.6, while the five recession periods averaged to 69.3; This signaling that we still have far to fall before adjusting.7 We believe that Consumer Confidence will decrease and hang slightly around 94 in the short term while Consumer Sentiment will hit 87.5. These numbers centered on the slight increases in employee compensations, the deteriorating income expectations and the assumption that oil will rebalance and rise in the capital markets. In the long term we anticipate the CCI to increase and stay around 97 and CSI to move back to 93.
Employment
Employment in the U.S. has continued to rise, showing the demand for a larger labor force while further ascertaining the strength of the job market as a whole. This hiring of employees can signal an expansive economy, as companies can afford to hire
more workers. Hourly earnings have risen 2.3 percent through 2015, and non-farm payrolls have increased 215,000 – which was 5,000 higher than the consensus.8
Salesforce, in order to hold market share, must hire the best talent available to the industry. Engineers and software developers will become ever more sought after as this field continues to expand and new entrants enter the industry. This will drive more people into careers like these and potentially lead to more people looking for work. Wage growth in the United States has increased at a steady rate, and could pose a potential problem for companies that are expecting to be able to pay huge premiums for talented labor. Having an already high salary percentage with the expectations of growth may not bode well. In 2015 employment rose from the previous year as a whole, leaving less people without a job. This shows that companies are feeling confident in their operations and futures, as they are making the investment to hire new employees. We feel this is one signal of a strong economy.
The employment cost index (ECI) rose in the fourth quarter of 2015 by .6%. The ECI is a measure of employee wage growth in the United States. This measure is important to monitor because it is useful to interpret cost pressures that can have an impact on the inflation rate in the United States.9
The unemployment rate has held steady for year-end 2015, through March 2016 at 5%.10
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The graph below shows that unemployment has continued to fall quarter after quarter for the last 2 years rather steadily. This could be because individuals are now more optimistic about finding a job, which can lead to a better performing economy, or because companies are looking to expand their operations and need new talent.
Bureau of Labor Statistics U.S. Department of Labor10
We feel that the economy is continuing to expand, which leads to an increase in employment. In the short-term (6 month outlook), we see the unemployment rate staying at 5%. In the long-term (2-3 year outlook), we see the unemployment rate dropping below 5%, to around 4.7%.
Our belief in this comes from the consumer confidence, which is at a high level right now, showing consumers are feeling positive about their financial future. For the software sector, we can expect to see an increase in the amount of skilled labor workers getting jobs. The software field is one of ever changing developments and increased innovation, which will be spurred on by the hiring of new employees.
The software industry is comprised of only a few companies that hold over 50% of the market share. That being said, competition in this field is very high among the top firms, as they don’t want to lose potential ideas (workers) to their rivals. One of the best ways for companies to stay innovative is to hire new people who will in turn bring with them new ideas.
Exchange Rates
The exchange rate is the price of a nation's currency in terms of another currency.11 For simplicity; we will be analyzing current exchange rates using the US dollar, as a base currency.
Analyzing current exchange rates plays an important role in the technology sector mainly due to the large amount of sales from foreign markets. There has been a notable correlation between the strength of the US dollar and US technology performance. The graph below shows that when the US is dollar is weak, technology performance tends to excel due to foreign buyers having more confidence in the US market.12
Fisher Investments on Technology pg. 56-57
Conversely, there are also benefits for US industries when the US dollar is strong. Products imported from foreign markets will be cheaper to US corporations resulting in lower costs. Companies who have more imports than exports in times of a strong US dollar will benefit more than those who don't.13
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Shown above is a 10-year graph of the Trade Weighted US Dollar index. This value is measured by giving importance to currencies mainly used in international trade.14
Due to recent decline of production recorded by the Purchasing Managers Index (PMI) manufacturing report, we estimate the Trade Weighted US dollar Index to increase to 130 in the next 6 months. However, we predict the Trade Weighted US dollar Index to fall between 100-105 in the next 2-3 years. We believe the main reason for this long-term Trade Weighted US Dollar Index decline is the US export estimates to increase over the next two years.21
Salesforce is continuing their efforts at entering into emerging markets across seas. We feel a slight decline in the value of the US dollar will help make their products and services more affordable.
Capital Markets Outlook
The technology industry as a whole has performed very well over 2015 (3.39% return from S&P 500 Information Technology Sector), and we see this continuing on into the future. With the increase in online traffic, companies that provide online services are benefitting from more advertising to a broader range of consumers, enhanced developments in the specific technology hardware, and the increases in online sales.22
We feel this is a good time to invest in the Internet software and services sector of the tech industry. The field is continuing to spend on innovation and research to enhance the already expanding software systems. The sector as a whole has an average revenue growth rate over the last 5 years as 12.9%.15
A company similar to Salesforce that has been thriving as of late is Oracle. Oracle has been in the market for a longer time than Salesforce, which has given it a three times larger market cap over Salesforce. However, Salesforce’s growth rates in revenues have been much higher on an average rate of the last 5 years than have Oracles, which demonstrates the continuing expansion of companies in this field.
Analysis
Salesforce operates within the Internet software & services industry inside of the technology sector. This segment of the technology sector is responsible for creating software & platforms that improve company’s connections with clients and also improve analysis of their data. Revenues for this industry are generated through customers purchasing the right to use the software, service packages, and software subscriptions.
The industry is expected to continue strong growth through 2021. High corporate profit, low interest rates, and an increasing number of companies preferring that their CRM services be accessible from the Internet drive this growth. Industry competitors will continue to improve their services to meet customer needs and invest in even more cloud space to ease the increasing population of clients. For the next 5 years, industry revenue is forecast to grow at an annualized rate of 11.1% to around $25.5 billion.
xvi.
Industry Trends
As a whole, the industry has focused on improving cloud computing in an effort to provide their customers with a more accessible product/service. This is evident in the transition from SaaP systems to SaaS systems. SaaP systems required clients to store data, servers, and applications within their own business and could only be accessed at the certain location because it’s a purchasable product. SaaS systems now allow clients to access their information from nearly any Internet accessible device. This is made possible by cloud computing that stores customer information and data without linking it with specific location or hardware. SaaS have a lower up front cost and can be put into use at a quicker start up
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rate because of no longer needing expensive servers and hardware to store the data.16
Competition
The industry has a medium concentration rate with over 50% of the revenue being controlled by four firms.
(Source: Yahoo Finance)
This can make it difficult for new entrants into the industry as their main competitors are already proven CRM pioneers.
Porters Five Forces
Industry Competition:
Threat of New Entrants: Barriers to enter this industry are moderate. New entrants usually develop through small businesses or more powerful software. Entrants are deterred due to high startup costs and the widespread usage of existing services by prospective customers. The elite firms won’t lose its largest contracts to smaller startups, so new entrants must have superior software to grow market share.
Threat of Substitutes: Substitution is a moderate industry threat. Currently, switching CRM providers may be costly due to initial hardware and the subsequent large support systems. However, with the emergence of cloud computing and SaaS systems, this switch cost will decrease and become less of a deterrent in the coming years.
Buying Power: The customers buying power is high in this industry. An increasing amount of customers are looking to solve their always changing needs. Companies must be flexible in order to meet customer needs. Customers are also now demanding payment
plans that better suit them. They are no longer locked into long-term contracts with their software provider, as these companies now offer monthly payment plans. Paired with no longer needed physical hardware, customers control the ability to quickly switch providers.
Supplier Power: Supplier power in this industry is different from others because they require no raw materials, but rather human capital and intellect. This industry relies heavily upon the growth of research & development, and the hiring of skilled employees is paramount to retaining market share.17
Catalysts for Growth/Change
Increased Accessibility: With more Internet users and an increasing amount of mobile usage, these services are becoming more accessible to customers than ever before. The accessibility is being driven by cloud based computing that doesn’t limit customers to a location or specific hardware. The consistent growth in mobile phone users has lead to an increase in demand for services CRM companies provide to be accessible on cellular phones.
(Source: Yahoo Finance)
The amount of cellphones being used per year continues to increase, specifically by an average of 5.35% over the last 3 years. People are becoming more and more dependent on their phones, and utilize them as not only a phone, but also a source to access the Internet. Salesforce is capturing this increased accessibility by offering an “App” marketplace, where the customer can download specific CRM
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applications to their phone for use.
Customer Awareness: Customers take a larger interest in how the product fits them and how the company treats them. This fits into the software industry producing specialized and customized products for their customers in order to serve their special needs. A recent study shows that 82% of customers will leave a company if they feel they are not being cared about. CRM software allows client corporations to be more connected to their customers by supplying firms with personalized data about their customers. This could help eliminated or at least diminish the chances of the customer feeling uncared about and keep them happy. www.superoffice.com/blog/crm-charts
Investment Positive/Negative
Positive: The software industry, specifically the CRM segment, has experienced significant growth. The software industry has year to date returns of 4.1%, with the S&P returning 1.35%.18 This is due in large part to companies having easier access to the products the firms in this industry supply.
