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Important disclosures appear on the last page of this report.

0.95 0.97 9.06

Krause Fund Research Spring 2019 Technology Salesforce.com (CRM) is a cloud-based business solutions company within the cloud computing software industry. Salesforce.com’s primary technology, customer relationship management, is used to aid companies with their interactions between current and potential customers to drive sales through the compilation and organization of client information. Salesforce.com possess approximately 20% of the current market share in the customer relationship management space and is key rivals with SAP, Oracle, Red Hat, and Microsoft. The company has exhibited 20% quarterly growth of revenues for 16 consecutive quarters dating back to fiscal year 2015. For the fiscal year ended 01/31/2019, total sales rose 26.74% to 13.282 billion dollars.

Our group’s consensus opinion for Salesforce.com is to place a HOLD (no action) rating on the equity. Our opinion on the hold rating is driven largely by the large contingency of growth as a means of success for the company.

Drivers of hold rating: Sustainability: The ability to sustain robust 24% annual revenue growth is met with skepticism due to increasing competition in the cloud computing space. Premium on Growth: A forward price to earnings analysis indicates that growth is expected to remain at approximately 10% for fiscal year 2020; growth below that level will decrease the market value of the equity due to Salesforce.com’s relatively low return on equity in comparison to their high growth peers. Economic correlation: The success of a sales business correlates immensely to the success of other businesses ability to sell, thus down economic times provide for significant volatility in Salesforce.com. With a 5-year trailing beta figure of 1.388 and the economy triggering signals for a recession, Salesforce.com faces certain volatility due to their high beta.

Counter to thesis: Robust Financial Performance: Salesforce.com runs a fiscally sound business through efficient returns on invested capital (ROIC). Salesforce.com has a 23.65% ROIC and our group forecasts continual improvement due to operating expense margins shirking because of an attrition rate of existing customers of over 90% allowing them to decrease marketing and sales costs. Diversification of Operations: Salesforce.com has strategically acquired over 50 additional cloud software manufacturers, headlined by the acquisition of MuleSoft in 2017 for $6.5 billion dollars. By acquiring additional cloud computing manufactures, Salesforce.com creates a strategic advantage over their peers through the diversification of their offerings, which in turn, may suppress their historically close relationship with the economy.

Recommendation: HOLD

April 10, 2019

Analysts

Noah Heitshusen [email protected] River Dunne [email protected]

Jose Duran [email protected]

Travis Graff [email protected]

Current Price: Discounted Cash Flow (DCF) Valuation P/S Relative Multiple Valuation

160.24 164.00 130.94

Target Price $163-169

Stock Performance Highlights

Salesforce.com (NYSE: CRM)

Share Highlights:

Investment Thesis

Salesforce.com vs the S&P 500

Growth: At a reasonable price? Company Overview

52 Week High 52 Week Low Beta Value (Trailing 5 Years) Average Daily Volume

Market Capitalization Shares Outstanding Earnings Per Share Dividend Yield

Company Performance Highlights

ROA ROE Sales (YoY growth %) Approximate Historical Attrition Rate

Current Ratio Debt to Equity Price to Sales

120.34 b 751 m $1.48

0.00%

5.46% 11.82%

12.282 b (26.74%) 8-12%

$166.99 $113.60

1.388 5.4 m

Key Financial Ratios

UNIVERSITY OF IOWA KRAUSE FUND RESEARCH

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Our group has placed a HOLD (no action) rating on Salesforce.com. It is our belief that the tremendous growth that Salesforce.com has produced comes at a premium that is contingent upon a growth rate that is misaligned with the current economic cycle. The nature of cloud-based customer-relationship management firms are reliant heavily upon the cyclical growth of the overall economy. With gross domestic product showing signs of decline, interest rate yield curve inversion looking eminent on the horizon, and uncertainties with foreign nations in regards to trade, the risk associated with investing in a cyclically tied firm possesses risk due to our economic outlook. Gross Domestic Product In the final quarter of 2018, GDP growth was down from 3.4% to 2.2%.i With GDP being one of the primary barometers of economic prosperity, the Q4 2018 growth rate showed an apparent slowdown in the U.S. economy. Expectations for the first quarter of 2019 currently sit at 1.5%,ii a continued decrease in growth from the past two quarters. This is most likely due in part to ongoing trade disputes, as well as partly influenced by a government shutdown. It is our belief that the aforementioned political factors around trade will continue to drive down GDP growth. We believe that the stunted growth is also attributed from the recent, weak consumer spending reports. Personal Consumption Expenditures (PCE), while rebounded up 0.1% month-over-month in January after being down 0.6% in the month prior was still well below normal levels.iii As a result of weak PCE reports and consequences of political factors, we believe GDP growth will continue its underwhelming nature throughout 2019. Trade Salesforce.com derives nearly 75% of their revenues domestically.iv Therefore, Salesforce.com possesses some insulation in regards to trade with foreign countries as well as fluctuations in currencies. However, due to the nature of a sales business, the success of Salesforce.com hinges on the success of their clients that they do business with. Many of the

clients that Salesforce.com relies upon to upsell and maintain under contract depend on the ability to trade with foreign countries. As nationalism has become a growing trend amongst nations, trade between other nations possess complexities and increased costs in doing business. The chief area of concern right now is the ongoing trade war between the U.S. and China. The U.S. has been unable to implement a new deal with China and tariffs have ensued. As of this writing, the U.S. has been unwavering of their demands with the Chinese in ensuring fair trade. Fair trade with China would offer strong growth possibilities to domestic companies with large operations in China as it would lead to a lower cost of business. It is our group’s belief that decreases in their operational expenses will lead to increased investment due to the freeing of additional capital that no longer fall victim to tariffs. Our confidence in a favorable trade deal stems from China’s GDP growth. China’s GDP growth has stalled significantly in the past decade and has reached an approximate 30-year low. There is also reason to believe that these financial figures that are reported may be skewed by the government of China to misrepresent how poor performance currently is.

Data sourced from World Bankv

While we are firm in our belief that an agreement will be reached, it shall be noted that a failure to make a deal may have a fair share of consequences. As the market has provided some indication in our belief that the trade deal is already priced in the economy, anything less than a smooth trade agreement may swing markets. It is our guidance to avoid companies with high beta coefficients during this time as the market presents itself with a great deal of volatility.

Economic Outlook

Executive Summary


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Interest Rates: Pertaining directly to Salesforce.com, interest rates have minuscule impact on operations. Due to the capital structure of Salesforce.com being approximately 95% equity while also having a debt ratio of .103, predominantly the company has relied upon the issuance of equity rather than debt to finance the operations of their business; it is in our forecast that we do not foresee this capital structure altering signficantly.iv From an economic perspective, however, interest rates pose a distinct threat to the overall economy. Specifically, our focus remains on the actions of the Federal Reserve and the impact that their target rate has on the sovereign bond market. The yield curve has been a reliable indicator of recessions in the past. Abnormal activity in the yield curve has ultimately led to inversions between varying maturities of short-term treasury-notes and longer-term treasury-bonds. The activity in the yield curve supports our notion stated prior of the abnormalities that are occurring in the market. As yield spreads continue to contract on the long end of the yield curve with respect to the short end, this has accelerated our fears of an impending recession. A sustained inversion lasting over the course of consecutive quarters would escalate the fears of an impending recession further. Below is shown the yield curve as of 04/10/2019. Further explained in the following paragraph, the shorter term rates are slightly inverted, which does not present a cause for concern as long as treasury notes do not invert with longer end treasury-bonds for a sustained period of time.

Data sourced from Bloombergvi

At this present time, inversions are seen only on treasury-bills and notes of short maturities and have not been sustained between the shorter end treasury-notes and longer treasury-bonds. The Federal Reserve’s target rate has presented difficulties in predicting future movements of the yield curve.

The Federal Reserve has been indecisive as to their guidance of the target rate. At the inception of 2019, Jerome Powell and the Federal Reserve committee provided indication in their minutes that 2019 may feature one, if not two, incremental rate hikes.vii At the time of this report, the position has seemed to have flipped from the former of a hawkish one to potentially a more dovish approach. The Federal Reserve has now provided indication that they will opt to let the target rate remain at 2.5% and have adopted a more laissez-faire philosophy in their approach.viii Our group believes that letting rates ride does not appear to be in the best interest of the market at this time due to the direct impact that the target rate set by the Federal Reserve has on the yields of short-term treasury-bills and notes.

Data sourced from The Economistix In the graph provided above, the importance of the spread on the 2-year treasury-note and 10-year treasury-bond is illustrated. The inversion of the yield curve over consecutive quarters has provided a leading indicator for a recession on three distinctly different occasions. As shown above, only three times has the spread on the 2-year treasury-note and the 10-year treasury-bond been inverted over consecutive quarters and all three times they have provided a leading indicator of a recession. As of April 10th, 2019, the United States treasury rates were the following:

Data sourced from Bloombergx

The 2-year treasury-note and the 10-year treasury-bond have inverted previously, but as seen above, there is no longer an inversion at present levels. It is in our belief that these rates have the potential to invert for a sustained period and present a strong threat to cyclically natured industries.


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Salesforce.com operates in a rather cyclical line of business. As the main objective of customer-relationship management (CRM) software is to increase a company’s sales, it can be deduced that slow economic times will slow the sales of their clients; in turn, this hinders the attrition rate of Salesforce.com and dampens future growth of the company. This market correlation is reflected in their five-year trailing beta of 1.388 which indicates that a downturn in the economy would be intensified as compared to the market. Cloud Computing Software: Salesforce.com operates and identifies their operations as a cloud computing service provider. Cloud computing, as an industry, is examined in this report through the following three distinct components: Software as a Service (SaaS): The use of applications through a third-party vendor where the user of the application accesses the program on their side. Essentially, companies are renting the service provided by a cloud solutions provider. Salesforce.com’s leading software solution, customer relationship management, is a software as a service (SaaS). SaaS accounts for approximately 65% of the cloud computing space and is also the fastest growing facet of cloud computing with a projected compounded annual growth rate of 21.20% over the next five years.xi Infrastructure as a Service (IaaS): This model of cloud computing allows for more of a self-service approach to cloud technology. The main benefit of this structure for a firm is that it allows the firm to eliminate the purchase of costly hardware and can purchase the cloud capabilities on a consumption basis. IaaS accounts for approximately 25% of the cloud computing space.xi Platform as a Service (PaaS): The use of cloud technologies provided to power the applications and data of a firm. The firm will still rely on the cloud software for things such as the servers, storage, and operating systems. It is seen as the hybrid approach to cloud technology. PaaS accounts for approximately 10% of the cloud computing space.xi

The following graph illustrates the growth of these three components:

Data sourced from Gartnerxii Porter’s Five Forces: Threat of New Entrants: Low The customer relationship management (CRM) industry is dominated by a select number of firms. This is a result of the large upfront expenses in the development of SaaS cloud software solutions as well as the large number of sales needed to offset the associated marketing and sales expenses. The ability to also sell an unproven product over a brand trusted name is yet to be seen. With regards to Salesforce.com, the threat of new entrants is of least concern. Power of Suppliers: Low Cloud computing is an intangible product supplied on servers via the web and thus it does not place much emphasis on suppliers. Cloud computing uses proprietary computing software developed internally and then deployed to consumers over web servers that do not require material to be supplied. Competitive Rivalry: High Although Salesforce.com possesses the leading market share in the SaaS cloud subindustry of customer relationship management, they still feel a great deal of pressure from larger firms. Companies such as Microsoft and Alphabet have begun to develop and expand upon their customer relationship cloud technology. A company such as

Industry Trends

Industry Analysis


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Microsoft or Alphabet present a rather intimidating threat through the integration of client information through Office 365 and Google platforms respectively. The ability for Alphabet or Microsoft to develop a new offering in the customer relationship management space ultimately presents a looming threat to Salesforce.com due to their large existing user base and ability to sync existing data. Power of Buyers: High The power of the buyers of Salesforce.com’s cloud computing solutions remains extremely high. The nature of a sales company to attract and retain their customers is the hinge point of their success. Salesforce.com, at this present time, enjoys a retention rate of over 90%.xxi However, if their prior buyers were to decrease retention rate another 10% to a still respectable retention rate of 80%, it would greatly impact the profitability of the firm. Substitution Availability: Moderate Although customer-relationship management allows firms to easily track clients, identify opportunities, and improve upon relationships with clients, customer relationship management is not something that is necessarily vital to the success of a business. Therefore, the cloud offering by Salesfore.com as a customer relationship management provider is a luxury offering that could be substituted by potential customers with more basic organization programs. But, with regards to substituting proprietary software, there are few substitutable products on the market. Markets and Competition: Salesforce.com has been in operation for nearly 20 years, but, remain in a unique stage of growth and rapid expansion. Thus, when evaluating peers, growth of the company must also be evaluated against similar growth companies who exhibit similar characteristics. With regards to cloud computing, the leading firms in the space include: SAP, Oracle, and Red Hat.

Data sourced from Bloombergxiii Salesforce.com is presently trading at an implied growth rate that is second to only Oracle. From a fundamental price to earnings analysis, our group has determined that Oracle is trading at an astounding 20.01% implied growth rate whereas Salesforce.com trades at a still relatively high mark of 9.91%.xiii Oracle’s poor return on equity leads to this inflated figure and thus, does not receive a great deal of emphasis on their fundamental price-to-earnings analysis. The 5-year monthly beta provides an indication of the relative volatility exhibited by Salesforce.com in comparison to their peers. Over the past five years, Salesforce.com has had a relatively high beta of 1.388.xxxi The peers in the cloud computing space are not as influenced by market movements and tend to move more conservatively with the market. The exposure of Salesforce.com to a recession is evident, however, the table provided at the top of this page illustrates a significantly higher beta than the peers in their industry.

