Salesforce Team 1 - Initiation report

Stratton Oakmont, Inc. - Research

Salesforce.com (CRM – NYSE)Initiation Coverage

Rating Information

Outlook OutperformRecommendation BuyTarget Price $100.0Upside to Target Price 42.0 %LT Growth Rate 32.2%

Market Data

Price $70.4152-Wk High $78.4652-Wk Low $51.04Enterprise Value (B) $47.18Market Value (B) $46.16Shares Outstanding (M) 664.3Insider Ownership 6.3%Institutional Ownership 54.8%Average Daily Volume (M) 4Source: Factset. Data as of 08/07/2015

Financial/ Valuation

Cost of Equity 11.6%LT Debt/Market value 2.2%EV/Sales (5yr Target) $106EV/FCF (5yr Target) $140

YTD Stock Performance

The new star of SaaS is growing – very fast

Investment Highlights Leading Front-Office provider. Through their portfolio of six cloud offerings,

Salesforce attempts to be the main actor within the industry. The Consensus is valuing Salesforce on the basis of the total CRM-market, we disagree with this particular approach. Salesforce is the leading Software-as-a-Service (SaaS) company by revenue and users. Therefore, we believe valuation should mirror and acknowledge this factor. Salesforce has increased revenue at 32% CAGR in the last 5 years.

Growing Business with Existing Customers. Existing customers drive roughly 70% of new businesses. Furthermore, company sources and market research have highlighted and indicated customers’ will to expand into multicloud solutions. As such, it comes as no surprise Salesforce is growing into one of the largest expense line items for some companies. We think this makes it even more challenging to replace Salesforce services.

Increasing market share. Salesforce controlled 7.9% of the SaaS market in 2014. According to Forrester, the SaaS market is growing at a 16% CAGR, and will continue to grow for the next 10 years. Once again, we stand aside from the consensus forecasting a higher market share growth for Salesforce. With over 15 years of advantage in Cloud Computing and SaaS market development, the competition is considerably behind thus allowing CRM to leverage on its capacity to expand market share.

Desirable Ecosystem. Salesforce has more than 2700 partner apps, including system integrations such as Accenture and Deloitte, 2804 applications on the AppExchange, and plenty developers at their clients and independent software vendors. This leads to lower R&D expenses.

Recommendation. Performance over the last 10 years has been nothing short of impressive. Salesforce has an enormous target market, strong business model and management and an enviable partner ecosystem. We think its stock should trade at a premium to other SaaS companies and are initiating coverage with an Outperform investment rating and a $100 TP based on a weighted average of our DCF, and EV/Sales, P/FCF – multiple valuation.

1


Table of contents Pg.

Executive Summary ………………2 Industry and stock………………....3Investment merits…………………5 Customers……………………………..6Key risks……………………….……....7Executive Management………….8Product Services……………….......8Financials……………………………10Valuation…………………………….11Target price………………………...12S.O. vs. consensus…………..........13Credentials…………………............14

Figure 1: Salesforce product portfolio and business mix

Source: Factset

Figure 2: Salesforce historical and forecast revenue ($ billion)

Source: Factset and Stratton Oakmont calculation

Executive Summary

Companies of all sizes strive to optimize their sales operations by automating specific repetitive tasks and being able to seamlessly access and manipulate certain databases. In the past and before the appearance of Salesforce, software companies (Oracle, SAP, and Microsoft) provided many of these solutions through an on premise approach. Nevertheless, the large up-front costs, long years between updates, and high support/maintenance costs proved to be major drawbacks for the long-term operations of customers. The large costs mentioned also implied only large companies could afford these systems. Salesforce stands out from virtually any pack as the pioneering innovator of the cloud computing movement, and has flourished into a multi-product victory as it now rides atop multiple product pillars of substantial scale and trajectory. As “The Customer Company” alters industry parameters and re-invents front office systems, Salesforce has successfully revolutionized the application and platform markets in a way that, arguably, only Microsoft and Oracle have achieved before.

Products. Through its SaaS-model, Salesforce made Sales force automation (SFA) affordable for smaller businesses and less expensive for larger cooperation. Its SFA market share has stayed constant with 41%. After its achievement in SFA, Salesforce expanded its product portfolio by opening its platform for development in 2006, launching a customer service tool in 2009 and their newest exciting product, the Analytics Cloud, in 2014.

Successes factors have not resulted in the company stagnating. Instead, Salesforce is embracing, leading, and driving the net wave of cloud computing at a social, mobile, and cloud based level. The company has developed and made tactical acquisitions in social collaborations, talent performance management tools, and social marketing. We believe that these plans are critical to Salesforce long-term success.

Business Model. Customers usually sign up for two-year contracts and pay annually, quarterly, or monthly. In 2012, the company began encouraging clients to adopt yearly billing, which resulted in about 70% annual billings, up from 60% the year before, resulting in a deferred-revenue benefit.

Pricing. The prices for Sales Cloud range from $25-300 per user per month for up to five users. The Service cloud ranges from $60-300/user/month depending on number of users and functionality desired. Marketing Cloud ranges from $400/month for Email, Mobile, and Web Marketing, $1000/month for Social Media Marketing, $1250/month for advertising and $1000/month for B2B Marketing Automation. The Community Cloud prices are either $500/month or $700 month. Salesforce also launched the Analytics Cloud last year, were the prices are either $125/month or $250 month.

Financials. We project revenue of $16.8 billion for fiscal year 2019 and $26.7 billion for fiscal year 2024. As for profitability, in fiscal year 2019 we forecast adjusted EBIT of 15.8% and free cash flow margin of 29.6%, respectively as a percentage of revenue, and in fiscal year 2023 EBIT of 24.8% and a free cash flow margin of 35%.

2


Figure 3: Packaged software industry returns x S&P500 return x World return (2005 = base 100)

Source: Factset

Figure 4: US CRM System Providers revenue growth and US nominal GDP growth

Two-minute summary

We believe that Salesforce offers an enormous upside potential. This is a direct reflection of a 33% revenue average growth rate over the last five years. The upside potential is also based on the following reasons.

Cloud computing industry: Cloud Computing will be present in every business. This divergence from hardware to software will benefit SaaS companies like Salesforce. Licencing and hardware based products will continue to fade out as organizations reap value from SaaS company based services reshaping industries.

Business model: We firmly believe Salesforce is uniquely positioned within the industry as a result of its business model. It has invested heavily in marketing and sales representatives. In addition, Salesforce has a strong track record of successful acquisitions. The company continues to expand global exposure, grow its customer base, increases networks and tap into non-cloud based customers within Europe and Asia.

Expansion: We believe that due to increased expansion within the European market and collaboration with major telecom providers, Salesforce will be able to increase absolute number of customers. A significant increase in services in European markets will offset the high marketing costs and increase the top-line. EBIT margins will thus increase, and this will lead to strong FCF going forward.

Even though the stock has performed well and has had a strong run, we firmly believe the price will continue to rise. The company has delivered consistent top-line growth over the last five years, and offered an annual average growth of 32.7%. We are relatively conservative with our assumptions, but still believe Salesforce’s performance will be able to continue to deliver double-digit growth rates of approximately 25% for the next five years.

Industry and Stock Considerations

CRM System Providers Industry

A Resilient IndustryCRM Systems are the specific niche within the Packaged Software Industry in which Salesforce focuses its core business. Players within this industry develop, implement and provide support to software designed to deliver CRM platforms and sales management automation.

