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Net Surfers

Application Software
Matt Allen- Adobe- 1527 words
Will Radney- CA- 1368 words
Jon Esquivel- Intuit- 1776 words
Geovany Hernandez- Salesforce.com- 1425 words
Kaitlyn Hirschbuehler- Workday- 1586 words
9380 total words

Application Software Industry


Dashboard
Industry Overview
The application software industry has a market capitalization of $564B (1). The
industry provides businesses with the ability to perform single and/or multiple tasks.
The industry is divided into 2 parts: enterprise and non-enterprise application
software. Enterprise application software includes enterprise resource planning,
supply chain management, embedded software, and customer relationship
management, while non-enterprise application software includes entertainment,
graphics, and security. Workday, Salesforce.com, and CA, Inc. all provide enterprise
applications and solutions to various businesses and industries. Adobe offers
mostly non-enterprise application software, while Intuit offers business and financial
software and solutions. Workday, Salesforce.com, CA, Adobe and Intuit combine for
about 25.7% of the market share. Majority of revenue in the industry comes from
subscriptions to company applications (15).
Industry Analysis Report

Company
Adobe
CA, Inc.
Intuit
Salesforce.co
m
Workday
Industry
Average

Current
Ratio
1.85
1.36
1.47

Quick
Ratio
0.69
1.18
1.03

TIE
Ratio
7.05
24.72
27.37

% Revenue
to R&D
20.37%
14.15%
19.00%

0.81
3.29

0.66
3.19

15.00%
40.22%

1.756

1.35

3.91
-6.92
11.22
6

21.75%

Financial Performance Summary


In our industry report, we focus on many
key figures that we considered
important and comparable among
companies in the industry. One of our
most significant metrics is the
percentage of revenue put toward
research and development costs. In the
application software industry, and
technology industry in general, the
environment is constantly changing and
no company can afford to rest on its
laurels and most recent innovations.
Therefore, a high percentage of revenue put toward research and development

costs can be a strong sign toward growth in the future. A company not dedicating
resources to innovation is not positioning itself well for the future. We analyzed
liquidity and coverage ratios as well to give us a clearer picture of each companys
financial state, and compared all of these to the average in the industry.

Quantitative Analysis

Liquidity Ratios
Liquidity ratios are used to
evaluate a companys ability
to meet its short-term debt
obligations. The liquidity
ratios we chose to analyze in
an effort to evaluate our
companies and industry are
current ratio and quick ratio.
Current ratio evaluates a companys liquidity based on all of its current assets, while
quick ratio does so based off its most liquid assets (cash, marketable securities, and
accounts receivable) (9). The average current ratio for the industry at this point is
1.76(C-21), while the average quick ratio is 1.35(C-23). Workday is far and away in the
best position in regards to liquidity, with a stellar 3.19 (C-27) quick ratio and a 3.29(C-25)
current ratio. That is down however, from a 4.69 (C-28) quick and 4.8(C-26) current in the
previous year. Intuit and CA Technologies are also in good positions at 1.47 (C-29) and
1.36(C-37), respectively, but Salesforce.com and Adobe both seem to have some
issues. Salesforce.com has current liabilities that outweigh their assets with a
current ratio of .81(C-41), which could potentially pose a problem for them in the
future(12). Adobe is an interesting case because their current ratio shows that they
have plenty of current assets to cover their short-term liabilities with a current ratio
of 1.85(C-13), but the company has a quick ratio below 1 at .69 (11,C-35). This high
current ratio, but low quick ratio suggests that Adobe may have a significant portion
of their current assets tied up in short-term investments or inventory, neither of
which are included in quick ratio calculations. If faced with a liquidity issue, Adobe
should look to convert these investments or inventory into cash to meet short-term
obligations.
Overall, Workday, CA, and Intuit are all in the best shape with regard to liquidity. All
three companies have enough in current assets to meet their short-term
obligations, however Workday and Intuit have both experienced a significant
decrease in both ratios in the last year (10,13,14). If Adobe is faced with a sudden need
to pay off debts, they could have an issue (11). Salesforce.com currently does not
have enough current assets to meet their short-term obligations, but their numbers
are improving(12).
Times Interest Earned
Coverage ratios are an important metirc used to meausre a companys ability to pay
their debt, and how manny times a compnay can pay their interest with their pre
tax earnings4. On average in our industry, in FY 2015/2014 the TIE was 11.22 (C-1) and
in FY2014/2013 it was 13.39(C-2). Workday did have a negative TIE ratio, and that

was due to higher


employee related costs
driven by increased
headcount. They ended
the 2015 year with a
TIE of -6.92(C-3). The only
compnay that had an
extremely high TIE in
either 2014 or 2015
was Intuit. They had
very high pretax
earnings and a very low
interest expense in
2014 that produced a
high TIE for our industry
of 42.94(C-5). However, in
2015 their TIE decreased to 27.37 due to operating income from continuing
operations decreasing by 43%5, C-4). Adobe increased their TIE ratio to 7.05 in 2014
due to their EBIT going down, specifically due to an increase in R&D and operating
expenses6, (C-6). CA also increased their TIE ratio to 24.7 in 2015 (C-7). In 2014 they had
a huge other expense of 205 million causing EBIT to go down signifigantly 8. Since
this charge was not there in 2015, their TIE ratio rose 8. Lastly, Salesforce TIE earned
ratio dropped in 2015 due to interst expense dropping 32 percent 7. This caused the
TIE ratio to fall to 3.91(C-8),. We had 3 out of 5 companies increase their TIE in 2015
and in general our industry had a positive TIE.
% Revenue to R&D
A common trend in the software industry is the substantial amount of revenue is
spent on R&D. The reason for such an increase is due to the fast past industry. In
2015 as industry 21.75% of revenues were spent on R&D and 20.91% has been
spent in 2014C-1,C-2. CA Technologies had the lowest percent of revenue spent of R&D
in the industry with 14.15% in 2015 and 13% in 2014 C-3,C-4; however, CA was able to
increase revenue spent on R&D. In the opposite spectrum Workday spent 40.22% of
its revenue in 2015 and 33.84% in 2014C-5,C-6. In 2015 Workday spent $250 million of
its core operating expenses in product development and $159 million in 2014, a
57% increase from the past
year. Adobe spent 20.38% in
2015 having only a .01%
decrease from 2014 C-7, C-8.
Adobes total revenue increased
slightly as their R&D cost also
increased. In 2015 Intuit spent
19% of its revenue on R&D and
17% in 2014C-9,C-10. In 2015 Intuit
spent 84 million dollars more on
R&D, compared to 2014 when
they spent 714 million. This
resulted in an 11.76% increase
in product development costs.

Lastly, Salesforce.com spent 15% on R&D in 2015 a .32% decrease from 15.32% in
2014C-11,C-12. This decrease does not have a substantial effect as revenues have been
increasing substantially over the past three years.

