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March 17, 2009
Company Report
Company Update
salesforce.com, Inc. Buy CRM: $32.27
Price Target: $39.00
CRM: Interview With Partner Navatar Suggests A Ramping Force
Think Action:
We interviewed Alok Misra of Navatar Group, an important salesforce.com partner with Force.com expertise. In sum, Cloud Computing appears to be ramping in importance, and we're encouraged that activity and momentum is building around salesforce's differentiated offering and next leg of growth, Force.com. Force.com is relevant across many types of organizations and industries, and we're impressed that partners such as Navatar are accelerating the buildout of product depth and breadth, which ultimately could improve profitability and retention rates. While macro headwinds likely persist, we believe increased recognition of share gains, versus on-premise competitors, and the Force.com could drive multiple expansion.
Key Points:
We had the opportunity to interview Alok Misra, Co-Founder and Principal at Navatar Group, an important salesforce.com partner (and one salesforce's first resellers). Navatar Group has been an important partner for the past five years, due to its pre-built financial services solutions that run on the Force.com platform and its deep expertise in Force.com, which helps other ISVs build and market their products on Force.com.
Overall, we're encouraged that despite the tough economy, Navatar has seen pipeline expansion in SMB financial services and ramping interest in Force.com.
The Force.com model and pricing appears to offer a strong proposition for ISVs (including Navatar), enabling the buildout of a recurring revenue model at a very low cost of ownership and quicker time to market; Force.com enables cost savings in datacenter space, power, and Internet bandwidth. According to Mr. Misra, Navatar and others might not have been successful if not for the availability of Force.com.
According to Mr. Misra, Cloud Computing is picking up steam and Force.com could be the obvious beneficiary. He said interest in Force.com appears to be "tremendous," likely because it presents an attractive option to "do more for less." Importantly, ISV activity appears to be picking up and Mr. Misra expects to see more vertical Force.com products in the market within a year and expects to see more larger ISVs begin migrating their On-Premise products.
salesforce pricing for ISVs appears to be attractive to ISVs to make money, considering all the infrastructure development and maintenance that they do not have to deal with.
All relevant disclosures and certifications appear at the end of this report.
Michael Huang, ThinkEquity (TE): Could you give us some background on yourself and also on Navatar Group? Maybe help us understand which segments you target, how you work with salesforce.com?
Alok Misra, Navatar Group (AM): I come from the management consulting world and I've spent almost 10 years between Deloitte Consulting and PwC in various industries, especially financial services. Navatar Group has been one of the premier salesforce.com partners for five years, focused on two things. Firstly, as a leading salesforce.com OEM partner for Financial Services, we provide pre-built financial services solutions that run on the Force.com platform. That means Capital Market firms, mutual funds, hedge funds, and private equity firms can immediately start using these specialized versions of salesforce specific to their industry at the same price they would pay for plain vanilla salesforce and without paying any extra consultant fees for customization. Secondly, since we are one of the few SFDC partners with deep expertise in Force.com, as well as an offshore technical excellence center in New Delhi, India, our services group also helps other ISVs build and market their products on the Force.com platform.
TE: How many products do you have shipping right now?
AM: We have six products, and they're all financial services related. They are 100% natively built on Force.com, which means that all of the customer data, as well as all the code is hosted by salesforce.com as opposed to any external servers. The products are multi-tenant, just like salesforce, which means that all of the customers for a certain product share the same code base, but still have the ability to create their own customizations.
Multi-tenancy also ensures that we constantly add features and functions as well provide free maintenance and email support to our customers.
TE: What's your target market, and can you talk about some of your target areas and clients?
AM: We're focusing initially on the SMB market within financial services and our customers include companies like CCMP Capital, MidOcean Partners, and Crestview Advisors. We have products for Equity Capital Markets, Debt Capital Markets, Mutual Funds, Hedge Funds, Private Equity, and Mergers & Acquisitions. We're also selling our products internationally in EMEA and APAC, with customers as far away as Kazakhstan (Visor Capital) and India (ISSL). In addition, we are helping several ISVs build their products on
the Force.com platform within areas as diverse as Loan Syndication, Supply Chain Management, Retail Health Care, and Volunteer Management.
