I analyzed Salesforce.com by digging deep into the company's history, reviewing their financial statements and justifying my valuation methods. This is my final term paper for Financial Statement Analysis from the Spring of 2013.

1. SALESFORCE.COM
Financial Statement Analysis
By: Ashley Boecker

2. 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 FIRM’S EQUITY BASED ON FCFE ................................................................................................. 22
EARNINGS YIELD.......................................................................................................................................... 23
FINAL SUMMARY......................................................................................................................................... 24
BIBLIOGRAPHY ............................................................................................................................................ 27
APPENDIX………………………………………………………………………………………………………………………………………………28

3. 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 company’s 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 fulltime 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).

4. BUSINESS SEGMENTS
Table 1: Products and Descriptions of Salesforce.com
Salesforce.com Product
Sales Cloud
Service Cloud
Jigsaw Data Cloud
Chatter Collaboration Cloud
Force.com Custom Cloud
Database.com
RemedyForce
AppExchange
Brief Description
Includes SFA, PRM, marketing, Chatter, Jigsaw, content library and
mobile.
Comprehensive call center case management solution.
Mashup service to insert and append contacts as well as manage and
clean contact database.
Internal social communication tool to follow people, groups and
individual CRM records.
Platform-as-a-Service (PaaS) application development framework to
develop or customize.
Purpose-built cloud database to support online apps, social apps and
mobility.
Help desk support application.
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).

5. 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 company’s 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.com’s 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

6. 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 user’s 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

7. 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
Customer Additions
Market Position
Innovation
Intuitive Design
OPPORTUNITIES
Growing on-demand CRM Market
Growing Demand for Cloud Service
Increasing Presence in Asia Pacific


WEAKNESSES
Geographic Concentration
Dependency on the United States



THREATS
Competition
Privacy Concerns
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 today’s 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

8. Computer’s 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 Cofounder 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 bachelor’s degree
from Bristol University, in England, in economics and politics. Smith’s total
compensation year ended 2012 amounts to $3,472,287.
George Hu

9. 
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. Hu’s 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 bachelor’s 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
Earnings per Share (ttm)
Price to Earnings Ratio
Dividend yield
Number of Shares Outstanding
Average 3 Month Volume
Average 10 Day Volume
2013- 2014 Estimate Growth Rate
Float (locked up)
$176.06
-1.92
8.15
0%
146.41 M
1,590,420
1,794,640
27.90%
135.04 M

10. TECHNICAL ANALYSIS
170
150
130
110
90
Open
High
Low
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
175
Open
High
170
165
Low
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.

11. MAJOR HOLDERS
Table 4: Major Holders of Salesforce.com
BREAKDOWN
% of Shares Held by All Insider and 5% Owners:
% of Shares Held by Institutional & Mutual Fund
Owners:
% of Float Held by Institutional & Mutual Fund
Owners
Number of Institutions Holding Shares
8%
102%
110%
493
Table 5: Major Direct Holders of Salesforce.com
MAJOR DIRECT HOLDERS
HOLDER
Benioff, Marc
Ramsey, Craig
Harris, Parker
Hassenfeld, Alan
Koplow, Hilarie
SHARES
10,212,500
348,746
203,065
26,600
23,288
REPORTED
Dec. 27, 2012
Feb. 25, 2013
Apr. 29, 2013
Feb. 25, 2013
Apr. 2, 2013
Table 6: Top Institutional Holders of Salesforce.com
TOP INSTITUTIONAL HOLDERS
HOLDER
Sands Capital Management
Price Associates Inc.
Capital World Investors
Jennison Associates LLC
Vanguard Group, Inc.
SHARES
42,859,704
35,810,796
26,219,268
25,393,848
24,566,352
% OUT
7.32
6.11
4.48
4.33
4.19
VALUE
7,204,716,242
6,019,794,807
4,407,458,950
4,268,705,848
4,393,200,728
REPORTED
Dec. 31, 2012
Dec. 31, 2012
Dec. 31, 2012
Dec. 31, 2012
Mar. 31, 2013
Table 7: Top Mutual Fund Holders of Salesforce.com
TOP MUTUAL FUND HOLDERS
HOLDER
Fidelity Growth Company Fund
Fidelity Contrafund Inc.
Growth Fund of America Inc.
Mainstay Large Cap Growth Fund
Price Growth Stock Fund Inc.
SHARES
43,016,812
13,633,720
12,182,724
9,532,400
8,310,800
% OUT
7.34
2.33
2.08
1.63
1.42
VALUE
7,692,696,489
2,438,118,147
2,178,636,532
1,613,072,728
1,397,045,480
REPORTED
Mar. 31, 2013
Mar. 31, 2013
Mar. 31, 2013
Feb. 28, 2013
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 security’s price on the report

