Launch of AppStore Allows Salesforce.com to Raise FY2008 Revenue Outlook

Caris & Company analyst Tim Boyd addresses clients on Salesforce.com (CRM) raising its FY2008 revenue outlook in conjunction with the company's launch of “AppStore”. His note follows:

Yesterday morning Salesforce raised its FY2008 revenue guidance range to $710MM-$720MM from $700MM-$710MM. The boost to guidance complemented the announcement of “AppStore”, a sales platform for third-party applications that have been developed in the Apex programming language on the AppExchange. AppStore will be rolled out in phases over the next 12 months.

As the company notes in its press release, one of the ongoing Bear concerns vis-à-vis CRM has been whether or not AppExchange could be monetized. AppStore is, at least ostensibly, the company’s response to that concern. AppStore will employ a revenue-sharing program for developers and partners who use AppStore as a distribution channel for the applications that they build on AppExchange. Fees will range from 10%-25% of transaction value.

We are raising our FY08 and FY09 revenue estimates to account for the AppStore opportunity. Our FY08 revenue estimate goes to $715MM from $703MM; our FY09 revenue estimate rises to $963MM from $947MM.

Our EPS estimates remain unchanged at this time for two reasons:

1) We do not yet have a handle on the margin characteristics of the AppStore opportunity.

2) Management’s decision to raise revenue guidance but not EPS guidance suggests that they either are not yet sure of AppStore’s margins or believe it will be a break-even business in FY08.

We maintain our 3*/Average rating and $42 price target on CRM shares. Our target valuation is based on a combination of P/E and EV/EBITDA frameworks.

P/E: We apply a 54x multiple [1.3x our LT growth assumption of 42%] to our FY09 pro forma EPS estimate of $0.77 to arrive at a $42 target.

EV/EBITDA: We apply a 27x multiple [0.8x our LT growth assumption of 34%] to our FY09 EBITDA-per-share estimate of $1.42 to arrive at a $42 target [adjusting for $3 in FYE09 cash-per-share].

Risks to the achievement of our price target include: [1] decelerating revenue growth; [2] aggressive current valuation; [3] an increasingly competitive landscape for SaaS.