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ITEM 7.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following discussion contains forward-looking statements, including, without limitation, our expectations and statements regarding our outlook and future revenues, expenses, results of operations, liquidity, plans, strategies and objectives of management and any assumptions underlying any of the foregoing. Our actual results may differ significantly from those projected in the forward-looking statements. Our forward-looking statements and factors that might cause future actual results to differ materially from our recent results or those projected in the forward-looking statements include, but are not limited to, those discussed in the section titled “Forward-Looking Information” and “Risk Factors” of this Annual Report on Form 10-K. Except as required by law, we assume no obligation to update the forward-looking statements or our risk factors for any reason.
Overview
We are a leading provider of enterprise cloud computing solutions, with a focus on customer relationship management, or CRM. We introduced our first CRM solution in February 2000, and we have since expanded our service offerings with new editions, features and platform capabilities.
Our core mission is to help our customers transform by empowering them to connect with their customers in entirely new ways. Our Customer Success Platform - including sales force automation, customer service and support, marketing automation, digital commerce, community management, analytics, application development, Internet of Things (“IoT”) integration and collaborative productivity tools - provides the tools customers need to succeed in a digital world. Key elements of our strategy include:
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extend existing service offerings;
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expand into new horizontal markets;
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target vertical markets and industries;
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extend go-to-market capabilities;
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reduce customer attrition; and
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encourage the development of third-party applications on our cloud computing platforms.
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In addition to the key elements of our business strategy described above, we evaluate opportunities to acquire or invest in complementary businesses, services and technologies and intellectual property rights. This evaluation resulted in a significant increase in our acquisition activity during fiscal 2017.
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; the availability, performance and security of our service; our ability to continue to release, and gain customer acceptance of new and improved features; our ability to successfully integrate acquired businesses and technologies; successful customer adoption and utilization of our service; acceptance of our service in markets where we have few customers; the emergence of additional competitors in our market and improved product offerings by existing and new competitors; the location of new data centers that we operate as well as the new locations of services provided by third-party cloud computing platform providers; third-party developers’ willingness to develop applications on our platforms; our ability to attract new personnel and retain and motivate current personnel; and general economic conditions which could affect our customers’ ability and willingness to purchase our services, delay the customers’ purchasing decision or affect attrition rates.
To address these factors, we will need to, among other things, continue to add substantial numbers of paying subscriptions, upgrade our customers to fully featured versions or arrangements such as an Enterprise License Agreement, provide high quality technical support to our customers, encourage the development of third-party applications on our platforms and continue to focus on retaining customers at the time of renewal. Our plans to invest for future growth include the continuation of the expansion of our data center capacity, the hiring of additional personnel, particularly in direct sales, other customer-related areas and research and development, the expansion of domestic and international selling and marketing activities, specifically in our top markets, continuing to develop our brands, the addition of distribution channels, the upgrade of our service offerings, the development of new services such as the introduction of our Analytics Cloud, Community Cloud, and IoT Cloud, the integration of new and acquired technologies such as Commerce Cloud, artificial intelligence technologies and Salesforce Quip, the expansion of our Marketing Cloud and Salesforce Platform (formerly App Cloud) 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 and the Internet of Things. We drive innovation organically and to a lesser extent through acquisitions, such as our July 2016 acquisition of Demandware, Inc. (“Demandware”), a digital commerce leader. We have a disciplined and thoughtful acquisition process where we routinely survey the industry landscape across a wide range of companies. As a result of our aggressive growth plans and integration of our previously acquired businesses, we have incurred significant expenses from equity awards and amortization of purchased intangibles, which have reduced our operating income. We remained focused on improving operating margins in fiscal
2017
and expect to remain similarly focused in fiscal 2018.
Our typical subscription contract term is 12 to 36 months, although terms range from one to 60 months, so during any fiscal reporting period only a subset of active subscription contracts is eligible for renewal. We calculate our attrition rate as of the end of each month. Our current attrition rate calculation does not include the Marketing and Commerce Cloud service offerings. Our attrition rate was between eight and nine percent during the fiscal year ended
January 31, 2017
, which is comparable to the eight and nine percent attrition rate during the same period a year ago. While it is difficult to predict, we expect our attrition rate to remain in this range as we continue to expand our enterprise business and invest in customer success and related programs.
We expect marketing and sales costs, which were
47
percent of our total revenues for the fiscal year ended
January 31, 2017
and
49 percent
for the same period a year ago, 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 build greater brand awareness.
In July 2016 we acquired Demandware, an industry-leading provider of enterprise cloud commerce solutions in the digital commerce market. We acquired Demandware to expand our position in customer relationship management and to pursue the digital commerce market segment with the new Salesforce Commerce Cloud. The financial results of Demandware are included in our consolidated financial statements from the date of acquisition. The total purchase price for Demandware was approximately
$2.9 billion
.
In July 2016, we entered into a credit agreement (the “Term Loan Credit Agreement”) which provides for a
$500.0 million
term loan (the “Term Loan”) that matures on July 11, 2019. All amounts borrowed under the Term Loan were used to pay a portion of the total purchase price for Demandware. Additionally, we entered into an Amended and Restated Credit Agreement (the “Revolving Loan Credit Agreement”) with Wells Fargo Bank, National Association, and certain other institutional lenders that increased our existing revolving credit facility dated October 2014 to $1.0 billion. As of
January 31, 2017
, there was
$200.0 million
of borrowings outstanding under the revolving credit facility.
In August 2016, we acquired the outstanding stock of Quip, Inc. (“Quip”). Quip combines content and communication to create living documents to allow work-teams to write, edit and discuss documents, spreadsheets and checklists in a single experience. The total purchase price for Quip was approximately
$412.0 million
.
In November 2016, we acquired the outstanding stock of Krux Digital, Inc. (“Krux”). Krux is a leading data management platform that unifies, segments and activates audiences to increase engagement with users, prospects and customers. The total purchase price for Krux was approximately
$741.8 million
.
Prior to these and other acquisitions during fiscal 2017, our most significant acquisition was ExactTarget, Inc in fiscal 2014.
Fiscal Year
Our fiscal year ends on January 31. References to fiscal
2017
, for example, refer to the fiscal year ending
January 31, 2017
.
Operating Segments
We operate as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who in our case is the chief executive officer, in deciding how to allocate resources and assess performance. Over the past few years, including fiscal 2017, we have completed a number of acquisitions. These acquisitions have allowed us to expand our offerings, presence and reach in various market segments of the enterprise cloud computing market. While we have offerings in multiple enterprise cloud computing market segments, including as a result of the Company's acquisitions, our business operates in one operating segment because
the majority of our offerings operate on a single platform and are deployed in an identical way, and
our chief operating decision maker evaluates our financial information and resources and assesses the performance of these resources on a consolidated basis. Since we operate as one operating segment, all required financial segment information can be found in the consolidated financial statements.
Sources of Revenues
We derive our revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing our enterprise cloud computing services and from customers paying for additional support beyond the standard support that is included in the basic subscription fees; and (2) related professional services such as process mapping, project management, implementation services and other revenue. “Other revenue” consists primarily of training fees. Subscription and support revenues accounted for approximately
92 percent
of our total revenues for fiscal
2017
. Subscription revenues are driven primarily by the number of paying subscribers, varying service types, the price of our service and renewals. We define a “customer” as a separate and distinct buying entity (e.g., a company, a distinct business unit of a large corporation, a partnership, etc.) that has entered into a contract to access our enterprise cloud computing services. We define a “subscription” as a unique user account purchased by a customer for use by its employees or other customer-authorized users, and we refer to each such user as a “subscriber.” The number of paying subscriptions at each of our customers ranges from one to hundreds of thousands. None of our customers accounted for more than five percent of our revenues during fiscal
2017
,
2016
or
2015
.
Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement dates of each contract. The typical subscription and support term is 12 to 36 months, although terms range from one to 60 months. Our subscription and support contracts are non-cancelable, though customers typically have the right to terminate their contracts for cause if we materially fail to perform. We generally invoice our customers in advance, in annual installments, and typical payment terms provide that our customers pay us within 30 days of invoice. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue, or in revenue depending on whether the revenue recognition criteria have been met. In general, we collect our billings in advance of the subscription service period.
Professional services and other revenues consist of fees associated with consulting and implementation services and training. Our consulting and implementation engagements are billed on a time and materials, fixed fee or subscription basis. We also offer a number of training classes on implementing, using and administering our service that are billed on a per person, per class basis. Our typical professional services payment terms provide that our customers pay us within 30 days of invoice.
In determining whether professional services can be accounted for separately from subscription and support revenues, we consider a number of factors, which are described in “Critical Accounting Policies and Estimates—Revenue Recognition” below.
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 core cloud service offerings. Subscription and support revenues consisted of the following (in millions):
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Fiscal Year Ended January 31,
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2017
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2016
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2015
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Variance- Percent FY'17 and FY'16
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Variance- Percent FY'16 and FY'15
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Sales Cloud
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$
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3,060.6
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$
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2,699.0
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$
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2,443.0
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13
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%
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10
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%
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Service Cloud
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2,320.7
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1,817.8
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1,320.2
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28
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%
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38
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%
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Salesforce Platform and Other
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1,441.6
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1,034.7
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745.3
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39
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%
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39
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%
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Marketing Cloud
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933.3
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654.1
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505.3
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43
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%
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29
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%
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Total
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$
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7,756.2
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$
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6,205.6
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$
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5,013.8
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Subscription and support revenues from the Analytics Cloud, Community Cloud, IoT Cloud, Commerce Cloud and Salesforce Quip were not significant. Analytics Cloud, IoT Cloud and Salesforce Quip revenue is included with Salesforce Platform and Other in the table above. Community Cloud revenue is included in either Sales Cloud, Service Cloud or Salesforce Platform and Other revenue depending on the primary service offering purchased. Commerce Cloud revenue,
resulting from our Demandware acquisition in July 2016, is included in Marketing Cloud. As required under U.S. generally accepted accounting principles (“U.S. GAAP”), we recorded deferred revenue related to acquired contracts from Demandware at fair value. As a result, we did not recognize certain revenues related to these acquired contracts that Demandware would have otherwise recorded as an independent entity. Of the
$933.3 million
subscription and support revenue for Marketing Cloud for the fiscal year 2017, approximately
11 percent
was attributed to our Demandware acquisition. To the extent Demandware contracts are renewed following the acquisition, we will recognize the revenues for the full values of the contracts over the respective contractual periods.
In situations where a customer purchases multiple cloud offerings, such as through an Enterprise License Agreement, we allocate the contract value to each core service offering based on the customer’s estimated product demand plan and the service that was provided at the inception of the contract. We do not update these allocations based on actual product usage during the term of the contract. We have allocated approximately
13 percent
of our total subscription and support revenues for fiscal
2017
and
10 percent
for fiscal
2016
, based on customers’ estimated product demand plans and these allocated amounts are included in the table above.
Additionally, some of our service offerings have similar features and functions. For example, customers may use the Sales Cloud, the Service Cloud or our Salesforce Platform to record account and contact information, which are similar features across these core service offerings. Depending on a customer’s actual and projected business requirements, more than one core service offering may satisfy the customer’s current and future needs. We record revenue based on the individual products ordered by a customer, and 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 core service offering for comparability. Accordingly, comparisons of revenue performance by 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 Cloud is primarily derived from the Americas, with little impact from foreign exchange rate movement.
The revenue growth rates of each of our core service offerings fluctuate from quarter to quarter and over time. While we are a market leader in each core offering, we manage the total balanced product portfolio to deliver solutions to our customers. Accordingly, the revenue result for each cloud service offering is not necessarily indicative of the results to be expected for any subsequent quarter.
Seasonal Nature of Deferred Revenue, Accounts Receivable and Operating Cash Flow
Deferred revenue primarily consists of billings to customers for our subscription service. Over
90 percent
of the value of our billings to customers is for our subscription and support service. We generally invoice our customers in annual cycles. Approximately
80 percent
of all subscription and support invoices were issued with annual terms during fiscal
2017
, which is consistent with fiscal
2016
. Occasionally, we bill customers for their multi-year contract on a single invoice which results in an increase in noncurrent deferred revenue. We typically issue renewal invoices in advance of the renewal service period, and depending on timing, the initial invoice for the subscription and services contract and the subsequent renewal invoice may occur in different quarters. This may result in an increase in deferred revenue and accounts receivable. There is a disproportionate weighting towards 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, related deferred revenue and operating cash flow during the first three quarters of our fiscal year are not necessarily indicative of the billing activity that occurs in the fourth quarter as displayed below (in thousands, except unbilled deferred revenue):
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January 31,
2017
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October 31,
2016
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July 31,
2016
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April 30,
2016
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Fiscal 2017
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Accounts receivable, net
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$
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3,196,643
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$
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1,281,425
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$
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1,323,114
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$
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1,192,965
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Deferred revenue, current and noncurrent
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5,542,802
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3,495,133
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3,823,561
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4,006,914
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Operating cash flow (1)
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706,146
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154,312
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250,678
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1,051,062
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Unbilled deferred revenue (2)
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9.0 bn
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8.6 bn
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8.0 bn
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7.6 bn
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January 31,
2016
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October 31,
2015
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July 31,
2015
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April 30,
2015
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Fiscal 2016
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Accounts receivable, net
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$
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2,496,165
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$
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1,060,726
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$
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1,067,799
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$
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926,381
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Deferred revenue, current and noncurrent
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4,291,553
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2,846,510
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3,034,991
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3,056,820
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Operating cash flow (1)
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470,208
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162,514
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304,278
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735,081
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Unbilled deferred revenue (2)
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7.1 bn
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6.7 bn
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6.2 bn
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6.0 bn
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January 31,
2015
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October 31,
2014
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July 31,
2014
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April 30,
2014
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Fiscal 2015
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Accounts receivable, net
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$
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1,905,506
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$
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794,590
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$
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834,323
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$
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684,155
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Deferred revenue, current and noncurrent
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3,321,449
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2,223,977
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2,352,904
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2,324,615
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Operating cash flow (1)
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336,506
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123,732
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239,078
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482,128
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Unbilled deferred revenue (2)
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5.7 bn
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5.4 bn
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5.0 bn
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4.8 bn
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(1) Operating cash flow represents net cash provided by operating activities for the three months ended in the periods stated above. In the first quarter of fiscal year 2017, we adopted Accounting Standards Update No. 2016-09, “Stock Compensation (Topic 718): Improvements to Employee Shared-Based Payment Accounting” (“ASU 2016-09”), which addresses among other items, updates to the presentation and treatment of excess tax benefits related to stock based compensation on the Statements of Cash Flows. We have adopted changes to the statement of cash flows on a retrospective basis and have accordingly updated the operating cash flow amounts presented above.
