Friday, June 22, 2007 (NYSE:CRM): Color on yesterday's sell-off

- Citigroup notes (NYSE:CRM) stock was off over 5% yesterday based on three concerns from the Street: 1) an urgent meeting to address sub-par close rates; 2) hiring freeze; and 3) departure of key executives.

Citi thinks it's possible that this urgent meeting never occurred. In fact, CRM sales management has weekly forecasting calls. And some key sales execs reportedly were absent from this call leading Citi to believe that if the business was way off track, why wouldn't some of these keys execs show up. From firm's view, there is no issue in overall demand. But CRM has to demonstrate it can close this rich pipeline of potential deals. Post the GOOG partnership a couple weeks back, CRM saw a record surge of new customer leads.

The firm also believes hiring trends remain very healthy this Q. At 2,243 total employees at end of Q1, CRM has hired ~150-200 new employees per quarter over the past year. They believe CRM continues to hire aggressively in Q2. Even a small slowdown could be beneficial to the overall operating margins for the company.

While the departure of an AppExchange executive is disappointing after only four months on the job, the firm believes this exec chose another role at a smaller company and had little impact on the business during such a short duration at CRM.

Maintains Buy and $60 tgt.

Notablecalls: The decline started yesterday morning, about 90 mins into regular trading after First Albany put out a call to clients saying their sources indicate CRM held an urgent meeting to address sub-par close rates thus far this quarter in its North America SMB segment.

The firm also noted their contacts indicate that CRM's SVP and GM of AppExchange and Developer Marketing, Rene Bonvanie, recently resigned. In their opinion, Mr. Bonvanie was a relatively high-profile hire, and represented a symbolic move because he was hired from SAP, where he was VP of Global Marketing.

First Albany reduced their tgt on CRM to $53 from $58 saying it is still fairly early in CRM's July 2Q; it is possible that close rates will improve during the remainder of the quarter, or that CRM will make up the difference in other segments (e.g., Enterprise, International).

- I think Citi's right. Either this meeting never happened or it was just one of regular sales forecasting meetings CRM likes to hold. Adding 2,500 customers/quarter, sales management is always fine tuning the business. As for the departure of Mr. Bonvanie, it's likely a non-event.

I think CRM will be an early bouncer.

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