SALESFORCE.

COM
Financial Statement Analysis
By: Ashley Boecker
Contents
INTRODUCTION ............................................................................................................................................. 2
BUSINESS SEGMENTS .................................................................................................................................... 3
ENVIRONMENT AND STRATEGY .................................................................................................................... 4
KEY EXECUTIVES ............................................................................................................................................ 6
KEY STATISTICS .............................................................................................................................................. 8
TECHNICAL ANALYSIS .................................................................................................................................... 9
MAJOR HOLDERS......................................................................................................................................... 10
KEY COMPETITIORS ..................................................................................................................................... 11
REQUIRED RATE OF RETURN....................................................................................................................... 14
INCOME STATEMENT GROWTH RATES ....................................................................................................... 16
STATEMENT OF CASH FLOWS GROWTH RATES .......................................................................................... 17
VALUE LINE.................................................................................................................................................. 18
LONG RUN SUSTAINABLE GROWTH............................................................................................................ 18
ADJUSTING THE REQUIRED RATE AND GROWTH RATE .............................................................................. 19
FREE CASH FLOW TO SHAREHOLDERS ........................................................................................................ 21
FCFE1 (NEXT YEARS ESTIMATED FCFE) ....................................................................................................... 22
VALUE OF FIRMS EQUITY BASED ON FCFE ................................................................................................. 22
EARNINGS YIELD.......................................................................................................................................... 23
FINAL SUMMARY......................................................................................................................................... 24
BIBLIOGRAPHY ............................................................................................................................................ 27
APPENDIX28
INTRODUCTION
Salesforce.com is a leading provider of social enterprise solutions, as well as, enterprise cloud

computing that is headquartered out of San Francisco, California. The company was founded in

1999 with the concept of customer relationship management through internet applications.

The companys main focus is cloud computing which is the use of resources such as hardware

and software that, through a network, can be delivered to businesses. Salesforce.com has taken

the aspect of social networking and has incorporated this type of networking into the business

plan where companies can now communicate with employees, partners and management on a

real time basis, which has led to the transformation of social enterprises (Form 10-K).

Salesforce.com key competitors are Oracle, Microsoft and SAP. Salesforce.com is considered

the leader in the market. Because of their current size they are not the leaders in terms of

revenue growth but in terms of customer acquisition, SaaS CRM revenues and user subscription

Salesforce.com is a market share leader (Salesforce.com Review). Salesforce.com serves more

than 20,000 customers which represents approximately 400,000 subscribers in seventy

countries (Reference for Business).

The revenue for Salesforce.com as of Jan. 31, 2013 equals $3.05 billion. There are 9,801 full-

time employees as of Jan. 31, 2013 which shows a 20.57% growth from 2012. In 2012 there

were 7, 785 full-time employees which showed a 46.7% growth from the previous year of 2011.

The market cap for Salesforce.com as of March 11, 2013 is 27.01 billion (Yahoo! Finance).
BUSINESS SEGMENTS
Table 1: Products and Descriptions of Salesforce.com

Salesforce.com Product Brief Description

Sales Cloud Includes SFA, PRM, marketing, Chatter, Jigsaw, content library and
mobile.
Service Cloud Comprehensive call center case management solution.
Jigsaw Data Cloud Mashup service to insert and append contacts as well as manage and
clean contact database.
Chatter Collaboration Cloud Internal social communication tool to follow people, groups and
individual CRM records.
Force.com Custom Cloud Platform-as-a-Service (PaaS) application development framework to
develop or customize.
Database.com Purpose-built cloud database to support online apps, social apps and
mobility.
RemedyForce Help desk support application.
AppExchange Third party directory and marketplace of online applications integrated
with Salesforce.com.
(Salesforce.com Review)

The products offered by Salesforce.com, as shown in the chart above, can be broken down into

four main business revenues. The first source of revenue is subscription fees; customers are

then given access to the enterprise cloud computing services as shown above in the table. Fees

are collected in advance to the service period of any given product. The second source of

revenue comes from existing customers purchasing support, in addition to the standard

package. The third source of revenue comes from professional services such as consulting

customers by being a project manager or implementing and integrating their services in the

work place. The last source of revenue is other revenue which mainly consists of training fees.

During the fiscal year 2012, 94.05% of revenues came from subscription and support revenues.

Professional Services and other consisted of 5.95% of revenues (Bloomberg) No single customer

accounted for more than 5% of total revenues in the fiscal years 2012, 2011 and 2010 (2012

Annual Report).
ENVIRONMENT AND STRATEGY
Strengths
Salesforce.com serves customers that range from small businesses to large businesses. Their

customer additions are strengths for the company because there are strong growth patterns of

subscription and support revenues, which already mentioned, makes up approximately 94% of

revenues. Customer growth enhances their market position and, in turn, the companys top line

is allowed potential growth.

