ITEM 1. FINANCIAL STATEMENTS
salesforce.com, inc.
Consolidated Balance Sheets
(in thousands)
|
|
|
|
|
|
|
|
|
|
October 31,
2017
|
|
January 31,
2017
|
|
(unaudited)
|
|
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
2,071,837
|
|
|
$
|
1,606,549
|
|
Marketable securities
|
1,556,828
|
|
|
602,338
|
|
Accounts receivable, net
|
1,519,916
|
|
|
3,196,643
|
|
Deferred commissions
|
327,643
|
|
|
311,770
|
|
Prepaid expenses and other current assets
|
469,946
|
|
|
279,527
|
|
Total current assets
|
5,946,170
|
|
|
5,996,827
|
|
Property and equipment, net
|
1,864,891
|
|
|
1,787,534
|
|
Deferred commissions, noncurrent
|
253,004
|
|
|
227,849
|
|
Capitalized software, net
|
140,768
|
|
|
141,671
|
|
Strategic investments
|
670,406
|
|
|
566,953
|
|
Goodwill
|
7,294,141
|
|
|
7,263,846
|
|
Intangible assets acquired through business combinations, net
|
895,768
|
|
|
1,113,374
|
|
Other assets, net
|
424,888
|
|
|
486,869
|
|
Total assets
|
$
|
17,490,036
|
|
|
$
|
17,584,923
|
|
Liabilities, temporary equity and stockholders’ equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable, accrued expenses and other liabilities
|
$
|
1,686,408
|
|
|
$
|
1,752,664
|
|
Deferred revenue
|
4,392,082
|
|
|
5,542,802
|
|
Convertible 0.25% senior notes, net
|
1,137,954
|
|
|
0
|
|
Total current liabilities
|
7,216,444
|
|
|
7,295,466
|
|
Convertible 0.25% senior notes, net
|
0
|
|
|
1,116,360
|
|
Term loan
|
498,084
|
|
|
497,221
|
|
Loan assumed on 50 Fremont
|
198,471
|
|
|
198,268
|
|
Revolving credit facility
|
0
|
|
|
196,542
|
|
Other noncurrent liabilities
|
736,870
|
|
|
780,939
|
|
Total liabilities
|
8,649,869
|
|
|
10,084,796
|
|
Temporary equity:
|
|
|
|
Convertible 0.25% senior notes (See Note 8)
|
10,797
|
|
|
0
|
|
Stockholders’ equity:
|
|
|
|
Common stock
|
722
|
|
|
708
|
|
Additional paid-in capital
|
9,230,081
|
|
|
8,040,170
|
|
Accumulated other comprehensive income (loss)
|
3,554
|
|
|
(75,841
|
)
|
Accumulated deficit
|
(404,987
|
)
|
|
(464,910
|
)
|
Total stockholders’ equity
|
8,829,370
|
|
|
7,500,127
|
|
Total liabilities, temporary equity and stockholders’ equity
|
$
|
17,490,036
|
|
|
$
|
17,584,923
|
|
See accompanying Notes.
salesforce.com, inc.
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Nine Months Ended October 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
|
|
|
|
Subscription and support
|
$
|
2,486,131
|
|
|
$
|
1,983,981
|
|
|
$
|
7,055,538
|
|
|
$
|
5,645,554
|
|
Professional services and other
|
193,710
|
|
|
160,794
|
|
|
573,471
|
|
|
452,442
|
|
Total revenues
|
2,679,841
|
|
|
2,144,775
|
|
|
7,629,009
|
|
|
6,097,996
|
|
Cost of revenues (1)(2):
|
|
|
|
|
|
|
|
Subscription and support
|
528,182
|
|
|
426,487
|
|
|
1,484,982
|
|
|
1,154,044
|
|
Professional services and other
|
186,326
|
|
|
159,035
|
|
|
550,748
|
|
|
454,038
|
|
Total cost of revenues
|
714,508
|
|
|
585,522
|
|
|
2,035,730
|
|
|
1,608,082
|
|
Gross profit
|
1,965,333
|
|
|
1,559,253
|
|
|
5,593,279
|
|
|
4,489,914
|
|
Operating expenses (1)(2):
|
|
|
|
|
|
|
|
Research and development
|
393,998
|
|
|
311,459
|
|
|
1,156,526
|
|
|
863,935
|
|
Marketing and sales
|
1,184,733
|
|
|
997,993
|
|
|
3,464,986
|
|
|
2,828,784
|
|
General and administrative
|
270,614
|
|
|
246,765
|
|
|
813,868
|
|
|
709,622
|
|
Total operating expenses
|
1,849,345
|
|
|
1,556,217
|
|
|
5,435,380
|
|
|
4,402,341
|
|
Income from operations
|
115,988
|
|
|
3,036
|
|
|
157,899
|
|
|
87,573
|
|
Investment income
|
10,049
|
|
|
3,709
|
|
|
24,069
|
|
|
23,747
|
|
Interest expense
|
(21,557
|
)
|
|
(21,946
|
)
|
|
(65,382
|
)
|
|
(64,665
|
)
|
Other income (expense) (1)
|
1,921
|
|
|
1,782
|
|
|
(2,695
|
)
|
|
(11,500
|
)
|
Gains from acquisitions of strategic investments
|
0
|
|
|
833
|
|
|
0
|
|
|
13,697
|
|
Income (loss) before benefit from (provision for) income taxes
|
106,401
|
|
|
(12,586
|
)
|
|
113,891
|
|
|
48,852
|
|
Benefit from (provision for) income taxes
|
(55,007
|
)
|
|
(24,723
|
)
|
|
(53,968
|
)
|
|
182,220
|
|
Net income (loss)
|
$
|
51,394
|
|
|
$
|
(37,309
|
)
|
|
$
|
59,923
|
|
|
$
|
231,072
|
|
Basic net income (loss) per share
|
$
|
0.07
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.08
|
|
|
$
|
0.34
|
|
Diluted net income (loss) per share
|
$
|
0.07
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.08
|
|
|
$
|
0.33
|
|
Shares used in computing basic net income (loss) per share
|
717,445
|
|
|
690,468
|
|
|
711,884
|
|
|
683,075
|
|
Shares used in computing diluted net income (loss) per share
|
738,106
|
|
|
690,468
|
|
|
730,212
|
|
|
696,257
|
|
_______________
(1) Amounts include amortization of purchased intangibles from business combinations, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Nine Months Ended October 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cost of revenues
|
$
|
39,610
|
|
|
$
|
36,703
|
|
|
$
|
126,679
|
|
|
$
|
84,462
|
|
Marketing and sales
|
30,067
|
|
|
28,064
|
|
|
91,274
|
|
|
66,601
|
|
Other income (expense)
|
367
|
|
|
579
|
|
|
1,118
|
|
|
1,927
|
|
(2) Amounts include stock-based expense, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Nine Months Ended October 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cost of revenues
|
$
|
33,494
|
|
|
$
|
26,783
|
|
|
$
|
97,206
|
|
|
$
|
76,912
|
|
Research and development
|
66,626
|
|
|
50,372
|
|
|
197,185
|
|
|
124,164
|
|
Marketing and sales
|
116,992
|
|
|
93,718
|
|
|
356,538
|
|
|
275,515
|
|
General and administrative
|
34,165
|
|
|
33,878
|
|
|
108,402
|
|
|
99,389
|
|
See accompanying Notes.
salesforce.com, inc.
Consolidated Statements of
Comprehensive Income (Loss)
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Nine Months Ended October 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income (loss)
|
$
|
51,394
|
|
|
$
|
(37,309
|
)
|
|
$
|
59,923
|
|
|
$
|
231,072
|
|
Other comprehensive income (loss), before tax and net of reclassification adjustments:
|
|
|
|
|
|
|
|
Foreign currency translation and other gains (losses)
|
(2,218
|
)
|
|
(28,372
|
)
|
|
28,190
|
|
|
(28,523
|
)
|
Unrealized gains (losses) on marketable securities and strategic investments (See Note 2)
|
(11,763
|
)
|
|
(16,019
|
)
|
|
51,205
|
|
|
20,961
|
|
Other comprehensive income (loss), before tax
|
(13,981
|
)
|
|
(44,391
|
)
|
|
79,395
|
|
|
(7,562
|
)
|
Tax effect
|
0
|
|
|
(7,337
|
)
|
|
0
|
|
|
(5,464
|
)
|
Other comprehensive income (loss), net of tax
|
(13,981
|
)
|
|
(51,728
|
)
|
|
79,395
|
|
|
(13,026
|
)
|
Comprehensive income (loss)
|
$
|
37,413
|
|
|
$
|
(89,037
|
)
|
|
$
|
139,318
|
|
|
$
|
218,046
|
|
See accompanying Notes.
salesforce.com, inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Nine Months Ended October 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Operating activities:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
51,394
|
|
|
$
|
(37,309
|
)
|
|
$
|
59,923
|
|
|
$
|
231,072
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
187,546
|
|
|
169,346
|
|
|
564,911
|
|
|
451,479
|
|
Amortization of debt discount and issuance costs
|
7,795
|
|
|
7,281
|
|
|
23,265
|
|
|
21,334
|
|
Gains from acquisitions of strategic investments
|
0
|
|
|
(833
|
)
|
|
0
|
|
|
(13,697
|
)
|
Amortization of deferred commissions
|
117,677
|
|
|
93,230
|
|
|
331,687
|
|
|
270,527
|
|
Expenses related to employee stock plans
|
251,277
|
|
|
204,751
|
|
|
759,331
|
|
|
575,980
|
|
Changes in assets and liabilities, net of business combinations:
|
|
|
|
|
|
|
|
Accounts receivable, net
|
49,406
|
|
|
42,653
|
|
|
1,677,466
|
|
|
1,276,798
|
|
Deferred commissions
|
(171,562
|
)
|
|
(92,803
|
)
|
|
(372,714
|
)
|
|
(226,965
|
)
|
Prepaid expenses and other current assets and other assets
|
(15,669
|
)
|
|
40,676
|
|
|
(166,784
|
)
|
|
(25,723
|
)
|
Accounts payable, accrued expenses and other liabilities
|
74,480
|
|
|
57,836
|
|
|
(39,720
|
)
|
|
(275,058
|
)
|
Deferred revenue
|
(426,552
|
)
|
|
(330,516
|
)
|
|
(1,150,720
|
)
|
|
(829,695
|
)
|
Net cash provided by operating activities
|
125,792
|
|
|
154,312
|
|
|
1,686,645
|
|
|
1,456,052
|
|
Investing activities:
|
|
|
|
|
|
|
|
Business combinations, net of cash acquired
|
0
|
|
|
(32,117
|
)
|
|
(19,781
|
)
|
|
(2,832,110
|
)
|
Purchases of strategic investments
|
(54,585
|
)
|
|
(28,660
|
)
|
|
(113,088
|
)
|
|
(65,834
|
)
|
Sales of strategic investments
|
40,811
|
|
|
11,783
|
|
|
55,898
|
|
|
26,506
|
|
Purchases of marketable securities
|
(233,824
|
)
|
|
(111,731
|
)
|
|
(1,433,718
|
)
|
|
(986,862
|
)
|
Sales of marketable securities
|
193,783
|
|
|
93,391
|
|
|
437,248
|
|
|
1,927,049
|
|
Maturities of marketable securities
|
29,819
|
|
|
14,203
|
|
|
43,089
|
|
|
64,741
|
|
Capital expenditures
|
(111,278
|
)
|
|
(140,653
|
)
|
|
(396,268
|
)
|
|
(319,984
|
)
|
Net cash used in investing activities
|
(135,274
|
)
|
|
(193,784
|
)
|
|
(1,426,620
|
)
|
|
(2,186,494
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
Proceeds from term loan, net
|
0
|
|
|
0
|
|
|
0
|
|
|
495,550
|
|
Proceeds from employee stock plans
|
141,970
|
|
|
92,846
|
|
|
484,786
|
|
|
315,865
|
|
Principal payments on capital lease obligations
|
(7,716
|
)
|
|
(10,997
|
)
|
|
(82,890
|
)
|
|
(73,760
|
)
|
Payments on revolving credit facility
|
0
|
|
|
0
|
|
|
(200,000
|
)
|
|
0
|
|
Net cash provided by financing activities
|
134,254
|
|
|
81,849
|
|
|
201,896
|
|
|
737,655
|
|
Effect of exchange rate changes
|
(2,045
|
)
|
|
(11,867
|
)
|
|
3,367
|
|
|
(19,840
|
)
|
Net increase (decrease) in cash and cash equivalents
|
122,727
|
|
|
30,510
|
|
|
465,288
|
|
|
(12,627
|
)
|
Cash and cash equivalents, beginning of period
|
1,949,110
|
|
|
1,115,226
|
|
|
1,606,549
|
|
|
1,158,363
|
|
Cash and cash equivalents, end of period
|
$
|
2,071,837
|
|
|
$
|
1,145,736
|
|
|
$
|
2,071,837
|
|
|
$
|
1,145,736
|
|
See accompanying Notes.