Negative: Software companies, especially those dealing with CRM, have to be extremely cautious of their customer’s security. A possible breach into customer data/information would be detrimental to the industry’s credibility. In 2016 alone, 27% of banks and financial institutions along with 26% of online businesses use some form of CRM software.15
These banks and online retailers have contracts with CRM companies that would be terminated if a breach were to happen, as well as potential lawsuits that would diminish the reputation and value of the industry.
Company Analysis
Company Overview
Salesforce.com Inc., (NYSE:CRM) is a provider of enterprise cloud computing solutions that includes apps and platform services, as well as professional services. They serve businesses of all sizes and process billions of transactions daily in real time. Salesforce was founded 17 years ago, and had its IPO in 2006.In the past 5 years, the stock price for Salesforce has risen from around $30 to the current 75$.
(Source: Yahoo Finance)
Salesforces revenues have increased year over year for the past 4 years, by an average of 23%. (Salesforce 10K). Salesforce offers six core products that include sales, customer service, marketing, community management, analytics and a cloud for app development. Salesforce aims to gain even more market share going forward due to the increasing importance of CRM through its current revenue streams, as well as branching out into new emerging markets.
General Info
Salesforce is the leading customer relationship management service available in the market. Salesforce provides their customers with services and products that Customers pay for a membership to the service, and in return Salesforce provides them with different applications and professional services that supply the customer with an array of statistics, analytics, and data. The objective of this service is to provide the customer with in-depth, personalized information and data to better connect with their end customer. This objective is achieved through multiple product lines, membership retention, detailed applications, and professional support for customersi
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Products and Markets/Revenue Generation:
Salesforce is a provider of enterprise cloud computing solutions that include apps and platform services, as well as professional services. They are a company that focuses on customer relationship management. Salesforce offers six core cloud services that include sales force automation, customer service and support, marketing automation, community management, analytics, and a cloud platform for building custom applications. Salesforce also offers consulting, deployment, training, implementation, and integration services to its customers to facilitate the adoption of its cloud solutions. It derives its solutions as a service through all the Internet browsers and on mobile devices, on a subscription basis, primarily through its direct sales efforts and indirectly through partners. Salesforce derives their revenue from two sources: 93% comes from subscription revenues and their basic supportii; and the second source is from related professional service such as process mapping, project management, implementation services and other revenueiii.
(Source: Salesforce 10K)
We observed the revenues generated through their sales efforts by geography. Historically, the Americas have been the most success at generating revenues year over year at a high growth rate of close to 25%. Europe and Asia Pacific lag behind the Americas, but is becoming a more prominent portion of the revenues generated. The Americas make up approximately 72% of the total revenues generated, which has been the focus for much of their marketing strategy.8
Analysis of recent filings
Salesforce for the last three years has posted net losses, however this number has decreased when compared to total revenues recognized for the year. The net losses as a percentage of total revenue have decreased from 9% in 2013 to 5% 2015. The revenues have continued to grow, specifically by 24.24% from 2014 to 2015, but they are matched by the marketing and sales growth, which was 24.36% from 2014 to 2015iv. Salesforce's largest cost comes from marketing and sales, because of the attempt to expand their customer base. Salesforce is put up large costs in its previous years to try and set themselves up for massive growth. Their R&D cost growth in 2010-2012 were around 30% year over year. After which Salesforce focused more on marketing expense, and that became the leader in cost growth. The increased spending on marketing and sales, and the increased growth in revenue illustrates the overall growth of the company. This growth can be expected to continue as Salesforce has commented that they believe their marketing cost will continue to be their largest.
Competition
The software industry is one that is extremely competitive and evolving each day. Many firms in this industry charge high prices for their base services, and that can be a deterrent for customers to switch to a new companyv. This would lead to much higher customer retention than in other fields, leading to more focus on first time customers. With increasing reliance on cloud-based software, competition is expected to rise in the future. This will force Salesforce to continue to spend on the marketing of their services and products, as well as spend more in research and development to stay ahead of potentially new technologies. In this industry, companies may believe they can come up with a software like Salesforce's on their own for cheaper. This added competition can help be eliminated by continuing to spend on marketing and sales, along with research and development.
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Catalysts For Growth/Change
In the United States, roughly 543,000 new businesses are started each month. These businesses are opportunities for Salesforce to implement their services into these companiesvi. The monthly subscription to their services most commonly applied are in the 12-36 month range. Of the companies that acquire their services, between 9-10% did not renew their services. This is slightly above the industry average of about 80%vii. Focusing on a solid retention rate will help Salesforce grow even further. This shows the importance of acquiring contracts with new businesses because they will likely continue to use their services and continue to grow their client base.
The economy and businesses as a whole are becoming more reliant upon data analytics and becoming more efficient. According to a study conducted by BSA/The Software Alliance, 69% of American senior executives said data analytics is important to their companies. Furthermore, 79% of American senior executives said data analytics helps companies better meet their customers' needsviii. Salesforce's largest expenditure is from marketing and sales, and will continue to be into the foreseeable futureix. This is connected to the ideology that businesses are continuing to increase their focus on data analytics.
Key Investments (SWOT Analysis)
Salesforce's current business model and software already give them an advantage over their competition. They're currently ranked number 1 in the computer software industry by Fortune magazine, and have been number 1 for a few years in a row. They are the clear market leader and have increased their market share over the competitionx.
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Despite being the industry leader, Salesforce still has some weaknesses to overcome. In the current market, Salesforce's largest revenue stream is from their Sales Cloud. However, when compared to their competitors’ sales software, Salesforce's is considerably more expensive per month per user. This can have a negative effect on consumers because they may be hesitant to invest in Salesforce due to the higher price. However, this price gap is due to salesforce offering more customization, professional support for their products, and a more flexible payment plan than its competitors. Salesforce wants to penetrate the new market of emerging businesses, but may not be as attractive compared to cheaper options.
Company Cost/Month/User Salesforce Enterprise $ 125.00 Microsoft Dynamic CRM
$ 85.00
Infusionsoft Deluxe $ 75.00
Salesforce has many opportunities in the market due to new acquisitions and partnerships. Below is a table of Salesforce 5 most recent acquisitions. They’ve had a total of 37 since 2011.
RECENT ACQUISITIONS
MetaMind April 4th, 2016
PredictionIO February 19th, 2016
SteelBrick December 23rd, 2015
MiniHash December 14th, 2015
Kerensen Consulting July 31st, 2015
Salesforce formed a strategic global alliance with Google by revolutionizing how customers and businesses utilize the Internet. The two industry leading platforms came together to announce a new product: Salesforce Group Edition featuring Google Adwords that delivers everything an organization needs to jump start customer growth in a single servicexii. Salesforce also acquired InStranet, which provides knowledge management software for call centers. Salesforce can then integrate this newly
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acquired technology with their own software to expand upon their customer base and target Oracle, SAP, among other software companies. The growing demand in the CRM software market provides an opportunity of growth for Salesforce. As more businesses emerge or increase in size, customer relations becomes more and more important. As the industry leader, these businesses will turn to Salesforce to fill this new gap and to keep expanding.
The threat of data breaches and hacking has made business even more difficult for software companies around the world. Trust and safety are valued by customers when investing in companies, so possible data breaches and hacks could prove costly, especially to software companies that are viewed as impenetrable. These hacks could cost companies millions in tech repair, a loss of existing dissatisfied customers, and a negative association with their brand that will ultimately leave a lasting effect on stock prices. While this remains as a threat to the industry as a whole, Salesforce has taken measures to combat it, like limit IP ranges for logins, and double login identificationxiii.
There is also concern over government Internet and data regulations pertaining to the cloud. Expansion of the Internet, the cloud, and data sharing has asked for increased regulation and attention from the government. The attraction of the cloud is the promise of simplification and standardization without physical or geographic boundaries. However, Russia and many more countries are in the process of putting in privacy laws that mandate personal data on citizens to be stored in databases physically located within the country. This could be costly for cloud and data companies that would have to provide increased security measures and data servers.
Valuation Analysis
Valuation Overview
For our model, we found Salesforce’s intrinsic value using discounted cash flow (DCF) valuation, enterprise profit (EP) valuation, dividend discount model (DDM), and relative PS valuation. We feel that the intrinsic values generated from the DCF and EP models better represent the future target price.
Our DCF and EP models yielded an intrinsic adjusted value of $8 as of April 19th, 2016. The intrinsic value calculated is higher than its current stock price of $77.27.
General Assumptions for Models
Revenue Decomposition: To better understand where Salesforce revenue is being generated from, we decomposed the revenue by geographic location. Salesforce has been breaking into emerging markets, specifically European markets. Salesforce primarily derives revenue from two forms: subscription & support sales, and professional services. Breaking it down by geographic location would better represent their efforts to break into emerging markets. Salesforce customizes application software as specific to the customers’ need, so decomposing revenue by product would not be a fair representation of the revenue.
The strongest revenue stream was the America’s, which we continued its growth by 30% for the first 3 years, before slowing down to 4.5% in year 2021 (CV). We expect it to take this rate as they continue to have a retention rate of around 90% since there are few companies that have the level of service and support as Salesforce.
