|
|
ITEM 1.
|
FINANCIAL STATEMENTS
|
salesforce.com, inc.
Condensed Consolidated
Balance Sheets
(in
millions
)
(unaudited)
|
|
|
|
|
|
|
|
|
|
April 30,
2018
|
|
January 31, 2018 (as adjusted)
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
5,922
|
|
|
$
|
2,543
|
|
Marketable securities
|
1,237
|
|
|
1,978
|
|
Accounts receivable
|
1,763
|
|
|
3,921
|
|
Costs capitalized to obtain revenue contracts, net
|
667
|
|
|
671
|
|
Prepaid expenses and other current assets
|
562
|
|
|
471
|
|
Total current assets
|
10,151
|
|
|
9,584
|
|
Property and equipment, net
|
1,950
|
|
|
1,947
|
|
Costs capitalized to obtain revenue contracts, noncurrent, net
|
1,038
|
|
|
1,105
|
|
Capitalized software, net
|
149
|
|
|
146
|
|
Strategic investments
|
1,024
|
|
|
677
|
|
Goodwill
|
7,444
|
|
|
7,314
|
|
Intangible assets acquired through business combinations, net
|
815
|
|
|
827
|
|
Other assets, net
|
392
|
|
|
384
|
|
Total assets
|
$
|
22,963
|
|
|
$
|
21,984
|
|
Liabilities and stockholders’ equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable, accrued expenses and other liabilities
|
$
|
1,691
|
|
|
$
|
2,047
|
|
Unearned revenue
|
6,201
|
|
|
6,995
|
|
Current portion of debt
|
3
|
|
|
1,025
|
|
Total current liabilities
|
7,895
|
|
|
10,067
|
|
Noncurrent debt
|
3,172
|
|
|
695
|
|
Other noncurrent liabilities
|
836
|
|
|
846
|
|
Total liabilities
|
11,903
|
|
|
11,608
|
|
Stockholders’ equity:
|
|
|
|
Common stock
|
1
|
|
|
1
|
|
Additional paid-in capital
|
10,123
|
|
|
9,752
|
|
Accumulated other comprehensive loss
|
(33
|
)
|
|
(12
|
)
|
Retained earnings
|
969
|
|
|
635
|
|
Total stockholders’ equity
|
11,060
|
|
|
10,376
|
|
Total liabilities and stockholders’ equity
|
$
|
22,963
|
|
|
$
|
21,984
|
|
See accompanying Notes.
salesforce.com, inc.
Condensed Consolidated
Statements of Operations
(in
millions
, except per share data)
(unaudited)
|
|
|
|
|
|
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Three Months Ended April 30,
|
|
2018
|
|
2017 (as adjusted)
|
Revenues:
|
|
|
|
Subscription and support
|
$
|
2,810
|
|
|
$
|
2,209
|
|
Professional services and other
|
196
|
|
|
188
|
|
Total revenues
|
3,006
|
|
|
2,397
|
|
Cost of revenues (1)(2):
|
|
|
|
Subscription and support
|
573
|
|
|
463
|
|
Professional services and other
|
194
|
|
|
188
|
|
Total cost of revenues
|
767
|
|
|
651
|
|
Gross profit
|
2,239
|
|
|
1,746
|
|
Operating expenses (1)(2):
|
|
|
|
Research and development
|
424
|
|
|
376
|
|
Marketing and sales
|
1,329
|
|
|
1,106
|
|
General and administrative
|
295
|
|
|
260
|
|
Total operating expenses
|
2,048
|
|
|
1,742
|
|
Income from operations
|
191
|
|
|
4
|
|
Investment income
|
16
|
|
|
5
|
|
Interest expense
|
(34
|
)
|
|
(22
|
)
|
Gains on strategic investments, net
|
211
|
|
|
3
|
|
Other income
|
1
|
|
|
0
|
|
Income (loss) before (provision for) benefit from income taxes
|
385
|
|
|
(10
|
)
|
(Provision for) benefit from income taxes
|
(41
|
)
|
|
11
|
|
Net income
|
$
|
344
|
|
|
$
|
1
|
|
Basic net income per share
|
$
|
0.47
|
|
|
$
|
0.00
|
|
Diluted net income per share
|
$
|
0.46
|
|
|
$
|
0.00
|
|
Shares used in computing basic net income per share
|
729
|
|
|
706
|
|
Shares used in computing diluted net income per share
|
754
|
|
|
722
|
|
_______________
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|
(1)
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Amounts include amortization of intangible assets acquired through business combinations, as follows:
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Three Months Ended April 30,
|
|
2018
|
|
2017
|
Cost of revenues
|
$
|
39
|
|
|
$
|
44
|
|
Marketing and sales
|
30
|
|
|
31
|
|
(2) Amounts include stock-based expense, as follows:
|
|
|
|
|
|
|
|
|
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Three Months Ended April 30,
|
|
2018
|
|
2017
|
Cost of revenues
|
$
|
34
|
|
|
$
|
32
|
|
Research and development
|
66
|
|
|
64
|
|
Marketing and sales
|
120
|
|
|
119
|
|
General and administrative
|
32
|
|
|
37
|
|
See accompanying Notes.
salesforce.com, inc.
Condensed Consolidated
Statements of
Comprehensive Income
(in
millions
)
(unaudited)
|
|
|
|
|
|
|
|
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|
Three Months Ended April 30,
|
|
2018
|
|
2017 (as adjusted)
|
Net income
|
$
|
344
|
|
|
$
|
1
|
|
Other comprehensive income (loss), before tax and net of reclassification adjustments:
|
|
|
|
Foreign currency translation and other gains (losses)
|
(10
|
)
|
|
14
|
|
Unrealized gains (losses) on marketable securities and strategic investments
|
(4
|
)
|
|
71
|
|
Reclassification of unrealized gains upon adoption of ASU 2016-01* (Note 1)
|
(13
|
)
|
|
0
|
|
Other comprehensive income (loss), before tax
|
(27
|
)
|
|
85
|
|
Tax effect upon adoption of ASU 2016-01*
|
6
|
|
|
0
|
|
Other comprehensive income (loss), net of tax
|
(21
|
)
|
|
85
|
|
Comprehensive income
|
$
|
323
|
|
|
$
|
86
|
|
|
|
*
|
Accounting Standards Update 2016-01 “Financial Instruments” (ASU 2016-01)
|
See accompanying Notes.
salesforce.com, inc.
Condensed Consolidated
Statements of Cash Flows
(in
millions
)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
2018
|
|
2017 (as adjusted)
|
Operating activities:
|
|
|
|
Net income
|
$
|
344
|
|
|
$
|
1
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
181
|
|
|
185
|
|
Amortization of debt discount and issuance costs
|
16
|
|
|
8
|
|
Amortization of costs capitalized to obtain revenue contracts, net
|
188
|
|
|
141
|
|
Expenses related to employee stock plans
|
252
|
|
|
252
|
|
Gains on strategic investments, net
|
(211
|
)
|
|
(3
|
)
|
Changes in assets and liabilities, net of business combinations:
|
|
|
|
Accounts receivable, net
|
2,162
|
|
|
1,759
|
|
Costs capitalized to obtain revenue contracts, net
|
(118
|
)
|
|
(133
|
)
|
Prepaid expenses and other current assets and other assets
|
(90
|
)
|
|
(185
|
)
|
Accounts payable, accrued expenses and other liabilities
|
(456
|
)
|
|
(297
|
)
|
Unearned revenue
|
(802
|
)
|
|
(498
|
)
|
Net cash provided by operating activities
|
1,466
|
|
|
1,230
|
|
Investing activities:
|
|
|
|
Business combination, net of cash acquired
|
(182
|
)
|
|
(20
|
)
|
Purchases of strategic investments
|
(147
|
)
|
|
(12
|
)
|
Sales of strategic investments
|
4
|
|
|
12
|
|
Purchases of marketable securities
|
(263
|
)
|
|
(699
|
)
|
Sales of marketable securities
|
938
|
|
|
104
|
|
Maturities of marketable securities
|
48
|
|
|
4
|
|
Capital expenditures
|
(122
|
)
|
|
(157
|
)
|
Net cash provided by (used in) investing activities
|
276
|
|
|
(768
|
)
|
Financing activities:
|
|
|
|
Proceeds from issuance of debt, net
|
2,470
|
|
|
0
|
|
Proceeds from employee stock plans
|
201
|
|
|
160
|
|
Principal payments on capital lease obligations
|
(19
|
)
|
|
(9
|
)
|
Repayments of debt
|
(1,027
|
)
|
|
(200
|
)
|
Net cash provided by (used in) financing activities
|
1,625
|
|
|
(49
|
)
|
Effect of exchange rate changes
|
12
|
|
|
5
|
|
Net increase in cash and cash equivalents
|
3,379
|
|
|
418
|
|
Cash and cash equivalents, beginning of period
|
2,543
|
|
|
1,607
|
|
Cash and cash equivalents, end of period
|
$
|
5,922
|
|
|
$
|
2,025
|
|
See accompanying Notes.
salesforce.com, inc.
Condensed Consolidated
Statements of Cash Flows
Supplemental Cash Flow Disclosure
(in
millions
)
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
2018
|
|
2017
|
Supplemental cash flow disclosure:
|
|
|
|
Cash paid during the period for:
|
|
|
|
Interest
|
$
|
7
|
|
|
$
|
7
|
|
Income taxes, net of tax refunds
|
19
|
|
|
17
|
|
See accompanying Notes.
salesforce.com, inc.
Notes to
Condensed Consolidated
Financial Statements
1. Summary of Business and Significant Accounting Policies
Description of Business
Salesforce.com, inc. (the "Company") is a leading provider of enterprise software, delivered through the cloud, with a focus on customer relationship management, or CRM. The Company introduced its first CRM solution in 2000, and has since expanded its service offerings into new areas and industries with new editions, features and platform capabilities.
The Company's core mission is to empower its customers to connect with their customers in entirely new ways through cloud, mobile, social, Internet of Things (“IoT”) and artificial intelligence technologies.
The Company's Customer Success Platform is a comprehensive portfolio of service offerings providing sales force automation, customer service and support, marketing automation, digital commerce, community management, industry-specific solutions, analytics, application development, IoT integration, collaborative productivity tools, an enterprise cloud marketplace which the Company refers to as the AppExchange, and its professional cloud services.
Fiscal Year
The Company’s fiscal year ends on January 31. References to fiscal
2019
, for example, refer to the fiscal year ending
January 31, 2019
.
Basis of Presentation
The accompanying
condensed consolidated
balance sheets as of
April 30, 2018
and
January 31, 2018
and the
condensed consolidated
statements of operations,
condensed consolidated
statements of
comprehensive income
and
condensed consolidated
statements of cash flows for the
three months ended April 30, 2018
and
2017
, 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
condensed consolidated
financial statements include all adjustments necessary for the fair presentation of the Company’s balance sheets as of
April 30, 2018
and
January 31, 2018
, and its results of operations, including its
comprehensive income
, and its cash flows for the
three months ended April 30, 2018
and
2017
. All adjustments are of a normal recurring nature. The results for the
three months ended April 30, 2018
are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending
January 31, 2019
.
These unaudited interim
condensed 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, 2018
, filed with the Securities and Exchange Commission (the “SEC”) on March 9,
2018
.
The Company has adjusted its condensed consolidated financial statements from amounts previously reported due to the adoption of Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) as discussed below. In addition, the Company prospectively adopted Accounting Standards Update No. 2016-01, "Financial Instrument-Overall (Subtopic 825-10)" ("ASU 2016-01") and Accounting Standards Update No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory" ("ASU 2016-16"), as discussed below.
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
condensed consolidated
financial statements and notes thereto.
Significant estimates and assumptions made by management include the determination of:
|
|
•
|
the standalone selling price (SSP) of performance obligations for contracts with multiple performance obligations;
|
|
|
•
|
the estimate of variable consideration as part of the adoption of ASU 2014-09;
|
|
|
•
|
the fair value of assets acquired and liabilities assumed for business combinations;
|
|
|
•
|
the recognition, measurement and valuation of current and deferred income taxes;
|
|
|
•
|
the average period of benefit associated with costs capitalized to obtain revenue contracts;
|
|
|
•
|
the fair value of certain stock awards issued;
|
|
|
•
|
the useful lives of intangible assets; and
|
|
|
•
|
the valuation of strategic investments.
|
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
condensed 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
condensed 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. Collateral is not required for accounts receivable. 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 the recorded allowance when the Company has exhausted collection efforts without success.
No
single customer accounted for more than
five percent
of accounts receivable at
April 30, 2018
and
January 31, 2018
.
No
single customer accounted for
five percent
or more of total revenue during
the three months ended April 30, 2018
and
2017
. As of
April 30, 2018
and
January 31, 2018
, assets located outside the Americas were
12 percent
and
17 percent
of total assets, respectively. As of
April 30, 2018
and
January 31, 2018
, assets located in the United States were
86 percent
and
81 percent
of total assets, respectively.
Revenue Recognition
Adoption of Topic 606
Effective at the start of fiscal 2019, the Company adopted the provisions and expanded disclosure requirements described in ASU 2014-09 also referred to as Topic 606. The Company adopted the standard using the full retrospective method. Accordingly, the results for the prior comparable period were adjusted to conform to the current period measurement and recognition of results.
The impact of Topic 606 on reported revenue results was not material. Topic 606, however, modified the Company’s revenue recognition policy in the following ways:
•
Removal of the limitation on contingent revenue, which can result in the subscription and support revenue for certain multi-year customer contracts being recognized earlier in the duration of the contract term;
•
More allocation of subscription and support revenues across the Company’s cloud service offerings and to professional services revenue; and
•
Inclusion of an estimate of variable consideration, such as overage fees, in the total transaction price, which results in the estimated fees being recognized ratably over the contract term, further resulting in the recognition of subscription and support revenues before the actual variable consideration occurs.
