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ITEM 7.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following discussion contains forward-looking statements, including, without limitation, our expectations and statements regarding our outlook and future revenues, expenses, results of operations, liquidity, plans, strategies and objectives of management and any assumptions underlying any of the foregoing. Our actual results may differ significantly from those projected in the forward-looking statements. Our forward-looking statements and factors that might cause future actual results to differ materially from our recent results or those projected in the forward-looking statements include, but are not limited to, those discussed in the section titled “Forward-Looking Information” and “Risk Factors” of this Annual Report on Form 10-K. Except as required by law, we assume no obligation to update the forward-looking statements or our risk factors for any reason.
Overview
We are a leading provider of enterprise cloud computing solutions, with a focus on customer relationship management, or CRM. We introduced our first CRM solution in 2000, and we have since expanded our service offerings with new editions, features and platform capabilities. Our core mission is to empower our customers to connect with their customers in entirely new ways through cloud, mobile, social, Internet of Things (“IoT”) and artificial intelligence technologies.
Our Customer Success Platform - including sales force automation, customer service and support, marketing automation, digital commerce, community management, industry-specific solutions, analytics, application development, IoT integration, collaborative productivity tools, our AppExchange, which is our enterprise cloud marketplace, and our professional cloud services - provides the tools customers need to succeed in a digital world. Key elements of our strategy include:
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extend existing service offerings;
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reduce customer attrition;
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expand and strengthen the partner ecosystem;
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expand internationally;
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target vertical industries;
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expand into new horizontal markets;
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extend go-to-market capabilities;
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ensure strong customer adoption; and
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encourage the development of third-party applications on our cloud computing platform.
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We are also committed to a sustainable, low-carbon future, advancing equality and diversity, and fostering employee success. We try to integrate social good into everything we do. All of these goals align with our long-term growth strategy and financial and operational priorities.
We believe the factors that will influence our ability to achieve our objectives include: our prospective customers’ willingness to migrate to enterprise cloud computing services; our ability to maintain a balanced portfolio of products and customers; the availability, performance and security of our service; our ability to continue to release, and gain customer acceptance of new and improved features; our ability to successfully integrate acquired businesses and technologies; successful customer adoption and utilization of our service; our ability to continue to meet new and evolving privacy laws and regulations, acceptance of our service in markets where we have few customers; the emergence of additional competitors in our market and improved product offerings by existing and new competitors; the location of new data centers that we operate as well as the new locations of services provided by third-party cloud computing platform providers; third-party developers’ willingness to develop applications on our platforms; our ability to attract new personnel and retain and motivate current personnel; and general economic conditions which could affect our customers’ ability and willingness to purchase our services, delay the customers’ purchasing decision or affect attrition rates.
To address these factors, we will need to, among other things, continue to add substantial numbers of paying subscriptions, upgrade our customers to fully featured versions or arrangements such as an Enterprise License Agreement, provide high quality technical support to our customers, encourage the development of third-party applications on our platforms, realize the benefits from our strategic partnerships and continue to focus on retaining customers at the time of renewal. Our plans to invest for future growth include the continuation of the expansion of our data center capacity, whether internally or through the use of third parties, the hiring of additional personnel, particularly in direct sales, other customer-related areas and research and development, the expansion of domestic and international selling and marketing activities, specifically in our top markets, the continued development of our brands, the addition of distribution channels, the upgrade of our service offerings, the continued development of services including Community Cloud, Industry Clouds and Success Cloud, the integration of new and acquired technologies such as Commerce Cloud, artificial intelligence technologies and Salesforce
Quip, the expansion of our Marketing Cloud and Salesforce Platform core service offerings, and the additions to our global infrastructure to support our growth.
We also regularly evaluate acquisitions or investment opportunities in complementary businesses, joint ventures, services and technologies and intellectual property rights in an effort to expand our service offerings. We expect to continue to make such investments and acquisitions in the future and we plan to reinvest a significant portion of our incremental revenue in future periods to grow our business and continue our leadership role in the cloud computing industry. As part of our growth strategy, we are delivering innovative solutions in new categories, including analytics, e-commerce, artificial intelligence, IoT and collaborative productivity tools. We drive innovation organically and to a lesser extent through acquisitions, such as our July 2016 acquisition of Demandware, Inc. (“Demandware”), a digital commerce leader. We have a disciplined and thoughtful acquisition process where we routinely survey the industry landscape across a wide range of companies. As a result of our aggressive growth plans and integration of our previously acquired businesses, we have incurred significant expenses from equity awards and amortization of purchased intangibles, which have reduced our operating income. We remain focused on improving operating margins in fiscal
2019
and beyond.
Our typical subscription contract term is 12 to 36 months, although terms range from one to 60 months, so during any fiscal reporting period only a subset of active subscription contracts is eligible for renewal. We calculate our attrition rate as of the end of each month. Our current attrition rate, which does not include the Marketing and Commerce Cloud service offerings, was between eight and nine percent as of
January 31, 2018
. Our attrition rate, including the Marketing Cloud service offering, was less than ten percent as of
January 31, 2018
. While it is difficult to predict, we expect our attrition rate to remain consistent as we continue to expand our enterprise business and invest in customer success and related programs.
We expect marketing and sales costs, which were
46
percent and 47 percent for
fiscal 2018
and 2017, respectively, to continue to represent a substantial portion of total revenues in the future as we seek to grow our customer base, sell more products to existing customers, and continue to build greater brand awareness.
Fiscal Year
Our fiscal year ends on January 31. References to fiscal
2018
, for example, refer to the fiscal year ending
January 31, 2018
.
Operating Segments
We operate as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who in our case is the chief executive officer, in deciding how to allocate resources and assess performance. Over the past few years, we have completed a number of acquisitions. These acquisitions have allowed us to expand our offerings, presence and reach in various market segments of the enterprise cloud computing market. While we have offerings in multiple enterprise cloud computing market segments, including as a result of our acquisitions, our business operates in one operating segment because the majority of our offerings operate on a single platform and are deployed in an identical way, and
our chief operating decision maker evaluates our financial information and resources and assesses the performance of these resources on a consolidated basis. Since we operate as one operating segment, all required financial segment information can be found in the consolidated financial statements.
Sources of Revenues
We derive our revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing our enterprise cloud computing services and from customers paying for additional support beyond the standard support that is included in the basic subscription fees; and (2) related professional services such as process mapping, project management, implementation services and other revenue. “Other revenue” consists primarily of training fees. Subscription and support revenues accounted for approximately
93 percent
of our total revenues for
fiscal 2018
. Subscription revenues are driven primarily by the number of paying subscribers, varying service types, the price of our service and renewals. We define a “customer” as a separate and distinct buying entity (e.g., a company, a distinct business unit of a large corporation, a partnership, etc.) that has entered into a contract to access our enterprise cloud computing services. We define a “subscription” as a unique user account purchased by a customer for use by its employees or other customer-authorized users, and we refer to each such user as a “subscriber.” The number of paying subscriptions at each of our customers ranges from one to hundreds of thousands. None of our customers accounted for more than five percent of our revenues during
fiscal 2018
and
2017
.
Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement dates of each contract. The typical subscription and support term is 12 to 36 months, although terms range from one to 60 months. Our subscription and support contracts are non-cancelable, though customers typically have the right to terminate their contracts for cause if we materially fail to perform. We generally invoice our customers in advance, in annual installments, and typical payment terms provide that our customers pay us within 30 days of invoice. Amounts that have been invoiced are
recorded in accounts receivable and in deferred revenue, or in revenue depending on whether the revenue recognition criteria have been met. In general, we collect our billings in advance of the subscription service period.
Professional services and other revenues consist of fees associated with consulting and implementation services and training. Our consulting and implementation engagements are billed on a time and materials, fixed fee or subscription basis. We also offer a number of training classes on implementing, using and administering our service that are billed on a per person, per class basis. Our typical professional services payment terms provide that our customers pay us within 30 days of invoice.
In determining whether professional services can be accounted for separately from subscription and support revenues, we consider a number of factors, which are described in Note 1 “Summary of Business and Significant Accounting Policies.”
Revenue by Cloud Service Offering
The information below is provided on a supplemental basis to give additional insight into the revenue performance of our individual core service offerings. All of the cloud offerings that we offer to customers are grouped into four major cloud service offerings. Subscription and support revenues consisted of the following (in millions):
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Fiscal Year Ended January 31,
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2018
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2017
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2016
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Variance - Percent
Fiscal 2017 and 2018
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Variance - Percent
Fiscal 2016 and 2017
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Sales Cloud
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$
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3,554.3
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$
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3,060.6
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$
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2,699.0
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16%
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13%
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Service Cloud
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2,877.1
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2,320.7
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1,817.8
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24%
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28%
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Salesforce Platform and Other
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1,929.2
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1,441.6
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1,034.7
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34%
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39%
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Marketing and Commerce Cloud
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1,349.9
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933.3
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654.1
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45%
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43%
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Total
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$
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9,710.5
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$
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7,756.2
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$
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6,205.6
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Subscription and support revenues from the Community Cloud, Quip and our Industry Offerings were not significant in
fiscal 2018
. Quip revenue is included with Salesforce Platform and Other in the table above. Our Industry Offerings and Community Cloud revenue are included in either Sales Cloud, Service Cloud or Salesforce Platform and Other depending on the primary service offering purchased.
As required under U.S. generally accepted accounting principles (“U.S. GAAP"), we recorded deferred revenue related to acquired contracts from Demandware at fair value on the date of acquisition. As a result, we did not recognize certain revenues related to these acquired contracts that Demandware would have otherwise recorded as an independent entity. Of the
$1,349.9 million
subscription and support revenue for Marketing and Commerce Cloud for
fiscal 2018
, approximately
$253.4 million
was attributed to Commerce Cloud.
In situations where a customer purchases multiple cloud offerings, such as through an Enterprise License Agreement, we allocate the contract value to each core service offering based on the customer’s estimated product demand plan and the service that was provided at the inception of the contract. We do not update these allocations based on actual product usage during the term of the contract. We have allocated approximately
14 percent
,
13 percent
and
10 percent
of our total subscription and support revenues for
fiscal 2018
, 2017 and 2016, respectively, based on customers’ estimated product demand plans and these allocated amounts are included in the table above.
Additionally, some of our service offerings have similar features and functions. For example, customers may use the Sales Cloud, the Service Cloud or our Salesforce Platform to record account and contact information, which are similar features across these core service offerings. Depending on a customer’s actual and projected business requirements, more than one core service offering may satisfy the customer’s current and future needs. We record revenue based on the individual products ordered by a customer, not according to the customer’s business requirements and usage. In addition, as we introduce new features and functions within each offering and refine our allocation methodology for changes in our business, we do not expect it to be practical to adjust historical revenue results by service offering for comparability. Accordingly, comparisons of revenue performance by core service offering over time may not be meaningful.
Our Sales Cloud service offering is our most widely distributed service offering and has historically been the largest contributor of subscription and support revenues. As a result, Sales Cloud has the most international exposure and foreign exchange rate exposure relative to the other cloud service offerings. Conversely, revenue for Marketing and Commerce Cloud is primarily derived from the Americas with little impact from foreign exchange rate movement.
The revenue growth rates of each of our core service offerings fluctuate from quarter to quarter and over time. While we are a market leader in each core offering, we manage the total balanced product portfolio to deliver solutions to our customers. Accordingly, the revenue result for each cloud service offering is not necessarily indicative of the results to be expected for any subsequent quarter.
Seasonal Nature of Deferred Revenue, Accounts Receivable and Operating Cash Flow
Deferred revenue primarily consists of billings to customers for our subscription service. Over 90 percent of the value of our billings to customers is for our subscription and support service. We generally invoice our customers in annual cycles. Approximately 80 percent of the value of all subscription and support related invoices, excluding Demandware related invoices, were issued with annual terms during
fiscal 2018
,
2017
and
2016
. We typically issue renewal invoices in advance of the renewal service period, and depending on timing, the initial invoice for the subscription and services contract and the subsequent renewal invoice may occur in different quarters. This may result in an increase in deferred revenue and accounts receivable. There is a disproportionate weighting toward annual billings in the fourth quarter, primarily as a result of large enterprise account buying patterns. Our fourth quarter has historically been our strongest quarter for new business and renewals. The year on year compounding effect of this seasonality in both billing patterns and overall new and renewal business causes the value of invoices that we generate in the fourth quarter for both new business and renewals to increase as a proportion of our total annual billings. Accordingly, because of this billing activity, our first quarter is our largest collections and operating cash flow quarter.
Unbilled Deferred Revenue, an Operational Measure
The deferred revenue balance on our consolidated balance sheets does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. Unbilled deferred revenue is an operational measure that represents future billings under our subscription agreements that have not been invoiced and, accordingly, are not recorded in deferred revenue. Unbilled deferred revenue amounts by quarter are reflected in the table below. Our typical contract length is between 12 and 36 months. We expect that the amount of unbilled deferred revenue will change from quarter to quarter for several reasons, including the specific timing, duration and size of large customer subscription agreements, varying billing cycles of subscription agreements, the specific timing of customer renewals, foreign currency fluctuations, the timing of when unbilled deferred revenue is to be recognized as revenue, and changes in customer financial circumstances. For multi-year subscription agreements billed annually, the associated unbilled deferred revenue is typically high at the beginning of the contract period, zero just prior to renewal, and increases if the agreement is renewed. Low unbilled deferred revenue attributable to a particular subscription agreement is often associated with an impending renewal and may not be an indicator of the likelihood of renewal or future revenue from such customer. Accordingly, we expect that the amount of aggregate unbilled deferred revenue will change from year-to-year depending in part upon the number and dollar amount of subscription agreements at particular stages in their renewal cycle. Such fluctuations are not a reliable indicator of future revenues. Unbilled deferred revenue does not include minimum revenue commitments from indirect sales channels, as we recognize revenue, deferred revenue, and any unbilled deferred revenue upon sell-through to an end user customer. Unbilled deferred revenue also does not include any estimates for overage billings above a customer's minimum commitment.
The sequential quarterly changes in accounts receivable and the related deferred revenue and operating cash flow during the first quarter of our fiscal year are not necessarily indicative of the billing activity that occurs for the following quarters as displayed below (in thousands, except unbilled deferred revenue):
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January 31,
2018
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October 31,
2017
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July 31,
2017
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April 30,
2017
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Fiscal 2018
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Accounts receivable, net
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$
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3,917,401
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$
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1,519,916
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$
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1,569,322
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$
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1,439,875
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Deferred revenue
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7,094,705
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4,392,082
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4,818,634
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5,042,652
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Operating cash flow (1)
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1,051,320
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125,792
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331,269
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1,229,584
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Unbilled deferred revenue
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13.3 bn
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11.5 bn
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10.4 bn
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9.6 bn
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January 31,
2017
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October 31,
2016
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July 31,
2016
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April 30,
2016
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Fiscal 2017
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Accounts receivable, net
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$
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3,196,643
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$
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1,281,425
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$
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1,323,114
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$
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1,192,965
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Deferred revenue
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5,542,802
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3,495,133
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3,823,561
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4,006,914
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Operating cash flow (1)
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706,146
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154,312
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250,678
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1,051,062
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Unbilled deferred revenue
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9.0 bn
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8.6 bn
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8.0 bn
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7.6 bn
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January 31,
2016
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October 31,
2015
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July 31,
2015
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April 30,
2015
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Fiscal 2016
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Accounts receivable, net
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$
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2,496,165
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$
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1,060,726
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$
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1,067,799
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$
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926,381
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Deferred revenue
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4,291,553
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2,846,510
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3,034,991
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3,056,820
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Operating cash flow (1)
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470,208
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162,514
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304,278
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735,081
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Unbilled deferred revenue
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7.1 bn
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6.7 bn
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6.2 bn
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6.0 bn
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(1)
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Operating cash flow represents net cash provided by operating activities for the three months ended in the periods stated above.
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Cost of Revenues and Operating Expenses
Cost of Revenues
Cost of subscription and support revenues primarily consists of expenses related to delivering our service and providing support, the costs of data center capacity, depreciation or operating lease expense associated with computer equipment and software, allocated overhead, amortization expense associated with capitalized software related to our services and acquired developed technologies and certain fees paid to various third parties for the use of their technology, services and data. We allocate overhead such as IT infrastructure, rent and occupancy charges based on headcount. Employee benefit costs and taxes are allocated based upon a percentage of total compensation expense. As such, general overhead expenses are reflected in each cost of revenue and operating expense category. Cost of professional services and other revenues consists primarily of employee-related costs associated with these services, including stock-based expenses, the cost of subcontractors, certain third-party fees and allocated overhead. The cost of providing professional services is higher as a percentage of the related revenue than for our enterprise cloud computing subscription service due to the direct labor costs and costs of subcontractors.
We intend to continue to invest additional resources in our enterprise cloud computing services. For example, we have invested in additional database software and hardware and we plan to increase the capacity that we are able to offer globally through data centers and third-party infrastructure providers. As we acquire new businesses and technologies, the majority of the amortization expense associated with this activity will be included in cost of revenues. Additionally, as we enter into new contracts with third parties for the use of their technology, services or data, or as our sales volume grows, the fees paid to use such technology or services may increase. Finally, we expect the cost of professional services to be approximately in line with revenues from professional services as we believe this investment in professional services facilitates the adoption of our service offerings. The timing of these additional expenses will affect our cost of revenues, both in terms of absolute dollars and as a percentage of revenues, in the affected periods.
Research and Development
Research and development expenses consist primarily of salaries and related expenses, including stock-based expenses, the costs of our development and test data center and allocated overhead. We continue to focus our research and development efforts on adding new features and services, integrating acquired technologies, increasing the functionality and security and enhancing the ease of use of our enterprise cloud computing services. Our proprietary, scalable and secure multi-tenant architecture enables us to provide all of our customers with a service based on a single version of our application. As a result, we do not have to maintain multiple versions, which enables us to have relatively lower research and development expenses as compared to traditional enterprise software companies.
We expect that in the future, research and development expenses will increase in absolute dollars and may increase as a percentage of total revenues as we invest in adding employees and building the necessary system infrastructure required to support the development of new, and improve existing, technologies and the integration of acquired businesses, technologies and all of our service offerings.
Marketing and Sales
Marketing and sales expenses are our largest cost and consist primarily of salaries and related expenses, including stock-based expenses, for our sales and marketing staff, including commissions, as well as payments to partners, marketing programs and allocated overhead. Marketing programs consist of advertising, events, corporate communications, brand building and product marketing activities.
We plan to continue to invest in marketing and sales by expanding our domestic and international selling and marketing activities, building brand awareness, attracting new customers and sponsoring additional marketing events. The timing of these marketing events, such as our annual and largest event, Dreamforce, will affect our marketing costs in a particular quarter. In addition, as we acquire new businesses and technologies, a component of the amortization expense associated with this activity will be included in marketing and sales. We expect that in the future, marketing and sales expenses will increase in absolute
dollars and continue to be our largest cost. We expect marketing and sales expenses, excluding sales personnel expenses, to grow in line with or at a slower rate than revenues and sales personnel expenses may increase as a percentage of total revenues as we invest in additional sales personnel to focus on adding new customers and increasing penetration within our existing customer base.
General and Administrative
General and administrative expenses consist of salaries and related expenses, including stock-based expenses, for finance and accounting, legal, internal audit, human resources and management information systems personnel, legal costs, professional fees, other corporate expenses and allocated overhead. We expect that in the future, general and administrative expenses will increase in absolute dollars as we invest in our infrastructure and we incur additional employee related costs, professional fees and insurance costs related to the growth of our business and international expansion. We expect general and administrative costs as a percentage of total revenues to either remain flat or decrease for the next several quarters. However, the timing of additional expenses in a particular quarter, both in terms of absolute dollars and as a percentage of revenues, will affect our general and administrative expenses.
Stock-Based Expenses
Our cost of revenues and operating expenses include stock-based expenses related to equity plans for employees and non-employee directors. We recognize our stock-based compensation as an expense in the statements of operations based on their fair values and vesting periods. These charges have been significant in the past and we expect that they will increase as our stock price increases, as we acquire more companies, as we hire more employees and seek to retain existing employees.
During
fiscal 2018
, we recognized stock-based expense related to our equity plans for employees and non-employee directors of
$997.0 million
. As of
January 31, 2018
, the aggregate stock compensation remaining to be amortized to costs and expenses was approximately
$1.8 billion
. We expect this stock compensation balance to be amortized as follows:
$855.4 million
during fiscal
2019
;
$582.7 million
during fiscal
2020
;
$318.1 million
during fiscal
2021
;
$59.5 million
during fiscal
2022
;
$17.2 million
during fiscal 2023 and
$8.0 million
thereafter. The expected amortization reflects only outstanding stock awards as of
January 31, 2018
and assumes no forfeiture activity. We expect to continue to issue stock-based awards to our employees in future periods.
In prior years, we had our annual equity grant cycle for employees in the month of November. During fiscal 2018, we changed our annual equity grant to occur in the month of March, starting in fiscal 2019. Therefore, the stock-based expense timing for fiscal 2018 is not consistent with prior years. We granted
14.9 million
shares under the annual equity grant in fiscal 2017 whereas we did not grant any shares under the annual equity grant cycle in fiscal 2018.
Amortization of Purchased Intangibles from Business Combinations and the Purchase of 50 Fremont
Our cost of revenues, operating expenses and other expenses include amortization of acquisition-related intangible assets, such as the amortization of the cost associated with an acquired company’s developed technology, trade names and trademarks, customer lists, acquired leases and customer relationships. We expect this expense to fluctuate as we acquire more businesses and intangible assets become fully amortized.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that of our significant accounting policies, which are described in Note 1 “Summary of Business and Significant Accounting Policies” to our consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Revenue Recognition
. We derive our revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing our enterprise cloud computing services and from customers purchasing additional support beyond the standard support that is included in the basic subscription fee; and (2) related professional services such as process mapping, project management, implementation services and other revenue. “Other revenue” consists primarily of training fees.
We commence revenue recognition when all of the following conditions are satisfied:
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•
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there is persuasive evidence of an arrangement;
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•
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the service has been or is being provided to the customer;
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•
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the collection of the fees is reasonably assured; and
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•
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the amount of fees to be paid by the customer is fixed or determinable.
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Our subscription service arrangements are non-cancelable and do not contain refund-type provisions.
Subscription and Support Revenues
Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement date of each contract, which is the date our service is made available to customers. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
Professional Services and Other Revenues
Our professional services contracts are either on a time and materials, fixed-fee or subscription basis. As discussed below, these revenues are recognized as the services are rendered for time and materials contracts, and when the milestones are achieved and accepted by the customer or on a proportional performance basis for fixed price contracts and ratably over the contract term for subscription professional services. The milestone method for revenue recognition is used when there is substantive uncertainty at the date the contract is entered into whether the milestone will be achieved. Training revenues are recognized after the services are performed.
Multiple Deliverable Arrangements
We enter into arrangements with multiple deliverables that generally include multiple subscriptions, premium support, and professional services. If the deliverables have standalone value at contract inception, we account for each deliverable separately. Subscription services have standalone value as such services are often sold separately. In determining whether professional services have standalone value, we consider the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the subscription service start date, and the contractual dependence of the subscription service on the customer’s satisfaction with the professional services work. To date, we have concluded that all of the professional services included in multiple deliverable arrangements executed have standalone value.
Multiple deliverables included in an arrangement are separated into different units of accounting and the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. We determine the relative selling price for a deliverable based on its vendor-specific objective evidence of selling price (“VSOE”), if available, or our best estimate of selling price (“BESP”), if VSOE is not available. We have determined that third-party evidence (“TPE”) is not a practical alternative due to differences in our service offerings compared to other parties and the availability of relevant third-party pricing information. The amount of revenue allocated to delivered items is limited by contingent revenue, if any.
For certain professional services, we have established VSOE as a consistent number of standalone sales of this deliverable have been priced within a reasonably narrow range. We have not established VSOE for our subscription services due to lack of pricing consistency, the introduction of new services and other factors. Accordingly, we use our BESP to determine the relative selling price.
We determined BESP by considering our overall pricing objectives and market conditions. Significant pricing practices taken into consideration include our discounting practices, the size and volume of our transactions, the customer demographic, the geographic area where our services are sold, our price lists, our go-to-market strategy, historical standalone sales and contract prices. The determination of BESP is made through consultation with and approval by management, taking into consideration the go-to-market strategy. As our go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes in relative selling prices, including both VSOE and BESP.
Deferred Revenue.
The deferred revenue balance does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from subscription services described above and is recognized as the revenue recognition criteria are met. We generally invoice customers in annual installments. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, dollar size and new business linearity within the quarter.
Deferred Commissions.
We defer commission payments to our direct sales force. The commissions are deferred and amortized to sales expense over the non-cancelable terms of the related subscription contracts with our customers, which are typically 12 to 36 months. The commission payments, which are paid in full the month after the customer’s service commences, are a direct and incremental cost of the revenue arrangements. The deferred commission amounts are recoverable through the future revenue streams under the non-cancelable customer contracts. We believe this is the preferable method of accounting as the commission charges are so closely related to the revenue from the non-cancelable customer contracts that they should be recorded as an asset and charged to expense over the same period that the subscription revenue is recognized.
During fiscal
2018
, we deferred
$799.3 million
of commission expenditures and we amortized
$464.7 million
to sales expense. During fiscal
2017
, we deferred
$462.0 million
of commission expenditures and we amortized
$371.5 million
to sales expense. Deferred commissions on our consolidated balance sheets totaled
$874.3 million
at
January 31, 2018
and
$539.6 million
at
January 31, 2017
.
Capitalized Internal-Use Software Costs
. We are required to follow the guidance of Accounting Standards Codification 350 (“ASC 350”), Intangibles- Goodwill and Other in accounting for the cost of computer software developed for internal-use and the accounting for web-based product development costs. ASC 350 requires companies to capitalize qualifying computer software costs, which are incurred during the application development stage, and amortize these costs on a straight-line basis over the estimated useful life of the respective asset. We deliver our enterprise cloud computing solutions as a service via all the major Internet browsers and on leading major mobile device operating systems. As a result of this software as a service delivery model, we believe we have larger capitalized costs as compared to traditional enterprise software companies as they are required to use a different accounting standard.
Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life. We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Stock-Based Expense.
We recognize stock-based expenses related to stock options and restricted stock awards on a straight-line basis, net of estimated forfeitures, over the requisite service period of the awards, which is generally the vesting term of four years. We recognize stock-based expenses related to shares issued pursuant to our 2004 Employee Stock Purchase Plan (“ESPP”) on a straight-line basis over the offering period, which is 12 months.
Stock-based expenses related to performance share grants are measured based on grant date fair value and expensed on a straight-line basis over the service period of the awards, which is generally the vesting term of three years.
We, at times, grant unvested restricted shares to employee stockholders of certain acquired companies in lieu of cash consideration. These awards are generally subject to continued post-acquisition employment, and as a result, we have accounted for them as post-acquisition stock-based expense. We recognize stock-based expenses equal to the grant date fair value of the restricted stock awards on a straight-line basis over the requisite service period of the awards.
Business Combinations.
Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired and liabilities assumed and pre-acquisition contingencies. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date.
Examples of critical estimates in valuing certain of the intangible assets and goodwill we have acquired include but are not limited to:
|
|
•
|
future expected cash flows from subscription and support contracts, professional services contracts, other customer contracts and acquired developed technologies and patents;
|
|
|
•
|
the acquired company’s trade name, trademark and existing customer relationship, as well as assumptions about the period of time the acquired trade name and trademark will continue to be used in our offerings;
|
|
|
•
|
uncertain tax positions and tax related valuation allowances assumed; and
|
Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
In the event that we acquire an entity in which we previously held a strategic investment, the difference between the fair value of the shares as of the date of the acquisition and the carrying value of the strategic investment is recorded as a gain or loss and disclosed separately within the statements of operations.
Goodwill and Intangibles.
We make estimates, assumptions, and judgments when valuing goodwill and other intangible assets in connection with the initial purchase price allocation of an acquired entity, as well as when evaluating the recoverability of our goodwill and other intangible assets on an ongoing basis. These estimates are based upon a number of factors, including historical experience, market conditions, and information obtained from the management of acquired companies. Critical estimates in valuing certain intangible assets include, but are not limited to, historical and projected attrition rates, discount rates, anticipated growth in revenue from the acquired customers and acquired technology, and the expected use of the acquired assets. These factors are also considered in determining the useful life of acquired intangible assets. The amounts and useful lives assigned to identified intangible assets impact the amount and timing of future amortization expense.
Income Taxes.
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date.
Our tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. We recognize the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than 50 percent likely to be realized upon settlement with the taxing authority. We recognize interest accrued and penalties related to unrecognized tax benefits in our income tax provision.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the applicable tax law. We regularly review the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. Our judgment regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute our business plans and/or tax planning strategies. Should there be a change in our ability to realize deferred tax assets, our income tax provision would increase or decrease in the period in which the assessment is changed.
In December 2017, the Tax Cuts and Jobs Act ("Tax Act") was enacted into law, significantly changing income tax law that affects U.S corporations. Key changes included a corporate tax rate reduction from 35 percent to 21 percent effective January 1, 2018, expensing of certain qualified property, significant changes to the U.S international tax system such as a one-time transition tax on accumulated foreign earnings, and how foreign earnings are subject to U.S. tax. We are required to recognize the effects of the tax law changes in the period of enactment, including the determination of the transition tax and the re-measurement of deferred taxes as well as to re-assess the realizability of our deferred tax assets. Subsequent to the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which allows companies to record provisional amounts related to the effects of the Tax Act during a measurement period not to extend beyond one year of the enactment date. Due to the timing of the Tax Act and additional guidance and interpretations that may be issued by the U.S. Treasury Department, IRS and other standard-setting bodies in the future, we have not completed our analysis of the income tax effects of the Tax Act. Our provisional estimates will be adjusted during the measurement period defined under SAB 118, based upon our ongoing analysis of our data and tax positions along with the new guidance from regulators and interpretations of the law.
Strategic Investments.
We hold strategic investments in marketable equity securities and non-marketable debt and equity securities in which we do not have a controlling interest or significant influence, as defined in Accounting Standards Codification 323 (“ASC 323”), Investments - Equity Method and Joint Ventures. Marketable equity securities and non-marketable debt securities, which consist of debt investments in privately held companies, are recorded at fair value with changes in fair value recorded through accumulated other comprehensive income. Equity investments without readily determinable fair values for which the Company does not have the ability to exercise significant influence are accounted for using the cost method of accounting. If, based on the terms of our ownership of these marketable and non-marketable securities, we determine that we exercise significant influence on the entity to which these marketable and non-marketable securities relate, we apply the equity method of accounting for such investments.
We determine the fair value of our marketable equity securities and non-marketable debt and equity securities quarterly for impairment and disclosure purposes; however, the non-marketable debt and equity securities are recorded at fair value only if an impairment is recognized. The measurement of fair value requires significant judgment and includes a qualitative and quantitative analysis of events and circumstances that impact the fair value of the investment. Our assessment of the severity and duration of the impairment and qualitative and quantitative analysis includes the investee’s financial metrics, the investee’s products and technologies meeting or exceeding predefined milestones, market acceptance of the product or technology, other competitive products or technology in the market, general market conditions, management and governance structure of the investee, investee’s liquidity, debt ratios and the rate at which the investee is using its cash, and investee’s receipt of additional funding at a lower valuation. In determining the estimated fair value of our strategic investments in privately held companies, we utilize the most recent data available to us. Valuations of privately held companies are inherently complex due to the lack of readily available market data.
If the fair value of an investment is below our cost, we determine whether the investment is other-than-temporarily impaired based on our qualitative and quantitative analysis, which includes the severity and duration of the impairment. If the investment is considered to be other-than-temporarily impaired, we record the investment at fair value by recognizing an impairment through the income statement and establishing a new cost basis for the investment.
Results of Operations
The following tables set forth selected data for each of the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2018
|
|
As a % of Total revenues
|
|
2017
|
|
As a % of Total revenues
|
|
2016
|
|
As a % of Total revenues
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and support
|
$
|
9,710,538
|
|
|
93
|
%
|
|
$
|
7,756,205
|
|
|
92
|
%
|
|
$
|
6,205,599
|
|
|
93
|
%
|
Professional services and other
|
769,474
|
|
|
7
|
|
|
635,779
|
|
|
8
|
|
|
461,617
|
|
|
7
|
|
Total revenues
|
10,480,012
|
|
|
100
|
|
|
8,391,984
|
|
|
100
|
|
|
6,667,216
|
|
|
100
|
|
Cost of revenues (1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and support
|
2,033,457
|
|
|
19
|
|
|
1,617,315
|
|
|
19
|
|
|
1,241,692
|
|
|
19
|
|
Professional services and other
|
740,065
|
|
|
7
|
|
|
616,724
|
|
|
8
|
|
|
412,856
|
|
|
6
|
|
Total cost of revenues
|
2,773,522
|
|
|
26
|
|
|
2,234,039
|
|
|
27
|
|
|
1,654,548
|
|
|
25
|
|
Gross profit
|
7,706,490
|
|
|
74
|
|
|
6,157,945
|
|
|
73
|
|
|
5,012,668
|
|
|
75
|
|
Operating expenses (1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
1,553,073
|
|
|
15
|
|
|
1,208,127
|
|
|
14
|
|
|
946,300
|
|
|
14
|
|
Marketing and sales
|
4,829,291
|
|
|
46
|
|
|
3,918,027
|
|
|
47
|
|
|
3,239,824
|
|
|
49
|
|
General and administrative
|
1,088,358
|
|
|
10
|
|
|
967,563
|
|
|
11
|
|
|
748,238
|
|
|
11
|
|
Operating lease termination resulting from purchase of 50 Fremont
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(36,617
|
)
|
|
(1
|
)
|
Total operating expenses
|
7,470,722
|
|
|
71
|
|
|
6,093,717
|
|
|
72
|
|
|
4,897,745
|
|
|
73
|
|
Income from operations
|
235,768
|
|
|
3
|
|
|
64,228
|
|
|
1
|
|
|
114,923
|
|
|
2
|
|
Investment income
|
35,848
|
|
|
0
|
|
|
27,374
|
|
|
0
|
|
|
15,341
|
|
|
0
|
|
Interest expense
|
(86,943
|
)
|
|
(1
|
)
|
|
(88,988
|
)
|
|
(1
|
)
|
|
(72,485
|
)
|
|
(1
|
)
|
Other income (expense) (1)
|
17,435
|
|
|
0
|
|
|
9,072
|
|
|
0
|
|
|
(15,292
|
)
|
|
0
|
|
Gain on sales of land and building improvements
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
21,792
|
|
|
0
|
|
Gains from acquisitions of strategic investments
|
0
|
|
|
0
|
|
|
13,697
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Income before benefit from (provision for) income taxes
|
202,108
|
|
|
2
|
|
|
25,383
|
|
|
0
|
|
|
64,279
|
|
|
1
|
|
Benefit from (provision for) income taxes
|
(74,630
|
)
|
|
(1
|
)
|
|
154,249
|
|
|
2
|
|
|
(111,705
|
)
|
|
(2
|
)
|
Net income (loss)
|
$
|
127,478
|
|
|
1
|
%
|
|
$
|
179,632
|
|
|
2
|
%
|
|
$
|
(47,426
|
)
|
|
(1
|
)%
|
(1) Amounts related to amortization of purchased intangibles from business combinations, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2018
|
|
As a % of Total revenues
|
|
2017
|
|
As a % of Total revenues
|
|
2016
|
|
As a % of Total revenues
|
Cost of revenues
|
$
|
165,545
|
|
|
2
|
%
|
|
$
|
127,676
|
|
|
2
|
%
|
|
$
|
80,918
|
|
|
1
|
%
|
Marketing and sales
|
121,340
|
|
|
1
|
|
|
97,601
|
|
|
1
|
|
|
77,152
|
|
|
1
|
|
Other income (expense)
|
1,433
|
|
|
0
|
|
|
2,491
|
|
|
0
|
|
|
3,636
|
|
|
0
|
|
(2) Amounts related to stock-based expenses, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2018
|
|
As a % of Total revenues
|
|
2017
|
|
As a % of Total revenues
|
|
2016
|
|
As a % of Total revenues
|
Cost of revenues
|
$
|
129,954
|
|
|
1
|
%
|
|
$
|
107,457
|
|
|
1
|
%
|
|
$
|
69,443
|
|
|
1
|
%
|
Research and development
|
259,838
|
|
|
2
|
|
|
187,487
|
|
|
2
|
|
|
129,434
|
|
|
2
|
|
Marketing and sales
|
468,553
|
|
|
4
|
|
|
388,937
|
|
|
5
|
|
|
289,152
|
|
|
4
|
|
General and administrative
|
138,668
|
|
|
1
|
|
|
136,486
|
|
|
2
|
|
|
105,599
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
2018
|
|
2017
|
Selected Balance Sheet Data (in thousands):
|
|
|
|
Cash, cash equivalents and marketable securities
|
$
|
4,521,705
|
|
|
$
|
2,208,887
|
|
Deferred revenue
|
7,094,705
|
|
|
5,542,802
|
|
Unbilled deferred revenue (an operational measure)
|
13,300,000
|
|
|
9,000,000
|
|
Principal due on our outstanding debt obligations
|
1,726,821
|
|
|
2,050,000
|
|
Unbilled deferred revenue represents future billings under our non-cancelable subscription agreements that have not been invoiced and, accordingly, are not recorded in deferred revenue.
Fiscal Year Ended January 31, 2018
and
2017
Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
|
(in thousands)
|
2018
|
|
2017
|
|
Dollars
|
|
Percent
|
Subscription and support
|
$
|
9,710,538
|
|
|
$
|
7,756,205
|
|
|
$
|
1,954,333
|
|
|
25%
|
Professional services and other
|
769,474
|
|
|
635,779
|
|
|
133,695
|
|
|
21%
|
Total revenues
|
$
|
10,480,012
|
|
|
$
|
8,391,984
|
|
|
$
|
2,088,028
|
|
|
25%
|
Total revenues were
$10.5 billion
for
fiscal 2018
, compared to
$8.4 billion
during the same period a year ago,
an increase
of
$2.1 billion
, or
25 percent
. Subscription and support revenues were
$9.7 billion
, or
93 percent
of total revenues, for
fiscal 2018
, compared to
$7.8 billion
, or
92 percent
of total revenues, during the same period a year ago,
an increase
of
$2.0 billion
, or
25 percent
. The
increase
in subscription and support revenues was primarily caused by volume-driven increases from new business, which includes new customers, upgrades and additional subscriptions from existing customers. Our acquisition of Demandware in July 2016 contributed
$287.7 million
to total revenues in
fiscal 2018
as compared to $120.4 million from the date of acquisition to
January 31, 2017
. This was offset by a reduction in subscription revenues of approximately $20.0 million as a result of one less day in
fiscal 2018
compared to
fiscal 2017
. We continue to invest in a variety of customer programs and initiatives which, along with increasing enterprise adoption, have helped keep our attrition rate consistent as compared to the prior year. Consistent attrition rates play a role in our ability to maintain growth in our subscription and support revenues. Changes in the net price per user per month have not been a significant driver of revenue growth for the periods presented. Professional services and other revenues were
$769.5 million
, or
seven percent
of total revenues, for
fiscal 2018
, compared to
$635.8 million
, or
eight percent
of total revenues, for the same period a year ago, an increase of
$133.7 million
, or
21 percent
. The
increase
in professional services and other revenues was due primarily to the higher demand for services from an increased number of customers.
Revenues
by geography were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2018
|
|
As a % of Total Revenues
|
|
2017
|
|
As a % of Total Revenues
|
Americas
|
$
|
7,579,116
|
|
|
72
|
%
|
|
$
|
6,224,971
|
|
|
74
|
%
|
Europe
|
1,903,524
|
|
|
18
|
|
|
1,373,547
|
|
|
16
|
|
Asia Pacific
|
997,372
|
|
|
10
|
|
|
793,466
|
|
|
10
|
|
|
$
|
10,480,012
|
|
|
100
|
%
|
|
$
|
8,391,984
|
|
|
100
|
%
|
Revenues by geography are determined based on the region of the Salesforce contracting entity, which may be different than the region of the customer. Americas revenue attributed to the United States was approximately
96 percent
and
96 percent
during
fiscal 2018
and
2017
, respectively.
Revenues in Europe and Asia Pacific accounted for
$2.9 billion
, or
28 percent
of total revenues, for
fiscal 2018
, compared to
$2.2 billion
, or
26 percent
of total revenues, during the same period a year ago,
an increase
of
$0.7 billion
, or
34 percent
. The
increase
in revenues outside of the Americas was the result of the increasing acceptance of our services, our focus on marketing our services internationally and additional resources. Revenues outside of the Americas increased on a total dollar basis by
$97.3 million
in
fiscal 2018
compared to the same period a year ago as a result of the strengthening British Pound Sterling.
Cost of Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
Dollars
|
(in thousands)
|
2018
|
|
2017
|
|
Subscription and support
|
$
|
2,033,457
|
|
|
$
|
1,617,315
|
|
|
$
|
416,142
|
|
Professional services and other
|
740,065
|
|
|
616,724
|
|
|
123,341
|
|
Total cost of revenues
|
$
|
2,773,522
|
|
|
$
|
2,234,039
|
|
|
$
|
539,483
|
|
Percent of total revenues
|
26
|
%
|
|
27
|
%
|
|
|
Cost of revenues was
$2.8 billion
, or
26 percent
of total revenues, for
fiscal 2018
, compared to
$2.2 billion
, or
27 percent
of total revenues, during the same period a year ago,
an increase
of
$539.5 million
. The
increase
in absolute dollars was primarily due to
an increase
of
$191.5 million
in employee-related costs,
an increase
of
$22.5 million
in stock-based expenses,
an increase
of
$196.9 million
in service delivery costs, primarily due to our efforts to increase data center capacity,
an increase
of amortization of purchased intangible assets of
$37.9 million
and
an increase
of
$23.2 million
in allocated overhead. We have increased our headcount by
11 percent
since
January 31, 2017
to meet the higher demand for services from our customers and as a result of our fiscal 2017 acquisitions. We intend to continue to invest additional resources in our enterprise cloud computing services and data center capacity to allow us to scale with our customers and continuously evolve our security measures. We also plan to add additional employees in our professional services group to facilitate the adoption of our services. The timing of these expenses will affect our cost of revenues, both in terms of absolute dollars and as a percentage of revenues in future periods.
The cost of professional services and other revenues was
$740.1 million
during
fiscal 2018
resulting in
positive
gross margin of
$29.4 million
. The cost of professional services and other revenues was
$616.7 million
during
fiscal 2017
resulting in
positive
gross margins of
$19.1 million
. We expect the cost of professional services to be approximately in line with revenues from professional services in future fiscal quarters. We believe that this investment in professional services facilitates the adoption of our service offerings.
Operating Expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
Dollars
|
(in thousands)
|
2018
|
|
2017
|
|
Research and development
|
$
|
1,553,073
|
|
|
$
|
1,208,127
|
|
|
$
|
344,946
|
|
Marketing and sales
|
4,829,291
|
|
|
3,918,027
|
|
|
911,264
|
|
General and administrative
|
1,088,358
|
|
|
967,563
|
|
|
120,795
|
|
Total operating expenses
|
$
|
7,470,722
|
|
|
$
|
6,093,717
|
|
|
$
|
1,377,005
|
|
Percent of total revenues
|
71
|
%
|
|
72
|
%
|
|
|
Research and development expenses were
$1.6 billion
, or
15 percent
of total revenues, for
fiscal 2018
, compared to
$1.2 billion
, or
14 percent
of total revenues, during the same period a year ago,
an increase
of
$344.9 million
. The
increase
in absolute dollars was primarily due to
an increase
of approximately
$211.5 million
in employee-related costs,
an increase
of
$72.4 million
in stock-based expenses,
an increase
in our development and test data center costs and allocated overhead. We increased our research and development headcount by
11 percent
since
January 31, 2017
in order to improve and extend our service offerings, develop new technologies and integrate previously acquired companies, including our fiscal 2017 acquisitions. We expect that research and development expenses will increase in absolute dollars and may increase as a percentage of revenues in future periods as we continue to invest in additional employees and technology to support the development of new, and improve existing, technologies and the integration of acquired technologies.
Marketing and sales expenses were
$4.8 billion
, or
46 percent
of total revenues, for
fiscal 2018
, compared to
$3.9 billion
, or
47 percent
of total revenues, during the same period a year ago,
an increase
of
$911.3 million
. The change was primarily due to
an increase
of
$719.8 million
in employee-related costs and amortization of deferred commissions,
an increase
of
$79.6 million
in stock-based expenses,
an increase
in amortization of purchased intangible assets of
$23.7 million
, and allocated overhead. Our marketing and sales headcount increased by
22 percent
since
January 31, 2017
. The increase in headcount was primarily attributable to hiring additional sales personnel to focus on adding new customers and increasing penetration within our existing customer base.
General and administrative expenses were
$1.1 billion
, or
10 percent
of total revenues, for
fiscal 2018
, compared to
$1.0 billion
, or
11 percent
of total revenues, during the same period a year ago,
an increase
of
$120.8 million
. The
increase
was primarily due to an increase in employee-related costs. Our general and administrative headcount increased by
16 percent
since
January 31, 2017
as we added personnel to support our growth.
Other income and expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
Dollars
|
(in thousands)
|
2018
|
|
2017
|
|
Investment income
|
$
|
35,848
|
|
|
$
|
27,374
|
|
|
$
|
8,474
|
|
Interest expense
|
(86,943
|
)
|
|
(88,988
|
)
|
|
2,045
|
|
Other income (expense)
|
17,435
|
|
|
9,072
|
|
|
8,363
|
|
Gains from acquisitions of strategic investments
|
0
|
|
|
13,697
|
|
|
(13,697
|
)
|
Investment income was
$35.8 million
for
fiscal 2018
and was
$27.4 million
during the same period a year ago. The increase was due to higher interest income across our portfolio.
Interest expense consists of interest on our convertible senior notes, capital leases, financing obligation related to 350 Mission, the loan assumed on 50 Fremont, revolving credit facility and the $500.0 million term loan that was entered into in connection with our acquisition of Demandware. Interest expense was
$86.9 million
for
fiscal 2018
and was
$89.0 million
during the same period a year ago.
Other income (expense) primarily consists of non-operating transactions such as strategic investment realized gains and losses and other-than-temporary impairments, gains and losses from foreign exchange rate fluctuations and real estate transactions. The Company sold a portion of its publicly-held investments in fiscal 2018, which resulted in a reclassification of previously unrealized gains from the accumulated other comprehensive loss on the balance sheet to other income (expense) in the amount of
$58.6 million
. This amount was offset by other-than-temporary impairments on strategic investments.
Gains from acquisitions of strategic investments represents gains recognized related to strategic investments when we acquire an entity in which we previously held a strategic investment. The difference between the fair value of the shares as of the date of the acquisition and the carrying value of the strategic investment is recorded as a gain or loss and disclosed separately within the statements of operations.
Benefit from (provision for) income taxes
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
Dollars
|
(in thousands)
|
2018
|
|
2017
|
|
Benefit from (provision for) income taxes
|
$
|
(74,630
|
)
|
|
$
|
154,249
|
|
|
$
|
(228,879
|
)
|
Effective tax rate
|
37
|
%
|
|
(608
|
)%
|
|
|
We recognized a tax
provision
of
$74.6 million
on a pretax
income
of
$202.1 million
for
fiscal 2018
. The tax provision recorded was primarily related to income taxes in profitable jurisdictions outside of the United States.
In fiscal 2017, we recorded a tax
benefit
of
$154.2 million
on a pretax
income
of
$25.4 million
for
fiscal 2017
. The most significant component of this tax amount was the discrete tax benefit of $210.3 million from a partial release of the valuation allowance in connection with the acquisition of Demandware. The net deferred tax liability from the acquisition of Demandware provided a source of additional income to support the realizability of our preexisting deferred tax assets and, as a result, we released a portion of our valuation allowance. The tax benefit associated with the release of the valuation allowance was partially offset by income taxes in profitable jurisdictions outside of the United States.
Fiscal Years Ended January 31, 2017 and 2016
Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
|
(in thousands)
|
2017
|
|
2016
|
|
Dollars
|
|
Percent
|
Subscription and support
|
$
|
7,756,205
|
|
|
$
|
6,205,599
|
|
|
$
|
1,550,606
|
|
|
25%
|
Professional services and other
|
635,779
|
|
|
461,617
|
|
|
174,162
|
|
|
38%
|
Total revenues
|
$
|
8,391,984
|
|
|
$
|
6,667,216
|
|
|
$
|
1,724,768
|
|
|
26%
|
Total revenues were $8.4 billion for fiscal 2017, compared to $6.7 billion for fiscal 2016, an increase of $1.7 billion, or 26 percent. Subscription and support revenues were $7.8 billion, or 92 percent of total revenues, for fiscal 2017, compared to $6.2 billion, or 93 percent of total revenues, for fiscal 2016, an increase of $1.6 billion, or 25 percent. The increase in subscription and support revenues in fiscal 2017 was primarily caused by volume-driven increases from new business, which includes new customers, upgrades and additional subscriptions from existing customers. Revenue resulting from our July 2016 acquisition of Demandware contributed $120.4 million to total revenues for fiscal 2017. Revenues from other acquired businesses in fiscal 2017 were not material. We continued to invest in a variety of customer programs and initiatives, which, along with increasing enterprise adoption, have helped keep our attrition rate consistent as compared to fiscal 2016. Our attrition rate also played a role in the increase in subscription and support revenues. Changes in our pricing have not been a significant driver of revenue growth for the periods presented. Professional services and other revenues were $635.8 million, or eight percent of total revenues, for fiscal 2017, compared to $461.6 million, or seven percent of total revenues, for fiscal 2016, an increase of $174.2 million, or 38 percent. The increase was primarily due to the growth in our subscription professional services.
Revenues by geography were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2017
|
|
As a % of Total Revenues
|
|
2016
|
|
As a % of Total Revenues
|
Americas
|
$
|
6,224,971
|
|
|
74
|
%
|
|
$
|
4,910,745
|
|
|
74
|
%
|
Europe
|
1,373,547
|
|
|
16
|
|
|
1,162,808
|
|
|
17
|
|
Asia Pacific
|
793,466
|
|
|
10
|
|
|
593,663
|
|
|
9
|
|
|
$
|
8,391,984
|
|
|
100
|
%
|
|
$
|
6,667,216
|
|
|
100
|
%
|
Revenues in Europe and Asia Pacific accounted for $2.2 billion, or 26 percent of total revenues, for fiscal 2017, compared to $1.8 billion, or 26 percent of total revenues, for fiscal 2016, an increase of $410.5 million, or 23 percent. The increase in revenues on a total dollar basis outside of the Americas was the result of the increasing acceptance of our service, our focus on marketing our services internationally, additional resources and consistent attrition rates as a result of the reasons stated above. Revenues outside of the Americas increased on a total dollar basis in fiscal 2017 despite an overall strengthening of the U.S. dollar, which reduced aggregate international revenues by $103.8 million compared to fiscal 2016.
Americas revenue attributed to the United States was approximately 96 percent and 95 percent for fiscal 2017 and 2016, respectively. No other country represented more than ten percent of total revenue during fiscal 2017 or 2016.
Cost of Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
Dollars
|
(in thousands)
|
2017
|
|
2016
|
|
Subscription and support
|
$
|
1,617,315
|
|
|
$
|
1,241,692
|
|
|
$
|
375,623
|
|
Professional services and other
|
616,724
|
|
|
412,856
|
|
|
203,868
|
|
Total cost of revenues
|
$
|
2,234,039
|
|
|
$
|
1,654,548
|
|
|
$
|
579,491
|
|
Percent of total revenues
|
27
|
%
|
|
25
|
%
|
|
|
Cost of revenues was $2.2 billion, or 27 percent of total revenues, for fiscal 2017, compared to $1.7 billion, or 25 percent of total revenues, for fiscal 2016, an increase of $579.5 million. The increase in absolute dollars was primarily due to an increase of $240.9 million in employee-related costs, an increase of $38.0 million in stock-based expenses, an increase of $162.4 million in service delivery costs, primarily due to our efforts to increase data center capacity, an increase of $23.5 million in professional and outside services, an increase of amortization of purchased intangibles of $46.8 million, an increase in depreciation of equipment of $16.2 million and an increase in allocated overhead of $35.9 million. We increased our headcount by 34 percent in fiscal 2017 to meet the higher demand for services from our customers and as a result of our fiscal 2017 acquisitions.