Europe has continued to have high revenue growth year over year, however we expect them to remain more constant in their growth due to increased efforts in Asian Pacific areas. The Asian Pacific areas are the newest segment in revenue generation. With large growth the last two years, and continued marketing in the area, we feel starting revenue growth at 20% and slowly decreasing it to 4.5% in 2021 (CV) reflects the overall efforts in the emerging markets.
Dividends/Payout Ratio
Salesforce has not paid any dividends since its IPO in 2006. In their past 10K reports, they have emphasized
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that there will be no changing of this dividend policy in the foreseeable future.
Since Salesforce does not pay dividends, we took an industry average of current payout ratios and applied that average to our forecasted earnings per share (EPS).
Income Statement Assumptions
Cost of Goods Sold
Cost of Goods Sold is broken down into two segments: subscription & support, and professional services. Cost of goods sold for both segments has remained relatively consistent over the past 5 years, at 17% and 7%, respectively. We continued these rates to reflect a consistent cost to service Salesforce’s products and service.
Marketing & Sales
Salesforce’s largest cost, historical, has been their marketing & sales. Marketing and sales cost continued to grow 24% year over year, and we extended that into our forecast. Salesforce representatives have said that marketing and sales will continue to be their largest cost as they continue their expansion efforts. We wanted to hold true to this large but necessary cost. We kept it as their largest cost, but decelerated its rate to a more economic outlook in the CV year. By this year, we believe their presence in the market will no longer require them to continue at such a high rate.
Research & Development
Research and Development is a very important cost to remain competitive force in an industry founded on innovation. We took a 5-year average growth of R&D to reflect recent developments for their company. We used this rate for the near future and then decelerated it at the CV year as to show Salesforce moving to a more steady state.
Balance Sheet Assumptions
Cash & Cash Equivalents
Due to being in an industry that prioritizes R&D, it is conceivable that a company would need a larger amount of cash on hand. The cash was calculated by a
plug account in order for our assets to equal our liabilities & stockholder’s equity.
Capitalized Software
Capitalized software is the internally developed or acquired software that is used for the internal needs of the business. Salesforce needs to continue its growth rate of 6% but will decline to a more steady state once growth decelerate.
Debt
We forecast their long-term debt as a percentage of the sales due to the continued need to fund their marketing and R&D costs. We link our short-term debt to a percentage of long-term debt over the life of the debt.
Weighted Average Cost of Capital (WACC)
In calculating our cost of equity, we used the capital asset pricing model (CAPM). Our risk free rate is the 30-year treasury bond of 2.62%. For the equity risk premium, we used the implied ERP on April 1st, 2016, for the 12-month adjusted trailing payout. This was 5.15%. We calculated the beta by averaging the monthly beta from 2007 to 2016 to give us the beta of 1.42. We chose these parameters for our beta to account for market fluctuations and how that affects Salesforce directly.xxi.
Cost of Debt
Salesforce’s current bond market only has a 2-year maturity date. So to accommodate for such a short time horizon, we instead found the industry average for a 30-year bond and applied that into our model. This gave us a pretax cost of debt of 5.38%.
WACC
Under these assumptions, we derived a WACC of 9.64%. This accurately characterizes Salesforce’s cost structure.
Discounted Cash Flows and Economic Profit
After running our DCF and EP model, we came to a stock price of $79.78. We then adjusted the stock price for the time since 12/31/2015 to arrive at our adjusted stock price of $82.08. This price yields a 6.22% upside over the current stock price of $77.27.
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We derived this amount by discounting our free cash flows back to a present value to arrive at our value of operations. From there we added back in the short tem marketable securities and accounted for the debt obligations, operating leases and stock option plans to arrive at our value of equity. We feel this model accurately describes the intrinsic value of the stock based on our assumptions built around the future performance of the company.
Dividend Discount Model (DDM)
Salesforce does not pay out dividends to shareholders, and sees no change in this practice in the foreseeable future. We felt the best way to forecast around this was to find the average payout ratio for similar companies in the industry, and apply that payout ratio to our forecasted EPS. We used the damodaran website to locate an industry average payout ratio of 1.29%. This resulted in a lower intrinsic value of $64.59, a 16.41% decrease in stock price. We do not expect Salesforce to change their dividend policy, and thus put less emphasis on the DDM intrinsic value.
Relative Valuation
We decided to use a Price/Sales relative valuation for our model. It did not make sense to use a Price/Earnings model as our projected net income for 2015 and 2016 were net loses. This would result in a negative intrinsic value, which would supply no insight into a potential price. The P/S model takes the market capitalization of a firm, and divides that number by the total number of sales for that year. After finding companies that were comparable to Salesforce based on sales and price, we multiplied the average P/S ratio for 2016 estimates of comparable companies to Salesforce’s estimated Sales for 2016. This yielded a relative P/S (EPS16) of $46.22. The company’s chosen for this model were similar companies in the industry, such as Oracle, SAP, NetSuite, and IBM. Continuing Value The continuing value is the present value in a future point of time of all future cashflows where we expect steady growth. We assumed Salesforce’s CV year would be in 2021. We believed 2021 was the best year because it allows time for Salesforce to grow and finally earn a very high earnings after its recent years
of net loss, but was also a short enough time horizon where the model would remain realistic and stable. Forecasting our results past this period would be impractical and unreasonable in predicting macroeconomic and industry conditions. Sensitivity Analysis A valuable tool in analyzing Discounted Cash Flow and Economic Profit models is using a sensitivity analysis on the assumptions made in our calculations. Continuing Value assumptions have a large weight on the output of our models and should therefore be evaluated. To test this sensitivity, we observed how different inputs for these assumptions affected our intrinsic price in the DCF and EP models. Below are explanations of why we chose the certain variables when performing these sensitivity analyses. CV Growth of NOPLAT vs. R&D CV Year Growth In order to find the intrinsic value in the DCF and EP models, a CV value must be chosen at a steady growth rate. We assumed this rate would be 4.5% at CV year 2021. This growth rate is important to expansion but realistically expanding within our means. We compared this to R&D CV Year growth rate because of how important R&D is to Salesforce’s effort to expand and become a larger company. R&D is a large cost that can catalyze a company to break through and expand, or it can diminish the company’s size due to very little R&D effort. After analyzing this sensitivity table, it is clear that CV growth of NOPLAT could widely change intrinsic price due to small changes and even R&D growth could change stock price by nearly $4 due to only a small percentage change. Marketing & Sales CV Growth vs. SG&A CV Growth Marketing & sales and SG&A were two of our largest operating expenses, so analyzing the change in their growth is important to understanding how the two affect intrinsic price. Salesforce has maintained their stance that marketing & sales will remain a large presence for the coming years as they expand their company, however we have them decelerating this rate to 3% in the CV year. Simply by increasing their marketing & sales by 6%, the intrinsic value can change by $7. The growth of this operating expense should be kept in mind when evaluating this company
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in the future due to such a large impact on its stock price. WACC vs. CV Growth of NOPLAT The weighted average cost of capital (WACC) is very important to computing our intrinsic value in our models. It is one of the lead drivers in determining the CF to discount and its subsequent PV (CF). A simple 1% change in WACC could change the intrinsic value by as much as $20. This showcases Salesforce importance on future cash flows and how an increase or decrease from estimated cash flows could affect the company’s overall value very quickly. CV Growth of NOPLAT vs. CV ROIC CV ROIC is a measure of how well the company utilizes its capital on hand. Capital on hand is very important to the expansion and R&D possibilities in this industry, so ROIC is a good measure of how well companies are putting that capital to use. Salesforce intrinsic price could change by over $1 with a 10% change in ROIC, compared to about $14 change from 1% change in NOPLAT Growth.