Data sourced from YahooFinancexiv

As illustrated above, there is a premium attached to Salesforce.com’s exposure to the market. In our analysis, we have found that less than 5 monthly instances in the past 5 years where the S&P 500 finished down and Salesforce.com has had a positive return that month.xiv This analysis has led us to support and illustrate a cause for concern in uncertain economic times. As the S&P 500 continues to march to all-time highs, a cyclical pullback will more likely than not be felt by

Key Industry Comparisons


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Salesforce.com more significantly than its cloud computing peers. The business structure and revenue model differ drastically from firm to firm in the cloud computing space. Salesforce.com is a sales company that remains heavily reliant upon a deferred revenue structure that acknowledges revenue at the point of sale. The primary expense for Salesforce.com is the marketing and sales of the product. Companies who exhibit a similar revenue structure and prospects for growth have been identified as Netflix, Facebook, and Amazon. Although there are differences in their respective business segments, these companies are bound together by their commonality of growth.

Data sourced from Bloombergxiii

Implied growth derived from a fundamental price-to-earnings analysis illustrates that all four of these companies are priced at a similar implied growth rate. To generate additional shareholder value, the main emphasis our group believes is return on equity. The return on equity for Salesforce.com is approximately 12%.xii Because Salesforce.com exhibits a poor ROE in perspective to the listed comparative peers above, it acts as a deflating factor in their price. Management of Salesforce.com must focus on effectively using company assets to create profits to drive return for investors; otherwise, the company is reliant upon the near double-digit growth expectation that remains an unfeasible task in our view over the lifetime of the company. Market Performance: Technology is used to make cutting-edge innovations within a business; it is also one of the first in line to receive a cut from a budget.

Adoption of the technology in a strong economy will spur investment into cloud-computing solutions. A catalyst for growth will rely upon the United States to expand upon market levels that are already nearing all-time highs. Our group remains bearish about this being able to drive the growth of the industry at present levels. Ease of International Economic Tensions: The recent conflicting trade wars between the economic powers of the United States and China have ultimately deterred the growth of the two nations as highlighted from previously stated slowing of GDP growth. The anticipated trade resolution with China leads to strong optimism of foreign investment from China into cloud technologies. Historically, China has accounted nearly ⅓ of investment into United States technology.xv It is our postulation that China would be of keen interest to SaaS software technologies with an emphasis in customer relationship management as they aim to rejuvenate their economy. Return on Equity (Company Specific) As indicated in the company analysis, Salesforce.com presents a favorable return on equity in comparison to their more mature peers in the cloud computing space. However, Salesforce.com severely underachieves in comparison to its high growth peers. As Salesforce.com matures, growth cannot solely be the reliant factor upon success. Although growth drives the business, how efficiently a company returns on shareholder equity is what sustains the business. Salesforce.com has established themselves as a leader among cloud service CRM software. Their goal is to provide their customers with efficient solutions through the cloud, mobile, social, Internet of Things and artificial technologies. Salesforce.com provides CRM solutions that connect businesses to their customers.

Catalysts for Growth

Company Overview


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Salesforce.com currently produces nine cloud solutions. Their primary solutions include:

• Sales Cloud: The product enables sales teams to store data, monitor leads, forecast opportunities found from relationship analytics and deliver quotes, contracts and invoices

• Service Cloud: Enables customers to provide service and support through phone, email, SMS chat, live video, etc. Also allows for the use of a centralized platform.

• Marketing Cloud: Customers can plan, personalize and optimize segmenting and targeting prospective customers. Can be integrated with Sales and Service Clouds

• Commerce Cloud: Unifies all points of commerce. Increases conversion rate and revenue

• Salesforce Platform: Provides customers with tools to create personal applications

The secondary segments of cloud solutions include Community Cloud, Quip, Industry Offerings, and Success Cloud. The following graph illustrates the revenue generated by different segments as a percentage of total subscription and support revenues, the firm’s main avenue of income:

Data sourced from Salesforce.com 10Kiv

As previously stated, the majority of Salesforce.com’s revenue, approximately 93%, is attributed to their subscription and support division. In FY2019, revenue from this was $12.4B, a 28% increase from FY2018. The other source of revenue comes from professional services, which were about $0.9B in FY2019, an increase of 13% from FY2018.iv Historically, the professional services segment has lost money but in recent years the segment has been trending towards a

profit. It is our belief that this segment will create future profit as overall efficiency increases. See the following graph for historical revenue versus cost as it relates to the professional services segment:

Data sourced from Factset.comxvi

Salesforce.com manufactures growth through both organic channels with returns on invested capital as well as through acquisitions. Salesforce.com, at fiscal year end 2019, possessed a modest return on invested capital of 23.65% while relying heavily upon the use of strategic investments and acquisitions.iv Since the inception of the company, Salesforce.com has been involved in over 50 acquisitions.xvii This strategy of growth is of concern as they have seemingly been reliant on outside forces to drive the high multiple of growth at which they are presently trading at. The firm’s largest acquisition to date is MuleSoft. MuleSoft is a cloud-based technology firm equipped with proprietary application programming interface (API) that supplies Salesforce.com with a product that integrates information from customer’s own systems into the Salesforce Platform. The MuleSoft transaction had a total value of about $6B and was serviced with $3B in debt.xviii This is the extent of debt that Salesforce.com holds on their balance sheet, in which our group has forecasted to be paid off by FY2025. It is our belief that these acquisitions have not only fueled strong historical growth but will also provide significant growth in the upcoming years. We believe the acquisitions Salesforce.com has made will provide future bottom line growth through several different avenues. The first is directly increasing revenues through a wider diversification of products. With the new solutions and by simply buying out competitors, the firm will be able to strengthen their already strong


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position in the market as they have done historically as shown in the following graph.

Graph courtesy of Salesforce.comxix

The other ways Salesforce.com will experience bottom line growth through these acquisitions will be by creating cost efficiency as the new software is fully integrated into the Salesforce Platform. Due to the style in which Salesforce.com generates revenue, they have an abnormally high marketing and sales expense. This specific expense was 46% of FY2019 total revenue.iv For a comparison of this figure see the following graph showing latest fiscal year figures:

Data sourced from Factset.comxx

From the graph above; Red Hat is a firm that provides a comparison with similar revenue levels. Oracle and SAP on the other hand are larger companies that we believe show where Salesforce.com can trend towards in the upcoming years regarding their marketing and sales expense. It is our group’s belief that the firm’s marketing and sales expense will also trend downward in the upcoming years because of their high customer retention rate. The firm reported a retention rate of approximately 91%.xxi As subscriptions are renewed, revenue is created without increasing marketing and sales expense. It is also important to note that while marketing and sales expense is abnormally high, the

firm is not burdened by manufacturing, distribution or materials expenses as their products are software based. Another necessary expense that the firm is subject to is research and development. With the highly competitive nature of the cloud-computing market, finding new innovative solutions is pivotal for growth and even survival. In FY2019 R&D was 14% of total revenue.iv The graph shows that Salesforce.com is in line with the larger competitors with regards to R&D expense as a % of revenue.

Data sourced from Factset.comxxii

The following graph shows the exponential relationship marketing & sales and R&D costs have had with revenue regarding Salesforce.com since 2011.


We find the above graph favorable because it shows that Salesforce.com is creating year over year revenue growth through an effective sales team and R&D department. The most recent earnings release included backward looking success along with forward looking optimism. FY2019 proved successful for Salesforce.com. As mentioned earlier revenue was up with a 28% year-

Latest Earnings News


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over-year increase. An exciting milestone was surpassed for the firm as they were the fastest enterprise software company to achieve $13B in revenue. Guidance for FY2020 was raised to $16.05B, representing 21% projected growth year-over-year. Looking further ahead revenue targets for the firm are $26-$28B in FY2023. Fourth quarter EPS was $0.46, beating expectations. Analysts expect earnings to grow to $2.76 in FY2020, while we believe that a more conservative approach be taken to the upcoming year as there was a non-recurring gain in the past year that boosted earnings.xxiii These notions reinforce our belief of the firm’s continued growth non-inclusive of EPS growth from this year to the next.xxiv A conference call dated September 25, 2018 gave some insight into how Salesforce.com combats the competitive environment that is the CRM and cloud computing market. The Chief Technology Officer, Parker Harris, explained a need for innovation. Mr. Harris explained several ways the firm plans to differentiate themselves from the competition.xxv It begins with bringing their products full circle. Salesforce.com is currently in works to enable all their products to interact with each other. This will provide a one stop shop for customers to achieve their CRM needs. The final differentiating factor that the firm is focusing on is new technologies like Einstein AI. Einstein AI is an artificial intelligence solution that “automatically discovers relevant insights, predicts future behavior, proactively recommends best next actions and automates tasks”.iv In summary the AI estimates consumer needs and then outlines the most efficient steps that should be taken to meet these needs. This will cut time and costs for companies. The AI is included in the Salesforce Platform. As a group we believe the continued investment in new technologies like Einstein AI that make customer lives easier will continue to provide a competitive advantage for Salesforce.com.

The following graph shows Salesforce.com’s revenue growth in the past three years in comparison to the company’s top competitors.

Data sourced from Factset.comxxvi

It is our belief that the firm’s ability to increase revenues so rapidly as compared to competitors is due to their effectiveness in strategic acquisitions and reinvestment into new CRM solutions. This trend is advantageous in future years as it proves the firm can grow independent of poor peer performance. The following graph shows the firm’s contributed revenue by region:


With 71% of revenue coming from America in the last fiscal year we believe the firm is partially mitigated from future foreign policy changes. Another note has to do with new firm personnel. Maria Martinez, who serves as President, Global Customer Success and Latin America, was previously employed

Growth Comparison

Other Company Notes


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by Microsoft prior to 2010.iv Our group believes it is a significant advantage to have a top executive who understands, from an insider’s perspective, how a direct competitor operates. A main catalyst for growth will be the ability to provide an innovative offering that presents itself not only as a premium feature, but moreover as a necessity to customer’s operations. It is our belief that the firm has been doing this as they provide new efficient and fully integrated solutions. It is also clear that the firm has invested and will continue to invest in R&D as previously mentioned. According to Salesforce.com latest annual filing, they highlight their main offerings for growth as the following:iv

• Cross selling and upselling • Extending existing service offerings • Reducing customer attrition • International Expansion • Targeting vertical industries • Expanding into new horizontal markets • Ensuring strong customer adoption

From this guidance, we hold a similar belief that cross-selling and upselling can act as catalysts for growth in 2019.

Data sourced from Salesforce.com’s

2018 Annual Reportiv As shown above, Salesforce.com has grown by at least 20% each year-over-year in the number of subscribers. More importantly, they have also exponentially increased revenues. As previously mentioned the firm has a high retention rate, which increases cash flows from existing customers.

Strengths Salesforce.com has grown their cash by 194% in the past five years and have, as of FY2019, $2.7B on their balance sheet.xxvii This large amount of cash puts the firm in a position to grow through either acquiring smaller, niche cloud computing firms that offer innovative solutions or through investment into R&D to come up with their own innovative solutions. Another strength, as previously mentioned, has been the firm’s subscriber retention rate. The firm’s ability to bring customers back will provide growth opportunities through upselling and cross selling. Weaknesses A primary weakness is the sensitivity of service industries to fluctuations in the market. The service sector comprises the largest market for CRM solutions and therefore, a downturn in the economic performance of these industries will also result in decreased spending towards CRM solutions. Salesforce.com has a weakness in the sense that their business is driven solely by their CRM solutions. Opportunities The cloud-computing market is host to some of the highest growth in today’s economy. This will continue to provide investment opportunity to those firms who continually hold market share. Another opportunity comes from other firms’ continual search for cost cutting solutions. The main goal of Salesforce.com is to provide efficient solutions to CRM. Therefore, an opportunity stands to be the firm that is best able to meet these needs. Threats A threat that will have to be monitored in the upcoming months will be the ongoing trade wars. While most of the firm’s sales are domestic, they can still be affected indirectly. Negative trade policy can hinder the spending power of businesses. This will slow Salesforce.com’s current revenue streams and possibly lead to losses in subscriptions altogether.

Catalysts

S.W.O.T. Analysis


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Another threat will be the heavy competition in the market. We have identified that Salesforce.com is currently in a strong position in comparison to competitors, but to keep this position the firm will have to continually produce new innovative solutions. Revenue Saleforce.com collects revenue from two main avenues, which they categorize as subscription and support, and professional services and other. Subscription and support has consistently accounted for just over 90% of Salesforce.com’s total revenue.xvi For this reason, we chose to take a 5-year average and forecast that as the percentage subscription and support contributes to future revenues. In 2015 the firm began breaking down subscription and support revenues into their four main product offerings, Sales Cloud, Service Cloud, Salesforce Platform and Other, and Marketing and Commerce Cloud. Since then the four offerings have followed close trends in contributed revenue. With these we took 5-year averages as well for our forecast. Professional services and other were forecasted as the remaining 7% of total revenue as it was trending in the past.xvi When forecasting future revenues, we had to take into consideration where the firm is in its life cycle. Below are the last five years of revenue growth for Salesforce.com

Data sourced from Factset.comxxviii

We determined the firm is still in a period of high growth and it is our overall belief that this high growth will continue for several years to come. To account for this in our model we extended the forecast out to 2030. For FY2020 we are projecting 25% YoY growth and from there we incrementally decrease the growth rate for the firm’s revenue until it reaches 10% for the final year. Accounts Receivable The accounts receivable assumption was modeled as a % of sales. This assumption we have forecasted to remain constant throughout our model due to the business structure of Salesforce.com and their practice of extending credit as a means of retaining their top clients. Cost of Revenue The firm splits cost of revenue according to their two main avenues of revenue previously mentioned, subscription and support, and professional services and other. Costs of subscription and support encompass a wide variety of expenses that include delivery of the service and providing support, costs of data center capacity, third party fees, etc. With the wide range of costs associated with it we chose to look for a historical trend to give us some insight. What we found was that the cost hovered around 20% of subscription and support revenue.xvi We chose to forecast this 20% as a proportion of yearly subscription and support revenue over the life of our analysis. Cost of professional services and other is another story. Historically the cost has been in line with its respective revenue. Professional services are meant to be more of a facilitator for the services the firm offers.