The cost of professional services and other revenues was $616.7 million during fiscal 2017 resulting in positive gross margin of $19.1 million. The cost of professional services and other revenues was $412.9 million during fiscal 2016 resulting in positive gross margins of $48.8 million.
Operating Expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
Dollars
|
(in thousands)
|
2017
|
|
2016
|
|
Research and development
|
$
|
1,208,127
|
|
|
$
|
946,300
|
|
|
$
|
261,827
|
|
Marketing and sales
|
3,918,027
|
|
|
3,239,824
|
|
|
678,203
|
|
General and administrative
|
967,563
|
|
|
748,238
|
|
|
219,325
|
|
Operating lease termination resulting from purchase of 50 Fremont
|
0
|
|
|
(36,617
|
)
|
|
36,617
|
|
Total operating expenses
|
6,093,717
|
|
|
4,897,745
|
|
|
1,195,972
|
|
Percent of total revenues
|
72
|
%
|
|
73
|
%
|
|
|
Research and development expenses were $1.2 billion, or 14 percent of total revenues, for fiscal 2017, compared to $946.3 million, or 14 percent of total revenues, for fiscal 2016, an increase of $261.8 million. The increase in absolute dollars was primarily due to an increase of $173.2 million in employee-related costs, an increase of $58.1 million in stock-based expense, an increase of $28.1 million in development and test data center expense, and an increase in allocated overhead. We increased our research and development headcount by 35 percent in fiscal 2017 in order to improve and extend our service offerings and develop new technologies as a result of our fiscal 2017 acquisitions.
Marketing and sales expenses were $3.9 billion, or 47 percent of total revenues, for fiscal 2017, compared to $3.2 billion, or 49 percent of total revenues, for fiscal 2016, an increase of $678.2 million. The increase in absolute dollars was primarily due to increases of $484.3 million in employee-related costs, including amortization of deferred commissions, $34.7 million in advertising expense, $20.4 million in amortization of purchased intangibles, $99.8 million stock-based expense and $36.5 million in allocated overhead. Our marketing and sales headcount increased by 24 percent in fiscal 2017. The increase in headcount was also attributable to hiring additional sales personnel to focus on adding new customers and increasing penetration within our existing customer base.
General and administrative expenses were $967.6 million, or 11 percent of total revenues, for fiscal 2017, compared to $748.2 million, or 11 percent of total revenues, for fiscal 2016, an increase of $219.3 million. The increase was primarily due to an increase of $175.2 million in employee-related costs, an increase of $30.9 million in stock-based expense and an increase in professional and outside services. Our general and administrative headcount increased by 22 percent in fiscal 2017 as we added personnel to support our growth.
In connection with the purchase of 50 Fremont, we recognized a net non-cash gain in fiscal 2016 totaling approximately $36.6 million on the termination of the lease signed in January 2012.
Other income and expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
Dollars
|
(in thousands)
|
2017
|
|
2016
|
|
Investment income
|
$
|
27,374
|
|
|
$
|
15,341
|
|
|
$
|
12,033
|
|
Interest expense
|
(88,988
|
)
|
|
(72,485
|
)
|
|
(16,503
|
)
|
Other income (expense)
|
9,072
|
|
|
(15,292
|
)
|
|
24,364
|
|
Gain on sales of land and building improvements
|
0
|
|
|
21,792
|
|
|
(21,792
|
)
|
Gains from acquisitions of strategic investments
|
13,697
|
|
|
0
|
|
|
13,697
|
|
Investment income consists of income on our cash and marketable securities balances. Investment income was $27.4 million for fiscal 2017 and was $15.3 million for fiscal 2016. The increase was due to both realized gains resulting from the sales of marketable securities as well as higher interest income across our portfolio.
Interest expense consists of interest on our convertible senior notes, capital leases, financing obligation related to 350 Mission, the loan assumed on 50 Fremont, revolving credit facility and the $500.0 million term loan that was entered into in connection with our acquisition of Demandware. Interest expense was $89.0 million for fiscal 2017 and was $72.5 million for fiscal 2016. The increase was primarily due to the term loan in fiscal 2017 associated with the Demandware purchase and our outstanding balance in our revolving facility in in fiscal 2017.
Other income (expense) primarily consists of non-operating transactions such as strategic investments fair market value adjustments, gains and losses from foreign exchange rate fluctuations and real estate transactions.
Gain on sales of land and building improvements consists of the gain the company recognized from sales of undeveloped real estate and a portion of associated perpetual parking rights in San Francisco, California. Gain on sales of land and building improvements, net of closing costs, was $21.8 million during fiscal 2016.
Gains from acquisitions of strategic investments represents gains on sales of strategic investments when we acquire an entity in which we previously held a strategic investment. The difference between the fair value of the shares as of the date of the acquisition and the carrying value of the strategic investment is recorded as a gain or loss and disclosed separately within the statements of operations.
Benefit from (provision for) income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
Dollars
|
(in thousands)
|
2017
|
|
2016
|
|
Benefit from (provision for) income taxes
|
$
|
154,249
|
|
|
$
|
(111,705
|
)
|
|
$
|
265,954
|
|
Effective tax rate
|
(608
|
)%
|
|
174
|
%
|
|
|
We reported a tax benefit of $154.2 million on a pretax income of $25.4 million, which resulted in a negative effective tax rate of 608 percent for fiscal 2017. The most significant component of this tax amount was the tax benefit of $210.3 million from a partial release of the valuation allowance in connection with the acquisition of Demandware. The net deferred tax liability from the acquisition of Demandware provided a source of additional income to support the realizability of our preexisting deferred tax assets and as a result, we released a portion of our tax valuation allowance. The tax benefit associated with the release of the valuation allowance was partially offset by income taxes in profitable jurisdictions outside the United States. Additionally, as a result of early adopting Accounting Standards Update No. 2016-09, “Stock Compensation (Topic 718): Improvements to Employee Shared-Based Payment Accounting” (“ASU 2016-09”) and our valuation allowance position, we did not record significant U.S. current income tax expense.
We recorded a tax provision of $111.7 million with a pretax income of $64.3 million, which resulted in an effective tax rate of 174 percent for fiscal 2016. We had a tax provision in profitable jurisdictions outside the United States and current tax
expense in the United States. We had U.S. current tax expense as a result of taxable income before considering certain excess
tax benefits from stock options and vesting of restricted stock.
Liquidity and Capital Resources
At
January 31, 2018
, our principal sources of liquidity were cash, cash equivalents and marketable securities totaling
$4.5 billion
and accounts receivable of
$3.9 billion
. Our cash, cash equivalents and marketable securities are comprised primarily of corporate notes and obligations, U.S. treasury securities, asset backed securities, foreign government obligations, mortgage backed obligations, time deposits, money market mutual funds and municipal securities.
Net cash provided by operating activities was
$2.7 billion
during
fiscal 2018
and
$2.2 billion
during the same period a year ago. Net cash provided by operating activities was
$2.2 billion
during
fiscal 2017
and
$1.7 billion
during
fiscal 2016
. Cash provided by operating activities has historically been affected by the amount of net
income
adjusted for non-cash expense items such as depreciation and amortization; amortization of purchased intangibles from business combinations; amortization of debt discount; the expense associated with stock-based awards; gains on sales of strategic investments; the timing of employee related costs including commissions and bonus payments; the timing of payments against accounts payable, accrued expenses and other current liabilities; the timing of collections from our customers, which is our largest source of operating cash flows; the timing of business combination activity and the related integration and transaction costs; and changes in working capital accounts.
Our working capital accounts consist of accounts receivable, deferred commissions, prepaid assets and other current assets. Claims against working capital include accounts payable, accrued expenses, deferred revenue, and other current
liabilities and payments related to our debt obligations. Our working capital may be impacted by factors in future periods such as billings to customers for subscriptions and support services and the subsequent collection of those billings, certain amounts and timing of which are seasonal. Our working capital in some quarters may be impacted by adverse foreign currency exchange rate movements and this impact may increase as our working capital balances increase in our foreign subsidiaries. Our billings are also influenced by new business linearity within the quarters and across quarters.
As described above in “Seasonal Nature of Deferred Revenue, Accounts Receivable and Operating Cash Flow,” our fourth quarter has historically been our strongest quarter for new business and renewals and, correspondingly, the first quarter has historically been the strongest for cash collections. The year on year compounding effect of this seasonality in both billing patterns and overall business causes both the value of invoices that we generate in the fourth quarter and cash collections in the first quarter to increase as a proportion of our total annual billings.
We generally invoice our customers for our subscription and services contracts in advance in annual installments. We typically issue renewal invoices in advance of the renewal service period, and depending on timing, the initial invoice for the subscription and services contract and the subsequent renewal invoice may occur in different quarters. Such invoice amounts are initially reflected in accounts receivable and deferred revenue, which is reflected on the balance sheets, and as the contract renewal approaches, the corresponding deferred revenue decreases to zero. The operating cash flow benefit of increased billing activity generally occurs in the subsequent quarter when we collect from our customers. As such, our first quarter is our largest collections and operating cash flow quarter.
Net cash used in investing activities was
$2.0 billion
during
fiscal 2018
and
$2.7 billion
during the same period a year ago. The net cash used in investing activities during
fiscal 2018
primarily related to purchases of marketable securities of
$2.0 billion
and new office build outs and capital investments of
$534.0 million
, which were offset by the cash inflows for the period from the sales of marketable securities of
$558.6 million
. Net cash used in investing activities was
$2.7 billion
during
fiscal 2017
and
$1.5 billion
during
fiscal 2016
. The net cash used in investing activities during
fiscal 2017
primarily related to business combinations with the largest being the acquisition of Demandware in July 2016, purchases of marketable securities of approximately
$1.1 billion
, new office build-outs and strategic and capital investments, which were offset by the cash inflows for the period from sales and maturities of marketable securities of
$2.0 billion
. Net cash used in investing activities was
$1.5 billion
during
fiscal 2016
, which primarily related to capital expenditures, strategic investments, business combinations, the purchase of 50 Fremont land and building, new office build-outs, investment of cash balances offset by proceeds from sales and maturities of marketable securities and proceeds from the sale of Mission Bay land and the use of restricted cash to purchase 50 Fremont land and building.
Net cash provided by financing activities was
$221.2 million
during
fiscal 2018
as compared to
$997.7 million
during the same period a year ago. Net cash provided by financing activities during
fiscal 2018
consisted primarily of
$650.3 million
from proceeds from equity plans offset by
$200.0 million
repayment of the revolving credit facility,
$123.2 million
of principal payments on conversions of the 0.25% Senior Notes and
$105.9 million
of principal payments on capital lease obligations. Net cash provided by financing activities was
$997.7 million
during
fiscal 2017
as compared to net cash provided by financing activities of
$73.2 million
during
fiscal 2016
. Net cash provided by financing activities during
fiscal 2017
consisted primarily of
$748.8 million
proceeds from borrowings under our revolving credit facility,
$495.6 million
of proceeds from the Term Loan, net of loan fees,
$401.5 million
from proceeds from equity plans offset by
$98.2 million
of principal payments on capital leases and
$550.0 million
payment of our revolving credit facility. Net cash provided by financing activities during
fiscal 2016
consisted primarily of
$455.5 million
from proceeds from equity plan offset by
$82.3 million
of principal payments on capital leases and
$300.0 million
payment of our revolving credit facility.
In March 2013, we issued at par value $1.15 billion of 0.25% convertible senior notes (“0.25% Senior Notes”), due April 2018, unless earlier purchased by us or converted. The Notes are classified as a current liability on our consolidated balance sheet as of
January 31, 2018
as they are due within one year. As of
January 31, 2018
the remaining principal balance of the 0.25% Senior Notes outstanding is
$1.03 billion
.
In July 2016, we entered into a credit agreement (“
Revolving Loan Credit Agreement
”), which provides for a
$1.0 billion
unsecured revolving credit facility (“Credit Facility”) that matures in July 2021. We may use any future borrowings under the Credit Facility for refinancing other indebtedness, working capital, capital expenditures and other general corporate purposes, including permitted acquisitions. We may borrow amounts under the Credit Facility at any time during the term of the
Revolving Loan Credit Agreement
. As of
January 31, 2018
, we had no outstanding borrowings under the Credit Facility. We were in compliance with the
Revolving Loan Credit Agreement
’s covenants as of
January 31, 2018
.
In July 2016, to partially finance the acquisition of Demandware, we entered into a
$500.0 million
term loan (“Term Loan”) which matures in July 2019. As of
January 31, 2018
, the noncurrent outstanding principal portion of the Term Loan was
$500.0 million
.
All outstanding amounts under the Term Loan Credit Agreement will be due and payable in July 2019. The Company may prepay the Term Loan, in whole or in part, at any time without premium or penalty, subject to certain conditions, and
amounts repaid or prepaid may not be reborrowed. The Company’s obligations under the Term Loan Credit Agreement are required to be guaranteed by certain of its subsidiaries meeting certain thresholds set forth in the Term Loan Credit Agreement. The Company was in compliance with the Term Loan Credit Agreement’s covenants as of
January 31, 2018
.
As of
January 31, 2018
, we have a total of
$99.9 million
in letters of credit outstanding in favor of certain landlords for office space. To date, no amounts have been drawn against the letters of credit, which renew annually and expire at various dates through
December 2030.
We do not have any special purpose entities, and other than operating leases for office space and computer equipment, we do not engage in off-balance sheet financing arrangements.
Our principal commitments consist of obligations under leases for office space, co-location data center facilities and our development and test data center, as well as leases for computer equipment, software, furniture and fixtures. At
January 31, 2018
, the future non-cancelable minimum payments under these commitments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
Payments Due by Period
|
|
Total
|
|
Less than 1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than 5 Years
|
Capital lease obligations, including interest
|
$
|
317,645
|
|
|
$
|
115,909
|
|
|
$
|
201,695
|
|
|
$
|
41
|
|
|
$
|
0
|
|
Operating lease obligations:
|
|
|
|
|
|
|
|
|
|
Facilities space
|
2,727,369
|
|
|
335,289
|
|
|
660,807
|
|
|
575,673
|
|
|
1,155,600
|
|
Computer equipment and furniture and
fixtures
|
555,958
|
|
|
275,636
|
|
|
280,322
|
|
|
0
|
|
|
0
|
|
0.25% Convertible Senior Notes
|
1,026,821
|
|
|
1,026,821
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Loan assumed on 50 Fremont
|
200,000
|
|
|
2,128
|
|
|
7,661
|
|
|
8,257
|
|
|
181,954
|
|
Term loan
|
500,000
|
|
|
0
|
|
|
500,000
|
|
|
0
|
|
|
0
|
|
Financing obligation - leased facility
|
300,903
|
|
|
21,881
|
|
|
45,095
|
|
|
46,872
|
|
|
187,055
|
|
Contractual commitments
|
513,831
|
|
|
185,449
|
|
|
229,132
|
|
|
53,500
|
|
|
45,750
|
|
|
$
|
6,142,527
|
|
|
$
|
1,963,113
|
|
|
$
|
1,924,712
|
|
|
$
|
684,343
|
|
|
$
|
1,570,359
|
|
The majority of our operating lease agreements provide us with the option to renew. Our future operating lease obligations would change if we exercised these options and if we entered into additional operating lease agreements as we expand our operations.
The financing obligation - leased facility above represents the total obligation for our lease of approximately 445,000 rentable square feet of office space at 350 Mission St. ("350 Mission") in San Francisco, California. As of
January 31, 2018
,
$218.2 million
of the total obligation noted above was recorded to Financing obligation - leased facility, of which the current portion is included in “Accounts payable, accrued expenses and other liabilities” and the noncurrent portion is included in “Other noncurrent liabilities” on the consolidated balance sheets.
Purchase orders are not included in the table above. Our purchase orders represent authorizations to purchase rather than binding agreements. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum services to be used; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.
In April 2016, we entered into an agreement with a third-party provider for certain infrastructure services for a period of four years. We paid
$96.0 million
in connection with this agreement during
fiscal 2018
. The agreement further provides that we will pay an additional
$108.0 million
in fiscal 2019 and
$126.0 million
in fiscal 2020. This agreement is included in the table above under contractual commitments.
In July 2017, we entered into an agreement with a third-party to obtain the exclusive naming rights for the Salesforce Transit Center project in San Francisco for a period of 25 years. We paid a non-refundable fee of $1.0 million upon execution of the agreement and we are obligated to pay approximately $4.4 million each year over the life of the agreement. The agreement may be terminated by us without cause upon satisfaction of certain conditions and is therefore excluded from the table above.
During fiscal
2018
and in future fiscal years, we have made and expect to continue to make additional investments in our infrastructure to scale our operations and increase productivity. We plan to upgrade or replace various internal systems to scale with the overall growth of the Company. Additionally, we expect capital expenditures to be higher in absolute dollars and remain consistent as a percentage of total revenues in future periods as a result of continued office build-outs, other leasehold improvements and data center investments.
In the future, we may enter into arrangements to acquire or invest in complementary businesses, services and technologies, and intellectual property rights. To facilitate these acquisitions or investments, we may seek additional equity or debt financing, which may not be available on terms favorable to us or at all, which may affect our ability to complete subsequent acquisitions or investments, and which may affect the risks of owning our common stock.
We believe our existing cash, cash equivalents, marketable securities, cash provided by operating activities and, if necessary, our borrowing capacity under our Credit Facility will be sufficient to meet our working capital, capital expenditure and debt repayment needs over the next 12 months. We expect our cash tax payments for the next 12 months, primarily from profitable jurisdictions outside of the U.S, to be consistent with those paid in prior years. Additionally, the one-time transition tax under the Tax Act will not have an impact on our cash taxes based on our provisional assessment.
New Accounting Pronouncements
See Note 1 “Summary of Business and Significant Accounting Policies” to the consolidated financial statements for our discussion about new accounting pronouncements adopted and those pending.
Other Information
Environmental, Social and Governance
We believe the business of business is improving the state of the world for all of our stakeholders, including our stockholders, customers, employees, community, environment and society. We are committed to creating a sustainable, low-carbon future by delivering a carbon neutral cloud, operating as a net-zero greenhouse gas emissions company and by working to achieve our goal of 100 percent renewable energy for our global operations. In addition, we have spearheaded initiatives to drive equality in four key areas: equal rights, equal pay, equal education and equal opportunity. We also pioneered and have inspired other companies to adopt our 1-1-1 integrated philanthropy model, which leverages 1 percent of a company’s equity, employee time and product to help improve communities around the world. Together with the Salesforce Foundation, a 501(c)(3) nonprofit organization, and Salesforce.org, a nonprofit social enterprise, which are not included in our consolidated financial statements, we have given approximately $200 million to charitable organizations, logged more than 2.6 million employee volunteer hours around the world and provided more than 34,000 nonprofit and higher education organizations with the use of our service offerings for free or at a discount.
Below are some of the key highlights of our environmental, social and governance efforts:
|
|
•
|
In fiscal 2018 we achieved net-zero greenhouse gas emissions and began delivering a carbon neutral cloud for all customers. In addition, we are committed to working toward 100 percent renewable energy for our global operations. To support this goal, in fiscal 2016, we signed two virtual power purchase agreements in West Virginia and Texas and, in fiscal 2018, we began sourcing 100 percent renewable energy for approximately 90 percent of our urban campus in San Francisco.
|
|
|
•
|
As part of our ongoing work to promote equality in employee pay, opportunity and advancement, in fiscal 2017, we initiated our equal pay assessment and subsequently adjusted our pay practices to eliminate statistically significant gender-associated differences in pay, committing approximately $6 million to this end to date.
|
|
|
•
|
In fiscal 2018, we announced that Salesforce Tower will feature the largest on-site water recycling system in a commercial high-rise building in the United States. The system is expected to reduce the building's water consumption and provide water recycling capabilities for all building tenants.
|
|
|
•
|
We strive to integrate sustainability into our corporate events. For example, at Dreamforce 2017, we offset 100 percent of onsite event greenhouse gas emissions, as well as emissions from employee travel, through carbon credits purchased by us.
|
|
|
•
|
We are active in and support organizations that move the United States and the world toward a more sustainable, low-carbon future. For example, we were a founding member of the Business Renewables Center, signed the Corporate Renewable Energy Buyers’ Principles, helped to launch the Corporate Colocation and Cloud Buyers’ Principles, disclose our annual carbon emissions to the Carbon Disclosure Project, and signed on to initiatives such as We Mean Business and the American Business Act on Climate.
|
|
|
•
|
We have significantly increased the diversity of our Board over the past five years, including with respect to gender and race.
|
We leverage a number of communications channels and strategic content to better serve and engage our many stakeholders. Our sustainability website, www.salesforce.com/company/sustainability, provides information regarding our environmental and other sustainability efforts, including our annual impact reports and our environmental policy. At our equality portal, www.salesforce.com/company/equality, our stakeholders can gain insights on our approach to equality, see our company profile by gender, and review our most recent Employer Information Report, which provides a snapshot in time of our
U.S. demographics based on categories prescribed by the federal government. In addition, stakeholders can learn about equality through one of our many free Trailheads. Our annual proxy statement, as available on the Investor Relations website, www.investor.salesforce.com, or www.sec.gov, provides additional details on our corporate governance practices, including our board composition.
|
|
ITEM 8.
|
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements are filed as part of this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of salesforce.com, inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of salesforce.com, inc. (the Company) as of January 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss)
,
stockholders' equity and cash flows for each of the three years in the period ended January 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a)2 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)
and our report dated
March 9, 2018
expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2002
Redwood City, California
March 9, 2018
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of salesforce.com, inc.
Opinion on Internal Control Over Financial Reporting
We have audited salesforce.com, inc.’s internal control over financial reporting as of January 31, 2018 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, salesforce.com, inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of January 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of January 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended January 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a)2, and our report dated
March 9, 2018
expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Redwood City, California
March 9, 2018
salesforce.com, inc.
Consolidated Balance Sheets
(in thousands)
|
|
|
|
|
|
|
|
|
|
January 31,
2018
|
|
January 31,
2017
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
2,543,484
|
|
|
$
|
1,606,549
|
|
Marketable securities
|
1,978,221
|
|
|
602,338
|
|
Accounts receivable, net of allowance for doubtful accounts of $20,963 and $12,039 at January 31, 2018 and 2017, respectively
|
3,917,401
|
|
|
3,196,643
|
|
Deferred commissions
|
460,887
|
|
|
311,770
|
|
Prepaid expenses and other current assets
|
390,378
|
|
|
279,527
|
|
Total current assets
|
9,290,371
|
|
|
5,996,827
|
|
Property and equipment, net
|
1,946,527
|
|
|
1,787,534
|
|
Deferred commissions, noncurrent
|
413,375
|
|
|
227,849
|
|
Capitalized software, net
|
146,065
|
|
|
141,671
|
|
Strategic investments
|
677,283
|
|
|
566,953
|
|
Goodwill
|
7,314,096
|
|
|
7,263,846
|
|
Intangible assets acquired through business combinations, net
|
826,445
|
|
|
1,113,374
|
|
Other assets, net
|
395,640
|
|
|
486,869
|
|
Total assets
|
$
|
21,009,802
|
|
|
$
|
17,584,923
|
|
Liabilities, temporary equity and stockholders’ equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable, accrued expenses and other liabilities
|
$
|
2,010,096
|
|
|
$
|
1,752,664
|
|
Deferred revenue
|
7,094,705
|
|
|
5,542,802
|
|
Current portion of debt
|
1,024,717
|
|
|
0
|
|
Total current liabilities
|
10,129,518
|
|
|
7,295,466
|
|
Non-current debt
|
694,781
|
|
|
2,008,391
|
|
Other noncurrent liabilities
|
793,140
|
|
|
780,939
|
|
Total liabilities
|
11,617,439
|
|
|
10,084,796
|
|
Commitments and contingencies (See Notes 13 and 15)
|
|
|
|
Temporary equity:
|
|
|
|
Convertible 0.25% senior notes due April 2018
|
3,867
|
|
|
0
|
|
Stockholders’ equity:
|
|
|
|
Preferred stock, $0.001 par value; 5,000 shares authorized and none issued and outstanding
|
0
|
|
|
0
|
|
Common stock, $0.001 par value; 1,600,000 shares authorized, 729,853 and 707,460 issued and outstanding at January 31, 2018 and 2017, respectively
|
730
|
|
|
708
|
|
Additional paid-in capital
|
9,752,340
|
|
|
8,040,170
|
|
Accumulated other comprehensive loss
|
(27,142
|
)
|
|
(75,841
|
)
|
Accumulated deficit
|
(337,432
|
)
|
|
(464,910
|
)
|
Total stockholders’ equity
|
9,388,496
|
|
|
7,500,127
|
|
Total liabilities, temporary equity and stockholders’ equity
|
$
|
21,009,802
|
|
|
$
|
17,584,923
|
|
See accompanying Notes.
salesforce.com, inc.