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Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report. i https://www.salesforce.com/company/ ii Salesforce 10K iiihttp://topics.nytimes.com/top/news/business/companies/salesforcecom-inc/index.html iv Salesforce 10K v Salesforce 10K vi www.businessinsider.com/infographic-the-state-of-us-small-business-2013-9 vii Salesforce 10K viii cioinsight.com, bsa.org ix Salesforce 10K x crmsearch.com/crm-market-share.php xi http://fortune.com/worlds-most-admired-companies/abb-100000/ xii Salesforce 10K xiiihttp://content.trust.salesforce.com/trust/en/learn/bestpractices/ Xv IBISworldreportscrm xvi Clients1.ibisworld.com
xvii Netadvantage.standardandpoors.com/software
xviii FactSet
xiv https://www.crunchbase.com/organization/salesforce/acquisitions
xx https://ycharts.com/indicators/sandp_500_total_return_annual
xxi danodaran.com
Salesforce.com, incRevenue Decomposition
Fiscal Years Ending Jan. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021CVRevenues by geographyAmericas 2123.74 2899.84 3868.33 5028.829 6537.4777 8498.721 10623.401 12535.613 13099.716Growth YoY 27% 27% 25% 30% 30% 30% 25% 18% 4.5%Europe 525.3 741.22 984.92 1181.904 1418.2848 1701.9418 1974.2524 2230.9053 2331.296Growth YoY 22% 29% 25% 20% 20% 20% 16% 13% 4.5%Asia Pacific 401.16 429.95 520.34 624.408 749.2896 899.14752 1052.0026 1188.7629 1242.2573Growth YoY 21% 7% 17% 20% 20% 20% 17% 13% 4.5%Total Revenue 3050.2 4071.0 5373.59 6835.141 8705.0521 11099.81 13649.656 15955.282 16673.269Growth YoY 26% 25% 24% 27% 27% 28% 23% 17% 4.5%
Salesforce.com, incIncome Statement (in thousands)
Fiscal Years Ending Jan. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021CVRevenues:Subscription and Support 2,868,808 3,824,542 5,013,764 6,377,447 8,122,145 10,356,545 12,735,649 14,886,885 15,556,795 Professional services and other 181,387 246,461 359,822 457,689 582,901 743,257 913,997 1,068,385 1,116,462 Total Revenues 3,050,195 4,071,003 5,373,586 6,835,136 8,705,046 11,099,802 13,649,646 15,955,270 16,673,257 Cost of Revenues:Subscription and Support 494,187 711,880 924,638 1,161,973 1,479,858 1,886,966 1,637,958 1,595,527 1,333,861 Professional services and other 189,392 256,548 364,632 478,460 609,353 776,986 955,475 1,116,869 1,167,128 Total Cost of Revenue 683,579 968,428 1,289,270 1,640,433 2,089,211 2,663,952 2,593,433 2,712,396 2,500,989 Gross Profit 2,366,616 3,102,575 4,084,316 5,194,703 6,615,835 8,435,850 11,056,213 13,242,874 14,172,268 Operating Expenses:Research and Development 429,479 623,798 792,917 991,146 1,238,933 1,548,666 1,749,993 1,889,992 1,965,592 Marketing and Sales 1,614,026 2,168,132 2,757,096 3,418,799 4,239,311 5,256,745 5,887,555 6,270,246 6,458,353 General and Administrative 433,821 596,719 679,936 788,726 914,922 1,061,309 1,167,440 1,249,161 1,299,128 Total Operating Expenses 2,477,326 3,388,649 4,229,949 5,198,671 6,393,166 7,866,721 8,804,988 9,409,399 9,723,073 Income (loss) From Operations (110,710) (286,074) (145,633) (3,968) 222,669 569,129 2,251,226 3,833,475 4,449,196 Investment Income 19,562 10,218 10,038 10,640 11,279 11,955 12,673 13,433 14,239 Interest Expense (30,948) (77,211) (73,237) (94,512) (121,968) (157,399) (181,009) (195,490) (203,310)Gain on Sales of Land and Building Improvements ‐ ‐ 15,625
Other income (expense) (5,698) (4,868) (19,878) (24,787) (30,908) (38,540) (46,249) (53,186) (55,313)Income (Loss) Before Benefit From (Provision for) income taxes ad noncontrolling interest (127,794) (357,935) (213,085) (112,627) 81,072 385,144 2,036,640 3,598,232 4,204,812 Benefit from (provision for) income taxes (142,651) 125,760 (49,603) (7,535) 5,424 25,766 136,251 240,722 281,302 Consolidated net income (loss) (270,445) (232,175) (262,688) (120,161) 86,496 410,910 2,172,892 3,838,954 4,486,114
Less: net income attributable to noncontrolling interest ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Net income (loss) attributable to salesforce.com (270,445) (232,175) (262,688) (120,161) 86,496 410,910 2,172,892 3,838,954 4,486,114
Earnings Per Share ‐0.48 ‐0.39 ‐0.42 ‐0.1923 0.1383 0.6561 3.4655 6.1156 7.1384Shares Outstanding 564896 597613 624148 624864 625580 626297 627013 627729 628445Dividends per share 0 0 0
Salesforce.com, incBalance Sheet (in thousands)
Fiscal Years Ending Jan. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021CV
AssetsCurrent assets:Cash and cash equivalents 747,245 781,635 908,117 2,388,767 3,663,898 5,677,461 7,799,949 11,460,866 13,449,069 Short‐term marketable securities 120,376 57,139 87,312 198,372 339,815 520,168 741,953 1,001,200 1,272,113 Accounts Receivable 872,634 1,360,837 1,905,506 1,708,785 2,176,262 2,774,952 3,412,413 3,988,818 4,168,315 Deferred commissions 142,311 171,461 225,386 259,194 298,073 342,784 394,202 453,332 521,332 Deferred income taxes 7,321 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Prepaid expenses and other current assets 125,993 309,180 280,554 400,169 854,658 1,434,177 2,146,822 2,979,844 3,850,352
Land and building improvements held for sale ‐ ‐ 143,197 ‐ ‐ ‐ ‐ ‐ ‐
Total current assets 2,015,880 2,680,252 3,550,072 4,955,287 7,332,706 10,749,541 14,495,338 19,884,060 23,261,181
Marketable securities, noncurrent 890,664 482,243 894,855 1,168,260 1,516,462 1,960,454 2,506,440 3,144,651 3,811,581 Property and equipment, net 604,669 1,240,746 1,125,866 1,421,708 1,810,649 2,308,759 2,839,126 3,318,696 3,468,037
Deferred commissions, noncurrent 112,082 153,459 162,796 169,308 176,080 183,123 190,448 198,066 205,989 Deferred income taxes, noncurrent, net 19,212 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Capitalized software, net 207,323 481,917 433,398 438,132 557,993 711,497 874,942 1,022,733 1,068,756 Goodwill 1,529,378 3,500,823 3,782,660 3,782,660 3,782,660 3,782,660 3,782,660 3,782,660 3,782,660
Other assets, net 149,748 613,490 628,320 546,811 696,404 887,984 1,091,972 1,276,422 1,333,861 Restricted cash ‐ ‐ 115,015 ‐ ‐ ‐ ‐ ‐ ‐
Total assets 5,528,956 9,152,930 10,692,982 12,482,166 15,872,955 20,584,019 25,780,926 32,627,288 36,932,065 LiabilitiesAccounts payable and accrued expenses 597,706 934,324 1,103,335 1,329,878 1,602,936 1,932,060 2,221,869 2,555,149 2,657,355
Deferred revenue 1,798,640 2,473,705 3,286,768 4,108,460 5,135,575 6,419,469 7,382,389 8,489,747 8,829,337
Current portion of long‐term debt 521,278 572,159 ‐ 685,346 751,865 957,555 1,220,978 1,228,468 1,116,869
Income taxes payable ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Deferred income taxes ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Current portion of capital lease obligations ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Total current liabilities 2,917,624 3,980,188 4,390,103 6,123,684 7,490,376 9,309,084 10,825,236 12,273,365 12,603,561
Term loan, noncurrent ‐ 1,301,930 1,370,692 1,503,730 1,915,110 2,441,956 2,456,936 2,233,738 2,000,791
Inome taxes payable, noncurrent 49,074 ‐ ‐ 90,907 115,777 147,627 181,540 212,205 221,754
Deferred revenue, noncurrent 64,355 48,410 34,681 68,351 87,050 110,998 136,496 159,553 166,733