(2) Unbilled deferred revenue represents future billings under our non-cancelable subscription agreements that have not been invoiced and, accordingly, are not recorded in deferred revenue.
Unbilled Deferred Revenue, an Operational Measure
The U.S. GAAP deferred revenue balance on our consolidated balance sheet does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. Unbilled deferred revenue is an operational measure that represents future billings under our subscription agreements that have not been invoiced and, accordingly, are not recorded in deferred revenue. Unbilled deferred revenue amounts by quarter are reflected in the table above. Our typical contract length is between 12 and 36 months. We expect that the amount of unbilled deferred revenue will change from quarter to quarter for several reasons, including the specific timing, duration and size of large customer subscription agreements, varying billing cycles of subscription agreements, the specific timing of customer renewals, foreign currency fluctuations, the timing of when unbilled deferred revenue is to be recognized as revenue, and changes in customer financial circumstances. For multi-year subscription agreements billed annually, the associated unbilled deferred revenue is typically high at the beginning of the contract period, zero just prior to renewal, and increases if the agreement is renewed. Low unbilled deferred revenue attributable to a particular subscription agreement is often associated with an impending renewal and may not be an indicator of the likelihood of renewal or future revenue from such customer. Accordingly, we expect that the amount of aggregate unbilled deferred revenue will change from year-to-year depending in part upon the number and dollar amount of subscription agreements at particular stages in their renewal cycle. Such fluctuations are not a reliable indicator of future revenues. Unbilled deferred revenue does not include minimum revenue commitments from indirect sales channels, as we recognize revenue, deferred revenue, and any unbilled deferred revenue upon sell-through to an end user customer. Unbilled deferred revenue also does not include any estimates for overage billings above a customer's minimum commitment.
Cost of Revenues and Operating Expenses
Cost of Revenues.
Cost of subscription and support revenues primarily consists of expenses related to delivering our service and providing support, the costs of data center capacity, depreciation or operating lease expense associated with computer equipment and software, allocated overhead, amortization expense associated with capitalized software related to our services and acquired developed technologies and certain fees paid to various third parties for the use of their technology, services and data. We allocate overhead such as information technology infrastructure, rent and occupancy charges based on headcount. Employee benefit costs and taxes are allocated based upon a percentage of total compensation expense. As such, general overhead expenses are reflected in each cost of revenue and operating expense category. Cost of professional services and other revenues consists primarily of employee-related costs associated with these services, including stock-based expenses, the cost of subcontractors, certain third party fees and allocated overhead. The cost of providing professional services is significantly 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 we plan to increase the capacity that we are able to offer globally through data centers and third party infrastructure providers. As we acquire new businesses and technologies, the amortization expense associated with this activity will be included in cost of revenues. Additionally, as we enter into new contracts with third parties for the use of their technology, services or data, or as our sales volume grows, the fees paid to use such technology or services may increase. The timing of these additional expenses will affect our cost of revenues, both in terms of absolute dollars and as a percentage of revenues, in the affected periods.
Research and Development
. Research and development expenses consist primarily of salaries and related expenses, including stock-based expenses, the costs of our development and test data center and allocated overhead. We continue to focus our research and development efforts on adding new features and services, integrating acquired technologies, increasing the functionality and security and enhancing the ease of use of our enterprise cloud computing services. Our proprietary, scalable and secure multi-tenant architecture enables us to provide all of our customers with a service based on a single version of our application. As a result, we do not have to maintain multiple versions, which enables us to have relatively lower research and development expenses as compared to traditional enterprise software companies.
We expect that in the future, research and development expenses will increase in absolute dollars and may increase as a percentage of total revenues as we invest in building the necessary employee and system infrastructure required to support the development of new, and improve existing, technologies and the integration of acquired businesses and technologies.
Marketing and Sales.
Marketing and sales expenses are our largest cost and consist primarily of salaries and related expenses, including stock-based expenses, for our sales and marketing staff, including commissions, payments to partners, marketing programs and allocated overhead. Marketing programs consist of advertising, events, corporate communications, brand building and product marketing activities.
We plan to continue to invest in marketing and sales by expanding our domestic and international selling and marketing activities, building brand awareness, attracting new customers and sponsoring additional marketing events. The timing of these marketing events, such as our annual and largest event, Dreamforce, will affect our marketing costs in a particular quarter. We expect that in the future, marketing and sales expenses will increase in absolute dollars and continue to be our largest cost.
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 statement of operations based on their fair values and vesting periods. These charges have been significant in the past and we expect that they will increase as our stock price increases, as we acquire more companies, as we hire more employees and seek to retain existing employees.
During fiscal
2017
, we recognized stock-based expense of
$820.4 million
. As of
January 31, 2017
, the aggregate stock compensation remaining to be amortized to costs and expenses was
$2.6 billion
. We expect this stock compensation balance to be amortized as follows:
$980.5 million
during fiscal
2018
;
$762.9 million
during fiscal
2019
;
$540.5 million
during fiscal
2020
;
$249.7 million
during fiscal
2021
;
$17.4 million
during fiscal
2022
;
$17.2 million
during fiscal
2023
;
$8.0 million
during fiscal
2024
. The expected amortization reflects only outstanding stock awards as of
January 31, 2017
and assumes no forfeiture activity. We expect to continue to issue stock-based awards to our employees in future periods.
Amortization of Purchased Intangibles from Business Combinations
. Our cost of revenues and operating expenses include amortization of acquisition-related intangible assets, such as the amortization of the cost associated with an acquired company’s research and development efforts, trade names, customer lists and customer relationships. We expect this expense to fluctuate as we acquire more companies.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that of our significant accounting policies, which are described in Note 1 “Summary of Business and Significant Accounting Policies” to our consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Revenue Recognition
. We derive our revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing our enterprise cloud computing services and from customers purchasing additional support beyond the standard support that is included in the basic subscription fee; and (2) related professional services such as process mapping, project management, implementation services and other revenue. “Other revenue” consists primarily of training fees.
We commence revenue recognition when all of the following conditions are satisfied:
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•
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there is persuasive evidence of an arrangement;
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•
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the service has been or is being provided to the customer;
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•
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the collection of the fees is reasonably assured; and
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the amount of fees to be paid by the customer is fixed or determinable.
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Our subscription service arrangements are non-cancelable and do not contain refund-type provisions.
Subscription and Support Revenues
Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement date of each contract, which is the date our service is made available to customers. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
Professional Services and Other Revenues
Our professional services contracts are either on a time and materials, fixed-fee or subscription basis. As discussed below, these revenues are recognized as the services are rendered for time and materials contracts, and when the milestones are achieved and accepted by the customer or on a proportional performance basis for fixed price contracts and ratably over the contract term for subscription professional services. The milestone method for revenue recognition is used when there is substantive uncertainty at the date the contract is entered into whether the milestone will be achieved. Training revenues are recognized after the services are performed.
Multiple Deliverable Arrangements
We enter into arrangements with multiple deliverables that generally include multiple subscriptions, premium support, and professional services. If the deliverables have standalone value at contract inception, we account for each deliverable separately. Subscription services have standalone value as such services are often sold separately. In determining whether professional services have standalone value, we consider the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the subscription service start date, and the contractual dependence of the subscription service on the customer’s satisfaction with the professional services work. To date, we have concluded that all of the professional services included in multiple deliverable arrangements executed have standalone value.
Multiple deliverables included in an arrangement are separated into different units of accounting and the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. We determine the relative selling price for a deliverable based on its vendor-specific objective evidence of selling price (“VSOE”), if available, or our best estimate of selling price (“BESP”), if VSOE is not available. We have determined that third-party evidence (“TPE”) is not a practical alternative due to differences in our service offerings compared to other parties and the availability of relevant third-party pricing information. The amount of revenue allocated to delivered items is limited by contingent revenue, if any.
For certain professional services, we have established VSOE as a consistent number of standalone sales of this deliverable have been priced within a reasonably narrow range. We have not established VSOE for our subscription services due to lack of pricing consistency, the introduction of new services and other factors. Accordingly, we use our BESP to determine the relative selling price.
We determined BESP by considering our overall pricing objectives and market conditions. Significant pricing practices taken into consideration include our discounting practices, the size and volume of our transactions, the customer demographic, the geographic area where our services are sold, our price lists, our go-to-market strategy, historical standalone sales and contract prices. The determination of BESP is made through consultation with and approval by management, taking into consideration the go-to-market strategy. As our go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes in relative selling prices, including both VSOE and BESP.
Deferred Revenue.
The deferred revenue balance does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from subscription services described above and is recognized as the revenue recognition criteria are met. We generally invoice customers in annual installments. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, dollar size and new business linearity within the quarter.
Deferred revenue that will be recognized during the succeeding twelve month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent.
Deferred Commissions.
We defer commission payments to our direct sales force. The commissions are deferred and amortized to sales expense over the non-cancelable terms of the related subscription contracts with our customers, which are typically 12 to 36 months. The commission payments, which are paid in full the month after the customer’s service commences, are a direct and incremental cost of the revenue arrangements. The deferred commission amounts are recoverable through the future revenue streams under the non-cancelable customer contracts. We believe this is the preferable method of accounting as the commission charges are so closely related to the revenue from the non-cancelable customer contracts that they should be recorded as an asset and charged to expense over the same period that the subscription revenue is recognized.
During fiscal
2017
, we deferred
$462.0 million
of commission expenditures and we amortized
$371.5 million
to sales expense. During fiscal
2016
, we deferred
$380.0 million
of commission expenditures and we amortized
$319.1 million
to sales expense. Deferred commissions on our consolidated balance sheets totaled
$539.6 million
at
January 31, 2017
and
$449.1 million
at
January 31, 2016
.
Capitalized Internal-Use Software Costs
. We are required to follow the guidance of Accounting Standards Codification 350 (“ASC 350”), Intangibles- Goodwill and Other in accounting for the cost of computer software developed for internal-use and the accounting for web-based product development costs. ASC 350 requires companies to capitalize qualifying computer software costs, which are incurred during the application development stage, and amortize these costs on a straight-line basis over the estimated useful life of the respective asset. We deliver our enterprise cloud computing solutions as a service via all the major Internet browsers and on leading major mobile device operating systems. As a result of this software as a service delivery model, we believe we have larger capitalized costs as compared to traditional enterprise software companies as they are required to use a different accounting standard.
Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life. We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Stock-Based Expense.
We recognize stock-based expenses related to stock options and restricted stock awards on a straight-line basis, net of estimated forfeitures, over the requisite service period of the awards, which is generally the vesting term of
four years
. We recognize stock-based expenses related to shares issued pursuant to our 2004 Employee Stock Purchase Plan (“ESPP”) on a straight-line basis over the offering period, which is
12 months
.
Stock-based expenses related to performance share grants are measured based on grant date fair value and expensed on a straight-line basis over the service period of the awards, which is generally the vesting term of three years.
We, at times, grant unvested restricted shares to employee stockholders of certain acquired companies in lieu of cash consideration. These awards are generally subject to continued post-acquisition employment, and as a result, we have accounted for them as post-acquisition stock-based expense. We recognize stock-based expenses equal to the grant date fair value of the restricted stock awards on a straight-line basis over the requisite service period of the awards.
Business Combinations.
Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired and liabilities assumed and pre-acquisition contingencies. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date.
Examples of critical estimates in valuing certain of the intangible assets and goodwill we have acquired include but are not limited to:
|
|
•
|
future expected cash flows from subscription and support contracts, professional services contracts, other customer contracts and acquired developed technologies and patents;
|
|
|
•
|
the acquired company’s trade name, trademark and existing customer relationship, as well as assumptions about the period of time the acquired trade name and trademark will continue to be used in our offerings;
|
|
|
•
|
uncertain tax positions and tax related valuation allowances assumed; and
|
Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
In the event that we acquire an entity in which we previously held a strategic investment, the difference between the fair value of the shares as of the date of the acquisition and the carrying value of the strategic investment is recorded as a gain or loss and disclosed separately within the statements of operations.
Goodwill and Intangibles.
We make estimates, assumptions, and judgments when valuing goodwill and other intangible assets in connection with the initial purchase price allocation of an acquired entity, as well as when evaluating the recoverability of our goodwill and other intangible assets on an ongoing basis. These estimates are based upon a number of factors, including historical experience, market conditions, and information obtained from the management of acquired companies. Critical estimates in valuing certain intangible assets include, but are not limited to, historical and projected
attrition rates, discount rates, anticipated growth in revenue from the acquired customers and acquired technology, and the expected use of the acquired assets. These factors are also considered in determining the useful life of acquired intangible assets. The amounts and useful lives assigned to identified intangible assets impact the amount and timing of future amortization expense.
Income Taxes.
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date.
Our tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. We recognize the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than 50 percent likely to be realized upon settlement with the taxing authority. We recognize interest accrued and penalties related to unrecognized tax benefits in our income tax provision.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the applicable tax law. We regularly review the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. Our judgment regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute the business plans and/or tax planning strategies. Should there be a change in the ability to recover deferred tax assets, our income tax provision would increase or decrease in the period in which the assessment is changed.
Strategic Investments.
We hold strategic investments in marketable equity securities and non-marketable debt and equity securities in which we do not have a controlling interest or significant influence, as defined in Accounting Standards Codification 323 (“ASC 323”), Investments - Equity Method and Joint Ventures. Marketable equity securities are measured using quoted prices in their respective active markets and non-marketable debt and equity securities are recorded at cost. If, based on the terms of our ownership of these marketable and non-marketable securities, we determine that we exercise significant influence on the entity to which these marketable and non-marketable securities relate, we apply the equity method of accounting for such investments.