Over the past 10 years, this industry has grown by 13.6% CAGR in the US and it is projected to grow 16% in the 5 years to 2020, outperforming both the S&P500 and world’s return indexes. In fact, resiliency is one of the main characteristics of this industry. Through the provision of software to business of all sizes in almost every industry, CRM System Providers are expected to not only grow in bull markets, but also bear markets as well. Considering this industry creates value by improving the companies’ sales and margins, companies look for automation as a way to reduce costs. This feature inherently makes CRM companies’ attractive investments and partners during bear markets. During the 2008-2009 crises, the US CRM System Providers grew by 37.2% whereas the country’s GDP decreased by 2%.

Product and ServicePlayers in CRM System Providers industry offer solutions in two different ways: Software-as-a-Product (SaaP) and Software-as-a-Service (SaaS). Historically, the industry has mainly focused in offering SaaP systems, which are installed directly in clients’ servers. Therefore, SaaP systems require customers to make considerable upfront investment in hardware to support data storage, access and connection, leading to a longer set-up time and overall

3


Source: IbisWorld, World Bank Group and International Monetary Fund

Figure 5: US CRM System Providers revenue distribution

Source: IbisWorld

Figure 6: US Market share by player

Source: IbisWorld

Figure 7: Industry cost structureSource: IbisWorld

costs.

On the other hand, SaaS systems allow business to access CRM applications over the internet. This feature has greatly increased demand for SaaS over the last decade. The main difference compared to SaaP solutions is the seamless integration of the system through the web with no need of heavy and complex hardware interface. In recent years, many companies have preferred SaaS as it requires lower up-front investments, has a lower set-up time and provides more flexibility turning a fixed cost into a variable expense. Furthermore, it allows them to focus on their core business whilst the provider constantly and seamlessly updates systems automatically.

Major marketsAlthough CRM systems are used by almost every industry, manufacturing companies, wholesale trade, retail trade, finance & insurance and public administration are the key customers targeted. Regarding the business size, CRM System Providers had historically focused on large enterprises for which the scalability of large up-front investments in hardware was justified. However, the advent of cloud computing made it possible for business of virtually any and all sizes to engage in CRM automation. This significantly expanded the industry total addressable market to an expected $36.5 billion worldwide by 2017, according to Gartner.

Key PlayersThe key players in this industry are Salesforce, SAP and Oracle. In spite of the latter two companies having a combined market share of 35.9% in the United States, Salesforce is the only major company which exclusively focuses on providing CRM system through cloud computing. This element plays a fundamental role in the explanation of their market share leadership in this industry.

Industry trendsConstantly evolving technology is one of the main characteristics of this industry. Over the last decade, two recent innovations have shocked the Industry: cloud computing and social media integration. Cloud computing allows users to access data on the internet from virtually anywhere, at any time and using different mobile devices. However, concerning issues regarding information security have generated setbacks for the industry. Nevertheless, these barriers are expected to dissipate as more users adopt these services and as providers start offering complementary solutions such as data encryption. The social media integration also allows the companies to monitor in real time their image on social media websites, increasing their interaction to their customers.

Competitive PositioningKey success factorsPlayers in this industry depends heavily on their ability to (i) quickly adopt new technology; (ii) access highly skilled workers; (iii) provide a user-friendly product; and (iv) maintain an image of high quality brand. When considering these four key success factors, Salesforce’s innovative technology, brand awareness and heavy marketing expenditure support their market share leadership.

Cost StructureThis industry relies heavily on human resources. Therefore, it is no surprise that wages represents 30% of revenue. Research and development expenses are the second largest amount (10% of revenue) followed by legal costs to protect intellectual property (7%), and marketing expenses (4%). Historically, capital expenditures and depreciation & amortization (D&A) had an irrelevant participation in the cost structure. However, both, CAPEX and D&A are expected to increase in the next years, as more providers adopt the cloud computing technology.

Barriers to new entrantsBarriers to entry within this industry for new competitors are considered to be moderate to high. The main obstacle comes in the form of a shortage for skilled software engineers, which play a vital role in the development of the services and offerings. In addition to this, few large corporations predominantly own the market. This result in new entrants being easy targets for acquisitions. All the three major players reflect this through the

4


Table 1: Salesforce equity structure

Source: Factset

Figure 8: Salesforce 10-year revenue forecast revenue ($ billion)


Figure 9: SaaS historical and forecast market size ($ billion)

Source: Gartner

significantly high number of M&A transactions recently registered.

Salesforce – Pioneer of SaaS

Salesforce has been a pioneer and leading driver in the seismic shift from client-server to cloud computing. After multiple years of pioneering, we believe that SaaS is the standard for CIOs, consumers, and companies. The industry is roughly 10 years into this trend, which we believe should last another 10-15 years. We base this assumption on a number of facts, which include that according to Gartner, by 2011 only 41% of CRM platforms were on the Cloud. As such, this offers considerable runway for expansion and for Salesforce to continue to ascertain itself as market and industry leader.The company went public in July 2004 at $15.00 per share. The stock recently peaked at $74.40 during June 2015. The stock tends to react severely to quarterly calculated billings (revenue plus change in deferred revenue). This is a strong indicator for tone of strong business given Salesforce’s deferred revenue model. In January 2009, the stock price dropped below $6.65. The stock has fully recovered from this shortfall after delivering good quarterly results. As such, Salesforce’s stock has increased 30% between January 2015 and August 7, 2015. Given the impact on deferred revenue and calculated billings from the company’s aforementioned push for annual billings, we support and continue to encourage management to aggressively educating the investment community about intrinsic growth.Management owns about 6.3% of the company. Salesforce’s largest public equity holders are Fidelity Management & Research (14.5%), T. Rowe Price Associates (6.4%), The Vanguard Group (5.1%), and Capital Research & Management Co. (4.3%).

Investment Merits

High-Growth Ambitions. Salesforce is focusing on high growth and is set to become the fastest software company to reach the $10 billion revenue milestone. It took the company 12 years to reach the $2.0 billion mark, faster than Microsoft’s 16 years, Oracle’s 17 years and SAP’s 23 years. We expect Salesforce to reach the $10 billion milestone in less than 5 years. One must note the previously mentioned competitors took between 5 to 8 years to pass from the $2.0 billion mark to $10 billion revenue. The company has grown at an average rate of 35% in the past 3 years. We expect growth rate to continue at this level in the mid-term because of strong results in EMEA and the vertical strategies in US markets.

Large Available Market. According to latest Gartner data, the total addressable market for SaaS platforms and front-office solutions will be around $87 billion in 2019. The biggest components still are SFA solutions and platform-as-a-service solutions. We expect a healthy market growth for social marketing, collaboration and talent performance management as companies educate customers about the benefits of multi-cloud solutions in these areas. Finally, the introduction of the Analytics cloud opens new benefits for the users and increases the addressable market for Salesforce.

Multi-Cloud Approach has tremendous upside. In 2014, 40% of Salesforce revenue came from the Sales Cloud. The participation of their other clouds was ranging between 10% and 13%. However, we believe that there is a big upside and scalability of their other clouds. Salesforce reports show that whilst only 25% of their customers have multi-cloud solutions, 75% of their dollar revenues come from multi-cloud users. For this reason we believe Salesforce has the ability to gain further growth by introducing their existing customers to other cloud solutions.

Market Share gains. According to Gartner, Salesforce is currently the #1 CRM vendor in the market. During 2012 it was located 2nd only to Oracle, the biggest software company in the industry. This shows how fast the company has been

5

EQUITY STRUCTURE

Management 6.3%Fidelity Management & Research

14.5%

T. Rowe Price 6.4%The Vanguard Group 5.1%Capital Research & Management Co.

4.3%

Others 63.4%


Figure 10: Salesforce’s geographic distribution

Source: Salesforce 10K

gaining market share and signals their market strategy to be working perfectly. We envision Salesforce gaining a rapid market share in the entire SaaS market as a result of the development of new solutions (other cloud platforms), forecasted to have a value of $125.5 Billion by 2019. SAP and Oracle have been growing within this market, nevertheless, the rate has been significantly smaller than that of Salesforce. As such, we do not see an immediate risk to Salesforce’s potential growth performance.