Other noncurrent liabilities 126,658 757,187 922,323 909,757 1,158,642 1,477,384 1,228,468 1,435,974 666,930
Minority Interest 53,612 26,705 66,984 85,309 108,778 133,767 156,362 163,398
Total Liabilities 3,157,711 6,087,715 6,717,799 8,763,413 10,852,265 13,595,827 14,962,444 16,471,196 15,823,167
Stockholders' equity:Common stock 2,411,478 3,363,987 4,605,136 4,442,838 5,658,280 7,214,871 8,872,270 10,370,925 10,837,617
Deferred Stock Based CompensationAccumulated other comprehensive income (loss) 17,137 17,680 (24,108) 1,921 1,921 1,921 1,921 1,921 1,921
Retained earnings (accumulated deficit) (110,982) (343,157) (605,845) (726,006) (639,510) (228,600) 1,944,292 5,783,246 10,269,360
Total stockholders' equity 2,317,633 3,038,510 3,975,183 3,718,753 5,020,690 6,988,192 10,818,483 16,156,092 21,108,897
Total liabilities, temporary equity, and stockholders equity 5,528,956 9,152,930 10,692,982 12,482,166 15,872,955 20,584,019 25,780,926 32,627,288 36,932,065
Salesforce.com, incCash Flow Statement (in thousands)
Fiscal Years Ending Jan. 31 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Operating Activities:Net Income (loss) 28,474 481 18,356 48,035 84,692 69,697 (11,572) (270,445) (232,175) (262,688)
Adjustments to reconcile net los to net cash provided by operating activities:Depreciation and amortization 6,027 12,504 24,219 35,971 53,177 75,746 157,286 216,795 369,423 448,296
Amortization of debt discount and transaction costs ‐ ‐ ‐ ‐ 728 19,621 10,347 24,086 49,582 39,620
Gain on sale of land and building improvements ‐ ‐ (1,272) ‐ ‐ ‐ ‐ ‐ ‐ (15,625)
Change in the deferred income tax valuation allowance (7,225) ‐ (970)
Loss on conversions of convertible senior notes ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 214 10,326
Lease recovery (285) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Minority interest in consolidated joint venture 1,034 2,220 4,472 ‐ ‐ ‐ ‐ ‐ ‐ ‐
Amortization of deferred commissions 14,606 23,381 42,195 58,732 63,891 80,159 107,195 154,818 194,553 257,642
Expenses related to employee stock plans 3,448 39,205 55,207 77,366 88,892 120,429 229,258 379,350 503,280 564,765
Excess tax beneits from employee stock plans 3,662 (16,574) (31,978) (54,597) (51,539) (35,991) (6,018) (14,933) (8,144) (7,730)
Loss on securities ‐ ‐ ‐ 1,783 ‐ ‐ ‐ ‐ ‐ ‐
Changes in assets and liabiilities, net of business combinations:Accounts receivable, net (27,254) (52,523) (91,368) (44,798) (54,522) (102,507) (244,947) (183,242) (424,702) (544,610)
Deferred commissions (22,068) (37,856) (62,759) (63,701) (82,336) (121,247) (167,199) (232,591) (265,080) (320,904)
Prepaid expenses and other current assets and other assets (2,871) (8,157) (11,376) (4,746) (3,899) 2,001 (10,736) (9,718) 105,218 45,819
Accounts payable, accrued expenses and other liabilities 24,208 26,162 70,387 63,952 62,910 133,250 80,336 193,358 (29,043) 159,973
Deferred revenue 73,275 114,500 196,831 112,852 110,322 227,693 444,674 479,419 612,343 798,830
Income taxes 2,434 9,590 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Other assets (1,572) (1,709) (7,669) (1,292) (1,405) (9,770) 2,883 ‐ ‐ ‐
Net cash provided by operating activities 95,893 111,224 204,275 229,557 270,911 459,081 591,507 736,897 875,469 1,173,714
Investing activitiesBusiness combinations, net of cash acquired ‐ (15,502) ‐ (27,907) (11,999) (403,331) (422,699) (579,745) (2,617,302) 38,071
Proceeds from land activity, net ‐ ‐ 1,659 ‐ ‐ (277,944) (19,655) (4,106) ‐ 223,240
Deposit for purchase of building and land ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ (126,435)
Strategic investments ‐ ‐ ‐ ‐ (4,400) (20,105) (37,370) (9,695) (31,160) (93,725)
Restricted cash 3,191
Purchases of marketable securities (193,165) (336,878) (447,296) (449,035) (1,317,952) (1,682,549) (623,231) (1,021,287) (558,703) (780,540)
Sales of marketable securities 64,614 13,012 19,608 154,287 874,573 1,197,492 724,564 706,893 1,038,284 243,845
Maturities of marketable securities 100,989 195,672 366,872 284,339 130,663 214,770 40,346 144,623 36,436 87,638 Capital expenditures (23,434) (22,123) (43,552) (61,059) (49,501) (90,887) (151,645) (175,601) (299,110) (290,454)
Net cash used in investing activities (47,805) (165,819) (102,709) (99,375) (378,616) (1,062,554) (489,690) (938,918) (2,431,555) (698,360)
Financing activitiesProceeds from borrowings on convertible senior notes, net ‐ ‐ ‐ ‐ 567,094 ‐ ‐ ‐ 1,132,750 ‐
Proceeds from issuance of warrants ‐ ‐ ‐ ‐ 59,283 ‐ ‐ ‐ 84,800 ‐
Purchase of convertible note hedge ‐ ‐ ‐ ‐ (126,500) ‐ ‐ ‐ (153,800) ‐
Proceeds from term loan, net ‐ ‐ ‐ ‐ ‐ ‐ ‐ 298,500 ‐
Purchase of subsidiary stock ‐ (2,777) ‐ (21,622) ‐ (171,964) ‐ ‐ ‐ ‐
Proceeds from revolving credit facility, net ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 297,325
Proceeds from employee stock plans 15,735 29,082 60,910 43,311 93,856 160,402 116,565 351,366 289,931 308,989
Excess tax beneits from employee stock plans ‐ 16,574 31,978 54,597 51,539 35,991 6,018 14,933 8,144 7,730
Collection of notes receivable from stockholders 727 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Payments on convertible senior notes ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ (5,992) (568,862)
Repurchase of unvested shares (28) (12) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Contingent consideration payment related to prior business combinations ‐ ‐ ‐ ‐ ‐ ‐ (16,200) ‐ ‐ ‐
Principle payments on capital lease obligations (614) (617) (175) (997) (8,119) (10,355) (30,533) (31,754) (41,099) (70,663)
Payments of term loan ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ (15,000) (285,000)
Net cash provided by (used in ) financing activities 15,820 42,250 92,713 75,289 637,153 14,074 75,850 334,545 1,598,234 (310,481)
Effect of exchange rate changes 203 (889) (1,792) (732) (1,976) 2,385 5,325 7,437 (7,758) (38,391)
Net increase (decrease) in cash and cash equivalents 64,111 (13,234) 192,487 204,739 527,472 (587,014) 182,992 139,961 34,390 126,482
Cash and cash equivalents, beginning of period 35,731 99,842 86,608 279,095 483,834 1,011,306 424,292 607,254 747,215 781,635
Cash and cash equivalents, end of period 99,842 86,608 279,095 483,834 1,011,306 424,292 607,284 747,215 781,635 908,117
Salesforce.com, incStatement of Expected Cash Flows
Fiscal year End Jan. 31 2016E 2017E 2018E 2019E 2020E 2021CVOperating ActivitiesNet Income (120,161) 86,496 410,910 2,172,892 3,838,954 4,486,114 Adjustments:Accounts Receivable 196,721 (467,477) (598,689) (637,461) (576,406) (179,497) Deferred Commisions (33,808) (38,879) (44,711) (51,418) (59,130) (68,000) Prepaid Assets/other current assets (119,615) (454,489) (579,519) (712,646) (833,022) (870,508) Deferred Commisions noncurrent (6,512) (6,772) (7,043) (7,325) (7,618) (7,923) Capitalized Software net (4,734) (119,861) (153,504) (163,445) (147,790) (46,023) Other assets net 81,509 (149,593) (191,581) (203,988) (184,450) (57,439) Accounts payable, accrued expenses, other liabilities 226,543 273,058 329,124 289,809 333,280 102,206 Deferred Rev 821,692 1,027,115 1,283,894 962,920 1,107,358 339,590 Income taxes payable - - - - - - income taxes payable noncurrent 90,907 24,870 31,850 33,913 30,665 9,549 deferred rev noncurrent 33,670 18,699 23,948 25,498 23,056 7,180 other noncurrent liabilities (12,566) 248,885 318,742 (248,915) 207,506 (769,044) Net cash flows from operating activities 1,153,646 442,051 823,422 1,459,835 3,732,403 2,946,206