The Company used the following transitional practical expedients in the adoption of Topic 606:
•
the Company has not disclosed the remaining transaction price for reporting periods prior to the first quarter of fiscal 2019; and
•
contracts modified before fiscal 2017 were reflected using the retrospective method.
Additionally, as part of its business strategy, the Company periodically makes acquisitions of complementary businesses, services and technology. These acquired businesses may have customer arrangements that include the delivery of an on-premise software element combined with a software-as-a-service element. The Company has to apply significant judgment to
determine the appropriate revenue recognition policy for such products and services since Topic 606 eliminated the provision that service revenue accounting was appropriate when the relative selling price of one or more deliverables in a multiple element solution arrangement could not be determined.
Revenue Recognition Policy
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 (collectively, "Cloud 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 and implementation services. Other revenue consists primarily of training fees.
With the adoption of Topic 606, revenue is recognized upon transfer of control of promised products and services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. If the consideration promised in a contract includes a variable amount, for example, overage fees, contingent fees or service level penalties, the Company includes an estimate of the amount it expects to receive for the total transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur.
The Company determines the amount of revenue to be recognized through application of the following steps:
•
Identification of the contract, or contracts with a customer;
•
Identification of the performance obligations in the contract;
•
Determination of the transaction price;
•
Allocation of the transaction price to the performance obligations in the contract; and
•
Recognition of revenue when or as the Company satisfies the performance obligations.
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 comprised of fees that provide customers with access to Cloud Services, related support and updates during the term of the arrangement. Cloud Services allow customers to use the Company's multi-tenant software without taking possession of the software. Revenue is generally recognized ratably over the contract term beginning on the commencement date of each contract, which is the date the Company’s Cloud Services are made available to customers.
The Company typically invoices its customers annually in advance upon execution of the contract or subsequent renewals. Amounts that have been invoiced are recorded in accounts receivable and in unearned revenue or revenue, depending on whether transfer of control to customers has occurred.
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 or on a proportional performance basis 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.
Significant Judgments - Contracts with Multiple Performance Obligations
The Company enters into contracts with its customers that often include promises to transfer multiple Cloud Services, premium support and professional services. A performance obligation is a promise in a contract with a customer to transfer products or services that are distinct. Determining whether products and services are distinct performance obligations that should be accounted for separately or combined as one unit of accounting may require significant judgment.
Cloud Services are distinct as such services are often sold separately. In determining whether professional services are distinct, 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 Cloud Service start date and the contractual dependence of the Cloud 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 contracts with multiple performance obligations are distinct.
The Company allocates the transaction price to each performance obligation on a relative standalone selling price ("SSP") basis. The SSP is the price at which the Company would sell a promised product or service separately to a customer. Judgment is required to determine the SSP for each distinct performance obligation.
The Company determines SSP 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 sales and contract prices. The determination of SSP 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 to SSP.
In certain cases, the Company is able to establish SSP based on observable prices of products or services sold separately in comparable circumstances to similar customers. The Company uses a single amount to estimate SSP when it has observable prices.
If SSP is not directly observable, for example when pricing is highly variable, the Company uses a range of SSP. The Company determines the SSP range using information that may include market conditions or other observable inputs. The Company typically has more than one SSP for individual products and services due to the stratification of those products and services by customer size and geography.
Costs Capitalized to Obtain Revenue Contracts
As part of its adoption of ASU 2014-09, the Company capitalizes incremental costs of obtaining a non-cancelable subscription and support revenue contract. The provisions of ASU 2014-09 are significantly different than the Company's previous accounting for deferred commissions. The new guidance results in the capitalization of significantly more costs and longer amortization lives. Under the prior accounting guidance, the Company only capitalized sales commissions that had a direct relationship to a specific new revenue contract and amortized the capitalized amounts over the initial contract period, which was typically 12 to 36 months.
Under the new accounting, the capitalized amounts consist primarily of sales commissions paid to the Company’s direct sales force. Capitalized amounts also include (1) amounts paid to employees other than the direct sales force who earn incentive payouts under annual compensation plans that are tied to the value of contracts acquired, (2) commissions paid to employees upon renewals of subscription and support contracts, (3) the associated payroll taxes and fringe benefit costs associated with the payments to the Company’s employees, and to a lesser extent (4) success fees paid to partners in emerging markets where the Company has a limited presence.
Costs capitalized related to new revenue contracts are amortized on a straight-line basis over
four years
, which, although longer than the typical initial contract period, reflects the average period of benefit, including expected contract renewals. In arriving at this average period of benefit, the Company evaluated both qualitative and quantitative factors which included the estimated life cycles of its offerings and its customer attrition. Additionally, the Company amortizes capitalized costs for renewals and success fees paid to partners over
two years
.
The capitalized amounts are recoverable through future revenue streams under all non-cancelable customer contracts. The Company periodically evaluates whether there have been any changes in its business, the market conditions in which it operates or other events which would indicate that its amortization period should be changed or if there are there are potential indicators of impairment.
Amortization of capitalized costs to obtain revenue contracts is included in marketing and sales expense in the accompanying condensed consolidated statements of operations.
During
the three months ended April 30, 2018
, the Company capitalized
$118 million
of costs to obtain revenue contracts and amortized
$188 million
to marketing and sales expense. During the same period a year ago, the Company capitalized
$133 million
of costs to obtain revenue contracts and amortized
$141 million
to marketing and sales expense. Capitalized costs to obtain a revenue contract, net on the Company's
condensed consolidated
balance sheets totaled
$1.7 billion
at
April 30, 2018
and
$1.8 billion
at
January 31, 2018
.
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
condensed 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
condensed consolidated
statements of comprehensive income until realized. Fair value is determined based on quoted market rates when observable or utilizing data points that are observable, such as quoted prices, interest rates and yield curves. Declines in fair value judged to be other-than-
temporary on securities available for sale are included as a reduction to investment income. To determine whether a decline in value is other-than-temporary, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value and its intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. For the purposes of computing realized and unrealized gains and losses, the cost of securities sold is based on the specific-identification method. Interest on securities classified as available for sale is also included as a component of investment income.
Strategic Investments
The Company holds strategic investments in publicly held equity securities and privately held debt and equity securities in which the Company does not have a controlling interest or significant influence. Publicly held equity securities are measured using quoted prices in their respective active markets with changes recorded through net gains on strategic investments on the condensed consolidated statement of operations. Privately held equity securities without a readily determinable fair value are recorded at cost and adjusted for impairments and observable price changes with a same or similar security from the same issuer and are recorded through net gains on strategic investments on the condensed consolidated statement of operations. Privately held debt securities are recorded at fair value with changes in fair value recorded through accumulated other comprehensive income on the condensed consolidated balance sheet. If, based on the terms of these publicly traded and privately held securities, the Company determines that the Company exercises significant influence on the entity to which these securities relate, the Company will apply the equity method of accounting for such investments.
Privately held debt and equity securities 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 carrying value is not adjusted for the Company's privately held equity securities if there are no observable price changes in a same or similar security from the same issuer or if there are no identified events or changes in circumstances that may indicate impairment, as discussed below. In determining the estimated fair value of its strategic investments in privately held companies, the Company utilizes the most recent data available to the Company. Valuations of privately held companies are inherently complex due to the lack of readily available market data. In addition, the determination of whether an orderly transaction is for a similar investment requires significant management judgment including: the rights and obligations of the investments, the extent to which those differences would affect the fair values of those investments, and the impact of any differences based on the stage of operational development of the investee.
The Company assesses its strategic investments portfolio quarterly for impairment. The Company’s impairment analysis encompasses an assessment of the severity and duration of the impairment and qualitative and quantitative analysis of other key factors including: the investee’s financial metrics, the investee’s products and technologies meeting or exceeding predefined milestones, market acceptance of the product or technology, other competitive products or technology in the market, general market conditions, management and governance structure of the investee, the investee’s liquidity, debt ratios and the rate at which the investee is using its cash. If the investment is considered to be other-than-temporarily impaired, the Company will record the investment at fair value by recognizing an impairment through the condensed consolidated statement of operations and establishing a new carrying value for the investment.
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
April 30, 2018
and
January 31, 2018
, the outstanding foreign currency derivative contracts were recorded at fair value on the
condensed 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 5 “Fair Value Measurement.” In addition, the Company measures its publicly held equity securities at fair value. The additional disclosure regarding the Company's fair value measurements of its strategic investments are included in Note 3 "Investments."
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:
|
|
|
Computers, equipment and software
|
3 to 9 years
|
Furniture and fixtures
|
5 years
|
Leasehold improvements
|
Shorter of the estimated lease term or 10 years
|
Building and structural components
|
Average weighted useful life of 32 years
|
Building - leased facility
|
27 years
|
Building improvements
|
10 years
|
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. Management tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
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 capitalized software, intangible assets, long-lived assets or goodwill during
the three months ended April 30, 2018
and
2017
.
Business Combinations
The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the acquisition date. The Company continues to collect information and reevaluates these estimates and assumptions quarterly and records any adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s
condensed consolidated
statement 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 condensed consolidated 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 recorded within net gains on strategic investments in the
condensed consolidated
statement 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).
Stock-Based Expense
The Company recognizes stock-based expenses related to stock options and restricted stock awards on a straight-line basis, net of estimated forfeitures, over the requisite service period of the awards, which is generally the vesting term of
four years
.
The Company recognizes stock-based expenses related to shares issued pursuant to its Amended and Restated 2004 Employee Stock Purchase Plan (“ESPP” or “2004 Employee Stock Purchase Plan”) on a straight-line basis over the offering period, which is
12 months
. The ESPP allows employees to purchase shares of the Company's common stock at a
15 percent
discount and also allows employees to reduce their percentage election once during a
six
month purchase period (December 15 and June 15 of each fiscal year), but not increase that election until the next one-year offering period. The ESPP also includes a re-set provision for the purchase price if the stock price on the purchase date is less than the stock price on the offering date.
Stock-based expenses related to performance share grants are measured based on grant date fair value and expensed on a straight-line basis, net of estimated forfeitures, 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
condensed consolidated
statements of operations in the period that includes the enactment date.
The Company’s tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, solely based on its technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than
50 percent
likely to be realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax provision.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the applicable tax law. The Company regularly reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The Company’s judgments regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute its business plans and/or tax planning strategies. Should there be a change in the ability to recover deferred tax assets, the tax provision would increase or decrease in the period in which the assessment is changed.
In December 2017, the Tax Cuts and Jobs Act ("Tax Act") was enacted into law, significantly changing income tax law that affects U.S corporations. Key changes included a corporate tax rate reduction from 35 percent to 21 percent effective January 1, 2018, expensing of certain qualified property, significant changes to the U.S international tax system such as a one-time transition tax on accumulated foreign earnings, and how foreign earnings are subject to U.S. tax. The Company was required to recognize the effects of the tax law changes in the period of enactment, including the determination of the transition tax and the re-measurement of deferred taxes as well as to re-assess the realizability of the deferred tax assets. Subsequent to the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which allows companies to record provisional amounts related to the effects of the Tax Act during a measurement period not to extend beyond one year from the enactment date. Due to the timing of the Tax Act and additional guidance and interpretations that may be issued by the U.S. Treasury Department, the Internal Revenue Service ("IRS") and other standard-setting bodies in the future, the Company has not completed its analysis of the income tax effects of the Tax Act. The provisional estimates will be adjusted during the measurement period defined under SAB 118, based upon the Company's ongoing analysis of its data and tax positions along with new guidance from regulators and interpretations of the law.
Foreign Currency Translation
The functional currency of the Company’s major foreign subsidiaries is generally the local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as a separate component on the
condensed consolidated
statement of comprehensive income. Foreign currency transaction gains and losses are included in Other income (expense) in the
condensed consolidated
statement 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
condensed 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 2019
In May 2014, the FASB issued ASU 2014-09, which in addition to replacing the existing revenue recognition guidance, provides guidance on the recognition of costs related to obtaining customer contracts. The adoption was material to the Company’s reported operating results and balance sheet for fiscal 2018 and 2017, as it requires additional types of costs to be capitalized and amortized over a longer period. The Company also recorded the related income tax effects, which did not have a material impact due to the Company's valuation allowance. The adoption had no impact to the Company’s operating cash flow.
Adoption of ASU 2014-09 impacted the Company's previously reported results for the
three months ended April 30, 2017
as follows (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
Change
|
|
As adjusted
|
Total revenues
|
$
|
2,388
|
|
|
$
|
9
|
|
|
$
|
2,397
|
|
Marketing and sales
|
1,110
|
|
|
(4
|
)
|
|
1,106
|
|
Benefit from income taxes
|
14
|
|
|
(3
|
)
|
|
11
|
|
Net income
|
(9
|
)
|
|
10
|
|
|
1
|
|
Diluted net income per share
|
(0.01
|
)
|
|
0.01
|
|
|
0.00
|
|
Adoption of ASU 2014-09 impacted the Company's previously reported results as of
January 31, 2018
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
Change
|
|
As adjusted
|
Accounts receivable, net
|
$
|
3,918
|
|
|
$
|
3
|
|
|
$
|
3,921
|
|
Costs capitalized to obtain revenue contracts, net
|
461
|
|
|
210
|
|
|
671
|
|
Prepaid expenses and other current assets
|
390
|
|
|
81
|
|
|
471
|
|
Costs capitalized to obtain revenue contracts, noncurrent, net
|
413
|
|
|
692
|
|
|
1,105
|
|
Other assets, net
|
396
|
|
|
(12
|
)
|
|
384
|
|
Accounts payable, accrued expenses and other liabilities
|
2,010
|
|
|
37
|
|
|
2,047
|
|
Unearned revenue
|
7,095
|
|
|
(100
|
)
|
|
6,995
|
|
Other noncurrent liabilities
|
796
|
|
|
50
|
|
|
846
|
|
Stockholders’ equity
|
9,389
|
|
|
987
|
|
|
10,376
|
|
In January 2016, the FASB issued ASU 2016-01, which requires entities to measure equity instruments at fair value and recognize any changes in fair value within the statement of operations. The Company adopted ASU 2016-01 in the first quarter of fiscal 2019 on a prospective basis for privately held equity securities and a modified retrospective basis for publicly held equity investments. Upon adoption of ASU 2016-01, the Company reclassified approximately
$13 million
of unrealized gains related to its publicly traded equity investments and approximately
$6 million
reflecting the tax impact, from accumulated other comprehensive loss on the balance sheet to retained earnings. The adoption of the standard resulted in a net unrealized gain of
$224 million
, which was recorded in the condensed consolidated statement of operations for the
three months ended April 30, 2018
, and the Company anticipates additional volatility to the Company's statements of operations in future periods, due to changes in market prices of the Company's investments in publicly held equity investments and the valuation and timing of observable price changes and impairments of its investments in privately held securities.