International Expansion. Most software companies’ revenue pool is fundamentally located within the United States. Salesforce is no different wherein US revenues account for 70% of their top line. Nevertheless, the company has been expanding their presence through the EMEA region. Their strategy has paid off in the last years wherein the EMEA region has shown growth rates of 50% yearly. As for the Chinese market, even though the company has partnered up with a local company to offer their products, the company doesn’t expect to heavily expand in that region.

Customers

To provide a better sense of how customers use Salesforce, four case studies are summarized.

Coca-Cola Germany. The company was facing low-integration capacity within its mobile solutions and customer service applications constantly affecting business performance. With the adoption of Salesforce1 Platform, Sales Cloud, Service Cloud and Salesforce chatter the company was able to engage customers faster and efficiently. The technical service department increased productivity by 30% and sales representatives were able to make deal decision on-site with the customers. Coca-Cola Germany saw a rapid improvement in their business development and the parent company is taking a close attention to Salesforce’s solutions for other markets.

Wells Fargo Bank. Wells Fargo bank offers more than 300 products and their customers usually have more than one of their products. This means that customers constantly deal with different representatives throughout the organization. With the use of Sales Cloud, Service Cloud, Marketing Cloud and Salesforce Chatter, the company has access to what their customers are talking in Facebook, Twitter, LinkedIn, etc., giving the company a profound understanding of their needs. The result: customer satisfaction has skyrocketed and its competitors will have a hard time catching up.

Chipotle. With more than 1,300 locations, Chipotle adopted Salesforce’s Service Cloud to provide exceptional customer service. Maintaining a high-level of customer satisfaction can be a difficult task for a company with that amount of locations. However, the Service Cloud has helped Chipotle to receive and understand feedback from its customers in social media and creates better ways to improve customers’ satisfaction.

Caesars Entertainment. In the competitive casino industry, hotels and resorts engage in continuous battles over VIP customers. Caesars Entertainment use of Salesforce platform and social capability helped the company maintain robust customer profile maintenance, including event attendance and individual guest preferences to build loyalty. According to David Koloski, VP of VIP Innovation & Operations claims, “Getting to know our best clients on a personal level lets us give them a highly customized experience at any of our resorts around the world”.

6

Americas72%

Europe18%

Asia Pacific10%


Figure 11: Assessment of key risks by impact and likelihood

Source: Stratton Oakmont analysis

Key risks to our investment thesis

Missed growth opportunities. The growth in marketing and platform development underperform our expectation thus leading to actual growth decreasing at a faster rate.

Decreasing sales. A ramp-up in costs leads to a deceleration in sales growth or an increase in attrition.

Competition. Competition from on premise vendor turns out to be stronger than previously anticipated.

Bad acquisitions. Salesforce is not able to make good acquisitions at the right price to maintain its momentum in cloud growth.

Other Risks

Slowing of Billings Growth. Investors pay close attention to Salesforce’s billing growth, which can be seen as an important indicator of future revenue streams. Whereas monthly billing offers a constant revenue stream, quarterly and yearly billings offer large upfront inflows. Large customer segments transferring onto longer period billings could lead to lower levels of liquidity which threaten the company because of SaaS company business models. These require high levels of liquidity as a reflection of the need of cash to cover costs to serve and acquire customers upfront before customer monetization. Furthermore, should renewals or new subscriptions drop, results for individual quarters could be misleading.

Failure to Execute in Marketing Automation. With the acquisition of ExactTarget, Salesforce started to compete in marketing automation. If Salesforce is not able to steer this market and gain a significant market share over its competitors, its growth could be hampered and its ability to cross-sell existing Salesforce products could diminish.

Progress of Sales Force Automation (The Sales Cloud). The company just started to release revenues by category: Service Cloud, ExactTarget, Sales Cloud, Marketing Cloud and other. The data history in the past is brief, nevertheless it reveals that Sales Cloud contributes nearly to half of Salesforce’s revenue, and is also growing on a slower basis. Therefore, Salesforce needs to maintain a high revenue growth in Sales Cloud; otherwise it might be difficult for Salesforce to offset any decelerating growth of Sales Cloud on total revenue growth with other product revenue streams.

Competition from Legacy Vendors. Salesforce grew to a $5B+ software company whilst taking market share from other competitors (Microsoft, SAP, Oracle). This trend may not hold indefinitely and competition efforts could be ramped up reclaiming market share.

Complications from Acquisitions. Over the past years, Salesforce’s growth was significantly powered through strategic acquisitions. Nevertheless, the strategy of acquiring companies and integrating these products into their core businesses pose numerous risks. These can be difficult to integrate, disrupt the business, dilute stockholder value, and put strain on the company’s resources, financial conditions, and prospects.

Security Breach or Service Disruption. Security breaches can lead to negative publicity and loss of client confidence in the effectiveness and even the business model of the company. This can lead to customer reduction and/or difficulties in customer acquisitions. Therefore, any significant disruption in the company’s

7

Stratton Oakmont, Inc. - Researchsolutions could reduce the attractiveness the company in itself, its products and result in loss of customers.

Executive Management

Marc Benioff, Chairman and CEOOne of the pioneers of cloud computing, Benioff founded the company in 1999with a vision to create an on-demand, information management service to replace traditional enterprise software technology. Prior to launching Salesforce, he spent 13 years at Oracle Corporation.

Keith Block, Vice Chairman and PresidentKeith Block leads the company’s Distribution Organization, which includes global sales, alliances and channels, customer support, and consulting services. With a focus on customer transformation and building long-term relationships, Mr Block has managed world-class sales, consulting and engineering teams for nearly 30 years. Prior to joining Salesforce, Mr Block served as Oracle’s executive vice president of North America Sales and Consulting.

Mark Hawkins, CFO and Executive Vice PresidentMark Hawkins has more than 30 years of experience with leading finance Organizations at global software and technology companies including Autodesk, Logitech, Dell and Hewlett-Packard. He holds an M.B.A in Finance from the University of Colorado, a B.A. from Michigan State University, and completed the Advanced Management Program at Harvard Business School.

In addition to the 3 mentioned executives, we should highlight the board of directors include proven leaders with experience in large corporations with outstanding track records. We believe the strong management core will help Salesforce in building partnerships, expand their business and execute their new strategies.

Product and Services

The company has a multi-platform strategy to create value for its customers. They have 6 clouds Service, Sales, Marketing, Community, Analytics and Platform, offering a complete social front-office solution. According to RightScale, from the top 40 deals in 2013, 76% were multi-cloud solutions. Additionally, the report also highlighted that around 68% of firms moving to cloud services were also planning to buy multi-platform solutions.

Sales Cloud: Launched in 2000, Sales cloud is the customer relationship management solution and the company’s flagship used by over 100,000 customers. The Sales Cloud is an automated and customizable sales tool with functionality for all sales and marketing activities, including lead management and distribution, deal progress, territory alignment, channel management, and social media marketing.

Service Cloud: Launched in 2009, it contains customer service and support solutions. More than 16,000 companies (ranging from 5 to 35000 representatives in size) use the product resulting in over 350,000 service representatives using the tool. It primarily replaces traditional on-premise call centre technology and software.

Platform and Apps Cloud: Launched in 2008, it is the platform-as-a-service solution. It allows users to design and run social, mobile and real-time employee applications. Development requires minimal coding, integrates with sandbox environments and other

8

Stratton Oakmont, Inc. - Researchapps through open APIs. This allows users to develop fast solutions without the complex requirements of coding or inscription.