Valuation Discussion


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Data Sources from Factset.comxvi

As shown in the graph above, the segment has turned a profit in the last two years. It is our belief that the efficiency of the segment is increasing due to the growth of the firm and economies of scale decreasing costs in proportion to revenues. For this reason we have forecasted the costs to be 98% of resepective revenue every year for the life of the analysis. Marketing and Sales As previously stated Salesforce.com creates revenue through subscriptions. To sign up new subscribers the firm uses a direct sales team and strong marketing campaigns. For these reasons marketing and sales expense makes up the largest cost for the firm. In FY2019 marketing and sales was approximately 46% of total revenues.iv A figure that, while high, has been trending down from approximately 53% in 2013xvi. As shown in the graph below we found that larger firms in the industry have much smaller marketing and sales expenses.

Data sourced from Factset.comxx

This graph, coupled with Salesforce.com’s actual expense trends, has led us to believe that as the firm continues to add subscribers they will be able

to reduce marketing and sales costs as a proportion of total revenue. To further explain why we believe this to be the case we must dig into how the firm incurs expenses with their subscription revenues. When a new subscription is added there are up-front costs. These costs include salesperson commissions that are reduced when the subscription is renewed. The costs also include other one-time expenses like third party fees. With this cost analysis it is important to note that the firm has approximately a 9% attrition rate meaning they retain 91% of subscribers.xxi For the reasons above we have forecasted marketing and sales to be 45% of total revenue in FY2020 and incrementally decrease until it reaches 30% for FY2030. Research and Development Salesforce.com is uniquely positioned with regards to their peers with research and development spending as a % of sales. Due to the high associated operating costs in their line business surrounding marketing and sales, research and development as a % of sales lags their respective peers in the cloud computing space, specifically competitors shown below who are involved heavily also in the customer relationship space.

Data sourced from Factset.comxxii

Salesforce.com in our forecast will continue to lag industry competitors with regards to research and development as a % of revenue. Rather, they have shown a record of employing capital into the sale and marketing of their product and through acquisitions.


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Acquisitions remain to be the biggest question mark with regards to Salesforce.com’s ability to innovate and ultimately grow. From a conservative lens, it is difficult to justify paying a large premium of growth on a company who lags their peers in research and development yet expects a high multiple to be attached to their growth. The other cloud leaders identified above, Red Hat, Oracle, and SAP all trump Salesforce.com when it comes to research and development. As their peers continue to innovate, Salesforce.com has deployed their large cash position to acquire over 50 cloud computing related companies, headlined by the large cloud innovator MuleSoft for 6.5 billion in 2018.xvii Capital Expenditures Our expectation of capital expenditures for Salesforce.com is forecasted as a percentage of sales. There is difficulty associated with the forecast, however, due to the cash position that Salesforce.com possess at the given time. Salesforce.com has tended to prefer to invest in vehicles outside of property, plant, & equipment and thus we find it to be a reasonable expectation for the aim to continue to cut these expenses as a percentage of their sales. In addition, as the business matures, there simply lacks an evident need for a cloud service provider to rapidly expand upon their capital expenditures. Depreciation and Amortization The firm depreciates its assets on a straight-line basis. As it is not feasible to obtain every depreciation schedule we determined it was best to forecast depreciation and amortization as a proportion of PP&E. To calculate a sensible proportion, we averaged historical depreciation and amortization expense and divided it by historical PP&E. The calculated proportion was just over 37%, which we used as a yearly proportion for the life of the analysis. Debt In FY2019 the firm issued approximately $3B in debt to facilitate the acquisition of MuleSoft.xviii We aligned our forecast of debt with the debt schedule outlined in the firm’s 10K, which has the

firm paying off the debt by 2025. We do not believe the firm will take on any debt after that as management has not indicated its desire to add debt. We also feel the firm won’t have any problems paying off the debt due to their strong cash position. WACC The firm’s weighted average cost of capital (WACC) that we calculated was 9.54%. This figure was applied in the DCF valuation and Economic Profit valuation to find Salesforce.com’s intrinsic stock price. Cost of Equity Assumptions:

• Cost of Equity: 9.91% o Risk-Free Rate: 2.47%xxix o Market Risk Premium: 5.36%xxx o Firm Beta: 1.388xxxi

With these variables we used the CAPM to calculate the firm’s cost of equity. The risk-free rate is the 10-year treasury rate as of April 10th. The market risk premium was sourced from Damodaran. The firm beta is the raw beta retrieved from the Bloomberg Terminal. Cost of Debt

• Pre-Tax Cost of Debt: 3.70%xxxii

The pre-tax cost of debt is the yield to maturity on a bond recently issued by the firm that has a 10-year maturity. It is important to note that debt only accounts for approximately 5% of Salesforce.com’s total capital structure. Valuation Models The intrinsic range at which we have valued Salesforce.com to trade at is $163-169. This range is derived from our Discounted Cash Flow (DCF) and Economic Profit (EP) models. These two models produced an intrinsic value of $164.00. It is important to not underscore the difficulty in forecasting the revenue of a firm such as Salesforce.com due to their rapid growth as well as their strategy to pursue growth through non-organic


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means such as mergers and acquisitions. The DCF and EP models rely upon assumptions of growth that were derived in our analysis from other analysts, company disclosures, as well as our own personal insights into the projected outlook of the company and their respective operations. Discounted Cash Flow & Economic Profit Model These models were given the most weight in deriving a final stock price. These methods gave us the ability to model high growth for the extended time horizon that we believe the firm will achieve. It is our belief that steady state for the firm will begin in 2030. This is also a favorable analysis as the firm creates high free cash flow, which we feel needs to be accounted for in valuation. A flaw in the discounted cash flow model lies in long-range assumptions that are certain to fluctuate as the company continues to evolve over their life cycle. However, our group has best derived what we feel are the most accurate forecasts based upon guidance indicated in Salesforce.com’s annual reports, analyst forecasts, and our interpretation of future market conditions. The large cash position that is derived at the end of our model of over 100 billion dollars does not reflect accurately our belief of their future balance sheet. The large growth that is modeled in Salesforce.com’s cash position is based upon our forecast of increasing free cash flows available to the firm. The increase in free cash flows allow for Salesforce.com to continue their acquisition strategy for growth without having to compromise on their capital structure that is primarily weighted upon equity. Relative Valuation High growth technology companies present a unique task with regards to relative valuation as different relative variables provide for a different, unique story. Our group made the decision to use a relative valuation model amongst customer-relationship management (CRM) firms and targeted a unique basket of firms. The firms that were used in the valuation were the following:

• HubSpot • Oracle • SAP • Red Hat • IBM

The following were chosen not only because they operate in the same industry, but because they also feature a diverse look at companies in different stages of their life cycle. HubSpot is a relatively young and small market cap firm in comparison to Salesforce.com. It is seen as the up-and-coming firm in the CRM space. The high multiple of growth that it presently trades at provides a similar picture to Salesforce.com. Although it may have represented around a 1% of the weighted average market share, it was included for purposes of arithmetic modeling and not weighted average. Oracle is in a mature stage in their life cycle and have been included as a similar image as to what Salesforce.com may develop to in the future. With a rather low return on equity around only 7% and Salesforce.com also having a relatively low return on equity in comparison to their high growth peers, it appears that Red Hat may be the best future barometer for Salesforce.com.xxxiii SAP is a firm that represents the middle ground between HubSpot and Oracle. SAP has begun to enter in the life cycle from growth and aiming to sustain the growth as illustrated from their conservative growth estimation and relatively low price to earnings multiple. IBM was the final firm to meet our criteria as we were ultimately seeking to balance the influence of HubSpot and their astounding multiple figures that they are trading at. It was our aim to paint the most diverse and accurate picture of what we believe a customer-relationship management based, cloud computing company should be assessed against. In conclusion of the models, we found a price of $130.84 as the most statistically significant conclusion. This relative valuation was with regards to the arithmetic average of the relative firm’s price to sales multiple. As customer-


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relationship business are driven heavily by sales, understanding where similar companies are trading at with regards to their price to sales is vital. An examination of the market cap weighted average was also conducted to illustrate that the larger firms do not necessarily enjoy the same amount of premium placed upon their growth and to reiterate the speculative nature associated with Salesforce.com. Although the model was off the current price of Salesforce.com by 30 dollars, the premium associated with growth companies was easily discoverable.

Data sourced from Bloombergxxxiv

A simple relative analysis highlights the price that the market is currently willing to pay for a dollar of Salesforce.com’s sales and the underwhelming enthusiasm of the market to pay for a dollar of mature firms such as IBM. Dividend Discount Model Using the Dividend Discount Model, we arrived at a stock price of $103.86. This abnormally low value is since Salesforce.com does not pay a dividend. Upper management of the firm have stated they have no plans to pay a dividend.iv Accordingly, we did not forecast any dividends to be paid. Beta vs Market Risk Premium With uncertainty ahead in the market we chose to test how the firm’s price would fare in a changing market. What we discovered is that the price jumps approximately $5 with every .2% decrease in market risk premium (MRP), with the rate currently at 5.36%. The historical average is 4.69%, so a drop in the MRP would not be unheard of.xxxv With the MRP we tested Beta. As the firm is a high growth company the raw beta is high at 1.388. We believe the firm’s beta will trend down as it matures. In testing this we discovered that if the

beta drops by .188 the price increases to $181.24. The important contingency associated with this price is the maturity of the firm which we do not believe to be anytime soon. CV ROIC vs CV Growth This table analyzes how the firm’s ability to create a return on invested capital and the continuing value growth rate affect stock price. The firm currently returns a rather healthy 62% on invested capital.iv We found that a decrease in ROIC of 14% only decreases overall stock price $2.02. The CV growth rate we chose, 3%, is based on estimated long-term GDP growth. The graph below shows GDP growth has ranged from 1.5% to 4.2% since the beginning of 2016.

Data sourced from TradingEconomicsxxxvi

In testing how this type of range could affect our stock price we found that a 2% growth rate would yield a price of $147.76, while a 4% growth rate would yield a price of $186.11. CV Marketing and Sales Expense vs CV Revenue Growth These are both key drivers of Salesforce.com’s growth as a company. It is our belief that the firm will be able to cut their largest operating expense, marketing and sales cost, but it is important to see how their value is affected if they are unable to cut this expense as a percentage of revenue. If they are unable to improve upon their CV marketing and sales expense and it remained at 45% of revenue, the stock price would decrease to $84.88. Thus, there is an implication contingent upon the ability of Salesforce.com to increase their efficient acquisition of sales. This likely will stem from the high attrition rate that is afforded by

Sensitivity Analysis


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Salesforce.com through the renewal of contracts without the need to pay for marketing and sales. The component of CV revenue growth does not carry as much implication as the component of CV marketing and sales, but nonetheless, it illustrates how important the expense of marketing and sales is. Our model indicates that Salesforce.com can maintain a stock price of $154.46 if they can continue to grow revenues at only a rate of 2.0% in the CV year with the implications they are able to trim their marketing and sales expense down to a reasonable 30% of sales in the CV year of 2030. CV Growth vs PP&E (as % of Total Revenue) It is our belief that spending towards PP&E will increase when the economy is doing well and vice versa if the economy is doing poorly. Since we determined CV growth based on long-term GDP, we felt it valuable to see how the two act together. We found that incremental percentage point changes in PP&E do not show any significant change in price and any change in price would be due to changes in CV growth. Marginal Tax Rate vs Risk-Free Rate Recently tax law changed, decreasing the corporate tax rate to 21%. In case of future change in tax law we have tested the firm’s sensitivity to marginal tax rate. If the marginal tax rate were to increase 8% the price would decrease to $145.50. The 10-year treasury rate (risk-free) is currently at 2.47%.xxix The following graph shows the fluctuation in the 10-year treasury rate since 2012. The rate has ranged from 1.37%- 3.23%.

Data sourced from MacroTrendsxxxvii

We found that if the rate were to jump 0.4% the price would drop to $151.20, and if it were to drop 0.4% the price would reach $178.48.


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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.


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References i Gross Domestic Product, 4th quarter and annual 2018 (third estimate); Corporate Profits, 4th quarter and annual 2018 | U.S. Bureau of Economic Analysis (BEA). (n.d.). Retrieved from https://www.bea.gov/news/2019/gross-domestic-product-4th-quarter-and-annual-2018-third-estimate-corporate-profits-4th ii Economic Calendar. (n.d.). Retrieved from https://www.marketwatch.com/tools/calendars/economic iii Personal Income, February 2019; Personal Outlays, January 2019 | U.S. Bureau of Economic Analysis (BEA). (n.d.). Retrieved from https://www.bea.gov/news/2019/personal-income-february-2019-personal-outlays-january-2019 iv Salesforce.com 10K. (n.d.).Retrieved March 26th, Retrieved from https://company-security.apps.factset.com/filings/CRM-US v The World Bank. (2019, January 03). GDP (current US$). Retrieved January 31, 2019, from https://data.worldbank.org/indicator/NY.GDP.MKTP.CD vi U.S. Treasury Yield Curve. (2019) Bloomberg Professional. [Online]. Available at: Subscription Service (Accessed: 10 April 2019) vii Minutes of the Federal Open Market Committee, January 29-30, 2019. (n.d.). Retrieved March 23, 2019, from https://www.federalreserve.gov/newsevents/pressreleases/monetary20190220a.htm viii Target Rate. (n.d.). Retrieved April 4, 2019, from https://www.federalreserve.gov/monetarypolicy/openmarket.htm ix The Economist. (2018, July 26). Bond yields reliably predict recessions. Why? Retrieved April 10, 2019, from https://www.economist.com/finance-and-economics/2018/07/26/bond-yields-reliably-predict-recessions-why x Bloomberg L.P. (2019) Yield Curve Retrieved April 12, 2017 from Bloomberg terminal xi “Industry Overview.” CompTIA Information Technology, CompTIA, Jan. 2019 https://www.comptia.org/resources /it-industry-trends-analysis xii Gartner. (2018, September 12). Gartner Forecasts Worldwide Public Cloud Revenue to Grow 17.3 Percent in 2019. Retrieved February 4, 2019, from https://www.gartner.com/en/newsroom/press-releases/2018-09-12-gartner-forecasts-worldwide-public-cloud-revenue-to-grow-17-percent-in-2019 xiii Bloomberg L.P. (2019) Comparable Firm Financial Analysis Retrieved April 12, 2017 from Bloomberg terminal xiv Salesforce.com. (CRM). Historical Data, February 11, 2019. Yahoo! Finance. Retrieved from https://finance.yahoo.com/quote/CRM/history?p=CRM xv Chinese Investment in Critical U.S. Technology: Risks to U.S. Security Interests. (n.d.). Retrieved March 14, 2019, from https://www.cfr.org/report/chinese-investment-critical-us-technology-risks-us-security-interests xvi FactSet Research Systems. (n.d.). Salesforce.com.: Revenue Decomposition and Cost of Revenues. Retrieved April 2nd, 2019, from FactSet database. xvii M/A Summary. (n.d.). Retrieved April 8, 2019, from https://company-security.apps.factset.com/ma-summary/CRM-US xviii MuleSoft Acquisition. (2019, March 23). Retrieved from https://deals.apps.factset.com/deal-detail/3046488MM