We determine the fair value of our marketable equity securities and non-marketable debt and equity securities quarterly for impairment and disclosure purposes; however, the non-marketable debt and equity securities are recorded at fair value only if an impairment is recognized. The measurement of fair value requires significant judgment and includes a qualitative and quantitative analysis of events and circumstances that impact the fair value of the investment. Our assessment of the severity and duration of the impairment and qualitative and quantitative analysis includes the investee’s financial metrics, the investee’s products and technologies meeting or exceeding predefined milestones, market acceptance of the product or technology, other competitive products or technology in the market, general market conditions, management and governance structure of the investee, investee’s liquidity, debt ratios and the rate at which the investee is using its cash, and investee’s receipt of additional funding at a lower valuation. In determining the estimated fair value of our strategic investments in privately held companies, we utilize the most recent data available to us. Valuations of privately held companies are inherently complex due to the lack of readily available market data.
If the fair value of an investment is below our cost, we determine whether the investment is other-than-temporarily impaired based on our qualitative and quantitative analysis, which includes the severity and duration of the impairment. If the investment is considered to be other-than-temporarily impaired, we record the investment at fair value by recognizing an impairment through the income statement and establishing a new cost basis for the investment.
Results of Operations
The following tables set forth selected data for each of the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
As a % of Total Revenues
|
|
2016
|
|
As a % of Total Revenues
|
|
2015
|
|
As a % of Total Revenues
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and support
|
|
$
|
7,756,205
|
|
|
92%
|
|
$
|
6,205,599
|
|
|
93%
|
|
$
|
5,013,764
|
|
|
93%
|
Professional services and other
|
|
635,779
|
|
|
8
|
|
461,617
|
|
|
7
|
|
359,822
|
|
|
7
|
Total revenues
|
|
8,391,984
|
|
|
100
|
|
6,667,216
|
|
|
100
|
|
5,373,586
|
|
|
100
|
Cost of revenues (1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and support
|
|
1,556,353
|
|
|
19
|
|
1,188,967
|
|
|
18
|
|
924,638
|
|
|
17
|
Professional services and other
|
|
677,686
|
|
|
8
|
|
465,581
|
|
|
7
|
|
364,632
|
|
|
7
|
Total cost of revenues
|
|
2,234,039
|
|
|
27
|
|
1,654,548
|
|
|
25
|
|
1,289,270
|
|
|
24
|
Gross profit
|
|
6,157,945
|
|
|
73
|
|
5,012,668
|
|
|
75
|
|
4,084,316
|
|
|
76
|
Operating expenses (1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
1,208,127
|
|
|
14
|
|
946,300
|
|
|
14
|
|
792,917
|
|
|
15
|
Marketing and sales
|
|
3,918,027
|
|
|
47
|
|
3,239,824
|
|
|
49
|
|
2,757,096
|
|
|
51
|
General and administrative
|
|
967,563
|
|
|
11
|
|
748,238
|
|
|
11
|
|
679,936
|
|
|
13
|
Operating lease termination resulting from purchase of 50 Fremont
|
|
0
|
|
|
0
|
|
(36,617
|
)
|
|
(1)
|
|
0
|
|
|
0
|
Total operating expenses
|
|
6,093,717
|
|
|
72
|
|
4,897,745
|
|
|
73
|
|
4,229,949
|
|
|
79
|
Income (loss) from operations
|
|
64,228
|
|
|
1
|
|
114,923
|
|
|
2
|
|
(145,633
|
)
|
|
(3)
|
Investment income
|
|
27,374
|
|
|
0
|
|
15,341
|
|
|
0
|
|
10,038
|
|
|
0
|
Interest expense
|
|
(88,988
|
)
|
|
(1)
|
|
(72,485
|
)
|
|
(1)
|
|
(73,237
|
)
|
|
(1)
|
Other income (expense) (1)
|
|
9,072
|
|
|
0
|
|
(15,292
|
)
|
|
0
|
|
(19,878
|
)
|
|
0
|
Gain on sales of land and building improvements
|
|
0
|
|
|
0
|
|
21,792
|
|
|
0
|
|
15,625
|
|
|
0
|
Gains from acquisitions of strategic investments
|
|
13,697
|
|
|
0
|
|
0
|
|
|
0
|
|
0
|
|
|
0
|
Income (loss) before benefit from (provision for) income taxes
|
|
25,383
|
|
|
0
|
|
64,279
|
|
|
1
|
|
(213,085
|
)
|
|
(4)
|
Benefit from (provision for) income taxes (3)
|
|
154,249
|
|
|
2
|
|
(111,705
|
)
|
|
(2)
|
|
(49,603
|
)
|
|
(1)
|
Net income (loss)
|
|
$
|
179,632
|
|
|
2%
|
|
$
|
(47,426
|
)
|
|
(1)%
|
|
$
|
(262,688
|
)
|
|
(5)%
|
(1) Cost of revenues and marketing and sales expenses include the following amounts related to amortization of purchased intangibles from business combinations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
As a % of Total Revenues
|
|
2016
|
|
As a % of Total Revenues
|
|
2015
|
|
As a % of Total Revenues
|
Cost of revenues
|
|
$
|
127,676
|
|
|
2%
|
|
$
|
80,918
|
|
|
1%
|
|
$
|
90,300
|
|
|
2%
|
Marketing and sales
|
|
97,601
|
|
|
1
|
|
77,152
|
|
|
1
|
|
64,673
|
|
|
1
|
Other non-operating expense
|
|
2,491
|
|
|
0
|
|
3,636
|
|
|
0
|
|
0
|
|
|
0
|
(2) Cost of revenues and operating expenses include the following amounts related to stock-based expenses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
As a % of Total Revenues
|
|
2016
|
|
As a % of Total Revenues
|
|
2015
|
|
As a % of Total Revenues
|
Cost of revenues
|
|
$
|
107,457
|
|
|
1%
|
|
$
|
69,443
|
|
|
1%
|
|
$
|
53,812
|
|
|
1%
|
Research and development
|
|
187,487
|
|
|
2
|
|
129,434
|
|
|
2
|
|
121,193
|
|
|
2
|
Marketing and sales
|
|
388,937
|
|
|
5
|
|
289,152
|
|
|
4
|
|
286,410
|
|
|
5
|
General and administrative
|
|
136,486
|
|
|
2
|
|
105,599
|
|
|
2
|
|
103,350
|
|
|
2
|
(3) Amounts include a
$210.3 million
tax benefit recorded during fiscal 2017 as a result of the partial release of the valuation allowance related to the Demandware, Inc. acquisition. See Note 11 “Income Taxes.”
|
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
2017
|
|
2016
|
Selected Balance Sheet Data (in thousands):
|
|
|
|
|
Cash, cash equivalents and marketable securities
|
|
$
|
2,208,887
|
|
|
$
|
2,725,377
|
|
Deferred revenue, current and noncurrent
|
|
5,542,802
|
|
|
4,291,553
|
|
Unbilled deferred revenue (an operational measure)
|
|
9,000,000
|
|
|
7,100,000
|
|
Principal due on our outstanding debt obligations
|
|
2,050,000
|
|
|
1,350,000
|
|
Unbilled deferred revenue was approximately
$9.0 billion
as of
January 31, 2017
and
$7.1 billion
as of
January 31, 2016
. Unbilled deferred revenue represents future billings under our non-cancelable subscription agreements that have not been invoiced and, accordingly, are not recorded in deferred revenue. The
January 31, 2017
balance includes approximately
$450.0 million
related to Demandware, which we acquired in July 2016.
Fiscal Years Ended
January 31, 2017
and
2016
Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
|
(in thousands)
|
2017
|
|
2016
|
|
Dollars
|
|
Percent
|
Subscription and support
|
$
|
7,756,205
|
|
|
$
|
6,205,599
|
|
|
$
|
1,550,606
|
|
|
25%
|
Professional services and other
|
635,779
|
|
|
461,617
|
|
|
174,162
|
|
|
38%
|
Total revenues
|
$
|
8,391,984
|
|
|
$
|
6,667,216
|
|
|
$
|
1,724,768
|
|
|
26%
|
Total revenues were
$8.4 billion
for fiscal
2017
, compared to
$6.7 billion
during the same period a year ago, an
increase
of
$1.7 billion
, or
26 percent
. Subscription and support revenues were
$7.8 billion
, or
92 percent
of total revenues, for fiscal
2017
, compared to
$6.2 billion
, or
93 percent
of total revenues, during the same period a year ago, an
increase
of
$1.6 billion
, or
25 percent
. The
increase
in subscription and support revenues in fiscal
2017
was primarily caused by volume-driven increases from new business, which includes new customers, upgrades and additional subscriptions from existing customers. Revenue resulting from our July 2016 acquisition of Demandware contributed
$120.4 million
to total revenues for fiscal
2017
. Revenues from other acquired businesses in fiscal 2017 were not material. We 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. Our attrition rate also played a role in the increase in subscription and support revenues. Changes in our pricing have not been a significant driver of revenue growth for the periods presented. Professional services and other revenues were
$635.8 million
, or
eight percent
of total revenues, for fiscal
2017
, compared to
$461.6 million
, or
seven percent
of total revenues, for the same period a year ago, an
increase
of
$174.2 million
, or
38 percent
. The increase is primarily due to the growth in our subscription professional services.
Revenues by geography were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Americas
|
|
$
|
6,224,971
|
|
|
$
|
4,910,745
|
|
|
$
|
3,868,329
|
|
Europe
|
|
1,373,547
|
|
|
1,162,808
|
|
|
984,919
|
|
Asia Pacific
|
|
793,466
|
|
|
593,663
|
|
|
520,338
|
|
|
|
$
|
8,391,984
|
|
|
$
|
6,667,216
|
|
|
$
|
5,373,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Revenues by geography:
|
|
|
|
|
|
|
Americas
|
|
74
|
%
|
|
74
|
%
|
|
72
|
%
|
Europe
|
|
16
|
|
|
17
|
|
|
18
|
|
Asia Pacific
|
|
10
|
|
|
9
|
|
|
10
|
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Revenues in Europe and Asia Pacific accounted for
$2.2 billion
, or
26 percent
of total revenues, for fiscal
2017
, compared to
$1.8 billion
, or
26 percent
of total revenues, during the same period a year ago, an
increase
of
$410.5 million
, or
23 percent
. The
increase
in revenues on a total dollar basis outside of the Americas was the result of the increasing acceptance of our service, our focus on marketing our services internationally, additional resources and consistent attrition rates as a result of the reasons stated above. Revenues outside of the Americas increased on a total dollar basis in fiscal
2017
despite an overall strengthening of the U.S. dollar, which reduced aggregate international revenues by
$103.8 million
compared to fiscal 2016.
Americas revenue attributed to the United States was approximately
96 percent
,
95 percent
and
94 percent
for fiscal
2017
,
2016
and
2015
, respectively. No other country represented more than ten percent of total revenue during fiscal
2017
,
2016
or
2015
.
Cost of Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
Dollars
|
(in thousands)
|
|
2017
|
|
2016
|
|
Subscription and support
|
|
$
|
1,556,353
|
|
|
$
|
1,188,967
|
|
|
$
|
367,386
|
|
Professional services and other
|
|
677,686
|
|
|
465,581
|
|
|
212,105
|
|
Total cost of revenues
|
|
$
|
2,234,039
|
|
|
$
|
1,654,548
|
|
|
$
|
579,491
|
|
Percent of total revenues
|
|
27
|
%
|
|
25
|
%
|
|
|
Cost of revenues was
$2.2 billion
, or
27 percent
of total revenues, for fiscal
2017
, compared to
$1.7 billion
, or
25 percent
of total revenues, during the same period a year ago, an
increase
of
$579.5 million
. The
increase
in absolute dollars was primarily due to an increase of
$240.9 million
in employee-related costs, an increase of
$38.0 million
in stock-based expenses, an increase of
$162.4 million
in service delivery costs, primarily due to our efforts to increase data center capacity, an increase of
$23.5 million
in professional and outside services, an increase of amortization of purchased intangibles of
$46.8 million
, an increase in depreciation of equipment of
$16.2 million
and an increase in allocated overhead of
$35.9 million
. We have increased our headcount by
34 percent
since
January 31, 2016
to meet the higher demand for services from our customers and as a result of our fiscal 2017 acquisitions. We intend to continue to invest additional resources in our enterprise cloud computing services and data center capacity. Additionally, the amortization of purchased intangible assets may increase as we acquire additional businesses and technologies. 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 exceeded the related revenue during fiscal
2017
and fiscal
2016
by
$41.9 million
and
$4.0 million
, respectively. The increase is primarily due to the growth in our headcount as well as the increase in employee costs for our subscription professional services employees. We expect the cost of professional services to continue to exceed revenue from professional services in future fiscal years. We believe that this investment in professional services facilitates the adoption of our service offerings.
Operating Expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
Dollars
|
(in thousands)
|
|
2017
|
|
2016
|
|
Research and development
|
|
$
|
1,208,127
|
|
|
$
|
946,300
|
|
|
$
|
261,827
|
|
Marketing and sales
|
|
3,918,027
|
|
|
3,239,824
|
|
|
678,203
|
|
General and administrative
|
|
967,563
|
|
|
748,238
|
|
|
219,325
|
|
Operating lease termination resulting from purchase of 50 Fremont
|
|
0
|
|
|
(36,617
|
)
|
|
36,617
|
|
Total operating expenses
|
|
6,093,717
|
|
|
4,897,745
|
|
|
1,195,972
|
|
Percent of total revenues
|
|
72
|
%
|
|
73
|
%
|
|
|
Research and development expenses were
$1.2 billion
, or
14 percent
of total revenues, for fiscal
2017
, compared to
$946.3 million
, or
14 percent
of total revenues, during the same period a year ago, an
increase
of
$261.8 million
. The increase in absolute dollars was primarily due to an increase of
$173.2 million
in employee-related costs, an increase of
$58.1 million
in stock-based expense, an increase of
$28.1 million
in development and test data center expense, and an increase in allocated overhead. We increased our research and development headcount by
35 percent
since
January 31, 2016
in order to improve and extend our service offerings and develop new technologies as a result of 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
$3.9 billion
, or
47 percent
of total revenues, for fiscal
2017
, compared to
$3.2 billion
, or
49 percent
of total revenues, during the same period a year ago, an
increase
of
$678.2 million
. The
increase
in absolute dollars was primarily due to increases of
$484.3 million
in employee-related costs, including amortization of deferred commissions,
$34.7 million
in advertising expense,
$20.4 million
in amortization of purchased intangibles,
$99.8 million
stock-based expense and
$36.5 million
in allocated overhead. Our marketing and sales headcount increased by
24
percent since
January 31, 2016
. The increase in headcount was also attributable to hiring additional sales personnel to focus on adding new customers and increasing penetration within our existing customer base.