Salesforce.com has a significant market position because of the ability of the company to

customize and integrate their enterprise applications to companies of any size. Within this

industry Salesforce.com is a major provider of CRM technology for capital markets. This

company is also a leader in on-demand CRM solutions. In 2012 alone, Salesforce.com won three

different CRM Market Awards.

Salesforce.com is a proven innovator. This is a major strength because payback for customers is

increased as well as software longevity. From the beginning of Salesforce.coms existence is has

been one of the first companies to include customer technologies into the business applications

it provides. They continue to do this faster than most of their competitors. In the year 2012

Salesforce.com was ranked #1 on Forbes List of innovative companies.

Salesforce.com provides services that are easy to use because of the intuitive design. Their

products seem familiar to the average person, more so than other enterprise applications.

Customers have the sense of a rewarding experience and user adoption for their applications

has easily been a success. Along with the idea of user success, the company has also created

success for themselves in the realm of actually practicing CRM. They do so by promoting user
communities. They solicit community input on active monitors and social channels. This is to

provide a community online for customers so that they are able to make themselves heard and

get answer quickly.

Weaknesses
Salesforce.com has a limited geographic concentration in terms of operating international data

centers. The centers, internationally, are limited and fewer than many of its competitors. This

impacts the users performance overseas because of lack of customer service centers specific to

the exact language of the user. This is seen as less appealing to customers outside of the United

States.

Opportunities
Salesforce.com has the ability to focus on small and medium level businesses. They have the

opportunity to reach $20 billion dollars by the year 2017, so the company estimates. Because of

their ability to service small and medium businesses this number may prove to be conservative.

According to a survey completed by CSO Insights, 51% of organizations do not use CRM systems

until very recently. This gives Salesforce.com a competitive advantage in the short term. It

provides them with the opportunity to continue expanding the CRM market before other

companies have the chance to catch up.

The possible alliance with Google and an acquisition of Intranet are opportunities for

Salesforce.com as long as the alliance and acquisition are successful.

Threats
As CRM is taking off, there is intense competition within the industry. Many companies such as

Oracle, SAP and Microsoft Dynamics are also competing for cloud space and the same customer
base. R&D will be a huge factor as far as resources and who can make the next move the

quickest and most efficiently.

Salesforce.com is vulnerable to macroeconomic situations. In conditions such as a recession,

Salesforce.com could suffer because they serve mostly small and medium sized businesses.

Recessions result in a change of spending habits and cuts for businesses which may lead the

company, Salesforce.com, to incur some lost business.

Table 2: SWOT Analysis

STRENGTHS WEAKNESSES
Customer Additions Geographic Concentration
Market Position Dependency on the United States
Innovation
Intuitive Design
OPPORTUNITIES THREATS
Growing on-demand CRM Market Competition
Growing Demand for Cloud Service Privacy Concerns
Increasing Presence in Asia Pacific Macroeconomic Situations

KEY EXECUTIVES
Marc Benioff

Mr. Benioff is the Chairman, CEO and founder of Salesforce.com. He founded Salesforce

on the vision of creating a service that would one day eliminate enterprise software

technology. He is now leading in innovation in this industry and is widely recognized as a

visionary leader. Benioff is allowing businesses to connect with customers, employees

and partners in a whole new way by engaging in todays social media frenzy. Prior to

founding Salesforce Benioff had 30 years of experience in the software industry. For

eleven years he worked at, his now competitor, Oracle. He also held a position in Apple
 Computers Macintosh Division as an assembly language programmer. Prior to Apple,

Benioff founded Liberty Software when he was only fifteen years old. He has proved

tremendous growth as a leader in cloud computing which has brought him a long way.

His current compensation year ended 2012 amounts to $17,714, 306.

Parker Harris

Mr. Harris is the co-founder of Salesforce.com. As of December 7, 2004 Harris became

the Executive Vice President of Technology. Harris was also the Senior Vice President,

Research and Development at Salesforce.com until 2008. Mr. Harris was also the Co-

founder of Left Coast Software and Vice President from 1996 to 1999. Harris received

his education from Middlebury College. His total compensation as of year ended

December 2012 is $3,419,337.

Graham Smith

Mr. Smith is the CFO and Executive Vice President of Salesforce.com. He has been CFO

since December of 2007 and Executive Vice President since March of 2008. Prior to

working for Salesforce Smith had already gained twenty years of experience in the

software industry working directly with finances. Mr. Smith has a bachelors degree

from Bristol University, in England, in economics and politics. Smiths total

compensation year ended 2012 amounts to $3,472,287.