Investing ActivitiesMarketable securities current (111,060) (141,443) (180,354) (221,784) (259,247) (270,913) Marketable Securities noncurrent (273,405) (348,202) (443,992) (545,986) (638,211) (666,930) Property Plant and Equipment, net (295,842) (388,941) (498,109) (530,368) (479,570) (149,341) Goodwill - - - - - - Land and Building Improvements Held for Sale 143,197 - - - Restricted Cash 115,015 - - - Minority Interest 66,984 18,325 23,469 24,988 22,595 7,036 Net cash flows from investing activities (355,111) (860,261) (1,098,986) (1,273,149) (1,354,432) (1,080,149)
Financing ActivitiesShort term debt 685,346 66,519 205,690 263,423 7,490 (111,599) Long term debt 133,038 411,380 526,846 14,980 (223,199) (232,947) Common Stock and additional paid in capital (162,298) 1,215,441 1,556,592 1,657,399 1,498,655 466,692 Accumulated other comprehensive income 26,029 - - - - - Net cash flow from financing activites 682,115 1,693,340 2,289,128 1,935,802 1,282,947 122,145
Net increase (decrease) in cash and cash equivalents 1,480,650 1,275,131 2,013,563 2,122,487 3,660,918 1,988,203 Cash and cash equivalents at the beginning of year 908,117 2,388,767 3,663,898 5,677,461 7,799,949 11,460,866 Cash and cash equivalents at the end of year 2,388,767 3,663,898 5,677,461 7,799,949 11,460,866 13,449,069
Salesforce.com, incCommon Size Income Statement
Fiscal Years Ending Jan. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021CVRevenues:Subscription and Support 94.05% 93.95% 93.30% 93.30% 93.30% 93.30% 93.30% 93.30% 93.30%Professional services and other 5.95% 6.05% 6.70% 6.70% 6.70% 6.70% 6.70% 6.70% 6.70%Total Revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of Revenues: 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Subscription and Support 16.20% 17.49% 17.21% 17.00% 17.00% 17.00% 12.00% 10.00% 8.00%Professional services and other 6.21% 6.30% 6.79% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%Total Cost of Revenue 22.41% 23.79% 23.99% 24.00% 24.00% 24.00% 19.00% 17.00% 15.00%Gross Profit 77.59% 76.21% 76.01% 76.00% 76.00% 76.00% 81.00% 83.00% 85.00%Operating Expenses: 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Research and Development 14.08% 15.32% 14.76% 14.50% 14.23% 13.95% 12.82% 11.85% 11.79%Marketing and Sales 52.92% 53.26% 51.31% 50.02% 48.70% 47.36% 43.13% 39.30% 38.73%General and Administrative 14.22% 14.66% 12.65% 11.54% 10.51% 9.56% 8.55% 7.83% 7.79%Total Operating Expenses 81.22% 83.24% 78.72% 76.06% 73.44% 70.87% 64.51% 58.97% 58.32%Income (loss) From Operations ‐3.63% ‐7.03% ‐2.71% ‐0.06% 2.56% 5.13% 16.49% 24.03% 26.68%Investment Income 0.64% 0.25% 0.19% 0.16% 0.13% 0.11% 0.09% 0.08% 0.09%Interest Expense ‐1.01% ‐1.90% ‐1.36% ‐1.38% ‐1.40% ‐1.42% ‐1.33% ‐1.23% ‐1.22%Gain on Sales of Land and Building Improvements 0.00% 0.00% 0.29% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other income (expense) ‐0.19% ‐0.12% ‐0.37% ‐0.36% ‐0.36% ‐0.35% ‐0.34% ‐0.33% ‐0.33%Income (Loss) Before Benefit From (Provision for) income taxes ad noncontrolling interest ‐4.19% ‐8.79% ‐3.97% ‐1.65% 0.93% 3.47% 14.92% 22.55% 25.22%Benefit from (provision for) income taxes ‐4.68% 3.09% ‐0.92% ‐0.11% 0.06% 0.23% 1.00% 1.51% 1.69%Consolidated net income (loss) ‐8.87% ‐5.70% ‐4.89% ‐1.76% 0.99% 3.70% 15.92% 24.06% 26.91%Less: net income attributable to noncontrolling interest 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Net income (loss) attributable to salesforce.com ‐8.87% ‐5.70% ‐4.89% ‐1.76% 0.99% 3.70% 15.92% 24.06% 26.91%
Salesforce.com, incCommon Size Balance Sheet
Fiscal Years Ending Jan. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021CVAssetsCurrent assets:Cash and cash equivalents 24.50% 19.20% 16.90% 34.95% 42.09% 51.15% 57.14% 71.83% 80.66%Short‐term marketable securities 3.95% 1.40% 1.62% 14.75% 3.90% 4.69% 5.44% 6.28% 7.63%Accounts receivable 28.61% 33.43% 35.46% 28.26% 25.00% 25.00% 25.00% 25.00% 25.00%Deferred commissions 4.67% 4.21% 4.19% 4.23% 3.42% 3.09% 2.89% 2.84% 3.13%Deferred income taxes 0.24% 0.00% 0.00% 1.03% 0.00% 0.00% 0.00% 0.00% 0.00%Prepaid expenses and other current assets 4.13% 7.59% 5.22% 4.00% 9.82% 12.92% 15.73% 18.68% 23.09%Land and building improvements held for sale 0.00% 0.00% 2.66% 0.27% 0.00% 0.00% 0.00% 0.00% 0.00%Total current assets 66.09% 65.84% 66.07% 84.77% 84.24% 96.84% 106.20% 124.62% 139.51%Marketable securities, noncurrent 29.20% 11.85% 16.65% 28.68% 17.42% 17.66% 18.36% 19.71% 22.86%Property and equipment, net 19.82% 30.48% 20.95% 15.13% 20.80% 20.80% 20.80% 20.80% 20.80%Deferred commissions, noncurrent 3.67% 3.77% 3.03% 2.60% 2.02% 1.65% 1.40% 1.24% 1.24%Deferred income taxes, noncurrent, net 0.63% 0.00% 0.00% 2.26% 0.00% 0.00% 0.00% 0.00% 0.00%Capitalized software, net 6.80% 11.84% 8.07% 5.13% 6.41% 6.41% 6.41% 6.41% 6.41%Goodwill 50.14% 85.99% 70.39% 27.55% 43.45% 34.08% 27.71% 23.71% 22.69%Other assets, net 4.91% 15.07% 11.69% 5.75% 8.00% 8.00% 8.00% 8.00% 8.00%Restricted cash 0.00% 0.00% 2.14% 0.21% 0.00% 0.00% 0.00% 0.00% 0.00%Total assets 181.27% 224.83% 198.99% 172.08% 182.34% 185.44% 188.88% 204.49% 221.50%Liabilities 0.00% 0.00% 0.00% 0.00% 0.00%Accounts payable, accrued expenses and other liabilities 19.60% 22.95% 20.53% 19.55% 18.41% 17.41% 16.28% 16.01% 15.94%Deferred revenue 58.97% 60.76% 61.17% 57.44% 59.00% 57.83% 54.08% 53.21% 52.96%Convertible .75% senior notes, net 17.09% 14.05% 0.00% 11.60% 8.64% 8.63% 8.95% 7.70% 6.70%Income taxes payable 0.00% 0.00% 0.00% 0.37% 0.00% 0.00% 0.00% 0.00% 0.00%Deferred income taxes 0.00% 0.00% 0.00% 0.10% 0.00% 0.00% 0.00% 0.00% 0.00%Current portion of capita lease obligations 0.00% 0.00% 0.00% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00%Total current liabilities 95.65% 97.77% 81.70% 89.09% 86.05% 83.87% 79.31% 76.92% 75.59%Term loan, noncurrent 0.00% 31.98% 25.51% 5.75% 22.00% 22.00% 18.00% 14.00% 12.00%Inome taxes payable, noncurrent 1.61% 0.00% 0.00% 0.80% 1.33% 1.33% 1.33% 1.33% 1.33%Deferred revenue, noncurrent 2.11% 1.19% 0.65% 1.28% 1.00% 1.00% 1.00% 1.00% 1.00%Other noncurrent liabilities 40.88% 244.37% 297.66% 61.52% 13.31% 13.31% 9.00% 9.00% 4.00%Minority Interest 17.30% 8.62% 0.00% 5.99% 0.98% 0.98% 0.98% 0.98% 0.98%Total Liabilities 103.52% 149.54% 125.02% 102.30% 124.67% 122.49% 109.62% 103.23% 94.90%Stockholders' equity: 0.00% 0.00% 0.00% 0.00% 0.00%Common stock 778.26% 1085.66% 1486.21% 500.58% 65.00% 65.00% 65.00% 65.00% 65.00%Deferred Stock Based Compensation 0.00% 0.00% 0.00% ‐0.08% 0.00% 0.00% 0.00% 0.00% 0.00%Accumulated other comprehensive income (loss) 0.56% 0.43% ‐0.45% ‐0.03% 0.02% 0.02% 0.01% 0.01% 0.01%Retained earnings (accumulated deficit) ‐3.64% ‐8.43% ‐11.27% ‐1.66% ‐7.35% ‐2.06% 14.24% 36.25% 61.59%Total stockholders' equity 75.98% 74.64% 73.98% 69.54% 57.68% 62.96% 79.26% 101.26% 126.60%