xix Salesforce.com. (2018, May 8). Salesforce Named #1 CRM Provider for Fifth Consecutive Year. Retrieved February 12, 2019, from https://www.salesforce.com/company/news-press/stories/2018/5/050818/ xx FactSet Research Systems. (n.d.). Salesforce.com.: Marketing & Sales Comparable Analysis. Retrieved April 2nd, 2019, from FactSet database. xxi Salesforce.com. (2019). Annual report 2018. Retrieved from https://investor.salesforce.com/about-us/investor/ overview/default.aspx xxii FactSet Research Systems. (n.d.). Salesforce.com.: R&D Comparable Analysis. Retrieved April 2nd, 2019, from FactSet database. xxiii Salesforce.com Inc (CRM) Analyst Ratings, Estimates & Forecasts. (2019, April 16). Retrieved from https://finance.yahoo.com/quote/CRM/analysis?p=CRM xxiv Salesforce.com Q4 2019 Earnings Call. (n.d.). Retrieved March 26th, Retrieved from https://company-security.apps.factset.com/filings/CRM-US xxv FactSet Research Systems. (n.d.). Salesforce.com.: Earnings Call Retrieved April 2nd, 2019, from FactSet database. xxvi FactSet Research Systems. (n.d.). Salesforce.com.: Revenue Comparable Analysis. Retrieved March 23rd, 2019, from FactSet database. xxvii FactSet Research Systems. (n.d.). Salesforce.com.: Balance Sheet Analysis. Retrieved April 2nd, 2019, from FactSet database. xxviii FactSet Research Systems. (n.d.). Salesforce.com.: Revenue Growth YoY. Retrieved April 2nd, 2019, from FactSet database. xxix U.S. Department of the Treasury. (n.d.). Retrieved April 10, 2019, from https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield xxx (n.d.). Retrieved April 10, 2019, from http://pages.stern.nyu.edu/~adamodar/ xxxi Bloomberg L.P. (2019) Salesforce.com Raw Beta Retrieved April 12, 2017 from Bloomberg terminal xxxii Salesforce.com Bond Issuance. (n.d.). Retrieved April 10, 2019, from https://company-security.apps.factset.com/dcs-detail/CRM-US xxxiii FactSet Research Systems. (n.d.). Salesforce.com.: Comparable ROE. Retrieved April 2nd, 2019, from FactSet database. xxxiv Bloomberg L.P. (2019) Fundamental P/E Analysis Retrieved April 8, 2017 from Bloomberg terminal xxxv Fenebris.com, F. (2019, March 27). US - Market Risk Premia. Retrieved March 5, 2019, from http://www.market-risk-premia.com/us.html xxxvi United States GDP Growth Rate. (n.d.). Retrieved February 26, 2019, from https://tradingeconomics.com/united-states/gdp-growth xxxvii 10 Year Treasury Rate - 54 Year Historical Chart. (n.d.). Retrieved February 16, 2019, from https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart

https://data.worldbank.org/indicator/NY.GDP.MKTP.CD

https://www.economist.com/finance-and-economics/2018/07/26/bond-yields-reliably-predict-

https://www.economist.com/finance-and-economics/2018/07/26/bond-yields-reliably-predict-

Salesforce.comRevenue DecompositionAll figures in millions of U.S. DollarsFiscal Years Ending Jan. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030CV

Revenue By Business SegmentSales Cloud 3,060.6 3,554.3 4,040.0 6,200.9 7,627.2 9,305.1 11,259.2 13,511.1 16,078.2 19,052.6 22,196.3 25,525.8 28,588.9 31,447.7

YoY Growth % 13.40% 16.13% 13.67% 53.49% 23.00% 22.00% 21.00% 20.00% 19.00% 18.50% 16.50% 15.00% 12.00% 10.00%Service Cloud 2,320.7 2,877.1 3,621.0 4,456.2 5,481.1 6,687.0 8,091.2 9,709.5 11,554.3 13,691.8 15,951.0 18,343.6 20,544.8 22,599.3

YoY Growth % 27.67% 23.98% 25.86% 23.07% 23.00% 22.00% 21.00% 20.00% 19.00% 18.50% 16.50% 15.00% 12.00% 10.00%Salesforce Platform and Other 1,441.6 1,929.2 2,854.0 2,871.0 3,531.3 4,308.2 5,213.0 6,255.6 7,444.1 8,821.3 10,276.8 11,818.3 13,236.5 14,560.2

YoY Growth % 39.33% 33.82% 47.94% 0.60% 23.00% 22.00% 21.00% 20.00% 19.00% 18.50% 16.50% 15.00% 12.00% 10.00%Marketing and Commerce Cloud 933.3 1,349.9 1,898.0 1,909.5 2,348.7 2,865.4 3,467.1 4,160.5 4,951.0 5,867.0 6,835.0 7,860.3 8,803.5 9,683.9

YoY Growth % 42.68% 44.64% 40.60% 0.61% 23.00% 22.00% 21.00% 20.00% 19.00% 18.50% 16.50% 15.00% 12.00% 10.00%Professional Services and Other 635.8 769.5 869.0 1,164.9 1,432.8 1,748.0 2,115.1 2,538.1 3,020.3 3,579.1 4,169.6 4,795.1 5,370.5 5,907.5

YoY Growth % 37.73% 21.03% 12.93% 34.05% 23.00% 22.00% 21.00% 20.00% 19.00% 18.50% 16.50% 15.00% 12.00% 10.00%Total Revenue 8,392.0 10,480.0 13,282.0 16,602.5 20,421.1 24,913.7 30,145.6 36,174.7 43,047.9 51,011.8 59,428.7 68,343.0 76,544.2 84,198.6

YoY Growth % 25.87% 24.88% 26.74% 25.00% 23.00% 22.00% 21.00% 20.00% 19.00% 18.50% 16.50% 15.00% 12.00% 10.00%

Revenue by Geography

Americas 6,225.0 7,579.1 9,445.0 12,061.7 14,835.9 18,099.8 21,900.8 26,281.0 31,274.3 37,060.1 43,175.0 49,651.3 55,609.4 61,170.4 YoY Growth % 26.76% 21.75% 24.62% 27.70% 23.00% 22.00% 21.00% 20.00% 19.00% 18.50% 16.50% 15.00% 12.00% 10.00%

Europe 1,373.5 1,903.5 2,553.0 2,972.6 3,656.3 4,460.7 5,397.4 6,476.9 7,707.5 9,133.4 10,640.4 12,236.5 13,704.8 15,075.3 YoY Growth % 18.12% 38.59% 34.12% 16.44% 23.00% 22.00% 21.00% 20.00% 19.00% 18.50% 16.50% 15.00% 12.00% 10.00%

Asia Pacific 793.5 997.4 1,284.0 1,568.2 1,928.9 2,353.2 2,847.4 3,416.9 4,066.1 4,818.3 5,613.3 6,455.3 7,229.9 7,952.9 YoY Growth % 33.65% 25.70% 28.73% 22.13% 23.00% 22.00% 21.00% 20.00% 19.00% 18.50% 16.50% 15.00% 12.00% 10.00%

Total Revenue 8,392.0 10,480.0 13,282.0 16,602.5 20,421.1 24,913.7 30,145.6 36,174.7 43,047.9 51,011.8 59,428.7 68,343.0 76,544.2 84,198.6 YoY Growth % 25.87% 24.88% 26.74% 25.00% 23.00% 22.00% 21.00% 20.00% 19.00% 18.50% 16.50% 15.00% 12.00% 10.00%

Segment as % of Total Revenue

Total Subscription and Support 92.42% 92.66% 93.46% 92.98% 92.98% 92.98% 92.98% 92.98% 92.98% 92.98% 92.98% 92.98% 92.98% 92.98%Sales Cloud 36.47% 33.92% 30.42% 37.35% 37.35% 37.35% 37.35% 37.35% 37.35% 37.35% 37.35% 37.35% 37.35% 37.35%Service Cloud 27.65% 27.45% 27.26% 26.84% 26.84% 26.84% 26.84% 26.84% 26.84% 26.84% 26.84% 26.84% 26.84% 26.84%Salesforce Platform and Other 17.18% 18.41% 21.49% 17.29% 17.29% 17.29% 17.29% 17.29% 17.29% 17.29% 17.29% 17.29% 17.29% 17.29%Marketing and Commerce Cloud 11.12% 12.88% 14.29% 11.50% 11.50% 11.50% 11.50% 11.50% 11.50% 11.50% 11.50% 11.50% 11.50% 11.50%

Professional Services and Other 7.58% 7.34% 6.54% 7.02% 7.02% 7.02% 7.02% 7.02% 7.02% 7.02% 7.02% 7.02% 7.02% 7.02%

% of Total Revenue (Region)

Americas 74.18% 72.32% 71.11% 72.65% 72.65% 72.65% 72.65% 72.65% 72.65% 72.65% 72.65% 72.65% 72.65% 72.65%Europe 16.37% 18.16% 19.22% 17.90% 17.90% 17.90% 17.90% 17.90% 17.90% 17.90% 17.90% 17.90% 17.90% 17.90%Asia Pacific 9.46% 9.52% 9.67% 9.45% 9.45% 9.45% 9.45% 9.45% 9.45% 9.45% 9.45% 9.45% 9.45% 9.45%

Salesforce.comIncome StatementAll figures in millions of U.S. DollarsFiscal Years Ending Jan. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030CVRevenue:

Subscription and support 7,756.2 9,710.5 12,413.0 15,437.6 18,988.3 23,165.7 28,030.5 33,636.6 40,027.6 47,432.7 55,259.1 63,548.0 71,173.7 78,291.1 Sales Cloud 3,060.6 3,554.3 4,040.0 6,200.9 7,627.2 9,305.1 11,259.2 13,511.1 16,078.2 19,052.6 22,196.3 25,525.8 28,588.9 31,447.7 Service Cloud 2,320.7 2,877.1 3,621.0 4,456.2 5,481.1 6,687.0 8,091.2 9,709.5 11,554.3 13,691.8 15,951.0 18,343.6 20,544.8 22,599.3 Salesforce Platform and Other 1,441.6 1,929.2 2,854.0 2,871.0 3,531.3 4,308.2 5,213.0 6,255.6 7,444.1 8,821.3 10,276.8 11,818.3 13,236.5 14,560.2 Marketing and Commerce Cloud 933.3 1,349.9 1,898.0 1,909.5 2,348.7 2,865.4 3,467.1 4,160.5 4,951.0 5,867.0 6,835.0 7,860.3 8,803.5 9,683.9

Professional services and other 635.8 769.5 869.0 1,164.9 1,432.8 1,748.0 2,115.1 2,538.1 3,020.3 3,579.1 4,169.6 4,795.1 5,370.5 5,907.5 Total Revenues 8,392.0 10,480.0 13,282.0 16,602.5 20,421.1 24,913.7 30,145.6 36,174.7 43,047.9 51,011.8 59,428.7 68,343.0 76,544.2 84,198.6

Cost of RevenueSubscription and support (1,556.4) (2,033.5) (2,604.0) (3,131.7) (3,852.0) (4,699.4) (5,686.3) (6,823.5) (8,120.0) (9,622.2) (11,209.9) (12,891.4) (14,438.3) (15,882.2)Professional services and other (677.7) (740.1) (847.0) (1,141.6) (1,404.1) (1,713.0) (2,072.8) (2,487.3) (2,959.9) (3,507.5) (4,086.2) (4,699.2) (5,263.1) (5,789.4)

Total Cost of Revenue (2,234.0) (2,773.5) (3,451.0) (4,273.3) (5,256.1) (6,412.4) (7,759.1) (9,310.9) (11,079.9) (13,129.7) (15,296.1) (17,590.5) (19,701.4) (21,671.5) Depreciation & Amortization (632.2) (752.6) (962.0) (767.0) (1,303.9) (1,527.4) (1,770.3) (2,029.3) (2,299.9) (2,575.9) (2,861.6) (3,111.6) (3,322.7) (3,435.2)

Total Cost of Revenues Excluding Depreciation (1,601.8) (2,020.9) (2,489.0) (3,506.2) (3,952.2) (4,885.0) (5,988.8) (7,281.5) (8,780.0) (10,553.8) (12,434.5) (14,479.0) (16,378.7) (18,236.4) Gross Profit 6,157.9 7,706.5 9,831.0 12,329.2 15,165.0 18,501.3 22,386.5 26,863.8 31,968.0 37,882.1 44,132.6 50,752.5 56,842.8 62,527.1 Operating Expenses:

Research and development (1,208.1) (1,553.1) (1,886.0) (2,440.2) (2,654.7) (2,989.6) (3,617.5) (3,979.2) (4,520.0) (5,101.2) (5,794.3) (6,492.6) (7,080.3) (7,577.9) Marketing and sales (3,918.0) (4,829.3) (6,064.0) (7,471.1) (8,781.1) (10,339.2) (11,455.3) (13,022.9) (14,636.3) (16,961.4) (18,720.0) (21,186.3) (23,346.0) (25,259.6) General and administrative (967.6) (1,088.4) (1,346.0) (1,992.3) (2,246.3) (2,491.4) (3,014.6) (3,617.5) (4,304.8) (5,101.2) (5,942.9) (6,834.3) (7,654.4) (8,419.9) Operating lease termination resulting from purchase of 50 Fremont - - - - - - - - - - - - - -