Consolidated Statements of Operations
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
|
|
Subscription and support
|
$
|
9,710,538
|
|
|
$
|
7,756,205
|
|
|
$
|
6,205,599
|
|
Professional services and other
|
769,474
|
|
|
635,779
|
|
|
461,617
|
|
Total revenues
|
10,480,012
|
|
|
8,391,984
|
|
|
6,667,216
|
|
Cost of revenues (1)(2):
|
|
|
|
|
|
Subscription and support
|
2,033,457
|
|
|
1,617,315
|
|
|
1,241,692
|
|
Professional services and other
|
740,065
|
|
|
616,724
|
|
|
412,856
|
|
Total cost of revenues
|
2,773,522
|
|
|
2,234,039
|
|
|
1,654,548
|
|
Gross profit
|
7,706,490
|
|
|
6,157,945
|
|
|
5,012,668
|
|
Operating expenses (1)(2):
|
|
|
|
|
|
Research and development
|
1,553,073
|
|
|
1,208,127
|
|
|
946,300
|
|
Marketing and sales
|
4,829,291
|
|
|
3,918,027
|
|
|
3,239,824
|
|
General and administrative
|
1,088,358
|
|
|
967,563
|
|
|
748,238
|
|
Operating lease termination resulting from purchase of 50 Fremont
|
0
|
|
|
0
|
|
|
(36,617
|
)
|
Total operating expenses
|
7,470,722
|
|
|
6,093,717
|
|
|
4,897,745
|
|
Income from operations
|
235,768
|
|
|
64,228
|
|
|
114,923
|
|
Investment income
|
35,848
|
|
|
27,374
|
|
|
15,341
|
|
Interest expense
|
(86,943
|
)
|
|
(88,988
|
)
|
|
(72,485
|
)
|
Other income (expense) (1)
|
17,435
|
|
|
9,072
|
|
|
(15,292
|
)
|
Gain on sales of land and building improvements
|
0
|
|
|
0
|
|
|
21,792
|
|
Gains from acquisitions of strategic investments
|
0
|
|
|
13,697
|
|
|
0
|
|
Income before benefit from (provision for) income taxes
|
202,108
|
|
|
25,383
|
|
|
64,279
|
|
Benefit from (provision for) income taxes
|
(74,630
|
)
|
|
154,249
|
|
|
(111,705
|
)
|
Net income (loss)
|
$
|
127,478
|
|
|
$
|
179,632
|
|
|
$
|
(47,426
|
)
|
Basic net income (loss) per share
|
$
|
0.18
|
|
|
$
|
0.26
|
|
|
$
|
(0.07
|
)
|
Diluted net income (loss) per share
|
$
|
0.17
|
|
|
$
|
0.26
|
|
|
$
|
(0.07
|
)
|
Shares used in computing basic net income (loss) per share
|
714,919
|
|
|
687,797
|
|
|
661,647
|
|
Shares used in computing diluted net income (loss) per share
|
734,598
|
|
|
700,217
|
|
|
661,647
|
|
_______________
(1) Amounts include amortization of purchased intangibles from business combinations, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
Cost of revenues
|
$
|
165,545
|
|
|
$
|
127,676
|
|
|
$
|
80,918
|
|
Marketing and sales
|
121,340
|
|
|
97,601
|
|
|
77,152
|
|
Other income (expense)
|
1,433
|
|
|
2,491
|
|
|
3,636
|
|
(2) Amounts include stock-based expense, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
Cost of revenues
|
$
|
129,954
|
|
|
$
|
107,457
|
|
|
$
|
69,443
|
|
Research and development
|
259,838
|
|
|
187,487
|
|
|
129,434
|
|
Marketing and sales
|
468,553
|
|
|
388,937
|
|
|
289,152
|
|
General and administrative
|
138,668
|
|
|
136,486
|
|
|
105,599
|
|
See accompanying Notes.
salesforce.com, inc.
Consolidated Statements of
Comprehensive Income (Loss)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
Net income (loss)
|
$
|
127,478
|
|
|
$
|
179,632
|
|
|
$
|
(47,426
|
)
|
Other comprehensive income (loss), before tax and net of reclassification adjustments:
|
|
|
|
|
|
Foreign currency translation and other gains (losses)
|
52,072
|
|
|
(43,070
|
)
|
|
(16,616
|
)
|
Unrealized gains (losses) on marketable securities and strategic investments
|
(4,497
|
)
|
|
14,500
|
|
|
(9,193
|
)
|
Other comprehensive income (loss), before tax
|
47,575
|
|
|
(28,570
|
)
|
|
(25,809
|
)
|
Tax effect
|
1,124
|
|
|
2,646
|
|
|
0
|
|
Other comprehensive income (loss), net of tax
|
48,699
|
|
|
(25,924
|
)
|
|
(25,809
|
)
|
Comprehensive income (loss)
|
$
|
176,177
|
|
|
$
|
153,708
|
|
|
$
|
(73,235
|
)
|
See accompanying Notes.
salesforce.com, inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated Other Comprehensive Loss
|
|
Accumulated
Deficit
|
|
Total
Stockholders’
Equity
|
|
Shares
|
|
Amount
|
|
Balance at January 31, 2015
|
650,596
|
|
|
$
|
651
|
|
|
$
|
4,604,485
|
|
|
$
|
(24,108
|
)
|
|
$
|
(605,845
|
)
|
|
$
|
3,975,183
|
|
Exercise of stock options and stock grants to board members for board services
|
8,278
|
|
|
8
|
|
|
296,493
|
|
|
0
|
|
|
0
|
|
|
296,501
|
|
Vested restricted stock units converted to shares
|
8,933
|
|
|
9
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
9
|
|
Shares issued related to business combinations, net
|
117
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Shares issued under employee stock plans
|
3,005
|
|
|
3
|
|
|
154,957
|
|
|
0
|
|
|
0
|
|
|
154,960
|
|
Tax benefits from employee stock plans
|
0
|
|
|
0
|
|
|
59,496
|
|
|
0
|
|
|
0
|
|
|
59,496
|
|
Stock-based expenses
|
0
|
|
|
0
|
|
|
589,955
|
|
|
0
|
|
|
0
|
|
|
589,955
|
|
Other comprehensive loss, net of tax
|
0
|
|
|
0
|
|
|
0
|
|
|
(25,809
|
)
|
|
0
|
|
|
(25,809
|
)
|
Net loss
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(47,426
|
)
|
|
(47,426
|
)
|
Balance at January 31, 2016
|
670,929
|
|
|
$
|
671
|
|
|
$
|
5,705,386
|
|
|
$
|
(49,917
|
)
|
|
$
|
(653,271
|
)
|
|
$
|
5,002,869
|
|
Exercise of stock options and stock grants to board members for board services
|
5,555
|
|
|
6
|
|
|
200,760
|
|
|
0
|
|
|
0
|
|
|
200,766
|
|
Vested restricted stock units converted to shares
|
8,098
|
|
|
8
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
8
|
|
Shares issued related to business combinations, net
|
19,697
|
|
|
20
|
|
|
1,192,170
|
|
|
0
|
|
|
0
|
|
|
1,192,190
|
|
Shares issued under employee stock plans
|
3,181
|
|
|
3
|
|
|
126,147
|
|
|
0
|
|
|
0
|
|
|
126,150
|
|
Stock-based expenses
|
0
|
|
|
0
|
|
|
815,707
|
|
|
0
|
|
|
0
|
|
|
815,707
|
|
Other comprehensive loss, net of tax
|
0
|
|
|
0
|
|
|
0
|
|
|
(25,924
|
)
|
|
0
|
|
|
(25,924
|
)
|
Excess tax benefits cumulative-effect adjustment
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
8,729
|
|
|
8,729
|
|
Net income
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
179,632
|
|
|
179,632
|
|
Balance at January 31, 2017
|
707,460
|
|
|
$
|
708
|
|
|
$
|
8,040,170
|
|
|
$
|
(75,841
|
)
|
|
$
|
(464,910
|
)
|
|
$
|
7,500,127
|
|
Exercise of stock options and stock grants to board members for board services
|
8,389
|
|
|
8
|
|
|
389,819
|
|
|
0
|
|
|
0
|
|
|
389,827
|
|
Vested restricted stock units converted to shares
|
9,527
|
|
|
10
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
10
|
|
Shares issued related to business combinations, net
|
333
|
|
|
0
|
|
|
12,145
|
|
|
0
|
|
|
0
|
|
|
12,145
|
|
Shares issued under employee stock plans
|
4,144
|
|
|
4
|
|
|
319,683
|
|
|
0
|
|
|
0
|
|
|
319,687
|
|
Temporary equity reclassification related to 0.25% convertible notes
|
0
|
|
|
0
|
|
|
(3,867
|
)
|
|
0
|
|
|
0
|
|
|
(3,867
|
)
|
Settlement of 0.25% convertible notes
|
0
|
|
|
0
|
|
|
(346
|
)
|
|
0
|
|
|
0
|
|
|
(346
|
)
|
Stock-based expenses
|
0
|
|
|
0
|
|
|
994,736
|
|
|
0
|
|
|
0
|
|
|
994,736
|
|
Other comprehensive income, net of tax
|
0
|
|
|
0
|
|
|
0
|
|
|
48,699
|
|
|
0
|
|
|
48,699
|
|
Net income
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
127,478
|
|
|
127,478
|
|
Balance at January 31, 2018
|
729,853
|
|
|
$
|
730
|
|
|
$
|
9,752,340
|
|
|
$
|
(27,142
|
)
|
|
$
|
(337,432
|
)
|
|
$
|
9,388,496
|
|
See accompanying Notes.
salesforce.com, inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
Operating activities:
|
|
|
|
|
|
Net income (loss)
|
$
|
127,478
|
|
|
$
|
179,632
|
|
|
$
|
(47,426
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
752,600
|
|
|
632,245
|
|
|
525,750
|
|
Amortization of debt discount and issuance costs
|
31,267
|
|
|
30,541
|
|
|
27,467
|
|
Gain on sales of land and building improvements
|
0
|
|
|
0
|
|
|
(21,792
|
)
|
Gains from acquisitions of strategic investments
|
0
|
|
|
(13,697
|
)
|
|
0
|
|
50 Fremont lease termination
|
0
|
|
|
0
|
|
|
(36,617
|
)
|
Amortization of deferred commissions
|
464,662
|
|
|
371,541
|
|
|
319,074
|
|
Expenses related to employee stock plans
|
997,013
|
|
|
820,367
|
|
|
593,628
|
|
Changes in assets and liabilities, net of business combinations:
|
|
|
|
|
|
Accounts receivable, net
|
(720,019
|
)
|
|
(628,477
|
)
|
|
(582,425
|
)
|
Deferred commissions
|
(799,305
|
)
|
|
(462,030
|
)
|
|
(380,022
|
)
|
Prepaid expenses and other current assets and other assets
|
24,140
|
|
|
(28,850
|
)
|
|
50,772
|
|
Accounts payable, accrued expenses and other liabilities
|
308,225
|
|
|
49,953
|
|
|
253,986
|
|
Deferred revenue
|
1,551,904
|
|
|
1,210,973
|
|
|
969,686
|
|
Net cash provided by operating activities
|
2,737,965
|
|
|
2,162,198
|
|
|
1,672,081
|
|
Investing activities:
|
|
|
|
|
|
Business combinations, net of cash acquired
|
(25,391
|
)
|
|
(3,192,739
|
)
|
|
(58,680
|
)
|
Proceeds from land and building improvements held for sale
|
0
|
|
|
0
|
|
|
127,066
|
|
Purchase of 50 Fremont land and building
|
0
|
|
|
0
|
|
|
(425,376
|
)
|
Deposit for purchase of 50 Fremont land and building
|
0
|
|
|
0
|
|
|
115,015
|
|
Non-refundable amounts received for sale of land available for sale
|
0
|
|
|
0
|
|
|
6,284
|
|
Purchases of strategic investments
|
(216,438
|
)
|
|
(110,329
|
)
|
|
(386,219
|
)
|
Sales of strategic investments
|
130,732
|
|
|
80,342
|
|
|
19,700
|
|
Purchases of marketable securities
|
(2,003,115
|
)
|
|
(1,070,412
|
)
|
|
(1,139,267
|
)
|
Sales of marketable securities
|
558,614
|
|
|
2,005,301
|
|
|
500,264
|
|
Maturities of marketable securities
|
79,123
|
|
|
67,454
|
|
|
37,811
|
|
Capital expenditures
|
(534,027
|
)
|
|
(463,958
|
)
|
|
(284,476
|
)
|
Net cash used in investing activities
|
(2,010,502
|
)
|
|
(2,684,341
|
)
|
|
(1,487,878
|
)
|
Financing activities:
|
|
|
|
|
|
Proceeds from term loan, net
|
0
|
|
|
495,550
|
|
|
0
|
|
Proceeds from employee stock plans
|
650,300
|
|
|
401,481
|
|
|
455,482
|
|
Principal payments on capital lease obligations
|
(105,896
|
)
|
|
(98,157
|
)
|
|
(82,330
|
)
|
Payments on revolving credit facility
|
(200,000
|
)
|
|
(550,000
|
)
|
|
(300,000
|
)
|
Proceeds from revolving credit facility
|
0
|
|
|
748,824
|
|
|
0
|
|
Payments on convertible 0.25% senior notes
|
(123,179
|
)
|
|
0
|
|
|
0
|
|
Net cash provided by financing activities
|
221,225
|
|
|
997,698
|
|
|
73,152
|
|
Effect of exchange rate changes
|
(11,753
|
)
|
|
(27,369
|
)
|
|
(7,109
|
)
|
Net increase in cash and cash equivalents
|
936,935
|
|
|
448,186
|
|
|
250,246
|
|
Cash and cash equivalents, beginning of period
|
1,606,549
|
|
|
1,158,363
|
|
|
908,117
|
|
Cash and cash equivalents, end of period
|
$
|
2,543,484
|
|
|
$
|
1,606,549
|
|
|
$
|
1,158,363
|
|
See accompanying Notes.
salesforce.com, inc.
Consolidated Statements of Cash Flows
Supplemental Cash Flow Disclosure
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
Supplemental cash flow disclosure:
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
Interest
|
$
|
40,340
|
|
|
$
|
54,999
|
|
|
$
|
37,954
|
|
Income taxes, net of tax refunds
|
$
|
53,234
|
|
|
$
|
36,388
|
|
|
$
|
31,462
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Fixed assets acquired under capital leases
|
$
|
4,038
|
|
|
$
|
585
|
|
|
$
|
12,948
|
|
Building - leased facility acquired under financing obligation
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
77,057
|
|
Fair value of loan assumed on 50 Fremont
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
198,751
|
|
Fair value of equity awards assumed
|
$
|
0
|
|
|
$
|
103,267
|
|
|
$
|
0
|
|
Fair value of common stock issued as consideration for business combinations
|
$
|
12,145
|
|
|
$
|
1,088,917
|
|
|
$
|
0
|
|
Increase (decrease) to non-cash equity liability
|
$
|
(68,355
|
)
|
|
$
|
68,355
|
|
|
$
|
0
|
|
See accompanying Notes.
salesforce.com, inc.
Notes to Consolidated Financial Statements
1. Summary of Business and Significant Accounting Policies
Description of Business
Salesforce.com, inc. (the "Company") is a leading provider of enterprise software, delivered through the cloud, with a focus on customer relationship management, or CRM. The Company introduced its first CRM solution in 2000, and has since expanded its service offerings into new areas and industries with new editions, features and platform capabilities.
The Company's core mission is to empower its customers to connect with their customers in entirely new ways through cloud, mobile, social, Internet of Things (“IoT”) and artificial intelligence technologies.
The Company's Customer Success Platform is a comprehensive portfolio of service offerings providing sales force automation, customer service and support, marketing automation, digital commerce, community management, industry-specific solutions, analytics, application development, IoT integration, collaborative productivity tools, an enterprise cloud marketplace which the Company refers to as the AppExchange, and its professional cloud services.
Fiscal Year
The Company’s fiscal year ends on January 31. References to fiscal
2018
, for example, refer to the fiscal year ending
January 31, 2018
.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP") requires management to make estimates and assumptions in the Company’s consolidated financial statements and notes thereto.
Significant estimates and assumptions made by management include the determination of:
|
|
•
|
the best estimate of selling price of the deliverables included in multiple deliverable revenue arrangements;
|
|
|
•
|
the fair value of assets acquired and liabilities assumed for business combinations;
|
|
|
•
|
the recognition, measurement and valuation of current and deferred income taxes;
|
|
|
•
|
the fair value of certain stock awards issued;
|
|
|
•
|
the useful lives of intangible assets, property and equipment and building and structural components; and
|
|
|
•
|
the valuation of strategic investments and the determination of other-than-temporary impairments.
|
Actual results could differ materially from those estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the result of which forms the basis for making judgments about the carrying values of assets and liabilities.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Segments
The Company operates as
one
operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who is the chief executive officer, in deciding how to allocate resources and assessing performance. Over the past few years, the Company has completed a number of acquisitions. These acquisitions have allowed the Company to expand its offerings, presence and reach in various market segments of the enterprise cloud computing market. While the Company has offerings in multiple enterprise cloud computing market segments, including as a result of the Company's acquisitions, the Company’s business operates in
one
operating segment because the majority of the Company's offerings operate on a single platform and are deployed in an identical way, and
the Company’s chief operating decision maker evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis. Since the Company operates in
one
operating segment, all required financial segment information can be found in the consolidated financial statements.
Concentrations of Credit Risk and Significant Customers
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable. In addition, in connection with the Company's Convertible
0.25%
Senior Notes (as defined in Note 8 "Debt"), which were issued in March 2013, the Company entered into convertible note
hedge transactions with respect to its common stock, which are exposed to concentrations of credit risk. Collateral is not required for accounts receivable or the note hedge transactions. The Company maintains an allowance for its doubtful accounts receivable. This allowance is based upon historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with delinquent accounts. Receivables are written-off and charged against its recorded allowance when the Company has exhausted collection efforts without success.
No
single customer accounted for more than
five percent
of accounts receivable at
January 31, 2018
and
January 31, 2017
.
No
single customer accounted for
five percent
or more of total revenue during
fiscal 2018
,
2017
and
2016
.
Geographic Locations
As of
January 31, 2018
and
2017
, assets located outside the Americas were
16 percent
and
12 percent
of total assets, respectively. As of
January 31, 2018
and
2017
, assets located in the United States were
83 percent
and
86 percent
of total assets, respectively.
Revenues by geographical region are as follows (in thousands):
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Fiscal Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
Americas
|
$
|
7,579,116
|
|
|
$
|
6,224,971
|
|
|
$
|
4,910,745
|
|
Europe
|
1,903,524
|
|
|
1,373,547
|
|
|
1,162,808
|
|
Asia Pacific
|
997,372
|
|
|
793,466
|
|
|
593,663
|
|
|
$
|
10,480,012
|
|
|
$
|
8,391,984
|
|
|
$
|
6,667,216
|
|
Revenues by geography are determined based on the region of the Salesforce contracting entity, which may be different than the region of the customer. Americas revenue attributed to the United States was approximately
96 percent
,
96 percent
and
95 percent
during
fiscal 2018
,
2017
and
2016
, respectively.
No
other country represented more than ten percent of total revenue during the
fiscal 2018
,
2017
and
2016
.
Revenue Recognition
The Company derives its revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing the Company’s enterprise cloud computing services and from customers paying for additional support beyond the standard support that is included in the basic subscription fees; and (2) related professional services such as process mapping, project management, implementation services and other revenue. Other revenue consists primarily of training fees.
The Company commences revenue recognition when all of the following conditions are satisfied:
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•
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there is persuasive evidence of an arrangement;
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•
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the service has been or is being provided to the customer;
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•
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the collection of the fees is reasonably assured; and
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•
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the amount of fees to be paid by the customer is fixed or determinable.
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The Company’s subscription service arrangements are non-cancelable and do not contain refund-type provisions.
Subscription and Support Revenues
Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement date of each contract, which is the date the Company’s service is made available to customers.
Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
Professional Services and Other Revenues
The Company’s professional services contracts are either on a time and materials, fixed fee or subscription basis. These revenues are recognized as the services are rendered for time and materials contracts, when the milestones are achieved and accepted by the customer or on a proportional performance basis for fixed price contracts and ratably over the contract term for subscription professional services contracts. The milestone method for revenue recognition is used when there is substantive uncertainty at the date the contract is entered into whether the milestone will be achieved. Training revenues are recognized as the services are performed.
Multiple Deliverable Arrangements
The Company enters into arrangements with multiple deliverables that generally include multiple subscriptions, premium support and professional services. If the deliverables have standalone value at contract inception, the Company accounts for each deliverable separately. Subscription services have standalone value as such services are often sold separately. In determining whether professional services have standalone value, the Company considers the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the subscription service start date and the contractual dependence of the subscription service on the customer’s satisfaction with the professional services work. To date, the Company has concluded that all of the professional services included in multiple deliverable arrangements executed have standalone value.
Multiple deliverables included in an arrangement are separated into different units of accounting and the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. The Company determines the relative selling price for a deliverable based on its vendor-specific objective evidence of selling price (“VSOE”), if available, or its best estimate of selling price (“BESP”), if VSOE is not available. The Company has determined that third-party evidence of selling price (“TPE”) is not a practical alternative due to differences in its service offerings compared to other parties and the availability of relevant third-party pricing information. The amount of revenue allocated to delivered items is limited by contingent revenue, if any.
For certain professional services, the Company has established VSOE as a consistent number of standalone sales of these deliverables have been priced within a reasonably narrow range. The Company has not established VSOE for its subscription services due to lack of pricing consistency, the introduction of new services and other factors. Accordingly, the Company uses its BESP to determine the relative selling price for its subscription services.
The Company determines BESP by considering its overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the Company’s discounting practices, the size and volume of the Company’s transactions, the customer demographic, the geographic area where services are sold, price lists, its go-to-market strategy, historical standalone sales and contract prices. The determination of BESP is made through consultation with and approval by the Company’s management, taking into consideration the go-to-market strategy. As the Company’s go-to-market strategies evolve, the Company may modify its pricing practices in the future, which could result in changes in relative selling prices, including both VSOE and BESP.
Deferred Revenue
The deferred revenue balance does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from subscription services described above and is recognized as the revenue recognition criteria are met. The Company generally invoices customers in annual installments. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, dollar size and new business linearity within the quarter.
Deferred Commissions
Deferred commissions are the incremental costs that are directly associated with non-cancelable subscription contracts with customers and consist of sales commissions paid to the Company’s direct sales force.
The commissions are deferred and amortized over the non-cancelable terms of the related customer contracts, which are typically
12
to
36 months
. The commission payments are paid in full the month after the customer’s service commences and are a direct and incremental cost of the revenue arrangements. The deferred commission amounts are recoverable through the future revenue streams under the non-cancelable customer contracts. The Company believes this is the preferable method of accounting as the commission charges are so closely related to the revenue from the non-cancelable customer contracts that they should be recorded as an asset and charged to expense over the same period that the subscription revenue is recognized. Amortization of deferred commissions is included in marketing and sales expense in the accompanying consolidated statements of operations.
During
fiscal 2018
, the Company deferred
$799.3 million
of commission expenditures and amortized
$464.7 million
to marketing and sales expense. During the same period a year ago, the Company deferred
$462.0 million
of commission expenditures and amortized
$371.5 million
to marketing and sales expense. Deferred commissions on the Company's consolidated balance sheets totaled
$874.3 million
at
January 31, 2018
and
$539.6 million
at
January 31, 2017
.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at fair value.
Marketable Securities
The Company considers all of its marketable debt securities as available for use in current operations, including those with maturity dates beyond one year, and therefore classifies these securities within current assets on the consolidated balance sheets. Securities are classified as available for sale and are carried at fair value, with the change in unrealized gains and losses, net of tax, reported as a separate component on the consolidated statements of comprehensive income until realized. Fair value is determined based on quoted market rates when observable or utilizing data points that are observable, such as quoted prices, interest rates and yield curves. Declines in fair value judged to be other-than-temporary on securities available for sale are included as a reduction to investment income. To determine whether a decline in value is other-than-temporary, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value and its intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. For the purposes of computing realized and unrealized gains and losses, the cost of securities sold is based on the specific-identification method. Interest on securities classified as available for sale is also included as a component of investment income.
Strategic Investments
The Company holds certain marketable equity and non-marketable debt and equity securities within its strategic investments portfolio. Marketable equity securities are measured using quoted prices in their respective active markets, non-marketable debt securities are recorded at their estimated fair value and the non-marketable equity securities are recorded at cost.
Marketable equity securities and non-marketable debt securities, which consist of debt investments in privately held companies, are recorded at fair value with changes in fair value recorded through accumulated other comprehensive income. Equity investments without readily determinable fair values for which the Company does not have the ability to exercise significant influence are accounted for using the cost method of accounting. Under the cost method of accounting, the non-marketable securities are carried at cost and are adjusted only for other-than-temporary impairments, certain distributions and additional investments. These investments are valued using significant unobservable inputs or data in an inactive market and the valuation requires the Company's judgment due to the absence of market prices and inherent lack of liquidity. The estimated fair value is based on quantitative and qualitative factors including, but not limited to, subsequent financing activities by the investee and projected discounted cash flows.
The carrying value of the Company’s strategic investments is impacted by various events such as entering into new investments, dispositions due to acquisitions, fair market value adjustments or initial public offerings. The cash inflows from exits and cash outflows for new investments are disclosed within the investing activities section of the statement of cash flows and any realized gains or losses are recorded within the operating activities of the statements of cash flows for each of the respective fiscal quarter periods.
Derivative Financial Instruments
The Company enters into foreign currency derivative contracts with financial institutions to reduce foreign exchange risk. The Company uses forward currency derivative contracts to minimize the Company’s exposure to balances primarily denominated in the Euro, British Pound Sterling, Japanese Yen, Canadian Dollar and Australian Dollar. The Company’s foreign currency derivative contracts, which are not designated as hedging instruments, are used to reduce the exchange rate risk associated primarily with intercompany receivables and payables. The Company’s derivative financial instruments program is not designated for trading or speculative purposes. As of
January 31, 2018
and
2017
, the outstanding foreign currency derivative contracts were recorded at fair value on the consolidated balance sheets.
Foreign currency derivative contracts are marked-to-market at the end of each reporting period with gains and losses recognized as other expense to offset the gains or losses resulting from the settlement or remeasurement of the underlying foreign currency denominated receivables and payables. While the contract or notional amount is often used to express the volume of foreign currency derivative contracts, the amounts potentially subject to credit risk are generally limited to the amounts, if any, by which the counterparties’ obligations under the agreements exceed the obligations of the Company to the counterparties.
Fair Value Measurement
The Company measures its cash and cash equivalents, marketable securities and foreign currency derivative contracts at fair value. The additional disclosures regarding the Company’s fair value measurements are included in Note 4 “Fair Value Measurement.”
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of those assets as follows:
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Computers, equipment and software
|
3 to 9 years
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Furniture and fixtures
|
5 years
|
Leasehold improvements
|
Shorter of the estimated lease term or 10 years
|
Building and structural components
|
Average weighted useful life of 32 years
|
Building - leased facility
|
27 years
|
Building improvements
|
10 years
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When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from their respective accounts and any loss on such retirement is reflected in operating expenses.