Total liabilities, temporary equity, and stockholders equity 181.27% 224.83% 198.99% 172.43% 182.34% 185.44% 188.88% 204.49% 221.50%
Salesforce.com, incValue Driver Estimation (in thousands)
Fiscal Years Ending Jan. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021CV
NOPLATNet Revenues 3,050,195 4,071,003 5,373,586 6,835,136 8,705,046 11,099,802 13,649,646 15,955,270 16,673,257
Less: COGS 683,579 968,428 1,289,270 1,640,433 2,089,211 2,663,952 2,593,433 2,712,396 2,500,989
Less: Research and Development 429,479 623,798 792,917 991,146 1,238,933 1,548,666 1,749,993 1,889,992 1,965,592
Less: Marketing and Sales 1,614,026 2,168,132 2,757,096 3,418,799 4,239,311 5,256,745 5,887,555 6,270,246 6,458,353
Less: General and Administrative 433,821 596,719 679,936 788,726 914,922 1,061,309 1,167,440 1,249,161 1,299,128
Plus: Implied interest on Operating Leas 28,632 61,730 58,027 73,274 93,320 118,993 146,328 171,044 178,741
EBITA (82,078) (224,344) (87,606) 69,307 315,989 688,121 2,397,553 4,004,519 4,627,937
Marginal tax rate 22.5% ‐28.7% 23.5% 25% 25% 25% 25% 25% 25%
Total income tax provision (142,651) 125,760 (49,603) (7,535) 5,424 25,766 136,251 240,722 281,302
Plus: Tax shield on interest expens 6,963 (22,160) 17,211 23,628 30,492 39,350 45,252 48,873 50,827
Less: Tax on interest or investment incom (4,401) 2,933 (2,359) (2,660) (2,820) (2,989) (3,168) (3,358) (3,560)
Less: Tax on any non‐operating income ‐ ‐ 3,672 ‐ ‐ ‐ ‐ ‐ ‐
Plus: Tax shield on any non‐operating losse 1,282 (1,635) 1,339 1,425 1,425 1,425 1,425 1,425 1,425
Plus: Tax shield on operating lease interes 6,442 (17,717) 13,636 18,319 23,330 29,748 36,582 42,761 44,685
Total adjusted taxes (132,365) 87,181 (16,104) 33,176 57,851 93,300 216,342 330,422 374,679
Change in deferred taxes 92875 26533 0 0 0 0 0 0 0
NOPLAT 143,162 (284,992) (71,502) 36,130 258,139 594,822 2,181,211 3,674,098 4,253,258
Invested CapitalOperating Current Assets:Normal Cash 579,537 773,491 1,020,981 1,298,676 1,653,959 2,108,962 2,593,433 3,031,501 3,167,919
Accounts Receivable 872,634 1,360,837 1,905,506 1,708,785 2,176,262 2,774,952 3,412,413 3,988,818 4,168,315
Deferred Commissions 142,311 171,461 225,386 259,194 298,073 342,784 394,202 453,332 521,332
Prepaid Expenses and Other Assets 125,993 309,180 280,554 400,169 854,658 1,434,177 2,146,822 2,979,844 3,850,352
Current Operating Assets 1,720,475 2,614,969 3,432,427 3,666,824 4,982,952 6,660,874 8,546,869 10,453,496 11,707,918
Non‐Interest Bearing Current Liabilities:Accounts Payable/Accrued Expenses 597,706 934,324 1,103,335 1,329,878 1,602,936 1,932,060 2,221,869 2,555,149 2,657,355
Deferred Revenue 1,798,640 2,473,705 3,286,768 4,108,460 5,135,575 6,419,469 7,382,389 8,489,747 8,829,337
Income Taxes Payable ‐ ‐ ‐
Current Operating Liabilities 2,396,346 3,408,029 4,390,103 5,438,338 6,738,511 8,351,529 9,604,258 11,044,897 11,486,692
Net Operating Working Capital (675,871) (793,060) (957,676) (1,771,514) (1,755,559) (1,690,654) (1,057,389) (591,401) 221,225
Plus: Net PP&E 604,669 1,240,746 1,125,866 1,421,708 1,810,649 2,308,759 2,839,126 3,318,696 3,468,037
Plus: Capitalized Software 207,323 481,917 433,398 438,132 557,993 711,497 874,942 1,022,733 1,068,756
Plus: Net Other Operating Assets 149,748 613,490 628,320 546,811 696,404 887,984 1,091,972 1,276,422 1,333,861
Plus: Long term deferred commission 112,082 153,459 162,796 169,308 176,080 183,123 190,448 198,066 205,989
Plus: Present value of operating lease 28,632 61,730 58,027 68,472 80,796 92,108 110,529 121,582 133,741
Invested Capital 426,583 1,758,282 1,450,731 872,916 1,566,364 2,492,817 4,049,629 5,346,098 6,431,608
Core Value DriversNOPLAT 143,162 (284,992) (71,502) 36,130 258,139 594,822 2,181,211 3,674,098 4,253,258
Beginning Invested Capital 437,928 426,583 1,758,282 1,450,731 872,916 1,566,364 2,492,817 4,049,629 5,346,098
Return on Invested Capital (ROIC) 32.69% ‐66.81% ‐4.07% 2.49% 29.57% 37.97% 87.50% 90.73% 79.56%
NOPLAT 143,162 (284,992) (71,502) 36,130 258,139 594,822 2,181,211 3,674,098 4,253,258
Less: Change in Invested Capital 167,906 (11,345) 1,331,699 (577,815) 693,448 926,453 1,556,812 1,296,469 1,085,510
Free Cash Flow (FCF) (24,743) (273,647) (1,403,201) 613,945 (435,309) (331,632) 624,399 2,377,629 3,167,748
NOPLAT 143,162 (284,992) (71,502) 36,130 258,139 594,822 2,181,211 3,674,098 4,253,258
Beginning Invested Capital 437,928 426,583 1,758,282 1,450,731 872,916 1,566,364 2,492,817 4,049,629 5,346,098
ROIC 32.69% ‐66.81% ‐4.07% 2.49% 29.57% 37.97% 87.50% 90.73% 79.56%WACC 8.00% 8.00% 8.00% 9.64% 9.64% 9.64% 9.64% 9.64% 9.64%Economic Profit (EP) 108,128 (319,118) (212,165) (103,743) 173,976 443,799 1,940,865 3,283,650 3,737,810
CV Growth of NOPLAT CV Growth of NOPLAT
79.78 3.30% 3.60% 3.90% 4.20% 4.50% 4.80% 5.10% 5.40% 5.70% 6.00% 80.33 4.20% 4.30% 4.40% 4.50% 4.60% 4.70% 4.80% 4.90%
1.00% 66.71 69.71 73.03 76.71 80.82 85.44 90.67 96.64 103.51 111.53 9.00% 88.34 90.08 91.89 93.79 95.78 97.85 100.03 102.31
2.00% 66.43 69.42 72.71 76.38 80.47 85.07 90.27 96.21 103.06 111.04 9.16% 84.88 86.49 88.17 89.93 91.76 93.67 95.67 97.77
3.00% 66.15 69.12 72.40 76.05 80.12 84.70 89.88 95.79 102.61 110.55 9.32% 81.64 83.14 84.70 86.33 88.02 89.79 91.63 93.56
4.00% 65.87 68.82 72.09 75.72 79.78 84.33 89.49 95.37 102.16 110.06 WACC 9.48% 78.60 80.00 81.45 82.96 84.53 86.17 87.87 89.65
5.00% 65.58 68.53 71.78 75.40 79.43 83.96 89.09 94.95 101.70 109.57 9.64% 75.72 77.02 78.37 79.78 81.24 82.75 84.33 85.98
R&D CV Year Growth 6.00% 65.30 68.23 71.47 75.07 79.08 83.59 88.70 94.53 101.25 109.08 9.80% 73.06 74.28 75.54 76.85 78.21 79.62 81.09 82.61
7.00% 65.02 67.94 71.16 74.74 78.74 83.23 88.31 94.11 100.80 108.59 9.96% 70.53 71.67 72.84 74.06 75.33 76.65 78.01 79.43
8.00% 64.74 67.64 70.85 74.41 78.39 82.86 87.92 93.69 100.35 108.10 10.12% 68.13 69.20 70.30 71.45 72.63 73.86 75.13 76.45
9.00% 64.46 67.35 70.54 74.08 78.04 82.49 87.52 93.27 99.89 107.61 10.28% 65.87 66.87 67.90 68.97 70.08 71.23 72.42 73.65
10.00% 64.18 67.05 70.23 73.76 77.69 82.12 87.13 92.85 99.44 107.12
11.00% 63.90 66.76 69.92 73.43 77.35 81.75 86.74 92.43 98.99 106.63 CV ROIC
80.33 64.56% 69.56% 74.56% 79.56% 84.56% 89.56% 94.56% 99.56%
SGA Growth CV Year 4.00% 72.37 72.71 73.00 73.26 73.49 73.69 73.87 74.03
79.78 0.40% 1.00% 1.60% 2.20% 2.80% 3.40% 4.00% 4.60% 5.20% 5.80% 4.10% 73.54 73.89 74.20 74.47 74.71 74.92 75.10 75.27
0.60% 83.36 83.23 83.09 82.95 82.81 82.67 82.54 82.40 82.26 82.12 4.20% 74.75 75.12 75.44 75.72 75.97 76.19 76.38 76.56
1.20% 82.67 82.53 82.40 82.26 82.12 81.98 81.85 81.71 81.57 81.43 4.30% 76.01 76.40 76.73 77.02 77.28 77.51 77.71 77.90
1.80% 81.98 81.84 81.71 81.57 81.43 81.29 81.16 81.02 80.88 80.74 4.40% 77.32 77.72 78.07 78.37 78.64 78.88 79.09 79.28
2.40% 81.29 81.15 81.02 80.88 80.74 80.60 80.47 80.33 80.19 80.05 4.50% 78.68 79.10 79.46 79.78 80.056 80.30 80.53 80.73
Marketing & Sales CV Growth 3.00% 80.60 80.46 80.33 80.19 80.05 79.91 79.78 79.64 79.50 79.36 CV Growth 4.60% 80.09 80.52 80.90 81.23 81.53 81.78 82.02 82.22
