Salesforce.com F4Q Preview and Partner Survey

Even cloud provider Salesforce.com is underperform becuase it has sold everyone. Aivars Lode avantce

Salesforce.com F4Q Preview and Partner Survey

Rating  UNDERPERFORM

Price Target $47.00

Price $63.74

Our quarterly partner survey suggests F4Q commercial business was solid, though we question large deal traction based on further conversations with market participants. While the company is likely to be at least in line on the income statement excluding FX (>90% of revenue in any Q is booked in prior periods), new subscription billings growth may remain suppressed, with continued elevated cost. We remain Underperform at 41.5x F16 EV/FCF.

Expect Modest Organic New Subscription ACV Growth, cc. While the Street is expecting calculated total billings growth of 24% y/y, we estimate new subscription ACV (license equivalent) growth to be significantly less (high single digit growth). We note that YTD total billings grew 30% vs. our YTD estimate of new subscription ACV growth (equivalent to license growth) at 6%.

4Q = Enterprise Q? Most investors expect this Q to reflect CRM’s efforts over the past 18 mos. to further penetrate the enterprise with large deals, which typically close in the customer’s F4Q (Dec) or the vendor’s (Jan). Given a typical large deal sales cycle of about 12 mos. and 4Q seasonality (about 41% of last year’s new subscription ACV occurred in 4Q), we’d expect any mega deals to materialize (if they do) this period. We haven’t come across any such deals in our field checks, which may hinder much stock appreciation.

Generally positive partner survey. 85 representatives of salesforce.com partner organizations responded to our survey, with generally positive results. We believe the responses are indicative of healthy mid-market transaction flow, though with less visibility to large enterprise. Sales Cloud and Service Cloud were standout growth categories. We note the following highlights from our 15 question survey:

1) For the JanQ, 44% of respondents indicated their CRM related business performed above plan, 41% at plan and 15% below plan. See Chart 11.

2) 60% indicated the company's sense of urgency and promotional activity was typical vs. other Jan ending Qs. 35% more aggressive, 5% less.

3) Several partners commented on major changes to the partner program this year, including new annual membership fees for some partners. The general feedback suggests a culling of the program, favoring the larger, more strategic partners.

Valuation/Risks

Our $47 PT is based on our DCF analysis. Key risks include accelerated growth through enterprise adoption, or further penetration into markets beyond SFA.