George Hu
 Mr. Hu is the Chief Operating Officer at Saelsfore.com and has been since November

2011. Hu was previously Executive Vice President of Platform and Marketing, as well as

Executive Vice President of marketing, Applications & Education for Salesforce.com. His

history with Salesforce.com goes back as far as 2002. Mr. Hu received his education

from Harvard and graduated with a Bachelor of Arts in economics. He graduated from

Stanford Graduate School of Business with his MBA. Hus compensation year ended

December 2012 amounts to $3,419,337.

Daniel Blair Crump

Mr. Crump is the President of the global enterprise business unit for Salesforce.com. He

assumed this position in February of 2012. Prior to working at Salesforce.com Crump

worked for Verizon, where he was the president of worldwide sales and consulting

services. He received his bachelors degree from Wharton School at the University of

Pennsylvania, in economics. Because he joined the company in 2012 he does not

currently have a defined compensation available (Salesforce.com, Inc.).

KEY STATISTICS
Table 3: Statistics

On the date: March 22, 2013

Current Stock Price $176.06
Earnings per Share (ttm) -1.92
Price to Earnings Ratio 8.15
Dividend yield 0%
Number of Shares Outstanding 146.41 M
Average 3 Month Volume 1,590,420
Average 10 Day Volume 1,794,640
2013- 2014 Estimate Growth Rate 27.90%
Float (locked up) 135.04 M
TECHNICAL ANALYSIS

170
150
Open
130
High
110
Low
90
Close

Figure 1: January 1 - December 31, 2012

For Fiscal Year 2012 Salesforce.com had an upward trend. Stock prices started around $105 per

share and rose to approximately $170 per share at the end of the year. Salesforce.com showed

growth throughout the year and trends indicate that it will continue to do so in the short-term.

190

185

180
Open
175
High
170
Low
165 Close
160

Figure 2: January 1 - March 22, 2013

Salesforce.com continued to push its way up, testing the resistance level, as previous predicted.

CRM broke through on March 1, 2013, only for a short period of time amount to one and a half

weeks. After that the stock has dropped off in the recent quarter and will continue to do so in

the short term. Trends predict that the stock will slowly continue a slight uptrend pattern in the

long-term.
MAJOR HOLDERS
Table 4: Major Holders of Salesforce.com

BREAKDOWN
% of Shares Held by All Insider and 5% Owners: 8%
% of Shares Held by Institutional & Mutual Fund 102%
Owners:
% of Float Held by Institutional & Mutual Fund 110%
Owners
Number of Institutions Holding Shares 493

Table 5: Major Direct Holders of Salesforce.com

MAJOR DIRECT HOLDERS

HOLDER SHARES REPORTED
Benioff, Marc 10,212,500 Dec. 27, 2012
Ramsey, Craig 348,746 Feb. 25, 2013
Harris, Parker 203,065 Apr. 29, 2013
Hassenfeld, Alan 26,600 Feb. 25, 2013
Koplow, Hilarie 23,288 Apr. 2, 2013

Table 6: Top Institutional Holders of Salesforce.com

TOP INSTITUTIONAL HOLDERS

HOLDER SHARES % OUT VALUE REPORTED
Sands Capital Management 42,859,704 7.32 7,204,716,242 Dec. 31, 2012
Price Associates Inc. 35,810,796 6.11 6,019,794,807 Dec. 31, 2012
Capital World Investors 26,219,268 4.48 4,407,458,950 Dec. 31, 2012
Jennison Associates LLC 25,393,848 4.33 4,268,705,848 Dec. 31, 2012
Vanguard Group, Inc. 24,566,352 4.19 4,393,200,728 Mar. 31, 2013

Table 7: Top Mutual Fund Holders of Salesforce.com

TOP MUTUAL FUND HOLDERS

HOLDER SHARES % OUT VALUE REPORTED
Fidelity Growth Company Fund 43,016,812 7.34 7,692,696,489 Mar. 31, 2013
Fidelity Contrafund Inc. 13,633,720 2.33 2,438,118,147 Mar. 31, 2013
Growth Fund of America Inc. 12,182,724 2.08 2,178,636,532 Mar. 31, 2013
Mainstay Large Cap Growth Fund 9,532,400 1.63 1,613,072,728 Feb. 28, 2013
Price Growth Stock Fund Inc. 8,310,800 1.42 1,397,045,480 Dec. 31, 2012

Above are the Top 5 Major Direct Shareholders, Top 5 Institutional Holders and the Top 5

Mutual Fund Holders. The value shown is computed using the securitys price on the report
date given. Information and data were gathered from Yahoo!Finance and Bloomberg. The

companys float is 540.26 Million. The annual earnings estimate for Jan. 2014 is 0.49 and 0.63

for Jan. 2015.