Marketing Cloud: Salesforce acquired Radian 6 in 2011 to offer the marketing solution to its customers. It is a SaaS social media monitoring and engagement solution capturing over 150 million sources of social media conversation including Facebook, Twitter, LinkedIn, YouTube, blogs, and online communities. This allows Salesforce customers to understand customers’ perspective of their brand, products and services in social media and engage them with different social media strategies.

Community Cloud: It was launched in 2011 with the acquisition of Rypple, Inc. It combines talent performance management solutions and collaboration between employees. It replaces traditional HCM software with a SaaS social network and applications focusing on an open and transparent workplace. It provides functionality for goals, coaching, feedback, recognition, and a performance summary.

Analytics Cloud: It’s the newest cloud solution launched by Salesforce. It allows business and users to quickly access data and create charts and reports. Alongside mobile solutions, it gives business leaders quick access to data and analytic tools to make faster decisions. It is the ultimate business intelligence tool.

Product Lifecycle – BCG Analysis

The following chart shows Salesforce’s products maturity and their perception within the market according to the BCG framework. We have established Sales cloud as the star product of Salesforce, which is currently driving the revenues. We believe the Service cloud, Marketing cloud and the recently introduced Analytics Cloud offer the potential for a growing service platform. Nevertheless, we can’t predict where these products will be placed according to the BCG matrix in the future. This is because the products are still in an early stage of their lifecycle. It is worth mentioning that any of their products are yet to be categorized as “cash cows” or “poor dogs”.

Figure 12: Product Life Cycle and BCG matrix framework

Source: Stratton Oakmont analysis

9


Figure 13: Salesforce total revenue growth x organic growth

Source: Company website, Crunchbase, The Wall Street Journal, TechCrunch, and Forbes.

Recent Financial Performance

Revenues. A subscription model, professional services and the corresponding service provided to customers in the long run drive company revenues. Whilst subscriptions can go up to 60 months, the usual term is between 12 and 24 months. These contracts are non-cancellable unless Salesforce fails to perform. The professional service sub branch that also drives revenues consists of fees associated with consulting, implementation services and training. During 2014 revenue was $5.4 billion, an increase of 32% from $4.1 billion in the previous year. One must note that during the last 3 fiscal years, revenue growth has been between 32% and 35% at an average of 33.3%. For 2015E, we forecast revenues of $6.6 billion, a 22 % YOY growth which is in line with the proposed guidance.Non GAAP Gross Profit. The majority of the costs of revenue consist of costs linked to data center capacity, depreciation or operating lease expense associated with computer equipment and software, and support. Furthermore, overhead and amortization expense associated with capitalized software are also allocated to this section. Finally, services and costs of acquired developed technologies are also taken into account within this section. For 2014, Non GAAP Gross Profit was $4.1 billion, which is equal to a 76% margin. We estimated within our model a 76.1% margin and a Non GAAP Gross Profit of $5 billion for 2015E.Operating Expenses. Sales and marketing expenses continuously account for the largest cost as part of the growth effort. The Sales element consists primarily of salaries and related expenses. Marketing programs include advertising, events, corporate communications, brand building and product marketing activities. For the year 2014 sales and marketing expense was $2.4 billion (44.8% of revenue). We estimate that 2015E will be $ 2.9 billion, a 45% margin as a percentage of sales. For 2016E, we forecast $3.8 billion, once again a 45% of sales.Research and Development: Test data centers and the associated overheads drive the Research and Development Costs. Expenses consist primarily of salaries and related expenses to the development costs of the Salesforce. During 2014, this expense line was $671.7 million (12.5% of revenue). We forecast within out model an expense for2015E of $819.6 million, keeping the estimate of 12.5% as a percentage of sales.General and Administrative: expenses consist of salaries and related expenses to supporting departments which include: finance and accounting, legal, internal audit, human resources and management information systems personnel, legal costs, amongst other corporate expenses and associated overheads. During 2014, this expense line accounted for $576.6 million (10.7% of revenue). We estimate for 2015E an expense of $655.7 million, 10% as a percentage of sales. For 2017E, we forecast $846.2 million, 10% as a percentage of sales.Adjusted EBIT: For the year 2014, the company generated a $430 million EBIT, representing an 8% margin. We forecast for 2015E an adjusted EBIT of $ 566.2million, equal to 8.6% of sales. For 2016E, we predict $721.6 million, or 8.5% as a percentage of sales.Organic growth analysis. Much has been said about the acquisitions Salesforce has done in the past years. When companies mature and innovation becomes more difficult, companies start purchasing companies to accelerate growth. In the case of Salesforce, we calculated the organic growth to identify if the company was “purchasing” growth in the past years. Since 2011, the organic growth has been similar to the total growth and by 2014 the organic growth rate even surpassed the total growth. We believe Salesforce acquisitions were focused on providing customers with new solutions rather than to generate wider revenue streams, which explains why the organic growth of the company still remains very strong.

Table 2: DFCF key assumptions

Valuation

10


Source: Stratton Oakmont calculation

Figure 14: Historical and forecast revenue breakdown ($billion)


Figure 15: Historical and forecast cost of goods sold and operating expenses ($billion)


Discounted Free Cash Flow to Firm MethodThe DFCFF is a forward-looking valuation approach. Therefore, in order to derive the target price, we built several assumptions into the three main pillars that sustain this method: (1) Free cash flows, (2) Terminal value, and (3) Weighted average cost of capital. Considering that the company has been growing at significant levels during the last five years, we found it appropriate to use a three-stage model. The first stage ranges from 2015 to 2019 and it is mainly characterized by continuous growth, although at slightly lower levels. The second stage starts in 2020 and continues until 2024. In this stage, we forecasted the company to stabilize its operating activities. Finally, we forecasted the terminal value from 2024 and on.

(1) Free cash flow: To forecast the free cash flow, we made the following assumptions based on our analysis:a. Sales: We divided the sales forecast in Salesforce’s two main segments:

Subscription and Professional Services. We looked at the SaaS historical and expected market size though the next 3 years using data collected from Gartner, Ledgeview and Forbes to generate our sales assumptions. For the remaining period of the FCFF, we assumed that the market would grow at decreasing rates. Then, we forecasted Salesforce’s market share, following two cornerstones: First, that Salesforce will reach $10 billion in revenue by the end of 2017. Second, that by the end of 2025 the company will have 16.5% of the SaaS market through their subscription segment. In summary, we projected sales to grow in the first stage at 25.5% CAGR and in the second stage at 9.7% CAGR. Additionally, we believe that the Subscription segment will continue to represent more than 90% of the total revenue.

b. Cost of goods sold (COGS): We projected the cost of goods sold by segment, taking into consideration their historical relevance over the total revenue. In the Subscription Segment, we believe that as the business scales, the representativeness of the cost as a percentage of revenue will decrease. However, in the Professional Services component, we believe that Salesforce will continue with the strategy of breakeven as a way to acquire big corporate accounts. Therefore, overall COGS in the first stage represent 23.2% of total revenue. In the second stage, we expect a slight decrease in COGS, reaching 22.3% of revenue.

c. Research and development expenses (R&D): In the first stage, we expect R&D expenses to be similar to 2014 levels, representing 12.5% of revenue. However, as the company grows, we believe that Salesforce will shift investments to acquisitions as a way to maintain innovation. Therefore, in the second stage, we projected R&D expenses to represent only 10% of revenue.

d. Sales & marketing (S&M): Aligned with the high growth in sales during the first stage of the FCFF, we projected high levels of S&M expenses as a way to support the business expansion. Therefore, we assumed S&M to represent 42.5% of revenue. As the growth rate decreases in the second stage of the model, we also assumed a decrease in S&M expenses, amounting to 31.5% of sales.

e. General and administrative (G&A): As the revenue grows, we expect G&A expenses to dilute over a big amount of revenue. Therefore, in the first stage we assumed G&A expenses to amount 10% of revenue, whereas in the second stage we assumed that it will represent only 8% of total sales.

f. Income taxes: As expected in every high growth business, Salesforce’s historical income taxes are very volatile. However, as the business matures and the company normalizes it financial results, we believe that operating income will be taxed at the competitor’s average income tax rate, representing 22.3% of the operating income.