Capitalized Software Costs
The Company capitalizes costs related to its enterprise cloud computing services and certain projects for internal use incurred during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life, which is generally
three
to
five
years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Intangible Assets acquired through Business Combinations
Intangible assets are amortized over their estimated useful lives. Each period, the Company evaluates the estimated remaining useful life of its intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization.
Impairment Assessment
The Company evaluates intangible assets and long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This includes but is not limited to significant adverse changes in business climate, market conditions, or other events that indicate an asset's carrying amount may not be recoverable. Recoverability of these assets is measured by comparing the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. If the undiscounted cash flows used in the test for recoverability are less than the carrying amount of these assets, the carrying amount of such assets is reduced to fair value.
The Company evaluates and tests the recoverability of its goodwill for impairment at least annually during its fourth quarter of each fiscal year or more often if and when circumstances indicate that goodwill may not be recoverable.
There was
no
impairment of intangible assets, long-lived assets or goodwill during
fiscal 2018
,
2017
and
2016
.
Business Combinations
The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the acquisition date. The Company continues to collect information and reevaluates these estimates and assumptions quarterly and records any adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations.
In the event the Company acquires an entity with which the Company has a preexisting relationship, the Company will recognize a gain or loss to settle that relationship as of the acquisition date, which is recorded in other income (expense) within the statements of operations. In the event that the Company acquires an entity in which the Company previously held a strategic investment, the difference between the fair value of the shares as of the date of the acquisition and the carrying value of the strategic investment is recorded as a gain or loss and disclosed separately within the statements of operations.
Leases and Asset Retirement Obligations
The Company categorizes leases at their inception as either operating or capital leases. In certain lease agreements, the Company may receive rent holidays and other incentives. The Company recognizes lease costs on a straight-line basis once control of the space is achieved, without regard to deferred payment terms such as rent holidays that defer the commencement date of required payments. Additionally, incentives received are treated as a reduction of costs over the term of the agreement.
The Company establishes assets and liabilities for the present value of estimated future costs to retire long-lived assets at the termination or expiration of a lease. Such assets are depreciated over the lease period to operating expense.
In the event the Company is the deemed owner for accounting purposes during construction, the Company records assets and liabilities for the estimated construction costs incurred under build-to-suit lease arrangements to the extent it is involved in the construction of structural improvements or takes construction risk prior to commencement of a lease.
The Company additionally has entered into subleases for unoccupied leased office space. To the extent there are losses associated with the sublease, they are recognized in the period the sublease is executed. Gains are recognized over the sublease life. Any sublease payments received in excess of the straight-line rent payments for the sublease are recorded in other income (expense).
Accounting for Stock-Based Expense
The Company recognizes stock-based expenses related to stock options and restricted stock awards on a straight-line basis, net of estimated forfeitures, over the requisite service period of the awards, which is generally the vesting term of
four years
. The Company recognizes stock-based expenses related to shares issued pursuant to its Amended and Restated 2004 Employee Stock Purchase Plan (“ESPP” or “2004 Employee Stock Purchase Plan”) on a straight-line basis over the offering period, which is
12 months
. The ESPP allows employees to purchase shares of the Company's common stock at a 15 percent discount and also allows employees to reduce their percentage election once during a six month purchase period (December 15 and June 15 of each fiscal year), but not increase that election until the next one-year offering period. The ESPP also includes a re-set provision for the purchase price if the stock price on the purchase date is less than the stock price on the offering date.
Stock-based expenses related to performance share grants are measured based on grant date fair value and expensed on a straight-line basis over the service period of the awards, which is generally the vesting term of
three
years.
The Company, at times, grants unvested restricted shares to employee stockholders of certain acquired companies in lieu of cash consideration. These awards are generally subject to continued post-acquisition employment. Therefore, the Company accounts for them as post-acquisition stock-based expense. The Company recognizes stock-based expense equal to the grant date fair value of the restricted stock awards on a straight-line basis over the requisite service period of the awards, which is generally
four years
.
Advertising Expenses
Advertising is expensed as incurred. Advertising expense was
$372.9 million
,
$350.3 million
and
$315.6 million
for fiscal
2018
,
2017
and
2016
, respectively.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the consolidated statements of operations in the period that includes the enactment date.
The Company’s tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, solely based on its technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than
50 percent
likely to be realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax provision.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the applicable tax law. The Company regularly reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The Company’s judgments regarding future profitability may change due to many factors, including future market conditions and the ability to
successfully execute its business plans and/or tax planning strategies. Should there be a change in the ability to recover deferred tax assets, the tax provision would increase or decrease in the period in which the assessment is changed.
In December 2017, the Tax Cuts and Jobs Act ("Tax Act") was enacted into law, significantly changing income tax law that affects U.S corporations. Key changes included a corporate tax rate reduction from 35 percent to 21 percent effective January 1, 2018, expensing of certain qualified property, significant changes to the U.S international tax system such as a one-time transition tax on accumulated foreign earnings, and how foreign earnings are subject to U.S. tax. The Company is required to recognize the effects of the tax law changes in the period of enactment, including the determination of the transition tax and the re-measurement of deferred taxes as well as to re-assess the realizability of the deferred tax assets. Subsequent to the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which allows companies to record provisional amounts related to the effects of the Tax Act during a measurement period not to extend beyond one year from the enactment date. Due to the timing of the Tax Act and additional guidance and interpretations that may be issued by the U.S. Treasury Department, the Internal Revenue Service ("IRS") and other standard-setting bodies in the future, the Company has not completed its analysis of the income tax effects of the Tax Act. The provisional estimates will be adjusted during the measurement period defined under SAB 118, based upon the Company's ongoing analysis of its data and tax positions along with new guidance from regulators and interpretations of the law.
Foreign Currency Translation
The functional currency of the Company’s major foreign subsidiaries is generally the local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as a separate component on the consolidated statements of comprehensive income. Foreign currency transaction gains and losses are included in Other income (expense) in the consolidated statements of operations for the period. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average exchange rate during the period. Equity transactions are translated using historical exchange rates.
Warranties and Indemnification
The Company’s enterprise cloud computing services are typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable and materially in accordance with the Company’s online help documentation under normal use and circumstances.
The Company’s arrangements generally include certain provisions for indemnifying customers against liabilities if its products or services infringe a third party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of such obligations and has not accrued any material liabilities related to such obligations in the accompanying consolidated financial statements.
The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as the Company’s director or officer or that person’s services provided to any other company or enterprise at the Company’s request. The Company maintains director and officer insurance coverage that would generally enable the Company to recover a portion of any future amounts paid. The Company may also be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.
New Accounting Pronouncements Adopted in Fiscal 2018
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2017-01, "Business Combinations (Topic 805) Clarifying the Definition of a Business" ("ASU 2017-01") which amended the existing FASB Accounting Standards Codification. The standard provides additional guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 is effective for fiscal 2019 with early adoption permitted. The Company early adopted the standard in the first quarter of fiscal 2018 on a prospective basis. Since the Company has not acquired any material businesses since the start of the year, this standard has had no impact on the Company's financial statements.
In May 2017, the FASB issued Accounting Standards Update No. 2017-09, "Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting" ("ASU 2017-09") which amended the existing FASB Accounting Standards Codification. The standard provides clarity and reduces the cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. ASU 2017-09 is
effective for fiscal 2019 with early adoption permitted. The Company early adopted the standard in the second quarter of fiscal 2018 on a prospective basis and this standard has had no impact on the Company's financial statements.
Accounting Pronouncements Pending Adoption
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"), which amended the existing FASB Accounting Standards Codification and replaces the existing revenue recognition guidance with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. The standard also provides guidance on the recognition of costs related to obtaining customer contracts. ASU 2014-09, as amended, will be effective as of the beginning of fiscal 2019, including interim periods within that reporting period.
The Company plans to adopt the standard using the full retrospective method to restate each prior reporting period presented. The Company does not expect the adoption of ASU 2014-09 to have any impact on its total cash flows from operating, investing or financing activities.
Revenue pursuant to ASU 2014-09
The Company is continuing to assess the impact of adopting ASU 2014-09 on its financial position, results of operations and related disclosures and believes that the impact is not material.
The Company believes that the new standard will impact the following policies and disclosures:
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removal of the current limitation on contingent revenue will result in revenue being recognized earlier for certain contracts;
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•
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allocation of subscription and support revenue across different clouds and to professional services revenue;
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•
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estimation of variable consideration for arrangements with overage fees;
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•
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required disclosures including disaggregation of revenues, information about the remaining transaction price and when the Company expects to recognize revenue; and
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accounting for deferred commissions including costs that qualify for deferral and the amortization period.
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Capitalized costs to acquire a contract pursuant to ASU 2014-09
The accounting for capitalized costs to acquire a contract under the new standard is significantly different than the Company’s current accounting for deferred commissions. The new guidance results in the capitalization of significantly more costs and longer amortization lives. Under the Company’s current accounting, the Company only capitalizes sales commissions that have a direct relationship to a specific new revenue contract. Currently, payments made to those employees not directly related to the sale of a new contract or those related to any renewals, including the associated fringe benefits and payroll taxes, and partner referral fees are not capitalized. Additionally, all amounts capitalized under the Company’s current policy are amortized over the specific contract terms of the underlying new revenue arrangements, which were typically 12 to 36 months.
Under the new standard, the Company will capitalize incremental costs of acquiring a non-cancelable subscription and support revenue contract. The capitalized amounts will consist primarily of sales commissions paid to the Company’s direct sales force. Capitalized amounts will also include (1) amounts paid to employees other than the direct sales force who earn incentive payouts under annual compensation plans that are tied to the value of contracts acquired, (2) commissions paid to employees upon renewals of subscription and support contracts, (3) the associated payroll taxes and fringe benefit costs associated with the payments to the Company’s employees, and to a lesser extent (4) success fees paid to partners in emerging markets where the Company has a limited presence.
Capitalized costs related to new revenue contracts will be amortized on a straight-line basis over four years, which, although longer than the typical initial contract period, reflects the average period of benefit, including expected contract renewals. In arriving at this average period of benefit, the Company evaluated both qualitative and quantitative factors, including the estimated life cycles of its offerings and its customer attrition. Additionally, the Company will amortize capitalized costs for renewals and success fees paid to partners over two years.
While the Company has not yet finalized its assessment of the impact the new commission accounting policy will have on its financial position and results of operations, the Company believes it will be material to both its balance sheet and statement of operations due to the capitalization of additional costs and the longer period of amortization.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, "Financial Instrument-Overall (Subtopic 825-10)" ("ASU 2016-01"), which requires entities to measure equity instruments at fair value and recognize any changes in fair value within the statement of operations. Under the new standard, the Company will record its publicly traded equity investments at fair value on a quarterly basis and record the change within the statement of operations. Previously, such adjustments were recorded in other comprehensive income. The guidance provides for electing the measurement alternative or defaulting to the fair value option for equity investments that do not have readily determinable fair values.
The Company plans to elect the measurement alternative for its equity investments in privately held companies, which are included in strategic
investments in the accompanying consolidated balance sheets. These investments will be measured at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer, which will be recorded within the statement of operations. The determination of whether a transaction is for a similar investment will require significant management judgment including consideration of the rights and obligations between the investments and the extent to which those differences would affect the fair values of those investments with additional consideration for the stage of development of the investee company. In addition, the determination of fair value for those investments with orderly transactions for similar investments may require significant assumptions and complex valuation models, all of which requires management judgment due to the absence of market prices and lack of liquidity.
The new standard is effective as of the beginning of fiscal 2019, including interim periods within that reporting period, on a prospective basis for nonmarketable equity securities and a modified retrospective basis for publicly held equity investments. The adoption of ASU 2016-01 will impact the Company's strategic investments portfolio, which consists of approximately
$24.5 million
in publicly traded equity investments and
$599.3 million
in privately held equity investments, as of
January 31, 2018
, both of which are recorded in strategic investments within the balance sheet. Upon adoption of ASU 2016-01, the Company will reclassify
$13.0 million
, excluding the tax impact, from accumulated other comprehensive loss on the balance sheet to accumulated deficit. This amount reflects unrealized gains recorded on the Company's publicly traded equity investments as of January 31, 2018. Refer to Note 2, "Investments," for additional details. The new standard could have a material impact to the Company's consolidated financial statements, including additional volatility to the Company's statements of operations in future periods, due to changes in market prices of the Company's investments in publicly held equity investments and the valuation and timing of observable price changes and impairments of its investments in non-marketable securities.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory" ("ASU 2016-16"), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The new standard is effective for annual periods beginning after December 15, 2017, with early adoption permitted as of the beginning of a fiscal year. The Company plans to adopt the new standard in its first quarter of fiscal 2019. Based on transactions up to January 31, 2018, the Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which requires lessees to record most leases on their balance sheets but recognize the expenses on their statements of operations in a manner similar to current accounting rules. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The new standard is effective for interim and annual periods beginning after December 15, 2018 on a modified retrospective basis. The Company is in the process of implementing changes to its systems, processes and controls, in conjunction with its review of existing lease agreements, in order to adopt the new standard in its first quarter of fiscal 2020. The Company expects its leases designated as operating leases in Note 13, “Commitments,” will be reported on the consolidated balance sheets upon adoption. The Company is currently evaluating the impact to its consolidated financial statements as it relates to other aspects of the business.
Reclassifications
Certain reclassifications to fiscal 2017 and
2016
balances were made to conform to the current period presentation in the consolidated balance sheets, consolidated statement of operations and consolidated statements of cash flows. These reclassifications include cost of revenues-subscription and support, cost of revenues-professional services and other, and purchases and sales of strategic investments.
2. Investments
Marketable Securities
At
January 31, 2018
, marketable securities consisted of the following (in thousands):
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Investments classified as Marketable Securities
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Amortized
Cost
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Unrealized
Gains
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Unrealized
Losses
|
|
Fair Value
|
Corporate notes and obligations
|
$
|
1,222,752
|
|
|
$
|
877
|
|
|
$
|
(7,264
|
)
|
|
$
|
1,216,365
|
|
U.S. treasury securities
|
196,224
|
|
|
2
|
|
|
(1,926
|
)
|
|
194,300
|
|
Mortgage backed obligations
|
99,994
|
|
|
7
|
|
|
(1,250
|
)
|
|
98,751
|
|
Asset backed securities
|
251,197
|
|
|
38
|
|
|
(1,206
|
)
|
|
250,029
|
|
Municipal securities
|
53,019
|
|
|
1
|
|
|
(703
|
)
|
|
52,317
|
|
Foreign government obligations
|
86,623
|
|
|
0
|
|
|
(978
|
)
|
|
85,645
|
|
U.S. agency obligations
|
19,256
|
|
|
1
|
|
|
(131
|
)
|
|
19,126
|
|
Commercial Paper
|
11,429
|
|
|
0
|
|
|
0
|
|
|
11,429
|
|
Covered bonds
|
50,530
|
|
|
13
|
|
|
(284
|
)
|
|
50,259
|
|
Total marketable securities
|
$
|
1,991,024
|
|
|
$
|
939
|
|
|
$
|
(13,742
|
)
|
|
$
|
1,978,221
|
|
At
January 31, 2017
, marketable securities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments classified as Marketable Securities
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Value
|
Corporate notes and obligations
|
$
|
321,284
|
|
|
$
|
887
|
|
|
$
|
(1,531
|
)
|
|
$
|
320,640
|
|
U.S. treasury securities
|
62,429
|
|
|
68
|
|
|
(674
|
)
|
|
61,823
|
|
Mortgage backed obligations
|
74,882
|
|
|
39
|
|
|
(669
|
)
|
|
74,252
|
|
Asset backed securities
|
101,913
|
|
|
74
|
|
|
(197
|
)
|
|
101,790
|
|
Municipal securities
|
33,523
|
|
|
35
|
|
|
(183
|
)
|
|
33,375
|
|
Foreign government obligations
|
10,491
|
|
|
3
|
|
|
(36
|
)
|
|
10,458
|
|
Total marketable securities
|
$
|
604,522
|
|
|
$
|
1,106
|
|
|
$
|
(3,290
|
)
|
|
$
|
602,338
|
|
The contractual maturities of the investments classified as marketable securities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
January 31,
2018
|
|
January 31,
2017
|
Due within 1 year
|
$
|
395,120
|
|
|
$
|
104,631
|
|
Due in 1 year through 5 years
|
1,578,738
|
|
|
494,127
|
|
Due in 5 years through 10 years
|
4,363
|
|
|
3,580
|
|
|
$
|
1,978,221
|
|
|
$
|
602,338
|
|
As of
January 31, 2018
, the following marketable securities were in an unrealized loss position (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
Corporate notes and obligations
|
$
|
910,294
|
|
|
$
|
(6,435
|
)
|
|
$
|
39,000
|
|
|
$
|
(829
|
)
|
|
$
|
949,294
|
|
|
$
|
(7,264
|
)
|
U.S. treasury securities
|
152,413
|
|
|
(1,658
|
)
|
|
9,543
|
|
|
(268
|
)
|
|
161,956
|
|
|
(1,926
|
)
|
Mortgage backed obligations
|
76,929
|
|
|
(905
|
)
|
|
18,763
|
|
|
(345
|
)
|
|
95,692
|
|
|
(1,250
|
)
|
Asset backed securities
|
193,262
|
|
|
(1,109
|
)
|
|
11,484
|
|
|
(97
|
)
|
|
204,746
|
|
|
(1,206
|
)
|
Municipal securities
|
41,077
|
|
|
(550
|
)
|
|
8,469
|
|
|
(153
|
)
|
|
49,546
|
|
|
(703
|
)
|
Foreign government obligations
|
79,526
|
|
|
(922
|
)
|
|
6,119
|
|
|
(56
|
)
|
|
85,645
|
|
|
(978
|
)
|
U.S. agency obligations
|
15,375
|
|
|
(131
|
)
|
|
0
|
|
|
0
|
|
|
15,375
|
|
|
(131
|
)
|
Covered bonds
|
21,453
|
|
|
(186
|
)
|
|
3,301
|
|
|
(98
|
)
|
|
24,754
|
|
|
(284
|
)
|
|
$
|
1,490,329
|
|
|
$
|
(11,896
|
)
|
|
$
|
96,679
|
|
|
$
|
(1,846
|
)
|
|
$
|
1,587,008
|
|
|
$
|
(13,742
|
)
|
The unrealized losses for each of the fixed rate marketable securities were less than
$0.3 million
. The Company does not believe any of the unrealized losses represent an other-than-temporary impairment based on its evaluation of available evidence as of
January 31, 2018
, such as the Company's intent to hold and whether it is more likely than not that the Company will be required to sell the investment before recovery of the investment's amortized basis. The Company expects to receive the full principal and interest on all of these marketable securities.
Investment Income
Investment income consists of interest income, realized gains and realized losses on the Company’s cash, cash equivalents and marketable securities. The components of investment income are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
Interest income
|
$
|
36,480
|
|
|
$
|
21,901
|
|
|
$
|
14,146
|
|
Realized gains
|
940
|
|
|
7,858
|
|
|
3,287
|
|
Realized losses
|
(1,572
|
)
|
|
(2,385
|
)
|
|
(2,092
|
)
|
Total investment income
|
$
|
35,848
|
|
|
$
|
27,374
|
|
|
$
|
15,341
|
|
Reclassification adjustments out of accumulated other comprehensive income into investment income were immaterial for
fiscal 2018
,
2017
and
2016
.
Strategic Investments
As of
January 31, 2018
, the Company had
two
investments in marketable equity securities with a fair value of
$24.5 million
, which included an unrealized gain of
$13.0 million
. As of
January 31, 2017
, the Company had
six
investments in marketable equity securities with a fair value of
$41.0 million
, which included an unrealized gain of
$24.5 million
. The change in the fair value of the investments in publicly held companies is recorded in the consolidated balance sheets within strategic investments and accumulated other comprehensive income (loss).
As of
January 31, 2018
and
2017
, the carrying value of the Company’s non-marketable debt and equity securities was
$652.8 million
and
$526.0 million
, respectively. The estimated fair value of the non-marketable debt and equity securities was approximately
$912.0 million
and
$758.3 million
as of
January 31, 2018
and
2017
, respectively.
The Company sold a portion of its publicly-held investments in
fiscal 2018
, which resulted in a reclassification of previously unrealized gains from the statement of comprehensive income (loss) to other income (expense) in the statement of operations in the amount of
$58.6 million
. This amount was not material in prior periods.
Strategic investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
Balance at
beginning of
year
|
|
Additions
|
|
Sales, dispositions and fair market value adjustments (1)
|
|
Balance at
end of
year
|
Fiscal year ended January 31, 2018
|
$
|
566,953
|
|
|
$
|
216,438
|
|
|
$
|
(106,108
|
)
|
|
$
|
677,283
|
|
Fiscal year ended January 31, 2017
|
$
|
520,721
|
|
|
$
|
110,329
|
|
|
$
|
(64,097
|
)
|
|
$
|
566,953
|
|
(1) Amounts include the release of the cost-basis and the current unrealized gain or loss balance recorded in accumulated other comprehensive loss when shares of a publicly-held investment are sold, disposition-related reductions of a cost-basis investment if a privately-held company within the portfolio is acquired by another company, fair market value adjustments such as cost basis reductions related to impairments that are other-than-temporary and unrealized gains or losses related to investments held in publicly traded companies.
3. Derivatives
Details on outstanding foreign currency derivative contracts are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
January 31, 2018
|
|
January 31, 2017
|
Notional amount of foreign currency derivative contracts
|
$
|
1,871,258
|
|
|
$
|
1,280,953
|
|
Fair value of foreign currency derivative contracts
|
$
|
12,368
|
|
|
$
|
10,205
|
|
The fair value of the Company’s outstanding derivative instruments not designated as hedging instruments are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
Balance Sheet Location
|
January 31, 2018
|
|
January 31, 2017
|
Derivative Assets
|
|
|
|
|
Foreign currency derivative contracts
|
Prepaid expenses and other current assets
|
$
|
17,949
|
|
|
$
|
13,238
|
|
Derivative Liabilities
|
|
|
|
|
Foreign currency derivative contracts
|
Accounts payable, accrued expenses and other liabilities
|
$
|
5,581
|
|
|
$
|
3,033
|
|
Gains/losses on derivative instruments not designated as hedging instruments recorded in
Other income (expense)
in the consolidated statements of operations during
fiscal 2018
,
2017
and
2016
, respectively, are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
Foreign currency derivative contracts
|
$
|
15,403
|
|
|
$
|
(86,239
|
)
|
|
$
|
(25,786
|
)
|
4. Fair Value Measurement
The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1.
Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2.
Significant other inputs that are directly or indirectly observable in the marketplace.
Level 3.
Significant unobservable inputs which are supported by little or no market activity.
All of the Company’s cash equivalents, marketable securities and foreign currency derivative contracts are classified within Level 1 or Level 2 because the Company’s cash equivalents, marketable securities and foreign currency derivative contracts are valued using quoted market prices or alternative pricing sources and models utilizing observable market inputs.
The following table presents information about the Company’s assets and liabilities that are measured at fair value as of
January 31, 2018
and indicates the fair value hierarchy of the valuation (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Balances as of January 31, 2018
|
Cash equivalents (1):
|
|
|
|
|
|
|
|
Time deposits
|
$
|
0
|
|
|
$
|
542,756
|
|
|
$
|
0
|
|
|
$
|
542,756
|
|
Money market mutual funds
|
1,389,165
|
|
|
0
|
|
|
0
|
|
|
1,389,165
|
|
Marketable securities:
|
|
|
|
|
|
|
|
Corporate notes and obligations
|
0
|
|
|
1,216,365
|
|
|
0
|
|
|
1,216,365
|
|
U.S. treasury securities
|
0
|
|
|
194,300
|
|
|
0
|
|
|
194,300
|
|
Mortgage backed obligations
|
0
|
|
|
98,751
|
|
|
0
|
|
|
98,751
|
|
Asset backed securities
|
0
|
|
|
250,029
|
|
|
0
|
|
|
250,029
|
|
Municipal securities
|
0
|
|
|
52,317
|
|
|
0
|
|
|
52,317
|
|
Foreign government obligations
|
0
|
|
|
85,645
|
|
|
0
|
|
|
85,645
|
|
U.S. agency obligations
|
0
|
|
|
19,126
|
|
|
0
|
|
|
19,126
|
|
Commercial Paper
|
0
|
|
|
11,429
|
|
|
0
|
|
|
11,429
|
|
Covered bonds
|
0
|
|
|
50,259
|
|
|
0
|
|
|
50,259
|
|
Foreign currency derivative contracts (2)
|
0
|
|
|
17,949
|
|
|
0
|
|
|
17,949
|
|
Total assets
|
$
|
1,389,165
|
|
|
$
|
2,538,926
|
|
|
$
|
0
|
|
|
$
|
3,928,091
|
|
Liabilities:
|
|
|
|
|
|
|
|
Foreign currency derivative contracts (3)
|
0
|
|
|
5,581
|
|
|
0
|
|
|
5,581
|
|
Total liabilities
|
$
|
0
|
|
|
$
|
5,581
|
|
|
$
|
0
|
|
|
$
|
5,581
|
|
___________
(1)
Included in “cash and cash equivalents” in the accompanying consolidated balance sheet as of
January 31, 2018
, in addition to
$611.6 million
of cash.
(2)
Included in “prepaid expenses and other current assets” in the accompanying consolidated balance sheet as of
January 31, 2018
.
(3)
Included in “accounts payable, accrued expenses and other liabilities” in the accompanying consolidated balance sheet as of
January 31, 2018
.