KEY COMPETITIORS
Table 8: Financial Ratio for Salesforce.com, Microsoft & Oracle

Salesforce.com Microsoft Oracle

2012 2011 2010 2012 2011 2010 2012 2011 2010
Current Ratio .72 .84 1.88 2.6 2.6 2.13 2.6 2.76 1.84
Cash Ratio .63 .72 1.72 2.41 2.35 1.9 2.41 2.5 1.64
Debt-Asset Ratio .98 1.0 --- 1.0 1.0 --- .99 .99 ---
Times Int. Earned -3.12 -0.95 5.18 0.58 0.95 .17 17.92 15.12 11.93
Operating Margin -1.55 5.88 8.83 29.52 38.83 38.57 36.92 33.78 33.79
Net Margin -.51 3.89 6.18 23.03 33.1 30.02 26.89 23.99 22.87
ROE -.79 5.56 9.41 27.43 44.84 43.76 23.85 24.22 21.95
*Data from Mergent Online Comparison (Salesforce.com Summary)

Liquidity Summary
The current ratio for Salesforce.com gives an idea as to how the company is able to pay back

short term liabilities using its short term assets. The ratio takes the companys current assets

and divides them by its current liabilities. A higher current ratio resembles a companys ability

to pay back its obligations. Compared to Microsoft and Oracle, Salesforce.com is less able to

pay back its obligations. Since Salesforce.com currently moved to a ratio under 1, in 2011 and

2012, this symbolizes that they are unable to pay off their obligations. Just because a

companys current ratio is under 1 it doesnt necessarily mean they are a failing company, or

that they are going bankrupt. The decrease in the current ratio and cash ratio could potentially

drive investors away. However, because Salesforce.com is a newer company than Microsoft

and Oracle, it may take some time for them to catch up and maintain a higher current and cash

ratio.
This is also the case for Salesforce.coms cash ratio compared to its two competitors. The cash

ratio of a company compares their total cash and cash equivalents to their current liabilities.

This is another great indicator of liquidity because it involves the most liquid assets of a

company. Salesforce.com has seen a significant decrease in their cash ratio over the past three

years. Microsoft seems to be the most liquid in terms of cash and cash equivalents as well as

comparing the current ratio, in an overall sense. Salesforce.com has the worst cash ratio of the

three companies; this doesnt mean they are completely unable to meet their short term

obligations.

In summary, Microsoft ranks highest in the overall sense when looking at the current ratio and

the cash ratio. Oracle comes in second when comparing both ratios and Salesforce.com has a

ways to go before they can catch up to Microsoft or Oracle, putting them as the least liquid

company of the three.

Solvency Summary
The total debt to asset ratio can be used to measure a companys financial risk by assessing

how much of the companys assets have been financed by debt. It is calculated by adding short

term and long term debt and dividing by the companys total assets. I found that 2010 numbers

were unavailable however looking at 2011 and 2012 Salesforce.com is very comparable to

Microsoft and Oracle. All three companies are in good standing with this ratio. Salesforce.com

does appear as the strongest in terms of this ratio for the year 2012. Oracle came in second and

Microsoft in third with the highest debt to asset ratio. As the other companies have been very

stable with the debt to asset ratio Salesforce.com has actually decreased from 2011 to 2012,

indicating that they are becoming more solvent.

When looking at all three times interest earned ratios Salesforce.com has a much lower ratio

than its two competitors. You calculate times interest earned by taking a companys earnings

before interest and taxes or EBIT and dividing it by the total interest payable on bonds and

other contractual debt, indicating how many times a company can cover its interest charges on

a pretax basis. Right now Salesforce.com does not appear to meet this obligation. Oracle

measures highest as far as times interest earned ratio, Microsoft second and Salesforce.com

last.

Profitability Summary
The operating margin allows for these companies to determine the profitability of individual

products. It is calculated by dividing operating sales by net income. Salesforce.com mostly

offers services and they have a considerably lower margin than Microsoft and Oracle, Oracle

having the most stable operating margin. Salesforce.com has seen a significant decrease in its

operating margin over the past three years. This is alarming and will definitely have an effect on

their ability to meet costs.

The same is true for the net margin. Net margin is calculated by taking net profit divided by

revenue. Microsoft come in highest for net margin and Oracle second with Salesforce.com

being last, however, there may be an appropriate reason as to why this is happening which isnt

completely bad. Right now the company is investing a lot more money than they are taking in.