In October 2016, the FASB issued 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 Company adopted the standard in the first quarter of fiscal 2019 using the modified retrospective transition method and reclassified a cumulative-effect adjustment to retained earnings as of the effective date of approximately
$18 million
.
Accounting Pronouncements Pending Adoption
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 14, “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.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU
2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.
Reclassifications
Certain reclassifications to fiscal 2018 balances were made to conform to the current period presentation in the
condensed consolidated
balance sheets and
condensed consolidated
statement of operations. These reclassifications include other noncurrent liabilities, temporary equity, other income (expense) and gains on strategic investments, net.
2. Revenues
Disaggregation of Revenue
Subscription and Support Revenue by the Company's core service offerings
Subscription and support revenues consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
2018
|
|
2017
|
Sales Cloud
|
$
|
965
|
|
|
$
|
830
|
|
Service Cloud
|
848
|
|
|
656
|
|
Salesforce Platform and Other
|
575
|
|
|
424
|
|
Marketing and Commerce Cloud
|
422
|
|
|
299
|
|
|
$
|
2,810
|
|
|
$
|
2,209
|
|
Total Revenue by Geographic Locations
Revenues by geographical region consisted of the following (in
millions
):
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
2018
|
|
2017
|
Americas
|
$
|
2,101
|
|
|
$
|
1,765
|
|
Europe
|
606
|
|
|
409
|
|
Asia Pacific
|
299
|
|
|
223
|
|
|
$
|
3,006
|
|
|
$
|
2,397
|
|
Revenues by geography are determined based on the region of the Company's 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 April 30, 2018
and
2017
, respectively. No other country represented more than ten percent of total revenue during
the three months ended April 30, 2018
and
2017
.
Contract Balances
As described in Note 1, subscription and support revenue is generally recognized ratably over the contract term beginning on the commencement date of each contract. Under Topic 606 the timing and amount of revenue recognition may differ in certain situations from the revenue recognized under previous accounting guidance, which included a contingent revenue rule that limited subscription and support revenue to the customer invoice amount for the period of service (collectively billings). Under Topic 606, the Company records a contract asset when revenue recognized on a contract exceeds the billings. Contract assets were
$75 million
at April 30, 2018 and
$81 million
at January 31, 2018.
Unearned Revenue
Topic 606 introduced the concept of unearned revenue, which is substantially similar to deferred revenue under previous accounting guidance, except for the removal of the limitation on contingent revenue. The unearned revenue balance does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. Unearned revenue primarily consists of billings or payments received in advance of revenue recognition from subscription services described above and is recognized as revenue when transfer of control to customers has occurred. The Company generally invoices customers in annual installments. The unearned 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.
The changes in unearned revenue were as follows (in
millions
):
|
|
|
|
|
|
Three Months Ended April 30, 2018
|
Unearned revenue, beginning of period
|
$
|
6,995
|
|
Billings and other
|
2,212
|
|
Revenue recognized
|
(3,006
|
)
|
Unearned revenue, end of period
|
$
|
6,201
|
|
Remaining Transaction Price
Topic 606 also introduced the concept of remaining transaction price, which is different than unbilled deferred revenue under previous accounting guidance. Transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized, which includes unearned revenue and unbilled amounts that will be recognized as revenue in future periods. Transaction price allocated to the remaining performance obligation is influenced by several factors, including seasonality, the timing of renewals, average contract terms and foreign currency exchange rates. Unbilled portions of the remaining transaction price denominated in foreign currencies are revalued each period based on the period end exchange rates.
The Company applied the practical expedient in accordance with Topic 606 to exclude amounts related to performance obligations that are billed and recognized as they are delivered. This primarily consists of professional services contracts that are on a time-and-material basis.
Remaining transaction price consisted of the following (in billions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
Noncurrent
|
|
Total
|
As of April 30, 2018
|
$
|
9.6
|
|
|
$
|
10.8
|
|
|
$
|
20.4
|
|
3. Investments
Marketable Securities
At
April 30, 2018
, marketable securities consisted of the following (in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments classified as Marketable Securities
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Value
|
Corporate notes and obligations
|
$
|
758
|
|
|
$
|
0
|
|
|
$
|
(9
|
)
|
|
$
|
749
|
|
U.S. treasury securities
|
90
|
|
|
0
|
|
|
(2
|
)
|
|
88
|
|
Mortgage backed obligations
|
88
|
|
|
0
|
|
|
(2
|
)
|
|
86
|
|
Asset backed securities
|
186
|
|
|
0
|
|
|
(2
|
)
|
|
184
|
|
Municipal securities
|
40
|
|
|
0
|
|
|
(1
|
)
|
|
39
|
|
Foreign government obligations
|
59
|
|
|
0
|
|
|
(1
|
)
|
|
58
|
|
U.S. agency obligations
|
4
|
|
|
0
|
|
|
0
|
|
|
4
|
|
Commercial paper
|
11
|
|
|
0
|
|
|
0
|
|
|
11
|
|
Covered bonds
|
18
|
|
|
0
|
|
|
0
|
|
|
18
|
|
Total marketable securities
|
$
|
1,254
|
|
|
$
|
0
|
|
|
$
|
(17
|
)
|
|
$
|
1,237
|
|
At
January 31, 2018
, marketable securities consisted of the following (in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments classified as Marketable Securities
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Value
|
Corporate notes and obligations
|
$
|
1,223
|
|
|
$
|
1
|
|
|
$
|
(7
|
)
|
|
$
|
1,217
|
|
U.S. treasury securities
|
196
|
|
|
0
|
|
|
(2
|
)
|
|
194
|
|
Mortgage backed obligations
|
100
|
|
|
0
|
|
|
(1
|
)
|
|
99
|
|
Asset backed securities
|
251
|
|
|
0
|
|
|
(1
|
)
|
|
250
|
|
Municipal securities
|
53
|
|
|
0
|
|
|
(1
|
)
|
|
52
|
|
Foreign government obligations
|
87
|
|
|
0
|
|
|
(1
|
)
|
|
86
|
|
U.S. agency obligations
|
19
|
|
|
0
|
|
|
0
|
|
|
19
|
|
Commercial paper
|
11
|
|
|
0
|
|
|
0
|
|
|
11
|
|
Covered bonds
|
51
|
|
|
0
|
|
|
(1
|
)
|
|
50
|
|
Total marketable securities
|
$
|
1,991
|
|
|
$
|
1
|
|
|
$
|
(14
|
)
|
|
$
|
1,978
|
|
The contractual maturities of the investments classified as marketable securities are as follows (in
millions
):
|
|
|
|
|
|
|
|
|
|
As of
|
|
April 30,
2018
|
|
January 31,
2018
|
Due within 1 year
|
$
|
202
|
|
|
$
|
395
|
|
Due in 1 year through 5 years
|
1,031
|
|
|
1,579
|
|
Due in 5 years through 10 years
|
4
|
|
|
4
|
|
|
$
|
1,237
|
|
|
$
|
1,978
|
|
As of
April 30, 2018
, the following marketable securities were in an unrealized loss position (in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
607
|
|
|
$
|
(8
|
)
|
|
$
|
29
|
|
|
$
|
(1
|
)
|
|
$
|
636
|
|
|
$
|
(9
|
)
|
U.S. treasury securities
|
82
|
|
|
(2
|
)
|
|
6
|
|
|
0
|
|
|
88
|
|
|
(2
|
)
|
Mortgage backed obligations
|
68
|
|
|
(2
|
)
|
|
16
|
|
|
0
|
|
|
84
|
|
|
(2
|
)
|
Asset backed securities
|
170
|
|
|
(2
|
)
|
|
9
|
|
|
0
|
|
|
179
|
|
|
(2
|
)
|
Municipal securities
|
31
|
|
|
(1
|
)
|
|
7
|
|
|
0
|
|
|
38
|
|
|
(1
|
)
|
Foreign government obligations
|
58
|
|
|
(1
|
)
|
|
0
|
|
|
0
|
|
|
58
|
|
|
(1
|
)
|
|
$
|
1,016
|
|
|
$
|
(16
|
)
|
|
$
|
67
|
|
|
$
|
(1
|
)
|
|
$
|
1,083
|
|
|
$
|
(17
|
)
|
The unrealized losses for each of the fixed rate marketable securities were less than
$1 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
April 30, 2018
, such as the Company's intent to hold and whether it is more likely than not that the Company will be required to sell the investment before recovery of the investment's amortized basis. The Company expects to receive the full principal and interest on all of these marketable securities.
Investment Income
Investment income consists of interest income, realized gains and realized losses on the Company’s cash, cash equivalents and marketable securities. The components of investment income are presented below (in
millions
):
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
2018
|
|
2017
|
Interest income
|
$
|
20
|
|
|
$
|
6
|
|
Realized gains
|
1
|
|
|
0
|
|
Realized losses
|
(5
|
)
|
|
(1
|
)
|
Total investment income
|
$
|
16
|
|
|
$
|
5
|
|
Reclassification adjustments out of accumulated other comprehensive income into investment income were immaterial for
the three months ended April 30, 2018
and
2017
.
Strategic Investments
Strategic investments by form and measurement category as of
April 30, 2018
were as follows (in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurement Category
|
|
Fair Value
|
|
Measurement Alternative
|
|
Other (1)
|
|
Total
|
Equity securities
|
$
|
363
|
|
|
$
|
554
|
|
|
$
|
40
|
|
|
$
|
957
|
|
Debt securities
|
53
|
|
|
0
|
|
|
14
|
|
|
67
|
|
Balance as of April 30, 2018
|
$
|
416
|
|
|
$
|
554
|
|
|
$
|
54
|
|
|
$
|
1,024
|
|
(1) Other includes the Company's investments accounted for under the equity method of accounting or amortized cost.
Measurement Alternative Adjustments
Privately held equity investments accounted for under the measurement alternative as of
April 30, 2018
were as follows (in millions):
|
|
|
|
|
|
Three Months Ended April 30, 2018
|
Carrying amount, beginning of period
|
$
|
548
|
|
Adjustments related to privately held equity investments:
|
|
|
Net additions
|
11
|
|
Unrealized gains, losses and impairments on strategic investments
|
(5
|
)
|
Carrying amount, end of period
|
$
|
554
|
|
Gains on strategic investments, net
Gains and losses recognized in
the three months ended April 30, 2018
and
2017
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
2018
|
|
2017
|
Net unrealized gains recognized on publicly traded equity securities
|
$
|
211
|
|
|
$
|
0
|
|
Net unrealized losses recognized on privately held equity securities
|
(9
|
)
|
|
0
|
|
Net realized gains recognized on strategic investments
|
9
|
|
|
3
|
|
Gains on strategic investments, net
|
$
|
211
|
|
|
$
|
3
|
|
Net gains recognized in
the three months ended April 30, 2018
for investments still held as of
April 30, 2018
were
$202 million
.
4. Derivatives
Details on outstanding foreign currency derivative contracts are presented below (in
millions
):
|
|
|
|
|
|
|
|
|
|
As of
|
|
April 30, 2018
|
|
January 31, 2018
|
Notional amount of foreign currency derivative contracts
|
$
|
2,449
|
|
|
$
|
1,871
|
|
Fair value of foreign currency derivative contracts
|
$
|
(11
|
)
|
|
$
|
12
|
|
The fair value of the Company’s outstanding derivative instruments not designated as hedging instruments are summarized below (in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
Balance Sheet Location
|
April 30, 2018
|
|
January 31, 2018
|
Foreign currency derivative contracts
|
Prepaid expenses and other current assets
|
$
|
6
|
|
|
$
|
18
|
|
Foreign currency derivative liabilities were not material as of
April 30, 2018
or
January 31, 2018
.
Gains/losses on derivative instruments not designated as hedging instruments recorded in
Other income (expense)
in the
condensed consolidated
statements of operations during
the three months ended April 30, 2018
and
2017
, respectively, are summarized below (in
millions
):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
2018
|
|
2017
|
Foreign currency derivative contracts
|
$
|
20
|
|
|
$
|
15
|
|
5. 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 that are measured at fair value as of
April 30, 2018
and indicates the fair value hierarchy of the valuation (in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 April 30, 2018
|
Cash equivalents (1):
|
|
|
|
|
|
|
|
Time deposits
|
$
|
0
|
|
|
$
|
36
|
|
|
$
|
0
|
|
|
$
|
36
|
|
Money market mutual funds
|
4,372
|
|
|
0
|
|
|
0
|
|
|
4,372
|
|
Marketable securities:
|
|
|
|
|
|
|
|
Corporate notes and obligations
|
0
|
|
|
749
|
|
|
0
|
|
|
749
|
|
U.S. treasury securities
|
0
|
|
|
88
|
|
|
0
|
|
|
88
|
|
Mortgage backed obligations
|
0
|
|
|
86
|
|
|
0
|
|
|
86
|
|
Asset backed securities
|
0
|
|
|
184
|
|
|
0
|
|
|
184
|
|
Municipal securities
|
0
|
|
|
39
|
|
|
0
|
|
|
39
|
|
Foreign government obligations
|
0
|
|
|
58
|
|
|
0
|
|
|
58
|
|
U.S. agency obligations
|
0
|
|
|
4
|
|
|
0
|
|
|
4
|
|
Commercial Paper
|
0
|
|
|
11
|
|
|
0
|
|
|
11
|
|
Covered bonds
|
0
|
|
|
18
|
|
|
0
|
|
|
18
|
|
Foreign currency derivative contracts (2)
|
0
|
|
|
6
|
|
|
0
|
|
|
6
|
|
Total assets
|
$
|
4,372
|
|
|
$
|
1,279
|
|
|
$
|
0
|
|
|
$
|
5,651
|
|
___________
(1)
Included in “cash and cash equivalents” in the accompanying
condensed consolidated
balance sheet as of
April 30, 2018
, in addition to
$1,514 million
of cash.