The following table presents information about the Company’s assets and liabilities that are measured at fair value as of
January 31, 2017
and indicates the fair value hierarchy of the valuation (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs (Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Balances as of
January 31, 2017
|
Cash equivalents (1):
|
|
|
|
|
|
|
|
Time deposits
|
$
|
0
|
|
|
$
|
25,100
|
|
|
$
|
0
|
|
|
$
|
25,100
|
|
Money market mutual funds
|
956,479
|
|
|
0
|
|
|
0
|
|
|
956,479
|
|
Marketable securities:
|
|
|
|
|
|
|
|
Corporate notes and obligations
|
0
|
|
|
320,640
|
|
|
0
|
|
|
320,640
|
|
U.S. treasury securities
|
0
|
|
|
61,823
|
|
|
0
|
|
|
61,823
|
|
Mortgage backed obligations
|
0
|
|
|
74,252
|
|
|
0
|
|
|
74,252
|
|
Asset backed securities
|
0
|
|
|
101,790
|
|
|
0
|
|
|
101,790
|
|
Municipal securities
|
0
|
|
|
33,375
|
|
|
0
|
|
|
33,375
|
|
Foreign government obligations
|
0
|
|
|
10,458
|
|
|
0
|
|
|
10,458
|
|
Foreign currency derivative contracts (2)
|
0
|
|
|
13,238
|
|
|
0
|
|
|
13,238
|
|
Total assets
|
$
|
956,479
|
|
|
$
|
640,676
|
|
|
$
|
0
|
|
|
$
|
1,597,155
|
|
Liabilities:
|
|
|
|
|
|
|
|
Foreign currency derivative contracts (3)
|
0
|
|
|
3,033
|
|
|
0
|
|
|
3,033
|
|
Total liabilities
|
$
|
0
|
|
|
$
|
3,033
|
|
|
$
|
0
|
|
|
$
|
3,033
|
|
______________
(1)
Included in “cash and cash equivalents” in the accompanying consolidated balance sheet as of
January 31, 2017
, in addition to
$625.0 million
of cash.
(2)
Included in “prepaid expenses and other current assets” in the accompanying consolidated balance sheet as of
January 31, 2017
.
(3)
Included in “accounts payable, accrued expenses and other liabilities” in the accompanying consolidated balance sheet as of
January 31, 2017
.
5. Property and Equipment
Property and Equipment
Property and equipment, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
January 31, 2018
|
|
January 31, 2017
|
Land
|
$
|
183,888
|
|
|
$
|
183,888
|
|
Buildings and building improvements
|
626,062
|
|
|
621,377
|
|
Computers, equipment and software
|
1,628,827
|
|
|
1,440,986
|
|
Furniture and fixtures
|
139,299
|
|
|
112,564
|
|
Leasehold improvements
|
824,470
|
|
|
627,069
|
|
|
3,402,546
|
|
|
2,985,884
|
|
Less accumulated depreciation and amortization
|
(1,456,019
|
)
|
|
(1,198,350
|
)
|
|
$
|
1,946,527
|
|
|
$
|
1,787,534
|
|
Depreciation and amortization expense totaled
$372.8 million
,
$322.8 million
, and
$302.0 million
during
fiscal 2018
,
2017
and
2016
, respectively. During
fiscal 2018
, the Company retired approximately
$122.3 million
of property and equipment that had been fully depreciated.
Computers, equipment and software at
January 31, 2018
and
2017
included a total of
$709.4 million
and
$729.0 million
acquired under capital lease agreements, respectively. Accumulated amortization relating to computers, equipment and software acquired under capital leases totaled
$449.6 million
and
$386.9 million
, respectively, at
January 31, 2018
and
2017
. Amortization of assets acquired under capital leases is included in depreciation and amortization expense.
Land Sales
In October 2015, the Company sold approximately
8.8
net acres of undeveloped real estate and the associated perpetual parking rights in San Francisco, California, which were classified as held for sale. The total proceeds from the sale were
$157.1 million
, of which the Company received
$127.1 million
in October 2015 and previously received a nonrefundable deposit in the amount of
$30.0 million
during April 2014. The Company recognized a gain of
$21.8 million
, net of closing costs, on the sale of this portion of the Company’s land and building improvements and perpetual parking rights.
Building - 350 Mission
In December 2013, the Company entered into a lease agreement for approximately
445,000
rentable square feet of office space at 350 Mission Street (“350 Mission”) in San Francisco, California, which is the total office space available in the building. As a result of the Company’s involvement during the construction period, the Company is considered for accounting purposes to be the owner of 350 Mission. As a result, the Company has capitalized the construction costs as Building with a corresponding current and noncurrent financing obligation liability and has accounted for the underlying land implicitly as an operating lease. Construction was completed in fiscal 2017. The Company capitalized
$178.8 million
of construction costs, based on the construction costs incurred by the landlord, and recorded a corresponding current and noncurrent financing obligation liability of
$20.0 million
and
$198.2 million
, respectively. The total expected financing obligation in the form of minimum lease payments inclusive of the amounts currently recorded is
$300.9 million
, including interest (see Note 13 “Commitments” for future commitment details). The obligation will be settled through monthly lease payments to the landlord, which commenced in October 2015. To the extent that operating expenses for 350 Mission are material, the Company, as the deemed accounting owner, will record the operating expenses.
6. Business Combinations
Fiscal Year 2018
During fiscal 2018, the Company acquired
two
companies for an aggregate of
$37.6 million
in cash and equity, net of cash acquired, and has included the financial results of these companies in its consolidated financial statements from the dates of acquisition. The transactions were not material to the Company and the costs associated with the acquisitions were not material. The Company accounted for the transactions as business combinations. In allocating the purchase consideration based on estimated fair values, the Company recorded
$2.7 million
of intangible assets and
$34.6 million
of goodwill. The majority of the goodwill balance associated with these business combinations is deductible for U.S. income tax purposes.
Fiscal Year 2017
Krux
In November 2016, the Company acquired the outstanding stock of Krux Digital, Inc. (“Krux”), for consideration consisting of cash, common stock, and equity awards assumed. Krux is a leading data management platform that unifies, segments and activates audiences to increase engagement with users, prospects and customers. The Company has included the financial results of Krux in the consolidated financial statements from the date of acquisition, which have not been material to date. The transaction costs associated with the acquisition were not material.
The acquisition date fair value consideration transferred for Krux was approximately
$741.8 million
, which consisted of the following (in thousands, except for share data):
|
|
|
|
|
|
Fair Value
|
Cash
|
$
|
367,995
|
|
Common stock (4,210,773 shares)
|
317,703
|
|
Fair value of stock options and restricted stock awards assumed
|
56,068
|
|
Total
|
$
|
741,766
|
|
The fair value of stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of
0.2
was applied to convert Krux's outstanding equity awards for Krux's common stock into equity awards for shares of the Company's common stock.
The following table summarizes the fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
|
|
|
|
|
|
Fair Value
|
Cash and cash equivalents
|
$
|
17,883
|
|
Other current and noncurrent tangible assets
|
12,418
|
|
Intangible assets
|
86,000
|
|
Goodwill
|
642,489
|
|
Deferred revenue
|
(7,037
|
)
|
Other liabilities, current and noncurrent
|
(9,308
|
)
|
Deferred tax liability
|
(679
|
)
|
Net assets acquired
|
$
|
741,766
|
|
The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets.
The following table sets forth the components of identifiable intangible assets acquired (in thousands) and their estimated useful lives as of the date of acquisition.
|
|
|
|
|
|
|
Fair Value
|
Useful Life
|
Developed technology
|
$
|
75,000
|
|
3 years
|
Customer relationships
|
10,000
|
|
9 years
|
Other intangibles
|
1,000
|
|
2 years
|
Total intangible assets subject to amortization
|
$
|
86,000
|
|
|
The amount recorded for developed technology represents the estimated fair value of Krux’s data management platform technology. The amount recorded for customer relationships represents the fair values of the underlying relationship with Krux customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating Krux's technology with the Company's other offerings. The goodwill balance is not deductible for U.S. income tax purposes.
The Company assumed equity awards for shares of Krux's common stock with a fair value of
$104.4 million
, of which
$56.1 million
was allocated to the consideration transferred.
BeyondCore
In September 2016, the Company acquired the outstanding stock of BeyondCore, Inc. (“BeyondCore”), for consideration consisting of cash, common stock, and equity awards assumed. BeyondCore is a smart data discovery technology company that automatically explores millions of variable combinations from structured data sources. The Company has included the financial results of BeyondCore in the consolidated financial statements from the date of acquisition. The transaction costs associated with the acquisition were not material.
The acquisition date fair value consideration transferred for BeyondCore was approximately
$106.6 million
, which consisted of the following (in thousands, except for share data):
|
|
|
|
|
|
Fair Value
|
Cash
|
$
|
21,053
|
|
Common stock (1,073,432 shares)
|
81,484
|
|
Fair value of stock options and restricted stock awards assumed
|
4,061
|
|
Total
|
$
|
106,598
|
|
The fair value of stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of
0.0464
was applied to convert BeyondCore's outstanding equity awards for BeyondCore's common stock into equity awards for shares of the Company's common stock.
The following table summarizes the fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
|
|
|
|
|
|
Fair Value
|
Cash and cash equivalents
|
$
|
2,046
|
|
Other current and noncurrent tangible assets
|
462
|
|
Intangible assets
|
15,600
|
|
Goodwill
|
90,794
|
|
Deferred revenue
|
(818
|
)
|
Other liabilities, current and noncurrent
|
(923
|
)
|
Deferred tax liability
|
(563
|
)
|
Net assets acquired
|
$
|
106,598
|
|
The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets.
The following table sets forth the components of identifiable intangible assets acquired (in thousands) and their estimated useful lives as of the date of acquisition.
|
|
|
|
|
|
|
Fair Value
|
Useful Life
|
Developed technology
|
$
|
14,900
|
|
6 years
|
Customer relationships
|
700
|
|
2 years
|
Total intangible assets subject to amortization
|
$
|
15,600
|
|
|
The amount recorded for developed technology represents the estimated fair value of BeyondCore's smart data analytics technology. The amount recorded for customer relationships represents the fair values of the underlying relationships with BeyondCore customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating BeyondCore's technology with the Company's other offerings. The goodwill balance is not deductible for U.S. income tax purposes.
The Company assumed equity awards for shares of BeyondCore's common stock with a fair value of
$8.6 million
, of which
$4.1 million
was allocated to the consideration transferred.
Quip
In August 2016, the Company acquired the outstanding stock of Quip, Inc. (“Quip”) for consideration consisting of cash, common stock, fair value of equity awards assumed, as well as fair value of the Company's pre-existing relationship. Quip combines content and communication to create living documents to allow work-teams to write, edit and discuss documents, spreadsheets and checklists in a single experience. The Company acquired Quip for its product offerings and employees. The Company has included the financial results of Quip in the consolidated financial statements from the date of acquisition. The transaction costs associated with the acquisition were not material.
The acquisition date fair value consideration transferred for Quip was approximately
$412.0 million
, which consisted of the following (in thousands, except for share data):
|
|
|
|
|
|
Fair Value
|
Cash
|
$
|
2,711
|
|
Common stock (4,796,152 shares)
|
385,131
|
|
Fair value of stock options and restricted stock awards assumed
|
22,345
|
|
Fair value of pre-existing relationship
|
1,833
|
|
Total
|
$
|
412,020
|
|
The fair value of stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of
0.5514
was applied to convert Quip's outstanding equity awards for Quip's common stock into equity awards for shares of the Company's common stock.
The Company had a
$1.0 million
, or approximately
0.3 percent
, noncontrolling equity investment in Quip prior to the acquisition. The acquisition date fair value of the Company's previously held equity interest was approximately
$1.8 million
and was included in the measurement of the consideration transferred. The Company recognized a gain of approximately
$0.8 million
as a result of remeasuring its prior equity interest in Quip held before the business combination. The gain is included in gains from acquisitions of strategic investments in the consolidated statement of operations.
The following table summarizes the fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
|
|
|
|
|
|
Fair Value
|
Cash and cash equivalents
|
$
|
27,985
|
|
Other current and noncurrent tangible assets
|
556
|
|
Intangible assets
|
31,200
|
|
Goodwill
|
357,610
|
|
Other liabilities, current and noncurrent
|
(2,491
|
)
|
Deferred tax liability
|
(2,840
|
)
|
Net assets acquired
|
$
|
412,020
|
|
The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets.
The following table sets forth the components of identifiable intangible assets acquired (in thousands) and their estimated useful lives as of the date of acquisition.
|
|
|
|
|
|
|
Fair Value
|
Useful Life
|
Developed technology
|
$
|
18,590
|
|
5 years
|
Customer relationships
|
12,460
|
|
10 years
|
Other purchased intangible assets
|
150
|
|
3 years
|
Total intangible assets subject to amortization
|
$
|
31,200
|
|
|
The amount recorded for developed technology represents the estimated fair value of Quip's productivity technology. The amount recorded for customer relationships represents the fair values of the underlying relationship with Quip customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating Quip's technology with the Company's other offerings. The goodwill balance is not deductible for U.S. income tax purposes.
The Company assumed equity awards for shares of Quip's common stock with a fair value of
$68.0 million
, of which
$22.3 million
was allocated to the consideration transferred.
Demandware
In July 2016, the Company acquired for cash the outstanding stock of Demandware, Inc. (“Demandware”), an industry-leading provider of enterprise cloud commerce solutions in the digital commerce market. The Company acquired Demandware to, among other things, expand the Company's position in customer relationship management and to pursue the digital commerce market with the new Salesforce Commerce Cloud. The Company has included the financial results of Demandware in the consolidated financial statements from the date of acquisition. The transaction costs associated with the acquisition were
$15.5 million
and are recorded in general and administrative expense. The acquisition date fair value of the consideration transferred for Demandware was approximately
$2.9 billion
, including the proceeds from the term loan of
$500.0 million
(see Note 8, "Debt"), which consisted of the following (in thousands):
|
|
|
|
|
|
Fair Value
|
Cash
|
$
|
2,920,336
|
|
Fair value of stock options and restricted stock awards assumed
|
9,344
|
|
Total
|
$
|
2,929,680
|
|
The fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of
0.9545
was applied to convert Demandware’s outstanding equity awards for Demandware’s common stock into equity awards for shares of the Company’s common stock.
The following table summarizes the fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
|
|
|
|
|
|
Fair Value
|
Cash and cash equivalents
|
$
|
139,259
|
|
Marketable securities
|
37,230
|
|
Accounts receivable
|
56,982
|
|
Other current assets
|
13,545
|
|
Customer contract asset, noncurrent
|
327,830
|
|
Intangible assets
|
633,277
|
|
Property and equipment
|
29,463
|
|
Other noncurrent assets
|
4,579
|
|
Goodwill
|
1,985,269
|
|
Accounts payable, accrued expenses and other liabilities
|
(51,870
|
)
|
Deferred revenue
|
(22,647
|
)
|
Other liabilities, noncurrent
|
(12,935
|
)
|
Deferred tax liability
|
(210,302
|
)
|
Net assets acquired
|
$
|
2,929,680
|
|
The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets.
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands):
|
|
|
|
|
|
|
Fair Value
|
Useful Life
|
Developed technology
|
$
|
242,550
|
|
2 to 5 years
|
Customer relationships
|
384,590
|
|
3 to 10 years
|
Other purchased intangible assets
|
6,137
|
|
3 to 10 years
|
Total intangible assets subject to amortization
|
$
|
633,277
|
|
|
Developed technology represents the fair value of Demandware’s e-commerce technology. Customer relationships represent the fair values of the underlying relationships with Demandware customers. Other purchased intangible assets also includes intangibles such as trademarks and favorable leases, which span over lease terms varying from
1
to
10
years. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating Demandware’s e-commerce technology with the Company’s other offerings. The majority of the goodwill balance is not deductible for U.S. income tax purposes.
The Company assumed equity awards with a fair value of
$135.2 million
, of which
$9.3 million
was allocated to the purchase consideration.
The Demandware acquisition was significant to the Company's consolidated financial statements. The amounts of revenue and earnings of Demandware included in the Company’s consolidated statement of operations from the acquisition date of July 11, 2016 through January 31, 2017 are as follows (in thousands):
|
|
|
|
|
Total revenues
|
$
|
120,383
|
|
Pretax loss
|
(102,524
|
)
|
Net loss
|
$
|
(103,149
|
)
|
SteelBrick
In February 2016, the Company acquired the outstanding stock of SteelBrick, Inc. (“SteelBrick”) for consideration consisting of cash and common stock. SteelBrick is a next generation quote-to-cash platform, delivered
100 percent
natively on the Salesforce platform, which offers applications, or apps, for automating the entire deal close process - from generating quotes and configuring orders to collecting cash. The Company has included the financial results of SteelBrick in the consolidated financial statements from the date of acquisition. The transaction costs associated with the acquisition were not material.
The acquisition date fair value consideration transferred for SteelBrick was approximately
$314.8 million
, which consisted of the following (in thousands, except for share data):
|
|
|
|
|
|
Fair Value
|
Cash
|
$
|
1,698
|
|
Common stock (4,288,447 shares)
|
278,372
|
|
Fair value of stock options and restricted stock awards assumed
|
10,989
|
|
Fair value of pre-existing relationship
|
23,726
|
|
Total
|
$
|
314,785
|
|
The fair value of stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of
0.08
was applied to convert SteelBrick's outstanding equity awards for SteelBrick's common stock into equity awards for shares of the Company's common stock.
The Company had a
$13.9 million
, or approximately
six percent
, noncontrolling equity investment in SteelBrick prior to the acquisition. The acquisition date fair value of the Company's previously held equity interest was approximately
$23.7 million
and is included in the measurement of the consideration transferred. The Company recognized a gain of approximately
$9.8 million
as a result of remeasuring its prior equity interest in SteelBrick held before the business combination. The gain is included in gains from acquisitions of strategic investments on the Consolidated Statement of Operations.
The following table summarizes the fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
|
|
|
|
|
|
Fair Value
|
Cash and cash equivalents
|
$
|
59,296
|
|
Other current and noncurrent tangible assets
|
3,012
|
|
Customer contract asset, noncurrent
|
6,954
|
|
Intangible assets
|
49,160
|
|
Goodwill
|
217,986
|
|
Deferred revenue
|
(8,479
|
)
|
Other liabilities, current and noncurrent
|
(2,665
|
)
|
Deferred tax liability
|
(10,479
|
)
|
Net assets acquired
|
$
|
314,785
|
|
The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill.
The following table sets forth the components of identifiable intangible assets acquired (in thousands) and their estimated useful lives as of the date of acquisition.
|
|
|
|
|
|
|
Fair Value
|
Useful Life
|
Developed technology
|
$
|
30,700
|
|
4 years
|
Customer relationships
|
17,110
|
|
7 years
|
Other purchased intangible assets
|
1,350
|
|
1 year
|
Total intangible assets subject to amortization
|
$
|
49,160
|
|
|
The amount recorded for developed technology represents the estimated fair value of SteelBrick's quote-to-cash and billing technology. The amount recorded for customer relationships represents the fair values of the underlying relationship with SteelBrick customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating SteelBrick's quote-to-cash technology with the Company's other offerings. The majority of the goodwill balance is not deductible for U.S. income tax purposes.
The Company assumed equity awards for shares of SteelBrick's common stock with a fair value of
$39.6 million
, of which
$11.0 million
was allocated to the consideration transferred.
MetaMind
In April 2016, the Company acquired MetaMind, Inc. (“MetaMind”) for approximately
$32.8 million
in cash, net of cash acquired. This amount includes amounts to be paid after an initial holdback period, and assumed equity awards. The primary reason for the acquisition was to extend the Company's intelligence in natural language processing and image recognition across all clouds. The Company has included the financial results of MetaMind, which have not been material to date, in its consolidated financial statements from the date of acquisition. The transaction costs associated with the acquisition were not material. In allocating the purchase consideration for MetaMind based on estimated fair values, the Company recorded
$31.2 million
of goodwill and
$1.9 million
of identifiable intangible assets. The goodwill balance is not deductible for U.S. income tax purposes.
The Company assumed equity awards for shares of MetaMind's common stock with a fair value of
$5.5 million
, of which
$0.5 million
was allocated to the purchase consideration.
The Company's chairman, who held a greater than
ten percent
ownership interest in MetaMind, received approximately
$6.0 million
in total proceeds, subject to customary escrow amounts, in connection with this acquisition.
Other Fiscal 2017 Business Combinations
During fiscal 2017, the Company acquired
seven
other companies for an aggregate of
$108.7 million
in cash, net of cash acquired, and the Company has included the financial results of these companies in its consolidated financial statements from the respective dates of acquisition. These transactions, individually and in the aggregate, are not material to the Company. The costs associated with these acquisitions were not material. The Company accounted for these transactions as business combinations. In allocating the purchase consideration for each company based on estimated fair values, the Company recorded
$108.2 million
of goodwill and
$34.2 million
of identifiable intangible assets. Amounts allocated to the remaining acquired tangible assets and liabilities were not material. The majority of the goodwill balance associated with these transactions is not deductible for U.S. income tax purposes.
Fiscal 2016 Business Combinations
During fiscal 2016, the Company acquired several companies, including the acquisition of the building and land at 50 Fremont, for an aggregate of
$697.7 million
in cash, net of cash acquired. The Company has included the financial results of these companies in its consolidated financial statements from the respective dates of acquisition. The costs associated with these acquisitions were not material. The Company accounted for these transactions as business combinations. In allocating the purchase consideration for each company based on fair values, the Company recorded
$68.7 million
of goodwill. Some of the goodwill balance associated with these transactions is deductible for U.S. income tax purposes.
In connection with the acquisition of 50 Fremont, the Company recognized a net non-cash gain totaling approximately
$36.6 million
on the termination of the lease signed in January 2012.
7. Intangible Assets Acquired Through Business Combinations and Goodwill
Intangible assets acquired through business combinations
Intangible assets acquired through business combinations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets, Gross
|
|
Accumulated Amortization
|
|
Intangible Assets, Net
|
|
Weighted
Average
Remaining Useful Life
|
|
Jan 31, 2017
|
|
Additions and retirements, net (1)
|
|
Jan. 31, 2018
|
|
Jan 31, 2017
|
|
Expense and retirements, net (1)
|
|
Jan. 31, 2018
|
|
Jan 31, 2017
|
|
Jan. 31, 2018
|
|
Acquired developed technology
|
$
|
1,092,161
|
|
|
$
|
(65,210
|
)
|
|
$
|
1,026,951
|
|
|
$
|
(577,929
|
)
|
|
$
|
(99,459
|
)
|
|
$
|
(677,388
|
)
|
|
$
|
514,232
|
|
|
$
|
349,563
|
|
|
2.8
|
Customer relationships
|
843,614
|
|
|
(12,870
|
)
|
|
830,744
|
|
|
(254,035
|
)
|
|
(104,773
|
)
|
|
(358,808
|
)
|
|
589,579
|
|
|
471,936
|
|
|
4.4
|
Other (2)
|
69,449
|
|
|
(16,339
|
)
|
|
53,110
|
|
|
(59,886
|
)
|
|
11,722
|
|
|
(48,164
|
)
|
|
9,563
|
|
|
4,946
|
|
|
4.3
|
Total
|
$
|
2,005,224
|
|
|
$
|
(94,419
|
)
|
|
$
|
1,910,805
|
|
|
$
|
(891,850
|
)
|
|
$
|
(192,510
|
)
|
|
$
|
(1,084,360
|
)
|
|
$
|
1,113,374
|
|
|
$
|
826,445
|
|
|
3.8
|
(1)
The Company retired
$96.1 million
of fully depreciated intangible assets during fiscal 2018, of which
$65.2 million
were included in acquired developed technology,
$14.6 million
in customer relationships and
$16.3 million
in other.
(2)
Included in other are the trade names and trademarks, territory rights and other and 50 Fremont intangible assets.
Amortization of intangible assets and unfavorable lease liabilities, which are not reflected in the table above, resulting from business combinations for
fiscal 2018
,
2017
and
2016
was
$288.3 million
,
$227.8 million
and
$161.7 million
, respectively.
The expected future amortization expense for intangible assets as of
January 31, 2018
is as follows (in thousands):
|
|
|
|
|
Fiscal Period:
|
|
Fiscal 2019
|
$
|
266,186
|
|
Fiscal 2020
|
224,990
|
|
Fiscal 2021
|
169,433
|
|
Fiscal 2022
|
111,305
|
|
Fiscal 2023
|
35,134
|
|
Thereafter
|
19,397
|
|
Total amortization expense
|
$
|
826,445
|
|
Goodwill
Goodwill represents the excess of the purchase price in a business combination over the fair value of net assets acquired. Goodwill amounts are not amortized, but rather tested for impairment at least annually during the fourth quarter.
The changes in the carrying amounts of goodwill, which is generally not deductible for tax purposes, were as follows (in thousands):
|
|
|
|
|
|
Balance as of January 31, 2016
|
|
$
|
3,849,937
|
|
Acquisitions
|
|
3,333,171
|
|
Adjustments of acquisition date fair values, including the effect of foreign currency translation
|
|
80,738
|
|
Balance as of January 31, 2017
|
|
$
|
7,263,846
|
|
Acquisitions
|
|
34,625
|
|
Adjustments of acquisition date fair values, including the effect of foreign currency translation
|
|
15,625
|
|
Balance as of January 31, 2018
|
|
$
|
7,314,096
|
|
8. Debt
The carrying values of our borrowings were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instrument
|
|
Date of issuance
|
|
Maturity date
|
|
Effective interest rate for fiscal 2018
|
|
January 31, 2018
|
|
January 31, 2017
|
0.25% Convertible Senior Notes
|
|
March 2013
|
|
April 2018
|
|
2.53%
|
|
$
|
1,022,588
|
|
|
$
|
1,116,360
|
|
Term loan
|
|
July 2016
|
|
July 2019
|
|
2.20%
|
|
498,372
|
|
|
497,221
|
|
Revolving credit facility
|
|
July 2016
|
|
July 2021
|
|
2.00%
|
|
0
|
|
|
196,542
|
|
Loan assumed on 50 Fremont
|
|
February 2015
|
|
June 2023
|
|
3.75%
|
|
198,538
|
|
|
198,268
|
|
Total carrying value of debt
|
|
|
|
|
|
|
|
1,719,498
|
|
|
2,008,391
|
|
Less current portion
|
|
|
|
|
|
|
|
(1,024,717
|
)
|
|
0
|
|
Total non-current debt
|
|
|
|
|
|
|
|
$
|
694,781
|
|
|
$
|
2,008,391
|
|
Each of the Company's debt agreements requires it to maintain compliance with certain debt covenants, all of which the Company was in compliance with as of
January 31, 2018
.