General and administrative expenses were
$967.6 million
, or
11 percent
of total revenues, for fiscal
2017
, compared to
$748.2 million
, or
11 percent
of total revenues, during the same period a year ago, an
increase
of
$219.3 million
. The increase was primarily due to an increase of
$175.2 million
in employee-related costs, an increase of
$30.9 million
in stock-based expense and an increase in professional and outside services. Our general and administrative headcount increased by
22
percent since
January 31, 2016
as we added personnel to support our growth.
In connection with the purchase of 50 Fremont, we recognized a net non-cash gain in fiscal 2016 totaling approximately
$36.6 million
on the termination of the lease signed in January 2012.
Other income and expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
Dollars
|
(in thousands)
|
|
2017
|
|
2016
|
|
Investment income
|
|
$
|
27,374
|
|
|
$
|
15,341
|
|
|
$
|
12,033
|
|
Interest expense
|
|
(88,988
|
)
|
|
(72,485
|
)
|
|
(16,503
|
)
|
Other income (expense)
|
|
9,072
|
|
|
(15,292
|
)
|
|
24,364
|
|
Gain on sales of land and building improvements
|
|
0
|
|
|
21,792
|
|
|
(21,792
|
)
|
Gains from acquisitions of strategic investments
|
|
13,697
|
|
|
0
|
|
|
13,697
|
|
Investment income consists of income on our cash and marketable securities balances. Investment income was
$27.4 million
for fiscal
2017
and was
$15.3 million
during the same period a year ago. The increase was due to both realized gains resulting from the sales of marketable securities as well as higher interest income across our portfolio.
Interest expense consists of interest on our convertible senior notes, capital leases, financing obligation related to 350 Mission, the loan assumed on 50 Fremont, revolving credit facility and the
$500.0 million
term loan that was entered into in connection with our acquisition of Demandware. Interest expense was
$89.0 million
for fiscal
2017
and was
$72.5 million
during the same period a year ago. The
increase
was primarily due to the term loan in fiscal 2017 associated with the Demandware purchase and our outstanding balance in our revolving facility in in fiscal 2017.
Other income (expense) primarily consists of non-operating transactions such as strategic investments fair market value adjustments, gains and losses from foreign exchange rate fluctuations and real estate transactions.
Gain on sales of land and building improvements consists of the gain the company recognized from sales of undeveloped real estate and a portion of associated perpetual parking rights in San Francisco, California. Gain on sales of land and building improvements, net of closing costs, was
$21.8 million
during fiscal 2016.
Gains from acquisitions of strategic investments represents gains on sales of strategic investments when we acquire an entity in which we previously held a strategic investment. The difference between the fair value of the shares as of the date of the acquisition and the carrying value of the strategic investment is recorded as a gain or loss and disclosed separately within the statements of operations.
Benefit from (provision for) income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
Dollars
|
(in thousands)
|
|
2017
|
|
2016
|
|
Benefit from (provision for) income taxes
|
|
$
|
154,249
|
|
|
$
|
(111,705
|
)
|
|
$
|
265,954
|
|
Effective tax rate
|
|
(608
|
)%
|
|
174
|
%
|
|
|
We reported a tax
benefit
of
$154.2 million
on a pretax income of
$25.4 million
, which resulted in a negative effective tax rate of
608 percent
for fiscal
2017
. The most significant component of this tax amount was the tax benefit of $210.3 million from a partial release of the valuation allowance in connection with the acquisition of Demandware. The net deferred tax liability from the acquisition of Demandware provided a source of additional income to support the realizability of our preexisting deferred tax assets and as a result, we released a portion of our tax valuation allowance. The tax benefit associated with the release of the valuation allowance was partially offset by income taxes in profitable jurisdictions outside the United States. Additionally, as a result of early adopting Accounting Standards Update No. 2016-09, “Stock Compensation (Topic 718): Improvements to Employee Shared-Based Payment Accounting” (“ASU 2016-09”) and our valuation allowance position, we did not record significant U.S. current income tax expense.
We recorded a tax provision of
$111.7 million
with a pretax income of
$64.3 million
, which resulted in an effective tax rate of
174 percent
for fiscal
2016
. We had a tax provision in profitable jurisdictions outside the United States and current tax
expense in the United States. We had U.S. current tax expense as a result of taxable income before considering certain excess
tax benefits from stock options and vesting of restricted stock.
We regularly assess the realizability of our deferred tax assets and establish a valuation allowance if it is more-likely-than-not that some or all of our deferred tax assets will not be realized. We evaluate and weigh all available positive and negative evidence such as historic results, future reversals of existing deferred tax liabilities, projected future taxable income, as well as prudent and feasible tax-planning strategies. Generally, more weight is given to objectively verifiable evidence, such as the cumulative loss in recent years. We will adjust our valuation allowance in the event sufficient positive evidence overcomes the negative evidence of losses in recent years, for example, if the trend in increasing taxable income continues. Our valuation allowance could contribute to the volatility of our effective tax rate and is difficult to forecast in future periods.
Fiscal Years Ended January 31, 2016 and 2015
Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
|
(in thousands)
|
2016
|
|
2015
|
|
Dollars
|
|
Percent
|
Subscription and support
|
$
|
6,205,599
|
|
|
$
|
5,013,764
|
|
|
$
|
1,191,835
|
|
|
24%
|
Professional services and other
|
461,617
|
|
|
359,822
|
|
|
101,795
|
|
|
28%
|
Total revenues
|
$
|
6,667,216
|
|
|
$
|
5,373,586
|
|
|
$
|
1,293,630
|
|
|
24%
|
Total revenues were $6.7 billion for fiscal 2016, compared to $5.4 billion for fiscal 2015, an increase of $1.3 billion, or 24 percent. Subscription and support revenues were $6.2 billion, or 93 percent of total revenues, for fiscal 2016, compared to $5.0 billion, or 93 percent of total revenues for fiscal 2015, an increase of $1.2 billion, or 24 percent. The increase in subscription and support revenues in fiscal 2016 was primarily attributable to volume-driven increases from new business, which includes new customers, upgrades and additional subscriptions from existing customers. Our attrition rate, which was favorable compared to the prior year, also played a role in the increase in subscription and support revenues. Changes in the net price per user per month were not a significant driver of revenue growth for the periods presented. Professional services and other revenues were $461.6 million, or seven percent of total revenues, for fiscal 2016, compared to $359.8 million, or seven percent of total revenues, for the same period a year ago, an increase of $101.8 million, or 28 percent.
Revenues in Europe and Asia Pacific accounted for $1.8 billion, or 26 percent of total revenues, for fiscal 2016, compared to $1.5 billion, or 28 percent of total revenues, during the same period a year ago, an increase of $251.2 million, or 17 percent. The increase in revenues on a total dollar basis outside of the Americas was the result of the increasing acceptance of our service, our focus on marketing our services internationally, additional resources and consistent attrition rates as a result of the reasons stated above. Revenues outside of the Americas increased on a total dollar basis in fiscal 2016 despite an overall strengthening of the U.S. dollar, which reduced aggregate international revenues by $170.5 million compared to fiscal 2015.
Cost of Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
Dollars
|
(in thousands)
|
|
2016
|
|
2015
|
|
Subscription and support
|
|
$
|
1,188,967
|
|
|
$
|
924,638
|
|
|
$
|
264,329
|
|
Professional services and other
|
|
465,581
|
|
|
364,632
|
|
|
100,949
|
|
Total cost of revenues
|
|
$
|
1,654,548
|
|
|
$
|
1,289,270
|
|
|
$
|
365,278
|
|
Percent of total revenues
|
|
25
|
%
|
|
24
|
%
|
|
|
Cost of revenues was $1.7 billion, or 25 percent of total revenues, for fiscal 2016, compared to $1.3 billion, or 24 percent of total revenues, for fiscal 2015, an increase of $365.3 million. The increase in absolute dollars was primarily due to an increase of $127.9 million in employee-related costs, an increase of $15.6 million in stock-based expenses, an increase of $137.2 million in service delivery costs, primarily due to our efforts to increase data center capacity, an increase of $40.6 million in professional and outside services, an increase in depreciation of equipment and an increase in allocated overhead, offset by a decrease of $9.4 million in amortization of purchased intangibles. Our headcount increased by 34 percent in fiscal 2016 to meet the higher demand for services from our customers.
The cost of professional services and other revenues exceeded the related revenue during fiscal 2016 by $4.0 million as compared to $4.8 million for fiscal 2015.
Operating Expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
Dollars
|
(in thousands)
|
|
2016
|
|
2015
|
|
Research and development
|
|
$
|
946,300
|
|
|
$
|
792,917
|
|
|
$
|
153,383
|
|
Marketing and sales
|
|
3,239,824
|
|
|
2,757,096
|
|
|
482,728
|
|
General and administrative
|
|
748,238
|
|
|
679,936
|
|
|
68,302
|
|
Operating lease termination resulting from purchase of 50 Fremont
|
|
(36,617
|
)
|
|
0
|
|
|
(36,617
|
)
|
Total operating expenses
|
|
$
|
4,897,745
|
|
|
$
|
4,229,949
|
|
|
$
|
667,796
|
|
Percent of total revenues
|
|
73
|
%
|
|
79
|
%
|
|
|
Research and development expenses were $946.3 million, or 14 percent of total revenues, for fiscal 2016, compared to $792.9 million, or 15 percent of total revenues, for fiscal 2015, an increase of $153.4 million. The increase in absolute dollars was primarily due to an increase of $114.0 million in employee-related costs, an increase of $8.2 million in stock-based expense, an increase of $18.2 million in development and test data center expense, and an increase in allocated overhead. Our research and development headcount increased by 16 percent in fiscal 2016 in order to improve and extend our service offerings and develop new technologies.
Marketing and sales expenses were $3.2 billion, or 49 percent of total revenues, for fiscal 2016, compared to $2.8 billion, or 51 percent of total revenues, for fiscal 2015, an increase of $482.7 million. The increase in absolute dollars was primarily due to increases of $304.7 million in employee-related costs, including amortization of deferred commissions, $112.0 million in advertising expense, $12.5 million in amortization of purchased intangibles, $2.7 million stock-based expense and $40.4 million in allocated overhead. Our marketing and sales headcount increased by 21 percent in fiscal 2016. The increase in headcount was primarily attributable to hiring additional sales personnel to focus on adding new customers and increasing penetration within our existing customer base.
General and administrative expenses were $748.2 million, or 11 percent of total revenues, for fiscal 2016, compared to $679.9 million, or 13 percent of total revenues, for fiscal 2015, an increase of $68.3 million. The increase was primarily due to an increase of $39.0 million in employee-related costs, an increase of $8.1 million in bad debt expense, an increase of $2.2 million in stock-based expense and an increase in professional and outside services. Our general and administrative headcount increased by 16 percent in fiscal 2016 as we added personnel to support our growth.
In connection with the purchase of 50 Fremont, we recognized in fiscal 2016 a net non-cash gain totaling approximately $36.6 million on the termination of the lease signed in January 2012.
Other income and expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
Dollars
|
(in thousands)
|
|
2016
|
|
2015
|
|
Investment income
|
|
$
|
15,341
|
|
|
$
|
10,038
|
|
|
$
|
5,303
|
|
Interest expense
|
|
(72,485
|
)
|
|
(73,237
|
)
|
|
752
|
|
Other expense
|
|
(15,292
|
)
|
|
(19,878
|
)
|
|
4,586
|
|
Gain on sales of land and building improvements
|
|
21,792
|
|
|
15,625
|
|
|
6,167
|
|
Investment income consists of income on our cash and marketable securities balances. Investment income was $15.3 million for fiscal 2016 and was $10.0 million for fiscal 2015. The increase was primarily due to the increase in cash, cash equivalent and marketable securities balances.
Interest expense consists of interest on our convertible senior notes, capital leases, term loan and revolving credit facility. Interest expense, net of interest costs capitalized, was $72.5 million for fiscal 2016 and was $73.2 million during fiscal 2015. The decrease was primarily due to the payment of our revolving credit facility in 2015.
Other expense primarily consists of non-operating costs such as strategic investments fair market adjustments, foreign exchange rate fluctuations, real estate transactions and losses on derecognition of debt. The decrease in other expense for fiscal 2016 was primarily due to losses totaling $10.3 million related to the extinguishment of the 0.75% Senior Notes converted by noteholders in fiscal 2015.
Gain on sales of land and building improvements consists of the gain we recognized from sales of undeveloped real estate and a portion of associated perpetual parking rights in San Francisco, California. Gain on sales of land and building improvements, net of closing costs, was $21.8 million for fiscal 2016 and was $15.6 million for fiscal 2015.
Provision for income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
Variance
Dollars
|
(in thousands)
|
|
2016
|
|
2015
|
|
Provision for income taxes
|
|
$
|
(111,705
|
)
|
|
$
|
(49,603
|
)
|
|
$
|
(62,102
|
)
|
Effective tax rate
|
|
174
|
%
|
|
(23
|
)%
|
|
|
We reported a tax provision of $111.7 million on a pretax income of $64.3 million, which resulted in an effective tax rate of 174 percent for fiscal 2016. We had a tax provision in profitable jurisdictions outside the United States and current tax expense in the United States. We had U.S. current tax expense as a result of taxable income before considering certain excess tax benefits from stock options and vesting of restricted stock.
We recorded a tax provision of $49.6 million on a pretax loss of $213.1 million, which resulted in a negative effective tax rate of 23 percent for fiscal 2015. We had a tax provision primarily due to income taxes in profitable jurisdictions outside the United States, which was partially offset by tax benefits from losses incurred by ExactTarget in certain state jurisdictions.
Liquidity and Capital Resources
At
January 31, 2017
, our principal sources of liquidity were cash, cash equivalents and marketable securities totaling
$2.2 billion
and accounts receivable of
$3.2 billion
.