Qualitative Analysis

Strengths: Transforms businesses,


many users of applications & large
and highly globalized industry

Strenths
Transforms
businesses
Many users of
applications
Large and highly
globalized industry
Opportunities
Opportunity for
growth in future
Mobile applications

Weaknesses
Competitive
landscape
Short product life
cycle

Threats
Privacy and
security risks
Outsourcing

The software industry is one of the


leading and most innovative
industries in the United States today.
The industry has transformed the
way business is done and is highly globalized. Applications have made computing
much easier and accessible1. In its beginning the industry serviced a small number
of customers that owned large mainframe computers. Today this industry has
evolved to become one where software is embedded in nearly everything, from
computers and medical equipment to mobile phones and home appliances.
Weaknesses: Competitive landscape & short product life cycles

The success of packaged-software companies depends on technical expertise and


effective marketing. Small software companies compete mainly by targeting niche
markets or developing new technology. The 50 largest companies in the US
generate about 70 percent of the industrys revenue 2. Another weakness facing the
application software industry is the short product lifecycles of products. This is very
visible with the shift from off-the-shelf, prepackaged applications to customized
apps being built for companies or software subscriptions that are available for
download. Instead of users having to buy total software packages, users are now
able to pay for select services from software packages.
Opportunities: Opportunity for growth in future & mobile applications
The field of mobile applications has been expanding rapidly in recent years due to
their ease of use and constant availability. This growth is being driven by new
platforms and readily available low-cost devices like smart phones and tablet
computers. Trends indicate that it will continue to be an industry in high demand as
new technologies, platforms and innovative solutions are created 3. For every
function or task for which software has already been applied, there is the neverending pursuit of more elegant solutions that work faster, smarter and better.
Threats: Privacy and security risks & outsourcing
Developers have been unable to permanently stop hackers from penetrating their
code to obtain user data and information. To mitigate this risk, software developers
must continuously develop stronger methods of security to stay one step ahead of
those who would seek to gain unwarranted access to applications. Another threat
facing the industry is outsourcing. The cost of US programmers to companies is very

high and some of these software companies are outsourcing part of their work to
other countries. Developments in communication have made international
collaboration possible, making foreign outsourcing easier, which is a threat to
American jobs.

Conclusion

Buy, Hold, or Sell as an Industry?


The application software industry is looking promising overall. Each of the
companies we analyzed (Adobe, CA Technologies, Intuit, Salesforce, and Workday)
are recommended to hold or buy. This is primarily due to increased research and
development costs and increased spending on research and development,
expanding, steady or lower profit margins, improved times interest earned ratio,
and constant revenue growth. Overall, the application software industry is rapidly
changing, but is also in high demand as the world becomes more dependent upon
technology. Finding a foothold in the industry can be a challenging task, but each of
these companies have found successful ways in competing in the enterprise or nonenterprise application software markets.

Works Cited
1. Must-know: An Overview of the Software Industry. N.p., 1 July 2014. Web. 11
Nov. 2015.
2. Source: [Application Software-Competitive Landscape], Hoovers, Inc.,
accessed [11/15].
3. Source: [Application Software-Executive Insight], Hoovers, Inc., accessed
[11/15].
4. "Times Interest Earned (TIE) Definition | Investopedia." Investopedia. N.p., 24
Nov. 2003. Web. 23 Oct. 2015.
<http://www.investopedia.com/terms/t/tie.asp>.
5. Intuit Inc., 2015 Annual Report (Mountain View, California), p. 36
6. Adobe Systems Incorporated, 2014 Annual Report (San Jose, California), p. 62
7. Salesforce.com, inc., 2015 Annual Report (San Francisco, California), p 51
8. CA, Inc., 2015 Annual Report (Islandia, CA, Inc., 2015), pg 27
9. "Liquidity Ratios Definition | Investopedia." Investopedia. 8 Nov. 2006. Web. 5
Nov. 2015.
10.Workday, Inc., 2015 Annual Report (Plesanton, Workday, Inc., 2015), p. 42.
11.Adobe Systems Incorporated, 2014 Annual Report (San Jose, California), p.
74,75.
12.Salesforce.com, inc., 2015 Annual Report (San Francisco, California), p 71.
13.CA, Inc., 2015 Annual Report (Islandia, CA, Inc., 2015), p. 65.
14.Intuit Inc., 2015 Annual Report (Mountain View, California), p. 51.
15.Shields, Anne. "Welcome to Market Realist." Why Middleware Is an Integral
Component of Software Industry. N.p., 1 July 2014. Web. 16 Nov. 2015.
<http://marketrealist.com/2014/07/middleware-integral-component-softwareindustry/>.

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Company Dashboard
Company Overview
Founded in 1982 and headquartered in San Jose, California, Adobe Systems
Incorporated (ADBE) is one of the largest and most diversified software companies
in the world. Adobe offers a line of products and services used by a variety of
customers for creating, managing, delivering, measuring, optimizing and engaging
with compelling content and experiences across multiple operating systems,
devices and media. Adobe also licenses their
technology to hardware manufacturers,
Key Information
software developers and service providers for
Ticker
ADBE
use in their products and solutions. Adobe
products run on personal and server-based
Revenue (in
$4,147,065
computers, as well as on smartphones, tablets
thousands)
and other devices, depending on the product.
Market Cap
$43.82B
Adobe is an international corporation with
EPS
$0.54
operations in the Americas, Europe, Middle
Industry
Application
East, Africa and Asia-Pacific.
Financial Performance Summary

Fiscal Year
End
Website

Adobe reported revenues of $4,147,065 (in


thousands) during the fiscal year ended
November 28th 2014. Most of Adobes
revenues are derived from subscriptions and products.

Key Ratios
Current Ratio
Quick Ratio
Times
Interest
Earned
% Revenue
to R&D

Software
November 28th
www.adobe.co
m

Revenue & Net Income

1.85
0.69
7.05x
20.37%

Graph
*See calculations page
Buy, Hold, or Sell? BUY!
Improving TIE Ratio
Solid ROA
No Preferred Stock
Affordable price per share

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Quantitative Analysis
Liquidity Ratios
The quick ratio is an indicator of
short-term liquidity, a companys
ability to meet its short-term
obligations with its most liquid
assets3. Adobes quick ratio has
decreased from 2013 to 2014 from
0.94C-8 to 0.69C-7. This is not a good
signal for Adobe because it means
that its dollar amount of liquid
assets to cover each dollar of current
liabilities has decreased. In 2013
Adobe had $0.94 cents of liquid
assets to cover each dollar of current liabilities. This number fell to $0.69 cents in
2014 showing that Adobes ability to liquidate assets has decreased. This negative
change in Adobes quick ratio is linked to three accounts: current liabilities,
accounts receivable and marketable securities. From 2013 to 2014 Adobes current
liabilities nearly doubled due to several factors in 2014. In the fourth quarter of
fiscal 2014 Adobe initiated a restructuring plan that would close facilities in China,
Russia and eliminate 350 full-time positions. This restructuring charge cost
approximately $18.8 million4 dollars related to ongoing termination benefits for the
positions eliminated. The greatest factor in the rise of current liabilities is the
sudden rise in Debt and Capital Lease Obligations. It rose from $14,676 to
$603,2295. In 2013 Adobe entered into a sale-leaseback agreement totaling $25.7
million dollars6, which contributed to the increase in current liabilities causing the
ratio to drop.
As expected, the current ratio
fell just like the quick ratio from
fiscal year 2013 to 2014. As a
whole current assets rose,
mostly due to the increase in
both short-term investments
and cash and cash equivalents
accounts. Adobe saw a huge
increase in its money market
mutual account and a
significant decrease in its time
deposits7. Despite the increase
in current assets there was still
a
fall due to the increase in current liabilities as discussed above. Despite the falling
current ratio Adobes liquidity is still okay to cover its current liabilities. As it is in
2013 Adobe had $2.65 of current assets to cover each dollar of current liabilities.
Although still positive the 2014 current ratio of 1.85 C-9 is still a concern because it

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means that Adobes assets are less liquid than the year before and are less able to
cover its current liabilities.
Times Interest Earned
The Times Interest Earned Ratio slightly improved for Adobe from 2013 to 2014.
This means that Adobe is able to cover their interest with operating income more
frequently throughout the 2014 fiscal year versus the 2013 fiscal year. This is a
good sign for shareholders and potential investors because it shows that Adobe is
generating enough income from operations to pay back its current debt obligations.
My coverage ratio went up because my EBT went down from 2013 to 2014. This was
due to an increase in operating expenses; specifically R&D, sales and marketing,
general and administrative. This trend follows the industry trend 2.
% Revenue to R&D
Across the industries, the average
company will spend about 5% of
their revenue on R&D. Adobe is
way above the average and spent
20.37%C-11 and 20.38%C-12 of its
revenue on R&D. Adobe develops
software internally as well as
acquiring products and technology
developed by others by purchasing
the stock or assets of the business
entity that owned the technology1.
From 2013 to 2014 Adobe
increased its overall revenue,
driven by increase in subscription revenue. Adobe increased its R&D expenses from
$826,631 in FY 2013 to $844,353 in FY 2014. This trend is consistent with the
industry because the software industry is characterized by rapid technological
change, so its no surprise that a continued high level of investment is required to
enhance existing products and services and develop new ones.