Total Operating Expenses (6,093.7) (7,470.7) (9,296.0) (11,903.6) (13,682.1) (15,820.2) (18,087.4) (20,619.6) (23,461.1) (27,163.8) (30,457.2) (34,513.2) (38,080.7) (41,257.3) Income / loss from operations 64.2 235.8 535.0 425.7 1,482.9 2,681.1 4,299.2 6,244.3 8,506.9 10,718.3 13,675.4 16,239.3 18,762.1 21,269.7

Investment income 27.4 35.8 57.0 45.0 55.4 67.6 81.8 98.1 116.8 138.4 161.2 185.4 207.7 228.4 Gain / loss on sale of investment 13.7 - 542.0 - - - - - - - - - - - Other expense / income 9.1 17.4 3.0 - - - - - - - - - - -

Earnings Before Interest & Taxes 114.4 289.1 1,137.0 470.7 1,538.3 2,748.7 4,381.0 6,342.4 8,623.7 10,856.7 13,836.6 16,424.7 18,969.7 21,498.2 Interest expense (89.0) (86.9) (154.0) (302.7) (254.6) (254.2) (206.1) (205.8) (157.7) - - - - -

Income / (loss) before provision for / benefit from income taxes 25.4 202.1 983.0 168.0 1,283.7 2,494.4 4,174.8 6,136.6 8,466.0 10,856.7 13,836.6 16,424.7 18,969.7 21,498.2 Provision for (Benefit from) income taxes (154.2) 74.6 (127.0) 35.3 269.6 523.8 876.7 1,288.7 1,777.9 2,279.9 2,905.7 3,449.2 3,983.6 4,514.6

Consolidated Net Income 179.6 127.5 1,110.0 132.7 1,014.1 1,970.6 3,298.1 4,847.9 6,688.1 8,576.8 10,930.9 12,975.5 14,986.1 16,983.6 Less: Minority interest in consolidated joint venture - - - - - - - - - - - - - -

Net income / loss 179.6 127.5 1,110.0 132.7 1,014.1 1,970.6 3,298.1 4,847.9 6,688.1 8,576.8 10,930.9 12,975.5 14,986.1 16,983.6

Earnings Per Share 0.26$ 0.18$ 1.48$ 0.17$ 1.32$ 2.55$ 4.24$ 6.19$ 8.48$ 10.80$ 13.68$ 16.13$ 18.50$ 20.83$ Shares Outstanding 687.8 714.9 751.0 761.7 767.1 772.4 777.8 783.2 788.5 793.9 799.2 804.6 809.9 815.3 Dividends Per Share - - - - - - - - - - - - - -

Salesforce.comBalance SheetAll figures in millions of U.S. DollarsFiscal Years Ending Jan. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030CV

AssetsCurrent assets

Cash and cash equivalents 1,606.5 2,543.5 2,669.0 4,891.4 6,500.1 9,613.1 14,223.1 21,180.3 28,157.8 39,604.8 53,687.0 70,121.2 88,531.1 108,933.0 Short-term marketable securities 602.3 1,978.2 1,673.0 1,715.2 1,758.4 1,802.7 1,848.1 1,894.7 1,942.4 1,991.4 2,041.6 2,093.0 2,145.8 2,199.8 Accounts receivable, net 3,196.6 3,917.4 4,924.0 6,036.6 7,425.1 9,058.6 10,960.9 13,153.0 15,652.1 18,547.8 21,608.1 24,849.4 27,831.3 30,614.4 Deferred commissions 311.8 460.9 788.0 677.6 833.4 1,016.8 1,230.3 1,476.4 1,756.9 2,081.9 2,425.5 2,789.3 3,124.0 3,436.4 Prepaid expenses and other current assets 279.5 390.4 629.0 598.5 736.1 898.1 1,086.7 1,304.0 1,551.8 1,838.9 2,142.3 2,463.6 2,759.3 3,035.2

Total current assets 5,996.8 9,290.4 10,683.0 13,919.3 17,253.2 22,389.3 29,349.1 39,008.5 49,061.1 64,064.8 81,904.5 102,316.5 124,391.4 148,218.9 Non-current assets:

Property and equipment, net 1,787.5 1,946.5 2,051.0 3,486.5 4,084.2 4,733.6 5,426.2 6,149.7 6,887.7 7,651.8 8,320.0 8,884.6 9,185.3 9,261.8 Deferred commissions, noncurrent 227.8 413.4 1,232.0 541.5 666.0 812.6 983.2 1,179.8 1,404.0 1,663.8 1,938.3 2,229.0 2,496.5 2,746.1 Goodwill 8,377.2 8,140.5 14,774.0 14,774.0 14,774.0 14,774.0 14,774.0 14,774.0 14,774.0 14,774.0 14,774.0 14,774.0 14,774.0 14,774.0 Capitalized Software, Net 141.7 146.1 152.0 155.8 159.7 163.7 167.8 172.0 176.3 180.7 185.2 189.8 194.6 199.4 Intangible assets 320.9 193.7 - (38.7) (77.5) (116.2) (155.0) (193.7) (232.4) (271.2) (309.9) (348.7) (387.4) (426.1) Deferred tax asset 28.9 36.5 39.5 49.4 60.7 74.1 89.6 107.6 128.0 151.7 176.7 203.2 227.6 250.3 Other assets 137.0 165.4 1,805.5 1,850.6 1,896.9 1,944.3 1,992.9 2,042.8 2,093.8 2,146.2 2,199.8 2,254.8 2,311.2 2,369.0

Total non-current assets 11,021.2 11,042.1 20,054.0 20,819.1 21,564.1 22,386.0 23,278.8 24,232.1 25,231.3 26,296.9 27,284.1 28,186.8 28,801.7 29,174.6 Total assets 17,018.0 20,332.5 30,737.0 34,738.3 38,817.2 44,775.3 52,627.9 63,240.6 74,292.4 90,361.6 109,188.6 130,503.3 153,193.2 177,393.4

Liabilities and Stockholders' EquityCurrent liabilties

Accounts payable, accrued expenses and other liabilities 1,752.7 2,010.1 2,688.0 3,204.5 3,941.5 4,808.6 5,818.4 6,982.1 8,308.7 9,845.8 11,470.3 13,190.9 14,773.8 16,251.2 Deferred revenue 5,505.7 7,094.7 8,564.0 10,600.5 12,661.1 14,948.2 18,087.4 21,704.8 25,828.7 30,607.1 35,657.2 41,005.8 45,926.5 50,519.2 Current Portion of Long-Term Debt 1,024.7 3.0 504.0 4.0 504.0 4.0 504.0 - - - - - -

Total current liabilities 7,258.4 10,129.5 11,255.0 14,308.9 16,606.5 20,260.8 23,909.8 29,190.9 34,137.4 40,452.8 47,127.6 54,196.7 60,700.3 66,770.3 Non-current liabilties

Long-term debt 2,008.4 694.8 3,173.0 2,669.0 2,665.0 2,161.0 2,157.0 1,653.0 - - - - - - Deferred revenue, noncurrent 37.1 - - - - - - - - - - - - - Other noncurrent liabilities 780.9 793.1 704.0 1,625.3 1,999.1 2,439.0 2,951.1 3,541.4 4,214.2 4,993.9 5,817.8 6,690.5 7,493.4 8,242.7

Total non-current liabilities 2,826.4 1,487.9 3,877.0 4,294.3 4,664.1 4,600.0 5,108.1 5,194.4 4,214.2 4,993.9 5,817.8 6,690.5 7,493.4 8,242.7 Total liabilities 10,084.8 11,617.4 15,132.0 18,603.2 21,270.7 24,860.8 29,017.9 34,385.3 38,351.6 45,446.7 52,945.4 60,887.2 68,193.7 75,013.1

Stockholders' Equity:Preferred stock - - - - - - - - - - - - - - Common stock 8,040.9 9,753.1 13,928.0 14,325.4 14,722.7 15,120.1 15,517.4 15,914.8 16,312.2 16,709.5 17,106.9 17,504.2 17,901.6 18,299.0 Accumulated other comprehensive loss / income (75.8) (27.1) (58.0) (58.0) (58.0) (58.0) (58.0) (58.0) (58.0) (58.0) (58.0) (58.0) (58.0) (58.0) Accumulated deficit / retained earnings (464.9) (337.4) 1,735.0 1,867.7 2,881.8 4,852.4 8,150.5 12,998.5 19,686.6 28,263.4 39,194.3 52,169.8 67,155.9 84,139.4 Temporary equity - 3.9 - - - - - - - - - - - -

Total stockholders' equity 7,500.1 9,388.5 15,605.0 16,135.1 17,546.6 19,914.5 23,610.0 28,855.3 35,940.8 44,914.9 56,243.2 69,616.0 84,999.5 102,380.4 Total liabilities and stockholders' equity 17,584.9 21,009.8 30,737.0 34,738.3 38,817.2 44,775.3 52,627.9 63,240.6 74,292.4 90,361.6 109,188.6 130,503.3 153,193.2 177,393.4

Salesforce.comCash Flow StatementAll figures in millions of U.S. DollarsFiscal Years Ending Jan. 31 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Cash Flows from Operating Activities

Net income / loss 0.5 18.4 43.4 84.7 69.7 (11.6) (270.4) (232.2) (262.7) (47.4) 179.6 127.5 1,110.0 Depreciation and amortization 12.5 24.2 36.0 53.2 75.7 157.3 216.8 369.4 448.3 525.8 632.2 752.6 962.0 Amortization of deferred commissions 23.4 42.2 58.7 63.9 80.2 107.2 154.8 194.6 257.6 319.1 371.5 464.7 737.0 Amortization of debt discount and transaction costs - - - 0.7 19.6 10.3 24.1 49.8 49.9 27.5 30.5 31.3 20.0 Gain on sales of land and building improvements - - - - - - - - (15.6) (21.8) - - - Gains on strategic investments, net - (1.3) - - - - - - - - (13.7) - (542.0) 50 Fremont lease termination - - - - - - - - - (36.6) - - - Change in the deferred income tax valuation allowance - (1.0) - - - - - - - - - - - Expenses related to employee stock plans 39.2 55.2 77.4 88.9 120.4 229.3 379.4 503.3 564.8 593.6 820.4 997.0 1,283.0 Excess tax benefits from employee stock plans (16.6) (32.0) (54.6) (51.5) (36.0) (6.0) (14.9) (8.1) (7.7) (59.5) - - - Loss / gain on securities - - 1.8 - - - - - - - - - - Minority interest in consolidated joint venture 2.2 4.5 4.6 - - - - - - - - - -

Changes in Assets and LiabilitiesAccounts receivable, net (52.5) (91.4) (44.8) (54.5) (102.5) (244.9) (183.2) (424.7) (544.6) (582.4) (628.5) (720.0) (923.0) Deferred commissions (37.9) (62.8) (63.7) (82.3) (121.2) (167.2) (232.6) (265.1) (320.9) (380.0) (462.0) (799.3) (981.0) Prepaid expenses and other current assets (8.2) (11.4) (4.7) (3.9) 2.0 (10.7) (20.8) 105.2 45.8 50.8 (28.9) 24.1 (58.0) Other assets (1.7) (7.7) (1.3) (1.4) (9.8) 2.9 11.1 - - - - - - Accounts payable, accrued expenses and other liabilities 35.8 70.4 64.0 62.9 133.3 80.3 193.4 (29.0) 160.0 254.0 50.0 308.2 287.0 Deferred revenue 114.5 196.8 112.9 110.3 227.7 444.7 479.4 612.3 798.8 969.7 1,211.0 1,551.9 1,503.0

Net cash provided by operating activities 111.2 204.3 229.6 270.9 459.1 591.5 736.9 875.5 1,173.7 1,612.6 2,162.2 2,738.0 3,398.0

Cash Flows from Investing ActivitesPurchase of subsidiary stock (2.8) - (21.6) - - - - - - - - - - Business combinations, net of cash acquired (15.5) - (27.9) (12.0) (403.3) (422.7) (579.7) (2,617.3) 38.1 (58.7) (3,192.7) (25.4) (5,115.0) Non-refundable amounts received for sale of land available for sale - - - - (277.9) (19.7) (4.1) - 96.8 248.4 - - - Purchase of 50 Fremont land and building - - - - - - - - - (425.4) - - - Capital expenditures (22.1) (43.6) (61.1) (53.9) (111.0) (189.0) (185.3) (330.3) (384.2) (651.0) (493.9) (619.7) (697.0) Changes in marketable securities (128.2) (60.8) (10.4) (312.7) (270.3) 141.7 (169.8) 516.0 (449.1) (601.2) 1,002.3 (1,365.4) 504.0 Proceeds from sale of investment - 1.7 - - - - - - - - - - -

Net cash used in / provided by investing activities (168.6) (102.7) (121.0) (378.6) (1,062.6) (489.7) (938.9) (2,431.6) (698.4) (1,487.9) (2,684.3) (2,010.5) (5,308.0)

Cash flows from Financing ActivitiesPurchase of subsidiary stock - - - - (172.0) - - - - - - - Proceeds from borrowings on convertible senior notes, net - - - 567.1 - - - 1,132.8 - - - - Proceeds from issuance of warrants - - - 59.3 - - - 84.8 - - - - Purchase of convertible note hedge - - - (126.5) - - - (153.8) - - - - Proceeds from term loan, net - - - - - - - 298.5 - - 495.5 - Payments on term loan - - - - - - - (15.0) (285.0) - - - Proceeds from employee stock plans 29.1 60.9 43.3 93.9 160.4 116.6 351.4 289.9 309.0 455.5 401.5 650.3 704.0 Principal payments on capital lease obligations (0.6) (0.2) (1.0) (8.1) (10.4) (30.5) (31.8) (41.1) (70.7) (82.3) (98.2) (105.9) (131.0) Proceeds from / payments on revolving credit facility, net - - - - - - - - 297.3 (300.0) 198.8 (200.0) 1,437.0 Excess tax benefits from employee stock plans 16.6 32.0 54.6 51.5 36.0 6.0 14.9 8.1 7.7 59.5 - - Contingent consideration payment related to prior business combinations - - - - - (16.2) - - - - - - Payments on convertible senior notes - - - - - - - (6.0) (568.9) - - (123.2) -

