STOCK: CRM | 9/1/20 FRESH LOOK

SALESFORCE (Ticker: CRM) LBIRLBIR Recommendation Recommendation

Stock Price: $271.1 (8/28/20) Company Size: $246.7B Author: Madhu Chaudhary

Company Rank: 380 Sector: Technology Industry: Software

Salesforce is a technology company that offers cloud-based customer relationship management as well as other productivity enhancing software solutions to global enterprises.

IN THIS FRESH LOOK WE’LL COVER:  Summary of the Business Salesforce’s core solutions help companies improve their sales and consumer service  productivity and efficiency. Grab-and-Go

THESIS  Recent Developments Salesforce has delivered strong quarterly results despite overall business spending slowdown. An investment in Salesforce is a play on the rate of digital transformation of  Competitive Environment business operations and adoption of Salesforce is an industry leading CRM software cloud-based software technology provider and enjoys a market share of 18.4%. It globally. The company holds a market faces competition from companies such as leading position in the CRM Oracle, Microsoft, SAP. application industry. Salesforce’s  Conclusions/Recommendations success depends upon its ability to Recent outperformance despite economic penetrate new markets and onboard challenges has led to a sharp rally in the additional clients while realizing company’s stock. Its dominant industry position synergies from acquisitions made. and growing addressable market makes us optimistic about the company’s future potential. We assign “GREEN LIGHT” rating to Salesforce.

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0.94 STOCK: CRM | 9/1/20 FRESH LOOK

Data as of 8/28/20 unless specified

Revenue Fwd $20.9B Enterprise Value: $240.1B Market Cap: $246.7B (TTM): ($19.4B) Fwd (TTM) 11.8x YTD Return: 48.7% RSI: 81.9 Price/Sales: (12.7x) Gross Margin Revenue Growth 79.1% 31.6% ROIC (TTM): 8.2% (TTM): (TTM, YoY): 200-day Moving 52-Week High: $278.3 52-Week Low $115.3 176.8 Avg.

EBITDA 5,842M CFO 4,218M FCF 2,282M

Insider Transactions (2020): Since March 2020, Marc Benioff (CEO) has sold 1,530,000 shares

social network, phone, etc.). It also helps SUMMARY OF BUSINESS  organizations manage field workflows through a Salesforce is a software company that provides single centralized platform that allows cloud-based customer relationship management coordination between agents, dispatchers, and solutions to global enterprises. Headquartered in mobile employees. San Francisco, the company was founded in 1999 Marketing and Commerce Cloud: It helps by Marc Benioff along with Parker Harris, Dave organizations deepen customer relationships Moellenhoff, and Frank Dominguez. It launched through multiple marketing tools and its first CRM solution in 2000 and has now automation. Customer data can be integrated expanded into several sales verticals including with Sales Cloud and Service Cloud to provide a marketing automation, integration, analytics, and complete view of the customer. Commerce cloud app development tools. helps companies grow online presence and Company’s cloud-based offerings can be broken deliver personalized and unified customer down into following areas: experience across all channels (mobile, store, Sales Cloud: It helps organizations improve web, etc.). efficiency in sales operations. It enables Salesforce Platform & Other: This includes: enterprises to store customer data, monitor sales Customer 360 platform which is used to build, leads and progress made, forecast sales secure, integrate, and manage business apps opportunities, gain customer insights through through PaaS tools. It includes myTrailhead, a free analytics, and deliver quotes, contracts, and online learning platform to support the adoption invoices. and use of the Customer 360 platform. Also, Services Cloud: It empowers organizations to included in this segment is the Heroku deliver improved and more personalized Engagement Platform to build and operate customer service and support by allowing service applications in the cloud. agents to get in touch with customers anywhere, Integration: Salesforce’s MuleSoft Anypoint across multiple channels and devices (email, Platform is an integration platform for SOA, SaaS

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0.94 STOCK: CRM | 9/1/20 FRESH LOOK

& APIs and helps businesses connect Americas, 21% comes from Europe, while 9% is applications, data, and devices in both cloud as generated from Asia-Pacific. well as on-premise. The company had 54,255 employees at the end of Analytics: Tableau and Einstein analytics provide Q2 FY21. Its customers include businesses in customer intelligent analytics capabilities to almost every industry and of all sizes ranging enable businesses better understand their data, from Fortune 500 companies to small startups. thereby improving decision-making. 90% of the Fortune 500 companies are Salesforce’s customers. No customer accounts for more than Productivity: Salesforce’s Quip unites work and 5% of the total revenue. communication by combining documents, spreadsheets, slides, and chat into one place The company targets a large addressable market inside Salesforce. estimated at $176 billion, projected to grow at a CAGR of 14% between 2020-2024 as per Gartner Subscription & Support Revenue numbers in Salesforce earnings presentation Q2 Mix FY21. It holds a commanding position in the CRM