salesforce.com, inc.
Consolidated Statements of Cash Flows
Supplemental Cash Flow Disclosure
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Nine Months Ended October 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Supplemental cash flow disclosure:
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
$
|
6,774
|
|
|
$
|
11,365
|
|
|
$
|
34,039
|
|
|
$
|
41,400
|
|
Income taxes, net of tax refunds
|
$
|
14,837
|
|
|
$
|
11,220
|
|
|
$
|
41,519
|
|
|
$
|
25,451
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
Fixed assets acquired under capital leases
|
$
|
0
|
|
|
$
|
180
|
|
|
$
|
2,471
|
|
|
$
|
765
|
|
Fair value of equity awards assumed
|
$
|
0
|
|
|
$
|
26,406
|
|
|
$
|
0
|
|
|
$
|
47,199
|
|
Fair value of common stock issued as consideration for business combinations
|
$
|
0
|
|
|
$
|
492,842
|
|
|
$
|
6,193
|
|
|
$
|
771,214
|
|
Non-cash equity liability (See Note 9)
|
$
|
5,959
|
|
|
$
|
(1,473
|
)
|
|
$
|
18,920
|
|
|
$
|
74,570
|
|
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, analytics, application development, IoT integration, collaborative productivity tools 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
.
Basis of Presentation
The accompanying consolidated balance sheet as of
October 31, 2017
and the consolidated statements of operations, consolidated statements of
comprehensive income (loss)
and consolidated statements of cash flows for the
three and nine months ended October 31, 2017
and
2016
, respectively, are unaudited.
These financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, the unaudited consolidated financial statements include all adjustments necessary for the fair presentation of the Company’s balance sheet as of
October 31, 2017
, and its results of operations, including its
comprehensive income (loss)
, and its cash flows for the
three and nine months ended October 31, 2017
and
2016
. All adjustments are of a normal recurring nature. The results for the
three and nine months ended October 31, 2017
are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending
January 31, 2018
.
These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 2017
, filed with the Securities and Exchange Commission (the “SEC”) on March 6,
2017
.
Use of Estimates
The preparation of financial statements in conformity with 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:
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the best estimate of selling price of the deliverables included in multiple deliverable revenue arrangements;
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the fair value of assets acquired and liabilities assumed for business combinations;
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the recognition, measurement and valuation of current and deferred income taxes;
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the fair value of certain stock awards issued;
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the useful lives of intangible assets, property and equipment and building and structural components; and
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the valuation of strategic investments and the determination of other-than-temporary impairments.
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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
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
October 31, 2017
and
January 31, 2017
.
No
single customer accounted for
five percent
or more of total revenue during the
three and nine months ended October 31, 2017
and
2016
.
Geographic Locations
As of
October 31, 2017
and
January 31, 2017
, assets located outside the Americas were
13 percent
and
12 percent
of total assets, respectively. As of
October 31, 2017
and
January 31, 2017
, assets located in the United States were
86 percent
and
86 percent
of total assets, respectively.
Revenues by geographical region are as follows (in thousands):
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Three Months Ended October 31,
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Nine Months Ended October 31,
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2017
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2016
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2017
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2016
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Americas
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$
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1,927,405
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$
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1,598,344
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$
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5,536,932
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$
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4,506,774
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Europe
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493,732
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337,497
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1,367,718
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1,012,671
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Asia Pacific
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258,704
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208,934
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724,359
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578,551
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$
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2,679,841
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$
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2,144,775
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$
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7,629,009
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$
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6,097,996
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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
during the
three and nine months ended October 31, 2017
and
2016
.
No
other country represented more than ten percent of total revenue during the
three and nine months ended October 31, 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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there is persuasive evidence of an arrangement;
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the service has been or is being provided to the customer;
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the collection of the fees is reasonably assured; and
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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 the
nine months ended October 31, 2017
, the Company deferred
$372.7 million
of commission expenditures and amortized
$331.7 million
to sales expense. During the same period a year ago, the Company deferred
$227.0 million
of commission expenditures and amortized
$270.5 million
to sales expense. Deferred commissions on the Company's consolidated balance sheets totaled
$580.6 million
at
October 31, 2017
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. In order 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 noncontrolling 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. Fair value is not estimated for non-marketable equity securities if there are no identified events or changes in circumstances that may have an effect on the fair value of the investment.
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 as strategic investments within the investing activities section of the statement of cash flows and any 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
October 31, 2017
and
January 31, 2017
, the foreign currency derivative contracts that were not settled 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
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3 to 9 years
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Furniture and fixtures
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5 years
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Leasehold improvements
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Shorter of the estimated lease term or 10 years
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Building and structural components
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Average weighted useful life of 32 years
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Building - leased facility
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27 years
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Building improvements
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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 the
three and nine months ended October 31, 2017
and
2016
.
Business Combinations
The Company uses its best estimates and assumptions to accurately 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 established 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 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
.
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
.
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.
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 does not expect it to have any 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, replaces 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 is continuing to assess the impact of adopting ASU 2014-09 on its financial position, results of operations and related disclosures and has concluded that the impact to the opening balance sheet as of February 1, 2016, due to the adjustment of revenues, is not material. The Company has not yet determined whether the impact on revenues will be material for the adjusted statements of operations or for future periods. Additionally, as the Company continues to assess the new standard along with industry trends and additional interpretive guidance, the Company may adjust its implementation plan accordingly.
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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allocation of subscription and support revenue across different clouds and to professional services revenue;
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estimation of variable consideration for arrangements with overage fees;
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required disclosures including 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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The commission accounting under the new standard is significantly different than the Company's current commission capitalization policy, as it will require the Company to capitalize more costs and amortize them over a longer period of time. Under the Company's current policy, the Company only capitalizes commissions that have a direct relationship to a specific revenue contract and the cost is deemed to be incremental. Under the new standard, the concept of what must be capitalized is significantly broader since a direct relationship with a revenue contract is not required. Accordingly, the new standard will result in additional types of costs being capitalized, including fringe benefits and taxes. Additionally, all amounts capitalized will be amortized over a period longer than the Company's current policy of amortizing the deferred amounts over the specific revenue contract terms, which are typically 12 to 36 months. Specifically, initial incremental contract costs will be deferred and amortized over an estimated customer life of four years, which is calculated based on both qualitative and quantitative factors, such as product life cycles and customer attrition. 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.
The Company does not expect the adoption of ASU 2014-09 to have any impact on its operating cash flows.
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 in other income (expense) 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 in other income (expense) 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. 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 are recorded in other income (expense) within the statement of operations. 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 Company expects the adoption of ASU 2016-01 will
impact its strategic investments portfolio, which consists of approximately
$100.3 million
in publicly traded equity investments and
$516.6 million
in privately held equity investments, as of
October 31, 2017
, both of which are recorded in strategic investments within the balance sheet. 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 other income (expense) within 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 same or similar transactions of the Company's investments in privately held equity investments.
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 and does not expect it 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 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, deferred revenue, deferred revenue, noncurrent, and purchases and sales of strategic investments.
2. Investments
Marketable Securities
At
October 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
|
$
|
939,959
|
|
|
$
|
2,246
|
|
|
$
|
(2,435
|
)
|
|
$
|
939,770
|
|
U.S. treasury securities
|
137,172
|
|
|
29
|
|
|
(491
|
)
|
|
136,710
|
|
Mortgage backed obligations
|
98,226
|
|
|
22
|
|
|
(532
|
)
|
|
97,716
|
|
Asset backed securities
|
202,180
|
|
|
96
|
|
|
(219
|
)
|
|
202,057
|
|
Municipal securities
|
56,387
|
|
|
81
|
|
|
(201
|
)
|
|
56,267
|
|
Foreign government obligations
|
68,845
|
|
|
2
|
|
|
(524
|
)
|
|
68,323
|
|
U.S. agency obligations
|
10,506
|
|
|
1
|
|
|
(9
|
)
|
|
10,498
|
|
Covered bonds
|
45,485
|
|
|
63
|
|
|
(61
|
)
|
|
45,487
|
|
Total marketable securities
|
$
|
1,558,760
|
|
|
$
|
2,540
|
|
|
$
|
(4,472
|
)
|
|
$
|
1,556,828
|
|
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
|
|
October 31,
2017
|
|
January 31,
2017
|
Due within 1 year
|
$
|
226,929
|
|
|
$
|
104,631
|
|
Due in 1 year through 5 years
|
1,314,352
|
|
|
494,127
|
|
Due in 5 years through 10 years
|
15,547
|
|
|
3,580
|
|
|
$
|
1,556,828
|
|
|
$
|
602,338
|
|
As of
October 31, 2017
, 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
|
$
|
424,101
|
|
|
$
|
(2,052
|
)
|
|
$
|
28,653
|
|
|
$
|
(383
|
)
|
|
$
|
452,754
|
|
|
$
|
(2,435
|
)
|
U.S. treasury securities
|
114,724
|
|
|
(491
|
)
|
|
0
|
|
|
0
|
|
|
114,724
|
|
|
(491
|
)
|
Mortgage backed obligations
|
68,841
|
|
|
(315
|
)
|
|
16,564
|
|
|
(217
|
)
|
|
85,405
|
|
|
(532
|
)
|
Asset backed securities
|
126,186
|
|
|
(210
|
)
|
|
3,461
|
|
|
(9
|
)
|
|
129,647
|
|
|
(219
|
)
|
Municipal securities
|
30,671
|
|
|
(148
|
)
|
|
2,788
|
|
|
(53
|
)
|
|
33,459
|
|
|
(201
|
)
|
Foreign government obligations
|
62,697
|
|
|
(520
|
)
|
|
1,027
|
|
|
(4
|
)
|
|
63,724
|
|
|
(524
|
)
|
U.S. agency obligations
|
6,746
|
|
|
(9
|
)
|
|
0
|
|
|
0
|
|
|
6,746
|
|
|
(9
|
)
|
Covered bonds
|
5,861
|
|
|
(61
|
)
|
|
0
|
|
|
0
|
|
|
5,861
|
|
|
(61
|
)
|
|
$
|
839,827
|
|
|
$
|
(3,806
|
)
|
|
$
|
52,493
|
|
|
$
|
(666
|
)
|
|
$
|
892,320
|
|
|
$
|
(4,472
|
)
|
The unrealized losses for each of the fixed rate marketable securities were less than
$0.2 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
October 31, 2017
, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Nine Months Ended October 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Interest income
|
$
|
10,038
|
|
|
$
|
3,642
|
|
|
$
|
24,433
|
|
|
$
|
17,961
|
|
Realized gains
|
258
|
|
|
210
|
|
|
770
|
|
|
7,771
|
|
Realized losses
|
(247
|
)
|
|
(143
|
)
|
|
(1,134
|
)
|
|
(1,985
|
)
|
Total investment income
|
$
|
10,049
|
|
|
$
|
3,709
|
|
|
$
|
24,069
|
|
|
$
|
23,747
|
|
Reclassification adjustments out of accumulated other comprehensive income into investment income were immaterial for the
three and nine months ended October 31, 2017
and
2016
.