Net cash provided by / used in financing activities 45.0 92.7 96.9 637.2 14.1 75.8 334.5 1,598.2 (310.5) 132.6 997.7 221.2 2,010.0

Net increase / decrease in cash and cash equivalents (13.2) 192.5 204.7 527.5 (587.0) 183.0 140.0 34.4 126.5 250.2 448.2 936.9 126.0 Cash and cash equivalents, beginning of period 99.8 86.6 279.1 483.8 1,011.3 424.3 607.3 747.2 781.6 908.1 1,158.4 1,606.5 2,543.0 Cash and cash equivalents, end of period 86.6 279.1 483.8 1,011.3 424.3 607.3 747.2 781.6 908.1 1,158.4 1,606.5 2,543.5 2,669.0

Salesforce.comStatement of Expected Cash FlowsAll figures in millions of U.S. DollarsFiscal Years Ending Jan. 31 2020E 2021E 2022E 2023E 2024E 2025CV 2026E 2027E 2028E 2029E 2030CV

Cash Flows from Operating ActivitiesNet income / loss 132.7 1,014.1 1,970.6 3,298.1 4,847.9 6,688.1 8,576.8 10,930.9 12,975.5 14,986.1 16,983.6

Adjustments to reconcile net income to net cash provided by operating activites:Depreciation and amortization 767.0 1,303.9 1,527.4 1,770.3 2,029.3 2,299.9 2,575.9 2,861.6 3,111.6 3,322.7 3,435.2 Increase (decrease) in deferred tax assets (9.9) (11.4) (13.4) (15.6) (17.9) (20.4) (23.7) (25.0) (26.5) (24.4) (22.8)

Changes (Increases or decreases) in working capital accounts:Accounts receivable, net (1,112.6) (1,388.4) (1,633.5) (1,902.3) (2,192.2) (2,499.1) (2,895.6) (3,060.4) (3,241.2) (2,981.9) (2,783.1) Deferred commissions 110.4 (155.8) (183.4) (213.5) (246.1) (280.5) (325.0) (343.5) (363.8) (334.7) (312.4) Prepaid expenses and other current assets 30.5 (137.7) (162.0) (188.6) (217.3) (247.8) (287.1) (303.4) (321.3) (295.6) (275.9) Deferred commissions, noncurrent 690.5 (124.5) (146.5) (170.6) (196.6) (224.2) (259.7) (274.5) (290.7) (267.5) (249.6) Accounts payable, accrued expenses and other liabilities 516.5 737.0 867.1 1,009.8 1,163.7 1,326.6 1,537.1 1,624.6 1,720.6 1,582.9 1,477.4 Deferred revenue 2,036.5 2,060.6 2,287.2 3,139.1 3,617.5 4,123.9 4,778.3 5,050.2 5,348.6 4,920.7 4,592.7

Net cash provided by operating activities 3,161.6 3,297.8 4,513.6 6,726.7 8,788.3 11,166.6 13,676.9 16,460.4 18,912.6 20,908.2 22,844.9

Cash Flows from Investing ActivitesCapital gain from (loss) on short-term investments (42.2) (43.2) (44.3) (45.4) (46.6) (47.7) (48.9) (50.2) (51.4) (52.7) (54.1) Capitalized Software, net (3.8) (3.9) (4.0) (4.1) (4.2) (4.3) (4.4) (4.5) (4.6) (4.7) (4.9) Intangible Assets 38.7 38.7 38.7 38.7 38.7 38.7 38.7 38.7 38.7 38.7 38.7 Capital expenditures (2,202.6) (1,901.6) (2,176.8) (2,462.9) (2,752.8) (3,037.9) (3,340.0) (3,529.9) (3,676.1) (3,623.4) (3,511.7) Business Acquistions - - - - - - - - - - - (Increase) decrease in other assets (45.1) (46.3) (47.4) (48.6) (49.8) (51.1) (52.3) (53.7) (55.0) (56.4) (57.8)

Net cash used in / provided by investing activities (2,254.9) (1,956.2) (2,233.8) (2,522.3) (2,814.7) (3,102.2) (3,406.9) (3,599.5) (3,748.5) (3,698.5) (3,589.7)

Cash flows from Financing ActivitiesProceeds from issuance of common stock (ESOP Exercise) 397.4 397.4 397.4 397.4 397.4 397.4 397.4 397.4 397.4 397.4 397.4 Issuance (Payment) of Long-Term Debt (504.0) (4.0) (504.0) (4.0) (504.0) (1,653.0) - - - - - Increase (Decrease) in other noncurrent liabilities 921.3 373.8 439.8 512.2 590.2 672.9 779.6 824.0 872.7 802.9 749.3 Issuance (Payment) of Current Portion of Long Term Debt 501.0 (500.0) 500.0 (500.0) 500.0 (504.0) - - - - - Change in accumulated other comprehensive income (loss) - - - - - - - - - - -

Net cash provided by / used in financing activities 1,315.7 267.2 833.2 405.5 983.6 (1,086.8) 1,177.0 1,221.3 1,270.0 1,200.2 1,146.7

Net increase / decrease in cash and cash equivalents 2,222.4 1,608.7 3,113.0 4,610.0 6,957.2 6,977.5 11,447.0 14,082.3 16,434.1 18,409.9 20,401.9 Cash and cash equivalents, beginning of period 2,669.0 4,891.4 6,500.1 9,613.1 14,223.1 21,180.3 28,157.8 39,604.8 53,687.0 70,121.2 88,531.1 Cash and cash equivalents, end of period 4,891.4 6,500.1 9,613.1 14,223.1 21,180.3 28,157.8 39,604.8 53,687.0 70,121.2 88,531.1 108,933.0

Salesforce.comCommon Size Income StatementAll figures in millions of U.S. DollarsFiscal Years Ending Jan. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030CVRevenue:

Subscription and support 92.42% 92.66% 93.46% 92.98% 92.98% 92.98% 92.98% 92.98% 92.98% 92.98% 92.98% 92.98% 92.98% 92.98%Professional services and other 7.58% 7.34% 6.54% 7.02% 7.02% 7.02% 7.02% 7.02% 7.02% 7.02% 7.02% 7.02% 7.02% 7.02%

Total Revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of Revenue

Subscription and support -18.55% -19.40% -19.61% -18.86% -18.86% -18.86% -18.86% -18.86% -18.86% -18.86% -18.86% -18.86% -18.86% -18.86%Professional services and other -8.08% -7.06% -6.38% -6.88% -6.88% -6.88% -6.88% -6.88% -6.88% -6.88% -6.88% -6.88% -6.88% -6.88%Depreciation & Amortization -7.53% -7.18% -7.24% -4.62% -6.39% -6.13% -5.87% -5.61% -5.34% -5.05% -4.82% -4.55% -4.34% -4.08%

Total Cost of Revenues -19.09% -19.28% -18.74% -21.12% -19.35% -19.61% -19.87% -20.13% -20.40% -20.69% -20.92% -21.19% -21.40% -21.66%Gross Profit 73.38% 73.54% 74.02% 74.26% 74.26% 74.26% 74.26% 74.26% 74.26% 74.26% 74.26% 74.26% 74.26% 74.26%Operating Expenses:

Research and development -14.40% -14.82% -14.20% -14.70% -13.00% -12.00% -12.00% -11.00% -10.50% -10.00% -9.75% -9.50% -9.25% -9.00%Marketing and sales -46.69% -46.08% -45.66% -45.00% -43.00% -41.50% -38.00% -36.00% -34.00% -33.25% -31.50% -31.00% -30.50% -30.00%General and administrative -11.53% -10.39% -10.13% -12.00% -11.00% -10.00% -10.00% -10.00% -10.00% -10.00% -10.00% -10.00% -10.00% -10.00%Operating lease termination resulting from purchase of 50 Fremont 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total Operating Expenses -72.61% -71.29% -69.99% -71.70% -67.00% -63.50% -60.00% -57.00% -54.50% -53.25% -51.25% -50.50% -49.75% -49.00%Income / loss from operations 0.77% 2.25% 4.03% 2.56% 7.26% 10.76% 14.26% 17.26% 19.76% 21.01% 23.01% 23.76% 24.51% 25.26%

Investment income 0.33% 0.34% 0.43% 0.27% 0.27% 0.27% 0.27% 0.27% 0.27% 0.27% 0.27% 0.27% 0.27% 0.27%Gain / loss on sale of investment 0.16% 0.00% 4.08% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other expense / income 0.11% 0.17% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Earnings Before Interest & Taxes 1.36% 2.76% 8.56% 2.84% 7.53% 11.03% 14.53% 17.53% 20.03% 21.28% 23.28% 24.03% 24.78% 25.53%Interest expense -1.06% -0.83% -1.16% -1.82% -1.25% -1.02% -0.68% -0.57% -0.37% 0.00% 0.00% 0.00% 0.00% 0.00%

Income / loss before benefit from / provision for income taxes 0.30% 1.93% 7.40% 1.01% 6.29% 10.01% 13.85% 16.96% 19.67% 21.28% 23.28% 24.03% 24.78% 25.53%Benefit from / provision for income taxes -1.84% 0.71% -0.96% 0.21% 1.32% 2.10% 2.91% 3.56% 4.13% 4.47% 4.89% 5.05% 5.20% 5.36%

Consolidated Net Income 2.14% 1.22% 8.36% 0.80% 4.97% 7.91% 10.94% 13.40% 15.54% 16.81% 18.39% 18.99% 19.58% 20.17%Less: Minority interest in consolidated joint venture 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Net income / loss 2.14% 1.22% 8.36% 0.80% 4.97% 7.91% 10.94% 13.40% 15.54% 16.81% 18.39% 18.99% 19.58% 20.17%

Salesforce.comCommon Size Balance Sheet as % of SalesAll figures in millions of U.S. DollarsFiscal Years Ending Jan. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030CV

AssetsCurrent Assets

Cash and cash equivalents 19.1% 24.3% 20.1% 29.6% 32.0% 38.8% 47.4% 58.8% 65.6% 77.9% 90.6% 102.9% 116.0% 129.7%Short-term marketable securities 7.2% 18.9% 12.6% 10.3% 8.6% 7.2% 6.1% 5.2% 4.5% 3.9% 3.4% 3.1% 2.8% 2.6%Accounts receivable, net 38.1% 37.4% 37.1% 36.4% 36.4% 36.4% 36.4% 36.4% 36.4% 36.4% 36.4% 36.4% 36.4% 36.4%Deferred commissions 3.7% 4.4% 5.9% 4.1% 4.1% 4.1% 4.1% 4.1% 4.1% 4.1% 4.1% 4.1% 4.1% 4.1%Prepaid expenses and other current assets 3.3% 3.7% 4.7% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6%

Total current assets 71.5% 88.6% 80.4% 84.0% 84.6% 90.0% 97.5% 108.0% 114.2% 125.8% 138.1% 150.0% 162.8% 176.3%Non-current assets:

Property and equipment, net 21.3% 18.6% 15.4% 21.0% 20.0% 19.0% 18.0% 17.0% 16.0% 15.0% 14.0% 13.0% 12.0% 11.0%Deferred commissions, noncurrent 2.7% 3.9% 9.3% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3%Goodwill 99.8% 77.7% 111.2% 89.0% 72.3% 59.3% 49.0% 40.8% 34.3% 29.0% 24.9% 21.6% 19.3% 17.5%Capitalized Software, Net 1.7% 1.4% 1.1% 0.9% 0.8% 0.7% 0.6% 0.5% 0.4% 0.4% 0.3% 0.3% 0.3% 0.2%Intangible assets 3.8% 1.8% 0.0% -0.2% -0.4% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5%Deferred tax asset 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%Other assets 1.6% 1.6% 13.6% 11.1% 9.3% 7.8% 6.6% 5.6% 4.9% 4.2% 3.7% 3.3% 3.0% 2.8%

Total non-current assets 131.3% 105.4% 151.0% 125.4% 105.6% 89.9% 77.2% 67.0% 58.6% 51.6% 45.9% 41.2% 37.6% 34.6%Total assets 202.8% 194.0% 231.4% 209.4% 190.2% 179.9% 174.8% 175.0% 172.8% 177.4% 184.0% 191.2% 200.4% 211.0%

Liabilities and Stockholders' EquityCurrent Liabilties

Accounts payable, accrued expenses and other liabilities 20.9% 19.2% 20.2% 19.3% 19.3% 19.3% 19.3% 19.3% 19.3% 19.3% 19.3% 19.3% 19.3% 19.3%Deferred revenue 65.6% 67.7% 64.5% 63.8% 62.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0%Current Portion of Long-Term Debt 0.0% 9.8% 0.0% 3.0% 0.0% 2.0% 0.0% 1.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Total current liabilities 86.5% 96.7% 84.7% 86.2% 81.3% 81.3% 79.3% 80.7% 79.3% 79.3% 79.3% 79.3% 79.3% 79.3%Non-current liabilties

Long-term Debt 23.9% 6.6% 23.9% 16.1% 13.1% 8.7% 7.2% 4.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Deferred revenue, noncurrent 0.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Other noncurrent liabilities 9.3% 7.6% 5.3% 9.8% 9.8% 9.8% 9.8% 9.8% 9.8% 9.8% 9.8% 9.8% 9.8% 9.8%

Total non-current liabilities 33.7% 14.2% 29.2% 25.9% 22.8% 18.5% 16.9% 14.4% 9.8% 9.8% 9.8% 9.8% 9.8% 9.8%Total liabilities 120.2% 110.9% 113.9% 112.1% 104.2% 99.8% 96.3% 95.1% 89.1% 89.1% 89.1% 89.1% 89.1% 89.1%

Stockholders' Equity:Preferred stock 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Common stock 95.8% 93.1% 104.9% 86.3% 72.1% 60.7% 51.5% 44.0% 37.9% 32.8% 28.8% 25.6% 23.4% 21.7%Accumulated other comprehensive loss / income -0.9% -0.3% -0.4% -0.3% -0.3% -0.2% -0.2% -0.2% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1%Accumulated deficit / retained earnings -5.5% -3.2% 13.1% 11.4% 14.3% 19.6% 27.2% 36.1% 46.0% 55.6% 66.2% 76.6% 88.0% 100.2%Temporary equity 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Total stockholders' equity 89.4% 89.6% 117.5% 97.3% 86.1% 80.1% 78.5% 80.0% 83.7% 88.3% 94.9% 102.1% 111.3% 121.9%Total liabilities and stockholders' equity 209.5% 200.5% 231.4% 209.4% 190.2% 179.9% 174.8% 175.0% 172.8% 177.4% 184.0% 191.2% 200.4% 211.0%