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Qualitative
Analysis
Strengths: Transforms businesses &
many users of applications

Strenths
Many customers
through licensing
The Digital Media
Creative Cloud
subscription service
Opportunities
Positioned to be a
leader in both
digital media and
digital marketing
categories
Creative Cloud
improvements

Weaknesses
Charging for
services
competitors make
available for free.

Adobes strengths include their many


customers and Digital Media Creative
Threats
Cloud subscription service. The

Intense
flagship of Adobes Digital Media
competition:
business is the Creative Cloud8. This is
HTML5, OS, and
a subscription-based service that
JavaFX
allows members to download and
install the latest versions of all of

Adobes creative products. The


Creative Cloud has attractive monthly
pricing, that will be a catalyst for revenue growth in the coming years. Adobe is
gaining new customers and expects this trend to continue for years to come 9.
Weaknesses: Charging for services available elsewhere for free
Although no company has offerings identical to Adobes Creative Cloud products
and services, these competitors are offering similar products and services for free.
Charging for products that others offer for free is a weakness. In order to address
this Adobe is working to ensure their products are at the forefront of innovation and
worth the money its customers are paying10.
Opportunities: Opportunity for growth in future & mobile applications
Adobes Creative Cloud Service is constantly improving and they are positioned to
be a leader in Digital Media and Digital Marketing categories, where their mission is
to change the world through digital experiences 11. Increasing data speeds and
mobile devices that access online content and services continue to provide a
significant market opportunity for Adobe in digital media 12. New Creative Cloud
Services have been developed and delivered to subscribers to increase the
utilization of its Cloud capabilities beyond the use of its desktop applications. Adobe
believes these new services will drive higher user interaction with Creative Cloud
and create upsell opportunities as users increasingly utilize higher-tiered versions of
such services.
Threats: Intense Competition
Adobe faces many threats because of the industry it is in. Its threats include intense
competition and alternative approaches to building rich content and web
applications. No single company has offerings identical to Adobes Creative Cloud
but they face collective competition from a variety of free products and
downloadable apps. Competitors are extending their products and feature sets to
platforms such as Apples iPhone and iPad. In addition to competition alternative

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approaches for users to create web content is threatening Adobes operations.


Adobe products are no longer the only way to create rich web content. Alternatives
include JavaFX, HTML5, native OS application programming environments and Unity.

Conclusion

Questions to CEO
Shantanu Narayen has been CEO of Adobe Inc. since 2007. I have a few questions
about data that could not be found publicly. One item that stuck out to me was the
huge increase in the Debt and Capital lease obligations account. Current debt went
from (in thousands) $14,676 to $603,22913. What caused this huge leap in your
debt? In your eyes what performance measures are in the most need of
improvement? Revenues outside of the Americas has continuously dropped 14, do
you expect this trend to continue and if not what is Adobe doing to change this
trend?
Buy, Hold, or Sell?
As an analyst Adobe is a strong buy! If you currently hold Adobe stock continue to
do so and buy more if possible. Adobes current stock price is $90.43 and if past
trends are any indication this value is likely to remain. The first thing I look at is a
companys overall efficiency. Adobes ROA is 2.54% C-13 well above the industry
average. Adobe has a profit margin percentage of 7% C-14. This is a positive sign
because it tells us that Adobe is overall efficiency is good and it indicates Adobe is
effective at controlling its costs. The second thing to look at is who will get paid
first? Adobe has little debt and is mostly financed by equity so repayment of debt
should not be an issue. Another way to prove this is Adobes TIE Ratio of 7.05 C-3 in
2014. Next I look at equity and since Adobe doesnt have any preferred stock
outstanding, there will be no P/S dividends and C/S holders will be next in line.

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Works Cited
1. Adobe Systems Incorporated, 2014 Annual Report (San Jose, California), p.
2. Adobe Systems Incorporated, 2014 Annual Report (San Jose, California), p.
3. "Quick Ratio Definition | Investopedia." Investopedia. N.p., 25 Nov. 2003.
Web. 05 Nov. 2015.
4. Adobe Systems Incorporated, 2014 Annual Report (San Jose, California), p.
5. Adobe Systems Incorporated, 2014 Annual Report (San Jose, California), p.
6. Adobe Systems Incorporated, 2014 Annual Report (San Jose, California), p.
103
7. Adobe Systems Incorporated, 2014 Annual Report (San Jose, California), p.
74,75
8. Adobe Systems Incorporated, 2014 Annual Report (San Jose, California), p.
9. Adobe Systems Incorporated, 2014 Annual Report (San Jose, California), p.
10.Adobe Systems Incorporated, 2014 Annual Report (San Jose, California), p.
11.Adobe Systems Incorporated, 2014 Annual Report (San Jose, California), p.
12.Adobe Systems Incorporated, 2014 Annual Report (San Jose, California), p.
13.Adobe Systems Incorporated, 2014 Annual Report (San Jose, California), p.
102
14.Adobe Systems Incorporated, 2014 Annual Report (San Jose, California), p.
105
15.Adobe Systems Incorporated, 2014 Annual Report (San Jose, California), p.
16.Source: [Market Cap.], via Hoovers, Inc., accessed [11/2015].

15
62
87
61

4
5
12
4
7

62

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17.Adobe Systems Incorporated, 2014 Annual Report (San Jose, California), p. 62

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Company Dashboard
Company Overview
Founded in 1976, CA Technologies is one of the largest
independent software corporations in the world. CA creates
information technology management software and
solutions that help organizations plan, develop, and manage their IT infrastructure 1.
CA primarily serves large enterprises, providing applications that work across
mainframes and cloud computing
environments. CA Technologies sells across
Key Information
the world to businesses, government agencies,
(11)
Ticker
CA
and schools .

Revenue

(in

$4,262

millions)

Key Ratios
Current
Ratio(C-1)
Quick Ratio(C-

1.36

Times
Interest
Earned(C-7)
% Revenue
to R&D(C-10)

24.7

14)

1.18

Market Cap
EPS
Industry
Fiscal Year
End
Website

$11.87B
$1.91
Business
Software &
Services
March 31st
www.ca.com

14.15

Revenue & Net


Income Graph12

Buy, Hold, or Sell?


Our analysis shows that investors should hold CA shares based on declining
revenues, but increased Research & Development costs and steady profit margins.
This conclusion aligns well with recommendations from other analysts.