12. date given. Information and data were gathered from Yahoo!Finance and Bloomberg. The
company’s 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
2012 2011 2010 2012 2011 2010 2012
Current Ratio
.72
.84
1.88 2.6
2.6
2.13 2.6
Cash Ratio
.63
.72
1.72 2.41 2.35 1.9
2.41
Debt-Asset Ratio .98
1.0
--1.0
1.0
--.99
Times Int. Earned -3.12 -0.95 5.18 0.58 0.95 .17
17.92
Operating Margin -1.55 5.88 8.83 29.52 38.83 38.57 36.92
Net Margin
-.51 3.89 6.18 23.03 33.1 30.02 26.89
ROE
-.79 5.56 9.41 27.43 44.84 43.76 23.85
*Data from Mergent Online Comparison (Salesforce.com Summary)
Oracle
2011
2.76
2.5
.99
15.12
33.78
23.99
24.22
2010
1.84
1.64
--11.93
33.79
22.87
21.95
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 company’s current assets
and divides them by its current liabilities. A higher current ratio resembles a company’s 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
company’s current ratio is under 1 it doesn’t 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.

13. This is also the case for Salesforce.com’s 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 doesn’t 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 company’s financial risk by assessing
how much of the company’s assets have been financed by debt. It is calculated by adding short
term and long term debt and dividing by the company’s 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.

14. 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 company’s 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 isn’t
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.

15. ROE Summary
ROE is calculated by dividing net income by shareholders equity. This is used to measure a
company’s 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
2012
ROE
-.79
2011
5.56
2010
9.41
Microsoft
2012
27.43
2011
44.84
Oracle
2010
43.76
2012
23.85
2011
24.22
Table 10: ROE, CAPM & Adjusted CAPM for Salesforce.com
ROE: Average of 2011 and 2010
7.48
CAPM:
10.73
Adjusted CAPM:
13.82
2010
21.95

16. 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.com’s 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.com’s 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 company’s
beta of 0.91. The CAPM turned out to be higher than the required rate of return when taking
the average of the historical ROE’s.
I adjusted the CAPM and used the past years S&P 500 market rate, Salesforce.com’s 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

17. 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
Revenue
% Change
Net Income
% Change
*All numbers in Thousands.
2013
2,868,808
34.92%
(270,445)
-22.37%
2012
2,126,234
37.07%
(11,572)
-1.18%
2011
1,551,145
-------64,474
--------
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 company’s 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

18. 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
Operating Cash Flow
Investing Cash Flow
Free Cash Flow
*All numbers in thousands
2013
736,897
-938,918
1,675,815
2012
591,507
-489,690
1,081,197
2011
459,081
-1,062,554
1,521,635
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
Operating Cash Flow
.52
% Change
20.93%
Investing Cash Flow
-.66
% Change
83.33%
Free Cash Flow
1.18
Total % Change
49.36%
*Numbers are in a per share basis
2012
.43
22.85%
-.36
55.55%
.79
31.89%
2011
.35
--------.81
-------1.16
--------
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

19. 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.

20. 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.com’s required rate of return to be 7.48.
is the formula used to calculate CAPM. When using this formula,
Salesforce.com’s required rate of return is 10.73.
I adjusted the CAPM and used the past years S&P 500 market rate, Salesforce.com’s 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

21. the company doesn’t 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.

22. Salesforce.com proves to be a company of ethics and management has the company’s 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
Operating Cash Flow
Investing Cash Flow
Free Cash Flow
Net Borrowings
2013
736,897
-938,918
1,675,815
-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

23. Analysis:
The FCFE per share I calculated is 1.16 and Salesforce.com’s 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 year’s estimate. This number divided by 141,224,000 computes the per share basis of 1.29.
VALUE OF FIRM’S EQUITY BASED ON FCFE
I will value the firm’s 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 firm’s 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

24. decision and provided me with the most accurate basis to value the firm’s equity based on
FCFE.
EARNINGS YIELD
Table 11: Matrix for Salesforce.com
1.29
Growth Rate
.09
.10
.11
.12
.13
.11
65
129
.12
43
65
129
Required Rate of Return
.13
.14
32
26
43
32
65
43
129
65
129
.15
22
26
32
43
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 year’s 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.

25. 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 company’s 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

26. 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.com’s 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

27. 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.

28. BIBLIOGRAPHY
Bloomberg Database (2013) Salesforce.com. 20 April 2013.
"Form 10-K." Form 10-K. SEC, 31 Jan. 2012. Web. 11 Mar. 2013.
http://investing.businessweek.com/research/stocks/financials/drawFiling.asp?docKey=1360001193125130988527E836246PHAA45BDVGHSEL288V&docFormat=HTM&formType=10-K
"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.
http://investing.businessweek.com/research/stocks/people/person.asp?personId=595730&tick
er=CRM
"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

29. APPENDIX
Table 13: Salesforce.com Balance Sheet
Table 14: Salesforce.com Income Statement

30. Table 15: Salesforce.com Cash Flows
Table 16: Stock Price Chart, May 13, 2013