Strategic Investments
As of
October 31, 2017
, the Company had
three
investments in marketable equity securities with a fair value of
$100.3 million
, which included an unrealized gain of
$62.0 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.
As of
October 31, 2017
and
January 31, 2017
, the carrying value of the Company’s non-marketable debt and equity securities was
$570.1 million
and
$526.0 million
, respectively. The estimated fair value of the non-marketable debt and equity securities was approximately
$803.9 million
and
$758.3 million
as of
October 31, 2017
and
January 31, 2017
, respectively.
The Company sold a portion of its publicly-held investments in the three months ended October 31, 2017, which resulted in a reclassification of previously unrealized gains from the statement of comprehensive income (loss) to the statement of operations in the amount of
$15.5 million
. This amount was not material in prior periods.
3. Derivatives
Details on outstanding foreign currency derivative contracts are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
October 31, 2017
|
|
January 31, 2017
|
Notional amount of foreign currency derivative contracts
|
$
|
1,275,276
|
|
|
$
|
1,280,953
|
|
Fair value of foreign currency derivative contracts
|
$
|
853
|
|
|
$
|
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
|
October 31, 2017
|
|
January 31, 2017
|
Derivative Assets
|
|
|
|
|
Foreign currency derivative contracts
|
Prepaid expenses and other current assets
|
$
|
4,225
|
|
|
$
|
13,238
|
|
Derivative Liabilities
|
|
|
|
|
Foreign currency derivative contracts
|
Accounts payable, accrued expenses and other liabilities
|
$
|
3,372
|
|
|
$
|
3,033
|
|
Gains/losses on derivative instruments not designated as hedging instruments recorded in
Other income (expense)
in the consolidated statements of operations during the
three and nine months ended October 31, 2017
and
2016
, respectively, are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Foreign currency derivative contracts
|
$
|
(1,606
|
)
|
|
$
|
(39,624
|
)
|
|
$
|
11,500
|
|
|
$
|
(86,528
|
)
|
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
October 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 October 31, 2017
|
Cash equivalents (1):
|
|
|
|
|
|
|
|
Time deposits
|
$
|
0
|
|
|
$
|
394,123
|
|
|
$
|
0
|
|
|
$
|
394,123
|
|
Money market mutual funds
|
805,554
|
|
|
0
|
|
|
0
|
|
|
805,554
|
|
Marketable securities:
|
|
|
|
|
|
|
|
Corporate notes and obligations
|
0
|
|
|
939,770
|
|
|
0
|
|
|
939,770
|
|
U.S. treasury securities
|
0
|
|
|
136,710
|
|
|
0
|
|
|
136,710
|
|
Mortgage backed obligations
|
0
|
|
|
97,716
|
|
|
0
|
|
|
97,716
|
|
Asset backed securities
|
0
|
|
|
202,057
|
|
|
0
|
|
|
202,057
|
|
Municipal securities
|
0
|
|
|
56,267
|
|
|
0
|
|
|
56,267
|
|
Foreign government obligations
|
0
|
|
|
68,323
|
|
|
0
|
|
|
68,323
|
|
U.S. agency obligations
|
0
|
|
|
10,498
|
|
|
0
|
|
|
10,498
|
|
Covered bonds
|
0
|
|
|
45,487
|
|
|
0
|
|
|
45,487
|
|
Foreign currency derivative contracts (2)
|
0
|
|
|
4,225
|
|
|
0
|
|
|
4,225
|
|
Total assets
|
$
|
805,554
|
|
|
$
|
1,955,176
|
|
|
$
|
0
|
|
|
$
|
2,760,730
|
|
Liabilities:
|
|
|
|
|
|
|
|
Foreign currency derivative contracts (3)
|
0
|
|
|
3,372
|
|
|
0
|
|
|
3,372
|
|
Total liabilities
|
$
|
0
|
|
|
$
|
3,372
|
|
|
$
|
0
|
|
|
$
|
3,372
|
|
___________
(1)
Included in “cash and cash equivalents” in the accompanying consolidated balance sheet as of
October 31, 2017
, in addition to
$872.2 million
of cash.
(2)
Included in “prepaid expenses and other current assets” in the accompanying consolidated balance sheet as of
October 31, 2017
.
(3)
Included in “accounts payable, accrued expenses and other liabilities” in the accompanying consolidated balance sheet as of
October 31, 2017
.
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
|
|
October 31, 2017
|
|
January 31, 2017
|
Land
|
$
|
183,888
|
|
|
$
|
183,888
|
|
Buildings and building improvements
|
626,168
|
|
|
621,377
|
|
Computers, equipment and software
|
1,600,783
|
|
|
1,440,986
|
|
Furniture and fixtures
|
132,374
|
|
|
112,564
|
|
Leasehold improvements
|
776,396
|
|
|
627,069
|
|
|
3,319,609
|
|
|
2,985,884
|
|
Less accumulated depreciation and amortization
|
(1,454,718
|
)
|
|
(1,198,350
|
)
|
|
$
|
1,864,891
|
|
|
$
|
1,787,534
|
|
Depreciation and amortization expense totaled
$94.2 million
and
$83.5 million
during the
three months ended October 31, 2017
and
2016
, respectively, and
$277.2 million
and
$239.2 million
during the
nine months ended October 31, 2017
and
2016
, respectively.
Computers, equipment and software at
October 31, 2017
and
January 31, 2017
included a total of
$729.5 million
and
$729.0 million
acquired under capital lease agreements, respectively. Accumulated amortization relating to computers, equipment and software acquired under capital leases totaled
$450.5 million
and
$386.9 million
, respectively, at
October 31, 2017
and
January 31, 2017
. Amortization of assets acquired under capital leases is included in depreciation and amortization expense.
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. As of
October 31, 2017
, the Company had capitalized
$178.8 million
of construction costs, based on the construction costs incurred to date by the landlord, and recorded a corresponding current and noncurrent financing obligation liability of
$19.9 million
and
$198.9 million
, respectively. As of
January 31, 2017
, the Company had capitalized
$178.8 million
of construction costs, based on the construction costs incurred to date by the landlord, and recorded a corresponding current and noncurrent financing obligation liability of
$19.6 million
and
$200.7 million
, respectively. The total expected financing obligation in the form of minimum lease payments inclusive of the amounts currently recorded is
$306.3 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
In February 2017, the Company acquired Sequence, Inc. for an aggregate of
$26.0 million
in cash and equity, net of cash acquired, and has included the financial results of the company in its consolidated financial statements from the date of acquisition. The costs associated with this acquisition were not material. The Company accounted for this acquisition as a business combination. In allocating the purchase consideration based on estimated fair values, the Company recorded
$2.7 million
of intangible assets and
$23.0 million
of goodwill. The goodwill balance associated with this business combination is deductible for U.S. income tax purposes. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
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
|
|
Oct. 31, 2017
|
|
Jan 31, 2017
|
|
Expense
|
|
Oct. 31, 2017
|
|
Jan 31, 2017
|
|
Oct. 31, 2017
|
|
Acquired developed technology
|
$
|
1,092,161
|
|
|
$
|
0
|
|
|
$
|
1,092,161
|
|
|
$
|
(577,929
|
)
|
|
$
|
(125,886
|
)
|
|
$
|
(703,815
|
)
|
|
$
|
514,232
|
|
|
$
|
388,346
|
|
|
3.0
|
Customer relationships
|
843,614
|
|
|
1,690
|
|
|
845,304
|
|
|
(254,035
|
)
|
|
(89,769
|
)
|
|
(343,804
|
)
|
|
589,579
|
|
|
501,500
|
|
|
4.7
|
Trade names and trademarks
|
45,950
|
|
|
0
|
|
|
45,950
|
|
|
(41,349
|
)
|
|
(1,530
|
)
|
|
(42,879
|
)
|
|
4,601
|
|
|
3,071
|
|
|
1.6
|
Territory rights and other
|
15,786
|
|
|
0
|
|
|
15,786
|
|
|
(12,256
|
)
|
|
(996
|
)
|
|
(13,252
|
)
|
|
3,530
|
|
|
2,534
|
|
|
8.3
|
50 Fremont lease intangibles
|
7,713
|
|
|
0
|
|
|
7,713
|
|
|
(6,281
|
)
|
|
(1,115
|
)
|
|
(7,396
|
)
|
|
1,432
|
|
|
317
|
|
|
0.3
|
Total
|
$
|
2,005,224
|
|
|
$
|
1,690
|
|
|
$
|
2,006,914
|
|
|
$
|
(891,850
|
)
|
|
$
|
(219,296
|
)
|
|
$
|
(1,111,146
|
)
|
|
$
|
1,113,374
|
|
|
$
|
895,768
|
|
|
3.9
|
Amortization of intangible assets and unfavorable lease liabilities, which are not reflected in the table above, resulting from business combinations for the
three months ended October 31, 2017
and
2016
was
$70.0 million
and
$65.3 million
, respectively, and for the
nine months ended October 31, 2017
and
2016
was
$219.1 million
and
$153.0 million
, respectively.