TE: And just to clarify, are these customers typically buying everything through you or is it a combination of some who have bought salesforce.com seats first and then bought your products?
AM: More and more customers now are buying through us and that's just because they want to set up a relationship with us directly. However, we sell directly as a reseller as well as in collaboration with the salesforce.com sales teams. Either way, our customers expect us to provide them support so they can deal with people with good knowledge of the industry, not just technical expertise.
TE: This kind of reseller type channel is a relatively new one for salesforce.com. Do you get the sense that the reseller channel is being put in place to help them deepen their penetration within verticals?
AM: I think salesforce.com can probably answer that better. One of our goals definitely is to help deepen their penetration within Financial Services. For example, within Alternative Investments our products span Investor Relations, Fundraising, Investor Reporting, Deal Management, and provide the depth to manage limited partners, automate commitments, side letters, sub-docs, fund details, capital calls, due diligence, portfolio tracking, etc. Our Capital Markets products also provide significant depth to manage various complex instruments and functions for a firm, helping increase the footprint.
TE: Doesn't salesforce.com have their own Financial Services product as well as sales teams? Don't they compete with you?
AM: salesforce.com doesn't have all the products or the depth of products that we provide for Financial Services. That said, we do need to figure out a go-to-market strategy so that we can collaborate with SFDC's Financial Services product as well as sales efforts, to avoid potential channel conflict.
TE: There's still some confusion with respect to Force.com and the AppExchange ecosystem. Could you help us understand what are the differences between the two and are you participating in both?
AM: Yes we participate in both. I think of AppExchange as one of the channels to sell solutions or products that are built on or are related to salesforce.com. Force.com, on the other hand, is the infrastructure for companies to build their products.
TE: What kind of opportunity is there around Force.com both for partners like you and for salesforce.com?
AM: The Force.com model enables significant cost savings to an ISV versus contracting for datacenter space, power, Internet bandwidth individually. It presents a great opportunity to build and market products, within their area of expertise, and establish a recurring revenue model at a very low cost of ownership. For salesforce.com, the more partners like us that build and succeed on the Force.com platform, the more seats they will sell. But the real opportunity is for the end customers of these products since they will be able to get better products that fit their needs out-of-the-box at a lower cost and little capital investment.
TE: Help us understand what kinds of the tools you're using to build these products?
AM: Financial services users are very demanding and expect deeper functionality, minimum clicks, multiple levels of security, complex calculations, many-to-many relationships, ability to customize, continuous value-addition and tight interoperability. To meet their needs, we use a wide variety of tools including VisualForce, Sites, APEX, Ajax, Adobe Flex and Javacript. For our products, we have done a lot to enhance the basic Force.com toolset. For instance, for Capital Markets we built data grids to provide users the ability to sort and analyze large amounts of data. We had to do it with compromising performance. For stringent security needs for Financial Services, we have enhanced the sharing model of the Force.com platform to provide multiple levels of security. We automated functionality to support complex calculations to help analyze performance of deals. We built a suite of testing tools that reduced testing time from days to hours. In the end, we have to strike a balance between customer demands and ease of maintenance which determines the toolset. Talking about maintenance, the Force.com product management tools have truly been terrific in helping us package and provision our products, manage client licenses and roll out product enhancements and upgrades.
TE: And, generally speaking what types of activity are you seeing now? Help us understand the direction of trends around Force.com.