This is expected to turn around in the next few years to come. They did not turn profits this

past year because of this investing activity which plans indicate that it will increase the net

margin in years to come.

ROE Summary
ROE is calculated by dividing net income by shareholders equity. This is used to measure a

companys profitability. It shows how much money the company has generated with the money

that shareholders have invested. Oracle is the most stable company as far as ROE is concerned;

however, Microsoft had a very high ROE in 2010 and 2011 which dropped dramatically in 2012.

This seems to have been a trend in the technology sector. ROE is also significantly lower for

Salesforce.com than it is for Oracle and Microsoft. I believe in the future Salesforce.com will see

an increase in their ROE, especially once their tremendous investing period slows down.

REQUIRED RATE OF RETURN

Table 9: ROE of Salesforce.com, Microsoft & Oracle

Salesforce.com Microsoft Oracle

2012 2011 2010 2012 2011 2010 2012 2011 2010

ROE -.79 5.56 9.41 27.43 44.84 43.76 23.85 24.22 21.95

Table 10: ROE, CAPM & Adjusted CAPM for Salesforce.com

ROE: Average of 2011 and 2010 7.48

CAPM: 10.73

Adjusted CAPM: 13.82

Analysis:
The required rate of return is the minimum percentage (annually) that is earned by an

investment that will influence companies to put money into a security or project. Investors use

the required rate of return when deciding where to put their money. The return on an

investment is compared to other options available by taking the risk free rate of return,

inflation and liquidity into consideration. The dividend discount model is used by investors to

pick stocks and the required rate of return affects the maximum price they may be willing to

pay for a particular stock.

Taking the average of the ROE, stated in the table above, with the exclusion of the 2012

number I found Salesforce.coms required rate of return to be 7.48. I excluded the 2012 ROE

because I do not feel as though it is a true representation of the company in the long term.

Right now they are investing more than they are spending which can contribute to why it is a

negative number. This is supposed to turn around within the next year and the ROE should

continue moving towards its normal range.

is the formula used to calculate CAPM. When using this formula,

Salesforce.coms required rate of return is 10.73. I used the suggested numbers for the risk free

rate equaling 0.04 and 0.11 for the expected return on the market. I also used the companys

beta of 0.91. The CAPM turned out to be higher than the required rate of return when taking

the average of the historical ROEs.

I adjusted the CAPM and used the past years S&P 500 market rate, Salesforce.coms beta and

the 10 year Treasury bond rate to amount to a required rate of return of 13.82. The 10 year

Treasury, as of May 2013, is .019. This is much lower than the suggested .04 used in the original
CAPM calculation, as explained above. I also used the return on the market as of last year,

2012, amounting to 0.15. I feel as the adjusted CAPM is the more accurate number to use. A

risk free rate of .04 seems very high for the current economic conditions and the 10 year

Treasury bond rate is a more appropriate number to use. The market was performed well in the

year 2012 and I think this is also a god representation of how Salesforce.com will perform.

INCOME STATEMENT GROWTH RATES

Fiscal Year Ended Jan. 30 2013 2012 2011
Revenue 2,868,808 2,126,234 1,551,145
% Change 34.92% 37.07% --------
Net Income (270,445) (11,572) 64,474
% Change -22.37% -1.18% --------
*All numbers in Thousands.

The growth rates for Salesforce.com have been increasing at a high percentage from year to

year. The company increased revenues in Jan. 2012 by 37.07% and by 34.92% ending on Jan.

31, 2013. The revenues have increased from year to year. In the year ending Jan. 2011 revenues

were $1,551,145, $2,126,234 in the year ending Jan. 2012 and $2,868,808 for the year ending

Jan. 2013, as can be seen in the table above.

Net income is a companys total earnings, in other words, their profit or loss. To calculate net

income revenues are adjusted by the cost of doing business, depreciation, interest, taxes and

other expenses. Net income has significantly decreased over the past three years. In Jan. 2011

net income amounted to $64,474, decreasing to $-11,572 in Jan. 2012 and decreasing again in

Jan. 2013 to $-270,445. Net income is very important in measuring how profitable

Salesforce.com is over a period of time. As mentioned previously Salesforce.com is going

through a large investing period where they are investing more than they are currently taking
in. This can be seen by the decrease in net income in the table above, under columns 2012 and

2013.