The expected future principal payments for all borrowings as of
January 31, 2018
is as follows (in thousands):
|
|
|
|
|
Fiscal period:
|
|
Fiscal 2019
|
$
|
1,028,949
|
|
Fiscal 2020
|
503,759
|
|
Fiscal 2021
|
3,902
|
|
Fiscal 2022
|
4,051
|
|
Fiscal 2023 and thereafter
|
186,160
|
|
Total principal outstanding
|
$
|
1,726,821
|
|
Convertible Senior Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par Value Outstanding
|
|
Equity
Component Recorded at Issuance
|
|
Liability Component of Par Value as of
|
(in thousands)
|
January 31,
2018
|
|
January 31,
2017
|
0.25% Convertible Senior Notes due April 2018
|
$
|
1,026,821
|
|
|
$
|
122,421
|
|
(1)
|
$
|
1,022,588
|
|
|
$
|
1,116,360
|
|
___________
(1)
This amount represents the equity component recorded at the initial issuance of the
0.25%
convertible senior notes. As of
January 31, 2018
,
$3.9 million
was reclassified to temporary equity on the accompanying consolidated balance sheet as these notes are convertible as of January 31, 2018 based on the conversion criteria below.
In March 2013, the Company issued at par value
$1.15 billion
of
0.25%
convertible senior notes (the “
0.25%
Senior Notes”, or “Notes”) due in
April 2018
, unless earlier purchased by the Company or converted and are therefore classified as current on the consolidated balance sheet as of
January 31, 2018
. Interest is payable semi-annually, in arrears on April 1 and October 1 of each year.
The
0.25%
Senior Notes are governed by an indenture between the Company, as issuer, and U.S. Bank National Association, as trustee. The
0.25%
Senior Notes are unsecured and do not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by the Company.
If converted, holders of the
0.25%
Senior Notes will receive cash equal to the principal amount, and at the Company’s election, cash, shares of the Company’s common stock, or a combination of cash and shares, for any amounts in excess of the principal amounts.
Certain terms of the conversion features of the
0.25%
Senior Notes are as follows:
|
|
|
|
|
|
|
|
|
|
|
Conversion
Rate per $1,000
Par Value
|
|
Initial Conversion Price per Share
|
|
Convertible Date
|
0.25% Senior Notes
|
15.0512
|
|
|
$
|
66.44
|
|
|
January 1, 2018
|
Throughout the term of the
0.25%
Senior Notes, the conversion rate may be adjusted upon the occurrence of certain events, including any cash dividends. Holders of the
0.25%
Senior Notes will not receive any cash payment representing
accrued and unpaid interest upon conversion of a Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than canceled, extinguished or forfeited.
As of January 31, 2018, holders may convert the
0.25%
Senior Notes at any time on or after the convertible date noted in the table above and as described in the indenture.
Holders of the
0.25%
Senior Notes have the right to require the Company to purchase with cash all or a portion of the Notes upon the occurrence of a fundamental change, such as a change of control, at a purchase price equal to
100%
of the principal amount of the
0.25%
Senior Notes plus accrued and unpaid interest. Following certain corporate transactions that constitute a change of control, the Company will increase the conversion rate for a holder who elects to convert the
0.25%
Senior Notes in connection with such change of control.
In accounting for the issuances of the
0.25%
Senior Notes, the Company separated the
0.25%
Senior Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the
0.25%
Senior Notes as a whole. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the
0.25%
Senior Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
As holders of the
0.25%
Senior Notes are eligible to exercise their conversion option as of January 31, 2018, the equity component related to convertible debt instruments is required to be reclassified from permanent equity to temporary equity. Therefore, the difference between (1) the amount of cash deliverable upon conversion (i.e., par value of debt) and (2) the carrying value of the debt component has been reclassified from permanent equity to temporary equity.
In accounting for the transaction costs related to the
0.25%
Senior Notes issuance, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Transaction costs attributable to the liability component are being amortized to expense over the terms of the
0.25%
Senior Notes, and transaction costs attributable to the equity component were netted with the equity component in stockholders’ equity.
The
0.25%
Senior Notes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
January 31,
2018
|
|
January 31,
2017
|
Liability component:
|
|
|
|
Principal (1)
|
$
|
1,026,821
|
|
|
$
|
1,150,000
|
|
Less: debt discount, net (2)
|
(3,867
|
)
|
|
(29,954
|
)
|
Less: debt issuance cost
|
(366
|
)
|
|
(3,686
|
)
|
Net carrying amount
|
$
|
1,022,588
|
|
|
$
|
1,116,360
|
|
(1)
The effective interest rate of the
0.25%
Senior Notes is
2.53%
. The interest rate is based on the interest rates of similar liabilities at the time of issuance that did not have an associated convertible feature.
(2)
Included in the consolidated balance sheets within Convertible
0.25%
Senior Notes (which is classified as a current liability as of
January 31, 2018
and a noncurrent liability as of January 31, 2017) and is amortized over the life of the
0.25%
Senior Notes using the effective interest rate method.
The total estimated fair value of the Company's
0.25%
Senior Notes at
January 31, 2018
was
$1.8 billion
. The fair value was determined based on the closing trading price per
$100
of the
0.25%
Senior Notes as of the last day of trading for the
fourth
quarter of fiscal
2018
.
Based on the closing price of the Company’s common stock of
$113.91
on
January 31, 2018
, the if-converted value of the
0.25%
Senior Notes exceeded their principal amount by approximately
$733.6 million
.
During fiscal
2018
,
$123.2 million
of the
0.25%
Senior Notes outstanding was converted by noteholders. The Company recorded a loss of approximately
$0.2 million
during fiscal
2018
related to the extinguishment of the
0.25%
Senior Notes converted by noteholders, which represents the difference between the fair market value allocated to the liability component on the settlement date and the net carrying amount of the liability component and unamortized debt issuance costs on the settlement date. As of
January 31, 2018
the remaining principal balance of the
0.25%
Senior Notes outstanding is approximately
$1.03 billion
. The remaining principal balance of the
0.25%
Senior Notes matures in
April 2018
unless earlier converted by noteholders.
Since January 31, 2018 through the filing date of this Form 10-K,
$73.6 million
of the remaining principal balance of the
0.25%
Senior Notes has been converted or has requested conversion.
Note Hedges
To minimize the impact of potential economic dilution upon conversion of the Notes, the Company entered into convertible note hedge transactions with respect to its common stock (“
0.25%
Note Hedges”).
|
|
|
|
|
|
|
|
|
|
(in thousands, except for shares)
|
Date
|
|
Purchase
|
|
Shares
|
0.25% Note Hedges
|
March 2013
|
|
$
|
153,800
|
|
|
17,308,880
|
|
The
0.25%
Note Hedges cover shares of the Company’s common stock at a strike price that corresponds to the initial conversion price of the
0.25%
Senior Notes, also subject to adjustment, and are exercisable upon conversion of the Notes. The
0.25%
Note Hedges will expire upon the maturity of the
0.25%
Senior Notes. The
0.25%
Note Hedges are intended to reduce the potential economic dilution upon conversion of the
0.25%
Senior Notes in the event that the market value per share of the Company’s common stock, as measured under the
0.25%
Senior Notes, at the time of exercise is greater than the conversion price of the
0.25%
Senior Notes. The
0.25%
Note Hedges are separate transactions and are not part of the terms of the
0.25%
Senior Notes. Holders of the
0.25%
Senior Notes will not have any rights with respect to the
0.25%
Note Hedges. The
0.25%
Note Hedges do not impact earnings per share.
As a result of the conversions of the
0.25%
Senior Notes that were settled during fiscal 2018, the Company exercised its rights on the corresponding portion of the
0.25%
Note Hedges and received approximately
675,000
shares of the Company's common stock.
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Proceeds
(in thousands)
|
|
Shares
|
|
Strike
Price
|
0.25% Warrants
|
March 2013
|
|
$
|
84,800
|
|
|
17,308,880
|
|
|
$
|
90.40
|
|
In March 2013, the Company also entered into a warrants transaction (“
0.25%
Warrants”), whereby the Company sold warrants to acquire, subject to anti-dilution adjustments, shares of the Company’s common stock. If the
0.25%
Warrants are not exercised on their exercise dates, which are in fiscal 2019, they will expire. For periods in which the market value per share of the Company's common stock exceeds the applicable exercise price of the
0.25%
Warrants and the Company is profitable, the
0.25%
Warrants have a dilutive effect on the Company's earnings per share. The
0.25%
Warrants are separate transactions entered into by the Company and are not part of the terms of the
0.25%
Senior Notes or the
0.25%
Note Hedges. Holders of the
0.25%
Senior Notes and
0.25%
Note Hedges will not have any rights with respect to the
0.25%
Warrants.
Term Loan
In July 2016, the Company entered into a credit agreement (“Term Loan Credit Agreement”) with Bank of America, N.A. and certain other institutional lenders for a
$500.0 million
term loan facility (“Term Loan”) that matures in July 2019. The Term Loan will bear interest, at the Company’s option, at either a base rate plus a spread of
0.00% to 0.75%
or an adjusted LIBOR rate plus a spread of
1.00% to 1.75%
, in each case with such spread being determined based on the Company’s consolidated leverage ratio for the preceding four fiscal quarter period.
In July 2016, the Company borrowed the full
$500.0 million
under the Term Loan. All of the net proceeds of the Term Loan were for the purpose of partially funding the acquisition of Demandware.
Interest on the Term Loan is due and payable in arrears quarterly for loans bearing interest at a rate based on the base rate and at the end of an interest period in the case of loans bearing interest at the adjusted LIBOR rate.
All outstanding amounts under the Term Loan Credit Agreement will be due and payable in July 2019. The Company may prepay the Term Loan, in whole or in part, at any time without premium or penalty, subject to certain conditions, and amounts repaid or prepaid may not be reborrowed. The Company’s obligations under the Term Loan Credit Agreement are required to be guaranteed by certain of its subsidiaries meeting certain thresholds set forth in the Term Loan Credit Agreement.
The weighted average interest rate on the Term Loan was
2.2%
for
fiscal 2018
. Accrued interest on the Term Loan was
$0.3 million
as of
January 31, 2018
. As of
January 31, 2018
, the noncurrent outstanding principal portion was
$500.0 million
.
Revolving Credit Facility
In July 2016, the Company entered into an Amended and Restated Credit Agreement (“
Revolving Loan Credit Agreement
”) with Wells Fargo Bank, National Association, and certain other institutional lenders that provides for
$1.0 billion
unsecured revolving credit facility (“Credit Facility”) that matures in July 2021. The Revolving Loan Credit Agreement amended and restated the Company’s existing revolving credit facility dated October 2014. The Company may use the proceeds of future borrowings under the Credit Facility for refinancing other indebtedness, working capital, capital expenditures and other general corporate purposes, including permitted acquisitions.
The borrowings under the Credit Facility bear interest, at the Company’s option, at a base rate plus a spread of
0.00% to 0.75%
or an adjusted LIBOR rate plus a spread of
1.00% to 1.75%
, in each case with such spread being determined based on the Company’s consolidated leverage ratio for the preceding four fiscal quarter period. Interest is due and payable in arrears quarterly for loans bearing interest at a rate based on the base rate and at the end of an interest period in the case of loans bearing interest at the adjusted LIBOR rate. Regardless of what amounts, if any, are outstanding under the Credit Facility, the Company is also obligated to pay an ongoing commitment fee on undrawn amounts at a rate of
0.125% to 0.25%
, with such rate being based on the Company’s consolidated leverage ratio for the preceding four fiscal quarter period, payable in arrears quarterly.
In fiscal 2018, the Company paid down the remaining
$200.0 million
of outstanding borrowings under the Credit Facility. There were
no
outstanding borrowings under the Credit Facility as of
January 31, 2018
. The Company continues to pay a commitment fee on the available amount of the Credit Facility.
Loan Assumed on 50 Fremont
The Company assumed a
$200.0 million
loan with the acquisition of 50 Fremont (“Loan”). The Loan bears an interest rate of
3.75%
per annum and is due in June 2023. Beginning in fiscal 2019, principal and interest payments are required, with the remaining principal due at maturity. For
fiscal 2018
and
2017
, total interest expense recognized was
$7.5 million
and
$7.5 million
, respectively. The Loan can be prepaid at any time subject to a yield maintenance fee. The agreement governing the Loan contains certain customary affirmative and negative covenants that the Company was in compliance with as of
January 31, 2018
.
Interest Expense on Convertible Senior Notes, Term Loan, Credit Facility and Loan Assumed on 50 Fremont
The following table sets forth total interest expense recognized related to the
0.25%
Senior Notes, the Term Loan, the Credit Facility and the Loan (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
Contractual interest expense
|
$
|
22,886
|
|
|
$
|
19,023
|
|
|
$
|
11,879
|
|
Amortization of debt issuance costs
|
5,324
|
|
|
5,403
|
|
|
4,105
|
|
Amortization of debt discount
|
25,943
|
|
|
25,137
|
|
|
24,504
|
|
|
$
|
54,153
|
|
|
$
|
49,563
|
|
|
$
|
40,488
|
|
9. Other Balance Sheet Accounts
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
January 31,
2018
|
|
January 31,
2017
|
Prepaid income taxes
|
$
|
33,523
|
|
|
$
|
26,932
|
|
Other taxes receivable
|
32,692
|
|
|
34,177
|
|
Prepaid expenses and other current assets
|
324,163
|
|
|
218,418
|
|
|
$
|
390,378
|
|
|
$
|
279,527
|
|
Capitalized Software, net
Capitalized software, net at
January 31, 2018
and
2017
was
$146.1 million
and
$141.7 million
, respectively. Accumulated amortization relating to capitalized software, net totaled
$325.6 million
and
$250.9 million
, respectively, at
January 31, 2018
and
2017
.
Capitalized internal-use software amortization expense totaled
$74.7 million
,
$64.6 million
and
$49.9 million
for
fiscal 2018
,
2017
and
2016
, respectively.
The Company capitalized
$8.4 million
,
$7.2 million
and
$6.1 million
of stock-based expensed related to capitalized internal-use software development during
fiscal 2018
,
2017
and
2016
, respectively.
Other Assets, net
Other assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
January 31,
2018
|
|
January 31,
2017
|
Deferred income taxes, noncurrent, net
|
$
|
36,523
|
|
|
$
|
28,939
|
|
Long-term deposits
|
23,518
|
|
|
23,597
|
|
Domain names and patents, net
|
22,779
|
|
|
39,213
|
|
Customer contract assets (1)
|
170,921
|
|
|
281,733
|
|
Other
|
141,899
|
|
|
113,387
|
|
|
$
|
395,640
|
|
|
$
|
486,869
|
|
(1) Customer contract asset reflects the fair value of future billings of amounts that are contractually committed by acquired companies' existing customers as of the acquisition date.
Domain names and patents amortization expense was
$17.0 million
,
$16.5 million
and
$15.5 million
for
fiscal 2018
,
2017
and
2016
, respectively.
Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable, accrued expenses and other liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
January 31,
2018
|
|
January 31,
2017
|
Accounts payable
|
$
|
76,465
|
|
|
$
|
115,257
|
|
Accrued compensation
|
960,453
|
|
|
730,390
|
|
Non-cash equity liability (1)
|
0
|
|
|
68,355
|
|
Accrued income and other taxes payable
|
305,861
|
|
|
239,699
|
|
Capital lease obligation, current
|
102,539
|
|
|
102,106
|
|
Other current liabilities
|
564,778
|
|
|
496,857
|
|
|
$
|
2,010,096
|
|
|
$
|
1,752,664
|
|
(1) Non-cash equity liability represents the purchase price of shares issued to non-executive employees, for those shares exceeding previously registered ESPP shares at the time of sale to the extent the shares had not been subsequently sold by the employee purchaser. This liability was relieved in the fourth quarter of fiscal 2018.
Other Noncurrent Liabilities
Other noncurrent liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
January 31,
2018
|
|
January 31,
2017
|
Deferred income taxes and income taxes payable
|
$
|
115,717
|
|
|
$
|
99,378
|
|
Financing obligation - leased facility
|
198,226
|
|
|
200,711
|
|
Long-term lease liabilities and other
|
479,197
|
|
|
480,850
|
|
|
$
|
793,140
|
|
|
$
|
780,939
|
|
10. Stockholders’ Equity
The Company maintains the following stock plans: the ESPP, the 2013 Equity Incentive Plan and the 2014 Inducement Equity Incentive Plan (“2014 Inducement Plan”).
As of
January 31, 2018
and 2017,
$62.8 million
and
$48.4 million
, respectively, was withheld on behalf of employees for future purchases under the ESPP and is recorded in accounts payable, accrued expenses and other liabilities.
Prior to February 2006, options issued under the Company’s stock option plans generally had a term of
10
years. From February 1, 2006 through July 2013, options issued had a term of
five
years. After July 2013, options issued have a term of
seven
years.
The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions and fair value per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
Stock Options
|
2018
|
|
2017
|
|
2016
|
|
Volatility
|
28.0 - 31.4
|
|
%
|
|
31.4 - 32.3
|
|
%
|
|
32.0 - 37.0
|
|
%
|
Estimated life
|
3.5 years
|
|
|
|
3.5 years
|
|
|
|
3.5 years
|
|
|
Risk-free interest rate
|
1.4 - 2.3
|
|
%
|
|
0.9 - 1.6
|
|
%
|
|
1.1 - 1.4
|
|
%
|
Weighted-average fair value per share of grants
|
$
|
22.71
|
|
|
|
$
|
19.13
|
|
|
|
$
|
20.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
ESPP
|
2018
|
|
2017
|
|
2016
|
Volatility
|
21.3- 27.6
|
|
%
|
|
28.2 - 35.2
|
|
%
|
|
30.0 - 34.0
|
|
%
|
Estimated life
|
0.75 years
|
|
|
|
0.75 years
|
|
|
|
0.75 years
|
|
|
Risk-free interest rate
|
1.1 - 1.7
|
|
%
|
|
0.5 - 1.0
|
|
%
|
|
0.1 - 0.8
|
|
%
|
Weighted-average fair value per share of grants
|
$
|
23.64
|
|
|
|
$
|
20.18
|
|
|
|
$
|
19.49
|
|
|
The Company estimated its future stock price volatility considering both its observed option-implied volatilities and its historical volatility calculations. Management believes this is the best estimate of the expected volatility over the expected life of its stock options and stock purchase rights.
The estimated life for the stock options was based on an analysis of historical exercise activity. The risk-free interest rate is based on the rate for a U.S. government security with the same estimated life at the time of the option grant and the stock purchase rights.
The estimated forfeiture rate applied is based on historical forfeiture rates. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of
zero
in the option pricing model.
During fiscal 2016, the Company granted a performance-based restricted stock unit award to the Chairman of the Board and Chief Executive Officer and during fiscal 2017, the Company granted performance-based restricted stock unit awards to certain executive officers, including the Chairman of the Board and Chief Executive Officer. The performance-based restricted stock unit awards are subject to vesting based on a performance-based condition and a service-based condition. At the end of the
three
-year service period, based on the Company's share price performance, these performance-based restricted stock units will vest in a percentage of the target number of shares between
0
and
200%
, depending on the extent the performance condition is achieved.
Stock activity excluding the ESPP is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Shares
Available for
Grant
|
|
Outstanding
Stock
Options
|
|
Weighted-
Average
Exercise Price
|
|
Aggregate
Intrinsic Value (in thousands)
|
Balance as of January 31, 2017
|
16,531,822
|
|
|
30,353,076
|
|
|
$
|
59.88
|
|
|
|
Increase in shares authorized:
|
|
|
|
|
|
|
|
2013 Equity Incentive Plan
|
37,009,109
|
|
|
0
|
|
|
0.00
|
|
|
|
2014 Inducement Plan
|
16,198
|
|
|
0
|
|
|
0.00
|
|
|
|
Options granted under all plans
|
(1,212,731
|
)
|
|
1,212,731
|
|
|
91.76
|
|
|
|
Restricted stock activity
|
(3,302,885
|
)
|
|
0
|
|
|
0.00
|
|
|
|
Stock grants to board and advisory board members
|
(211,588
|
)
|
|
0
|
|
|
0.00
|
|
|
|
Exercised
|
0
|
|
|
(8,288,960
|
)
|
|
46.41
|
|
|
|
Plan shares expired
|
(59,262
|
)
|
|
0
|
|
|
0.00
|
|
|
|
Canceled
|
1,541,850
|
|
|
(1,541,850
|
)
|
|
71.66
|
|
|
|
Balance as of January 31, 2018
|
50,312,513
|
|
|
21,734,997
|
|
|
$
|
65.96
|
|
|
$
|
1,042,149
|
|
Vested or expected to vest
|
|
|
20,533,483
|
|
|
$
|
65.40
|
|
|
$
|
996,145
|
|
Exercisable as of January 31, 2018
|
|
|
11,259,046
|
|
|
$
|
60.44
|
|
|
$
|
601,993
|
|
The total intrinsic value of the options exercised during
fiscal 2018
,
2017
and
2016
was
$373.0 million
,
$224.3 million
and
$291.3 million
, respectively. The intrinsic value is the difference between the current market value of the stock and the exercise price of the stock option.
The weighted-average remaining contractual life of vested and expected to vest options is approximately
5
years.
As of
January 31, 2018
, options to purchase
11,259,046
shares were vested at a weighted average exercise price of
$60.44
per share and had a remaining weighted-average contractual life of approximately
4.2
years. The total intrinsic value of these vested options as of
January 31, 2018
was
$602.0 million
.
During
fiscal 2018
, the Company recognized stock-based expense related to its equity plans for employees and non-employee directors of
$997.0 million
. As of
January 31, 2018
, the aggregate stock compensation remaining to be amortized to costs and expenses was approximately
$1.8 billion
. The Company will amortize this stock compensation balance as follows:
$855.4 million
during fiscal
2019
;
$582.7 million
during fiscal
2020
;
$318.1 million
during fiscal
2021
;
$59.5 million
during fiscal
2022
;
$17.2 million
during fiscal 2023 and
$8.0 million
thereafter. The expected amortization reflects only outstanding stock awards as of
January 31, 2018
and assumes no forfeiture activity.
In prior years, the Company had an annual equity grant cycle for employees in the month of November. During fiscal 2018, the Company changed its annual equity grant to occur in the month of March, starting in fiscal 2019. The Company granted
14.9 million
shares under the annual equity grant in fiscal 2017 whereas the Company did not grant any shares under the annual equity grant in fiscal 2018.
The aggregate stock compensation remaining to be amortized to costs and expenses will be recognized over a weighted average period of
1.8
years.
The following table summarizes information about stock options outstanding as of
January 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise
Prices
|
|
Number
Outstanding
|
|
Weighted-
Average
Remaining
Contractual Life
(Years)
|
|
Weighted-
Average
Exercise
Price
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
|
$0.86 to $52.30
|
|
4,142,116
|
|
|
4.1
|
|
$
|
36.78
|
|
|
3,497,985
|
|
|
$
|
42.40
|
|
$53.60 to $58.86
|
|
624,358
|
|
|
3.5
|
|
55.45
|
|
|
467,363
|
|
|
55.44
|
|
$59.34
|
|
4,440,985
|
|
|
3.8
|
|
59.34
|
|
|
3,285,181
|
|
|
59.34
|
|
$59.37 to $75.01
|
|
1,365,236
|
|
|
5.1
|
|
69.74
|
|
|
533,919
|
|
|
69.95
|
|
$75.57
|
|
5,129,107
|
|
|
5.8
|
|
75.57
|
|
|
1,271,214
|
|
|
75.57
|
|
$76.48 to $80.62
|
|
574,675
|
|
|
5.4
|
|
78.54
|
|
|
210,894
|
|
|
78.57
|
|
$80.99 to $112.89
|
|
5,458,520
|
|
|
5.2
|
|
83.40
|
|
|
1,992,490
|
|
|
80.99
|
|
|
|
21,734,997
|
|
|
4.8
|
|
$
|
65.96
|
|
|
11,259,046
|
|
|
$
|
60.44
|
|
Restricted stock activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Outstanding
|
|
Outstanding
|
|
Weighted-
Average
Exercise Price
|
|
Aggregate
Intrinsic
Value (in thousands)
|
Balance as of January 31, 2017
|
27,453,498
|
|
|
$
|
0.001
|
|
|
|
Granted - restricted stock units and awards
|
3,519,847
|
|
|
0.001
|
|
|
|
Canceled
|
(2,013,813
|
)
|
|
0.001
|
|
|
|
Vested and converted to shares
|
(9,941,049
|
)
|
|
0.001
|
|
|
|
Balance as of January 31, 2018
|
19,018,483
|
|
|
$
|
0.001
|
|
|
$
|
2,166,395
|
|
Expected to vest
|
16,557,373
|
|
|
|
|
$
|
1,886,050
|
|
The restricted stock, which upon vesting entitles the holder to one share of common stock for each share of restricted stock, has an exercise price of
$0.001
per share, which is equal to the par value of the Company’s common stock, and generally vests over
four years
. The total fair value of shares vested during
fiscal 2018
,
2017
and
2016
was
$952.8 million
,
$640.2 million
and
$667.6 million
, respectively.
The weighted-average grant date fair value of the restricted stock issued for
fiscal 2018
,
2017
and
2016
was
$95.85
,
$75.99
and
$73.61
, respectively.
Common Stock
The following number of shares of common stock were reserved and available for future issuance at
January 31, 2018
:
|
|
|
|
Options outstanding
|
21,734,997
|
|
Restricted stock awards and units and performance stock units outstanding
|
19,018,483
|
|
Stock available for future grant:
|
|
2013 Equity Incentive Plan
|
49,650,949
|
|
2014 Inducement Plan
|
550,832
|
|
Amended and Restated 2004 Employee Stock Purchase Plan
|
7,518,906
|
|
Acquired equity plans
|
110,732
|
|
Convertible Senior Notes
|
15,454,888
|
|
Warrants
|
17,308,880
|
|
|
131,348,667
|
|
During fiscal years
2018
,
2017
and
2016
, certain board members received stock grants totaling
57,832
shares of common stock,
62,632
shares of common stock and
67,041
shares of common stock, respectively for board services pursuant to the terms described in the 2013 Plan and previously, the 2004 Outside Directors Stock Plan. The expense related to these awards,
which was expensed immediately at the time of the issuance, totaled
$5.3 million
,
$4.7 million
and
$4.8 million
for fiscal
2018
,
2017
and
2016
, respectively.