(2) Terminal value: To derive the terminal value, we considered a long-term growth rate of 3%.

(3) Cost of capital: We derived Salesforce’s cost of capital using the Capital Asset Pricing

11

ASSUMPTION 5y AVG 1st STAGE 2nd STAGE

Revenue (CAGR) 32.7% 25.5% 9.7%COGS (% revenue) 22.9% 23.2% 22.3%R&D (% revenue) 11.9% 12.5% 10.0%S&M (% revenue) 45.4% 42.5% 31.5%G&A (% revenue) 12.0% 10.0% 8.0%Tax (% of EBIT) 6.2% 22.3% 22.3%

3.0%Long term growth rate

Salesforce market share

16.3%11.0%9.2%

Stratton Oakmont, Inc. - ResearchTable 3: WACC breakdown


Figure 16: Share price sensitivity to long-term growth and cost of capital


Table 4: Multiples from comparable companies.


Table 5: Valuation methods and weights


Model (CAPM). We obtained the beta we applied through the CAPM model by regressing weekly historical returns of Salesforce with the returns of S&P500 from June 2003 to July 2015, resulting in a levered beta of 1.48. We adjusted this beta towards the mean obtaining an adjusted beta of 1.32. We used the expected return of the 10-year Treasury bond as the risk-free rate. Considering that the current yield is significantly lower than past returns, we adjusted it towards the average between 1928 to 2014. The market risk premium is the spread between the average of S&P500 returns and the 10-year Treasury bond yield from 1928-2014.We based our before tax cost of debt on the company public information. To derive the after-tax cost of debt, we used the competitors’ average income tax. We used the market value of both, debt and equity, to compute the company’s capital structure.As a result, we estimated Salesforce’s Weighted Average Cost of Capital at 11.4%. Additionally, we assumed that the company will maintain the same capital structure for over the entire projected period.

Sensitivity to WACC and growthWe analysed the sensitivity of the model to changes in the long-term growth and weighted average cost of capital. As a result, we realized that Salesforce’s share price is more sensitive to changes in the capital structure, with a 1% increase in the WACC resulting in a 13.8% decrease in share price. Additionally, we realized that the upside potential deriving from a decrease in WACC is greater than the downside potential, with a 1% decrease in the cost of capital resulting in a 17.7% increase in Salesforce’s share price.

For a best-case scenario, we believe Salesforce must maintain its current growth rate or even improve it. Additionally, strategies that make current customers buy more Salesforce’s platforms will boost revenues to a higher rate. Finally, international expansion should continue to pay off and generate Salesforce growth rates around 35% in EMEA and Asia-Pacific.

A worst-case scenario will include a poor revenue performance from Salesforce in the next years (highly unlikely). Another important aspect that may affect the company’s valuation would be a slow growth from the SaaS market, reducing potential gains from market share.

Price Multiples

These were focused on long term run. Therefore, we based our multiple analyses on a five-year perspective. With our previously mentioned DCF analysis, we showed what we believe Salesforce’s intrinsic value is supposed to be now. The revenue contribution in 2015 is approximately $6.557B, this suggests that at average growth rate of 19.5% until 2019 Salesforce will trade at an approximately $106. Considering the free cash flow multiple, which converges to net income in the long term, this sets Salesforce’s stock value to be at approximately $140.

Target Price

We derive our target price using a weighted average of the results obtained under the DCF and the EV/Sales and P/FCF multiples. We believe that the EV/Sales multiple is a better measure for the value of innovative companies with disruptive business models and concepts, such as Salesforce. For this reason, we are giving a 50% weight to this measure.

We also believe that the DCF is an important method to analyse the company’s fundamental. Therefore, we are also giving a high weight to the price resulting for this method, corresponding to 45% to the final target price.

Finally, despite recognizing the relevance of using the P/FCF multiple, we understand that

12

COMPANY EV/SALES P/FCF

Oracle 4.17x 13.6xSAP 4.12x 25.7xNetSuite 11.5x 149.2xWorkday A 16.3x 306.7xZendesk 11.1x N/AMin 4.1x 13.6x25th perc 4.2x 22.7xAvg 9.4x 123.8xAvg ex outliers 8.9x 87.5x75th perc 11.5x 188.5xMax 16.3x 306.7x

VALUATION METHOD MULTIPLE

SHARE PRICE WEIGHT

DCF 88.4 45%EV/Sales 4.2x 106.0 50%P/FCF 22.7x 140.4 5%Target price 100.0

COST OF CAPITAL

Risk free rate 3.4%Market risk premium 6.3%Adjusted beta 1.3 Cost of equity 11.6%After tax cost of debt 2.6%Weight of equity 97.8%Weight of debt 2.2%WACC 11.4%

Stratton Oakmont, Inc. - Researchthe available information is not aligned to our calculations. Factset and other sources of financial information report this multiple taking into consideration CAPEX and working capital. However, we believe that in the long run this difference will null. Therefore, we intentionally didn't take into consideration CAPEX and working capital when computing the free cash flow. To account for this difference, we are giving this multiple a weight of 5%. Considering these weights, we derive the final target price of $100.0 per share.

Stratton Oakmont vs. consensus

We strongly believe that SaaS is a disruptive force within the enterprise landscape and that Salesforce is uniquely positioned to exploit and develop the merits of SaaS. Its growth rates (most recently 32% in FY14) demonstrate the company continues to drive the industry and most importantly that the company remains within the spotlight of the industry. However, this comes at a cost. Our analysis of the business illustrates that profitability has fallen dramatically at the expense of revenue growth. To offset this factor, accounting policies such as deferred commissions, capitalized R&D and the considerable use of stock options has inflated the income statement and keeps non-GAAP results at acceptable levels.

Nevertheless, recent M&A activity within the sector suggests that on-premise vendors are now taking SaaS more seriously and this will push Salesforce to continue spending at or even above historical levels to capitalize on this trend. We believe that the market leader will hold its position and even increase its market share to 16.5 % by 2024.

The consensus and our positive view on the market are mainly driven by the growth rate and the belief that the underlying business is highly profitable once S&M costs are normalized. We believe the level of spending in S&M is likely to decrease at a certain point to 30% of revenues. The price discrepancy between Stratton Oakmont and the consensus of approximately $20 is mainly driven by the short-term focus of the consensus and our long-term vision of Salesforce. Nevertheless, the market price estimate of $80.36 and our $100.00 target price both highlight the positive outlook for Salesforce.

13


Credentials

Esteban Angeletti. Financial and accounting sector professional with more than six years of experience in internal and external audit, strategic planning and business development. Coordinated the efforts of a USD 1.24B expansion plan of a multinational company and raised more than USD 620M in order to finance the plan. Performed the valuation of a USD 195M acquisition.

Taivansaikhan Enkhtaivan. Finance professional with three years of experience in asset and investment management in the finance and insurance industries. Worked as an insurance underwriter and research/investment analyst. Global experience in Central Asia and the United States.

Daniel Gomez. Management consultant with work experience in several start-ups. Administrative experience includes sales operations, price and cost structures analysis, personnel training and business-to-business negotiations. Experience in project management and implementation of quality management programs.