Sales Cloud industry with market share of 18.4%, significantly greater than its closest peers. 15% Service Cloud 27% Salesforce has made several acquisitions in recent 31% Salesforce Platform years with the most notable being the acquisition 27% and Other of Tableau Software, Inc. in August 2019 for a Marketing and Commerce Cloud consideration of $14.8bn to add data visualization and analytics features to its CRM platform. Previously in May 2018, it had acquired MuleSoft Source: Company filings for a consideration of $6.4bn to bolster integration features on its cloud services. Other recent Salesforce follows a subscription-based business acquisitions include ClickSoftware, a field service model which provides a high degree of company for $1.35 billion and Vlocity, Inc. for a predictability and stability to the company’s consideration of $1.2 billion. cashflows. In FY 2020, 94% of the total revenue came from subscriptions, while the rest was generated from professional services offered to clients that include process mapping, LB•LOGIC The company has been implementation and training provided to acquisitive in recent past which along facilitate adoption of cloud solutions. As of Q2 with elevated business spending has FY21, Remaining Performance Obligations (RPO) led to Salesforce’s margin growth which represents contractual revenue that is lagging big tech peers. We think the unbilled and unearned, stood at $30.6 billion. The company will eventually close the company expects to recognize 50% of this amount margin gap and that will provide in the next 12 months. another source of upside.

Geographically, US remains the largest market for Salesforce. It derives 70% of the top-line from

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0.94 STOCK: CRM | 9/1/20 FRESH LOOK

On August 24th, 2020, S&P Dow Jones announced been more successful more rapidly.” – Marc Benioff, Salesforce would be added to the Dow Jones CEO, Q2 FY21 earnings call. Industrial Average Index replacing ExxonMobil. Financial and Operating Results  RECENT DEVELOPMENTS Salesforce reported impressive financial and COVID-19 pandemic has had both positive and operational growth in Q2 FY 21, beating street negative impact on salesforce’s business estimates despite tough pandemic led business operations. Measures to cut down operational environment. As a result, company’s stock price spending by companies have resulted in near- rallied nearly 25% in a single day. term headwind, however, social distancing Salesforce reported revenue of $5.15 billion in Q2 norms and work from home initiatives have FY 21, which represents YoY growth of 29%, accelerated the ongoing digital transformation of beating the previous guidance by almost $250 businesses around the globe, thus directly million. Excluding the revenue generated by boosting demand for cloud services. Salesforce Tableau, which was acquired in Q3 last year, top has accelerated its capital spending to be better line was up 19.5% on a YoY basis. In terms of positioned in the post-COVID world and tap the product segments, Sales cloud revenue grew by growing market for cloud-based business 13%, while service cloud revenue was up by 20%. solutions. Revenue from marketing & commerce cloud was “As we look out over the next 12 to 24 months we up 21% whereas Salesforce platform significantly realized it is important for us to make a strategic shift outperformed all other services by growing at in investments today to better position our company 66% on a YoY basis. However, investors must for continued growth and customer success and this note that Salesforce includes Tableau’s business new all-digital work from anywhere environment… in platform services. As indicated in the chart we intend to accelerate spend in go to market in below, organic growth slowed just marginally in product originally planned for next year and pull that Q2 FY21, however, it was much better than the into the second half of this year.”- Mark Hawkins, lowered expectations. CFO, Q2 FY21 earnings call. Revenue growth The company saw new customers adopting its 33.0% 34.6% cloud-based offerings during the pandemic 30.2% 28.9% 24.3% including AT&T, PayPal, State of Rhode Island, 21.8% Oakland public schools, etc. It also made new 21.6% 22.7% technology additions to work.com that would 18.7% 20.3% 20.1% 19.50% enable businesses and schools to reopen safely.

“I also look at another incredible win in the quarter Q1 Q2 Q3 Q4 Q1 Q2 with PayPal. This is a tremendous organization that's FY20 FY20 FY20 FY20 FY21 FY21 Organic growth Total growth really it is the right time at the right place because we really need contact with payments we all know that... Source: Company’s filings Another incredible victory in the quarter has really been work.com. This is a product that I don’t think there is a product that we've ever built faster, but never

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0.94 STOCK: CRM | 9/1/20 FRESH LOOK

Remaining performance obligations increased to raised from $20 billion in Q1 FY21 to almost $21 $30.6 billion in Q2 FY21, representing a YoY billion. increase of 21%.