(2)
Included in “prepaid expenses and other current assets” in the accompanying
condensed consolidated
balance sheet as of
April 30, 2018
.
The following table presents information about the Company’s assets that are measured at fair value as of
January 31, 2018
and indicates the fair value hierarchy of the valuation (in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs (Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Balances as of
January 31, 2018
|
Cash equivalents (1):
|
|
|
|
|
|
|
|
Time deposits
|
$
|
0
|
|
|
$
|
543
|
|
|
$
|
0
|
|
|
$
|
543
|
|
Money market mutual funds
|
1,389
|
|
|
0
|
|
|
0
|
|
|
1,389
|
|
Marketable securities:
|
|
|
|
|
|
|
|
Corporate notes and obligations
|
0
|
|
|
1,217
|
|
|
0
|
|
|
1,217
|
|
U.S. treasury securities
|
0
|
|
|
194
|
|
|
0
|
|
|
194
|
|
Mortgage backed obligations
|
0
|
|
|
99
|
|
|
0
|
|
|
99
|
|
Asset backed securities
|
0
|
|
|
250
|
|
|
0
|
|
|
250
|
|
Municipal securities
|
0
|
|
|
52
|
|
|
0
|
|
|
52
|
|
Foreign government obligations
|
0
|
|
|
86
|
|
|
0
|
|
|
86
|
|
U.S. agency obligations
|
0
|
|
|
19
|
|
|
0
|
|
|
19
|
|
Commercial Paper
|
0
|
|
|
11
|
|
|
0
|
|
|
11
|
|
Covered bonds
|
0
|
|
|
50
|
|
|
0
|
|
|
50
|
|
Foreign currency derivative contracts (2)
|
0
|
|
|
18
|
|
|
0
|
|
|
18
|
|
Total assets
|
$
|
1,389
|
|
|
$
|
2,539
|
|
|
$
|
0
|
|
|
$
|
3,928
|
|
______________
(1)
Included in “cash and cash equivalents” in the accompanying
condensed consolidated
balance sheet as of
January 31, 2018
, in addition to
$611 million
of cash.
(2)
Included in “prepaid expenses and other current assets” in the accompanying
condensed consolidated
balance sheet as of
January 31, 2018
.
6. Property and Equipment
Property and Equipment
Property and equipment, net consisted of the following (in
millions
):
|
|
|
|
|
|
|
|
|
|
As of
|
|
April 30, 2018
|
|
January 31, 2018
|
Land
|
$
|
184
|
|
|
$
|
184
|
|
Buildings and building improvements
|
631
|
|
|
626
|
|
Computers, equipment and software
|
1,667
|
|
|
1,629
|
|
Furniture and fixtures
|
147
|
|
|
139
|
|
Leasehold improvements
|
862
|
|
|
825
|
|
|
3,491
|
|
|
3,403
|
|
Less accumulated depreciation and amortization
|
(1,541
|
)
|
|
(1,456
|
)
|
|
$
|
1,950
|
|
|
$
|
1,947
|
|
Depreciation and amortization expense totaled
$89 million
and
$88 million
during
the three months ended April 30, 2018
and
2017
, respectively.
Computers, equipment and software at
April 30, 2018
and
January 31, 2018
included a total of
$709 million
and
$709 million
acquired under capital lease agreements, respectively. Accumulated amortization relating to computers, equipment and software acquired under capital leases totaled
$467 million
and
$450 million
, respectively, at
April 30, 2018
and
January 31, 2018
. Amortization of assets acquired under capital leases is included in depreciation and amortization expense.
7. Business Combination
CloudCraze
In April 2018, the Company acquired all outstanding stock of CloudCraze LLC (“CloudCraze”), for consideration consisting of cash and equity awards assumed. CloudCraze is a commerce platform that allows businesses to generate online revenue and scale for growth. CloudCraze delivers interactions across commerce, sales, marketing and service. The Company has included the financial results of CloudCraze in the consolidated financial statements from the date of acquisition, which have not been material to date. The transaction costs associated with the acquisition were not material.
The preliminary acquisition date fair value consideration transferred for CloudCraze was approximately
$190 million
, which consisted of cash and the fair value of stock options and restricted stock awards assumed. The Company recorded approximately
$58 million
for developed technology and customer relationships with estimated useful lives of
one
to
seven
years. The Company recorded approximately
$134 million
of goodwill which is primarily attributed to the assembled workforce and expanded market opportunities from integrating CloudCraze's technology with the Company's other offerings. The goodwill balance is deductible for U.S. income tax purposes.
8. Intangible Assets Acquired Through Business Combinations and Goodwill
Intangible assets acquired through business combinations
Intangible assets acquired through business combinations are as follows (in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets, Gross
|
|
Accumulated Amortization
|
|
Intangible Assets, Net
|
|
Weighted
Average
Remaining Useful Life
|
|
Jan 31, 2018
|
|
Additions and retirements, net
|
|
Apr. 30, 2018
|
|
Jan 31, 2018
|
|
Expense and retirements, net
|
|
Apr. 30, 2018
|
|
Jan 31, 2018
|
|
Apr. 30, 2018
|
|
Acquired developed technology
|
$
|
1,027
|
|
|
$
|
17
|
|
|
$
|
1,044
|
|
|
$
|
(677
|
)
|
|
$
|
(39
|
)
|
|
$
|
(716
|
)
|
|
$
|
350
|
|
|
$
|
328
|
|
|
2.7
|
Customer relationships
|
831
|
|
|
40
|
|
|
871
|
|
|
(359
|
)
|
|
(30
|
)
|
|
(389
|
)
|
|
472
|
|
|
482
|
|
|
4.4
|
Other (1)
|
53
|
|
|
1
|
|
|
54
|
|
|
(48
|
)
|
|
(1
|
)
|
|
(49
|
)
|
|
5
|
|
|
5
|
|
|
3.9
|
Total
|
$
|
1,911
|
|
|
$
|
58
|
|
|
$
|
1,969
|
|
|
$
|
(1,084
|
)
|
|
$
|
(70
|
)
|
|
$
|
(1,154
|
)
|
|
$
|
827
|
|
|
$
|
815
|
|
|
3.8
|
(1)
Included in other are trade names, trademarks and territory rights.
Amortization of intangible assets resulting from business combinations for
the three months ended April 30, 2018
and
2017
was
$69 million
and
$75 million
, respectively.
The expected future amortization expense for intangible assets as of
April 30, 2018
is as follows (in
millions
):
|
|
|
|
|
Fiscal Period:
|
|
Remaining nine months of Fiscal 2019
|
$
|
207
|
|
Fiscal 2020
|
236
|
|
Fiscal 2021
|
181
|
|
Fiscal 2022
|
118
|
|
Fiscal 2023
|
41
|
|
Thereafter
|
32
|
|
Total amortization expense
|
$
|
815
|
|
Goodwill
The changes in the carrying amounts of goodwill, which is generally not deductible for tax purposes, were as follows (in
millions
):
|
|
|
|
|
|
Balance as of January 31, 2018
|
|
$
|
7,314
|
|
Acquisitions
|
|
134
|
|
Adjustments of acquisition date fair values, including the effect of foreign currency translation
|
|
(4
|
)
|
Balance as of April 30, 2018
|
|
$
|
7,444
|
|
9. Debt
The carrying values of the Company's borrowings were as follows (in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instrument
|
|
Date of issuance
|
|
Maturity date
|
|
Effective interest rate for the three months ended April 30, 2018
|
|
April 30, 2018
|
|
January 31, 2018
|
2023 Senior Notes
|
|
April 2018
|
|
April 2023
|
|
3.25%
|
|
$
|
991
|
|
|
$
|
0
|
|
2028 Senior Notes
|
|
April 2018
|
|
April 2028
|
|
3.70%
|
|
1,487
|
|
|
0
|
|
2019 Term Loan
|
|
July 2016
|
|
July 2019
|
|
2.71%
|
|
498
|
|
|
498
|
|
Loan assumed on 50 Fremont
|
|
February 2015
|
|
June 2023
|
|
3.75%
|
|
199
|
|
|
199
|
|
0.25% Convertible Senior Notes
|
|
March 2013
|
|
April 2018
|
|
2.53%
|
|
0
|
|
|
1,023
|
|
Total carrying value of debt
|
|
|
|
|
|
|
|
3,175
|
|
|
1,720
|
|
Less current portion of debt
|
|
|
|
|
|
|
|
(3
|
)
|
|
(1,025
|
)
|
Total noncurrent debt
|
|
|
|
|
|
|
|
$
|
3,172
|
|
|
$
|
695
|
|
Each of the Company's debt agreements requires it to maintain compliance with certain debt covenants, all of which the Company was in compliance with as of
April 30, 2018
.
The expected future principal payments for all borrowings as of
April 30, 2018
is as follows (in
millions
):
|
|
|
|
|
Fiscal period:
|
|
Remaining nine months of Fiscal 2019
|
$
|
2
|
|
Fiscal 2020
|
504
|
|
Fiscal 2021
|
4
|
|
Fiscal 2022
|
4
|
|
Fiscal 2023
|
4
|
|
Thereafter
|
2,682
|
|
Total principal outstanding
|
$
|
3,200
|
|
Bridge Facility
In March 2018, the Company entered into a commitment letter, pursuant to which certain lenders agreed to provide a senior unsecured
364
-day bridge loan facility of up to
$3.0 billion
(the "Bridge Facility”) for the purpose of providing the financing to support the Company's acquisition of MuleSoft, Inc., which is discussed in Note 17 "Subsequent Events."
Under the terms of the commitment letter, the Bridge Facility was terminated upon execution of the 2023 Senior Notes, 2028 Senior Notes and 2021 Term Loan (as defined below) in April 2018. For the three months ended April 30, 2018, the Company incurred costs in connection with the Bridge Facility of
$11 million
that were recorded to interest expense.
2023 Senior Notes
In April 2018, the Company issued an aggregate principal amount of
$1.0 billion
in senior notes that will mature in April 2023 and bear interest at a fixed rate of
3.25 percent
per annum ("2023 Senior Notes"). The interest is payable semi-annually in April and October of each year, commencing in October 2018. The Company incurred issuance costs of
$8 million
in connection with the 2023 Senior Notes that, along with the debt discount upon issuance, are being amortized to interest expense over the term of the senior notes. The 2023 Senior Notes are unsecured and rank equally in right of payment with all of our other senior unsecured indebtedness.
2028 Senior Notes
In April 2018, the Company issued an aggregate principal amount of
$1.5 billion
in senior notes that will mature in April 2028 and bear interest at a fixed rate of
3.70 percent
per annum ("2028 Senior Notes"). The interest is payable semi-annually in April and October of each year, commencing in October 2018. The Company incurred issuance costs of
$13 million
in connection with the 2028 Senior Notes that, along with the debt discount upon issuance, are being amortized to interest expense over the term of the senior notes. The 2028 Senior Notes are unsecured and rank equally in right of payment with all of our other senior unsecured indebtedness.
2019 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 million
term loan facility (“2019 Term Loan”) that matures in July 2019. In April 2018, the Company modified the Term Loan Credit Agreement with substantially the same terms, including the principal amount and maturity date. The Company accounted for the new 2019 Term Loan as a modification. No incremental fees were paid related to the modification of the 2019 Term Loan.
Interest on the 2019 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.
The weighted average interest rate on the 2019 Term Loan was
2.71%
for
the three months ended April 30, 2018
. Accrued interest on the 2019 Term Loan was immaterial as of
April 30, 2018
. As of
April 30, 2018
, the noncurrent outstanding principal portion was
$500 million
.
Loan Assumed on 50 Fremont
The Company assumed a
$200 million
loan with the acquisition of 50 Fremont in San Francisco, California (“Loan”). The Loan bears an interest rate of
3.75%
per annum and is due in June 2023. Beginning in fiscal 2019, principal and interest payments are required, with the remaining principal due at maturity. For
the three months ended April 30, 2018
and
2017
, total interest expense recognized was
$2 million
and
$2 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
April 30, 2018
.
Convertible Senior Notes
In March 2013, the Company issued at par value
$1.15 billion
of
0.25%
convertible senior notes (the “
0.25%
Senior Notes”, or “Notes”) due in
April 2018
. During the three months ended April 30, 2018, the outstanding balance of the
0.25%
Senior Notes matured and the Company repaid
$1.0 billion
in cash of principal balance of the
0.25%
Senior Notes. The Company also distributed approximately
7 million
shares of the Company's common stock to noteholders during the three months ended April 30, 2018, which represents the conversion value in excess of the principal amount.
To minimize the impact of potential economic dilution upon conversion of the Notes, also in March 2013, the Company entered into convertible note hedge transactions with respect to its common stock. The Company received approximately
7 million
shares of the Company's common stock from the exercise of the notes hedges related to the
0.25%
Senior Notes during this same period.
Warrants
In March 2013, the Company 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 or early terminated by the Company by their exercise dates, which will occur in July through September 2018, they will expire. For periods in which the market value per share of the Company's common stock exceeds the applicable exercise price of
$90.40
and the Company is profitable, the
0.25%
Warrants have a dilutive effect on the Company's earnings per share. The
0.25%
Warrants are separate transactions entered into by the Company and are not part of the terms of the
0.25%
Senior Notes or the related note hedges.