Preferred Stock
The Company’s board of directors has the authority, without further action by stockholders, to issue up to
5,000,000
shares of preferred stock in one or more series. The Company’s board of directors may designate the rights, preferences, privileges and restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preference, sinking fund terms, and number of shares constituting any series or the designation of any series. The issuance of preferred stock could have the effect of restricting dividends on the Company’s common stock, diluting the voting power of its common stock, impairing the liquidation rights of its common stock, or delaying or preventing a change in control. The ability to issue preferred stock could delay or impede a change in control. As of
January 31, 2018
and
2017
,
no
shares of preferred stock were outstanding.
11. Income Taxes
The domestic and foreign components of income (loss) before provision for (benefit from) income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
Domestic
|
$
|
51,131
|
|
|
$
|
65,432
|
|
|
$
|
(49,558
|
)
|
Foreign
|
150,977
|
|
|
(40,049
|
)
|
|
113,837
|
|
|
$
|
202,108
|
|
|
$
|
25,383
|
|
|
$
|
64,279
|
|
The provision for (benefit from) income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
Current:
|
|
|
|
|
|
Federal
|
$
|
(6,733
|
)
|
|
$
|
153
|
|
|
$
|
40,723
|
|
State
|
1,792
|
|
|
4,626
|
|
|
13,023
|
|
Foreign
|
85,361
|
|
|
71,878
|
|
|
57,347
|
|
Total
|
80,420
|
|
|
76,657
|
|
|
111,093
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(1,697
|
)
|
|
(182,848
|
)
|
|
1,453
|
|
State
|
342
|
|
|
(35,808
|
)
|
|
(426
|
)
|
Foreign
|
(4,435
|
)
|
|
(12,250
|
)
|
|
(415
|
)
|
Total
|
(5,790
|
)
|
|
(230,906
|
)
|
|
612
|
|
Provision for (benefit from) income taxes
|
$
|
74,630
|
|
|
$
|
(154,249
|
)
|
|
$
|
111,705
|
|
In fiscal 2017, the Company adopted Accounting Standards Update No. 2016-09, “Stock Compensation (Topic 718): Improvements to Employee Shared-Based Payment Accounting” ("ASU 2016-09"). The excess tax benefits from the vesting or the settlement of the stock awards recorded in the consolidated statement of operations during fiscal 2017 and fiscal 2018 were immaterial, after considering the change in the Company's valuation allowance. In fiscal 2016, the Company recorded excess tax benefits of
$59.5 million
directly to stockholders' equity.
In fiscal 2018, the Company recorded tax expense primarily from profitable jurisdictions outside of the United States. In fiscal 2017, the Company recorded a net tax benefit of
$154.2 million
. The most significant component of this tax amount was the benefit of
$210.3 million
resulting from a partial release of its valuation allowance in connection with the acquisition of Demandware. The net deferred tax liability from acquisitions provided an additional source of income to support the realizability of the Company's pre-existing deferred tax assets and as a result, the Company released a portion of its valuation allowance. The tax benefit associated with the release of the valuation allowance was partially offset by income taxes in profitable jurisdictions outside the United States. In addition, as a result of adopting ASU 2016-09 and the Company's valuation allowance, it did not record significant current tax expense for the United States. In fiscal 2016, the Company recorded income taxes in profitable jurisdictions outside the United States and current tax expense in the United States. The Company had U.S.
current tax expense as a result of taxable income before considering certain excess tax benefits from stock options and vesting of restricted stock prior to the adoption of ASU 2016-09.
A reconciliation of income taxes at the statutory federal income tax rate to the provision for (benefit from) income taxes included in the accompanying consolidated statements of operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
U.S. federal taxes at statutory rate (1)
|
$
|
68,313
|
|
|
$
|
8,884
|
|
|
$
|
22,498
|
|
State, net of the federal benefit
|
(10,769
|
)
|
|
838
|
|
|
(5,260
|
)
|
Foreign taxes in excess of the U.S. statutory rate (2)
|
(34,809
|
)
|
|
61,912
|
|
|
(25,780
|
)
|
Change in valuation allowance
|
39,317
|
|
|
(128,797
|
)
|
|
139,565
|
|
Tax credits
|
(107,260
|
)
|
|
(50,216
|
)
|
|
(48,943
|
)
|
Non-deductible expenses
|
52,636
|
|
|
47,836
|
|
|
26,841
|
|
Tax expense from acquisitions
|
1,137
|
|
|
568
|
|
|
1,584
|
|
Excess tax benefits related to shared based compensation (3)
|
(135,237
|
)
|
|
(95,030
|
)
|
|
0
|
|
Effect of U.S. tax law change
|
206,885
|
|
|
0
|
|
|
0
|
|
Other, net
|
(5,583
|
)
|
|
(244
|
)
|
|
1,200
|
|
Provision for (benefit from) income taxes
|
$
|
74,630
|
|
|
$
|
(154,249
|
)
|
|
$
|
111,705
|
|
(1) The Company revised its statutory rate from
35.0 percent
to
33.8 percent
for fiscal 2018 to reflect the corporate tax rate reduction effective January 1, 2018 due to the Tax Act.
(2) In fiscal 2016, the Company amended its inter-company cost-sharing arrangement to exclude stock-based compensation as a result of the U.S. Tax Court's opinion in Altera Corporation's ("Altera") litigation with the IRS, and accordingly, recorded a tax benefit subject to the valuation allowance. Most of the Altera related tax benefits were reflected in the foreign taxes in excess of the U.S. statutory rate in fiscal 2016, which were partially offset by a change in valuation allowance. In fiscal 2018, the benefit resulted from higher foreign tax credits, which were offset by the valuation allowance.
(3) Starting fiscal 2017, the excess tax benefits resulting from the vesting or the settlement of the stock awards were recorded in the tax provision, which were offset by the valuation allowance in the U.S. jurisdiction.
In December 2017, the Tax Act was enacted into law, significantly changing income tax law that affects U.S. corporations. Key changes included a corporate tax rate reduction from 35 percent to 21 percent effective January 1, 2018, expensing of certain qualified property, significant changes to the U.S international tax system such as a one-time transition tax on accumulated foreign earnings, and how foreign earnings are subject to U.S. tax. Due to the timing of the Tax Act and additional guidance and interpretations that may be issued in the future, the Company has not completed its analysis of the effects of the Tax Act. However, for the period ended January 31, 2018, the Company recorded a provisional tax expense of
$206.9 million
associated with the re-measurement of deferred taxes for the corporate rate reduction, which was offset by a reduction in valuation allowance of
$216.8 million
. Accordingly, an insignificant provisional benefit was recorded. Based on the Company's provisional assessment, the transition tax had no impact to its income tax provision. The provisional estimates will be adjusted during the measurement period defined under SAB 118, based upon the Company's ongoing analysis of its data and tax positions along with new guidance from regulators and interpretations of the law.
The Company received certain tax incentives in Singapore in the form of reduced tax rates, which will expire in fiscal 2020.
Deferred Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company recorded a provisional adjustment to its U.S. deferred income taxes as of January 31, 2018 to reflect the reduction in the corporate tax rate from 35 percent to 21 percent resulting from the Tax Act.
Significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
Net operating loss carryforwards
|
$
|
617,370
|
|
|
$
|
1,018,080
|
|
Deferred stock-based expense
|
78,706
|
|
|
133,921
|
|
Tax credits
|
496,695
|
|
|
240,925
|
|
Deferred rent expense
|
59,159
|
|
|
65,779
|
|
Accrued liabilities
|
113,182
|
|
|
141,008
|
|
Basis difference on strategic and other investments
|
41,441
|
|
|
42,034
|
|
Financing obligation
|
96,952
|
|
|
140,539
|
|
Deferred cost sharing adjustment
|
19,511
|
|
|
30,351
|
|
Non-cash equity liability
|
0
|
|
|
26,155
|
|
Other
|
14,382
|
|
|
21,432
|
|
Total deferred tax assets
|
1,537,398
|
|
|
1,860,224
|
|
Less valuation allowance
|
(974,706
|
)
|
|
(948,386
|
)
|
Deferred tax assets, net of valuation allowance
|
562,692
|
|
|
911,838
|
|
Deferred tax liabilities:
|
|
|
|
Deferred commissions
|
(137,479
|
)
|
|
(139,641
|
)
|
Purchased intangibles
|
(204,678
|
)
|
|
(408,203
|
)
|
Unrealized gains on investments
|
(5,093
|
)
|
|
(8,547
|
)
|
Depreciation and amortization
|
(166,382
|
)
|
|
(251,782
|
)
|
Deferred revenue
|
(37,435
|
)
|
|
(98,997
|
)
|
Total deferred tax liabilities
|
(551,067
|
)
|
|
(907,170
|
)
|
Net deferred tax assets
|
$
|
11,625
|
|
|
$
|
4,668
|
|
At
January 31, 2018
, for federal income tax purposes, the Company had net operating loss carryforwards of approximately
$2.7 billion
, which expire in fiscal 2021 through fiscal 2038, federal research and development tax credits of approximately
$274.5 million
, which expire in fiscal 2020 through fiscal 2038, foreign tax credits of approximately
$118.5 million
, which expire in fiscal 2019 through fiscal 2028, and alternative minimum tax credits of
$0.8 million
, which the Company expects to receive as a refund under the Tax Act. For California income tax purposes, the Company had net operating loss carryforwards of approximately
$847.5 million
which expire beginning in fis
cal 2019 through fiscal 2039, Ca
lifornia research and development tax credits of approximately
$215.1 million
, which do not expire, and
$8.8 million
of enterprise zone tax credits, which expire in fiscal 2025. For other states income tax purposes, the Company had net operating loss carryforwards of approximately
$1.2 billion
which expire beginning in fiscal 2019 through fiscal 2037 and tax credits of approximately
$27.1 million
, which expire beginning in fiscal 2021 through fiscal 2033. Utilization of the Company’s net operating loss carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carryforwards before utilization.
The Company regularly assesses the realizability of its deferred tax assets and establishes a valuation allowance if it is more-likely-than-not that some or all of its deferred tax assets will not be realized. The Company evaluates and weighs all available positive and negative evidence such as historic results, future reversals of existing deferred tax liabilities, projected future taxable income, as well as prudent and feasible tax-planning strategies. The Company will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions going forward. The Company may release all or a portion of its valuation allowance if there is sufficient positive evidence that outweighs the negative evidence, for example, if the trend in profitability continues.
Tax Benefits Related to Stock-Based Compensation
The income tax benefit related to stock-based compensation was
$264.9 million
,
$228.8 million
and
180.2 million
for
fiscal 2018
,
2017
and
2016
, respectively, the majority of which was not recognized as a result of the valuation allowance.
Unrecognized Tax Benefits and Other Considerations
The Company records liabilities related to its uncertain tax positions. Tax positions for the Company and its subsidiaries are subject to income tax audits by multiple tax jurisdictions throughout the world. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than
50 percent
likely to be realized upon settlement with the taxing authority. The Company had gross unrecognized tax benefits of
$304.0 million
,
$231.3 million
, and
$172.7 million
as of January 31, 2018, 2017 and 2016 respectively.
A reconciliation of the beginning and ending balance of total unrecognized tax benefits for fiscal years
2018
,
2017
and
2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
Beginning of period
|
$
|
231,317
|
|
|
$
|
172,741
|
|
|
$
|
146,188
|
|
Tax positions taken in prior period:
|
|
|
|
|
|
Gross increases
|
31,347
|
|
|
18,254
|
|
|
7,456
|
|
Gross decreases
|
(6,364
|
)
|
|
(1,131
|
)
|
|
(7,264
|
)
|
Tax positions taken in current period:
|
|
|
|
|
|
Gross increases
|
50,405
|
|
|
57,872
|
|
|
38,978
|
|
Settlements
|
(615
|
)
|
|
(15,598
|
)
|
|
(8,684
|
)
|
Lapse of statute of limitations
|
(8,193
|
)
|
|
(1,261
|
)
|
|
(781
|
)
|
Currency translation effect
|
6,054
|
|
|
440
|
|
|
(3,152
|
)
|
End of period
|
$
|
303,951
|
|
|
$
|
231,317
|
|
|
$
|
172,741
|
|
For fiscal
2018
,
2017
and
2016
total unrecognized tax benefits in an amount of
$77.2 million
,
$73.0 million
and
$56.2 million
, respectively, if recognized, would reduce income tax expense and the Company’s effective tax rate after considering the impact of the change in valuation allowance in the U.S.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the income tax provision. The Company recorded an immaterial amount for penalties and interest for each of fiscal
2018
,
2017
and
2016
. The balance in the non-current income tax payable related to penalties and interest was
$6.3 million
,
$6.7 million
and
$6.3 million
as of
January 31, 2018
,
2017
and
2016
, respectively.
Certain prior year tax returns are currently being examined by various taxing authorities in countries including the United States, France, United Kingdom and Germany. In March 2017, the Company received the final notice of proposed adjustments primarily related to transfer pricing issues from the IRS for fiscal 2011 and fiscal 2012. Accordingly, the Company re-assessed and adjusted its reserves, which resulted in a net immaterial impact to the tax provision due to its valuation allowance. The Company is currently appealing the IRS proposed adjustments. The Company believes that it has provided adequate reserves for its income tax uncertainties in all open tax years. As the outcome of the tax audits cannot be predicted with certainty, if any issues addressed in the Company's tax audits are resolved in a manner inconsistent with management's expectations, the Company could adjust its provision for income taxes in the future. Generally, any adjustments resulting from the U.S. audits should not have a significant impact to the Company's tax provision due to its valuation allowance.
The Company has operations and taxable presence in multiple jurisdictions in the U.S. and outside of the U.S. Tax positions for the Company and its subsidiaries are subject to income tax audits by multiple tax jurisdictions around the world. The Company currently considers U.S. federal and state, Canada, Japan, Australia, Germany, France and the United Kingdom to be major tax jurisdictions. The Company’s U.S. federal and state tax returns since February 1999, which was the inception of the Company, remain open to examination. With some exceptions, tax years prior to fiscal 2011 in jurisdictions outside of U.S. are generally closed. However, in Japan and United Kingdom, the Company is no longer subject to examinations for years prior to fiscal 2014 and fiscal 2015, respectively.
The Company anticipates it is reasonably possible that a decrease of unrecognized tax benefits up to approximately
$7.5 million
may occur in the next 12 months, as the applicable statutes of limitations lapse.
12. Earnings (Loss) Per Share
Basic earnings/loss per share is computed by dividing net income by the weighted-average number of common shares outstanding for the fiscal period. Diluted earnings per share is computed by giving effect to all potential weighted average dilutive common stock, including options, restricted stock units, warrants and the convertible senior notes. The dilutive effect of outstanding awards and convertible securities is reflected in diluted earnings per share by application of the treasury stock method. Diluted loss per share for fiscal 2016 is the same as basic loss per share as there was a net loss in fiscal 2016, and inclusion of potentially issuable shares was anti-dilutive.
A reconciliation of the denominator used in the calculation of basic and diluted earnings per share is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
Net income (loss)
|
$
|
127,478
|
|
|
$
|
179,632
|
|
|
$
|
(47,426
|
)
|
Denominator:
|
|
|
|
|
|
Weighted-average shares outstanding for basic earnings (loss) per share
|
714,919
|
|
|
687,797
|
|
|
661,647
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Convertible senior notes
|
4,672
|
|
|
1,906
|
|
|
0
|
|
Employee stock awards
|
14,163
|
|
|
10,514
|
|
|
0
|
|
Warrants
|
844
|
|
|
0
|
|
|
0
|
|
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings (loss) per share
|
734,598
|
|
|
700,217
|
|
|
661,647
|
|
The weighted-average number of shares outstanding used in the computation of diluted earnings per share does not include the effect of the following potential outstanding common stock. The effects of these potentially outstanding shares were not included in the calculation of diluted earnings per share because the effect would have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
Employee stock awards
|
7,210
|
|
|
10,527
|
|
|
26,615
|
|
Convertible senior notes
|
0
|
|
|
0
|
|
|
17,309
|
|
Warrants
|
0
|
|
|
17,309
|
|
|
17,309
|
|
13. Commitments
Letters of Credit
As of
January 31, 2018
, the Company had a total of
$99.9 million
in letters of credit outstanding substantially in favor of certain landlords for office space. These letters of credit renew annually and expire at various dates through
December 2030.
Leases
The Company leases facilities space and certain fixed assets under non-cancelable operating and capital leases with various expiration dates.
As of
January 31, 2018
, the future minimum lease payments under non-cancelable operating and capital leases are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Leases
|
|
Operating
Leases
|
|
Financing Obligation -Leased Facility (1)
|
Fiscal Period:
|
|
|
|
|
|
Fiscal 2019
|
$
|
115,909
|
|
|
$
|
610,925
|
|
|
$
|
21,881
|
|
Fiscal 2020
|
201,618
|
|
|
540,391
|
|
|
22,325
|
|
Fiscal 2021
|
77
|
|
|
400,738
|
|
|
22,770
|
|
Fiscal 2022
|
38
|
|
|
298,641
|
|
|
23,214
|
|
Fiscal 2023
|
3
|
|
|
277,032
|
|
|
23,658
|
|
Thereafter
|
0
|
|
|
1,155,600
|
|
|
187,055
|
|
Total minimum lease payments
|
317,645
|
|
|
$
|
3,283,327
|
|
|
$
|
300,903
|
|
Less: amount representing interest
|
(22,328
|
)
|
|
|
|
|
Present value of capital lease obligations
|
$
|
295,317
|
|
|
|
|
|
(1) Total Financing Obligation - Leased Facility noted above represents the total obligation on the lease agreement including amounts allocated to interest and the implied lease for the land as noted in Note 5 “Property and Equipment.” As of
January 31, 2018
,
$218.2 million
of the total
$300.9 million
above was recorded to Financing obligation leased facility, of which the current portion is included in "Accounts payable, accrued expenses and other liabilities" and the noncurrent portion is included in “Other noncurrent liabilities” on the consolidated balance sheets.
The Company’s agreements for the facilities and certain services provide the Company with the option to renew. The Company’s future contractual obligations would change if the Company exercised these options.
The terms of the lease agreements provide for rental payments on a graduated basis. The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not paid. Of the total operating lease commitment balance of
$3.3 billion
, approximately
$2.7 billion
is related to facilities space. The remaining commitment amount is related to computer equipment and furniture and fixtures.
Rent expense for fiscal
2018
,
2017
and
2016
was
$285.2 million
,
$226.0 million
and
$174.6 million
, respectively.
Other Purchase Commitments
In April 2016, the Company entered into an agreement with a third-party provider for certain infrastructure services for a period of
four years
. The Company paid
$96.0 million
in connection with this agreement during
fiscal 2018
. The agreement further provides that the Company will pay an additional
$108.0 million
in fiscal 2019 and
$126.0 million
in fiscal 2020.
14. Employee Benefit Plan
The Company has a 401(k) plan covering all eligible employees in the United States and a Registered Retirement Savings plan covering all eligible employees in Canada. Since January 1, 2006, the Company has been contributing to the plans. Total Company contributions during fiscal
2018
,
2017
and
2016
, were
$93.2 million
,
$56.4 million
and
$45.6 million
, respectively.
15. Legal Proceedings and Claims
In the ordinary course of business, the Company is or may be involved in various legal proceedings and claims related to alleged infringement of third-party patents and other intellectual property rights, commercial, corporate and securities, labor and employment, class actions, wage and hour, and other claims. The Company has been, and may in the future be put on notice and/or sued by third-parties for alleged infringement of their proprietary rights, including patent infringement.
In general, the resolution of a legal matter could prevent the Company from offering its service to others, could be material to the Company’s financial condition or cash flows, or both, or could otherwise adversely affect the Company’s operating results.
The Company makes a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. The outcomes of legal proceedings and other contingencies are, however, inherently unpredictable and subject to significant uncertainties. As a result, the Company is not able to reasonably estimate the amount or range of possible losses in excess of any amounts accrued, including losses that could arise as a result of application of non-
monetary remedies, with respect to the contingencies it faces, and the Company’s estimates may not prove to be accurate. In management’s opinion, resolution of all current matters is not expected to have a material adverse impact on the Company’s consolidated results of operations, cash flows or financial position. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect the Company’s current or future results of operations or cash flows, or both, in a particular quarter.
In September 2013, one of the Company’s subsidiaries, ExactTarget, Inc. (“ExactTarget”), was added as a defendant in a purported class-action lawsuit that alleged that ExactTarget and one of its customers, Simply Fashion Stores, Ltd. (“Simply Fashion”), violated the Telephone Consumer Protection Act (“TCPA”) as a result of Simply Fashion’s text messaging campaigns and alleged failure to opt-out certain Simply Fashion customers from receiving messages. The complaint was subsequently amended to remove Simply Fashion as a defendant and the lawsuit is currently before the United States District Court for the Southern District of Indiana. The complaint seeks statutory damages and injunctive relief. While disputing the allegations of wrongdoing, the Company has reached a settlement of the lawsuit for approximately
$6.3 million
. The parties submitted the settlement agreement to the Court for approval and the Court entered the preliminary approval order. The Court set the final approval hearing for July 20, 2018.
16. Related-Party Transactions
In January 1999, the Salesforce.com Foundation, also referred to as the Foundation, was chartered on an idea of leveraging the Company’s people, technology, and resources to help improve communities around the world. The Company calls this integrated philanthropic approach the 1-1-1 model. Beginning in 2008, Salesforce.org, which is a non-profit public benefit corporation, was established to resell the Company's services to nonprofit organizations and certain higher education organizations.
The Company’s Chairman is the chairman of both the Foundation and Salesforce.org. The Company’s Chairman holds
one
of the
three
Foundation board seats. The Company’s Chairman,
one
of the Company’s employees and
one
of the Company’s board members hold
three
of Salesforce.org’s
nine
board seats. The Company does not control the Foundation’s or Salesforce.org's activities, and accordingly, the Company does not consolidate either of the related entities' statement of activities with its financial results.
Since the Foundation’s and Salesforce.org’s inception, the Company has provided at no charge certain resources to those entities' employees such as office space, furniture, equipment, facilities, services, and other resources. The value of these items was approximately
$11.2 million
,
$3.3 million
and
$1.2 million
for
fiscal 2018
,
2017
and
2016
, respectively.
Additionally, the Company allows Salesforce.org to donate subscriptions of the Company’s services to other qualified non-profit organizations. The Company also allows Salesforce.org to resell the Company’s service to non-profit organizations and certain education entities. The Company does not charge Salesforce.org for these subscriptions, therefore income from subscriptions sold to non-profit organizations is donated back to the community through charitable grants made by the Foundation and Salesforce.org. The value of the subscriptions sold by Salesforce.org pursuant to the reseller agreement, as amended, was approximately
$182.6 million
,
$112.4 million
and
$69.9 million
for
fiscal 2018
,
2017
and
2016
, respectively.
As described in Note 6 “Business Combinations,” the Company's Chairman held an ownership interest in an acquisition that was completed by the Company in April 2016.
17. Subsequent events
In March 2018, Salesforce Ventures, a wholly owned subsidiary of the Company, entered into an agreement to make a strategic investment, through a private placement, in a late stage technology company. The Company had initially invested
$5.0 million
in this company in fiscal 2015 and the agreement provides that the Company will invest an additional
$100.0 million
in this company, subject to certain contingencies. This investment is expected to occur in the Company's first quarter of fiscal 2019, and will be one of the Company’s largest strategic investments to date. The Company expects its ownership interest after this investment to be less than
five percent
of the investee company’s outstanding shares.
18. Selected Quarterly Financial Data (Unaudited)
Selected summarized quarterly financial information for fiscal
2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
2nd
Quarter
|
|
3rd
Quarter
|
|
4th
Quarter
|
|
Fiscal Year
|
|
(in thousands, except per share data)
|
Fiscal 2018
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
2,387,579
|
|
|
$
|
2,561,589
|
|
|
$
|
2,679,841
|
|
|
$
|
2,851,003
|
|
|
$
|
10,480,012
|
|
Gross profit
|
1,737,024
|
|
|
1,890,922
|
|
|
1,965,333
|
|
|
2,113,211
|
|
|
7,706,490
|
|
Income (loss) from operations
|
(8,882
|
)
|
|
50,793
|
|
|
115,988
|
|
|
77,869
|
|
|
235,768
|
|
Net income (loss)
|
$
|
(9,207
|
)
|
|
$
|
17,736
|
|
|
$
|
51,394
|
|
|
$
|
67,555
|
|
|
$
|
127,478
|
|
Basic net income (loss) per share
|
$
|
(0.01
|
)
|
|
$
|
0.02
|
|
|
$
|
0.07
|
|
|
$
|
0.09
|
|
|
$
|
0.18
|
|
Diluted net income (loss) per share
|
$
|
(0.01
|
)
|
|
$
|
0.02
|
|
|
$
|
0.07
|
|
|
$
|
0.09
|
|
|
$
|
0.17
|
|
Fiscal 2017
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,916,603
|
|
|
$
|
2,036,618
|
|
|
$
|
2,144,775
|
|
|
$
|
2,293,988
|
|
|
$
|
8,391,984
|
|
Gross profit
|
1,419,622
|
|
|
1,511,039
|
|
|
1,559,253
|
|
|
1,668,031
|
|
|
6,157,945
|
|
Income (loss) from operations
|
51,986
|
|
|
32,551
|
|
|
3,036
|
|
|
(23,345
|
)
|
|
64,228
|
|
Net income (loss)
|
$
|
38,759
|
|
|
$
|
229,622
|
|
|
$
|
(37,309
|
)
|
|
$
|
(51,440
|
)
|
|
$
|
179,632
|
|
Basic net income (loss) per share
|
$
|
0.06
|
|
|
$
|
0.34
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
0.26
|
|
Diluted net income (loss) per share
|
$
|
0.06
|
|
|
$
|
0.33
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
0.26
|
|