Salesforce’s $50 Price Revision: Revenue Estimates Raised, Operating Loss Expected For CY2013

We have recently revised our price estimate for Salesforce.com (NYSE:CRM) from $33 to $50, indicating a 50% increase. In the current note, we highlight the recent changes made to our Salesforce analysis and their corresponding effects on our price estimate.

See our full analysis for Salesforce.com

Overall Revenue Estimates Raised On Strong Double Digit Q3 Performance

• We have raised our cloud-based CRM revenue estimates for the calendar year ending 2013 to $3.25 billion from our previous estimate of $2.41 billion. Additionally, we have pared down our revenue estimates for Salesforce’s cloud software business. We now expect cloud software revenues to stand at approximately $0.53 billion as compared to our previous estimate of $1.21 billion.
• The rationale behind increasing our revenue estimate for the cloud-based CRM is the annualized revenue growth rate that the division has seen in the past few years. Between 2007 – 2012, revenue from the segment has increased by more than 2.5 times.
• We now have a revised annualized revenue growth rate of 15.3% between 2012 – 2020 compared to our previous estimate of 12.4% for Salesforce’s cloud-based CRM business.
• On the whole, our changes to CRM’s revenues contributed to about 35% of the upside to our price estimate. Our revenue estimates for CY2013 at approximately $4 billion are marginally lower compared to the company’s guidance of $4.05-$4.055 billion.

Forecast Period Extended To 2020

• We extended our forecast period by a year, to 2020. This resulted in a 11% increase over our previous price estimate of $33.

Gross Margins Revised Upward But Short Term Pressures Remain

• Gross margins for the company increased from 80.55% in 2008 to 82.13% in 2010 before declining to 81.23% in 2012. In view of declining margins, we revised our long term gross margin estimates for the company.
• For CY2013, we expect gross margins to decrease to 80.8% compared to 81.6% in 2012 with increased investments into fueling strong growth for Salesforce’s latest acquisition ExactTarget. However, we believe gross margins would expand in the long term as competition in the cloud industry begins to stabilize. We expect long term margins to lie between 81.8% – 82.2% compared to our previous range of 81.4% – 81.6%.
• This revision contributed to 9% upside in our price estimate.

$2.5 Billion ExactTarget Acquisition To Strain Operating Margins In 2013

• Salesforce acquired cloud marketing player ExactTarget for $2.5 Billion in July 2013. This has particularly strained operating margins in the 9 months so far. For complete CY2013 (fiscal 2014), we now expect the company to post operating expenses close to $2.53 billion and a GAAP operating loss of $163 million. We have a non-GAAP operating income estimate of $495 million, lower than the $530 million posted during fiscal 2013.
• This change in our valuation contributed to a 6.5% reduction in our price estimate.

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