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Quantitative Analysis
Liquidity Ratios
The current ratio and quick ratio both
measure a companys ability to pay off its
current obligations with current assets. The
current ratio includes all current assets,
while the quick ratio only takes into account
the most liquid of current assets (cash,
marketable securities, and accounts
receivable) (2). A higher current or quick ratio
means a company is more capable of paying
off its current obligations. With a current
ratio of 1.36(C-1), CA is in good position in
regards to covering their current liabilities.
Additionally, 1.36(C-1) is an increase from CAs current ratio in 2014 of 1.16 (C-2),
showing that the company is in better shape in that regard.
Both current assets and current liabilities were greater in 2014, but current liabilities
were reduced by a larger amount, causing the increase in current ratio. This
decrease in current liabilities is primarily due to CA significantly reducing their
current portion of long-term debt.
Times Interest Earned
The Times Interest Earned ratio is used to measure a companys ability to meet its
debt obligations with its operating income (3). A 24.72 TIE ratio(C-7) suggests that CA
Technologies is in a great position
to pay off its debts, and an
increase from 19.8(C-8) in 2014
suggests the company is in a
better position now than it was a
year ago. 2013 showed a TIE
ratio of 29.64(C-9), a result of a
much higher operating income.
CA fluctuations in TIE Ratio have
largely been a result of the fiscal
2014 rebalancing plan, that
increased other expenses
significantly in 2014(6,7), but was
only a one time expense.

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% Revenue to R&D
Research and Development
costs are a significant portion of
expenses in any technologyrelated industry because the
competitive landscape is always
changing. In 2015, the R&D-toRevenue ratio for CA was
14.15%(C-10), up from 13%(C-11) in
2014. This is an encouraging
sign considering a decreasing
net income and revenue.
Investors can assume that the
company is spending more
money on research and development in an effort to create new products that would
lead to an increase in future revenue and earnings. While obviously declining
revenue and net income isnt a good thing, there is a silver lining in the increased
R&D expenditures.

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Qualitative Analysis
Strenths
Supplies majority of
Global Fortune
2000 companies
Global presence
Continued R&D
focus

Weaknesses
Declining
revenues, net
income
Declining
subscriptions,
maintenance
Decrease in
renewals
Threats
Intense
competition in the
industry
Could be passed
up without
continual
innovation

Strengths: Supplies majority of

Global Fortune 2000 companies,


global presence & continued R&D
focus

CA Technologies owns a significant


share of the market by supplying more
than half of the Global Fortune 500
Opportunities
companies with cutting edge IT
Growing clould

software and solutions. They also


computing market
supply the top 20 global banks as well
Growing application
as the largest 25 federal agencies (11).

economy
This is a strength that will do them
well going forward, but one that will
take commitment to continual
innovation in order to keep their
business. Additionally, CAs global presence is a major strength that will help them
to continue to grow and increase their business. While difficult to stay committed to
research and development when earnings arent doing well, CA managements
staunch commitment to continual growth and innovation should serve them well
going forward and is a definite strength.
Weaknesses: Declining revenues, net income, declining subscriptions,
maintenance & decrease in renewals
There are some clear weaknesses that CA faces currently that need to be addressed
if the company wants to grow and move forward. While still making money, the
company has seen their revenue and net income decline over the last 3 years,
which is not a promising sign for a growth company, like CA Technologies. This
decline in revenues is primarily due to a decrease in subscriptions and renewals
over the last few years(4,7). CA will need to make some changes in an effort to buck
the downward trend in subscription and maintenance renewals if they want to
continue to grow.
Opportunities: Growing cloud computing market & growing application economy
With every passing day, our world seems to be run more and more by technology.
Businesses and governments are becoming more dependent on technology, and
more than that cloud computing is becoming the cutting edge. This serves as an
opportunity for CA to get in and establish a presence as a high performer in that
industry. Additionally, the economy is becoming more and more application and
technology-based(5), so this provides another opportunity for CA to step in and offer
a great product for clients.

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Threats: Intense competition in the industry & could be passed up without


continual innovation
Along with all the opportunities that come in the technology industry, there are
many threats because profit margins have the potential to be very high and
everyone wants to create the next best thing. This leads to the competition being
more intense here than almost anywhere else (9). Additionally without continually
innovating and creating more advanced software and products, CA could be left in
the dust because the technology and application software
industry has an ever-changing environment which could
render some products useless within relatively short
periods of time(9).

Conclusion

Questions to CEO
If I were fortunate enough to have the opportunity to talk with Michael Gregoire, the
CEO of CA Technologies, I would have a few questions to ask him. First, what is his
plan is to turn around the downward trend of revenues and net income? Ultimately,
analysts and investors are very concerned with the bottom line i.e. net income, so if
there is a noticeable downward trajectory, he would need to have a plausible
explanation as too why that is, and a strong plan to turn that around. Additionally,
why do you and CA believe that the Software as a Service (SaaS) model is the best
plan for success going forward? And if that is the case, do you foresee professional
services becoming a more significant portion of revenue for the company moving
forward? If not, what do you see as CA Technologies key product or service to
remaining a leader in the market?
Buy, Hold, or Sell?
In summary, I would recommend CA Technologies as a hold. In first analyzing the
revenues, CA has shown a gradual decrease over the last few years from $4504 MM
in the fiscal year ending March 31, 2013 to $4262 MM in the fiscal year ending
March 31, 2015(7), a decrease of $242 MM or 5%(C-19). While not drastic, there has
been a decrease in all revenue sources over that time period, which is potential
cause for concern. With regard to profit margins, they have only decreased
gradually as well, at 21.2% in 2013, 20.7% in 2014, and 19.8% in 2015 (C-16,C-17,C-18).
Not necessarily cause for panic, but again a cause for concern. Lastly, what keeps
CA as a hold is their dedication to research and development. Their decreasing
margins are partially caused by steadily increasing their allotment to R&D costs, in
an effort to continually innovate and provide better products and services for
customers. CAs R&D-to-Revenue ratio has increased from 10.7% in 2013, to
13.01% in 2014, and 14.1% in 2015(C-7,C-8,C-9). Increasing their R&D spending despite
declining earnings represents a dedication to excellence and is a large reason why
CA Technologies remains a hold in spite of other issues.

25

Works Cited
1. CA, Inc., 2015 Annual Report (Islandia, CA, Inc., 2015), p. 5.
2. "Liquidity Ratios Definition | Investopedia." Investopedia. 8 Nov. 2006. Web.
15 Nov. 2015.
3. "Times Interest Earned (TIE) Definition | Investopedia." Investopedia. 24 Nov.
2003. Web. 05 Nov. 2015.
4. CA, Inc., 2015 Annual Report (Islandia, CA, Inc., 2015), p. 26.
5. CA, Inc., 2015 Annual Report (Islandia, CA, Inc., 2015), p. 1.
6. CA, Inc., 2015 Annual Report (Islandia, CA, Inc., 2015), p. 27.
7. CA, Inc., 2015 Annual Report (Islandia, CA, Inc., 2015), p. 64.
8. CA, Inc., 2015 Annual Report (Islandia, CA, Inc., 2015), p. 65.
9. CA, Inc., 2015 Annual Report (Islandia, CA, Inc., 2015), p. 13.
10."CA, Inc." Yahoo! Finance. N.p., n.d. Web. 23 Oct. 2015.
<http://finance.yahoo.com/q?s=CA>.
11."Company Information." - CA Technologies. Web. 23 Oct. 2015.
12.CA, Inc. Company Overview, Hoovers, Inc., accessed October 2015.