STATEMENT OF CASH FLOWS GROWTH RATES

Fiscal Year Ended Jan. 30 2013 2012 2011
Operating Cash Flow 736,897 591,507 459,081
Investing Cash Flow -938,918 -489,690 -1,062,554
Free Cash Flow 1,675,815 1,081,197 1,521,635
*All numbers in thousands

To put these numbers on a per share basis I took the operating cash flow and the investing cash

flow, individually, and divided this by the number of shares outstanding, which is currently

141,224,000 for 2013, 135,302,000 for 2012 and 130,222,000 for 2011. These numbers can be

seen on a per share basis in the table below.

Fiscal Year Ended Jan. 30 2013 2012 2011

Operating Cash Flow .52 .43 .35
% Change 20.93% 22.85% --------
Investing Cash Flow -.66 -.36 -.81
% Change 83.33% 55.55% --------
Free Cash Flow 1.18 .79 1.16
Total % Change 49.36% 31.89% --------
*Numbers are in a per share basis

Free cash flow is the difference between operating activities and investing activities.

Salesforce.com had a free cash flow of 1.16 with a decrease to .79 in 2012 and a tremendous

increase to 1.18 in 2013 to end the year. Operating cash flow is the cash generated from the

operations of a company. Salesforce.com has steadily been increasing their operating cash flow

during the past three years from .35 to currently .52.

The investing cash flow was at a -0.81 in 2011 and compared to today and increased slightly to -

0.66. I believe the reasons why the investing cash flow is so low right now is because of the
extensive investing they are doing right now. They are investing a lot into R&D and this will

begin to increase the investing cash flow for the future because they will see a return from

these investing projects soon.

VALUE LINE
Estimations Past 5 Years Est. 09-11 to 15-17
Revenues 35.00% 19.50%
Cash Flow 37.00% 26.00%
Earnings 32.50% 37.00%
Book Value 39.00% 11.50%
Per Share Estimations
Revenues 44.30
Cash Flow 5.05
Earnings 2.50
*All information gathered from Salesforce.com Value Line.

LONG RUN SUSTAINABLE GROWTH

The long run sustainable growth is calculated by using the following equation: Long run

sustainable growth = ROE * Plowback Ratio. Using the ROEs calculated in the sections above,

the ROEs will be matched to the plowback ratios for the same corresponding years. The

plowback ratio is also called the retention rate; the percentage of income that goes to retained

earnings. This is 1 minus the dividend payout ratio. The dividend payout ratio is dividends/net

income. Salesforce.com has never paid any cash dividends on their common stock. The board of

directors intends to retain any future earnings to support operations and to finance the growth

and developments of their business. There are no intentions to pay cash dividends in the

future. With this, the plowback ratio would be zero, essentially leaving the growth rate as what

the ROE is for a given year.

For this reason I thought it would be best to use the street consensus to determine the long run

sustainable growth for Salesforce.com, however upon finding those numbers even the lowest

growth found is at 20% with a high estimate of 40%. The mean street consensus was at 27.82%.

This proved to be a problem because the highest required rate of return that I calculated was

13.82% using the adjusted CAPM. Based on this information I have decided it is best to use the

ROE average for Salesforce.com as the long run growth rate. This is because the growth rate

can never be higher than the required rate of return in a perpetual valuation model, so doing

this will make the model work correctly.

ADJUSTING THE REQUIRED RATE AND GROWTH RATE

Taking the average of the ROE, previously stated in the table above, with the exclusion of the

2012 number I found Salesforce.coms required rate of return to be 7.48.

is the formula used to calculate CAPM. When using this formula,

Salesforce.coms required rate of return is 10.73.

I adjusted the CAPM and used the past years S&P 500 market rate, Salesforce.coms beta and

the 10 year Treasury bond rate to amount to a required rate of return of 14.73. I feel as though

this is the most appropriate number to use. Return and risk are positively related. I will be using

the adjusted CAPM I calculated at 13.82%, for the required rate of return in the first attempt at

valuation. Right now the firm is investing a lot of money, more than they are taking in with their

revenues. This can be seen as risky behavior, depending on how you look at it. One could say

that it will be turned around into higher revenues in the long term, which is actually the plan of

the company. However, if anything were to get in the way of this plan and for whatever reason
the company doesnt make its money back in the long run this can currently be considered

risky. I think that the adjusted CAPM is a correct presentation of the require rate of return for

Salesforce.com because it is fairly high to start with. I also think that this company could have a

required rate of return between the range of 10% and 14%.

The growth rate that would best represent Salesforce.com currently is the average of the ROEs.

However, this is too low for what the street consensus believes the growth rate will be. It is also

lower than my expectations for the company in the long term. I am going to adjust the growth

rate to be higher for the long run. Instead of having the average of the ROEs at a growth rate of

7.48, I am increasing the growth rate to be at 11%, this number is still very conservative

compared to what the street consensus is. The reason I want to use a conservative percentage

is because right now the competitive environment within the technology sector is very intense.