The expected future amortization expense for intangible assets as of
October 31, 2017
is as follows (in thousands):
|
|
|
|
|
|
Fiscal Period:
|
|
|
Remaining three months of Fiscal 2018
|
|
$
|
69,053
|
|
Fiscal 2019
|
|
266,233
|
|
Fiscal 2020
|
|
225,039
|
|
Fiscal 2021
|
|
169,481
|
|
Fiscal 2022
|
|
111,353
|
|
Thereafter
|
|
54,609
|
|
Total amortization expense
|
|
$
|
895,768
|
|
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, 2017
|
|
$
|
7,263,846
|
|
Sequence, Inc. acquisition
|
|
22,982
|
|
Adjustments of acquisition date fair values, including the effect of foreign currency translation
|
|
7,313
|
|
Balance as of October 31, 2017
|
|
$
|
7,294,141
|
|
8. Debt
Convertible Senior Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par Value Outstanding
|
|
Equity
Component Recorded at Issuance
|
|
Liability Component of Par Value as of
|
(in thousands)
|
October 31,
2017
|
|
January 31,
2017
|
0.25% Convertible Senior Notes due April 1, 2018
|
$
|
1,149,979
|
|
|
$
|
122,421
|
|
(1)
|
$
|
1,137,954
|
|
|
$
|
1,116,360
|
|
___________
(1)
This amount represents the equity component recorded at the initial issuance of the
0.25%
convertible senior notes. As of
October 31, 2017
,
$10.8 million
was reclassified to temporary equity on the accompanying consolidated balance sheet as these notes are convertible for the three months ending October 31, 2017 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
April 1, 2018
, unless earlier purchased by the Company or converted and are therefore classified as current on the consolidated balance sheet as of
October 31, 2017
as they are due within one year. 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.
Holders may convert the
0.25%
Senior Notes under the following circumstances:
|
|
•
|
during any fiscal quarter, if, for at least
20
trading days during the
30
consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sales price of the Company’s common stock for such trading day is greater than or equal to
130%
of the applicable conversion price on such trading day;
|
|
|
•
|
in certain situations, when the trading price of the
0.25%
Senior Notes is less than
98%
of the product of the sale price of the Company’s common stock and the conversion rate;
|
|
|
•
|
upon the occurrence of specified corporate transactions described under the
0.25%
Senior Notes indenture, such as a consolidation, merger or binding share exchange; or
|
|
|
•
|
at any time on or after the convertible date noted above (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.
In any period when holders of the
0.25%
Senior Notes are eligible to exercise their conversion option, the equity component related to convertible debt instruments is required to be reclassified from permanent equity to temporary equity. Therefore, if in any future period the holders of the
0.25%
Senior Notes are able to exercise their conversion rights, then 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 will be reclassified from permanent equity to temporary equity, and will continue to be reported as temporary equity for any period in which the debt remains currently convertible.
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
|
|
October 31,
2017
|
|
January 31,
2017
|
Liability component:
|
|
|
|
Principal (1)
|
$
|
1,149,979
|
|
|
$
|
1,150,000
|
|
Less: debt discount, net (2)
|
(10,797
|
)
|
|
(29,954
|
)
|
Less: debt issuance cost
|
(1,228
|
)
|
|
(3,686
|
)
|
Net carrying amount
|
$
|
1,137,954
|
|
|
$
|
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
October 31, 2017
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
October 31, 2017
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
third
quarter of fiscal
2018
.
Based on the closing price of the Company’s common stock of
$102.34
on
October 31, 2017
, the if-converted value of the
0.25%
Senior Notes exceeded their principal amount by approximately
$621.4 million
.
During the three months ended
October 31, 2017
, an immaterial portion of the
0.25%
Senior Notes outstanding was converted by noteholders. The Company recorded an immaterial loss during the three months ended
October 31, 2017
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 settlement date and the net carrying amount of the liability component and unamortized debt issuance costs on settlement date. As of
October 31, 2017
the remaining principal balance of the
0.25%
Senior Notes outstanding is approximately
$1.15 billion
. The remaining principal balance of the
0.25%
Senior Notes matures on
April 1, 2018
unless earlier converted by noteholders.
As of the filing date of this Form 10-Q, the Company has received additional conversion notices for
$26.7 million
of the principal balance of the
0.25%
Senior Notes.
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.
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. If the market value per share of the Company's common stock exceeds the applicable exercise price of the
0.25%
Warrants, the
0.25%
Warrants will have a dilutive effect on the Company's earnings per share if the Company has achieved profitability at that time. 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 on July 11, 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 on July 11, 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 Term Loan Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends or make distributions and repurchase stock. The Company is also required to maintain compliance with a consolidated leverage ratio and a consolidated interest coverage ratio. The Term Loan Credit Agreement includes customary events of default. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Term Loan Credit Agreement at a per annum rate equal to
2.00%
above the applicable interest rate for any overdue principal and
2.00%
above the rate applicable for base rate loans for any other overdue amounts. The occurrence of an event of default could result in the acceleration of obligations under the Term Loan Credit Agreement. The Company was in compliance with the Term Loan Credit Agreement’s covenants as of
October 31, 2017
.
The weighted average interest rate on the Term Loan was
2.2%
for the three months ended
October 31, 2017
. Accrued interest on the Term Loan was
$0.3 million
as of
October 31, 2017
. As of
October 31, 2017
, 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.
The Revolving Loan Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends or make distributions and repurchase stock. The Company is also required to maintain compliance with a consolidated leverage ratio and a consolidated interest coverage ratio. The Revolving Loan Credit Agreement includes customary events of default. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Revolving Loan Credit Agreement at a per annum rate equal to
2.00%
above the applicable interest rate for any overdue principal and
2.00%
above the rate applicable for base rate loans for any other overdue amounts. The occurrence of an event of default could result in the acceleration of obligations under the Revolving Loan Credit Agreement. The Company was in compliance with the Revolving Loan Credit Agreement’s covenants as of
October 31, 2017
.
In February 2017, 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
October 31, 2017
. 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. For the remainder of fiscal 2018, the Loan requires interest only payments. Beginning in fiscal 2019, principal and interest payments are required, with the remaining principal due at maturity. For the
three months ended October 31, 2017
and
2016
, total interest expense recognized was
$1.8 million
and
$1.8 million
, respectively. For the
nine months ended October 31, 2017
and
2016
, total interest expense recognized was
$5.6 million
and
$5.6 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
October 31, 2017
.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Nine Months Ended October 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Contractual interest expense
|
$
|
5,766
|
|
|
$
|
5,207
|
|
|
$
|
17,044
|
|
|
$
|
11,398
|
|
Amortization of debt issuance costs
|
1,332
|
|
|
1,342
|
|
|
3,996
|
|
|
4,071
|
|
Amortization of debt discount
|
6,463
|
|
|
6,304
|
|
|
19,269
|
|
|
18,794
|
|
|
$
|
13,561
|
|
|
$
|
12,853
|
|
|
$
|
40,309
|
|
|
$
|
34,263
|
|
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
|
|
October 31,
2017
|
|
January 31,
2017
|
Prepaid income taxes
|
$
|
43,301
|
|
|
$
|
26,932
|
|
Other taxes receivable
|
33,099
|
|
|
34,177
|
|
Prepaid expenses and other current assets
|
393,546
|
|
|
218,418
|
|
|
$
|
469,946
|
|
|
$
|
279,527
|
|
Capitalized Software, net
Capitalized software, net at
October 31, 2017
and
January 31, 2017
was
$140.8 million
and
$141.7 million
, respectively. Accumulated amortization relating to capitalized software, net totaled
$306.6 million
and
$250.9 million
, respectively, at
October 31, 2017
and
January 31, 2017
.
Capitalized internal-use software amortization expense totaled
$18.7 million
and
$16.6 million
for the
three months ended October 31, 2017
and
2016
, respectively and
$55.7 million
and
$47.5 million
for the
nine months ended October 31, 2017
and
2016
, respectively.
The Company capitalized
$2.0 million
and
$1.7 million
of stock-based expenses related to capitalized internal-use software development during the
three months ended October 31, 2017
and
2016
, respectively, and
$5.9 million
and
$5.1 million
for the
nine months ended October 31, 2017
and
2016
, respectively.
Other Assets, net
Other assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
October 31,
2017
|
|
January 31,
2017
|
Deferred income taxes, noncurrent, net
|
$
|
31,596
|
|
|
$
|
28,939
|
|
Long-term deposits
|
23,979
|
|
|
23,597
|
|
Domain names and patents, net
|
26,811
|
|
|
39,213
|
|
Customer contract assets (1)
|
201,357
|
|
|
281,733
|
|
Other
|
141,145
|
|
|
113,387
|
|
|
$
|
424,888
|
|
|
$
|
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
$4.3 million
and
$4.1 million
for the
three months ended October 31, 2017
and
2016
, respectively, and
$13.0 million
and
$11.9 million
for the
nine months ended October 31, 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
|
|
October 31,
2017
|
|
January 31,
2017
|
Accounts payable
|
$
|
120,019
|
|
|
$
|
115,257
|
|
Accrued compensation
|
622,419
|
|
|
730,390
|
|
Non-cash equity liability (1)
|
49,435
|
|
|
68,355
|
|
Accrued other liabilities
|
488,071
|
|
|
419,299
|
|
Accrued income and other taxes payable
|
193,693
|
|
|
239,699
|
|
Accrued professional costs
|
44,757
|
|
|
38,254
|
|
Accrued rent
|
33,968
|
|
|
19,710
|
|
Capital lease obligation, current
|
114,147
|
|
|
102,106
|
|
Financing obligation - leased facility, current
|
19,899
|
|
|
19,594
|
|
|
$
|
1,686,408
|
|
|
$
|
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. The Company expects this liability will be relieved in the fourth quarter of fiscal 2018.
Other Noncurrent Liabilities
Other noncurrent liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
October 31,
2017
|
|
January 31,
2017
|
Deferred income taxes and income taxes payable
|
$
|
117,193
|
|
|
$
|
99,378
|
|
Financing obligation - leased facility
|
198,903
|
|
|
200,711
|
|
Long-term lease liabilities and other
|
420,774
|
|
|
480,850
|
|
|
$
|
736,870
|
|
|
$
|
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”). The expiration of the 1999 Stock Option Plan (“1999 Plan”) in fiscal 2010 did not affect awards outstanding, which continue to be governed by the terms and conditions of the 1999 Plan.
As of
October 31, 2017
,
$119.2 million
has been 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
Stock Options
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Volatility
|
30.8
|
|
%
|
|
32.3
|
|
%
|
|
30.8 - 31.4
|
|
%
|
|
32.1 - 32.3
|
|
%
|
Estimated life
|
3.5 years
|
|
|
|
3.5 years
|
|
|
|
3.5 years
|
|
|
|
3.5 years
|
|
|
Risk-free interest rate
|
1.6 - 1.8
|
|
%
|
|
0.9 - 1.1
|
|
%
|
|
1.4 - 1.8
|
|
%
|
|
0.9 - 1.1
|
|
%
|
Weighted-average fair value per share of grants
|
$
|
24.12
|
|
|
|
$
|
18.75
|
|
|
|
$
|
22.26
|
|
|
|
$
|
18.75
|
|
|
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.
ESPP assumptions and the related fair value per share table will only be disclosed in the three month period in which there is ESPP activity, such as an ESPP purchase. The Company's ESPP allows for two purchases during the year, one during the second quarter and one during the fourth quarter. The estimated life of the ESPP will be based on the
two
purchase periods within each offering period. The weighted-average fair value per share of grants was
$21.13
and
$21.93
for the three months ended July 31, 2017 and 2016, respectively.