26

Company Dashboard
Company Overview
Intuit is a financial and tax preparation Software Company founded in 1983, and
headquartered in Mountain View California. Intuit is a Multinational Corporation with
offices worldwide in Canada, India, Singapore and the United Kingdom. Their most
well- known products are Turbo Tax, QuickBooks, Quicken and Mint. Intuits main
goal is simplifying the life of a small business,
consumers and accounting professionals
Key Information (6)
through easy to use accounting and financial
Ticker
NASDAQ:INTU
software9. As of August 2015, Intuit is selling
Revenue
$4,192B
their Quicken, QuickBase and demand force
10
Market Cap
$26.08 Billion
business . Intuits main line of customers are
small businesses, which make up over 50% of
EPS
$1.28
their sales11.
Industry
Application
Software
Financial Performance Summary
Fiscal Year End
July 31st
Website
www.intuit.com
Intuit records the majority of their sales
through product revenues, and a little over a
third from subscription based services 11. The product that draws the most income
from subscription services is their most popular product, Turbo Tax. Income from
services accounts for 50% of revenue from small business or $1,399B of $2,108B
revenue from small business11. Total revenues were $4,192B for FY15, compared to
$4,243B for FY14, a decrease of $51MM, or 12% 13, C-15. Additionally, Net income was
down in 2015 with Intuit only earning $365 million in FY 2015 compared to $907
million in FY201413. The decrease in net income was due mainly to the increased
cost of research and development, marketing
and selling and amortization of intangible
Key Ratios
assets13.
Current Ratio (C- 1.47
9)

Quick Ratio

(C-6)

Times Interest
Earned (C-1)
EBITDA
Coverage(C-4)
% Revenue to
R&(C-12)

1.03
27.37
35.56
19

Buy, Hold, or Sell? HOLD!

27

Our analysis shows that investors should hold Intuit shares based upon decreased
revenues and signifigantly lower profit margins in 2015. This conclusion is
consistent with other reports such as NASDAQ and Reuters (17, 18).

28

Quantitative Analysis

Liquidity Ratios
The current and quick ratios are
both liquidty ratios which measure
the ability of a company to pay its
short term debt. The quick ratio
takes into account marketable
securities, cash and equivalents and
accounts receivables divided by
current liabilites. In contrast, the
current ratio excludes acccounts
receivable and marketable
securities2. A higher ratio is prefered because it means a company is in better
position to pay off their debt. If a company has a ratio of less then 1, it means they
cant pay off their short term debt and their current liabiliites are greater than their
current assets. Intuits curent ratio in 2015 was 1.47, which is down from 2014 when
it was 1.84, a 20% decrease C-9,C-10,C-16. Their quick ratio went down as well, declining
from 1.43 in 2014 to 1.03 in 2015, a 28% decrease C-7,C-6,C-17. I will discuss the quick
ratio in more detail below.
Current assets were lower in 2015, declining from $2,332B to $2,223B, a 109 million
dollar decrease14. Additionally current liabilites rose substantially in 2015, up 323
million14. The increase in curent liabilities was the main reason for the decrease in
the current ratio. The factors that drove liabilities up mostly derive from an increase
in defered revenue, which went up by 196 million dollars in 2015 14. Intuit is a
company that generates revenue from both service fees and product sales.
However, with the 16 percent increase in QuickBooks Plus subscriptions and
Quickbooks online growing 40 perecent, their defered revenue increased in 2015 11.

Times Interest Earned

29

Times interest earned is widely used metric that measures a companys ability to
honor or make their debt payments16. Usually, this ratio is quoted as a ratio to how
many times a compay can pay its interest charges with its before tax income 16. In
FY 2015 Intuit currently has a 27.37 TIEC-1, indicating they are a healthy company
that can cover their interest on pre tax income 27 times C-1. The TIE is down from
the 2014 ratio of 42.94C-2. The decrease in the Times Interest earned ratio from
FY2015 to FY2014 is due mainly to the impact of the change to desktop software
offerings10. Operating income from continuing operations decreased by 43 perecent
due to the higher expenses for staffing and outside services 10. Staffing expenses
went up 96 million due to the higher headcount and operating expenses went up
57 million for share based compensation 10. This decresae in operating income
dropped the times interest earned ratio from 42.94 to 27.37 C1,C2. The EBITDA
coverage ratio also decreased from FY 2014 to FY2015, but the change was due
almost entirely due to the change in EBIT. The depreaction and amoritization
charges were mininal in affecting the EBITDA coverage ratio.

% Revenue to R&D
Research and development is one of the key expendtures a company can make to
ensure future growth of their products. In the technology and software industry, it is
a vital a part of not only getting ahead of competitors, but remaining a relevant
choice of consumers. Intuit has spent between 15.5 and 19 percent of their
revenues on R&D9.
In 2015 Intuit spent 84 million dollars more on Research and Development,
compared to 2014 when they spent 714 million 9 . This resulted in a 11.76 percent
increase in product development costs C-18. One of the main expenditures from
Intuits cash and cash reserves of 1.7 billion is product R&D 12. The increase in R&D
costs was due to two main reasons. The first was the launch of the new desktop
software offerings in 201510. The second reason was compensation costs for new
employees acquired by Intuit from the six acquisitions done in 2015 5. Intuit
continues to invest and reseach making the best, innovative and user friendly
software for the small business market.

30

31

Qualitative Analysis
Strenths
Invest well in R&D
Leading software
developer for small
business
Opportunities
Expanding small
customer base
Accessibility
through all
platforms

Weaknesses
International sales
Dependance on
economy

Strengths: Invest well in R&D &

leading software developer for small


business
Intuits major strength is that they
Threats
are the leading software developer

Heavy competition
for small business in the US. With
Product life cycle
many great products such as Turbo

Tax, QuickBooks, and Quicken they


are able to differentiate themselves
from other ERP systems. What
makes them so popular among small
business is the relatively inexpensive software, ease of use and integration of
software across all platforms. Approximately 50 percent of all revenue generated by
Intuit comes from small businesses11. Additionally Intuit is a company that values
Research and development. From 2013 to 2015 they spent anywhere from 15.5 to
19 percent of total revenue on R&D to enhance existing products and to develop
new products9. This is extremely important because being innovative in a
competitive industry is crucial to the success of the company.
Weaknesses: International Sales & dependance on economy
A main weakness of Intuit is their dependence on the economy and willingness of
companies to spend money on information technology 1. A drop in the economy will
lead to businesses spending less on information software and ERPs. A boom in the
economy will lead to business having more money and higher demand for
information technology1. These cycles can drastically affect the revenues of a
company. Another weakness of Intuit is their international sales only make up 5
percent of total revenues4. Intuit has offices in India, Singapore, Canada and
England. With India being one of the fastest growing markets in the world combined
with Singapore being the number 8 country for best business, one would think
international sales would be higher given the growth opportunities 3
Opportunities: Expaning customer base & accessibilty through all platforms
A major opportunity for Intuit is expanding their small business customer base.
Right now 50 percent of their revenue comes from small business 11. However, they
are planning an initiative to double the small business customer base size by 2019 4.
If they were able to achieve this initiative, revenues will increase substantially.
Additionally their other opportunity for growth is making their products accessible
through all platforms4. Intuit wants to make their products available via laptop,
desktop, phone and even through online forums via social media 4.
Threats: Heavy competition & product life cycle
The main threat to intuit is the fierce competition in the industry. There are many
people they compete with, including SAP, ADP, and CA. In an industry that has
many big names and lots of options, differentiating themselves can be hard.
Pressure to get ahead of competitors or to keep up can increase spending on
Research and development, taking away income available to the company 1.

32

The other threat to intuit is product life cycle 1. At times, this can be very hard to
estimate how long the shelf life or actual software is relevant before the next wave
of technology or updates from competitors are released.