Net cash provided by operating activities was
$2.2 billion
during fiscal
2017
and
$1.7 billion
during the same period a year ago. Net cash provided by operating activities was
$1.7 billion
during fiscal 2016 and
$1.2 billion
in fiscal 2015. 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; discrete items such as the non-cash gain from the termination of the 50 Fremont lease; the expense associated with stock-based awards; gains on sales of strategic investments; the timing of employee related costs including commissions and bonus payments; the timing of payments against accounts payable, accrued expenses and other current liabilities; the timing of collections from our customers, which is our largest source of operating cash flows; the timing of business combination activity and the related integration and transaction costs; and changes in working capital accounts. Net cash provided by operating activities was also impacted by payments made during fiscal 2017 for the transaction fees related to the acquisitions we completed during the year.
Our working capital accounts consist of cash, cash equivalents and marketable securities, accounts receivable, deferred commissions, prepaid assets and other current assets. Claims against working capital include accounts payable, accrued expenses, deferred revenue, and other current liabilities and payments related to our debt obligations. Our working capital may be impacted by factors in future periods such as billings to customers for subscriptions and support services and the subsequent collection of those billings, certain amounts and timing of which are seasonal. Our working capital in some quarters, may be impacted by adverse foreign currency exchange rate movements. Our billings are also influenced by new business linearity within the quarters and across quarters.
As described above in “Seasonal Nature of Deferred Revenue, Accounts Receivable and Operating Cash Flow,” our fourth quarter has historically been our strongest quarter for new business and renewals. The year on year compounding effect of this seasonality in both billing patterns and overall business causes the value of invoices that we generate in the fourth quarter to increase as a proportion of our total annual billings.
We generally invoice our customers for our subscription and services contracts in advance in annual installments. We typically issue renewal invoices in advance of the renewal service period, and depending on timing, the initial invoice for the subscription and services contract and the subsequent renewal invoice may occur in different quarters. Such invoice amounts are initially reflected in accounts receivable and deferred revenue, which is reflected on the balance sheet. The operating cash flow benefit of increased billing activity generally occurs in the subsequent quarter when we collect from our customers. As such, our first quarter is our largest collections and operating cash flow quarter.
Net cash used in investing activities was
$2.7 billion
during fiscal
2017
and
$1.5 billion
during the same period a year ago. The net cash used in investing activities during fiscal
2017
primarily related to business combinations with the largest being the acquisition of Demandware in July 2016, purchases of marketable securities of approximately
$1.1 billion
, new office build-outs and strategic and capital investments, which were offset by the cash inflows for the period from sales and maturities of marketable securities of
$2.0 billion
. Net cash used in investing activities was
$1.5 billion
during fiscal 2016 and
$698.4 million
during fiscal 2015. The net cash used in investing activities during fiscal 2016 primarily related to capital expenditures, strategic investments, business combinations, purchase of 50 Fremont land and building, new office build-outs, investment of cash balances offset by proceeds from sales and maturities of marketable securities and proceeds from sales of Mission Bay land and the use of restricted cash to purchase 50 Fremont land and building.
Net cash provided by financing activities was
$997.7 million
during fiscal
2017
as compared to net cash provided by financing activities of
$73.2 million
during the same period a year ago. Net cash provided by financing activities during fiscal
2017
consisted primarily of
$748.8 million
proceeds from borrowings under our revolving credit facility,
$495.6 million
of proceeds from the Term Loan, net of loan fees,
$401.5 million
from proceeds from equity plans and the reclassification of excess tax benefits from employee stock plans to cash flows from operating activities due to the early adoption of ASU 2016-09 offset by
$98.2 million
of principal payments on capital leases and
$550.0 million
payment of our revolving credit facility. Net cash provided by financing activities was $73.2 million during fiscal 2016 as compared to net cash used in financing activities of $318.2 million during fiscal 2015. Net cash provided by financing activities during fiscal 2016 consisted primarily of $455.5 million from proceeds from equity plan offset by $82.3 million of principal payments on capital leases and $300.0 million payment of our revolving credit facility. During fiscal 2015, we repaid the convertible senior notes that matured.
In March 2013, we issued at par value $1.15 billion of 0.25% convertible senior notes (the “0.25% Senior Notes”), due April 1, 2018, unless earlier purchased by us or converted. The 0.25% Senior Notes will be convertible if during any 20 trading days during the 30 consecutive trading days of any fiscal quarter, our common stock trades at a price exceeding 130% of the conversion price of
$66.44
per share applicable to the 0.25% Senior Notes. The 0.25% Senior Notes are classified as a noncurrent liability on our consolidated balance sheet as of
January 31, 2017
. Our common stock did not trade at a price exceeding 130% of the conversion price of $66.44 per share applicable to the Notes during the fiscal quarter ended
January 31, 2017
. Accordingly, the 0.25% Senior Notes were not convertible at the holders’ option.
In July 2016, in order to partially finance the acquisition of Demandware, we entered into a $500.0 million term loan (the “Term Loan”) which matures in July 2019 and bears interest at our option, at either a base rate plus a spread of 0.00% to 0.75% or an adjusted LIBOR rate plus a spread of 1.00% to 1.75%, in each case with such spread being determined based on the Company’s consolidated leverage ratio for the preceding four fiscal quarter period.
The Term Loan Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict us and our subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends or make distributions and repurchase stock. We are also required to maintain compliance with a consolidated leverage ratio and a consolidated interest coverage ratio. The Term Loan Credit Agreement includes customary events of default. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Term Loan Credit Agreement at a per annum rate equal to
2.00%
above the applicable interest rate for any overdue principal and
2.00%
above the rate applicable for base rate loans for any other overdue amounts. The occurrence of an event of default could result in the acceleration of obligations under the Term Loan Credit Agreement. We were in compliance with the Term Loan Credit Agreement’s covenants as of
January 31, 2017
.
In July 2016, we entered into a credit agreement (the “Revolving Loan Credit Agreement”), which provides for a
$1.0 billion
unsecured revolving credit facility (the “Credit Facility”) that matures in July 2021. We may use any future borrowings under the Credit Facility for refinancing other indebtedness, working capital, capital expenditures and other general corporate purposes, including permitted acquisitions. We may borrow amounts under the Credit Facility at any time during the term of the Revolving Loan Credit Agreement. As of
January 31, 2017
, we had
$200.0 million
in outstanding borrowings under the Credit Facility. Subsequent to
January 31, 2017
, we paid the remaining outstanding balance of the Credit Facility.
The Revolving Loan Credit Agreement contains certain customary affirmative and negative covenants, including a consolidated leverage ratio covenant, a consolidated interest coverage ratio covenant, a limit on our ability to incur additional indebtedness, dispose of assets, make certain acquisition transactions, pay dividends or distributions, and certain other restrictions on our activities each defined specifically in the Revolving Loan Credit Agreement. We were in compliance with the Revolving Loan Credit Agreement’s covenants as of
January 31, 2017
.
In February 2015, we acquired 50 Fremont Street, a 41-story building totaling approximately 820,000 rentable square feet located in San Francisco, California (“50 Fremont”). At the time of the acquisition, we were leasing approximately 500,000 square feet of the available space in 50 Fremont. The total purchase price for 50 Fremont was $637.6 million. In financing the purchase price, we used $115.0 million of restricted cash on hand and assumed a $200.0 million loan secured by the property with the remainder paid in cash.
In April 2016, we entered into an agreement with a third party provider for certain infrastructure services for a period of four years. The agreement provides that we will pay $96.0 million in fiscal 2018, $108.0 million in fiscal 2019 and $126.0 million in fiscal 2020. During fiscal 2017, we paid $70.0 million.
Our cash, cash equivalents and marketable securities are comprised primarily of corporate notes and other obligations, U.S. treasury securities, government obligations, collateralized mortgage obligations, mortgage backed securities, time deposits, money market mutual funds and municipal securities.
As of
January 31, 2017
, we have a total of
$83.3 million
in letters of credit outstanding in favor of certain landlords for office space. To date, no amounts have been drawn against the letters of credit, which renew annually and expire at various dates through December 2030.
We do not have any special purpose entities, and other than operating leases for office space and computer equipment, we do not engage in off-balance sheet financing arrangements.
Our principal commitments consist of obligations under leases for office space, co-location data center facilities, and our development and test data center, as well as leases for computer equipment, software, furniture and fixtures. At
January 31, 2017
, the future non-cancelable minimum payments under these commitments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
Payments Due by Period
|
|
Total
|
|
Less than 1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than 5 Years
|
Capital lease obligations, including interest
|
$
|
436,747
|
|
|
$
|
119,342
|
|
|
$
|
317,369
|
|
|
$
|
36
|
|
|
$
|
0
|
|
Operating lease obligations:
|
|
|
|
|
|
|
|
|
|
Facilities space
|
2,536,933
|
|
|
257,387
|
|
|
569,210
|
|
|
507,519
|
|
|
1,202,817
|
|
Computer equipment and furniture and
fixtures
|
382,215
|
|
|
205,863
|
|
|
176,352
|
|
|
0
|
|
|
0
|
|
0.25% Convertible Senior Notes, including interest
|
1,154,313
|
|
|
2,875
|
|
|
1,151,438
|
|
|
0
|
|
|
0
|
|
Loan assumed on 50 Fremont
|
200,000
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
200,000
|
|
Term loan
|
500,000
|
|
|
0
|
|
|
500,000
|
|
|
0
|
|
|
0
|
|
Revolving Credit Facility
|
200,000
|
|
|
0
|
|
|
0
|
|
|
200,000
|
|
|
0
|
|
Financing obligation - leased facility
|
322,340
|
|
|
21,437
|
|
|
44,206
|
|
|
45,984
|
|
|
210,713
|
|
Contractual commitments
|
365,200
|
|
|
122,660
|
|
|
239,558
|
|
|
2,982
|
|
|
0
|
|
|
$
|
6,097,748
|
|
|
$
|
729,564
|
|
|
$
|
2,998,133
|
|
|
$
|
756,521
|
|
|
$
|
1,613,530
|
|
The majority of our operating lease agreements provide us with the option to renew. Our future operating lease obligations would change if we exercised these options and if we entered into additional operating lease agreements as we expand our operations.
The financing obligation above represents the total obligation for our lease of approximately 445,000 rentable square feet of office space in San Francisco, California. As of
January 31, 2017
,
$220.3 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 non-current portion is included in “Other noncurrent liabilities” on the consolidated balance sheets.
Purchase orders are not included in the table above. Our purchase orders represent authorizations to purchase rather than binding agreements. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum services to be used; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.
In April 2014, we entered into an office lease agreement to lease approximately 732,000 rentable square feet of an office building located in San Francisco, California that is under construction. The lease payments associated with the lease will be approximately
$590.0 million
over the 15.5 year term of the lease, beginning in our second quarter of fiscal 2018, which is reflected above under Operating Leases.
In February 2016, we entered into an agreement to sublease additional office space in New York, New York. The amounts associated with the agreement will be approximately $288.0 million over the approximately 12 year term of the agreement, beginning in our first quarter of fiscal 2018. In May 2016, we entered into an agreement to lease additional office space in Indianapolis, Indiana. The amounts associated with the agreement will be approximately $77.0 million over the approximately 13 year term of the agreement, beginning in our second quarter of fiscal 2018.
During fiscal
2017
and in future fiscal years, we have made and expect to continue to make additional investments in our infrastructure to scale our operations and increase productivity. We plan to upgrade or replace various internal systems to scale with the overall growth of the Company. Additionally, we expect capital expenditures to be higher in absolute dollars and remain consistent as a percentage of total revenues in future periods as a result of continued office build-outs, other leasehold improvements and data center investments.
In the future, we may enter into arrangements to acquire or invest in complementary businesses or joint ventures, services and technologies, and intellectual property rights. To facilitate these acquisitions or investments, we may seek additional equity or debt financing, which may not be available on terms favorable to us or at all, which may affect our ability to complete subsequent acquisitions or investments, and which may affect the risks of owning our common stock.
We believe our existing cash, cash equivalents and marketable securities and cash provided by operating activities will be sufficient to meet our working capital, capital expenditure and debt repayment needs over the next 12 months.
New Accounting Pronouncements
See Note 1 “Summary of Business and Significant Accounting Policies” to the consolidated financial statements for our discussion about new accounting pronouncements adopted and those pending.
|
|
ITEM 8.
|
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements are filed as part of this Annual Report on Form 10-K:
|
|
|
|
|
|
Page No.
|
|
|
Reports of Independent Registered Public Accounting Firm
|
56
|
|
|
Consolidated Balance Sheets
|
58
|
|
|
Consolidated Statements of Operations
|
59
|
|
|
Consolidated Statements of Comprehensive Income (loss)
|
61
|
|
|
Consolidated Statements of Stockholders’ Equity
|
62
|
|
|
Consolidated Statements of Cash Flows
|
63
|
|
|
Notes to Consolidated Financial Statements
|
65
|
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of salesforce.com, inc.
We have audited the accompanying consolidated balance sheets of salesforce.com, inc. as of January 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended January 31, 2017. Our audits also included the financial statement schedule listed in the Index at Item 15(a)2. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of salesforce.com, inc. at January 31, 2017 and 2016 and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 2017, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Notes 1 and 11 to the consolidated financial statements, the Company changed its method of accounting for share-based payments to employees as a result of the adoption of the amendments to FASB Accounting Standards Codification resulting from Accounting Standards Update No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” effective February 1, 2016.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), salesforce.com, inc.’s internal control over financial reporting as of January 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations on the Treadway Commission (2013 framework) and our report dated March 6, 2017 expressed an unqualified opinion thereon.
Redwood City, California
March 6, 2017
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of salesforce.com, inc.
We have audited salesforce.com, inc.’s internal control over financial reporting as of January 31, 2017 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Salesforce.com, inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Demandware, Inc., which is included in the January 31, 2017 consolidated financial statements of salesforce.com, inc. and constituted two percent of both consolidated total and net assets as of January 31, 2017, and one percent of consolidated total revenues for the year then ended. Our audit of internal control over financial reporting of salesforce.com, inc. also did not include an evaluation of the internal control over financial reporting of Demandware, Inc.