Salesforce.comWeighted Average Cost of Capital (WACC) EstimationAll figures in millions of U.S. Dollars

Risk Free Rate: 2.47%Risk Premium 5.36%Beta 1.388

Cost of Equity: 9.91%

Cost of Debt 3.70%

Current Portion of Long Term Debt 3.0 Long Term Debt 3,173.0 PV of Operating Leases 3,563.7

Book Value of Debt 6,739.7

Current Price $160.24Shares Outstanding 751.00

Market Value of Equity 120,340.24

Book Value of Debt 6,739.73Market Value of Equity 120,340.24

Total Firm Value 127,079.97

Debt 5.30%Equity 94.70%

WACC 9.54%

Debt

Cost of Equity:

Equity

Target Weights

Capital Structure Weights

Salesforce.comValue Driver EstimationAll figures in millions of U.S. DollarsFiscal Years Ending Jan. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030CV

NOPLATNet Revenues 8,392.0 10,480.0 13,282.0 16,602.5 20,421.1 24,913.7 30,145.6 36,174.7 43,047.9 51,011.8 59,428.7 68,343.0 76,544.2 84,198.6

- Cost of Goods Sold 1,601.8 2,020.9 2,489.0 3,506.2 3,952.2 4,885.0 5,988.8 7,281.5 8,780.0 10,553.8 12,434.5 14,479.0 16,378.7 18,236.4 - General and Administrative 967.6 1,088.4 1,346.0 1,992.3 2,246.3 2,491.4 3,014.6 3,617.5 4,304.8 5,101.2 5,942.9 6,834.3 7,654.4 8,419.9 - Marketing and Sales 3,918.0 4,829.3 6,064.0 7,471.1 8,781.1 10,339.2 11,455.3 13,022.9 14,636.3 16,961.4 18,720.0 21,186.3 23,346.0 25,259.6 - Research and Development 1,208.1 1,553.1 1,886.0 2,440.2 2,654.7 2,989.6 3,617.5 3,979.2 4,520.0 5,101.2 5,794.3 6,492.6 7,080.3 7,577.9 - Depreciation 632.2 752.6 962.0 767.0 1,303.9 1,527.4 1,770.3 2,029.3 2,299.9 2,575.9 2,861.6 3,111.6 3,322.7 3,435.2 + Implied Interest on Operating Lease 71.9 90.7 104.3 131.9 169.3 189.2 218.2 256.5 308.2 362.0 440.4 532.1 636.0 746.5

EBITA 136.2 326.5 639.3 557.5 1,652.1 2,870.2 4,517.4 6,500.7 8,815.1 11,080.3 14,115.7 16,771.4 19,398.0 22,016.3

Marginal tax rate -282.21% 11.25% 28.99% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00%

Less: Adjusted TaxesProvision for (Benefit from) Income Tax (154.2) 74.6 (127.0) 35.3 269.6 523.8 876.7 1,288.7 1,777.9 2,279.9 2,905.7 3,449.2 3,983.6 4,514.6

+ Tax Shield on Interest Expense 251.1 (9.8) (44.6) 63.6 53.5 53.4 43.3 43.2 33.1 - - - - - + Tax Shield on Operating Lease Interest (203.0) 10.2 30.2 27.7 35.6 39.7 45.8 53.9 64.7 76.0 92.5 111.7 133.6 156.8 + Tax Shield on any non-operating losses (25.6) 2.0 0.9 - - - - - - - - - - - - Tax on Investment Income (77.3) (4.0) (16.5) (9.5) (11.6) (14.2) (17.2) (20.6) (24.5) (29.1) (33.9) (38.9) (43.6) (48.0) - Tax on Non-Operating Income (38.7) - - - - - - - - - - - - -

Total Adjusted Taxes (247.7) 73.0 (157.1) 117.1 347.0 602.7 948.7 1,365.2 1,851.2 2,326.9 2,964.3 3,522.0 4,073.6 4,623.4 Plus : Change in Deferred Taxes (13.0) (7.6) (3.0) (9.9) (11.4) (13.4) (15.6) (17.9) (20.4) (23.7) (25.0) (26.5) (24.4) (22.8)

NOPLAT 370.9 245.9 793.4 430.6 1,293.8 2,254.1 3,553.2 5,117.7 6,943.5 8,729.8 11,126.4 13,222.9 15,300.1 17,370.1

Invested CapitalOperating Current Assets:

Normal Cash 1,762.3 2,200.8 2,244.6 2,805.8 3,451.1 4,210.3 5,094.5 6,113.4 7,274.9 8,620.8 10,043.2 11,549.7 12,935.7 14,229.3 Accounts Receivable 3,196.6 3,917.4 4,924.0 6,036.6 7,425.1 9,058.6 10,960.9 13,153.0 15,652.1 18,547.8 21,608.1 24,849.4 27,831.3 30,614.4 Deferred Commissions 311.8 460.9 788.0 677.6 833.4 1,016.8 1,230.3 1,476.4 1,756.9 2,081.9 2,425.5 2,789.3 3,124.0 3,436.4 Prepaid Expenses or Other Assets 279.5 390.4 629.0 598.5 736.1 898.1 1,086.7 1,304.0 1,551.8 1,838.9 2,142.3 2,463.6 2,759.3 3,035.2

Current Operating Assets 5,550.3 6,969.5 8,585.6 10,118.5 12,445.7 15,183.8 18,372.4 22,046.9 26,235.8 31,089.4 36,219.1 41,652.0 46,650.3 51,315.3

Non-Interest Bearing Current Liabilities:Accounts Payable 1,752.7 2,010.1 2,688.0 3,204.5 3,941.5 4,808.6 5,818.4 6,982.1 8,308.7 9,845.8 11,470.3 13,190.9 14,773.8 16,251.2 Deferred Revenue 5,505.7 7,094.7 8,564.0 10,600.5 12,661.1 14,948.2 18,087.4 21,704.8 25,828.7 30,607.1 35,657.2 41,005.8 45,926.5 50,519.2 Income Taxes Payable - - - - - - - - - - - - - -

Current Operating Liabilities 7,258.4 9,104.8 11,252.0 13,804.9 16,602.5 19,756.8 23,905.8 28,686.9 34,137.4 40,452.8 47,127.6 54,196.7 60,700.3 66,770.3

Net Working Capital (1,708.1) (2,135.3) (2,666.4) (3,686.4) (4,156.8) (4,573.0) (5,533.4) (6,640.0) (7,901.6) (9,363.5) (10,908.4) (12,544.7) (14,050.0) (15,455.1) + Net PP&E 1,787.5 1,946.5 2,051.0 3,486.5 4,084.2 4,733.6 5,426.2 6,149.7 6,887.7 7,651.8 8,320.0 8,884.6 9,185.3 9,261.8 + Capitalized Software 141.7 146.1 152.0 155.8 159.7 163.7 167.8 172.0 176.3 180.7 185.2 189.8 194.6 199.4 + Net Other Operating Assets 137.0 165.4 1,805.5 1,850.6 1,896.9 1,944.3 1,992.9 2,042.8 2,093.8 2,146.2 2,199.8 2,254.8 2,311.2 2,369.0 + Long-Term Deferred Commissions 227.8 413.4 1,232.0 541.5 666.0 812.6 983.2 1,179.8 1,404.0 1,663.8 1,938.3 2,229.0 2,496.5 2,746.1 + PV of Operating Leases 2,452.3 2,818.3 3,563.7 4,575.3 5,112.5 5,897.3 6,931.5 8,329.3 9,784.9 11,901.4 14,381.0 17,188.3 20,176.8 23,364.1 - Long-Term Deferred Revenue 37.1 - - - - - - - - - - - - -

Invested Capital 3,001.2 3,354.3 6,137.8 6,923.3 7,762.6 8,978.4 9,968.3 11,233.5 12,445.0 14,180.3 16,115.9 18,201.9 20,314.3 22,485.5

Value DriversReturn on Invested Capital

NOPLAT 370.87 245.93 793.37 430.58 1,293.84 2,254.12 3,553.18 5,117.65 6,943.46 8,729.78 11,126.40 13,222.87 15,300.05 17,370.11Beginning Invested Capital 3,093.06 3,001.15 3,354.33 6,137.85 6,923.34 7,762.58 8,978.42 9,968.27 11,233.52 12,445.04 14,180.27 16,115.91 18,201.89 20,314.28

ROIC 11.99% 8.19% 23.65% 7.02% 18.69% 29.04% 39.57% 51.34% 61.81% 70.15% 78.46% 82.05% 84.06% 85.51%

Free Cash FlowNOPLAT 370.9 245.9 793.4 430.6 1,293.8 2,254.1 3,553.2 5,117.7 6,943.5 8,729.8 11,126.4 13,222.9 15,300.1 17,370.1 Change in Invested Capital (91.9) 353.2 2,783.5 785.5 839.2 1,215.8 989.9 1,265.3 1,211.5 1,735.2 1,935.6 2,086.0 2,112.4 2,171.2

FCF 462.8 (107.2) (1,990.1) (354.9) 454.6 1,038.3 2,563.3 3,852.4 5,731.9 6,994.6 9,190.8 11,136.9 13,187.7 15,198.9

Enterprise ProfitBeginning Invested Captial 3,093.1 3,001.2 3,354.3 6,137.8 6,923.3 7,762.6 8,978.4 9,968.3 11,233.5 12,445.0 14,180.3 16,115.9 18,201.9 20,314.3 ROIC 11.99% 8.19% 23.65% 7.02% 18.69% 29.04% 39.57% 51.34% 61.81% 70.15% 78.46% 82.05% 84.06% 85.51%WACC 9.54% 9.54% 9.54% 9.54% 9.54% 9.54% 9.54% 9.54% 9.54% 9.54% 9.54% 9.54% 9.54% 9.54%

EP 75.8 (40.3) 473.4 (154.9) 633.4 1,513.6 2,696.7 4,166.8 5,871.9 7,542.6 9,773.7 11,685.6 13,563.8 15,432.3

Salesforce.com

All figures in U.S. Dollars

Key Inputs:CV Growth 3.00%CV ROIC 61.81%WACC 9.54%Cost of Equity 9.91%

Fiscal Years Ending Jan. 31 2019A 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030CV

DCF ModelNOPLAT 793.4 430.6 1,293.8 2,254.1 3,553.2 5,117.7 6,943.5 8,729.8 11,126.4 13,222.9 15,300.1 17,370.1 CV 252,740.3 WACC 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 FCF (1,990.1) (354.9) 454.6 1,038.3 2,563.3 3,852.4 5,731.9 6,994.6 9,190.8 11,136.9 13,187.7 15,198.9 Period - 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 10.0

Present Value of Cash Flows (324.0) 378.9 790.0 1,780.4 2,442.8 3,318.1 3,696.4 4,434.0 4,905.0 5,302.4 101,620.5

Value of Operating Assets $128,344.44Add: Excess Cash 424Add: Short Term Marketable Securities 1,673.0Less: Long Term Debt 3,173.0Less: Current Portion of Long Term Debt 3.0Less: PV of Operating Leases 3,563.7Less: PV of ESOP 2,715.7

Value of Equity 120,986.38Shares Outstanding 751

Value of Stock 161.10

EP ModelNOPLAT 793.4 430.6 1293.8 2254.1 3553.2 5117.7 6943.5 8729.8 11126.4 13222.9 15300.1 17370.1Continuing Value 232,426.0WACC 9.54%EP to Discount (154.9) 633.4 1,513.6 2,696.7 4,166.8 5,871.9 7,542.6 9,773.7 11,685.6 13,563.8 232,426.0Period 0 1 2 3 4 5 6 7 8 9 10 10

Present Value of Cash Flows 0 (141.42) 527.90 1,151.64 1,873.09 2,642.12 3,399.08 3,986.00 4,715.26 5,146.66 5,453.64 93,452.64 Beginning Invested Capital 6,137.85

Value of Operating Assets $128,344.44Add: Excess Cash 424Add: Short-term marketable Securities 1,673.0Less: Long Term Debt 3,173.0Less: Current Portion of Long Term Debt 3.0Less: PV of Operating Leases 3,563.7Less: PV of ESOP 2,715.7

Value of Equity 120,986.4Shares Outstanding 751

Value of Stock 161.10$

Model Date 4/10/2019Next FYE 1/31/2020Last FYE 1/31/2019Days in FY 365 Days to FYE 69 Elapsed Fraction 0.189

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Salesforce.comDividend Discount Model (DDM) or Fundamental P/E Valuation ModelAll figures in U.S. Dollars

Fiscal Years Ending 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030CVEarnings Per Share:EPS 0.17$ 1.32$ 2.55$ 4.24$ 6.19$ 8.48$ 10.80$ 13.68$ 16.13$ 18.50$ 20.83$

Key AssumptionsCV growth 3.00%CV ROE 23.18%Cost of Equity 9.91%Forecasted Payout Ratio 0%

Future Cash Flows P/E Multiple (CV Year) 12.60 EPS (CV Year) 20.83$ Future Stock Price 262.46$ Dividends Per Share 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Period 1 2 3 4 5 6 7 8 9 10 10Discounted Cash Flows 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 102.02

Intrinsic Value 102.02$

Model Date 4/10/2019Next FYE 1/31/2020Last FYE 1/31/2019Days in FY 365 Days to FYE 69 Elapsed Fraction 0.189Adjusted Stock Price 103.86$