2021 Term Loan
In April 2018, the Company entered into a new
three
-year unsecured term loan with Bank of America, N.A. and certain other institutional lenders for
$500 million
(“2021 Term Loan”) that matures in May 2021. No amounts were outstanding as of
April 30, 2018
. All net proceeds of the 2021 Term Loan were for the purpose of partially funding the acquisition of MuleSoft, Inc. and were received in May 2018.
Revolving Credit Facility
In April 2018, the Company entered into a Second 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 2023. The Revolving Loan Credit Agreement amended and restated the Company’s existing revolving credit facility dated July 2016. 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.
In fiscal 2018, the Company paid down the remaining
$200 million
of outstanding borrowings under the original Credit Facility. There were
no
outstanding borrowings under the Credit Facility as of
April 30, 2018
. The Company continues to pay a commitment fee on the available amount of the Credit Facility.
Interest Expense on Debt
The following table sets forth total interest expense recognized related to debt (in
millions
):
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
2018
|
|
2017
|
Contractual interest expense
|
$
|
11
|
|
|
$
|
5
|
|
Amortization of debt issuance costs
|
12
|
|
|
1
|
|
Amortization of debt discount
|
4
|
|
|
7
|
|
|
$
|
27
|
|
|
$
|
13
|
|
10. Other Balance Sheet Accounts
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in
millions
):
|
|
|
|
|
|
|
|
|
|
As of
|
|
April 30,
2018
|
|
January 31,
2018
|
Prepaid income taxes
|
$
|
18
|
|
|
$
|
33
|
|
Other taxes receivable
|
34
|
|
|
33
|
|
Prepaid expenses and other current assets
|
510
|
|
|
405
|
|
|
$
|
562
|
|
|
$
|
471
|
|
Capitalized Software, net
Capitalized software, net at
April 30, 2018
and
January 31, 2018
was
$149 million
and
$146 million
, respectively. Accumulated amortization relating to capitalized software, net totaled
$344 million
and
$326 million
, respectively, at
April 30, 2018
and
January 31, 2018
.
Capitalized internal-use software amortization expense totaled
$19 million
and
$18 million
for
the three months ended April 30, 2018
and
2017
, respectively.
Other Assets, net
Other assets, net consisted of the following (in
millions
):
|
|
|
|
|
|
|
|
|
|
As of
|
|
April 30,
2018
|
|
January 31,
2018
|
Deferred income taxes, noncurrent, net
|
$
|
39
|
|
|
$
|
36
|
|
Long-term deposits
|
23
|
|
|
24
|
|
Domain names and patents, net
|
21
|
|
|
23
|
|
Customer contract assets resulting from business combinations (1)
|
138
|
|
|
159
|
|
Other
|
171
|
|
|
142
|
|
|
$
|
392
|
|
|
$
|
384
|
|
(1) Customer contract assets resulting from business combinations reflects the fair value of future billings of amounts that are contractually committed by acquired companies' existing customers as of the acquisition date.
Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable, accrued expenses and other liabilities consisted of the following (in
millions
):
|
|
|
|
|
|
|
|
|
|
As of
|
|
April 30,
2018
|
|
January 31,
2018
|
Accounts payable
|
$
|
134
|
|
|
$
|
76
|
|
Accrued compensation
|
596
|
|
|
1,001
|
|
Accrued income and other taxes payable
|
213
|
|
|
306
|
|
Capital lease obligation, current
|
100
|
|
|
103
|
|
Other current liabilities
|
648
|
|
|
561
|
|
|
$
|
1,691
|
|
|
$
|
2,047
|
|
Other Noncurrent Liabilities
Other noncurrent liabilities consisted of the following (in
millions
):
|
|
|
|
|
|
|
|
|
|
As of
|
|
April 30,
2018
|
|
January 31,
2018
|
Deferred income taxes and income taxes payable
|
$
|
123
|
|
|
$
|
121
|
|
Financing obligation - leased facility
|
197
|
|
|
198
|
|
Long-term lease liabilities and other
|
516
|
|
|
527
|
|
|
$
|
836
|
|
|
$
|
846
|
|
11. Stockholders’ Equity
The Company maintains the following stock plans: the ESPP, the 2013 Equity Incentive Plan and the 2014 Inducement Equity Incentive Plan (“2014 Inducement Plan”).
As of
April 30, 2018
and
January 31, 2018
,
$150 million
and
$63 million
, respectively, was withheld on behalf of employees for future purchases under the ESPP and is recorded in accounts payable, accrued expenses and other liabilities.
Prior to February 2006, options issued under the Company’s stock option plans generally had a term of
10
years. From February 1, 2006 through July 2013, options issued had a term of
five
years. After July 2013, options issued have a term of
seven
years.
The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions and fair value per share:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
Stock Options
|
2018
|
|
2017
|
Volatility
|
27.8 - 28
|
|
%
|
|
31.4
|
|
%
|
Estimated life
|
3.5 years
|
|
|
|
3.5 years
|
|
|
Risk-free interest rate
|
2.5 - 2.7
|
|
%
|
|
1.4 - 1.5
|
|
%
|
Weighted-average fair value per share of grants
|
$
|
28.39
|
|
|
|
$
|
20.63
|
|
|
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 are 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 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. In the first quarter of fiscal 2019, the Company granted additional performance-based restricted stock unit awards to certain employees, including the Chairman of the Board and Chief Executive Officer and other senior executives. 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
(in thousands)
|
|
Outstanding
Stock
Options
(in thousands)
|
|
Weighted-
Average
Exercise Price
|
|
Aggregate
Intrinsic Value (in millions)
|
Balance as of January 31, 2018
|
50,313
|
|
|
21,735
|
|
|
$
|
65.96
|
|
|
|
Increase in shares authorized:
|
|
|
|
|
|
|
|
Assumed equity plans
|
18
|
|
|
0
|
|
|
24.23
|
|
|
|
Options granted under all plans
|
(6,230
|
)
|
|
6,230
|
|
|
118.02
|
|
|
|
Restricted stock activity
|
(16,558
|
)
|
|
0
|
|
|
0.00
|
|
|
|
Performance-based restricted stock units
|
(1,878
|
)
|
|
0
|
|
|
0.00
|
|
|
|
Stock grants to board and advisory board members
|
(43
|
)
|
|
0
|
|
|
0.00
|
|
|
|
Exercised
|
0
|
|
|
(1,928
|
)
|
|
58.82
|
|
|
|
Plan shares expired
|
(5
|
)
|
|
0
|
|
|
0.00
|
|
|
|
Canceled
|
337
|
|
|
(337
|
)
|
|
84.18
|
|
|
|
Balance as of April 30, 2018
|
25,954
|
|
|
25,700
|
|
|
$
|
78.81
|
|
|
$
|
1,084
|
|
Vested or expected to vest
|
|
|
23,548
|
|
|
$
|
76.90
|
|
|
$
|
1,038
|
|
Exercisable as of April 30, 2018
|
|
|
10,842
|
|
|
$
|
61.29
|
|
|
$
|
647
|
|
The total intrinsic value of the options exercised during
the three months ended April 30, 2018
and
2017
was
$121 million
and
$125 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
April 30, 2018
, options to purchase
10.8 million
shares were vested at a weighted average exercise price of
$61.29
per share and had a remaining weighted-average contractual life of approximately
4
years. The total intrinsic value of these vested options as of
April 30, 2018
was
$647 million
.
During
the three months ended April 30, 2018
, the Company recognized stock-based expense related to its equity plans for employees and non-employee directors of
$252 million
. As of
April 30, 2018
, the aggregate stock compensation remaining to be amortized to costs and expenses was approximately
$2.7 billion
. The Company will amortize this stock compensation balance as follows:
$847 million
during the remaining
nine
months of fiscal
2019
;
$870 million
during fiscal
2020
;
$612 million
during fiscal
2021
;
$343 million
during fiscal
2022
;
$54 million
during fiscal
2023
and
$8 million
thereafter. The expected amortization reflects only outstanding stock awards as of
April 30, 2018
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
2
years.
The following table summarizes information about stock options outstanding as of
April 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise
Prices
|
|
Number
Outstanding
(in thousands)
|
|
Weighted-
Average
Remaining
Contractual Life
(Years)
|
|
Weighted-
Average
Exercise
Price
|
|
Number of
Shares
(in thousands)
|
|
Weighted-
Average
Exercise
Price
|
$0.86 to $52.30
|
|
3,715
|
|
|
3.8
|
|
$
|
37.88
|
|
|
3,215
|
|
|
$
|
42.64
|
|
$53.60 to $58.86
|
|
401
|
|
|
3.3
|
|
55.97
|
|
|
332
|
|
|
56.08
|
|
$59.34
|
|
3,953
|
|
|
3.6
|
|
59.34
|
|
|
3,172
|
|
|
59.34
|
|
$59.37 to $75.01
|
|
1,224
|
|
|
4.9
|
|
70.07
|
|
|
525
|
|
|
70.17
|
|
$75.57
|
|
4,741
|
|
|
5.5
|
|
75.57
|
|
|
1,335
|
|
|
75.57
|
|
$76.48 to $80.62
|
|
558
|
|
|
5.1
|
|
78.59
|
|
|
232
|
|
|
78.68
|
|
$80.99 to $122.82
|
|
11,108
|
|
|
6.0
|
|
102.62
|
|
|
2,031
|
|
|
81.05
|
|
|
|
25,700
|
|
|
5.1
|
|
$
|
78.81
|
|
|
10,842
|
|
|
$
|
61.29
|
|
Restricted stock activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Outstanding
|
|
Outstanding
(in thousands)
|
|
Weighted Average Grant Date Fair Value
|
|
Aggregate
Intrinsic
Value (in millions)
|
Balance as of January 31, 2018
|
19,018
|
|
|
$
|
77.85
|
|
|
|
Granted - restricted stock units and awards
|
8,210
|
|
|
117.93
|
|
|
|
Granted - performance-based stock units
|
437
|
|
|
118.16
|
|
|
|
Canceled
|
(480
|
)
|
|
77.72
|
|
|
|
Vested and converted to shares
|
(2,136
|
)
|
|
73.86
|
|
|
|
Balance as of April 30, 2018
|
25,049
|
|
|
$
|
91.95
|
|
|
$
|
3,031
|
|
Expected to vest
|
21,233
|
|
|
|
|
$
|
2,569
|
|
The restricted stock, which upon vesting entitles the holder to one share of common stock for each share of restricted stock, has an exercise price of
$0.001
per share, which is equal to the par value of the Company’s common stock, and generally vests over
four years
. The total fair value of shares vested during
the three months ended April 30, 2018
and
2017
was
$246 million
and
$166 million
, respectively.
Common Stock
The following number of shares of common stock were reserved and available for future issuance at
April 30, 2018
(in thousands):
|
|
|
|
Options outstanding
|
25,700
|
|
Restricted stock awards and units and performance-based stock units outstanding
|
25,049
|
|
Stock available for future grant:
|
|
2013 Equity Incentive Plan
|
25,336
|
|
2014 Inducement Plan
|
511
|
|
Amended and Restated 2004 Employee Stock Purchase Plan
|
7,518
|
|
Acquired equity plans
|
107
|
|
Warrants
|
17,309
|
|
|
101,530
|
|
12. 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 three months
ended April 30, 2018
, the Company reported a tax provision of
$41 million
on a pretax income of
$385 million
, which resulted in an effective tax rate of
11 percent
. The Company recorded year-to-date tax provision primarily from profitable jurisdictions outside of the United States.
In December 2017, the Tax Act was enacted into law, significantly changing income tax law that affects U.S.
corporations. Key changes included a corporate tax rate reduction from 35 percent to 21 percent effective January 1, 2018,
expensing of certain qualified property, significant changes to the U.S international tax system such as such as a one-time transition tax on accumulated foreign earnings, and how foreign earnings are subject to U.S. tax. Due to the timing of the Tax Act and additional guidance and interpretations that may be issued in the future, the Company has not completed its analysis of the effects of the Tax Act and recorded provisional estimates in the period ended January 31, 2018. The provisional estimates will be adjusted during the measurement period defined under SAB 118, based upon the Company's ongoing analysis of its data and tax positions along with new guidance from regulators and interpretations of the law. During the three months ended April 30, 2018, the Company did not adjust its provisional estimates.
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. The Company will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions going forward. The Company may release all or a portion of its valuation allowance if there is sufficient positive evidence that outweighs the negative evidence, for example, if
the trend in profitability continues.
For
the three months ended April 30, 2017
, the Company reported a tax benefit of
$11 million
on a pretax loss of
$10 million
, which resulted in an effective tax rate of
110 percent
. In computing the estimated annual effective tax rate, the Company expected pretax income for the full year and projected tax expense primarily related to profitable jurisdictions outside the United States. In addition, the tax benefit included a discrete benefit relating to the realization of certain U.S. state deferred taxes.
Tax Benefits Related to Stock-Based Compensation
The income tax benefit related to stock-based compensation was
$48 million
and
$68 million
for
the three months ended April 30, 2018
and
2017
, 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 or reviewed by various taxing authorities in countries including the United States, Australia, 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 and is currently appealing the 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
$19 million
may occur in the next 12 months, as the applicable statutes of limitations lapse, ongoing examinations are completed, or tax positions meet the conditions of being effectively settled.