33

Qualitative Analysis
Questions to CEO
I have three questions I would like to ask Brad Smith, the CEO of Intuit. Firstly, why
are international revenues so low at only 5 percent 4? Intuit is a worldwide company
with offices in India, England, Canada and Singapore. Singapore and India are great
markets that have lots of business oppurtunities3. Does Intuit have an international
expansion plan? Secondly, when listening to the earnings call and further reading
into the 10K, I discovered Intuit had 6 mergers in 2015 5. However, acquisitions are
not something Intuit is unfamiliar with. They have done acquisitions with smaller
companies in the past, and divulged some after they did not succesfuly merge 5. I
would like to know what Intuits strategy based on pervious unsuccesful mergers is?
My last question is how does Intuit plan to get back on track in 2016 and become
more consistant with their earnings? This past year 2015 was not a great year in
terms of Net Income for the company, so what is their plan for 2016?
Buy, Hold, or Sell?
Intuit is a Hold. They have had consistant and increasing revenues the last 4 years,
however 2015 was a down year for them 13. Both revenue and net income were
down, but their service revenue is increasing. Intuit is making a big push towards
expanding their service revenue4. Additionally, the Profit Margin is relativly high,
hovering around 20 to 21% in 2014 and 2013 C-20,C-21. However, it was down to 8.70%
in 2015 due to their increased cost of revenue 13, C-19. Lastly, they are a company that
invests well in reseach and development9. Over the past 3 years they have spent
between 15.5 and 19 percent of revenue on R&D 9. In conclusion, due to large
amounts of R&D spending, good profit margins and increasing revenues, intuit is a
solid Hold for now due to their down year. However, they are a company that can
trend up in the coming year.

34

Works Cited Page


1. Business Challenges. Hoovers.2015.n.pag. Hoovers. Web. 10 Nov. 2015
2. "Current Ratio Definition | Investopedia." Investopedia. N.p., 19 Nov. 2003.
Web. 23 Oct. 2015. <http://www.investopedia.com/terms/c/currentratio.asp>.
3. Holodny, Elena. "The 13 Fastest-growing Economies in the World." Business
Insider. Business Insider, Inc, 12 June 2015. Web. 10 Nov. 2015.
4. Intuit Inc. Description. Hoovers.2015.n.pag. Hoovers. Web. 10 Nov. 2015
5. "Intuit (INTU) Earnings Report: Q4 2015 Conference Call Transcript."TheStreet.
N.d, 21 Aug. 15. Web. 10 Nov. 2015.
6. "Intuit, Inc." Yahoo! Finance. N.p., n.d. Web. 10 Nov. 2015. <http://
http://finance.yahoo.com/q?s=INTU>.
7. Intuit Inc., 2014 Annual Report (Mountain View, California), p. 51
8. Intuit Inc., 2014 Annual Report (Mountain View, California), p. 53
9. Intuit Inc., 2015 Annual Report (Mountain View, California), p. 8.
10.Intuit Inc., 2015 Annual Report (Mountain View, California), p. 36
11.Intuit Inc., 2015 Annual Report (Mountain View, California) p. 37
12.Intuit Inc., 2015 Annual Report (Mountain View, California), p. 41
13.Intuit Inc., 2015 Annual Report (Mountain View, California), p. 49
14.Intuit Inc., 2015 Annual Report (Mountain View, California), p. 51
15.Intuit Inc., 2015 Annual Report (Mountain View, California), p. 53
16."Times Interest Earned (TIE) Definition | Investopedia." Investopedia. N.p., 24
Nov. 2003. Web. 23 Oct. 2015.
<http://www.investopedia.com/terms/t/tie.asp>.
17."Intuit, Inc. (Intuit) Analyst Research." NASDAQ.com. N.p., n.d. Web. 14 Nov.
2015. <http://www.nasdaq.com/symbol/intu/analyst-research>.
18."Intuit Inc. (Intuit.OQ) Analyst Research| Reuters.com." Reuters. Thomson
Reuters, n.d. Web. 14 Nov. 2015.
<http://www.reuters.com/finance/stocks/analystResearch?symbol=Intu.OQ>.

35

36

Company Dashboard
Company Overview
Salesforce.com is a cloud computing company,
founded in 1999 by former Oracle executive Marc
Benioff, Parker Harris, Dave Moellenhoff, and Frank Dominguez as a company
specializing in software as a service (SaaS). Salesforce offers internet-based
applications that manage employee collaboration as well as customer information
for sales (Salesforce Sales Cloud), marketing
(Salesforce Marketing Cloud), and customer
Key Information
support (Salesforce Service Cloud). In June
Ticker
CRM
2004, the company went public on the New
York Stock Exchange under the stock symbol
Revenue
$5.37B
CRM, raising $110 million.
Financial Performance Summary

Market Cap
EPS
Industry

$36.73B
($0.42)
Application
Software
January 31st

Sales grew an outstanding 32% in 2015 to


reach around $5.4 billion1. To boost its revenue
Fiscal Year
Salesforce, added new costumers and existing
End
costumers upgraded their accounts. Cash flow
Website
www.salesforce.
from operations has increased to $1.17
com
billion/34% in 2015 from $875 million in
2
2014 . As it has since 2012, Salesforce posted a net loss, which reached $262
million in 2015, compared to $232 million in 2014. Salesforce also reporte a wholeyear revunue from is 2013 acquisition of ExactTarget 3.

Key Ratios
Current Ratio
Quick Ratio
Times
Interest
Earned
% Revenue
to R&D

Revenue & Net Income

0.81
0.66
3.91x
15

Graph

37

Buy, Hold, or Sell? BUY!


Constant Revenue Growth
Solid Stock Performance
Good Cash Flow from operations
Expanding Profit Margins

38

Quantitative Analysis
Liquidity Ratios
Liquidity Ratios are a types of
metrics used to evaluate a
companys ability to repay its
short-term debt obligation7.
We have decided to use Quick
Ratio and Current Ratio to
determine if Salesforce.com
has enough resources to pay
its obligation using its assets.
Part of the liquidity ratios,
Quick ratio measures the
ability to meet its short-term
obligations with its most liquid assets 8. In other words, this metric indicates the
dollar amount of liquid assets available to each dollar of current liabilities.
Salesforce.coms quick ratio has improved from the last year of end, going from
0.55 in 2013 to 0.66 in 2014. Even though it was not a substantial amount of growth
it is still a positive indicator for Salesforce.com. This indicates that even though the
company has had a challenge paying short-term obligations with its most liquid
assets. In 2014 cash grew 16%C-12 going from $781,635 in 2013 to $908,117 in
20149, cash being an attributing factor in the in the increase of the companys
ability to pay its short-term obligations using its most liquid asset.
Current ratio measures a companys ability to pay its long-term and short-term
obligations10. Like its quick ratio, Salesforce.com was able to raise its current ratio
from 0.67 in 2013 to 0.81 in 2014. The two attributing factors to current ratio are
current assets and current liabilities. In which current liabilities only rose 9%,
playing a key factor in the improvement of Salesforce.coms improved current
ratio11, C-13.
Times Interest Earned
We find time interest earned (TIE) to determine a company's ability to meet its debt
obligations6. This metric is calculated using their coverage ratios. The TIE of
Salesforce.com decreased by 1.73
for the course of the last calendar
year. This means that Saleforce.com
was able to pay its interest with
operating income faster in 2013 than
they did in the last reported year.
One should note that

39

Salesforce.coms interest expense was lower in 2013 compared to 2014, having


expenses of $77M and 73M, respectively. Even though there was a substantial drop
in time interest expense,
% Revenue to R&D
Saleforce.com is in an industry
that sees constant and rapid
change. The company has made
it a priority to continue to spend
on its R&D in efforts to add new
features and services, integrating
acquired technologies, increasing
the functionality and security,
and enhancing the ease of use for
our enterprise cloud computing
4
services . The percentage of total revenue spent on R&D decreased by .32% c-11
from 2013 to 2014. Salesforce.coms revenue has risen over the past 3 years as well
as their R&D cost5.