In our opinion, salesforce.com, inc. maintained, in all material respects, effective internal control over financial reporting as of January 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2017 consolidated financial statements of salesforce.com, inc. and our report dated March 6, 2017 expressed an unqualified opinion thereon.
Redwood City, California
March 6, 2017
salesforce.com, inc.
Consolidated Balance Sheets
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
January 31,
2017
|
|
January 31,
2016
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
1,606,549
|
|
|
$
|
1,158,363
|
|
Marketable securities
|
602,338
|
|
|
1,567,014
|
|
Accounts receivable, net of allowance for doubtful accounts of $12,039 and $10,488 at January 31, 2017 and 2016, respectively
|
3,196,643
|
|
|
2,496,165
|
|
Deferred commissions
|
311,770
|
|
|
259,187
|
|
Prepaid expenses and other current assets
|
279,527
|
|
|
250,594
|
|
Total current assets
|
5,996,827
|
|
|
5,731,323
|
|
Property and equipment, net
|
1,787,534
|
|
|
1,715,828
|
|
Deferred commissions, noncurrent
|
227,849
|
|
|
189,943
|
|
Capitalized software, net
|
141,671
|
|
|
123,065
|
|
Strategic investments
|
566,953
|
|
|
520,721
|
|
Goodwill
|
7,263,846
|
|
|
3,849,937
|
|
Intangible assets acquired through business combinations, net
|
1,113,374
|
|
|
490,006
|
|
Other assets, net
|
486,869
|
|
|
142,097
|
|
Total assets
|
$
|
17,584,923
|
|
|
$
|
12,762,920
|
|
Liabilities and stockholders’ equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable, accrued expenses and other liabilities
|
$
|
1,752,664
|
|
|
$
|
1,349,338
|
|
Deferred revenue
|
5,505,689
|
|
|
4,267,667
|
|
Total current liabilities
|
7,258,353
|
|
|
5,617,005
|
|
Deferred revenue, noncurrent
|
37,113
|
|
|
23,886
|
|
Convertible 0.25% senior notes, net
|
1,116,360
|
|
|
1,088,097
|
|
Term loan
|
497,221
|
|
|
0
|
|
Loan assumed on 50 Fremont
|
198,268
|
|
|
197,998
|
|
Revolving credit facility
|
196,542
|
|
|
0
|
|
Other noncurrent liabilities
|
780,939
|
|
|
833,065
|
|
Total liabilities
|
10,084,796
|
|
|
7,760,051
|
|
Commitments and contingencies (Notes 13 and 15)
|
|
|
|
Stockholders’ equity:
|
|
|
|
Preferred stock, $0.001 par value; 5,000 shares authorized and none issued and outstanding
|
0
|
|
|
0
|
|
Common stock, $0.001 par value; 1,600,000
shares authorized, 707,460 and 670,929 issued and outstanding at January 31, 2017 and 2016, respectively
|
708
|
|
|
671
|
|
Additional paid-in capital
|
8,040,170
|
|
|
5,705,386
|
|
Accumulated other comprehensive loss
|
(75,841
|
)
|
|
(49,917
|
)
|
Accumulated deficit (Note 1)
|
(464,910
|
)
|
|
(653,271
|
)
|
Total stockholders’ equity
|
7,500,127
|
|
|
5,002,869
|
|
Total liabilities and stockholders’ equity
|
$
|
17,584,923
|
|
|
$
|
12,762,920
|
|
See accompanying Notes.
salesforce.com, inc.
Consolidated Statements of Operations
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
|
Subscription and support
|
|
$
|
7,756,205
|
|
|
$
|
6,205,599
|
|
|
$
|
5,013,764
|
|
Professional services and other
|
|
635,779
|
|
|
461,617
|
|
|
359,822
|
|
Total revenues
|
|
8,391,984
|
|
|
6,667,216
|
|
|
5,373,586
|
|
Cost of revenues (1)(2):
|
|
|
|
|
|
|
Subscription and support
|
|
1,556,353
|
|
|
1,188,967
|
|
|
924,638
|
|
Professional services and other
|
|
677,686
|
|
|
465,581
|
|
|
364,632
|
|
Total cost of revenues
|
|
2,234,039
|
|
|
1,654,548
|
|
|
1,289,270
|
|
Gross profit
|
|
6,157,945
|
|
|
5,012,668
|
|
|
4,084,316
|
|
Operating expenses (1)(2):
|
|
|
|
|
|
|
Research and development
|
|
1,208,127
|
|
|
946,300
|
|
|
792,917
|
|
Marketing and sales
|
|
3,918,027
|
|
|
3,239,824
|
|
|
2,757,096
|
|
General and administrative
|
|
967,563
|
|
|
748,238
|
|
|
679,936
|
|
Operating lease termination resulting from purchase of 50 Fremont
|
|
0
|
|
|
(36,617
|
)
|
|
0
|
|
Total operating expenses
|
|
6,093,717
|
|
|
4,897,745
|
|
|
4,229,949
|
|
Income (loss) from operations
|
|
64,228
|
|
|
114,923
|
|
|
(145,633
|
)
|
Investment income
|
|
27,374
|
|
|
15,341
|
|
|
10,038
|
|
Interest expense
|
|
(88,988
|
)
|
|
(72,485
|
)
|
|
(73,237
|
)
|
Other income (expense) (1)
|
|
9,072
|
|
|
(15,292
|
)
|
|
(19,878
|
)
|
Gain on sales of land and building improvements
|
|
0
|
|
|
21,792
|
|
|
15,625
|
|
Gains from acquisitions of strategic investments
|
|
13,697
|
|
|
0
|
|
|
0
|
|
Income (loss) before benefit from (provision for) income taxes
|
|
25,383
|
|
|
64,279
|
|
|
(213,085
|
)
|
Benefit from (provision for) income taxes (3)
|
|
154,249
|
|
|
(111,705
|
)
|
|
(49,603
|
)
|
Net income (loss)
|
|
$
|
179,632
|
|
|
$
|
(47,426
|
)
|
|
$
|
(262,688
|
)
|
Basic net income (loss) per share
|
|
$
|
0.26
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.42
|
)
|
Diluted net income (loss) per share
|
|
$
|
0.26
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.42
|
)
|
Shares used in computing basic net income (loss) per share
|
|
687,797
|
|
|
661,647
|
|
|
624,148
|
|
Shares used in computing diluted net income (loss) per share
|
|
700,217
|
|
|
661,647
|
|
|
624,148
|
|
_______________
(1) Amounts include amortization of purchased intangibles from business combinations, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Cost of revenues
|
|
$
|
127,676
|
|
|
$
|
80,918
|
|
|
$
|
90,300
|
|
Marketing and sales
|
|
97,601
|
|
|
77,152
|
|
|
64,673
|
|
Other non-operating expense
|
|
2,491
|
|
|
3,636
|
|
|
0
|
|
(2) Amounts include stock-based expenses, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Cost of revenues
|
|
$
|
107,457
|
|
|
$
|
69,443
|
|
|
$
|
53,812
|
|
Research and development
|
|
187,487
|
|
|
129,434
|
|
|
121,193
|
|
Marketing and sales
|
|
388,937
|
|
|
289,152
|
|
|
286,410
|
|
General and administrative
|
|
136,486
|
|
|
105,599
|
|
|
103,350
|
|
(3) Amounts include a
$210.3 million
tax benefit recorded during fiscal 2017 as a result of the release of a portion of the valuation allowance related to the Demandware, Inc. acquisition. See Note 11 “Income Taxes.”
See accompanying Notes.
salesforce.com, inc.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Net income (loss)
|
|
$
|
179,632
|
|
|
$
|
(47,426
|
)
|
|
$
|
(262,688
|
)
|
Other comprehensive income (loss), before tax and net of reclassification adjustments:
|
|
|
|
|
|
|
Foreign currency translation and other losses
|
|
(43,070
|
)
|
|
(16,616
|
)
|
|
(43,276
|
)
|
Unrealized gains (losses) on investments
|
|
14,500
|
|
|
(9,193
|
)
|
|
1,488
|
|
Other comprehensive loss, before tax
|
|
(28,570
|
)
|
|
(25,809
|
)
|
|
(41,788
|
)
|
Tax effect
|
|
2,646
|
|
|
0
|
|
|
0
|
|
Other comprehensive loss, net of tax
|
|
(25,924
|
)
|
|
(25,809
|
)
|
|
(41,788
|
)
|
Comprehensive income (loss)
|
|
$
|
153,708
|
|
|
$
|
(73,235
|
)
|
|
$
|
(304,476
|
)
|
See accompanying Notes.
salesforce.com, inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Other
Comprehensive
Income/(Loss)
|
|
Accumulated
Deficit
|
|
Total
Stockholders’
Equity
|
|
|
Shares
|
|
Amount
|
|
Balances at January 31, 2014
|
|
610,143
|
|
|
$
|
610
|
|
|
$
|
3,363,377
|
|
|
$
|
17,680
|
|
|
$
|
(343,157
|
)
|
|
$
|
3,038,510
|
|
Exercise of stock options and stock grants to board members for board services
|
|
7,413
|
|
|
8
|
|
|
182,270
|
|
|
0
|
|
|
0
|
|
|
182,278
|
|
Vested restricted stock units converted to shares
|
|
9,259
|
|
|
9
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
9
|
|
Shares issued related to business combinations
|
|
7,185
|
|
|
7
|
|
|
339,076
|
|
|
0
|
|
|
0
|
|
|
339,083
|
|
Shares issued under employee stock plans
|
|
3,264
|
|
|
4
|
|
|
127,816
|
|
|
0
|
|
|
0
|
|
|
127,820
|
|
Tax benefits from employee stock plans
|
|
0
|
|
|
0
|
|
|
7,730
|
|
|
0
|
|
|
0
|
|
|
7,730
|
|
Settlement of 0.75% convertible notes and related warrants
|
|
13,332
|
|
|
13
|
|
|
22,736
|
|
|
0
|
|
|
0
|
|
|
22,749
|
|
Stock-based expenses
|
|
0
|
|
|
0
|
|
|
561,480
|
|
|
0
|
|
|
0
|
|
|
561,480
|
|
Other comprehensive loss, net of tax
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(41,788
|
)
|
|
0
|
|
|
(41,788
|
)
|
Net loss
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(262,688
|
)
|
|
(262,688
|
)
|
Balances at January 31, 2015
|
|
650,596
|
|
|
$
|
651
|
|
|
$
|
4,604,485
|
|
|
$
|
(24,108
|
)
|
|
$
|
(605,845
|
)
|
|
$
|
3,975,183
|
|
Exercise of stock options and stock grants to board members for board services
|
|
8,278
|
|
|
8
|
|
|
296,493
|
|
|
0
|
|
|
0
|
|
|
296,501
|
|
Vested restricted stock units converted to shares
|
|
8,933
|
|
|
9
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
9
|
|
Shares issued related to business combinations
|
|
117
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Shares issued under employee stock plans
|
|
3,005
|
|
|
3
|
|
|
154,957
|
|
|
0
|
|
|
0
|
|
|
154,960
|
|
Tax benefits from employee stock plans
|
|
0
|
|
|
0
|
|
|
59,496
|
|
|
0
|
|
|
0
|
|
|
59,496
|
|
Stock-based expenses
|
|
0
|
|
|
0
|
|
|
589,955
|
|
|
0
|
|
|
0
|
|
|
589,955
|
|
Other comprehensive loss, net of tax
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(25,809
|
)
|
|
0
|
|
|
(25,809
|
)
|
Net loss
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(47,426
|
)
|
|
(47,426
|
)
|
Balances at January 31, 2016
|
|
670,929
|
|
|
$
|
671
|
|
|
$
|
5,705,386
|
|
|
$
|
(49,917
|
)
|
|
$
|
(653,271
|
)
|
|
$
|
5,002,869
|
|
Exercise of stock options and stock grants to board members for board services
|
|
5,555
|
|
|
6
|
|
|
200,760
|
|
|
0
|
|
|
0
|
|
|
200,766
|
|
Vested restricted stock units converted to shares
|
|
8,098
|
|
|
8
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
8
|
|
Shares issued related to business combinations
|
|
19,697
|
|
|
20
|
|
|
1,192,170
|
|
|
0
|
|
|
0
|
|
|
1,192,190
|
|
Shares issued under employee stock plans
|
|
3,181
|
|
|
3
|
|
|
126,147
|
|
|
0
|
|
|
0
|
|
|
126,150
|
|
Stock-based expenses
|
|
0
|
|
|
0
|
|
|
815,707
|
|
|
0
|
|
|
0
|
|
|
815,707
|
|
Other comprehensive loss, net of tax
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(25,924
|
)
|
|
0
|
|
|
(25,924
|
)
|
Excess tax benefits cumulative-effect adjustment resulting from the adoption of ASU 2016-09 (Note 1)
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
8,729
|
|
|
8,729
|
|
Net income
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
179,632
|
|
|
179,632
|
|
Balances at January 31, 2017
|
|
707,460
|
|
|
$
|
708
|
|
|
$
|
8,040,170
|
|
|
$
|
(75,841
|
)
|
|
$
|
(464,910
|
)
|
|
$
|
7,500,127
|
|
See accompanying Notes.