3.60% 79.91 79.77 79.64 79.50 79.36 79.22 79.09 78.95 78.81 78.67 4.70% 81.56 82.01 82.41 82.75 83.06 83.33 83.57 83.78
4.20% 79.22 79.08 78.95 78.81 78.67 78.53 78.39 78.26 78.12 77.98 4.80% 83.09 83.56 83.97 84.33 84.65 84.93 85.18 85.41
4.80% 78.53 78.39 78.25 78.12 77.98 77.84 77.70 77.57 77.43 77.29 4.90% 84.68 85.17 85.60 85.98 86.31 86.60 86.86 87.10
5.40% 77.84 77.70 77.56 77.43 77.29 77.15 77.01 76.88 76.74 76.60 5.00% 86.34 86.86 87.30 87.69 88.04 88.34 88.62 88.86
6.00% 77.15 77.01 76.87 76.74 76.60 76.46 76.32 76.19 76.05 75.91
6.60% 76.46 76.32 76.18 76.05 75.91 75.77 75.63 75.50 75.36 75.22
Salesforce.com, incWeighted Average Cost of Capital (WACC) Estimation
Cost of EquityRisk Free Rate 2.62%Equity Risk Premium 5.15%Beta 1.42Cost of Equity 9.93%
Cost of DebtYTM 5.38%
Capital Structure WeightsShares outstanding 624148Current Price $75.73Market Value of Equity 47266728
LT Debt 1,370,692
ST DebtPV of Operating Leases 58,027
Book Value of Debt $1,428,719
Total Firm Value (E+D) 48,695,447$
Weigth of Equity 97.07%Weigth of Debt 2.93%Tax Rate 25.00%
Weighted Average Cost of Capital 9.64%
Salesforce.com, incDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs: CV Growth 4.50% Beta 1.42 CV ROIC 79.56% WACC 9.64% Cost of Equity 9.93%
Fiscal Years Ending Jan. 31 2015A 2016E 2017E 2018E 2019E 2020E 2021CV
DCF ModelNOPLAT ‐71502 36130 258139 594822 2181211 3674098 4253258Continuing Value (CV) 78043978WACC 9.64%CF to Discount 613945 ‐435309 ‐331632 624399 2377629 78043978Period 1 2 3 4 5 5PV (CF) 559956 ‐362115 ‐251612 432077 1500610 49256464
Value of Operating Assets 51135381Add: Excess Cash 0Add: Short Term Marketable Securities 87312Less: Short Term Debt 0Less: Long‐term Debt 1370692Less: PV of Operating Leases 58027Less: PV of ESOP 2122Value of Equity 49791852Shares Outstanding 624148Intrinsic Value of Stock 79.78
EP ModelNOPLAT ‐71502 36130 258139 594822 2181211 3674098 4253258Continuing Value 72697880WACC 9.64%EP to Discount ‐103743 173976 443799 1940865 3283650 72697880Discount Periods 1 2 3 4 5 5PV (EP) ‐94620 144723 336714 1343057 2072434 45882342Beginning invested capital 1450731
Value of Operating Assets 51135381Add: Excess Cash 0Add: Short‐term marketable Securities 87312Less: Short‐term Debt 0Less: Long‐term Debt 1370692Less: PV of Operating Leases 58027Less: PV of ESOP 2122Value of Equity 49791852Shares Outstanding 624148Intrinsic Value of Stock 79.78
Today 4/19/2016Next FYE 12/31/2016Last FYE 12/31/2015Days in FY 366 Days to FYE 110 Elapsed Fraction 0.301Adjusted Stock Price 82.08
Salesforce.com, incDividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Jan. 31 2016E 2017E 2018E 2019E 2020E 2021CV
EPS ‐0.19 0.14 0.66 3.47 6.12 7.14239% 79% 81% 43% 14%
Key Assumptions CV growth 4.500% CV ROE 21.252% Cost of Equity 9.933%Industry average payout ratio 1.29%
Future Cash Flows P/E Multiple (CV Year) 14.51 EPS (CV Year) 7.14 Future Stock Price 103.57 Dividends Per Share ‐0.00248 0.001784 0.008464 0.044705 0.078891531
CV Price 103.57$ Period to Discount 1 2 3 4 5 5
Discounted Cash Flows ‐0.00226 0.001476 0.00637 0.030608 0.04913489 64.50463763
Intrinsic Value 64.59$
Salesforce.com, incRelative Valuation Models
Sales Sales Est. 5yrTicker Company Price 2015E 2016E P/S 2015 P/S 16 EPS gr. PEG 15 PEG 16ORCL Oracle $41.16 $38,226,000 $36,920,000 4.6 4.3 7.8 0.59 0.55
SAP‐DE SAP $79.49 $20,800,000 $21,840,000 4.0 4.0 6.9 0.58 0.58
N Net Suite $69.25 $741,150 $961,500 7.7 6.7 45.6 0.17 0.15
IBM IBM $152.52 $81,740,000 $78,140,000 1.8 1.9 7.3 0.25 0.26 Average 4.5 4.2 0.4 0.4
CRM Salesforce.com, inc $75.73 $8.61 $10.94 6.8 7.2 (8.3) (0.8) (0.9)
Implied Value: Relative P/S (EPS15) $ 39.02 Relative P/S (EPS16) 46.22$ PEG Ratio (EPS15) (28.25)$ PEG Ratio (EPS16) (34.85)$
Salesforce.com, incKey Management Ratios
Fiscal Years Ending Jan. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021CV
Liquidity RatiosCurrent Ratio Current Assets / Current Liabilities 0.69 0.67 0.81 0.81 0.98 1.15 1.34 1.62 1.85Quick Ratio (Current Assets ‐ Inventories) / Current Liabilities 0.60 0.55 0.66 0.70 0.83 0.96 1.10 1.34 1.50Operating Cash Flow Ratio Cash Flows from Operations / Current Liabilities 0.25 0.22 0.27 0.19 0.06 0.09 0.13 0.30 0.23Cash Ratio Cash and Cash Equivalents / Current Liabilities 0.30 0.21 0.23 0.42 0.53 0.67 0.79 1.02 1.17
Activity or Asset‐Management RatiosReceivables Turnover Net Credit Sales / Average Accounts Receivable 3.50 2.99 2.82 4.00 4.00 4.00 4.00 4.00 4.00Total Assets Turnover Revenues / Total Assets 0.55 0.44 0.50 0.55 0.55 0.54 0.53 0.49 0.45
Financial Leverage RatiosDebt to Equity Ratio Total Liabilities / Total Stockholders' Equity 1.36 2.00 1.69 2.36 2.16 1.95 1.38 1.02 0.75Debt Ratio Total Debt / Total Assets 0.53 0.43 0.41 0.49 0.47 0.45 0.42 0.38 0.34Interest Coverage 3.58 3.71 1.99 0.04 ‐1.83 ‐3.62 ‐12.44 ‐19.61 ‐21.88
Profitability RatiosGross Profit Margin (Revenue ‐ COGS) / Revenue 77.59% 76.21% 76.01% 76.00% 76.00% 76.00% 81.00% 83.00% 85.00%Return on Assets Net Income / Total Assets ‐4.89% ‐2.54% ‐2.46% ‐0.96% 0.54% 2.00% 8.43% 11.77% 12.15%Return on Equity Net Income / Shareholders' Equity ‐11.67% ‐7.64% ‐6.61% ‐3.23% 1.72% 5.88% 20.08% 23.76% 21.25%
Payout Policy RatiosDividend Yield Annual Dividends per Share / Price per Share 0 0 0 0 0 0 0 0 0
Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)
Operating Operating Operating OperatingFiscal Years Ending Jan. 31 Leases Fiscal Years Ending Jan. 31 Leases Fiscal Years Ending Leases Fiscal Years Ending Leases
2016 107343 2015 196514 2014 151347 2013 1242472017 101527 2016 189757 2015 140249 2014 1037532018 79074 2017 160521 2016 131439 2015 717872019 47126 2018 129733 2017 126099 2016 633272020 44423 2019 119027 2018 124329 2017 54391Thereafter 119791 Thereafter 587528 Thereafter 912952 Thereafter 250315Total Minimum Payments 499284 Total Minimum Payments 1383080 Total Minimum Payments 1586415 Total Minimum Payments 667820Less: Interest 82232 Less: Interest 303513 Less: Interest 437941 Less: Interest 135127PV of Minimum Payments 417052 PV of Minimum Payments 1079567 PV of Minimum Payments 1148474 PV of Minimum Payments 532693
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre‐Tax Cost of Debt 5.38% Pre‐Tax Cost of Debt 5.38% Pre‐Tax Cost of Debt 5.38% Pre‐Tax Cost of Debt 5.38%Number Years Implied by Year 6 Payment 2.7 Number Years Implied by Year 6 Payment 4.9 Number Years Implied by Year 6 Payment 7.3 Number Years Implied by Year 6 Payment 4.6
Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment
1 107343 101867.6 1 196514 186490.2 1 151347 143627.0 1 124247 117909.42 101527 91433.7 2 189757 170892.4 2 140249 126306.2 2 103753 93438.43 79074 67580.4 3 160521 137188.9 3 131439 112334.1 3 71787 61352.64 47126 38221.7 4 129733 105220.4 4 126099 102273.1 4 63327 51361.65 44423 34191.6 5 119027 91613.1 5 124329 95694.0 5 54391 41863.86 & beyond 44423 83757.1 6 & beyond 119027 388161.7 6 & beyond 124329 568239.5 6 & beyond 54391 166766.9PV of Minimum Payments 417052.2 PV of Minimum Payments 1079566.7 PV of Minimum Payments 1148473.8 PV of Minimum Payments 532692.7