Salesforce reported its highest ever adjusted Full-year FY 2021 guidance operating margin of 20.2%, which represents a Particulars Q4 FY20 Q1 FY21 Q2 FY21 significant expansion of 585 bps as compared to Revenue $21.1bn $20.0bn $20.8bn last year. Please note that in Q2 FY20, the YoY growth 23% 17% 22% company had incurred a one-time loss on Operating Margin 18.1% 16.8% 17.5% settlement of Salesforce.org reseller agreement, YoY expansion 130bps 0bps 70bps and excluding that one time item, the YoY Non-GAAP EPS $3.17 $2.94 $3.73* expansion in operating margin was 170 bps. Source: Company’s Earnings Calls transcripts Company’s adjusted net income margin also *Includes one-time mark-to-market gain of $0.58 per expanded from 13.2% in Q2 FY 20 to 25.8% in Q2 share on strategic investment in Q2 FY21. FY 21 representing a substantial expansion of 1260 bps. However, this increase was fueled by a mark to market positive impact of $573 million on

strategic investments. Excluding the impact of LB•LOGIC While the quarter was this non-recurring mark to market gain from Q2 strong, the company’s latest annual guidance is still below what it of both FY 20 and FY 21, adj. net margins improved from 11.6% to 12.5%. originally provided at the end of last fiscal year. The move in the stock after last quarter was more a function of the Quarterly trend $6,000 $5,151 30% $4,851 company beating significantly $5,000 25% $3,997 lowered expectations along with some $3,603 $4,000 $3,281 20% signs of momentum from digital $3,000 15% transformation globally. $2,000 10% $1,000 5%

$- 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 FY19 FY19 FY19 FY19 FY20 FY20 FY20 FY20 FY21 FY21 Revenue has grown at a strong 3-Year CAGR of 26.5% and 5-Year CAGR of 26% fueled by both Revenue Operating Profit Margin Net Income Margin organic and inorganic growth. Gross Margins Source: Company’s filings have improved by ~260 bps from 76.5% in FY18 to 79.1% over TTM 2021. Operating margins have improved by ~50 bps from 16.5% in FY18 to 17% Outlook and estimates over TTM 2021. Management provided guidance of 16% YoY top- Liquidity and balance sheet line growth in Q3 FY21 which is below the 20% Cash flow from operations in the first 6 months of organic growth it achieved in Q2 FY21. However, FY 21 declined from $2.40 billion in H1 FY 20 to we view the guidance as conservative with room $2.29 billion primarily because of delays in for upside. Full year guidance for FY 21 was payments from customers. Free cash flow also

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0.94 STOCK: CRM | 9/1/20 FRESH LOOK

declined from $1.68 billion to $0.67 billion Chief Technology Officer at Facebook and prior because of the $1.2 billion outflow for acquisition to that, he founded FriendFeed, a social of Vlocity, Inc. in June this year. Salesforce ended networking startup that was acquired by recent quarter with a strong liquidity position of Facebook. He also worked at Google where he co- $9.28bn available in the form of cash and created Google Maps. He holds MS & BS degree marketable securities. Further, it was net debt- in Computer Science from Stanford University. free. Mark Hawkins serves as the company’s President Meanwhile, the company also announced that it and CFO. He is also a member of the Board of will be moving away resources from some areas Directors at Plex Systems, Secureworks, The that no longer make strategic sense. Infact, it Ocean Cleanup, and Toast, Inc. Mark joined confirmed the layoff of 1,000 employees post its Salesforce in 2014. Prior to Salesforce, he served Q2 earnings call. in various finance executive roles at Autodesk, Logitech, Dell, and Hewlett-Packard. He has  COMPANY MANAGEMENT completed an Advanced Management Program In 1999, a former executive at Oracle, Marc from Harvard Business School and holds an MBA Benioff reached out to Parker Harris, Dave degree in Finance from the University of Moellenhoff, and Frank Dominguez with the Colorado and a B.A. degree in Operations Salesforce business plan. Soon the four started Management from Michigan State University. implementing the plan in a one-bedroom Executives and directors together hold 4.4% stake apartment in San Francisco and launched their in the company. first CRM solution in 2000. Over the years, Salesforce has expanded its product offering to  COMPETITIVE ENVIRONMENT cover most major aspects of customer The company operates in a fiercely competitive relationship processes. industry with rapidly changing technology, Marc Benioff is the company’s Founder, Chair of however, it enjoys the benefit of being an early the board, and CEO. Marc also owns Time disruptor in the CRM software market space. It Magazine and serves as a member of the World faces competition from large players such as SAP, Economic Forum Board of Trustees. He was Adobe, Oracle, etc. that offer multiple business named innovator of the decade in 2016 by Forbes. software solutions, as well as, relatively smaller Prior to founding Salesforce, he was SVP at companies with a focused set of offerings such as Oracle. There he served for 13 years and became Hubspot, Zendesk, Act-on, QlikView, etc. the youngest VP in Oracle’s history. He holds a Salesforce enjoys the size advantage, providing B.S. degree in Business Administration from the full-fledged cloud-based CRM software as well as University of Southern California. He owned a marketing automation, commerce, analytics, and 3.8% stake in the company as of March 1st, 2020. app development tools and solutions meeting Bret Taylor serves as the company’s President close to all sales related software needs of and Chief Operating Officer. He joined the enterprises. Salesforce has undertaken several company in 2016 when Salesforce acquired Quip, acquisitions in the past which has helped it a real-time collaborative platform where Bret was broaden its product portfolio and achieve the co-founder and CEO. He also serves on the synergies through strong integration between its board of Twitter. Before Quip, Bret served as offered solutions. Salesforce enjoys significant