This number considers the possibility that Salesforce.com does not do as well as expected, due

to competition beating them. I think the competition will only get more intense as time goes

on, however, I really believe that Salesforce.com has an advantage because they are innovative

and quick. They are spending a lot of money investing right now which proves they want to be

the first company to have the next big break through and want to advance the services they

currently offer. Furthermore, to grow, firms must invest. This often requires raising capital.

Once this intense investing period is over, Salesforce.com will have extremely strong growth

rates.
Salesforce.com proves to be a company of ethics and management has the companys best

interest at heart. The founding CEO is still running the company and he has every intention to

keep the company headed on its upward trend.

Overall, I believe Salesforce.com will continue to grow its sales at lower historical growth rate

for the next one year due to the investing period it is going through. Beyond that I believe that

the stock will grow its sales at a much higher rate than the historical growth rates in sales. After

two years of a high spike in sales, I believe the firm will stay pretty steady for a few years or

decrease slightly, still having a much higher growth rate than the average technology firm. I will

be using r=.1382 and g=.11 for further valuation.

FREE CASH FLOW TO SHAREHOLDERS

To calculate the free cash flow to shareholders I am using the following equation:

. Using the

numbers in the table below, calculated for operating cash flow and investing cash flow the

formula looks as shown:

Fiscal Year Ended Jan. 30 2013

Operating Cash Flow 736,897
Investing Cash Flow -938,918
Free Cash Flow 1,675,815
Net Borrowings -37,754
736,897 - (-938,918) + (-31,754) = 1,644,061 (Free Cash Flow to Shareholders) / 141,224,000

(Shares Outstanding)=

FCFE per share = 1.16

Salesforce.com Current EPS = -.48

Analysis:
The FCFE per share I calculated is 1.16 and Salesforce.coms EPS as of May 09, 2013 is -.48. I

think that due to the large amount of investing that Salesforce.com has started to partake in

during the 2013 year, the estimates are thrown off.

FCFE1 (NEXT YEARS ESTIMATED FCFE)

Taking my current estimate of FCF to shareholders on a per share basis and the growth rate

that I expect FCFE to grow at during the next year I will estimate one period forward.

To calculate I use the formula show above. 1,644,061 * (1+.11) = 1,481,136.03 is the FCFE for

next years estimate. This number divided by 141,224,000 computes the per share basis of 1.29.

VALUE OF FIRMS EQUITY BASED ON FCFE

I will value the firms equity based on FCFE by dividing FCFE by r-g (that I previously estimate) to

get a present value of the firms FCF to shareholders. This is an approximation of the current

value of the firms equity.

$45.74

Comparing FCFE to the current market price of the stock is very similar. The stock closed at

$44.17 as of May 10, 2013. My estimated stock price, calculated for Salesforce.com, is $45.74. I

believe the adjustments I made to my growth rate were very accurate especially with the

investing they are currently doing. I also believe that using the adjusted CAPM was the best
decision and provided me with the most accurate basis to value the firms equity based on

FCFE.

EARNINGS YIELD
Table 11: Matrix for Salesforce.com

Required Rate of Return

1.29 .11 .12 .13 .14 .15
Growth Rate .09 65 43 32 26 22
.10 129 65 43 32 26
.11 129 65 43 32
.12 129 65 43
.13 129 65

Evaluation:
My estimated growth rate was .11 and my return was .13, which would have given me an

estimate of $65 for the stock price. This is fairly far off from my estimate of $45.74. In

calculating EPS1, I found next years EPS by using the current and applied my growth rate of

11%. This resulted in an estimated EPS of 1.29 which I entered into the yield chart. Highlighted

is the $43 mark, which is closest to the current market price of $44.17. The difference between

my estimates for r and g, 13.82-11.00 equals the earnings yield I calculated of 2.82%. These

numbers differ by a 1.5%. I think this illustrates that my estimates for r and g are accurate and

correct. I think this shows that an 11% growth rate is safe for Salesforce.com and they should

be able to achieve this in the near future. My estimate for the earnings yield is also not very far

from that of the CAPM model , where I calculated a growth rate of 10.73 and adjusted it to get

10.82. Value line estimates for EPS for 2015-2017 indicate an EPS of 2.50. As you can see, all of

my calculations for estimated growth are very similar and I think this reiterates my valuation of

Salesforce.com.
To summarize, I believe that my valuation of Salesforce.com is accurate and is a definite

possibility in relation to growth. Obviously it is near impossible to predict and no valuation can

be considered correct at this stage, however, my valuation and base estimates for growth and

rate of return have validity and accuracy based on historical trends and future estimates. I think

that with decreasing investing costs in years to come, Salesforce.com could very well see their

price of the stock rise to $65. In identifying the differences between my valuation estimates and

the market price, you will notice that I act in favor of positive growth for Salesforce.com. I think

this valuation in conservative and very feasible taking into consideration the current market

conditions. As you can see by the historical price chart below, Salesforce.com has steadily been

increasing their price in the long term and I believe they will continue this trend.