AM: Cloud Computing is on a roll and I believe Force.com will be the obvious beneficiary. In the SMB sector within Financial Services, our pipeline has really grown in the last few months despite the economy. We used to see Hedge Funds and Private Equity firms spending 6 to 12 months evaluating various solutions before buying. The cost of evaluation was often more than the cost of the software they bought. All that has really changed after these firms realized that a Hedge Fund user can start using salesforce completely customized to manage prospective investors, investor relations, fundraising, investments and fund portfolio, for a daily cost as little as the price of a Starbucks coffee. salesforce.com pioneered the "pay-as-you-go and cancel if you're not satisfied" model – with the Force.com platform now, they have enabled us to use the same model to go beyond basic CRM and deliver exactly what Financial Services firms need and the customers are loving it. Other ISVs and entrepreneurs like us are also capitalizing on this opportunity to use Force.com to reduce the time-to-market and the cost-of-ownership for delivering SaaS products to their targets and customers. This ISV activity is really picking up and you will see more vertical Force.com products in the market within a year as well as larger ISVs begin migrating their On-Premise products to the SaaS model.
TE: So, the customers that are looking to move to Force.com, are these existing salesforce.com customers or new ones? Also, how long does it take an ISV to get up and running?
AM: It's both. We see ISVs building products as well as more and more companies that are existing customers, building business applications on Force.com. The time taken by an ISV to develop a market-ready product depends on the complexity of the product. In most situations, we recommend a six month timeline to get the first stable release of a vertical product out. Smaller ISVs need that time to understand the target market well, build something of value and prepare for customer support and product management. Even though it may take longer than six months for larger ISVs to build or migrate their entire product, getting the first release with reduced functionality out in that timeframe helps them get early market feedback.
TE: Help us understand the business model for Force.com. How do ISVs pay for the Force.com?
AM: ISVs just pay for services to build products and then once they sell the product, they pay SFDC for the seats that they sell. The SFDC pricing is attractive enough to present a significant opportunity for ISVs to make money, considering all the infrastructure development and maintenance that they do not have to deal with. For instance, a company like ours would not have been successful had we been mired in technical administration—with Force.com, we leave all of that to SFDC for a very low cost.
TE: What are the types of apps that would not be well suited for Force.com, if any?
AM: That's a good question since most ISVs who come to us for help in building a product ask us that. There are a number of factors that must determine if an application or product is well suited for Force.com. These include whether critical functions can be met through the technology, available workarounds, development and product costs, ability to leverage the salesforce.com customer base and marketing channels. We offer a Proof-Of-Concept program that can help determine the suitability really quickly. We also have a TCO model for Force.com that can help organizations compare costs with other options.
TE: Are there any aspects of the platform that you're not using yet?
AM: We have used the most advanced features of both for development and product management. We routinely use APEX, for instance, for complex calculations and mass data updates for Capital Markets. We have used VisualForce extensively—most recently to develop Capital Calls functionality for our Private Equity product. We have been implementing the latest Sites functionality for several products, including enhancing our Alternative Investments product so customers can provide their investors with information about investments, performance, and financial details through a Web interface.
TE: Given today's macro headwinds and concerns about the direction of the economy, have you seen either an increased market willingness to embrace Force.com or are do you see constrained adoption rates? What is the biggest inhibitor to adoption?
AM: At the moment, we're seeing tremendous interest, because in this market, it's very important to do more for less. Force.com is a very attractive option to enable firms to cut costs. For ISVs, the growing customer fervor for SaaS products, a recurring revenue model, lower costs related to product development/maintenance and revenue potential from new markets, are all strong incentives to seriously consider Force.com. The inhibitors have probably more to do with change issues within organizations; there are some companies that are slow adopters and have more conservative IT staff, and they take more time to learn new technologies or models.
TE: What would be the biggest complaint around Force.com, if any?
AM: When you take a comprehensive platform like Force.com which, like an application server, provides an entire toolset to build commercial apps, you will find areas of strength as well as areas that can be improved. An enterprise architect will always have to deal with trade-offs and workarounds dealing with implementing specific features. The complaints that we hear are mostly when architects do not have access to partners like us who can help with those workarounds. salesforce.com may be able to mitigate that by leveraging the partner channel more effectively.
TE: How big is the opportunity to migrate some of the legacy apps to Force.com custom-built apps?