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
|
(1,020,046
|
)
|
|
1,020,046
|
|
|
89.01
|
|
|
|
Restricted stock activity
|
(2,696,029
|
)
|
|
0
|
|
|
0.00
|
|
|
|
Stock grants to board and advisory board members
|
(163,596
|
)
|
|
0
|
|
|
0.00
|
|
|
|
Exercised
|
0
|
|
|
(6,705,729
|
)
|
|
43.57
|
|
|
|
Plan shares expired
|
(44,309
|
)
|
|
0
|
|
|
0.00
|
|
|
|
Canceled
|
1,314,229
|
|
|
(1,314,229
|
)
|
|
71.92
|
|
|
|
Balance as of October 31, 2017
|
50,947,378
|
|
|
23,353,164
|
|
|
$
|
65.16
|
|
|
$
|
868,266
|
|
Vested or expected to vest
|
|
|
21,891,255
|
|
|
$
|
64.58
|
|
|
$
|
826,607
|
|
Exercisable as of October 31, 2017
|
|
|
10,090,058
|
|
|
$
|
57.62
|
|
|
$
|
451,210
|
|
The total intrinsic value of the options exercised during the
nine months ended October 31, 2017
and
2016
was
$298.7 million
and
$176.2 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
October 31, 2017
, options to purchase
10,090,058
shares were vested at a weighted average exercise price of
$57.62
per share and had a remaining weighted-average contractual life of approximately
4
years. The total intrinsic value of these vested options as of
October 31, 2017
was
$451.2 million
.
During the
nine months ended October 31, 2017
, the Company recognized stock-based expense related to its equity plans for employees and non-employee directors of
$759.3 million
. As of
October 31, 2017
, the aggregate stock compensation remaining to be amortized to costs and expenses was approximately
$2.0 billion
. The Company will amortize this stock compensation balance as follows:
$234.5 million
during the remaining
three
months of fiscal
2018
;
$777.8 million
during fiscal
2019
;
$574.4 million
during fiscal
2020
;
$303.6 million
during fiscal
2021
;
$42.9 million
during fiscal
2022
and
$25.2 million
thereafter. The expected amortization reflects only outstanding stock awards as of
October 31, 2017
and assumes no forfeiture activity.
The aggregate stock compensation remaining to be amortized to costs and expenses will be recognized over a weighted average period of
1.9
years.
The following table summarizes information about stock options outstanding as of
October 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
4,540,787
|
|
|
4.4
|
|
$
|
35.63
|
|
|
3,693,473
|
|
|
$
|
41.41
|
|
$53.60 to $58.86
|
|
724,916
|
|
|
3.8
|
|
55.57
|
|
|
478,771
|
|
|
55.61
|
|
$59.34
|
|
4,826,489
|
|
|
4.1
|
|
59.34
|
|
|
3,309,418
|
|
|
59.34
|
|
$59.37 to $75.01
|
|
1,553,021
|
|
|
5.2
|
|
69.76
|
|
|
500,029
|
|
|
70.21
|
|
$75.57
|
|
5,576,546
|
|
|
6.0
|
|
75.57
|
|
|
0
|
|
|
0.00
|
|
$76.48 to $80.62
|
|
577,049
|
|
|
5.6
|
|
78.54
|
|
|
175,146
|
|
|
78.59
|
|
$80.99 to $98.90
|
|
5,554,356
|
|
|
5.3
|
|
82.48
|
|
|
1,933,221
|
|
|
80.99
|
|
|
|
23,353,164
|
|
|
5.0
|
|
$
|
65.16
|
|
|
10,090,058
|
|
|
$
|
57.62
|
|
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
|
2,844,391
|
|
|
0.001
|
|
|
|
Canceled
|
(1,606,148
|
)
|
|
0.001
|
|
|
|
Vested and converted to shares
|
(6,105,427
|
)
|
|
0.001
|
|
|
|
Balance as of October 31, 2017
|
22,586,314
|
|
|
$
|
0.001
|
|
|
$
|
2,311,483
|
|
Expected to vest
|
19,722,393
|
|
|
|
|
$
|
2,018,390
|
|
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 weighted-average grant date fair value of the restricted stock issued for the
nine months ended October 31, 2017
and
2016
was
$89.04
and
$76.90
, respectively.
Common Stock
The following number of shares of common stock were reserved and available for future issuance at
October 31, 2017
:
|
|
|
|
Options outstanding
|
23,353,164
|
|
Restricted stock awards and units and performance stock units outstanding
|
22,586,314
|
|
Stock available for future grant:
|
|
2013 Equity Incentive Plan
|
50,316,168
|
|
2014 Inducement Plan
|
520,478
|
|
Amended and Restated 2004 Employee Stock Purchase Plan
|
9,629,807
|
|
Acquired equity plans
|
110,732
|
|
Convertible Senior Notes
|
17,308,564
|
|
Warrants
|
17,308,880
|
|
|
141,134,107
|
|
11. Income Taxes
Effective Tax Rate
The Company computes its year-to-date provision for income taxes by applying the estimated annual effective tax rate to year to date pretax income or loss and adjusts the provision for discrete tax items recorded in the period. For the
nine months ended October 31, 2017
, the Company reported a tax provision of
$54.0 million
on a pretax income of
$113.9 million
, which resulted in
an
effective tax rate of
47 percent
. The Company recorded year-to-date tax provision primarily from profitable jurisdictions outside of the United States.
The Company regularly assesses the realizability of the deferred tax assets and establishes a valuation allowance if it is more-likely-than-not that some or all of the Company's 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. Generally, more weight is given to objectively verifiable evidence. The Company will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions going forward. The Company will adjust its valuation allowance in the event sufficient positive evidence overcomes the negative evidence of losses in recent years, for example, if the trend in increasing annual taxable income continues.
For the
nine months ended October 31, 2016
, the Company reported a tax benefit of
$182.2 million
on a pretax income of
$48.9 million
, which resulted in a negative effective tax rate of
373 percent
. The most significant component of this tax amount was the discrete tax benefit of
$205.6 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 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 of the United States.
Tax Benefits Related to Stock-Based Compensation
The income tax benefit related to stock-based compensation was
$206.8 million
and
$161.4 million
for the
nine months ended October 31, 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. 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 Internal Revenue Service ("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. In addition, the Company anticipates it is reasonably possible that a decrease of unrecognized tax benefits up to approximately
$6.8 million
may occur in the next 12 months, as the applicable statutes of limitations lapse.
12. Earnings Per Share
Basic earnings 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.
A reconciliation of the denominator used in the calculation of basic and diluted earnings per share is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Nine Months Ended October 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
51,394
|
|
|
$
|
(37,309
|
)
|
|
$
|
59,923
|
|
|
$
|
231,072
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average shares outstanding for basic earnings (loss) per share
|
717,445
|
|
|
690,468
|
|
|
711,884
|
|
|
683,075
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Convertible senior notes
|
5,162
|
|
|
0
|
|
|
4,571
|
|
|
1,994
|
|
Employee stock awards
|
14,717
|
|
|
0
|
|
|
13,235
|
|
|
11,188
|
|
Warrants
|
782
|
|
|
0
|
|
|
522
|
|
|
0
|
|
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings (loss) per share
|
738,106
|
|
|
690,468
|
|
|
730,212
|
|
|
696,257
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Nine Months Ended October 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Employee stock awards
|
1,355
|
|
|
17,946
|
|
|
9,239
|
|
|
8,640
|
|
Convertible senior notes
|
0
|
|
|
17,309
|
|
|
0
|
|
|
0
|
|
Warrants
|
0
|
|
|
17,309
|
|
|
0
|
|
|
17,309
|
|
13. Commitments
Letters of Credit
As of
October 31, 2017
, the Company had a total of
$96.6 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
October 31, 2017
, 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:
|
|
|
|
|
|
Remaining three months of Fiscal 2018
|
$
|
22,974
|
|
|
$
|
152,711
|
|
|
$
|
5,433
|
|
Fiscal 2019
|
115,830
|
|
|
575,237
|
|
|
21,881
|
|
Fiscal 2020
|
201,616
|
|
|
503,390
|
|
|
22,325
|
|
Fiscal 2021
|
73
|
|
|
368,148
|
|
|
22,770
|
|
Fiscal 2022
|
37
|
|
|
282,804
|
|
|
23,214
|
|
Thereafter
|
3
|
|
|
1,408,213
|
|
|
210,713
|
|
Total minimum lease payments
|
340,533
|
|
|
$
|
3,290,503
|
|
|
$
|
306,336
|
|
Less: amount representing interest
|
(23,384
|
)
|
|
|
|
|
Present value of capital lease obligations
|
$
|
317,149
|
|
|
|
|
|
______________
(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
October 31, 2017
,
$218.8 million
of the total
$306.3 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.
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 the
nine months ended October 31, 2017
. 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. 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 have submitted the settlement agreement to the Court for approval.
15. 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
$7.4 million
for the
nine months ended October 31, 2017
.
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
$129.7 million
for the
nine months ended October 31, 2017
.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Words such as “expects,” “anticipates,” “aims,” “projects,” “intends,” “plans,” “believes,” “estimates,” “seeks,” “assumes,” “may,” “should,” “could,” “would,” “foresees,” “forecasts,” “predicts,” “targets,” variations of such words and similar expressions are intended to identify such forward-looking statements, which may consist of, among other things, trend analyses and statements regarding future events, future financial performance, anticipated growth and industry prospects. These forward-looking statements are based on current expectations, estimates and forecasts, as well as the beliefs and assumptions of our management, and are subject to risks and uncertainties that are difficult to predict, including the effect of general economic and market conditions; the impact of foreign currency exchange rate and interest rate fluctuations on our results; our business strategy and our plan to build our business, including our strategy to be the leading provider of enterprise cloud computing applications and platforms; the pace of change and innovation in enterprise cloud computing services; the competitive nature of the market in which we participate; our international expansion strategy; our service performance and security; the expenses associated with new data centers and third-party infrastructure providers; additional data center capacity; real estate and office facilities space; our operating results and cash flows; new services and product features; our strategy of acquiring or making investments in complementary businesses, joint ventures, services, technologies and intellectual property rights; our ability to successfully integrate acquired businesses and technologies; our ability to continue to grow and maintain deferred revenue and unbilled deferred revenue; our ability to protect our intellectual property rights; our ability to develop our brands; our ability to realize the benefits from strategic partnerships and investments; our reliance on third-party hardware, software and platform providers; our dependency on the development and maintenance of the infrastructure of the Internet; the effect of evolving domestic and foreign government regulations, including those related to the provision of services on the Internet, those related to accessing the Internet, and those addressing data privacy and import and export controls; the valuation of our deferred tax assets; the potential availability of additional tax assets in the future; the impact of new accounting pronouncements and tax laws and interpretations thereof; the impact of expensing stock options and other equity awards; the sufficiency of our capital resources; factors related to our outstanding convertible notes, revolving credit facility, term loan and loan associated with 50 Fremont; compliance with our debt covenants and capital lease obligations; and current and potential litigation involving us. These and other risks and uncertainties may cause our actual results to differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified below under “Risk Factors” and elsewhere in this report for additional detail regarding factors that may cause actual results to be different than those expressed in our forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements 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, analytics, application development, IoT integration, collaborative productivity tools and our professional cloud services - provides the tools customers need to succeed in a digital world. Key elements of our strategy include:
|
|
•
|
extend existing service offerings;
|
|
|
•
|
expand into new horizontal markets;
|
|
|
•
|
target vertical markets;
|
|
|
•
|
extend go-to-market capabilities;
|
|
|
•
|
reduce customer attrition; and
|
|
|
•
|
encourage the development of third-party applications on our cloud computing platforms.