Table 12: Stock Price Chart of Salesforce.com 2004-2013

*FreeStockCharts.com

FINAL SUMMARY
The companys main focus is cloud computing which is the use of resources such as hardware

and software that, through a network, can be delivered to businesses. Salesforce.com has taken

the aspect of social networking and has incorporated this type of networking into the business

plan where companies can now communicate with employees, partners and management on a

real time basis, which has led to the transformation of social enterprises. The technology
industry is highly competitive and Salesforce.com faces competition on a daily basis. In order to

keep ahead of the curve they need to utilize their strengths of innovation, intuitive design,

customer additions and market position. That being said I think Salesforce.com will thrive in the

years to come as the market has been trending upward.

I also take into account economic factors like GDP, CPI and unemployment. Both GDP and CPI

have been seeing increases while unemployment has been steadily decreasing. This plays a role

in Salesforce.coms business because they deal directly and mainly with small to medium sized

businesses.

Management has increased revenues the past three years. The recession of 2008 pushed the

stock price down but by 2009 Salesforce.com bounced back full force and has yet to stop.

Salesforce.com also has a commitment to its employees and the community with their giving

back program. They attempt to add value whenever they can. Right now they are investing in

R&D in order to increase revenues in the future. I believe the strategy that Salesforce.com

shows that they are committed to growth. Therefore, I proposed a growth rate of 11%, and a

required rate of return of 13.82%. I believe the only direction for Salesforce.com to move is

upward.

Regarding future estimates and yield evaluation, my estimated growth rate was .11 and my

return was .13, which would have given me an estimate of $65 for the stock price. This is fairly

far off from my estimate of $45.74. The ROE matrix further reiterated the accuracy of my

estimations showing the closest price to the current market price is $44. This is a difference of

$1.74. The difference between my estimates for r and g, 13.82-11.00 equals the earnings yield I
calculated of 2.82%. These numbers have a difference of 1.5%. My estimate for the earnings

yield is also not very far from that of the CAPM model , where I calculated a growth rate of

10.73 and adjusted it to get a CAPM of 10.82. Value line estimates for EPS for 2015-2017 also

indicated an EPS of 2.50.

In conclusion, Salesforce.com is a growing company that I believe will generate high returns in

the future. I think it will be very exciting to watch this company grow as it started in an

apartment building and has already grown enough to compete in the technology industry with

Microsoft and Oracle which is an accomplishment in itself. For anyone who currently has

invested in Salesforce.com I recommend they hold their stocks. I also recommend a moderate

buy, pushing into a strong buy as I see a promising future for Salesforce.com.
 BIBLIOGRAPHY

Bloomberg Database (2013) Salesforce.com. 20 April 2013.

"Form 10-K." Form 10-K. SEC, 31 Jan. 2012. Web. 11 Mar. 2013.
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"FreeStockCharts.com." - Web's Best Streaming Realtime Stock Charts. Worden, 2013. Web. 10 May
2013. http://www.freestockcharts.com

"Reference for Business." Salesforce.com, Inc. Company History Index, n.d. Web. 11 Mar. 2013.
http://www.referenceforbusiness.com/history2/84/salesforce-com-Inc.html

"Salesforce.com, Inc." Businessweek. Bloomberg Businessweek, 2012. Web. 11 Mar. 2013.

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"Salesforce.com Review." Salesforce.com Review. CRM Search, 2012. Web. 11 Mar. 2013.
http://www.crmsearch.com/salesforce-com.php

"Salesforce.com Summary." Mergent Online, 2013. Web. 03 May 2013.

http://www.mergentonline.com/companydetail.php?compnumber=108973

"Yahoo! Finance." Yahoo!, 2013. Web. 11 Mar. 2013.

http://finance.yahoo.com/q/ks?s=CRM+Key+Statistics

"2012 Annual Report." Salesforce.com, 31 Dec. 2012. Web. 6 Mar. 2013.

http://www2.sfdcstatic.com/assets/pdf/investors/AnnualReport.pdf
APPENDIX
Table 13: Salesforce.com Balance Sheet

Table 14: Salesforce.com Income Statement

Table 15: Salesforce.com Cash Flows

Table 16: Stock Price Chart, May 13, 2013