40

Qualitative Analysis
Strenths
Growing Revenue
Leader in CRM

Weaknesses
Strong
Competition
Rising Debt/Loss
of income
Threats
Privacy & Hacking
Regulations and
Law changes

Strengths: Growing Revenue &


Leader in CRM
Salesforce.coms strengths are
Opportunities
interesting due to the fact that many
companies life goals are to get the
Growing demand of
strengths Salesforce.com currently
CRM
posses. In Salesforce.coms annual
New Markets
report (Jan 31,2015), It was reported
that the company has surpassed the $5 billion mark 12. Becoming the fastest CRM
Company to reach the $5 billion, and now hopes to be the fastest to reach $10
billion. A substantial amount of Salesforce.coms revenue was attained from their
subscription-based software business, which accounted for 93% of the companys
revenue13. Another attributing strength that Salesforce.com has is that they are the
leader in CRM. Starting with just the fact that they are the fastest software company
to reach $5 billion in a market that is extremely hard to achieve in. The innovation
Salesforce has brought into the world of CRM has definitely put them in the position
to be called the leader. An example of their innovation is found in how they moved
from an On-premise to a Cloud based CRM. Not only did this change the game, but
changed how the game is played.
Weaknesses: Strong Competition & Rising Debt/Loss of income
With all of the positive things going for Salesforce.com, there will also be barriers
that will come up. One of the weaknesses that are affecting the company is how
strong its competitors are. Having to compete with Microsoft, SAP, and Oracle can
be challenging since everyones goal is to reduce infrastructure cost and speed up
application development. Another weakness that is affecting Salesforce.com is their
accumulating debt. With 16% of total liabilities coming from their long term note
and their high cost of revenues amounting to 24% of its revenue, contributing to
their constant Loss of income14.
Opportunities: Growing demand of CRM & New Markets
As many companies are seeing the growth and opportunity in software as a service,
they want to organize and seek faster ROI alternatives. Salesforce has the
opportunity to capitalize on the opportunity that everyone wants in the ingenuity
and innovation that they are birthing into the CRM and SaaS world. With the
continuous growth of Salesforce.com they will need to continue their expansion into
the new markets. They were able to generate 28% of their revenues coming from
Europe and Asia pacific15. If Salesforce.com is able to continue increase the
acceptance of their service and continue their focus on their marketing.
Threats: Privacy & Hacking & Regulations and Law changes
Since Salesforce.com is a cloud-based they are open to many threats thats could
expose them to many possible breaches and potential losses. A big threat that is
presented to Salesforce.com is their potential vulnerability to Hackers. Since
Salesforce deals with costumers proprietary information, it is important that they

41

would take the proper action to make sure their security is at its all time high.
Another threat that posses to Salesforce.com is the constant changes to regulations
and laws. With federal, state, and foreign governments continue to adopt new laws
and regulations addressing data privacy and the collection of storage. For example,
Salesforce.com voluntarily complies with the regulations of third party TRUSTe,
which if they didnt comply with it could
inadvertently threat their business16.

Conclusion

Questions to CEO
I would like to conclude this analysis by asking Salesforce.com CEO Mark Benioff a
couple of questions. It is clear that one after reaching the $5 billion in revenue a
goal for Salesforce.com is to reach the $10 billion mark. My question is what does
the direction become once Salesforce has surpassed $10 billion in revenue?
Reaching this milestone would definitely affect operations and health of the
company. What do you believe the profitability level of the company might be?
Lastly with the desire to become the biggest software company what efforts or plan
does Salesforce.com have to not only compete but surpass the big three ( SAP,
Oracle, Microsoft)?
Buy, Hold, or Sell?
Salesforce.com is a Buy. Salesforce.coms current stock price is $79.40, and has
had a very strong and healthy stock performance. Since the beginning of the year
revenues grew a total 24%17. This growth in revenue seems to have come down to
the companys bottom line improving the earnings per share. Even though
Salesforce.com has a weak liquidity, with a quick ratio of 0.66. The companys
liquidity has increased from the last end of year indicating improving cash flows. For
these reasons I have concluded that one should Buy Salesforce.com stock.

42

Works Cited
1.
2.
3.
4.
5.
6.

Salesforce.com, inc., 2015 Annual Report (San Francisco, California), p 52


Salesforce.com, inc., 2015 Annual Report (San Francisco, California), p 74
Salesforce.com, inc., 2015 Annual Report (San Francisco, California), p 53
Salesforce.com, inc., 2015 Annual Report (San Francisco, California), p 40
Salesforce.com, inc., 2015 Annual Report (San Francisco, California), p 50
Time Interest Earned Definition | Investopedia." Investopedia. N.p., 21 Oct.
2003.Web. 06 Nov. 2015.
<http://www.investopedia.com/terms/t/timeinterestearned.asp>.
7. "Liquidity Ratios Definition | Investopedia." Investopedia. N.p., 19 Nov. 2003.
Web. 23 Oct. 2015.
<http://www.investopedia.com/terms/l/liquidityratios.asp>.
8. Quick Ratio Definition | Investopedia." Investopedia. N.p., 25 Nov. 2003. Web.
05 Nov. 2015. <http://www.investopedia.com/terms/q/quickratio.asp>.
9. Salesforce.com, inc., 2015 Annual Report (San Francisco, California), p 71
10."Current Ratio Definition | Investopedia." Investopedia. N.p., 19 Nov. 2003.
Web. 23 Oct. 2015. <http://www.investopedia.com/terms/c/currentratio.asp>.
11.Salesforce.com, inc., 2015 Annual Report (San Francisco, California), p 71
12.Salesforce.com, inc., 2015 Annual Report (San Francisco, California), p 77
13.Salesforce.com, inc., 2015 Annual Report (San Francisco, California), p 33
14.Salesforce.com, inc., 2015 Annual Report (San Francisco, California), p 72
15.Salesforce.com, inc., 2015 Annual Report (San Francisco, California), p 46
16.Salesforce.com, inc., 2015 Annual Report (San Francisco, California), p 13
17.Salesforce.com, inc., 2016 Quarterly Report (San Francisco, California), p 5

43

Company Dashboard
Company Overview
Workday (WDAY) is a leading provider of
enterprise cloud applications for human capital management, payroll, financial
management and analytics. Its products are created to replace on-site legacy
systems with a more collaborative, mobile, and user-friendly interface that is
frequently updated. The Company, formerly known as North Tahoe Power Tools, Inc.,
changed its name to Workday, Inc. in July 2005, and is headquartered in Pleasanton,
California(18).

Key Information(21)
Financial Performance Summary
WDAY reported revenues of $787.86MM during
the fiscal year ended January 31, 2015. Most
of Workdays revenues are derived from
subscription services fees and professional
services fees. In 2015, 78% of total revenue
was attributable to subscription services and
40.22%(C-10) of its revenue was spent on
research and development(11,16). In addition,
core operating margins improved from (19)%
for FY14 to (7)% for FY15(12,13). As it has since
2011, Workday posted a net loss, which reached
$173MM in 2014(16).

Key Ratios
Current
Ratio(C-1)
Quick Ratio(C-

3.29

Times
Interest
Earned(C-7)
% Revenue
to R&D(C-10)

-6.92

14)

Ticker
Revenue
Market Cap
EPS
Industry
Fiscal Year
End
Website

NYSE: WDAY
$787.86MM
$14.69B
($1.35)
Application
Software
January 31st
www.workday.c
om

$248MM in 2015, compared to

Revenue & Net Income

4.80

40.22

Graph(18)

Buy, Hold, or Sell?