AM: The cost of infrastructure is high. The cost of making it scalable is even higher, which is why several ISVs with existing On-Premise products are evaluating Force.com as an option for reducing the cost related to building and maintaining scalable infrastructure. In addition, organizations are beginning to see a potential for cost reduction in moving their legacy apps to the platform too. All of this adds up to a significant opportunity.
TE: Why should a customer buy one of your Force.com built products as opposed to buying Saleforce.com seats and then customizing them to their own needs?
AM: Buying salesforce seats and customizing them was the old model. Now, you can buy a customized version from us for the same price at which you would buy salesforce seats. It is, therefore, a no-brainer. Our industry expertise and experience is incorporated into our products, and they are also multi-tenant just like saleforce.com. So, as a result, innovations or new features can be rolled out to all of our customers simultaneously—for instance, we are just about to roll out a new release of our product to our Private Equity customers. But if organizations customize their own versions of salesforce, they have to deal with maintaining their apps and supporting them on their own. So what they're getting from Navatar is something that is not just customized for their needs, but also continuously adding new functionality. In addition, they get free maintenance and support from someone knowledgeable about the industry.
TE: Help us understand your product roadmap.
AM: Currently our customers have to go to multiple vendors for various needs such as CRM, accounting, market data, transaction data, deal or portfolio information. Our strategy is to build more depth and more features into our products as well as integrate third-party products so that our customers will have an integrated platform for all of their needs as well as a single point of contact to service them. Because we work so extensively on the salesforce.com platform, we are also able to create some very meaningful enhancements similar to the improvements that one sees in the open source environment or the applications being created for the iPhone that make the service more user friendly. For example, we're about to roll out a salesforce plugin which will enable sales people in any industry to manage all of their accounts, contacts, opportunities, activities, etc. from one screen as opposed to jumping through multiple pages.
TE: Do you have any advice for other ISVs hoping to build SaaS products on Force.com?
AM: It is easier to build a SaaS product than it is to make money on one. This is because SaaS customers expect more flexibility, adaptability, and constant improvement—all at a lower price. Before investing too much in developing a SaaS product, ISVs must spend time understanding the total cost of servicing the customers since that impacts how the product is built and packaged. You can also download a whitepaper written by me on this subject titled "The Dos and Don'ts on the transition to Cloud Computing" at http://www.navatargroup.com/WhitePaper.html.
TE: Thanks for your time.
CRM shares are not inexpensive, trading at 2.7x EV/CY09E revenue and 18x EV/CY09E CFO. We're encouraged by the relative health of trends and share gains in the face of severe headwinds, and would encourage investors to buy shares ahead of increased recognition of what we view as the larger, longer-term Force.com opportunity. Our new price target is $39 predicated on 3.1x EV/CY09E revenues. Near-term catalysts could include the upcoming Analyst Day, scheduled for March 23 in New York.
Risks To Price Target:
1)   Low switching costs;
2)   pricing pressure from larger competition;
3)   recession/macro economic headwinds
Company Description:
salesforce.com, headquartered in San Francisco and founded in 1999 by a former Oracle executive, has pioneered and legitimized on-demand customer relationship management (CRM), a monthly subscription for CRM functionality. In fact, the company, initially only successful at small, multi-user accounts, has now become more competitive for the largest of accounts, as the company has rapidly evolved the product to close the gap with on-premise solutions and been introduced for customization and integration capabilities.
Companies Mentioned in this Report:
Company   Exchange   Symbol   Price   Rating   Price Target
Cabot Microelectronics   NASDAQ   CCMP   $22.49   Buy   $29.00
Starbucks Corporation   NASDAQ   SBUX   $10.78   Acc   $10.00
Important Disclosures
Analyst Certification
I, Michael Huang, hereby certify that all of the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report.
I, Atul Bagga, hereby certify that all of the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report.
The analyst(s) responsible for preparing this report has/have received compensation based on various factors, including the firm's total revenues, a portion of which is generated by investment banking activities.
ThinkEquity LLC makes a market in Starbucks Corporation and Cabot Microelectronics securities; and/or associated persons may sell to or buy from customers on a principal basis.