Tiancheng Tian. 2 years auditing experience at Grant Thornton focusing on pre-IPO projects in China. Auditing experience covers industries including real estate, natural gas, manufacturing and film production. Chartered Financial Analyst (CFA) Level 3 candidate and Master of Finance degree holder at HULT International Business School.

Sean Wells. Senior Undergraduate Business student with a concentration in Finance and Accounting. One year experience within the SaaS industry specializing in multi-cloud CRM solutions for customers in Europe and South America.

Erkan Yaray. Internal consultant with work experience in cash and foreign exchange management in a globally leading automotive company. Work experience includes participation in major projects. CFA Level 1.

14

Stratton Oakmont, Inc. - ResearchAppendix 1 – Valuation summary ($)

15

VALUATION METHOD MULTIPLE

SHARE PRICE WEIGHT COMMENT

DCF 88.4 45%

We used the 10-year DCF valuation method to obtain a first estimate of the share price and to analyze Salesforce's fundamentals. With this method, we realized the three main points that support our recommendation: (i) Salesforce scalable business model; (ii) SaaS market potential; and (iii) Market expansion. For this reason we are giving a 45% weight to this method.

EV/Sales 4.2x 106.0 50%We used the EV/Sales because we believe this multiple better reflects the value of innovative companies which business models are based on disruptive technologies and concepts, such as Salesforce. For this reason, we are giving to this multiple the higher weight.

P/FCF 22.7x 140.4 5%

We used the P/FCF multiple as a proxy of the P/E multiple. The calculation of this multiple for comparable companies takes into consideration CAPEX and working capital, thus considerable lowering the free cash flow and resulting in a higher multiple. This is opposite to our calculation. We believe that in the long term this difference will null. Therefore we intentionally didn't take into consideration CAPEX and working capital when computing the free cash flow. To account for this difference, we are giving just a 5% weight to this multiple.

Target price 100.0 We believe that the market is not valuing Salesforce properly. As a result of a short term focus, most analysts are not taking into consideration (i) the scalability of the company's business model; (ii) the potential of the SaaS market; and (iii) the potential of Salesforce market expansion. Those are the three main points that support our target price.

Price as of 08/04/2015 70.4

Upside 42.0%Source: Team calculationsNotes1 For the multiples calculation we are taking into consideration mature companies, such as SAP and Oracle, and high growth companies as well, such as Netsuite and Workday A. However, for both multiples we are using the 25th percentile range, since we believe that as Salesforce matures, its multiples will be more similar to low growth companies

Stratton Oakmont, Inc. - ResearchAppendix 2 – Weighted average cost of capital

16

ASSUMPTION

Risk free rate 3.4%

Market risk premium 6.3%

Adjusted beta 1.3

Ke (cost of equity) 11.6%We (weight of equity) 97.8%Kd (cost of debt) 3.4%Tax rate 23.2%After tax cost of debt 2.6%Wd (weight of debt) 2.2%WACC 11.4%

We used the market value of debt to compute the weight of debt.(We x Ke)+(Wd x Kd)

COMMENTS

We used the expected return of the 10-year Treasury bond as the risk-free rate. Considering that the current yield is significantly lower than past returns, we adjusted it towards the average from 1928 to 2014.The market risk premium is the spread between the average of S&P500 returns and the 10-year Treasury bond yield from 1928-2014.

We obtained the beta to apply in the CAPM model by regressing weekly historical returns of Salesforce with the returns of S&P500 from June 2003 to July 2015.

Industry average.Cost of debt x (1- tax rate)

We computed the cost of debt dividing the most recent quarter interes expenses by the long-term debt.

Calculation using CAPM.We used the market value of equity to compute the weight of equity.

Stratton Oakmont, Inc. - ResearchAppendix 3 – DCF key assumptions

17

2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F COMMENTS

Market size ($ billions) 1 78.4 92.8 105.5 116.4 125.5 132.6 138.5 142.7 147.0 151.4

%yoy growth1 24.1% 18.3% 13.7% 10.3% 7.8% 5.6% 4.5% 3.0% 3.0% 3.0%

Salesforce market share (% of total market) 2 7.8% 8.5% 9.7% 11.5% 12.5% 13.5% 14.5% 15.5% 16.0% 16.5%

Revenue (%yoy growth) 2 22.0% 29.1% 29.5% 30.4% 17.3% 14.1% 12.2% 10.1% 6.3% 6.1%

Subscription and support2 22.0% 28.9% 29.8% 30.8% 17.2% 14.1% 12.2% 10.1% 6.3% 6.2%

Professional services and other2 22.0% 31.6% 25.9% 25.0% 18.0% 15.0% 12.0% 10.0% 6.0% 5.0%

Cost of goods sold (% of revenue)2 -23.9% -24.0% -23.8% -22.7% -22.7% -22.7% -22.3% -22.3% -22.3% -21.8%

Subscription and support2 -18.4% -18.4% -18.4% -17.4% -17.4% -17.4% -17.0% -17.0% -17.0% -16.5%

Professional services and other2 -100.0% -100.0% -100.0% -100.0% -100.0% -100.0% -100.0% -100.0% -100.0% -100.0%

Operating expenses (% of revenue)2 -67.5% -67.5% -67.5% -64.5% -61.5% -54.0% -51.0% -48.0% -48.0% -48.0%

Research and development2 -12.5% -12.5% -12.5% -12.5% -12.5% -10.0% -10.0% -10.0% -10.0% -10.0%As the company grows, we believe that Salesforce will shift investments to acquisitions as a way to maintain innovation and growth. Therefore, we expect R&D expenses as a percentage of revenue to decrease over time.

Sales and marketing2 -45.0% -45.0% -45.0% -42.0% -39.0% -36.0% -33.0% -30.0% -30.0% -30.0%Aligned with the high growth in sales the first stage of the DCF, we projected high levels of S&M expenses as a way to support the business expansion. However, as the growth rate decreases in the second stage of the model, we also assumed a decrease in S&M expenses.

General and administrative2 -10.0% -10.0% -10.0% -10.0% -10.0% -8.0% -8.0% -8.0% -8.0% -8.0%As revenue grows, we expect G&A expenses to dilute over a big amount of revenue. Therefore, we expect this expense to decrease as a percentage of revenue.

Operating taxes (% of operating income)2 -22.3% -22.3% -22.3% -22.3% -22.3% -22.3% -22.3% -22.3% -22.3% -22.3%As the business matures and the company normalizes its financial results, we believe that operating income will be taxed at the competitor’s average income tax rate, representing 23.2% of the operating income

Depreciation, amortization and stock-based expenses2 12.5% 12.5% 12.5% 12.5% 12.5% 11.5% 11.5% 11.5% 11.5% 11.5%Stock based expenses2 2.5% 2.5% 2.5% 2.5% 2.5% 1.5% 1.5% 1.5% 1.5% 1.5%

Depreciation2 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%We expect depreciaton as a percentage of revenue to remain constant over the next five years as a result of recent investments and future acquisitions of real assets.

Terminal growth 3.0% As the industry matures, we expect the terminal growth to be slight above inflation rate.Sources:

1 IDC, Gartner, Ledgeview partners and Forbes for 2013 and 2014 market size and market growth. Team own estimates for forecast period based on market research.2 Salesforce 10K for historical data. Team own estimates for forecast period based on market research.

Considering that Salesforce offers products in different cloud segments, we believe that SaaS is a better measure of its total addressable market.Additionally, we believe that although Salesforce in the future will gain a considerable part of the market share, it will not represent more than 16.5%, as the market will continue highly fragmented.

We believe that subscription and suport will continue to be the main source of revenue streams, representing more than 90% of total revenue. Additionaly, we believe that the company will continue to use professional services as a way to acquire big accounts, not profiting from these services.