13. 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
millions
):
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
Net income
|
$
|
344
|
|
|
$
|
1
|
|
Denominator:
|
|
|
|
Weighted-average shares outstanding for basic earnings per share
|
729
|
|
|
706
|
|
Effect of dilutive securities:
|
|
|
|
Convertible senior notes
|
4
|
|
|
4
|
|
Employee stock awards
|
17
|
|
|
12
|
|
Warrants
|
4
|
|
|
0
|
|
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share
|
754
|
|
|
722
|
|
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 millions):
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
2018
|
|
2017
|
Employee stock awards
|
3
|
|
|
14
|
|
Convertible senior notes
|
0
|
|
|
0
|
|
Warrants
|
0
|
|
|
17
|
|
14. Commitments
Letters of Credit
As of
April 30, 2018
, the Company had a total of
$100 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
April 30, 2018
, the future minimum lease payments under non-cancelable operating and capital leases are as follows (in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Leases
|
|
Operating
Leases
|
|
Financing Obligation -Leased Facility (1)
|
Fiscal Period:
|
|
|
|
|
|
Remaining nine months of Fiscal 2019
|
$
|
113
|
|
|
$
|
509
|
|
|
$
|
16
|
|
Fiscal 2020
|
201
|
|
|
626
|
|
|
22
|
|
Fiscal 2021
|
0
|
|
|
487
|
|
|
23
|
|
Fiscal 2022
|
0
|
|
|
340
|
|
|
23
|
|
Fiscal 2023
|
0
|
|
|
310
|
|
|
24
|
|
Thereafter
|
0
|
|
|
1,264
|
|
|
187
|
|
Total minimum lease payments
|
314
|
|
|
$
|
3,536
|
|
|
$
|
295
|
|
Less: amount representing interest
|
(22
|
)
|
|
|
|
|
Present value of capital lease obligations
|
$
|
292
|
|
|
|
|
|
(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 of
April 30, 2018
,
$217 million
of the total
$295 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
condensed consolidated
balance sheet.
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
$3.5 billion
, approximately
$2.9 billion
is related to facilities space. The remaining commitment amount is related to computer equipment and furniture and fixtures.
The Company has entered into various contractual commitments with infrastructure service providers for a total commitment of
$2.0 billion
. As of
April 30, 2018
the total remaining commitment is approximately
$1.9 billion
and
$94 million
is remaining to be paid this fiscal year.
15. Legal Proceedings and Claims
In the ordinary course of business, the Company is or may be involved in various legal or regulatory proceedings, claims or purported class actions related to alleged infringement of third-party patents and other intellectual property rights, commercial, corporate and securities, labor and employment, 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
condensed consolidated
results of operations, cash flows or financial position. However, depending on the nature and timing of any such dispute or other contingency, 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 reached a settlement of the lawsuit for approximately
$6 million
in fiscal 2018. The parties submitted the settlement agreement to the Court for approval and the Court entered the preliminary approval order. The Court set the final approval hearing for July 20, 2018.
16. Related-Party Transactions
In January 1999, the Salesforce.com Foundation, also referred to as the Foundation, was chartered on an idea of leveraging the Company’s people, technology, and resources to help improve communities around the world. The Company calls this integrated philanthropic approach the 1-1-1 model. Beginning in 2008, Salesforce.org, which is a non-profit public benefit corporation, was established to resell the Company's services to nonprofit organizations and certain higher education organizations.
The Company’s Chairman is the chairman of both the Foundation and Salesforce.org. The Company’s Chairman holds
one
of the
three
Foundation board seats. The Company’s Chairman,
one
of the Company’s employees and
one
of the Company’s board members hold
three
of Salesforce.org’s
nine
board seats. The Company does not control the Foundation’s or Salesforce.org's activities, and accordingly, the Company does not consolidate either of the related entities' statement of activities with its financial results.
Since the Foundation’s and Salesforce.org’s inception, the Company has provided at no charge certain resources to those entities' employees such as office space, furniture, equipment, facilities, services, and other resources. The value of these items was approximately
$4 million
and
$2 million
for
the three months ended April 30, 2018
and
2017
, respectively.
Additionally, the Company allows Salesforce.org to donate subscriptions of the Company’s services to other qualified non-profit organizations. The Company also allows Salesforce.org to resell the Company’s service to non-profit organizations and certain education entities. The Company does not charge Salesforce.org for these subscriptions, therefore income from subscriptions sold to non-profit organizations is donated back to the community through charitable grants made by the Foundation and Salesforce.org. The value of the subscriptions sold by Salesforce.org pursuant to the reseller agreement, as amended, was approximately
$56 million
and
$40 million
for
the three months ended April 30, 2018
and
2017
, respectively.
17. Subsequent Events
In May 2018, the Company acquired all outstanding stock of MuleSoft, Inc. ("MuleSoft”), which provides a platform for building application networks that connect enterprise apps, data and devices, across any cloud and on-premise. The preliminary acquisition date fair value of the consideration transferred for MuleSoft is estimated to be approximately
$6.5 billion
comprised of
$4.9 billion
in cash, including proceeds from the
three
year term loan of
$500 million
(see Note 9),
$1.2 billion
in common stock issued, and
$0.4 billion
related to the fair value of stock options and restricted stock awards assumed.
Approximately
$5 million
of transaction costs, such as legal, accounting and banker fees associated with the acquisition, were recorded in general and administrative expense for
the three months ended April 30, 2018
. Total impact to the Company's statement of operations for
the three months ended April 30, 2018
was approximately
$25 million
which includes, in addition to transaction costs, financing costs associated with the acquisition such as debt issuance costs associated with the Bridge Facility of
$11 million
and additional interest expense incurred related to the issuance of the 2023 Senior Notes and 2028 Senior Notes of
$5 million
.
|
|
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, including the resources and costs required to prevent, detect and remediate potential security breaches; 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; the performance and fair value of our investments in complementary businesses through our strategic investment portfolio; our ability to realize the benefits from strategic partnerships and investments; our ability to successfully integrate acquired businesses and technologies; our ability to continue to grow and maintain unearned revenue and remaining transaction price; our ability to protect our intellectual property rights; our ability to develop our brands; 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, cross-border data transfers 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, including the U.S. Tax Cuts and Jobs Act, and interpretations thereof; uncertainties affecting our ability to estimate our tax rate; the impact of expensing stock options and other equity awards; the sufficiency of our capital resources; factors related to our 2023 and 2028 senior notes, revolving credit facility, 2019 term loan and loan associated with 50 Fremont; compliance with our debt covenants and capital lease obligations; current and potential litigation involving us; and the impact of climate change. 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, industry-specific solutions, analytics, integration solutions, application development, IoT integration, collaborative productivity tools, our AppExchange, which is our enterprise cloud marketplace, and our professional cloud services - provides the tools customers need to succeed in a digital world. Key elements of our strategy include:
|
|
•
|
extend existing service offerings;
|
|
|
•
|
reduce customer attrition;
|
|
|
•
|
expand and strengthen the partner ecosystem;
|
|
|
•
|
expand internationally;
|
|
|
•
|
target vertical industries;
|
|
|
•
|
expand into new horizontal markets;
|
|
|
•
|
extend go-to-market capabilities;
|
|
|
•
|
ensure strong customer adoption; and
|
|
|
•
|
encourage the development of third-party applications on our cloud computing platform.
|
We are also committed to a sustainable, low-carbon future, advancing equality and diversity, and fostering employee success. We try to integrate social good into everything we do. All of these goals align with our long-term growth strategy and financial and operational priorities.
We believe the factors that will influence our ability to achieve our objectives include: our prospective customers’ willingness to migrate to enterprise cloud computing services; our ability to maintain a balanced portfolio of products and customers; the availability, performance and security of our service; our ability to continue to release, and gain customer acceptance of new and improved features; our ability to successfully integrate acquired businesses and technologies; successful customer adoption and utilization of our service; our ability to continue to meet new and evolving privacy laws and regulations, acceptance of our service in markets where we have few customers; the emergence of additional competitors in our market and improved product offerings by existing and new competitors; the location of new data centers that we operate as well as the new locations of services provided by third-party cloud computing platform providers; third-party developers’ willingness to develop applications on our platforms; our ability to attract new personnel and retain and motivate current personnel; and general economic conditions which could affect our customers’ ability and willingness to purchase our services, delay the customers’ purchasing decision or affect attrition rates.
To address these factors, we will need to, among other things, continue to add substantial numbers of paying subscriptions, upgrade our customers to fully featured versions or arrangements such as an Enterprise License Agreement, provide high quality technical support to our customers, encourage the development of third-party applications on our platforms, realize the benefits from our strategic partnerships and continue to focus on retaining customers at the time of renewal. Our plans to invest for future growth include the continuation of the expansion of our data center capacity, whether internally or through the use of third parties, the hiring of additional personnel, particularly in direct sales, other customer-related areas and research and development, the expansion of domestic and international selling and marketing activities, specifically in our top markets, the continued development of our brands, the addition of distribution channels, the upgrade of our service offerings, the continued development of services including Community Cloud, Industry Clouds, Success Cloud and Integration 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 May 2018 acquisition of MuleSoft, Inc. We have a disciplined and thoughtful acquisition process where we routinely survey the industry landscape across a wide range of companies. As a result of our aggressive growth plans and integration of our previously acquired businesses, we have incurred significant expenses from equity awards and amortization of purchased intangibles, which have reduced our operating income. We remain focused on improving operating margins in fiscal
2019
and beyond.
Our typical subscription contract term is 12 to 36 months, although terms range from one to 60 months, so during any fiscal reporting period only a subset of active subscription contracts is eligible for renewal. We calculate our attrition rate as of the end of each month. Our attrition rate, including the Marketing Cloud service offering but excluding our Commerce Cloud serving offering, was less than ten percent as of
April 30, 2018
. While it is difficult to predict, we expect our attrition rate to remain consistent as we continue to expand our enterprise business and invest in customer success and related programs.
We expect marketing and sales costs, which were
44 percent
and
46 percent
for
the three months ended April 30, 2018
and 2017, respectively, to continue to represent a substantial portion of total revenues in the future as we seek to grow our customer base, sell more products to existing customers, and continue to build greater brand awareness.
Fiscal Year
Our fiscal year ends on January 31. References to fiscal
2019
, for example, refer to the fiscal year ending
January 31, 2019
.
Adoption of New Accounting Standards
We have adjusted our condensed consolidated financial statements from amounts previously reported due to the adoption of Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The information presented reflects the adjusted amounts as compared to those previously reported. In addition, we have prospectively adopted Accounting Standards Update No. 2016-01, "Financial Instrument-Overall (Subtopic 825-10)" ("ASU 2016-01") and Accounting Standards Update No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory" ("ASU 2016-16")
Operating Segments
We operate as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who in our case is the chief executive officer, in deciding how to allocate resources and assess performance. Over the past few years, we have completed a number of acquisitions. These acquisitions have allowed us to expand our offerings, presence and reach in various market segments of the enterprise cloud computing market. While we have offerings in multiple enterprise cloud computing market segments, including as a result of our acquisitions, our business operates in one operating segment because the majority of our offerings operate on a single platform and are deployed in an identical way, and
our chief operating decision maker evaluates our financial information and resources and assesses the performance of these resources on a consolidated basis. We expect to continue to operate as one segment after the MuleSoft acquisition. Since we operate as one operating segment, all required financial segment information can be found in the
condensed consolidated
financial statements.
Sources of Revenues
We derive our revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing our enterprise cloud computing services and from customers paying for additional support beyond the standard support that is included in the basic subscription fees; and (2) related professional services such as process mapping, project management, implementation services and other revenue. “Other revenue” consists primarily of training fees. Subscription and support revenues accounted for approximately
93 percent
of our total revenues for
the three months ended April 30, 2018
. Subscription revenues are driven primarily by the number of paying subscribers, varying service types, the price of our service and renewals. We define a “customer” as a separate and distinct buying entity (e.g., a company, a distinct business unit of a large corporation, a partnership, etc.) that has entered into a contract to access our enterprise cloud computing services. We define a “subscription” as a unique user account purchased by a customer for use by its employees or other customer-authorized users, and we refer to each such user as a “subscriber.” The number of paying subscriptions at each of our customers ranges from one to hundreds of thousands. None of our customers accounted for more than five percent of our revenues during
the three months ended April 30, 2018
and
2017
.
Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement dates of each contract. The typical subscription and support term is 12 to 36 months, although terms range from one to 60 months. Our subscription and support contracts are non-cancelable, though customers typically have the right to terminate their contracts for cause if we materially fail to perform. We generally invoice our customers in advance, in annual installments, and typical payment terms provide that our customers pay us within 30 days of invoice. Amounts that have been invoiced are recorded in accounts receivable and in unearned revenue, or in revenue depending on whether transfer of control to customers has occurred. 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 April 30,
|
|
|
|
2018
|
|
2017
|
|
Variance- Percent
|
Sales Cloud
|
$
|
965
|
|
|
$
|
830
|
|
|
16%
|
Service Cloud
|
848
|
|
|
656
|
|
|
29%
|
Salesforce Platform and Other
|
575
|
|
|
424
|
|
|
36%
|
Marketing and Commerce Cloud
|
422
|
|
|
299
|
|
|
41%
|
Total
|
$
|
2,810
|
|
|
$
|
2,209
|
|
|
|
Subscription and support revenues from the Community Cloud, Quip and our Industry Offerings were not significant in
the three months ended April 30, 2018
. Quip revenue is included with Salesforce Platform and Other in the table above. Our Industry Offerings and Community Cloud revenue are included in either Sales Cloud, Service Cloud or Salesforce Platform and Other depending on the primary service offering purchased.
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, the service that was provided at the inception of the contract and standalone selling price ("SSP") of those products. We do not update these allocations based on actual product usage during the term of the contract. We have allocated approximately
17 percent
and
14 percent
of our total subscription and support revenues for
the three months ended April 30, 2018
and 2017, respectively, based on customers’ estimated product demand plans and these allocated amounts are included in the table above.
Additionally, some of our service offerings have similar features and functions. For example, customers may use the Sales Cloud, the Service Cloud or the 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 Unearned Revenue, Accounts Receivable and Operating Cash Flow
Unearned 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. 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 unearned 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.