Rating Definitions
The ThinkEquity LLC rating system is based on a stock's expected total return over a 12-month investment horizon. Ratings on coverage are defined as follows:
Buy: Appreciation potential of 20% or more over the next 12 months. Analyst has a high level of conviction that the company's business fundamentals are intact and that the company will meet or exceed earnings projections. Valuation is considered reasonable considering the company's potential.
Accumulate: Appreciation potential greater than 0% and less than 20% over the next 12 months. Typically good companies, with fundamentals and earnings visibility intact, but current valuation limits upside potential.
Source of Funds: Stock is expected to decline as much as 20% over the next 12 months, due to a single or combination of factors including excessive valuation, negative sector sentiment, and/ or reduced earnings expectations.
Sell: Stock expected to decline 20% or more over the next 12 months. Company fundamentals are deteriorating, leading to material downward revisions in earnings projections and valuation.
Distribution of Ratings, Firmwide
ThinkEquity LLC
  IB Serv./Past 12 Mos.

Rating Count Percent   Count Percent

Buy [B] 115 53.20   17 14.78
Hold Acc] 72 33.30   4 5.56
Sell [S/SoF] 29 13.50   1 3.45
This report does not purport to be a complete statement of all material facts related to any company, industry, or security mentioned. The information provided, while not guaranteed as to accuracy or completeness, has been obtained from sources believed to be reliable. The opinions expressed reflect our judgment at this time and are subject to change without notice and may or may not be updated. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. This notice shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which said offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such state. This research report was originally prepared and distributed to institutional clients of ThinkEquity LLC.
Recipients who are not market professionals or institutional clients of ThinkEquity LLC should seek the advice of their personal financial advisors before making any investment decisions based on this report. Stocks mentioned in this report are not covered by ThinkEquity LLC unless otherwise mentioned.
Additional information on the securities mentioned is available on request. In the event that this is a compendium report (covers more than six ThinkEquity LLC-covered subject companies), ThinkEquity LLC may choose to provide specific disclosures for the subject companies by reference. For more information regarding these disclosures, please send a request to: Director of Research, ThinkEquity LLC, 600 Montgomery Street, San Francisco, California, 94111.
Member of FINRA and SIPC.
Copyright 2009 ThinkEquity LLC, A Panmure Gordon Company
Application Software
Michael Huang
Atul Bagga
Click Here For Complete PDF Version   
Changes   Current   Previous
Rating   Buy   --
Price Target   $39.00   $36.00
FY09A EPS   $0.35A   --
FY10E EPS   $0.56E   --
FY09A REV (M)   $1,076.7A   --
FY10E REV (M)   $1,330.3E   --
52-Week High: $75.21
52-Week Low: $20.82
Shares O/S-Diluted (M): 124.5
Market Cap (M): $4,017.6
Average Daily Volume: 2,683,403
Short Interest: 9.8%
Debt/Total Cap: 0.0%
Net Cash Per Share: $7.09
P/E (12-month forward): 40.8x
Est. Long-Term EPS Growth: 40.0%
P/E/G: 102%
Fiscal Year-End: Jan
REV (M)  $   2008A   2009A   2010E
Apr   162.4A   247.6A   306.1E
Jul   176.6A   263.1A   322.8E
Oct   192.8A   276.5A   340.6E
Jan   216.9A   289.6A   360.7E
FY   748.7A   1076.7A   1330.3E
CY   1076.7A   1330.3E   NA
FY P/S   5.4x   3.7x   3.0x
CY P/S   3.7x   3.0x   NM
EPS $   2008A   2009A   2010E
Apr   0.01A   0.08A   0.11E
Jul   0.03A   0.08A   0.13E
Oct   0.05A   0.08A   0.15E
Jan   0.06A   0.11A   0.17E
FY   0.15A   0.35A   0.56E
CY   0.31E   0.56E   NA
FY P/E   215.1x   92.2x   57.6x
CY P/E   104.1x   57.6x   NM
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