In the Subscription Segment, we believe that as the business scale, the representativeness of the cost as a percentage of revenue will decrease. However, in the Professional Services, we believe that Salesforce will continue with the strategy of breaking even as a way to acquire big corporate accounts.

As the company grows, we expect stock based compensations to decrease as a percentage of revenue, as it will be cheaper for the company to reward its employees using cash.

Stratton Oakmont, Inc. - ResearchAppendix 4 – Historical and forecasted free cash flow ($ million)

18

2010 2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 5y AVG 1st STAGE 2nd STAGE

Revenues 1,657.1 2,266.5 3,050.2 4,071.0 5,373.6 6,556.6 8,461.6 10,959.9 14,293.9 16,762.6 19,130.5 21,469.2 23,636.9 25,126.5 26,669.4 (yoy growth) 26.9% 36.8% 34.6% 33.5% 32.0% 22.0% 29.1% 29.5% 30.4% 17.3% 14.1% 12.2% 10.1% 6.3% 6.1% 32.7% 25.5% 9.7%Subscription 1,551.1 2,126.2 2,868.8 3,824.5 5,013.8 6,117.5 7,883.8 10,232.5 13,384.9 15,690.0 17,897.0 20,087.7 22,117.2 23,515.6 24,978.0

(yoy growth) 28.2% 37.1% 34.9% 33.3% 31.1% 22.0% 28.9% 29.8% 30.8% 17.2% 14.1% 12.2% 10.1% 6.3% 6.2% 32.9% 25.6% 9.7%(% of revenue) 93.6% 93.8% 94.1% 93.9% 93.3% 93.3% 93.2% 93.4% 93.6% 93.6% 93.6% 93.6% 93.6% 93.6% 93.7% 93.7% 93.5% 93.6%

Professional services 106.0 140.3 181.4 246.5 359.8 439.0 577.8 727.4 909.0 1,072.6 1,233.5 1,381.5 1,519.7 1,610.9 1,691.4 (yoy growth) 10.3% 32.4% 29.3% 35.9% 46.0% 22.0% 31.6% 25.9% 25.0% 18.0% 15.0% 12.0% 10.0% 6.0% 5.0% 30.2% 24.4% 9.5%(% of revenue) 6.4% 6.2% 5.9% 6.1% 6.7% 6.7% 6.8% 6.6% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.3% 6.3% 6.5% 6.4%

Cost of goods sold (323.8) (488.9) (683.6) (968.4) (1,289.3) (1,564.7) (2,028.4) (2,610.2) (3,238.0) (3,802.7) (4,347.6) (4,796.4) (5,279.6) (5,608.5) (5,812.8) (yoy growth) 25.5% 51.0% 39.8% 41.7% 33.1% 21.4% 29.6% 28.7% 24.1% 17.4% 14.3% 10.3% 10.1% 6.2% 3.6% 38.0% 24.2% 8.9%(% of revenue) -19.5% -21.6% -22.4% -23.8% -24.0% -23.9% -24.0% -23.8% -22.7% -22.7% -22.7% -22.3% -22.3% -22.3% -21.8% -22.9% -23.2% -22.3%Subscription and support (208.2) (360.8) (494.2) (711.9) (924.6) (1,125.6) (1,450.6) (1,882.8) (2,329.0) (2,730.1) (3,114.1) (3,414.9) (3,759.9) (3,997.7) (4,121.4)

(yoy growth) 30.8% 73.2% 37.0% 44.1% 29.9% 21.7% 28.9% 29.8% 23.7% 17.2% 14.1% 9.7% 10.1% 6.3% 3.1% 42.2% 24.2% 8.6%(% of revenue) -13.4% -17.0% -17.2% -18.6% -18.4% -18.4% -18.4% -18.4% -17.4% -17.4% -17.4% -17.0% -17.0% -17.0% -16.5% -16.4% -16.7% -15.9%

Professional services and other (115.6) (128.1) (189.4) (256.5) (364.6) (439.0) (577.8) (727.4) (909.0) (1,072.6) (1,233.5) (1,381.5) (1,519.7) (1,610.9) (1,691.4) (yoy growth) 17.0% 10.9% 47.8% 35.5% 42.1% 20.4% 31.6% 25.9% 25.0% 18.0% 15.0% 12.0% 10.0% 6.0% 5.0% 29.9% 24.1% 9.5%(% of revenue) -109.0% -91.3% -104.4% -104.1% -101.3% -100.0% -100.0% -100.0% -100.0% -100.0% -100.0% -100.0% -100.0% -100.0% -100.0% -6.4% -6.5% -6.4%

Gross profit 1,333.3 1,777.7 2,366.6 3,102.6 4,084.3 4,991.9 6,433.1 8,349.7 11,055.9 12,959.9 14,782.9 16,672.8 18,357.3 19,517.9 20,856.6 Subscription and support 1,342.9 1,765.5 2,374.6 3,112.7 4,089.1 4,991.9 6,433.1 8,349.7 11,055.9 12,959.9 14,782.9 16,672.8 18,357.3 19,517.9 20,856.6 Professional services and other (9.6) 12.2 (8.0) (10.1) (4.8) - - - - - - - - - -

Operating expenses (1,123.3) (1,593.7) (2,120.8) (2,893.8) (3,654.3) (4,425.7) (5,711.6) (7,398.0) (9,219.5) (10,309.0) (10,330.5) (10,949.3) (11,345.7) (12,060.7) (12,801.3) (yoy growth) 20.5% 41.9% 33.1% 36.4% 26.3% 21.1% 29.1% 29.5% 24.6% 11.8% 0.2% 6.0% 3.6% 6.3% 6.1% 31.4% 23.1% 4.4%(% of revenue) -67.8% -70.3% -69.5% -71.1% -68.0% -67.5% -67.5% -67.5% -64.5% -61.5% -54.0% -51.0% -48.0% -48.0% -48.0% -69.3% -65.0% -49.5%Research and development (169.0) (249.5) (353.1) (516.4) (671.7) (819.6) (1,057.7) (1,370.0) (1,786.7) (2,095.3) (1,913.0) (2,146.9) (2,363.7) (2,512.6) (2,666.9)

(yoy growth) 28.1% 47.6% 41.6% 46.2% 30.1% 22.0% 29.1% 29.5% 30.4% 17.3% -8.7% 12.2% 10.1% 6.3% 6.1% 38.5% 25.5% 4.9%(% of revenue) -10.2% -11.0% -11.6% -12.7% -12.5% -12.5% -12.5% -12.5% -12.5% -12.5% -10.0% -10.0% -10.0% -10.0% -10.0% -11.9% -12.5% -10.0%

Sales and marketing (731.4) (1,046.6) (1,403.8) (1,872.4) (2,406.0) (2,950.5) (3,807.7) (4,932.0) (6,003.4) (6,537.4) (6,887.0) (7,084.8) (7,091.1) (7,537.9) (8,000.8) (yoy growth) 20.8% 43.1% 34.1% 33.4% 28.5% 22.6% 29.1% 29.5% 21.7% 8.9% 5.3% 2.9% 0.1% 6.3% 6.1% 31.8% 22.1% 4.1%(% of revenue) -44.1% -46.2% -46.0% -46.0% -44.8% -45.0% -45.0% -45.0% -42.0% -39.0% -36.0% -33.0% -30.0% -30.0% -30.0% -45.4% -42.5% -31.5%