|
Salesforce is 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; 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, 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, continuing to develop our brands, the addition of distribution channels, the upgrade of our service offerings, the continued development of services including Analytics Cloud, Community Cloud, and IoT 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 2018 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
October 31, 2017
. Our attrition rate, including the Marketing Cloud service offering, was approximately ten percent as of
October 31, 2017
. 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
45
percent and 46 percent for the
nine months ended October 31, 2017
and 2016, 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, including fiscal 2017, 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
92 percent
of our total revenues for the
nine months ended October 31, 2017
. 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 the
nine months ended October 31, 2017
and
2016
.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
|
|
Nine Months Ended October 31,
|
|
|
|
2017
|
|
2016
|
|
Variance- Percent
|
|
2017
|
|
2016
|
|
Variance- Percent
|
Sales Cloud
|
$
|
906.5
|
|
|
$
|
776.2
|
|
|
17%
|
|
$
|
2,622.5
|
|
|
$
|
2,255.7
|
|
|
16%
|
Service Cloud
|
738.1
|
|
|
589.9
|
|
|
25%
|
|
2,087.8
|
|
|
1,705.4
|
|
|
22%
|
Salesforce Platform and Other
|
495.3
|
|
|
370.7
|
|
|
34%
|
|
1,392.9
|
|
|
1,050.0
|
|
|
33%
|
Marketing and Commerce Cloud
|
346.2
|
|
|
247.2
|
|
|
40%
|
|
952.3
|
|
|
634.5
|
|
|
50%
|
Total
|
$
|
2,486.1
|
|
|
$
|
1,984.0
|
|
|
|
|
$
|
7,055.5
|
|
|
$
|
5,645.6
|
|
|
|
Subscription and support revenues from the Analytics Cloud, Community Cloud, IoT Cloud, and Salesforce Quip were not significant for the
three and nine months ended October 31, 2017
. Analytics Cloud, IoT Cloud and Salesforce Quip revenue
is included with Salesforce Platform and Other in the table above. Community Cloud revenue is included in either Sales Cloud, Service Cloud or Salesforce Platform and Other depending on the primary service offering purchased.
As required under 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
$952.3 million
subscription and support revenue for Marketing and Commerce Cloud for the
nine months ended October 31, 2017
, approximately
$160.9 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 of our total subscription and support revenues for the
three and nine months ended October 31, 2017
and
12
percent of our total subscription and support revenues for the
three and nine months ended October 31, 2016
, 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 the
three months ended October 31, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
2017
|
|
July 31,
2017
|
|
April 30,
2017
|
Fiscal 2018
|
|
|
|
|
|
Accounts receivable, net
|
$
|
1,519,916
|
|
|
$
|
1,569,322
|
|
|
$
|
1,439,875
|
|
Deferred revenue
|
4,392,082
|
|
|
4,818,634
|
|
|
5,042,652
|
|
Operating cash flow (1)
|
125,792
|
|
|
331,269
|
|
|
1,229,584
|
|
Unbilled deferred revenue
|
11.5 bn
|
|
|
10.4 bn
|
|
|
9.6 bn
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
2017
|
|
October 31,
2016
|
|
July 31,
2016
|
|
April 30,
2016
|
Fiscal 2017
|
|
|
|
|
|
|
|
Accounts receivable, net
|
$
|
3,196,643
|
|
|
$
|
1,281,425
|
|
|
$
|
1,323,114
|
|
|
$
|
1,192,965
|
|
Deferred revenue (2)
|
5,542,802
|
|
|
3,495,133
|
|
|
3,823,561
|
|
|
4,006,914
|
|
Operating cash flow (1)
|
706,146
|
|
|
154,312
|
|
|
250,678
|
|
|
1,051,062
|
|
Unbilled deferred revenue
|
9.0 bn
|
|
|
8.6 bn
|
|
|
8.0 bn
|
|
|
7.6 bn
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
2016
|
|
October 31,
2015
|
|
July 31,
2015
|
|
April 30,
2015
|
Fiscal 2016
|
|
|
|
|
|
|
|
Accounts receivable, net
|
$
|
2,496,165
|
|
|
$
|
1,060,726
|
|
|
$
|
1,067,799
|
|
|
$
|
926,381
|
|
Deferred revenue (2)
|
4,291,553
|
|
|
2,846,510
|
|
|
3,034,991
|
|
|
3,056,820
|
|
Operating cash flow (1)
|
470,208
|
|
|
162,514
|
|
|
304,278
|
|
|
735,081
|
|
Unbilled deferred revenue
|
7.1 bn
|
|
|
6.7 bn
|
|
|
6.2 bn
|
|
|
6.0 bn
|
|
|
|
(1)
|
Operating cash flow represents net cash provided by operating activities for the three months ended in the periods stated above.
|
|
|
(2)
|
Amounts include deferred revenue current and noncurrent
|
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 information technology 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 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 building the necessary employee and system infrastructure required to support the development of new, and improve existing, technologies and the integration of acquired businesses and technologies.
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. We expect that in the future, marketing and sales expenses will increase in absolute dollars and continue to be our largest cost. We also expect marketing and sales costs as a percentage of total revenues to either remain flat or decrease for the next several quarters.
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 the
nine months ended October 31, 2017
, we recognized stock-based expense related to our equity plans for employees and non-employee directors of
$759.3 million
. As of
October 31, 2017
, the aggregate stock compensation remaining to be amortized to costs and expenses was approximately
$2.0 billion
. We expect this stock compensation balance to be amortized as follows:
$234.5 million
during the remaining
three
months of fiscal
2018
;
$777.8 million
during fiscal
2019
;
$574.4 million
during fiscal
2020
;
$303.6 million
during fiscal
2021
;
$42.9 million
during fiscal
2022
and
$25.2 million
thereafter. The expected amortization reflects only outstanding stock awards as of
October 31, 2017
and assumes no forfeiture activity. We expect to continue to issue stock-based awards to our employees in future periods.
Amortization of Purchased Intangibles from Business Combinations and the Purchase of 50 Fremont
Our cost of revenues, operating expenses and other expense 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
There have been no significant changes in our critical accounting policies and estimates during the
nine months ended October 31, 2017
as compared to the critical accounting policies and estimates disclosed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended January 31, 2017.
Results of Operations
Three and Nine Months Ended October 31, 2017
and
2016
The following tables set forth selected data for each of the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
2017
|
|
As a % of Total Revenues
|
|
2016
|
|
As a % of Total Revenues
|
Revenues:
|
|
|
|
|
|
|
|
Subscription and support
|
$
|
2,486,131
|
|
|
93
|
%
|
|
$
|
1,983,981
|
|
|
93
|
%
|
Professional services and other
|
193,710
|
|
|
7
|
|
|
160,794
|
|
|
7
|
|
Total revenues
|
2,679,841
|
|
|
100
|
|
|
2,144,775
|
|
|
100
|
|
Cost of revenues (1)(2):
|
|
|
|
|
|
|
|
Subscription and support
|
528,182
|
|
|
20
|
|
|
426,487
|
|
|
20
|
|
Professional services and other
|
186,326
|
|
|
7
|
|
|
159,035
|
|
|
7
|
|
Total cost of revenues
|
714,508
|
|
|
27
|
|
|
585,522
|
|
|
27
|
|
Gross profit
|
1,965,333
|
|
|
73
|
|
|
1,559,253
|
|
|
73
|
|
Operating expenses (1)(2):
|
|
|
|
|
|
|
|
Research and development
|
393,998
|
|
|
15
|
|
|
311,459
|
|
|
15
|
|
Marketing and sales
|
1,184,733
|
|
|
44
|
|
|
997,993
|
|
|
47
|
|
General and administrative
|
270,614
|
|
|
10
|
|
|
246,765
|
|
|
11
|
|
Total operating expenses
|
1,849,345
|
|
|
69
|
|
|
1,556,217
|
|
|
73
|
|
Income from operations
|
115,988
|
|
|
4
|
|
|
3,036
|
|
|
0
|
|
Investment income
|
10,049
|
|
|
1
|
|
|
3,709
|
|
|
0
|
|
Interest expense
|
(21,557
|
)
|
|
(1
|
)
|
|
(21,946
|
)
|
|
(1
|
)
|
Other income (1)
|
1,921
|
|
|
0
|
|
|
1,782
|
|
|
0
|
|
Gains from acquisitions of strategic investments
|
0
|
|
|
0
|
|
|
833
|
|
|
0
|
|
Income (loss) before provision for income taxes
|
106,401
|
|
|
4
|
|
|
(12,586
|
)
|
|
(1
|
)
|
Provision for income taxes
|
(55,007
|
)
|
|
(2
|
)
|
|
(24,723
|
)
|
|
(1
|
)
|
Net income (loss)
|
$
|
51,394
|
|
|
2
|
%
|
|
$
|
(37,309
|
)
|
|
(2
|
)%
|
(1) Amounts related to amortization of purchased intangibles from business combinations, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
2017
|
|
As a % of Total Revenues
|
|
2016
|
|
As a % of Total Revenues
|
Cost of revenues
|
$
|
39,610
|
|
|
1
|
%
|
|
$
|
36,703
|
|
|
2
|
%
|
Marketing and sales
|
30,067
|
|
|
1
|
|
|
28,064
|
|
|
1
|
|
Other income (expense)
|
367
|
|
|
0
|
|
|
579
|
|
|
0
|
|
(2) Amounts related to stock-based expenses, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
2017
|
|
As a % of Total Revenues
|
|
2016
|
|
As a % of Total Revenues
|
Cost of revenues
|
$
|
33,494
|
|
|
1
|
%
|
|
$
|
26,783
|
|
|
1
|
%
|
Research and development
|
66,626
|
|
|
2
|
|
|
50,372
|
|
|
2
|
|
Marketing and sales
|
116,992
|
|
|
4
|
|
|
93,718
|
|
|
4
|
|
General and administrative
|
34,165
|
|
|
1
|
|
|
33,878
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 31,
|
|
2017
|
|
As a % of Total Revenues
|
|
2016
|
|
As a % of Total Revenues
|
Revenues:
|
|
|
|
|
|
|
|
Subscription and support
|
$
|
7,055,538
|
|
|
92
|
%
|
|
$
|
5,645,554
|
|
|
93
|
%
|
Professional services and other
|
573,471
|
|
|
8
|
|
|
452,442
|
|
|
7
|
|
Total revenues
|
7,629,009
|
|
|
100
|
|
|
6,097,996
|
|
|
100
|
|
Cost of revenues (1)(2):
|
|
|
|
|
|
|
|
Subscription and support
|
1,484,982
|
|
|
20
|
|
|
1,154,044
|
|
|
19
|
|
Professional services and other
|
550,748
|
|
|
7
|
|
|
454,038
|
|
|
7
|
|
Total cost of revenues
|
2,035,730
|
|
|
27
|
|
|
1,608,082
|
|
|
26
|
|
Gross profit
|
5,593,279
|
|
|
73
|
|
|
4,489,914
|
|
|
74
|
|
Operating expenses (1)(2):
|
|
|
|
|
|
|
|
Research and development
|
1,156,526
|
|
|
15
|
|
|
863,935
|
|
|
14
|
|
Marketing and sales
|
3,464,986
|
|
|
45
|
|
|
2,828,784
|
|
|
46
|
|
General and administrative
|
813,868
|
|
|
11
|
|
|
709,622
|
|
|
12
|
|
Total operating expenses
|
5,435,380
|
|
|
71
|
|
|
4,402,341
|
|
|
72
|
|
Income from operations
|
157,899
|
|
|
2
|
|
|
87,573
|
|
|
2
|
|
Investment income
|
24,069
|
|
|
0
|
|
|
23,747
|
|
|
0
|
|
Interest expense
|
(65,382
|
)
|
|
(1
|
)
|
|
(64,665
|
)
|
|
(1
|
)
|
Other expense (1)
|
(2,695
|
)
|
|
0
|
|
|
(11,500
|
)
|
|
0
|
|
Gains from acquisitions of strategic investments
|
0
|
|
|
0
|
|
|
13,697
|
|
|
0
|
|
Income before benefit from (provision for) income taxes
|
113,891
|
|
|
1
|
|
|
48,852
|
|
|
1
|
|
Benefit from (provision for) income taxes
|
(53,968
|
)
|
|
0
|
|
|
182,220
|
|
|
3
|
|
Net income
|
$
|
59,923
|
|
|
1
|
%
|
|
$
|
231,072
|
|
|
4
|
%
|
(1) Amounts related to amortization of purchased intangibles from business combinations, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 31,
|
|
2017
|
|
As a % of Total Revenues
|
|
2016
|
|
As a % of Total Revenues
|
Cost of revenues
|
$
|
126,679
|
|
|
2
|
%
|
|
$
|
84,462
|
|
|
1
|
%
|
Marketing and sales
|
91,274
|
|
|
1
|
|
|
66,601
|
|
|
1
|
|
Other income (expense)
|
1,118
|
|
|
0
|
|
|
1,927
|
|
|
0
|
|
(2) Amounts related to stock-based expenses, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 31,
|
|
2017
|
|
As a % of Total Revenues
|
|
2016
|
|
As a % of Total Revenues
|
Cost of revenues
|
$
|
97,206
|
|
|
1
|
%
|
|
$
|
76,912
|
|
|
1
|
%
|
Research and development
|
197,185
|
|
|
3
|
|
|
124,164
|
|
|
2
|
|
Marketing and sales
|
356,538
|
|
|
5
|
|
|
275,515
|
|
|
5
|
|
General and administrative