salesforce.com, inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Operating activities:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
179,632
|
|
|
$
|
(47,426
|
)
|
|
$
|
(262,688
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
632,245
|
|
|
525,750
|
|
|
448,296
|
|
Amortization of debt discount and transaction costs
|
|
30,541
|
|
|
27,467
|
|
|
39,620
|
|
Gain on sales of land and building improvements
|
|
0
|
|
|
(21,792
|
)
|
|
(15,625
|
)
|
Gains from acquisitions of strategic investments
|
|
(13,697
|
)
|
|
0
|
|
|
0
|
|
50 Fremont lease termination
|
|
0
|
|
|
(36,617
|
)
|
|
0
|
|
Loss on conversions of convertible senior notes
|
|
0
|
|
|
0
|
|
|
10,326
|
|
Amortization of deferred commissions
|
|
371,541
|
|
|
319,074
|
|
|
257,642
|
|
Expenses related to employee stock plans
|
|
820,367
|
|
|
593,628
|
|
|
564,765
|
|
Changes in assets and liabilities, net of business combinations:
|
|
|
|
|
|
|
Accounts receivable, net
|
|
(628,477
|
)
|
|
(582,425
|
)
|
|
(544,610
|
)
|
Deferred commissions
|
|
(462,030
|
)
|
|
(380,022
|
)
|
|
(320,904
|
)
|
Prepaid expenses and other current assets and other assets
|
|
(28,850
|
)
|
|
50,772
|
|
|
45,819
|
|
Accounts payable, accrued expenses and other liabilities
|
|
49,953
|
|
|
253,986
|
|
|
159,973
|
|
Deferred revenue
|
|
1,210,973
|
|
|
969,686
|
|
|
798,830
|
|
Net cash provided by operating activities (1)
|
|
2,162,198
|
|
|
1,672,081
|
|
|
1,181,444
|
|
Investing activities:
|
|
|
|
|
|
|
Business combinations, net of cash acquired
|
|
(3,192,739
|
)
|
|
(58,680
|
)
|
|
38,071
|
|
Proceeds from land and building improvements held for sale
|
|
0
|
|
|
127,066
|
|
|
223,240
|
|
Purchase of 50 Fremont land and building
|
|
0
|
|
|
(425,376
|
)
|
|
0
|
|
Deposit and withdrawal for purchase of 50 Fremont land and building
|
|
0
|
|
|
115,015
|
|
|
(126,435
|
)
|
Non-refundable amounts received for sale of land and building
|
|
0
|
|
|
6,284
|
|
|
0
|
|
Strategic investments
|
|
(29,987
|
)
|
|
(366,519
|
)
|
|
(93,725
|
)
|
Purchases of marketable securities
|
|
(1,070,412
|
)
|
|
(1,139,267
|
)
|
|
(780,540
|
)
|
Sales of marketable securities
|
|
2,005,301
|
|
|
500,264
|
|
|
243,845
|
|
Maturities of marketable securities
|
|
67,454
|
|
|
37,811
|
|
|
87,638
|
|
Capital expenditures
|
|
(463,958
|
)
|
|
(284,476
|
)
|
|
(290,454
|
)
|
Net cash used in investing activities
|
|
(2,684,341
|
)
|
|
(1,487,878
|
)
|
|
(698,360
|
)
|
Financing activities:
|
|
|
|
|
|
|
Proceeds from revolving credit facility, net
|
|
748,824
|
|
|
0
|
|
|
297,325
|
|
Payments on revolving credit facility, net
|
|
(550,000
|
)
|
|
(300,000
|
)
|
|
0
|
|
Proceeds from (payments on) term loan, net
|
|
495,550
|
|
|
0
|
|
|
(285,000
|
)
|
Proceeds from employee stock plans
|
|
401,481
|
|
|
455,482
|
|
|
308,989
|
|
Payments on convertible senior notes
|
|
0
|
|
|
0
|
|
|
(568,862
|
)
|
Principal payments on capital lease obligations
|
|
(98,157
|
)
|
|
(82,330
|
)
|
|
(70,663
|
)
|
Net cash provided by (used in) financing activities (1)
|
|
997,698
|
|
|
73,152
|
|
|
(318,211
|
)
|
Effect of exchange rate changes
|
|
(27,369
|
)
|
|
(7,109
|
)
|
|
(38,391
|
)
|
Net increase in cash and cash equivalents
|
|
448,186
|
|
|
250,246
|
|
|
126,482
|
|
Cash and cash equivalents, beginning of period
|
|
1,158,363
|
|
|
908,117
|
|
|
781,635
|
|
Cash and cash equivalents, end of period
|
|
$
|
1,606,549
|
|
|
$
|
1,158,363
|
|
|
$
|
908,117
|
|
(1) As of the start of fiscal 2017, the Company early adopted Accounting Standards Update No. 2016-09, “Improvements to Employee Share-Based Payment Accounting (Topic 718)” (“ASU 2016-09”), which addresses among other items, updates to the presentation and treatment of excess tax benefits related to stock based compensation. Excess tax benefits are no longer classified as a reduction of operating cash flows. The Company has adopted changes to the consolidated statements of cash flows on a retrospective basis. The impact for fiscal 2016 and 2015 was an increase of
$59,496
and
$7,730
to net cash provided by operating activities with a correlating decrease of equal amounts to net cash provided by (used in) financing activities, respectively.
See accompanying Notes.
salesforce.com, inc.
Consolidated Statements of Cash Flows
Supplemental Cash Flow Disclosure
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Supplemental cash flow disclosure:
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
Interest
|
|
$
|
54,999
|
|
|
$
|
37,954
|
|
|
$
|
24,684
|
|
Income taxes, net of tax refunds
|
|
$
|
36,388
|
|
|
$
|
31,462
|
|
|
$
|
36,219
|
|
Non-cash financing and investing activities:
|
|
|
|
|
|
|
Fixed assets acquired under capital leases
|
|
$
|
585
|
|
|
$
|
12,948
|
|
|
$
|
124,099
|
|
Building- leased facility acquired under financing obligation
|
|
$
|
0
|
|
|
$
|
77,057
|
|
|
$
|
85,118
|
|
Fair value of equity awards assumed
|
|
$
|
103,267
|
|
|
$
|
0
|
|
|
$
|
1,050
|
|
Fair value of common stock issued as consideration for business combinations
|
|
$
|
1,088,917
|
|
|
$
|
0
|
|
|
$
|
338,033
|
|
Fair value of loan assumed on 50 Fremont
|
|
$
|
0
|
|
|
$
|
198,751
|
|
|
$
|
0
|
|
Non-cash equity liability (Note 9)
|
|
$
|
68,355
|
|
|
$
|
0
|
|
|
$
|
0
|
|
See accompanying Notes.
salesforce.com, inc.
Notes to Consolidated Financial Statements
1. Summary of Business and Significant Accounting Policies
Description of Business
Salesforce.com, inc. (the “Company”) is a leading provider of enterprise cloud computing solutions, with a focus on customer relationship management, or CRM. The Company introduced its first CRM solution in February 2000, and has since expanded its service offerings with new editions, features and platform capabilities.
Our core mission is to help our customers transform by empowering them to connect with their customers in entirely new ways. Our Customer Success Platform - including sales force automation, customer service and support, marketing automation, digital commerce, community management, analytics, application development, Internet of Things (“IoT”) integration and collaborative productivity tools - provide the tools customers need to succeed in a digital world.
Fiscal Year
The Company’s fiscal year ends on January 31. References to fiscal 2017, for example, refer to the fiscal year ending
January 31, 2017
.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions in the Company’s consolidated financial statements and notes thereto.
Significant estimates and assumptions made by management include the determination of:
|
|
•
|
the best estimate of selling price of the deliverables included in multiple deliverable revenue arrangements,
|
|
|
•
|
the fair value of assets acquired and liabilities assumed for business combinations,
|
|
|
•
|
the recognition, measurement and valuation of current and deferred income taxes,
|
|
|
•
|
the fair value of certain stock awards issued,
|
|
|
•
|
the useful lives of intangible assets, property and equipment and building and structural components, and
|
|
|
•
|
the valuation of strategic investments and the determination of other-than-temporary impairments.
|
Actual results could differ materially from those estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the result of which forms the basis for making judgments about the carrying values of assets and liabilities.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Segments
The Company operates as
one
operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who is the chief executive officer, in deciding how to allocate resources and assessing performance. Over the past few years, including fiscal 2017, the Company has completed a number of acquisitions. These acquisitions have allowed the Company to expand its offerings, presence and reach in various market segments of the enterprise cloud computing market. While the Company has offerings in multiple enterprise cloud computing market segments, including as a result of the Company's acquisitions, the Company’s business operates in
one
operating segment because the majority of the Company's offerings operate on a single platform and are deployed in an identical way, and
the Company’s chief operating decision maker evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis. Since the Company operates in
one
operating segment, all required financial segment information can be found in the consolidated financial statements.
Concentrations of Credit Risk and Significant Customers
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and trade accounts receivable. In addition, in connection with the Company's
0.25%
Senior Notes, the Company entered into convertible note hedge transactions with respect to its common stock which are exposed to concentrations of credit risk. Collateral is not required for accounts receivable or the note hedge transactions. The Company maintains an allowance for doubtful accounts receivable balances. This allowance is based upon historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with delinquent accounts. Receivables are written-off and charged against its recorded allowance when the Company has exhausted collection efforts without success.
No
single customer accounted for more than
five percent
of accounts receivable at
January 31, 2017
and
2016
.
No
single customer accounted for
five percent
or more of total revenue during fiscal
2017
,
2016
and
2015
.
Geographic Locations
As of
January 31, 2017
and
2016
, assets located outside the Americas were
12 percent
and
11 percent
of total assets, respectively. As of
January 31, 2017
and
2016
, assets located in the United States were
86 percent
and
87 percent
of total assets, respectively.
Revenues by geographical region are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Americas
|
|
$
|
6,224,971
|
|
|
$
|
4,910,745
|
|
|
$
|
3,868,329
|
|
Europe
|
|
1,373,547
|
|
|
1,162,808
|
|
|
984,919
|
|
Asia Pacific
|
|
793,466
|
|
|
593,663
|
|
|
520,338
|
|
|
|
$
|
8,391,984
|
|
|
$
|
6,667,216
|
|
|
$
|
5,373,586
|
|
Americas revenue attributed to the United States was approximately
96 percent
,
95 percent
and
94 percent
in fiscal
2017
,
2016
and
2015
, respectively.
No
other country represented more than ten percent of total revenue during fiscal
2017
,
2016
or
2015
.
Revenue Recognition
The Company derives its revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing the Company’s enterprise cloud computing services and from customers paying for additional support beyond the standard support that is included in the basic subscription fees; and (2) related professional services such as process mapping, project management, implementation services and other revenue. “Other revenue” consists primarily of training fees.
The Company commences revenue recognition when all of the following conditions are satisfied:
|
|
•
|
there is persuasive evidence of an arrangement;
|
|
|
•
|
the service has been or is being provided to the customer;
|
|
|
•
|
the collection of the fees is reasonably assured; and
|
|
|
•
|
the amount of fees to be paid by the customer is fixed or determinable.
|
The Company’s subscription service arrangements are non-cancelable and do not contain refund-type provisions.
Subscription and Support Revenues
Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement date of each contract, which is the date the Company’s service is made available to customers.
Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
Professional Services and Other Revenues
The Company’s professional services contracts are either on a time and materials, fixed fee basis or subscription basis. These revenues are recognized as the services are rendered for time and materials contracts, when the milestones are achieved and accepted by the customer or on a proportional performance basis for fixed price contracts and ratably over the contract term for subscription professional services contracts. The milestone method for revenue recognition is used when there is substantive uncertainty at the date the contract is entered into whether the milestone will be achieved. Training revenues are recognized as the services are performed.
Multiple Deliverable Arrangements
The Company enters into arrangements with multiple deliverables that generally include multiple subscriptions, premium support and professional services. If the deliverables have standalone value at contract inception, the Company accounts for each deliverable separately. Subscription services have standalone value as such services are often sold separately. In determining whether professional services have standalone value, the Company considers the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the subscription service start date and the contractual dependence of the subscription service on the customer’s satisfaction with the professional services work. To date, the Company has concluded that all of the professional services included in multiple deliverable arrangements executed have standalone value.
Multiple deliverables included in an arrangement are separated into different units of accounting and the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. The Company determines the relative selling price for a deliverable based on its vendor-specific objective evidence of selling price (“VSOE”), if available, or its best estimate of selling price (“BESP”), if VSOE is not available. The Company has determined that third-party evidence of selling price (“TPE”) is not a practical alternative due to differences in its service offerings compared to other parties and the availability of relevant third-party pricing information. The amount of revenue allocated to delivered items is limited by contingent revenue, if any.
For certain professional services, the Company has established VSOE as a consistent number of standalone sales of these deliverables have been priced within a reasonably narrow range. The Company has not established VSOE for its subscription services due to lack of pricing consistency, the introduction of new services and other factors. Accordingly, the Company uses its BESP to determine the relative selling price for its subscription services.
The Company determines BESP by considering its overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the Company’s discounting practices, the size and volume of the Company’s transactions, the customer demographic, the geographic area where services are sold, price lists, its go-to-market strategy, historical standalone sales and contract prices. The determination of BESP is made through consultation with and approval by the Company’s management, taking into consideration the go-to-market strategy. As the Company’s go-to-market strategies evolve, the Company may modify its pricing practices in the future, which could result in changes in relative selling prices, including both VSOE and BESP.
Deferred Revenue
The deferred revenue balance does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from subscription services described above and is recognized as the revenue recognition criteria are met. The Company generally invoices customers in annual installments. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, dollar size and new business linearity within the quarter.
Deferred revenue that will be recognized during the succeeding twelve month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent.
Deferred Commissions
Deferred commissions are the incremental costs that are directly associated with non-cancelable subscription contracts with customers and consist of sales commissions paid to the Company’s direct sales force.
The commissions are deferred and amortized over the non-cancelable terms of the related customer contracts, which are typically
12
to
36 months
. The commission payments are paid in full the month after the customer’s service commences. The deferred commission amounts are recoverable through the future revenue streams under the non-cancelable customer contracts.
The Company believes this is the preferable method of accounting as the commission charges are so closely related to the revenue from the non-cancelable customer contracts that they should be recorded as an asset and charged to expense over the same period that the subscription revenue is recognized. Amortization of deferred commissions is included in marketing and sales expense in the accompanying consolidated statements of operations.
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
Securities are classified as available for sale and are carried at fair value, with the change in unrealized gains and losses, net of tax, reported as a separate component on the consolidated statements of comprehensive income (loss). 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 component of investment income. In order to determine whether a decline in value is other-than-temporary, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value and its intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. The cost of securities sold is based on the specific-identification method. Interest on securities classified as available for sale is also included as a component of investment income.
Strategic Investments
The Company holds certain marketable and non-marketable equity securities which are accounted for using the cost method of accounting. Marketable equity securities are measured using quoted prices in their respective active markets and the non-marketable equity securities are recorded at cost. Equity investments without readily determinable fair values for which we do not have the ability to exercise significant influence are accounted for using the cost method of accounting and classified as strategic investments on the consolidated balance sheets. Marketable securities are recorded at fair value with changes in fair value recorded through accumulated other comprehensive income. Under the cost method of accounting, the non-marketable securities are carried at cost and are adjusted only for other-than-temporary impairments, certain distributions and additional investments.