General and administrative (223.0) (297.6) (363.8) (505.0) (576.6) (655.7) (846.2) (1,096.0) (1,429.4) (1,676.3) (1,530.4) (1,717.5) (1,891.0) (2,010.1) (2,133.6) (yoy growth) 14.2% 33.5% 22.3% 38.8% 14.2% 13.7% 29.1% 29.5% 30.4% 17.3% -8.7% 12.2% 10.1% 6.3% 6.1% 24.2% 23.8% 4.9%(% of revenue) -13.5% -13.1% -11.9% -12.4% -10.7% -10.0% -10.0% -10.0% -10.0% -10.0% -8.0% -8.0% -8.0% -8.0% -8.0% -12.0% -10.0% -8.0%

Operating income 210.0 184.0 245.8 208.8 430.0 566.2 721.6 951.8 1,836.3 2,650.9 4,452.4 5,723.5 7,011.6 7,457.2 8,055.3 (yoy growth) 82.2% -12.4% 33.6% -15.1% 106.0% 31.7% 27.4% 31.9% 92.9% 44.4% 68.0% 28.5% 22.5% 6.4% 8.0% 30.1% 43.9% 24.9%(% of revenue) 12.7% 8.1% 8.1% 5.1% 8.0% 8.6% 8.5% 8.7% 12.8% 15.8% 23.3% 26.7% 29.7% 29.7% 30.2% 7.8% 11.8% 28.2%

Operating taxes (34.6) 21.7 (142.7) 125.8 (49.6) (126.3) (160.9) (212.2) (409.5) (591.2) (992.9) (1,276.3) (1,563.6) (1,663.0) (1,796.3) NOPAT 175.4 205.7 103.2 334.5 380.4 440.0 560.7 739.5 1,426.8 2,059.8 3,459.5 4,447.1 5,448.0 5,794.3 6,259.0 Depreciation, amortization and stock-based expenses 83.7 167.5 239.6 377.9 695.1 819.6 1,057.7 1,370.0 1,786.7 2,095.3 2,200.0 2,469.0 2,718.2 2,889.5 3,067.0 Free cash flow 259.1 373.2 342.8 712.4 1,075.5 1,259.5 1,618.4 2,109.5 3,213.6 4,155.1 5,659.5 6,916.1 8,166.2 8,683.8 9,325.9

113,803.0

Discount factor 0.85 0.76 0.68 0.61 0.55 0.49 0.44 0.40 0.36 0.32 PV of free cash flow 1,070.6 1,234.4 1,443.9 1,973.7 2,290.0 2,799.0 3,069.3 3,252.0 3,103.1 39,482.2

Enterprise value 59,718.3 Net debt (1,019.8) Equity value 58,698.5 Diluted shares outstanding 664.3 Target price 88.4 Price as of 08/04/2015 70.4 Upside/Downside 25.5%

Mid-year adjustment @ 0.5

Terminal growth @ 3.0%WACC @ 11.4%

Stratton Oakmont, Inc. - ResearchAppendix 5 – Stock price sensitivity ($)

19

I. WACC and growth sensitivity analysis

WACC88.4 9.4% 10.4% 11.4% 12.4% 13.4%

1% 103.3 88.6 77.0 67.5 59.7 2% 112.8 95.5 82.1 71.4 62.7 3% 125.2 104.2 88.4 76.1 66.3 4% 142.2 115.6 96.3 81.8 70.5 5% 166.9 131.2 106.8 89.2 75.9

∆% -2% -1% 0% +1% +2%

∆g ∆WACC-7.1% 17.9%9.0% -13.9%

Notes:Salesforce target price is more sensitive to WACC changes. Additionally, upside potential due to changes in terminal growth rate and WACC variations are greater than the downside potential.

II. Market share and marketing expenses sensitivity analysis

Marketing expenses88.4 28.0% 29.0% 30.0% 31.0% 32.0%

14.5% 83.2 82.0 80.8 79.6 78.5 15.5% 87.1 85.8 84.6 83.3 82.1 16.5% 91.0 89.7 88.4 87.0 85.7 17.5% 94.9 93.5 92.1 90.7 89.3 18.5% 98.8 97.4 95.9 94.4 93.0

∆% -2% -1% 0% +1% +2%

∆Mkt share

∆Mkt expenses

-4.3% 1.5%4.3% -1.5%

Notes:Salesforce target price is more sensitive to market share changes.

Gro

wth

∆

Mar

ket s

hare

∆-1%+1%

-1%+1%

WACC

$88.4 Growth

$0

$30

$60

$90

$120

$150

-2% -1% 0% +1% +2%

CRM

Sha

re p

rice

%∆ Variable

Marketing expenses

$88.4

Market share

$70

$80

$90

$100

-2% -1% 0% +1% +2%

CRM

Sha

re p

rice

%∆ Variable

Stratton Oakmont, Inc. - ResearchAppendix 6 – Risk free rate, market risk premium and company’s adjusted beta and capital structure ($ million)

20

I. RISK FREE RATE

PERIOD10 YEARS T-BONDS1 WEIGHT

1928-2014 5.28% 33%5/22/2015 2.43% 67%Estimated risk free rate 3.37%

II. MARKET RISK PREMIUM

PERIOD S&P1

10YEARS T-BONDS1

MARKET PREMIUM

1928-2014 11.53% 5.28% 6.25%Source:1 US Department of the Treasury

III. ADJUSTED BETA

Time 11.1y # observations 579 R2 0.33 Beta 1.48 Adjusted beta 1.32

IV. CAPITAL STRUCTURE

Enterprise value 47,177 Market value 46,158 Implicit value of net debt 1,020 Debt/market value 2.2%

Book value of cash 1,019 Book value of debt 2,039 Book value of net debt 1,020 Interest expense 70 Pre-tax cost of debt 3.4%Book value of equity 4,235 Debt/book value 24.1%Source: Factset

Stratton Oakmont, Inc. - ResearchAppendix 7 – Comparable companies and multiples valuation ($ million)

21

I. Comparable companies

COMPANY PRICEDILUTED SHARES OUTSTANDING

ENTERPRISE VALUE

MARKET VALUE BETA SALES

FREE CASH FLOW

TAX RATE EV/SALES P/FCF

Salesforce.com 70.41 664.3 47,177.5 46,157.7 1.61 5,658.0 1,130.0 -- 8.3x 41.4xOracle 39.56 4,463.0 159,560.2 171,535.2 1.27 38,226.0 12,945.0 22.4% 4.2x 13.6xSAP 71.697 1,198.0 95,161.4 88,080.7 0.73 23,090.6 3,337.5 24.1% 4.1x 25.7xNetSuite 95.37 78.0 7,431.5 7,538.1 1.41 643.6 49.9 -- 11.5x 149.2xWorkday A 82.51 187.4 14,335.9 15,759.4 1.76 879.1 50.4 -- 16.3x 306.7xZendesk 22.1 76.3 1,599.8 1,902.7 1.40 144.2 (30.5) -- 11.1x --

Average 62.2 1,200.5 55,617.8 56,963.2 1.31 12,596.7 3,270.5 23.2% 9.4x 123.8xSource: Factset. Data as of 08/07/2015

II. Comparable multiples

COMPANY EV/SALES P/FCF

Oracle 4.17x 13.6xSAP 4.12x 25.7xNetSuite 11.5x 149.2xWorkday A 16.3x 306.7xZendesk 11.1x N/AMin 4.1x 13.6x25th perc 4.2x 22.7xAvg 9.4x 123.8xAvg ex outliers 8.9x 87.5x75th perc 11.5x 188.5xMax 16.3x 306.7x

III. Salesforce valuation

SALES FCFSalesforce 5y forecast 16,762.6 4,155.1Diluted share outstanding 664.3Net debt 1,019.8Min 103.5 83.525th percentile 106.0 140.4Avg 237.2 772.8Avg ex outliers 224.6 545.875th percentile 290.2 1,177.5Max 411.3 1,916.8

Documents

Salesforce Team 1 - Initiation report