|
108,402
|
|
|
1
|
|
|
99,389
|
|
|
2
|
|
Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Variance
|
(in thousands)
|
2017
|
|
2016
|
|
Dollars
|
|
Percent
|
Subscription and support
|
$
|
2,486,131
|
|
|
$
|
1,983,981
|
|
|
$
|
502,150
|
|
|
25%
|
Professional services and other
|
193,710
|
|
|
160,794
|
|
|
32,916
|
|
|
20%
|
Total revenues
|
$
|
2,679,841
|
|
|
$
|
2,144,775
|
|
|
$
|
535,066
|
|
|
25%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 31,
|
|
Variance
|
(in thousands)
|
2017
|
|
2016
|
|
Dollars
|
|
Percent
|
Subscription and support
|
$
|
7,055,538
|
|
|
$
|
5,645,554
|
|
|
$
|
1,409,984
|
|
|
25%
|
Professional services and other
|
573,471
|
|
|
452,442
|
|
|
121,029
|
|
|
27%
|
Total revenues
|
$
|
7,629,009
|
|
|
$
|
6,097,996
|
|
|
$
|
1,531,013
|
|
|
25%
|
Total revenues were
$2.7 billion
for the
three months ended October 31, 2017
, compared to
$2.1 billion
during the same period a year ago,
an increase
of
$535.1 million
, or
25 percent
. Total revenues were
$7.6 billion
for the
nine months ended October 31, 2017
, compared to
$6.1 billion
during the same period a year ago,
an increase
of
$1.5 billion
, or
25 percent
. Subscription and support revenues were
$2.5 billion
, or
93 percent
of total revenues, for the
three months ended October 31, 2017
, compared to
$2.0 billion
, or
93 percent
of total revenues, during the same period a year ago,
an increase
of
$502.2 million
, or
25 percent
. Subscription and support revenues were
$7.1 billion
, or
92 percent
of total revenues, for the
nine months ended October 31, 2017
, compared to
$5.6 billion
, or
93 percent
of total revenues, during the same period a year ago,
an increase
of
$1.4 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
$160.9 million
to the
nine months ended October 31, 2017
as compared to
$57.9 million
from the date of acquisition to
October 31, 2016
. This was offset by a reduction in subscription revenues of approximately $20.0 million as a result of one less day in the
nine months ended October 31, 2017
compared to the
nine months ended October 31, 2016
. 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
$193.7 million
, or
seven percent
of total revenues, for the
three months ended October 31, 2017
, compared to
$160.8 million
, or
seven percent
of total revenues, for the same period a year ago,
an increase
of
$32.9 million
, or
20 percent
. Professional services and other revenues were
$573.5 million
, or
eight percent
of total revenues, for the
nine months ended October 31, 2017
, compared to
$452.4 million
, or
seven percent
of total revenues, for the same period a year ago, an increase of
$121.0 million
, or
27 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
2017
|
|
As a % of Total Revenues
|
|
2016
|
|
As a % of Total Revenues
|
Americas
|
$
|
1,927,405
|
|
|
72
|
%
|
|
$
|
1,598,344
|
|
|
74
|
%
|
Europe
|
493,732
|
|
|
18
|
|
|
337,497
|
|
|
16
|
|
Asia Pacific
|
258,704
|
|
|
10
|
|
|
208,934
|
|
|
10
|
|
|
$
|
2,679,841
|
|
|
100
|
%
|
|
$
|
2,144,775
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 31,
|
|
2017
|
|
As a % of Total Revenues
|
|
2016
|
|
As a % of Total Revenues
|
Americas
|
$
|
5,536,932
|
|
|
73
|
%
|
|
$
|
4,506,774
|
|
|
74
|
%
|
Europe
|
1,367,718
|
|
|
18
|
|
|
1,012,671
|
|
|
17
|
|
Asia Pacific
|
724,359
|
|
|
9
|
|
|
578,551
|
|
|
9
|
|
|
$
|
7,629,009
|
|
|
100
|
%
|
|
$
|
6,097,996
|
|
|
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 the
three months ended October 31, 2017
and
2016
, respectively, and
96 percent
and
96 percent
during the
nine months ended October 31, 2017
and
2016
, respectively.
Revenues in Europe and Asia Pacific accounted for
$752.4 million
, or
28 percent
of total revenues, for the
three months ended October 31, 2017
, compared to
$546.4 million
, or
26 percent
of total revenues, during the same period a year ago,
an increase
of
$206.0 million
, or
38 percent
. Revenues in Europe and Asia Pacific accounted for
$2.1 billion
, or
27 percent
of total revenues, for the
nine months ended October 31, 2017
, compared to
$1.6 billion
, or
26 percent
of total revenues, during the same period a year ago,
an increase
of
$500.9 million
, or
31 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
$38.6 million
and
$33.5 million
in the three and
nine months ended October 31, 2017
, respectively, compared to the same periods a year ago as a result of the weakening U.S. dollar.
Cost of Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Variance
|
(in thousands)
|
2017
|
|
2016
|
|
Dollars
|
Subscription and support
|
$
|
528,182
|
|
|
$
|
426,487
|
|
|
$
|
101,695
|
|
Professional services and other
|
186,326
|
|
|
159,035
|
|
|
27,291
|
|
Total cost of revenues
|
$
|
714,508
|
|
|
$
|
585,522
|
|
|
$
|
128,986
|
|
Percent of total revenues
|
27
|
%
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 31,
|
|
Variance
|
(in thousands)
|
2017
|
|
2016
|
|
Dollars
|
Subscription and support
|
$
|
1,484,982
|
|
|
$
|
1,154,044
|
|
|
$
|
330,938
|
|
Professional services and other
|
550,748
|
|
|
454,038
|
|
|
96,710
|
|
Total cost of revenues
|
$
|
2,035,730
|
|
|
$
|
1,608,082
|
|
|
$
|
427,648
|
|
Percent of total revenues
|
27
|
%
|
|
26
|
%
|
|
|
Cost of revenues was
$714.5 million
, or
27 percent
of total revenues, for the
three months ended October 31, 2017
, compared to
$585.5 million
, or
27 percent
of total revenues, during the same period a year ago,
an increase
of
$129.0 million
. Cost of revenues was
$2.0 billion
, or
27 percent
of total revenues, for the
nine months ended October 31, 2017
, compared to
$1.6 billion
, or
26 percent
of total revenues, during the same period a year ago,
an increase
of
$427.6 million
. For the
three months ended October 31, 2017
, the
increase
in absolute dollars was primarily due to
an increase
of
$41.6 million
in employee-related costs,
an increase
of
$6.7 million
in stock-based expenses,
an increase
of
$53.7 million
in service delivery costs, primarily due to our efforts to increase data center capacity,
an increase
of amortization of purchased intangible assets of
$2.9 million
and
an increase
of
$4.6 million
in allocated overhead. For the
nine months ended October 31, 2017
, the
increase
in absolute dollars was primarily due to
an increase
of
$149.1 million
in employee-related costs,
an increase
of
$20.3 million
in stock-based expenses,
an increase
of
$143.8 million
in service delivery costs, primarily due to our efforts to increase data center capacity,
an increase
of amortization of purchased intangible assets of
$42.2 million
and
an increase
of
$22.8 million
in allocated overhead. We have increased our headcount by
14 percent
since
October 31, 2016
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. 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
$186.3 million
during the
three months ended October 31, 2017
resulting in
positive
gross margins of
$7.4 million
. The cost of professional services and other revenues was
$550.7 million
during the
nine months ended October 31, 2017
resulting in
positive
gross margin of
$22.7 million
. The cost of professional services and other revenues was
$159.0 million
during the
three months ended October 31, 2016
resulting in
positive
gross margins of
$1.8 million
and
$454.0 million
during the
nine months ended October 31, 2016
resulting in
negative
gross margins of
$1.6 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Variance
|
(in thousands)
|
2017
|
|
2016
|
|
Dollars
|
Research and development
|
$
|
393,998
|
|
|
$
|
311,459
|
|
|
$
|
82,539
|
|
Marketing and sales
|
1,184,733
|
|
|
997,993
|
|
|
186,740
|
|
General and administrative
|
270,614
|
|
|
246,765
|
|
|
23,849
|
|
Total operating expenses
|
$
|
1,849,345
|
|
|
$
|
1,556,217
|
|
|
$
|
293,128
|
|
Percent of total revenues
|
69
|
%
|
|
73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 31,
|
|
Variance
|
(in thousands)
|
2017
|
|
2016
|
|
Dollars
|
Research and development
|
$
|
1,156,526
|
|
|
$
|
863,935
|
|
|
$
|
292,591
|
|
Marketing and sales
|
3,464,986
|
|
|
2,828,784
|
|
|
636,202
|
|
General and administrative
|
813,868
|
|
|
709,622
|
|
|
104,246
|
|
Total operating expenses
|
$
|
5,435,380
|
|
|
$
|
4,402,341
|
|
|
$
|
1,033,039
|
|
Percent of total revenues
|
71
|
%
|
|
72
|
%
|
|
|
Research and development expenses were
$394.0 million
, or
15 percent
of total revenues, for the
three months ended October 31, 2017
, compared to
$311.5 million
, or
15 percent
of total revenues, during the same period a year ago,
an increase
of
$82.5 million
. Research and development expenses were
$1.2 billion
, or
15 percent
of total revenues, for the
nine months ended October 31, 2017
, compared to
$863.9 million
, or
14 percent
of total revenues, during the same period a year ago,
an increase
of
$292.6 million
. For the
three months ended October 31, 2017
, the
increase
in absolute dollars was primarily due to
an increase
of approximately
$47.2 million
in employee-related costs,
an increase
of
$16.3 million
in stock-based expenses,
an increase
in our development and test data center costs and allocated overhead. For the
nine months ended October 31, 2017
, the
increase
in absolute dollars was primarily due to
an increase
of approximately
$164.0 million
in employee-related costs,
an increase
of
$73.0 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
14 percent
since
October 31, 2016
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
$1.2 billion
, or
44 percent
of total revenues, for the
three months ended October 31, 2017
, compared to
$998.0 million
, or
47 percent
of total revenues, during the same period a year ago,
an increase
of
$186.7 million
. Marketing and sales expenses were
$3.5 billion
, or
45 percent
of total revenues, for the
nine months ended October 31, 2017
, compared to
$2.8 billion
, or
46 percent
of total revenues, during the same period a year ago,
an increase
of
$636.2 million
. For the
three months ended October 31, 2017
, the
increase
was primarily due to
an increase
of
$164.1 million
in employee-related costs and amortization of deferred commissions,
an increase
of
$23.3 million
in stock-based expenses,
an increase
in amortization of purchased intangible assets of
$2.0 million
, and allocated overhead, offset by
a decrease
of
$24.3 million
in advertising expenses. For the
nine months ended October 31, 2017
. the change was primarily due to
an increase
of
$474.4 million
in employee-related costs and amortization of deferred commissions,
an increase
of
$81.0 million
in stock-based expenses,
an increase
in amortization of purchased intangible assets of
$24.7 million
, and allocated overhead. Our marketing and sales headcount increased by
24 percent
since
October 31, 2016
. 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
$270.6 million
, or
10 percent
of total revenues, for the
three months ended October 31, 2017
, compared to
$246.8 million
, or
11 percent
of total revenues, during the same period a year ago,
an increase
of
$23.8 million
. General and administrative expenses were
$813.9 million
, or
11 percent
of total revenues, for the
nine months ended October 31, 2017
, compared to
$709.6 million
, or
12 percent
of total revenues, during the same period a year ago,
an increase
of
$104.2 million
. The
increase
s were primarily due to an increase in employee-related costs. Our general and administrative headcount increased by
19 percent
since
October 31, 2016
as we added personnel to support our growth.