The sequential quarterly changes in accounts receivable and the related unearned 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
millions
):
|
|
|
|
|
|
April 30,
2018
|
Fiscal 2019
|
|
Accounts receivable, net
|
$
|
1,763
|
|
Unearned revenue
|
6,201
|
|
Operating cash flow (1)
|
1,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
2018
|
|
October 31,
2017
|
|
July 31,
2017
|
|
April 30,
2017
|
Fiscal 2018
|
|
|
|
|
|
|
|
Accounts receivable, net
|
$
|
3,921
|
|
|
$
|
1,522
|
|
|
$
|
1,572
|
|
|
$
|
1,442
|
|
Unearned revenue
|
6,995
|
|
|
4,312
|
|
|
4,749
|
|
|
4,969
|
|
Operating cash flow (1)
|
1,051
|
|
|
126
|
|
|
331
|
|
|
1,230
|
|
|
|
(1)
|
Operating cash flow represents net cash provided by operating activities for the three months ended in the periods stated above.
|
The unearned revenue balance on our
condensed consolidated
balance sheets does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. Transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized, which includes unearned revenue and unbilled amounts that will be recognized as revenue in future periods. Transaction price allocated to the remaining performance obligation is influenced by several factors, including seasonality, the timing of renewals, average contract terms and foreign currency exchange rates. Unbilled portions of the remaining transaction price denominated in foreign currencies are revalued each period based on the period end exchange rates. For multi-year subscription agreements billed annually, the associated unbilled balance and corresponding remaining transaction price is typically high at the beginning of the contract period, zero just prior to renewal, and increases if the agreement is renewed. Low remaining transaction prices attributable to a particular subscription agreement are often associated with an impending renewal and may not be an indicator of the likelihood of renewal or future revenue from such customer.
Remaining transaction price consisted of the following (in billions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
Noncurrent
|
|
Total
|
As of April 30, 2018
|
$
|
9.6
|
|
|
$
|
10.8
|
|
|
$
|
20.4
|
|
As of April 30, 2017
|
$
|
7.6
|
|
|
$
|
7.4
|
|
|
$
|
15.0
|
|
Cost of Revenues and Operating Expenses
Cost of Revenues
Cost of subscription and support revenues primarily consists of expenses related to delivering our service and providing support, the costs of data center capacity, depreciation or operating lease expense associated with computer equipment and software, allocated overhead, amortization expense associated with capitalized software related to our services and acquired developed technologies and certain fees paid to various third parties for the use of their technology, services and data. We allocate overhead such as IT infrastructure, rent and occupancy charges based on headcount. Employee benefit costs and taxes are allocated based upon a percentage of total compensation expense. As such, general overhead expenses are reflected in each cost of revenue and operating expense category. Cost of professional services and other revenues consists primarily of employee-related costs associated with these services, including stock-based expenses, the cost of subcontractors, certain third-party fees and allocated overhead. The cost of providing professional services is higher as a percentage of the related revenue than for our enterprise cloud computing subscription service due to the direct labor costs and costs of subcontractors.
We intend to continue to invest additional resources in our enterprise cloud computing services. For example, we have invested in additional database software and hardware and we plan to increase the capacity that we are able to offer globally through data centers and third-party infrastructure providers. In addition, we intend to continue to invest additional resources in enhancing our security measures. As we acquire new businesses and technologies, the amortization expense associated with the purchase of acquired developed technology will be included in cost of revenues. Additionally, as we enter into new contracts with third parties for the use of their technology, services or data, or as our sales volume grows, the fees paid to use such technology or services may increase. Finally, we expect the cost of professional services to be approximately in line with revenues from professional services as we believe this investment in professional services facilitates the adoption of our service
offerings. The timing of these additional expenses will affect our cost of revenues, both in terms of absolute dollars and as a percentage of revenues, in the affected periods.
Research and Development
Research and development expenses consist primarily of salaries and related expenses, including stock-based expenses, the costs of our development and test data center and allocated overhead. We continue to focus our research and development efforts on adding new features and services, integrating acquired technologies, increasing the functionality and security and enhancing the ease of use of our enterprise cloud computing services. Our proprietary, scalable and secure multi-tenant architecture enables us to provide all of our customers with a service based on a single version of our application. As a result, we do not have to maintain multiple versions, which enables us to have relatively lower research and development expenses as compared to traditional enterprise software companies.
We expect that in the future, research and development expenses will increase in absolute dollars and may increase as a percentage of total revenues as we invest in adding employees and building the necessary system infrastructure required to support the development of new, and improve existing, technologies and the integration of acquired businesses, technologies and all of our service offerings.
Marketing and Sales
Marketing and sales expenses are our largest cost and consist primarily of salaries and related expenses, including stock-based expenses, for our sales and marketing staff, including commissions, as well as payments to partners, marketing programs and allocated overhead. Marketing programs consist of advertising, events, corporate communications, brand building and product marketing activities.
We plan to continue to invest in marketing and sales by expanding our domestic and international selling and marketing activities, building brand awareness, attracting new customers and sponsoring additional marketing events. The timing of these marketing events, such as our annual and largest event, Dreamforce, will affect our marketing costs in a particular quarter. In addition, as we acquire new businesses and technologies, a component of the amortization expense associated with this activity will be included in marketing and sales. We expect that in the future, marketing and sales expenses will increase in absolute dollars and continue to be our largest cost. We expect marketing and sales expenses, excluding sales personnel expenses, to grow in line with or at a slower rate than revenues and sales personnel expenses may increase as a percentage of total revenues as we invest in additional sales personnel to focus on adding new customers and increasing penetration within our existing customer base.
General and Administrative
General and administrative expenses consist of salaries and related expenses, including stock-based expenses, for finance and accounting, legal, internal audit, human resources and management information systems personnel, legal costs, professional fees, other corporate expenses and allocated overhead. We expect that in the future, general and administrative expenses will increase in absolute dollars as we invest in our infrastructure and we incur additional employee related costs, professional fees and insurance costs related to the growth of our business and international expansion. We expect general and administrative costs as a percentage of total revenues to either remain flat or decrease for the next several quarters. However, the timing of additional expenses in a particular quarter, both in terms of absolute dollars and as a percentage of revenues, will affect our general and administrative expenses.
Stock-Based Expenses
Our cost of revenues and operating expenses include stock-based expenses related to equity plans for employees and non-employee directors. We recognize our stock-based compensation as an expense in the statements of operations based on their fair values and vesting periods. These charges have been significant in the past and we expect that they will increase as our stock price increases, as we acquire more companies, as we hire more employees and seek to retain existing employees.
During
the three months ended April 30, 2018
, we recognized stock-based expense related to our equity plans for employees and non-employee directors of
$252 million
. As of
April 30, 2018
, the aggregate stock compensation remaining to be amortized to costs and expenses was approximately
$2.7 billion
. We expect this stock compensation balance to be amortized as follows:
$847 million
during the remaining
nine
months of fiscal
2019
;
$870 million
during fiscal
2020
;
$612 million
during fiscal
2021
;
$343 million
during fiscal
2022
;
$54 million
during fiscal
2023
and
$8 million
thereafter. The expected amortization reflects only outstanding stock awards as of
April 30, 2018
and assumes no forfeiture activity. We expect to continue to issue stock-based awards to our employees in future periods.
Amortization of Purchased Intangible Assets Acquired Through Business Combinations
Our cost of revenues, operating expenses and other expenses include amortization of acquisition-related intangible assets, such as the amortization of the cost associated with an acquired company’s developed technology, trade names and trademarks,
customer lists, acquired leases and customer relationships. We expect this expense to fluctuate as we acquire more businesses and intangible assets become fully amortized.
Critical Accounting Policies and Estimates
Our
condensed consolidated
financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that of our significant accounting policies, which are described in Note 1 “Summary of Business and Significant Accounting Policies” to our condensed consolidated financial statements, the following accounting policies and specific estimates involve a greater degree of judgment and complexity. Accordingly, these are the policies and estimates we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations:
|
|
•
|
the SSP of performance obligations for contracts with multiple performance obligations;
|
|
|
•
|
the estimate of variable consideration as part of the adoption of ASU 2014-09;
|
|
|
•
|
the fair value of assets acquired and liabilities assumed for business combinations;
|
|
|
•
|
the recognition, measurement and valuation of current and deferred income taxes;
|
|
|
•
|
the average period of benefit associated with costs capitalized to obtain revenue contracts;
|
|
|
•
|
the fair value of certain stock awards issued;
|
|
|
•
|
the useful lives of intangible assets; and
|
|
|
•
|
the valuation of strategic investments.
|
Results of Operations
The following tables set forth selected data for each of the periods indicated (in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
2018
|
|
As a % of Total Revenues
|
|
2017
|
|
As a % of Total Revenues
|
Revenues:
|
|
|
|
|
|
|
|
Subscription and support
|
$
|
2,810
|
|
|
93
|
%
|
|
$
|
2,209
|
|
|
92
|
%
|
Professional services and other
|
196
|
|
|
7
|
|
|
188
|
|
|
8
|
|
Total revenues
|
3,006
|
|
|
100
|
|
|
2,397
|
|
|
100
|
|
Cost of revenues (1)(2):
|
|
|
|
|
|
|
|
Subscription and support
|
573
|
|
|
19
|
|
|
463
|
|
|
19
|
|
Professional services and other
|
194
|
|
|
7
|
|
|
188
|
|
|
8
|
|
Total cost of revenues
|
767
|
|
|
26
|
|
|
651
|
|
|
27
|
|
Gross profit
|
2,239
|
|
|
74
|
|
|
1,746
|
|
|
73
|
|
Operating expenses (1)(2):
|
|
|
|
|
|
|
|
Research and development
|
424
|
|
|
14
|
|
|
376
|
|
|
16
|
|
Marketing and sales
|
1,329
|
|
|
44
|
|
|
1,106
|
|
|
46
|
|
General and administrative
|
295
|
|
|
10
|
|
|
260
|
|
|
11
|
|
Total operating expenses
|
2,048
|
|
|
68
|
|
|
1,742
|
|
|
73
|
|
Income from operations
|
191
|
|
|
6
|
|
|
4
|
|
|
0
|
|
Investment income
|
16
|
|
|
1
|
|
|
5
|
|
|
0
|
|
Interest expense
|
(34
|
)
|
|
(1
|
)
|
|
(22
|
)
|
|
0
|
|
Gains on strategic investments, net
|
211
|
|
|
7
|
|
|
3
|
|
|
0
|
|
Other income
|
1
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Income (loss) before (provision for) benefit from income taxes
|
385
|
|
|
13
|
|
|
(10
|
)
|
|
0
|
|
(Provision for) benefit from income taxes
|
(41
|
)
|
|
(2
|
)
|
|
11
|
|
|
0
|
|
Net income
|
$
|
344
|
|
|
11
|
%
|
|
$
|
1
|
|
|
0
|
%
|
(1) Amounts related to amortization of intangible assets acquired through business combinations, as follows (in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
2018
|
|
As a % of Total Revenues
|
|
2017
|
|
As a % of Total Revenues
|
Cost of revenues
|
$
|
39
|
|
|
1
|
%
|
|
$
|
44
|
|
|
2
|
%
|
Marketing and sales
|
30
|
|
|
1
|
|
|
31
|
|
|
1
|
|
(2) Amounts related to stock-based expenses, as follows (in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
2018
|
|
As a % of Total Revenues
|
|
2017
|
|
As a % of Total Revenues
|
Cost of revenues
|
$
|
34
|
|
|
1
|
%
|
|
$
|
32
|
|
|
1
|
%
|
Research and development
|
66
|
|
|
2
|
|
|
64
|
|
|
3
|
|
Marketing and sales
|
120
|
|
|
4
|
|
|
119
|
|
|
5
|
|
General and administrative
|
32
|
|
|
1
|
|
|
37
|
|
|
2
|
|
Three Months Ended April 30, 2018
and
2017
Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
Variance
|
(in millions)
|
2018
|
|
2017
|
|
Dollars
|
|
Percent
|
Subscription and support
|
$
|
2,810
|
|
|
$
|
2,209
|
|
|
$
|
601
|
|
|
27%
|
Professional services and other
|
196
|
|
|
188
|
|
|
8
|
|
|
4%
|
Total revenues
|
$
|
3,006
|
|
|
$
|
2,397
|
|
|
$
|
609
|
|
|
25%
|
Total revenues were
$3.0 billion
for the
three months ended April 30, 2018
, compared to
$2.4 billion
during the same period a year ago,
an increase
of
$609 million
, or
25 percent
. Subscription and support revenues were
$2.8 billion
, or
93 percent
of total revenues, for the
three months ended April 30, 2018
, compared to
$2.2 billion
, or
92 percent
of total revenues, during the same period a year ago,
an increase
of
$601 million
, or
27 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. 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
$196 million
, or
seven percent
of total revenues, for the
three months ended April 30, 2018
, compared to
$188 million
, or
eight percent
of total revenues, for the same period a year ago,
an increase
of
$8 million
, or
four 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
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
(in millions)
|
2018
|
|
As a % of Total Revenues
|
|
2017
|
|
As a % of Total Revenues
|
Americas
|
$
|
2,101
|
|
|
70
|
%
|
|
$
|
1,765
|
|
|
74
|
%
|
Europe
|
606
|
|
|
20
|
|
|
409
|
|
|
17
|
|
Asia Pacific
|
299
|
|
|
10
|
|
|
223
|
|
|
9
|
|
|
$
|
3,006
|
|
|
100
|
%
|
|
$
|
2,397
|
|
|
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 April 30, 2018
and
2017
, respectively.
Revenues in Europe and Asia Pacific accounted for
$905 million
, or
30 percent
of total revenues, for the
three months ended April 30, 2018
, compared to
$632 million
, or
26 percent
of total revenues, during the same period a year ago,
an increase
of
$273 million
, or
43 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
$78 million
in the
three months ended April 30, 2018
, compared to the same period a year ago primarily as a result of the strengthening British Pound Sterling.