44

Our analysis shows that investors should buy Workday shares based upon
increasing revenues and operating margins, and a high percentage of revenue
spent on reseach and development. This conclusion is consistent with other reports
such as Thompson Reuters and NASDAQ(19,20).

45

Quantitative Analysis
Liquidity Ratios
The current ratio and quick ratio
both measure the ability to pay
obligations with its assets.
However, the quick ratio excludes
prepaid assets and inventory from
current assets to gauge a
companys ability to pay off shortterm debts(22). The higher the ratio,
the more capable a company is
able to pay its obligations(1). Because Workdays coverage ratios are almost equal, I
will analyze only the quick ratio in more detail. A 31.98% (C-13) YoY decrease in the
quick ratio from 4.69(C-5) in FY14 to 3.19(C-4) in FY15 indicates that Workday is able to
cover their liabilities with their assets; however not as effectively in FY15 as FY14 (15).
Current assets were flat YoY ($2.0B in FY14 vs. $2.1B FY15), so the primary reason
for the decrease YoY was due to the increase in liabilities YoY ($422MM in FY14 vs.
$641MM in FY15) due to the increase in unearned revenue (15). Workday derives most
of their revenues from subscription services fees and professional fees through
three year contracts. The increase in unearned revenue was due to the increase in
subscription services revenues ($354MM in FY14 vs. $613MM in FY15) (16).
Times Interest Earned
The Times Interest Earned ratio is a
metric used to measure a
companys ability to meet its debt
obligations, or how many times a
company could pay the interest
with its before tax income(3). A
10.25%(C-14) YoY increase in TIE from
-7.71(C-8) in FY14 to -6.92(C-7) in FY15
indicates that Workdays loss is
currently more than its annual
interest expense. In other words,
Workday cannot afford to pay
(2)
additional interest expenses; therefore, it is risky .
Core operating margins improved from (19)% for FY14 to (7)% for FY15 and from
(33)% for FY13 to (19)% in FY14. This improvement was primarily due to higher
subscription services revenues in each year. The improvement in FY15 was also due
to higher professional services revenues driven by improved utilization rates and
increased demand for services, and improvements to operating leverage. Core
operating expenses increased by $275MM, or 51%, for FY15 compared to FY14, and

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by $191MM, or 52% for FY14 compared to FY13. These increases for both periods
were primarily due to higher employee-related costs driven by higher headcount.
Due to the large increase in demand for Workdays professional services versus the
prior year, they have increased both their internal professional service staff as well
as third party supplemental staff. Over time, they expect these costs to decline as a
percentage of total revenue as Workday increasingly rely on third parties to deploy
their applications and as the number of customers continues to grow (12,13).
In addition, interest expense was $31.0MM, $19.6MM, and $1.3MM for FY15, 14, and
13, respectively. This increase compared to prior periods was primarily due to the
interest expense related to the issuance of convertible senior notes (14).
% Revenue to R&D

10,C-11)

of its revenue on R&D(16,23).

Research and development


(R&D) is one of the ways
companies can experience
future growth by developing
new products to improve their
existing operations. Across
industries, the average
company will spend about 5% of
their revenue on R&D; however,
for the past 3 years, WDAY as
spent between 37.52-40.22%(C-

In FY15,WDAY spent $250MM in core operating expenses in product development,


compared to $159MM in FY14, an increase of 57% YoY. This increase was primarily
due to the $66MM increase in employee compensation costs due to higher
headcount(13). WDAY ended the year with approximately 3,750 full time employees,
an increase of nearly 1,150 for the year. WDAY continues to invest in product
development for solutions such as student and professional services automation, as
well as strengthening and extending their suite of HR, payroll, and financial
management applications(4). Its ability to compete with others in their industry
depends heavily upon their commitment to product development and upon their
ability to rapidly introduce new applications, technologies, features and
functionality. WDAY is focused on developing new applications and core
technologies as well as future enhancing existing applications (5). In fiscal year 2015,
WDAY delivered Workday recruiting last spring with Workday 22, made significant
strides at financial management, and announced the acquisition of a team to help
them enhance search capabilities and accelerate the delivery of productive
analytics and machine learning throughout their suite of application (4).

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Qualitative Analysis

Strengths: Rapid Company Growth &


Customers Success and Satisfaction

Strenths
Rapid Company
Growth
Customers Success
and Satisfaction
Opportunities
New Markets
and/or Customers

Weaknesses
Cumulative Losses

Threats
Growing
Competition

Workday has experienced rapid


growth in their customers, headcount,
and operations. They grew from 300 employees in December 31, 2015 to 3,750
employees in January 31, 2015 and have significantly increased the size of their
customer base(6). Due to this, total revenues increased 68% from fiscal year 2014 to
2015. One of the most dominant factors of company growth is high customer
success and satisfaction(5). At the end of fiscal year 2015, more than 70% of their
customers were live and WDAY achieved a 97% customer satisfaction rating for
their third consecutive year(4).
Weaknesses: Cumulative Losses
WDAY has encountered significant losses since the inception of the company in
2003 and reached $248MM in 2015(16). Operating expenses are expected to increase
in the future due to anticipated increases in sales and marketing expenses, product
development expenses, operations costs and general and administrative costs, and
therefore they expect their losses to continue in the foreseeable future 9). In order for
Workday to become profitable, it must either increase revenues or cut costs. Longterm profitability and cash flow generation are important forward looking goals (4).
Opportunities: New Markets and/or Customers
A key element of Workdays growth strategy is to expand their international
operations and develop a worldwide customer base. To date, Workday does not
have a substantial portion of their revenues from international customers (8,10) A new
market that Workday announced they are going to expand into are Germany and
Japan. Currently, companies in these two markets are frustrated with their current
legacy systems and are looking for new alternatives. These two strategic market
moves will increase profitability for WDAY due to a larger customer base to increase
revenues(4).
Threats: Growing Competition & Changes in Technology
Workday competes with large, well-established, enterprise application software
vendors that have greater name recognition, larger customer bases, much longer
operating histories and significantly greater financial, technical, sales, marketing,
and other resources than Workday has. In addition, these competitors are able to
provide comprehensive business applications that are broader in scope than
Workdays current suite of applications (5,7). When Workday is unable to attract

48

customers from investing in their competitors, they lose revenue opportunities, thus
their profitability decreases.

Conclusion

Questions to CEO
I have several questions I would like to ask the CEO of Workday, Aneel Bhursri. First,
international revenues increased from $74,374 in FY14 to $130,775 in FY15 and it
has been announced Workday is expanding into the German and Japan markets (8,17).
What is your approach to international expansion, and what was the decision
process involved in choosing Germany and Japan. Second, WDAY has achieved a
97% customer satisfaction rate for fiscal 2015, which is awesome, but WDAY also
faces high competition with more established application software companies. So,
what size are Workdays target customers and what is Workdays marketing
strategy to attract these customers (5,8)? Third, Workday mentioned their increased
headcount many times in their 10-K and earnings release. Where are the primary
areas this increased headcount will be utalized (6,8)?
Buy, Hold, or Sell?
Workday is a buy. Total revenues were $788MM for FY15, compared to $469MM for
FY14, an increase of $319MM, or 68%. The increase in subscription revenues was
due primarily to an increased number of customer contracts YoY. Most of the
revenues of Workday are derived from subscription services fees and professional
services fees. Subscription fees for 2015 accounted for 78% of total revenue (11).
Core operating margins improved from (19)% for fiscal year 2014 to (7)% for fiscal
year 2015(12,13). WDAY as spent between 37.52-40.22% of its revenue on R&D, which
indicates commitment to creating new products to stimulate growth (16,21). Due to
these three positive measurements analyzed in the preceeding pages, investors
should buy Workday.

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