Other income and expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Variance
|
(in thousands)
|
2017
|
|
2016
|
|
Dollars
|
Investment income
|
$
|
10,049
|
|
|
$
|
3,709
|
|
|
$
|
6,340
|
|
Interest expense
|
(21,557
|
)
|
|
(21,946
|
)
|
|
389
|
|
Other income (expense)
|
1,921
|
|
|
1,782
|
|
|
139
|
|
Gains from acquisitions of strategic investments
|
0
|
|
|
833
|
|
|
(833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 31,
|
|
Variance
|
(in thousands)
|
2017
|
|
2016
|
|
Dollars
|
Investment income
|
$
|
24,069
|
|
|
$
|
23,747
|
|
|
$
|
322
|
|
Interest expense
|
(65,382
|
)
|
|
(64,665
|
)
|
|
(717
|
)
|
Other income (expense)
|
(2,695
|
)
|
|
(11,500
|
)
|
|
8,805
|
|
Gains from acquisitions of strategic investments
|
0
|
|
|
13,697
|
|
|
(13,697
|
)
|
Investment income consists of income on our cash and marketable securities balances. Investment income was
$10.0 million
for the
three months ended October 31, 2017
compared to
$3.7 million
during the same period a year ago. Investment income was
$24.1 million
for the
nine months ended October 31, 2017
and was
$23.7 million
during the same period a year ago. The
increase
was due to greater realized gains resulting from the sales of marketable securities in the
three and nine months ended October 31, 2017
.
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
$21.6 million
for the
three months ended October 31, 2017
compared to
$21.9 million
during the same period a year ago. Interest expense was
$65.4 million
for the
nine months ended October 31, 2017
and was
$64.7 million
during the same period a year ago.
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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Variance
|
(in thousands)
|
2017
|
|
2016
|
|
Dollars
|
Provision for income taxes
|
$
|
(55,007
|
)
|
|
$
|
(24,723
|
)
|
|
$
|
(30,284
|
)
|
Effective tax rate
|
52
|
%
|
|
196
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 31,
|
|
Variance
|
(in thousands)
|
2017
|
|
2016
|
|
Dollars
|
Benefit from (provision for) income taxes
|
$
|
(53,968
|
)
|
|
$
|
182,220
|
|
|
$
|
(236,188
|
)
|
Effective tax rate
|
47
|
%
|
|
(373
|
)%
|
|
|
We recognized a tax
provision
of
$55.0 million
on a pretax
income
of
$106.4 million
for the
three months ended October 31, 2017
and a tax
provision
of
$54.0 million
on a pretax
income
of
$113.9 million
for the
nine months ended October 31, 2017
. 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
provision
of
$24.7 million
with a pretax
loss
of
$12.6 million
for the
three months ended October 31, 2016
. We finalized the fair value assessment of the assets acquired and liabilities assumed from Demandware, including the customer relationship asset and the customer contract asset during the third quarter of fiscal 2017. As a result of the updated valuation, we adjusted the net deferred tax liability recognized which correspondingly impacted our valuation allowance because the net deferred tax liability provided a source of additional income to support the realizability of our preexisting deferred tax assets. These changes to the valuation of the acquired assets resulted in a quarterly discrete tax expense of $60.0 million. Excluding this discrete item, we had a tax benefit of $35.3 million for the quarter. The tax benefit was related
to our acquisitions which changed our quarterly earnings and the recognition of our interim tax provision, resulting in a favorable adjustment to our quarterly income tax provision.
Also in fiscal 2017, we recorded a tax
benefit
of
$182.2 million
with a pretax
income
of
$48.9 million
for the
nine months ended October 31, 2016
. The most significant component of this tax amount was the discrete tax benefit of $205.6 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.
Liquidity and Capital Resources
At
October 31, 2017
, our principal sources of liquidity were cash, cash equivalents and marketable securities totaling
$3.6 billion
and accounts receivable of
$1.5 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
$1.7 billion
during the
nine months ended October 31, 2017
and
$1.5 billion
during the same period a year ago. 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 from acquisitions 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. 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
$1.4 billion
during the
nine months ended October 31, 2017
and
$2.2 billion
during the same period a year ago. The net cash used in investing activities during the
nine months ended October 31, 2017
primarily related to purchases of marketable securities of approximately
$1.4 billion
, new office build outs and strategic and capital investments which were offset by the cash inflows for the period from the sales of marketable securities of
$437.2 million
.
Net cash provided by financing activities was
$201.9 million
during the
nine months ended October 31, 2017
as compared to
$737.7 million
during the same period a year ago. Net cash provided by financing activities during the
nine months ended October 31, 2017
consisted primarily of
$484.8 million
from proceeds from equity plans offset by
$200.0 million
repayment of the revolving credit facility and
$82.9 million
of principal payments on capital lease obligations.
In March 2013, we issued at par value $1.15 billion of 0.25% convertible senior notes (“0.25% Senior Notes”), due April 1, 2018, unless earlier purchased by us or converted. The Notes will be convertible if during any 20 trading days during the 30 consecutive trading days of any fiscal quarter, our common stock trades at a price exceeding 130% of the conversion price of $66.44 per share applicable to the Notes. The Notes are classified as a current liability on our consolidated balance sheet as of
October 31, 2017
as they are due within one year. For the 20 trading days during the 30 consecutive trading days ended
October 31, 2017
, our common stock traded at a price exceeding 130% of the conversion price of $66.44 per share applicable to the 0.25% Senior Notes. Accordingly, the 0.25% Senior Notes will be convertible at the holders’ option for the quarter ending January 31, 2018. As of
October 31, 2017
the remaining principal balance of the 0.25% Senior Notes outstanding is
$1.15 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
October 31, 2017
, we had no outstanding borrowings under the Credit Facility.
The
Revolving Loan Credit Agreement
contains certain customary affirmative and negative covenants, including a consolidated leverage ratio covenant, a consolidated interest coverage ratio covenant, a limit on our ability to incur additional indebtedness, dispose of assets, make certain acquisition transactions, pay dividends or distributions, and certain other restrictions on our activities each defined specifically in the
Revolving Loan Credit Agreement
. We were in compliance with the
Revolving Loan Credit Agreement
’s covenants as of
October 31, 2017
.
In July 2016, in order 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
October 31, 2017
, the noncurrent outstanding principal portion of the Term Loan was
$500.0 million
.
As of
October 31, 2017
, we have a total of
$96.6 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
October 31, 2017
, the future non-cancelable minimum payments under these commitments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Leases
|
|
Operating
Leases
|
|
Financing Obligation - Leased Facility
|
Fiscal Period:
|
|
|
|
|
|
Remaining three months of Fiscal 2018
|
$
|
22,974
|
|
|
$
|
152,711
|
|
|
$
|
5,433
|
|
Fiscal 2019
|
115,830
|
|
|
575,237
|
|
|
21,881
|
|
Fiscal 2020
|
201,616
|
|
|
503,390
|
|
|
22,325
|
|
Fiscal 2021
|
73
|
|
|
368,148
|
|
|
22,770
|
|
Fiscal 2022
|
37
|
|
|
282,804
|
|
|
23,214
|
|
Thereafter
|
3
|
|
|
1,408,213
|
|
|
210,713
|
|
Total minimum lease payments
|
340,533
|
|
|
$
|
3,290,503
|
|
|
$
|
306,336
|
|
Less: amount representing interest
|
(23,384
|
)
|
|
|
|
|
Present value of capital lease obligations
|
$
|
317,149
|
|
|
|
|
|
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 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
October 31, 2017
,
$218.8 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.
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 the
nine months ended October 31, 2017
. The agreement further provides that we will pay an additional
$108.0 million
in fiscal 2019 and
$126.0 million
in fiscal 2020.
In July 2017, we entered into an agreement with a third-party to obtain the exclusive naming rights for the project formerly known as the Transbay Transit Terminal 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.
During the remaining
three
months of fiscal
2018
and in future fiscal years, we 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 or joint ventures, 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.
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.