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0.94 STOCK: CRM | 9/1/20 FRESH LOOK

switching costs moat as its customers are Despite fierce and growing competition, reluctant to adopt a different CRM software Salesforce continues to cement its dominant vendor as Salesforce integrates well into their position in the CRM software market with operational ecosystem. This is also evident in industry leading top-line growth and consistently Salesforce’s low attrition rate of below 10%. expanding market share as evident in the chart Salesforce CRM software has a rating of 4.2 out of below. The company held a market share of 5 on g2.com. This is significantly higher than 18.4% in 2019 as compared to just 5.3% of SAP other CRM products such as Zoho CRM (3.9), which is its nearest competitor. Going forward, Microsoft Dynamic 365 Sales (3.7), SAP CRM (3.6) we expect Salesforce to continue to maintain its and Oracle EBS CRM (3.8). Salesforce was named commanding position in the CRM software as a leader in Gartner’s CRM customer industry through its consistently improving and engagement center magic quadrant by a expanding product offerings. significant margin.

Source: Q2 FY21 Earning Presentation

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0.94 STOCK: CRM | 9/1/20 FRESH LOOK

 CONCLUSION / RECOMMENDATION

The recent earnings beat led to a significant rally company offers attractive return potential to long in the company’s stock. It is currently trading at a term investors given its robust subscription TTM price to sales ratio of 12.7x which is above model, industry leading position, and expanding the pre-pandemic highs of 9.4x and 5-year addressable market. We assign a “GREEN LIGHT” average of 7.8x. Having said that, we believe the rating to Salesforce.

◼ Stock Chart for Salesforce.com, Inc. (CRM)

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0.94 STOCK: CRM | 9/1/20 FRESH LOOK

◼ Performance Data FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 RETURN ON INVESTED CAPITAL (%) 15.2% 20.2% 17.5% 22.2% 16.6% 8.0% GROSS MARGIN (%) 79% 77% 76% 76% 77% 79% EARNINGS (MILLIONS USD) 574 830 1263 1738 2265 2874 YoY Earnings Growth (%) 58% 45% 52% 38% 30% 27% REVENUE (MILLIONS USD) 5,374 6,667 8,437 10,540 13,282 17,098 YoY Revenue Growth (%) 32% 24% 27% 25% 26% 29%

◼ Valuation Data 2014 2015 2016 2017 2018 2019 SHARE PRICE (USD) 56.5 68.1 79.1 113.9 152.0 182.3 SHARES OUTSTANDING (MILLIONS) 651 671 708 732 771 895 MARKET CAP (MILLIONS USD) 36,726 45,661 55,963 83,318 117,169 163,167 PRICE/SALES RATIO 6.8 6.8 6.6 7.9 8.8 9.5

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0.94 STOCK: CRM | 9/1/20 FRESH LOOK

A word about our Fresh Looks: These reports are meant to be produced quickly, giving our Portfolio Manager the information he needs to make an investment decision in a short timeframe, as markets often move quickly after earnings announcements. You will notice the “Traffic Light” at the top. This is a scale indicating the likelihood that we follow a name in future quarters, with the intention of producing a rating of Buy/Hold/Sell after we study the company further. “Green Light” is roughly equivalent to “Buy” after we study a company more than once. “Yellow Light” approximately means “Hold” and “Red Light” would indicate a sell and an end to our continuing coverage of a company. By making these reports public, we intend to give the broader investing community a window into the Left Brain investment process. Since many of the names we cover lack Wall Street research, sometimes these Quick Looks will be some of the only publicly available analysis on a particular stock/bond. We believe that even our rapid-fire reports on certain names will provide great value for the reader. Given the time-sensitive nature of Fresh Looks, they are raw, unfiltered documents. You may see a typo here or there, or perhaps a note from an analyst written directly to our PM, Noland Langford. That is just part of the process. The methodology here is the analyst reads the most recent earnings call, along with the Management Discussion & Analysis section of the most recent Quarterly Report, along with compiling the key quantitative metrics that we value most at Left Brain. The result is a short report that gives us just enough information to take a position in securities where time is of the essence: sometimes the market doesn’t give us enough time to consider every angle before we take action. We hope you find these previously “internal use only” documents useful in your understanding of the investment markets.

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0.94 STOCK: CRM | 9/1/20 FRESH LOOK

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