Cost of Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
Variance
|
(in millions)
|
2018
|
|
2017
|
|
Dollars
|
Subscription and support
|
$
|
573
|
|
|
$
|
463
|
|
|
$
|
110
|
|
Professional services and other
|
194
|
|
|
188
|
|
|
6
|
|
Total cost of revenues
|
$
|
767
|
|
|
$
|
651
|
|
|
$
|
116
|
|
Percent of total revenues
|
26
|
%
|
|
27
|
%
|
|
|
Cost of revenues was
$767 million
, or
26 percent
of total revenues, for the
three months ended April 30, 2018
, compared to
$651 million
, or
27 percent
of total revenues, during the same period a year ago,
an increase
of
$116 million
. For the
three months ended April 30, 2018
, the
increase
in absolute dollars was primarily due to
an increase
of
$35 million
in employee-related costs,
an increase
of
$2 million
in stock-based expenses,
an increase
of
$73 million
in service delivery costs, primarily
due to our efforts to increase data center capacity, and
an increase
of
$3 million
in allocated overhead offset by
a decrease
of amortization of purchased intangible assets of
$5 million
. We have increased our headcount by
nine percent
since
April 30, 2017
to meet the higher demand for services from our customers. 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
$194 million
during the
three months ended April 30, 2018
resulting in
positive
gross margins of
$2 million
. The cost of professional services and other revenues was
$188 million
during the
three months ended April 30, 2017
resulting in break-even gross margins. 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 April 30,
|
|
Variance
|
(in millions)
|
2018
|
|
2017
|
|
Dollars
|
Research and development
|
$
|
424
|
|
|
$
|
376
|
|
|
$
|
48
|
|
Marketing and sales
|
1,329
|
|
|
1,106
|
|
|
223
|
|
General and administrative
|
295
|
|
|
260
|
|
|
35
|
|
Total operating expenses
|
$
|
2,048
|
|
|
$
|
1,742
|
|
|
$
|
306
|
|
Percent of total revenues
|
68
|
%
|
|
73
|
%
|
|
|
Research and development expenses were
$424 million
, or
14 percent
of total revenues, for the
three months ended April 30, 2018
, compared to
$376 million
, or
16 percent
of total revenues, during the same period a year ago,
an increase
of
$48 million
. For the
three months ended April 30, 2018
, the
increase
in absolute dollars was primarily due to
an increase
of approximately
$42 million
in employee-related costs,
an increase
of
$2 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
10 percent
since
April 30, 2017
in order to improve and extend our service offerings, develop new technologies and integrate previously acquired companies, including our fiscal 2017 acquisitions. We expect that research and development expenses will increase in absolute dollars and may increase as a percentage of revenues in future periods as we continue to invest in additional employees and technology to support the development of new, and improve existing, technologies and the integration of acquired technologies.
Marketing and sales expenses were
$1.3 billion
, or
44 percent
of total revenues, for the
three months ended April 30, 2018
, compared to
$1.1 billion
, or
46 percent
of total revenues, during the same period a year ago,
an increase
of
$223 million
. For the
three months ended April 30, 2018
, the
increase
was primarily due to
an increase
of
$186 million
in employee-related costs and amortization of costs capitalized to obtain revenue contracts,
an increase
of
$1 million
in stock-based expenses and
an increase
of
$16 million
in advertising expenses. Our marketing and sales headcount increased by
19 percent
since
April 30, 2017
. The increase in headcount was primarily attributable to hiring additional sales personnel to focus on adding new customers and increasing penetration within our existing customer base.
General and administrative expenses were
$295 million
, or
10 percent
of total revenues, for the
three months ended April 30, 2018
, compared to
$260 million
, or
11 percent
of total revenues, during the same period a year ago,
an increase
of
$35 million
. The
increase
s were primarily due to an increase in employee-related costs as well as transaction costs related to the acquisition of MuleSoft. Our general and administrative headcount increased by
17 percent
since
April 30, 2017
as we added personnel to support our growth.
Other income and expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
Variance
|
(in millions)
|
2018
|
|
2017
|
|
Dollars
|
Investment income
|
$
|
16
|
|
|
$
|
5
|
|
|
$
|
11
|
|
Interest expense
|
(34
|
)
|
|
(22
|
)
|
|
(12
|
)
|
Net gains on strategic investments
|
211
|
|
|
3
|
|
|
208
|
|
Other income
|
1
|
|
|
0
|
|
|
1
|
|
Investment income consists of income on our cash and marketable securities balances. Investment income was
$16 million
for the
three months ended April 30, 2018
compared to
$5 million
during the same period a year ago. The
increase
was due to greater interest income earned in the
three months ended April 30, 2018
.
Interest expense consists of interest on our debt, capital leases, and financing obligation related to 350 Mission. Interest expense was
$34 million
for the
three months ended April 30, 2018
compared to
$22 million
during the same period a year ago. The increase was primarily driven by costs associated with the Bridge Facility of approximately $11 million and interest expense on the 2023 Senior Notes and 2028 Senior Notes of approximately
$5 million
. We expect interest expense to increase in future quarters as a result of the 2023 Senior Notes and 2028 Senior Notes.
Net gains on strategic investments consists primarily of mark-to-market adjustments related to our publicly held equity securities, observable price adjustments related to our privately held equity securities and other adjustments. The adoption of ASU 2016-01 resulted in unrealized gains, net related to our strategic investments of approximately
$224 million
during the
three months ended April 30, 2018
. This gain was primarily driven by initial public offerings of two strategic investments and unrealized gains related thereto of approximately $197 million during the
three months ended April 30, 2018
.
Other income (expense) primarily consists of non-operating transactions such as gains and losses from foreign exchange rate fluctuations and real estate transactions.
(Provision for) benefit from income taxes
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
Variance
|
(in millions)
|
2018
|
|
2017
|
|
Dollars
|
(Provision for) benefit from income taxes
|
$
|
(41
|
)
|
|
$
|
11
|
|
|
$
|
(52
|
)
|
Effective tax rate
|
11
|
%
|
|
110
|
%
|
|
|
We recognized a tax
provision
of
$41 million
on a pretax
income
of
$385 million
for the
three months ended April 30, 2018
. The tax provision recorded was primarily related to income taxes in profitable jurisdictions outside of the United States.
We recorded a tax
benefit
of
$11 million
on a pretax
loss
of
$10 million
for the
three months ended April 30, 2017
. On a full year basis, we expected pretax income and projected tax expense primarily related to profitable jurisdictions outside the United States. In addition, the tax benefit included a discrete benefit relating to the realization of certain U.S. state deferred taxes.
Liquidity and Capital Resources
At
April 30, 2018
, our principal sources of liquidity were cash, cash equivalents and marketable securities totaling
$7.2
billion and accounts receivable of
$1.8
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.
The overall increase in cash and cash equivalents was primarily due to $2.5 billion in debt raised in April 2018 in contemplation of the acquisition of MuleSoft, Inc. which closed in May 2018. Total cash paid in connection with the acquisition in May 2018 was approximately
$4.9 billion
, including proceeds from the 2021 Term Loan of $500.0 million, which funded in May 2018.
For the three months ended
April 30, 2018
and 2017, our cash flows were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
2018
|
|
2017
|
Net cash provided by operating activities
|
$
|
1,466
|
|
|
$
|
1,230
|
|
Net cash provided by (used in) investing activities
|
276
|
|
|
(768
|
)
|
Net cash provided by (used in) financing activities
|
1,625
|
|
|
(49
|
)
|
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; net gains on 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, costs capitalized to obtain revenue contracts, prepaid assets and other current assets. Claims against working capital include accounts payable, accrued expenses, unearned 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 Unearned 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 unearned revenue, which is reflected on the balance sheets, and as the next billing cycle approaches, the corresponding unearned revenue decreases to zero. The operating cash flow benefit of increased billing activity generally occurs in the subsequent quarter when we collect from our customers. As such, our first quarter is our largest collections and operating cash flow quarter.
The net cash provided by investing activities during
the three months ended April 30, 2018
primarily related to sales of marketable securities of
$938 million
offset by purchases of marketable securities of
$263 million
, the acquisition of CloudCraze, net of cash acquired for
$182 million
, purchases of strategic investments of
$147 million
and new office build outs and capital investments of
$122 million
. The net cash used in investing activities during
the three months ended April 30, 2017
primarily related to purchases of marketable securities of approximately
$699 million
, new office build-outs and capital investments of
$157 million
, which were offset by the cash inflows for the period from sales and maturities of marketable securities of
$104 million
.
Net cash provided by financing activities during
the three months ended April 30, 2018
consisted primarily of
$2.5 billion
from proceeds from issuance of debt,
$201 million
from proceeds from equity plans offset by
$1.0 billion
of principal payments on conversions of the 0.25% Senior Notes. Net cash used in financing activities during
the three months ended April 30, 2017
consisted primarily of
$200 million
in repayments of debt offset by
$160 million
from proceeds from equity plans.
As of April 30, 2018, we have senior unsecured notes outstanding due in 2019, 2023, and 2028 with a total carrying value of
$3.0 billion
. In addition, we have senior secured notes outstanding related to our loan on 50 Fremont due in 2023 with a total carrying value of
$199 million
. We were in compliance with all debt covenants as of April 30, 2018.
In March 2013, we issued at par value $1.15 billion of 0.25% convertible senior notes (“0.25% Senior Notes”), due April 2018, unless earlier purchased by us or converted. During the three months ended April 30, 2018, the outstanding balance of the 0.25% Senior Notes matured and the Company repaid
$1.0 billion
in cash of principal balance. As of April 30, 2018, all 0.25% Senior Notes had been repaid in full and were no longer outstanding.
As of
April 30, 2018
, we have a total of
$100 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, excluding all secured and unsecured debt. At
April 30, 2018
, the future non-cancelable minimum payments under these commitments were as follows (in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Leases
|
|
Operating
Leases
|
|
Financing Obligation - Leased Facility
|
Fiscal Period:
|
|
|
|
|
|
Remaining nine months of Fiscal 2019
|
$
|
113
|
|
|
$
|
509
|
|
|
$
|
16
|
|
Fiscal 2020
|
201
|
|
|
626
|
|
|
22
|
|
Fiscal 2021
|
0
|
|
|
487
|
|
|
23
|
|
Fiscal 2022
|
0
|
|
|
340
|
|
|
23
|
|
Fiscal 2023
|
0
|
|
|
310
|
|
|
24
|
|
Thereafter
|
0
|
|
|
1,264
|
|
|
187
|
|
Total minimum lease payments
|
314
|
|
|
$
|
3,536
|
|
|
$
|
295
|
|
Less: amount representing interest
|
(22
|
)
|
|
|
|
|
Present value of capital lease obligations
|
$
|
292
|
|
|
|
|
|
The majority of our operating lease agreements provide us with the option to renew. Our future operating lease obligations would change if we exercised these options and if we entered into additional operating lease agreements as we expand our operations.
The financing obligation - leased facility above represents the total obligation for our lease of approximately 445,000 rentable square feet of office space at 350 Mission St. ("350 Mission") in San Francisco, California. As of
April 30, 2018
,
$217 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
condensed consolidated
balance sheets.
Purchase orders are not included in the table above. Our purchase orders represent authorizations to purchase rather than binding agreements. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum services to be used; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.
During fiscal
2019
and in future fiscal years, we have made and expect to continue to make additional investments in our infrastructure to scale our operations, increase productivity and enhance our security measures. 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.
The Company has entered into various contractual commitments with infrastructure service providers for a total commitment of
$2.0 billion
. As of
April 30, 2018
the total remaining commitment is approximately
$1.9 billion
and
$94 million
is remaining to be paid this fiscal year.
In the future, we may enter into arrangements to acquire or invest in complementary businesses, services and technologies, and intellectual property rights. To facilitate these acquisitions or investments, we may seek additional equity or debt financing, which may not be available on terms favorable to us or at all, which may affect our ability to complete subsequent acquisitions or investments, and which may affect the risks of owning our common stock.
We believe our existing cash, cash equivalents, marketable securities, cash provided by operating activities and, if necessary, our borrowing capacity under our Credit Facility will be sufficient to meet our working capital, capital expenditure and debt repayment needs over the next 12 months. We expect our cash tax payments for the next 12 months, primarily from profitable jurisdictions outside of the U.S, to be consistent with those paid in prior years. Additionally, the one-time transition tax under the Tax Act will not have an impact on our cash taxes based on our provisional assessment.
New Accounting Pronouncements
See Note 1 “Summary of Business and Significant Accounting Policies” to the
condensed consolidated
financial statements for our discussion about new accounting pronouncements adopted and those pending.
Environmental, Social and Governance
We believe the business of business is improving the state of the world for all of our stakeholders, including our stockholders, customers, employees, partners, community, environment and society. We are committed to creating a sustainable, low-carbon future by delivering a carbon neutral cloud, operating as a net-zero greenhouse gas emissions company and by working to achieve our goal of 100 percent renewable energy for our global operations. In addition, we have spearheaded initiatives to drive equality in four key areas: equal rights, equal pay, equal education and equal opportunity. We also pioneered and have inspired other companies to adopt our 1-1-1 integrated philanthropy model, which leverages 1 percent of a company’s equity, employee time and product to help improve communities around the world. Together with the Salesforce Foundation, a 501(c)(3) nonprofit organization, and Salesforce.org, a nonprofit social enterprise, which are not included in our consolidated financial statements, we have given approximately
$220 million
to charitable organizations, logged more than
3 million
employee volunteer hours around the world and provided more than
36,000
nonprofit and higher education organizations with the use of our service offerings for free or at a discount.
We leverage a number of communications channels and strategic content to better serve and engage our many stakeholders. Our sustainability website, www.salesforce.com/company/sustainability, provides information regarding our environmental and other sustainability efforts, including our annual impact reports and our environmental policy. At our equality portal, www.salesforce.com/company/equality, our stakeholders can gain insights on our approach to equality, see our company profile by gender, and review our most recent Employer Information Report, which provides a snapshot in time of our U.S. demographics based on categories prescribed by the federal government. In addition, stakeholders can learn about equality through one of our many free Trailheads. Our annual proxy statement, as available on the Investor Relations website, www.investor.salesforce.com, or www.sec.gov, provides additional details on our corporate governance practices, including our board composition.