Salesforce.comRelative Valuation ModelsAll figures in millions of U.S. Dollars

Shares Mkt Cap Sales Sales P/S P/S EPS EPS P/E P/ETicker Company Price Outstanding Weight 2019E 2020E 2019E 2020E 2019E 2020E 2019E 2020EHUBS HubSpot $166.21 41 0.01 $650.87 $804.87 10.51 8.50 1.14 1.65 145.80 100.73 IBM IBM $141.10 890 0.16 $77,990 $78,070 1.61 1.61 13.91 14.16 10.14 9.96 ORCL Oracle $53.71 3,420 0.60 $39,320 $40,200 4.67 4.57 3.44 3.76 15.61 14.28 RHT Red Hat $182.70 177 0.03 $3,880 $4,470 8.32 7.22 3.96 4.55 46.14 40.15 SAP SAP SE $115.46 1,190 0.21 $30,550 $32,930 4.50 4.17 5.36 5.89 21.54 19.60

4.31 4.14 17.88 16.14 5.92 5.22 47.85 36.95

Shares Sales Sales EPS EPSTicker Company Price Outstanding 2019E 2020E 2019E 2020E

CRM Salesforce.com $160.24 751 $16,603 $20,421 0.17 1.32

P/S 2019E 7.25 P/E 2019E 919.50P/S 2020E 5.89 P/E 2020E 121.21

Salesforce.com Sales/Share 2019E 22.11 Salesforce.com Earnings/Share 2019E 0.17Salesforce.com Sales/Share 2020E 27.19 Salesforce.com Earnings/Share 2020E 1.32

Market Cap P/S Price (2019E): 95.37$ Market Cap P/E Price (2019E): 3.12$ Market Cap P/S Price (2020E): 112.47$ Market Cap P/S Price (2020E): 21.34$ Arithmetic P/S Price (2019E) 130.94$ Arithmetic P/S Price (2019E) 8.34$ Arithmetic P/S Price (2020E) 141.81$ Arithmetic P/S Price (2020E) 48.85$

Relative Valuation (P/S) Price Estimation: Relative Valuation (P/E) Price Estimation:

P/S Market Cap Average:P/S Arithmetic Average:

P/E Market Cap Average:P/E Arithmetic Average:

Implied Relative Value:

Sales Per Share Earnings Per Share

Salesforce.comKey Management RatiosFiscal Years Ending Definition 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030CV

Liquidity RatiosCurrent Ratio (Current Assets) / (Current Liabilities) 0.83 0.92 0.95 0.97 1.04 1.11 1.23 1.34 1.44 1.58 1.74 1.89 2.05 2.22 Quick Ratio (Current Assets - Prepaids) / (Current Liabilities) 0.74 0.83 0.82 0.88 0.94 1.01 1.13 1.24 1.34 1.49 1.64 1.79 1.95 2.12 Operating Cash Flow Ratio (Cash Provided from Operating Activities) / (Current Liabilities) 0.30 0.27 0.30 0.22 0.20 0.22 0.28 0.30 0.33 0.34 0.35 0.35 0.34 0.34

Activity or Asset-Management RatiosReceivables Turnover (Revenue) / (Average Accounts Receivable) 4.97 4.64 3.85 4.31 4.47 4.61 4.72 4.82 4.91 4.98 5.04 5.08 5.12 5.14 Total Asset Turnover (Revenue) / (Average Total Assets) 0.45 0.41 0.41 0.45 0.49 0.51 0.52 0.53 0.52 0.51 0.50 0.48 0.46 0.95

Financial Leverage RatiosDebt to Equity Ratio (Total Debt) / (Total Equity) 1.34 1.24 0.97 1.15 1.21 1.25 1.23 1.19 1.07 1.01 0.94 0.87 0.80 0.73 Equity Multiplier (Total Assets) / (Total Equity) 1.69 1.75 2.03 1.87 1.82 1.80 1.81 1.84 1.94 1.99 2.06 2.14 2.25 2.36

Profitability RatiosGross Profit Margin (Revenue - Cost of Revenue Excluding Depr.) / Revenue 80.91% 80.72% 81.26% 78.88% 80.65% 80.39% 80.13% 79.87% 79.60% 79.31% 79.08% 78.81% 78.60% 78.34%Return on Assets (ROA) (Net Income) / (Total Assets) 1.65% 0.75% 5.46% 0.43% 2.92% 5.08% 7.37% 9.21% 10.58% 11.54% 12.10% 11.88% 11.48% 11.09%Return on Equity (ROE) (Net Income) / (Beginning Shareholder Equity) 3.59% 1.70% 11.82% 0.85% 6.28% 11.23% 16.56% 20.53% 23.18% 23.86% 24.34% 23.07% 21.53% 19.98%Operating Margin (EBIT) / (Revenue) 1.36% 2.76% 8.56% 2.84% 7.53% 11.03% 14.53% 17.53% 20.03% 21.28% 23.28% 24.03% 24.78% 25.53%

Payout Policy RatiosDividend Yield - - - - - - - - - - - - - -

Valuation of Options Granted in ESOP

Ticker Symbol CRMCurrent Stock Price $160.24Risk Free Rate 2.47%Current Dividend Yield 0.00%Annualized St. Dev. of Stock Returns 40.35%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 3.664 11.91 6.30 150.08$ 550$ Range 2 6.119 53.60 2.90 111.42$ 682$ Range 3 0.995 68.37 5.20 106.31$ 106$ Range 4 3.920 75.57 4.80 100.52$ 394$ Range 5 3.634 80.85 3.90 93.94$ 341$ Range 6 0.954 98.03 5.60 90.91$ 87$ Range 7 6.660 120.23 6.20 83.50$ 556$ Total 26 74.15$ 4.84 101.55$ 2,716$

Present Value of Operating Lease Obligations (2019) Present Value of Operating Lease Obligations (2018) Present Value of Operating Lease Obligations (2017)

Operating Operating OperatingFiscal Year Ending Jan. 31 Leases Fiscal Years Ending Jan. 31 Leases Fiscal Years Ending Jan. 31 Leases2020 778.0 2019 610.9 2018 463.252021 658.0 2020 540.4 2019 413.4352022 466.0 2021 400.7 2020 322.1272023 369.0 2022 298.6 2021 266.2532024 314.0 2023 277.0 2022 241.266Thereafter 1,610.0 Thereafter 1,155.6 Thereafter 1202.817Total Minimum Payments 4,195.0 Total Minimum Payments 3,283.3 Total Minimum Payments 2909.148Less: Interest 631.3 Less: Interest 465.0 Less: Interest 457PV of Minimum Payments 3,563.7 PV of Minimum Payments 2,818.3 PV of Minimum Payments 2452

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 3.70% Pre-Tax Cost of Debt 3.70% Pre-Tax Cost of Debt 3.70%Number Years Implied by Year 6 Payment 5.1 Number Years Implied by Year 6 Payment 4.2 Number Years Implied by Year 6 Payment 5.0

Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 778 750.2 1 610.9 589.1 1 463.25 446.72 658 611.9 2 540.4 502.5 2 413.435 384.53 466 417.9 3 400.7 359.4 3 322.127 288.94 369 319.1 4 298.6 258.2 4 266.253 230.25 314 261.8 5 277.0 231.0 5 241.266 201.26 & beyond 314 1202.8 6 & beyond 277.032 878.0 6 & beyond 241.266 900.9PV of Minimum Payments 3563.7 PV of Minimum Payments 2818.3 PV of Minimum Payments 2452.3

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 26Average Time to Maturity (years): 4.84Expected Annual Number of Options Exercised: 5

Current Average Strike Price: 74.15$ Cost of Equity: 9.91%Current Stock Price: $160.24

2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030EIncrease in Shares Outstanding: 5 5 5 5 5 5 5 5 5 5 5Average Strike Price: 74.15$ 74.15$ 74.15$ 74.15$ 74.15$ 74.15$ 74.15$ 74.15$ 74.15$ 74.15$ 74.15$ Increase in Common Stock Account: 397 397 397 397 397 397 397 397 397 397 397

Change in Treasury Stock 0 0 0 0 0 0 0 0 0 0 0Expected Price of Repurchased Shares: 176.12$ 193.57$ 212.75$ 233.84$ 257.01$ 282.48$ 310.47$ 341.24$ 375.05$ 412.22$ 453.07$ Number of Shares Repurchased: - - - - - - - - - - -

Shares Outstanding (beginning of the year) 756 762 767 772 778 783 789 794 799 805 810Plus: Shares Issued Through ESOP 5 5 5 5 5 5 5 5 5 5 5Less: Shares Repurchased in Treasury - - - - - - - - - - - Shares Outstanding (end of the year) 762 767 772 778 783 789 794 799 805 810 815

$164.00 1.0 1.1 1.2 1.3 1.388 1.5 1.6 1.7 1.84.96% 298.29 260.13 229.18 203.62 184.58 163.99 148.37 134.83 123.01 5.06% 289.90 252.72 222.56 197.65 179.09 159.02 143.80 130.60 119.08 5.16% 281.88 245.64 216.23 191.94 173.84 154.27 139.42 126.56 115.33 5.26% 274.22 238.87 210.18 186.47 168.81 149.73 135.24 122.70 111.74 5.36% 266.88 232.38 204.38 181.24 164.00 145.37 131.24 119.00 108.31 5.46% 259.86 226.17 198.82 176.23 159.40 141.20 127.40 115.45 105.02 5.56% 253.12 220.21 193.49 171.42 154.98 137.21 123.73 112.06 101.87 5.66% 246.65 214.49 188.38 166.81 150.74 133.37 120.20 108.80 98.84 5.76% 240.44 209.00 183.47 162.38 146.66 129.69 116.81 105.67 95.94

$164.00 2.0% 2.3% 2.5% 2.8% 3.0% 3.3% 3.5% 3.8% 4.0%48% 146.59 150.05 153.74 157.71 161.98 166.59 171.59 177.0 182.93 52% 147.00 150.51 154.28 158.32 162.68 167.38 172.47 178.0 184.02 54% 147.18 150.72 154.52 158.60 162.99 167.73 172.86 178.4 184.51 58% 147.50 151.10 154.95 159.09 163.54 168.35 173.56 179.2 185.38 62% 147.76 151.41 155.31 159.50 164.00 168.87 174.14 179.9 186.11 66% 148.02 151.71 155.65 159.89 164.45 169.37 174.70 180.5 186.81 70% 148.24 151.96 155.94 160.22 164.83 169.80 175.18 181.0 187.40 74% 148.43 152.18 156.20 160.52 165.16 170.17 175.60 181.5 187.93 78% 148.61 152.39 156.44 160.78 165.46 170.51 175.98 181.9 188.40

$164.00 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00%-50% 56.63 57.10 57.57 58.03 58.50 58.97 59.44 59.91 60.38 -45% 81.09 82.03 82.98 83.93 84.88 85.83 86.77 87.72 88.67 -40% 105.54 106.97 108.40 109.83 111.25 112.68 114.11 115.54 116.96 -35% 130.00 131.91 133.81 135.72 137.63 139.54 141.44 143.35 145.26 -30% 154.46 156.84 159.23 161.62 164.00 166.39 168.78 171.16 173.55 -25% 178.91 181.78 184.65 187.51 190.38 193.25 196.11 198.98 201.84 -20% 203.37 206.72 210.06 213.41 216.75 220.10 223.45 226.79 230.14 -15% 227.83 231.65 235.48 239.30 243.13 246.96 250.78 254.61 258.43 -10% 252.29 256.59 260.90 265.20 269.51 273.81 278.12 282.42 286.73

$164.00 17% 18% 19% 20% 21% 22% 23% 24% 25%2.00% 147.84 147.82 147.80 147.78 147.76 147.75 147.73 147.71 147.69 2.25% 151.48 151.46 151.44 151.42 151.41 151.39 151.37 151.35 151.33 2.50% 155.38 155.36 155.34 155.32 155.31 155.29 155.27 155.25 155.24 2.75% 159.57 159.55 159.53 159.51 159.50 159.48 159.46 159.44 159.42 3.00% 164.08 164.06 164.04 164.02 164.00 163.99 163.97 163.95 163.93 3.25% 168.94 168.92 168.91 168.89 168.87 168.85 168.84 168.82 168.80 3.50% 174.21 174.19 174.18 174.16 174.14 174.12 174.10 174.09 174.07 3.75% 179.94 179.92 179.90 179.88 179.87 179.85 179.83 179.81 179.79 4.00% 186.18 186.16 186.14 186.13 186.11 186.09 186.07 186.05 186.04

$164.00 2.07% 2.17% 2.27% 2.37% 2.47% 2.57% 2.67% 2.77% 2.87%13% 198.39 194.21 190.16 186.24 182.44 178.75 175.17 171.70 168.33 15% 193.42 189.34 185.38 181.55 177.83 174.23 170.74 167.34 164.05 17% 188.44 184.46 180.60 176.86 173.23 169.71 166.30 162.99 159.77 19% 183.46 179.58 175.81 172.16 168.62 165.19 161.86 158.62 155.49 21% 178.48 174.69 171.01 167.45 164.00 160.66 157.41 154.26 151.20 23% 173.49 169.80 166.22 162.75 159.38 156.12 152.96 149.89 146.91 25% 168.50 164.90 161.41 158.04 154.76 151.59 148.51 145.52 142.61 27% 163.50 160.00 156.61 153.32 150.13 147.04 144.05 141.14 138.32 29% 158.50 155.09 151.79 148.60 145.50 142.50 139.59 136.76 134.01

$164.00 2.9% 3.1% 3.3% 3.5% 3.7% 3.9% 4.1% 4.3% 4.5%13% 182.48 182.46 182.45 182.44 182.44 182.44 182.44 182.44 182.45 15% 177.86 177.85 177.84 177.84 177.83 177.84 177.84 177.85 177.87 17% 173.23 173.23 173.22 173.22 173.23 173.24 173.25 173.26 173.28 19% 168.60 168.60 168.60 168.61 168.62 168.63 168.64 168.66 168.68 21% 163.97 163.98 163.98 163.99 164.00 164.02 164.04 164.06 164.08 23% 159.34 159.34 159.36 159.37 159.38 159.40 159.43 159.45 159.48 25% 154.70 154.71 154.72 154.74 154.76 154.78 154.81 154.84 154.87 27% 150.06 150.07 150.09 150.11 150.13 150.16 150.19 150.22 150.25 29% 145.41 145.43 145.45 145.48 145.50 145.53 145.56 145.60 145.63

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