Fair Value Measurement
The Company measures its 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 2 “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
The Company capitalizes costs related to its enterprise cloud computing services and certain projects for internal use incurred during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life,
which is generally
three
to
five
years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Intangible Assets acquired through Business Combinations
Intangible assets are amortized over their estimated useful lives. Each period the Company evaluates the estimated remaining useful life of its intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization.
Impairment Assessment
The Company evaluates intangible assets and long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This includes but is not limited to significant adverse changes in business climate, market conditions, or other events that indicate an asset's carrying amount may not be recoverable. Recoverability of these assets is measured by comparison of 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, then 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 our fourth quarter of each fiscal year or more often if and when circumstances indicate that goodwill may not be recoverable.
There was
no
impairment of intangible assets, long-lived assets or goodwill during fiscal
2017
,
2016
or
2015
.
Business Combinations
The Company uses its best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. The Company continues to collect information and reevaluates these estimates and assumptions quarterly and records any adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations.
In the event that the Company acquires an entity in which the Company previously held a strategic investment, the difference between the fair value of the shares as of the date of the acquisition and the carrying value of the strategic investment is recorded as a gain or loss and disclosed separately within the statements of operations.
Leases and Asset Retirement Obligations
The Company categorizes leases at their inception as either operating or capital leases. In certain lease agreements, the Company may receive rent holidays and other incentives. The Company recognizes lease costs on a straight-line basis once control of the space is achieved, without regard to deferred payment terms such as rent holidays that defer the commencement date of required payments. Additionally, incentives received are treated as a reduction of costs over the term of the agreement.
The Company establishes assets and liabilities for the present value of estimated future costs to retire long-lived assets at the termination or expiration of a lease. Such assets are depreciated over the lease period into operating expense, and the recorded liabilities are accreted to the future value of the estimated retirement costs.
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 term. Any sublease payments received in excess of the straight-line rent payments for the sublease are recorded in other income (expense).
Accounting for Stock-Based Expense
The Company recognizes stock-based expenses related to stock options and restricted stock awards on a straight-line basis, net of estimated forfeitures, over the requisite service period of the awards, which is generally the vesting term of
four years
. The Company recognizes stock-based expenses related to shares issued pursuant to its 2004 Employee Stock Purchase Plan (“ESPP”) on a straight-line basis over the offering period, which is
12 months
.
Stock-based expenses related to performance share grants are measured based on grant date fair value and expensed on a straight-line basis over the service period of the awards, which is generally the vesting term of
three years
.
The Company, at times, grant unvested restricted shares to employee stockholders of certain acquired companies in lieu of cash considerations. These awards are generally subject to continued post-acquisition employment, therefore the Company has accounted for them as post-acquisition stock-based expense. The Company recognizes stock-based expenses equal to the grant date fair value of the restricted stock awards on a straight-line basis over the requisite service period of the awards.
Advertising Expenses
Advertising is expensed as incurred. Advertising expense was
$350.3 million
,
$315.6 million
and
$203.6 million
for fiscal
2017
,
2016
and
2015
, respectively.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the consolidated statement of operations in the period that includes the enactment date.
The Company’s tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, solely based on its technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than
50 percent
likely to be realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax provision.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the applicable tax law. The Company regularly reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The Company’s judgments regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute its business plans and/or tax planning strategies. Should there be a change in the ability to recover deferred tax assets, the tax provision would increase or decrease in the period in which the assessment is changed.
Foreign Currency Translation
The functional currency of the Company’s major foreign subsidiaries is generally the local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as a separate component on the consolidated statements of comprehensive income (loss). Foreign currency transaction gains and losses are included in net income (loss) for the period. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average exchange rate during the period. Equity transactions are translated using historical exchange rates.
Warranties and Indemnification
The Company’s enterprise cloud computing services are typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable and materially in accordance with the Company’s online help documentation under normal use and circumstances.
The Company’s arrangements generally include certain provisions for indemnifying customers against liabilities if its products or services infringe a third party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of such obligations and has not accrued any material liabilities related to such obligations in the accompanying consolidated financial statements.
The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as the Company’s director or officer or that person’s services provided to any other company or enterprise at the Company’s request. The Company maintains director and officer insurance coverage that would generally enable the Company to recover a portion of any future amounts paid. The Company may also be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.
New Accounting Pronouncements Adopted in Fiscal 2017
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability rather than an asset that is amortized. However, ASU 2015-03 does not address deferred issuance costs for line-of-credit arrangements; therefore, in August 2015, the FASB issued Accounting Standards Update No. 2015-15, “Interest-Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” (“ASU 2015-15”). ASU 2015-15 allows an entity to defer debt issuance costs associated with line-of-credit arrangements, including arrangements with no outstanding borrowings, and classify them as an asset, and amortize them over the term of the arrangements. The recognition and measurement guidance for debt issuance costs is not affected by the standards. These standards are adopted on a retrospective basis in the period of adoption. The Company adopted the standards in fiscal 2017. Upon adoption, the unamortized debt issuance costs previously reported in Other assets, net, with a carrying amount of approximately
$7.9 million
at January 31, 2016, were reclassified and presented as a deduction of the corresponding liabilities, Convertible
0.25%
senior notes, net, Term Loan, and Loan assumed on 50 Fremont.
In September 2015, the FASB issued Accounting Standards Update No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments (Topic 805)” (“ASU 2015-16”), which eliminates the requirement to restate prior period financial statements for measurement period adjustments in business combinations. ASU 2015-16 requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The Company adopted this standard during the three months ended April 30, 2016 and there was no material impact of this on the Company's financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, “Stock Compensation (Topic 718): Improvements to Employee Shared-Based Payment Accounting” (“ASU 2016-09”), which simplifies and improves several aspects of the accounting for employee share-based payment transactions for public entities. The new guidance requires companies to record excess tax benefits and tax deficiencies as income tax benefit or expense in the statement of operations when the awards vest or are settled, and eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the statement of cash flows. The Company adopted the standard in the three months ended April 30, 2016. Upon adoption, the Company recognized the previously unrecognized excess tax benefits using the modified retrospective transition method, which resulted in a cumulative-effect adjustment of
$8.7 million
to accumulated deficit. This adjustment reduced the accumulated deficit balance for fiscal 2017. The previously unrecognized excess tax effects were recorded as a deferred tax asset, which was almost fully offset by a valuation allowance. Without the valuation allowance, the Company’s deferred tax assets would have increased by
$614.5 million
. The Company also elected to apply the change in presentation to the statements of cash flows retrospectively and no longer classified the excess tax benefits from employee stock plans as a reduction from operating cash flows for all periods presented. As a result of the adoption of ASU 2016-09, the consolidated statements of cash flows for fiscal 2016 and 2015 were adjusted as follows:
$59.5 million
and
$7.7 million
increases to net cash provided by operating activities, respectively, and
$59.5 million
and
$7.7 million
decrease to net cash used in financing activities, respectively.
Pending Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) which amended the existing FASB Accounting Standards Codification. This standard replaces existing revenue recognition guidance with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. The standard also provides guidance on the recognition of costs related to obtaining customer contracts. ASU 2014-09, as amended, will be effective for the beginning of fiscal 2019, including interim periods within that reporting period.
The Company currently anticipates adopting the standard using the full retrospective method to restate each prior reporting period presented. The Company's ability to adopt using the full retrospective method is dependent upon system readiness for both revenue and commissions and the completion of the analysis of information necessary to restate prior period financial statements.
The Company is continuing to assess the impact of adopting ASU 2014-09 on its financial position, results of operations, cash flows and related disclosures and has not yet determined whether the effect will be material. Additionally, as the Company continues to assess the new standard along with industry trends and additional interpretive guidance, the Company may adjust its implementation plan accordingly.
The Company believes that the new standard will impact the following policies and disclosures:
|
|
•
|
The removal of the current limitation on contingent revenue may result in revenue being recognized earlier for certain contracts;
|
|
|
•
|
Allocation of revenue across different clouds and professional services;
|
|
|
•
|
Estimation of variable consideration for arrangements with overage fees;
|
|
|
•
|
Required disclosures including information about the remaining transaction price and when the Company expects to recognize revenue; and
|
|
|
•
|
Accounting for deferred commissions including costs that qualify for deferral and the amortization period.
|
The commission accounting under the new standard is significantly different than the Company's current capitalization policy. The new standard will result in additional types of costs that will be capitalized. Additionally, all amounts capitalized will be amortized over a period longer than the Company's current policy of amortizing the deferred amounts over the specific revenue contract terms.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, “Financial Instrument-Overall (Subtopic 825-10)” (“ASU 2016-01”), which requires entities to measure equity instruments at fair value and recognize any changes in fair value in net income. However, for equity investments that do not have readily determinable fair values and do not qualify for the existing practical expedient, the investments will be measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The new standard is effective for interim and annual periods beginning after December 15, 2017 and early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-01, including the impact to its marketable securities and strategic investments. The adoption could have a material impact on its consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. 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 and early adoption is permitted. The Company expects its leases designated as operating leases in Note 13, “Commitments,” will be reported on the consolidated balance sheets upon adoption. The Company is currently evaluating the impact to its consolidated financial statements as it relates to other aspects of the business.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”)”, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The new standard is effective for annual periods beginning after December 15, 2017, with early adoption permitted as of the beginning of a fiscal year. The Company plans to adopt the new standard in its first quarter of fiscal 2019 and does not expect it to have a material impact on its consolidated financial statements.
Reclassifications
Certain reclassifications to fiscal 2016 balances were made to conform to the current period presentation in the Balance Sheet. These reclassifications include short-term marketable securities, marketable securities, noncurrent capitalized software, net, intangible assets acquired from business combinations, net and other assets, net.
2. Investments
Marketable Securities
The Company considers all its marketable debt securities as available for use in current operations, including those with maturity dates beyond one year, and therefore classifies these securities within current assets on the consolidated balance sheets. Marketable securities are carried at fair value, with the unrealized gains and losses, net of income taxes, reflected in accumulated other comprehensive income until realized. For the purposes of computing realized and unrealized gains and losses, cost is determined on a specific identification basis.
At
January 31, 2017
, marketable securities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments classified as Marketable Securities
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Value
|
Corporate notes and obligations
|
$
|
321,284
|
|
|
$
|
887
|
|
|
$
|
(1,531
|
)
|
|
$
|
320,640
|
|
U.S. treasury securities
|
62,429
|
|
|
68
|
|
|
(674
|
)
|
|
61,823
|
|
Mortgage backed obligations
|
74,882
|
|
|
39
|
|
|
(669
|
)
|
|
74,252
|
|
Asset backed securities
|
101,913
|
|
|
74
|
|
|
(197
|
)
|
|
101,790
|
|
Municipal securities
|
33,523
|
|
|
35
|
|
|
(183
|
)
|
|
33,375
|
|
Foreign government obligations
|
10,491
|
|
|
3
|
|
|
(36
|
)
|
|
10,458
|
|
Total marketable securities
|
$
|
604,522
|
|
|
$
|
1,106
|
|
|
$
|
(3,290
|
)
|
|
$
|
602,338
|
|
At
January 31, 2016
, marketable securities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments classified as Marketable Securities
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Value
|
Corporate notes and obligations
|
$
|
949,266
|
|
|
$
|
1,398
|
|
|
$
|
(2,983
|
)
|
|
$
|
947,681
|
|
U.S. treasury securities
|
157,625
|
|
|
375
|
|
|
(56
|
)
|
|
157,944
|
|
Mortgage backed obligations
|
104,242
|
|
|
106
|
|
|
(323
|
)
|
|
104,025
|
|
Asset backed securities
|
271,292
|
|
|
186
|
|
|
(226
|
)
|
|
271,252
|
|
Municipal securities
|
44,934
|
|
|
209
|
|
|
(6
|
)
|
|
45,137
|
|
Foreign government obligations
|
18,014
|
|
|
42
|
|
|
(5
|
)
|
|
18,051
|
|
U.S. agency obligations
|
16,076
|
|
|
16
|
|
|
(6
|
)
|
|
16,086
|
|
Covered bonds
|
6,690
|
|
|
148
|
|
|
0
|
|
|
6,838
|
|
Total marketable securities
|
$
|
1,568,139
|
|
|
$
|
2,480
|
|
|
$
|
(3,605
|
)
|
|
$
|
1,567,014
|
|
The contractual maturities of the investments classified as marketable securities is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
2017
|
|
2016
|
|
|
|
|
Due within 1 year
|
$
|
104,631
|
|
|
$
|
309,944
|
|
Due in 1 year through 5 years
|
494,127
|
|
|
1,240,711
|
|
Due in 5 years through 10 years
|
3,580
|
|
|
16,359
|
|
|
$
|
602,338
|
|
|
$
|
1,567,014
|
|
As of
January 31, 2017
, the following marketable securities were in an unrealized loss position (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
Corporate notes and obligations
|
$
|
121,810
|
|
|
$
|
(1,528
|
)
|
|
$
|
1,997
|
|
|
$
|
(3
|
)
|
|
$
|
123,807
|
|
|
$
|
(1,531
|
)
|
U.S. treasury securities
|
49,945
|
|
|
(674
|
)
|
|
0
|
|
|
0
|
|
|
49,945
|
|
|
(674
|
)
|
Mortgage backed obligations
|
60,187
|
|
|
(669
|
)
|
|
0
|
|
|
0
|
|
|
60,187
|
|
|
(669
|
)
|
Asset backed securities
|
51,420
|
|
|
(187
|
)
|
|
1,193
|
|
|
(10
|
)
|
|
52,613
|
|
|
(197
|
)
|
Municipal securities
|
20,457
|
|
|
(183
|
)
|
|
0
|
|
|
0
|
|
|
20,457
|
|
|
(183
|
)
|
Foreign government obligations
|
8,280
|
|
|
(36
|
)
|
|
0
|
|
|
0
|
|
|
8,280
|
|
|
(36
|
)
|
|
$
|
312,099
|
|
|
$
|
(3,277
|
)
|
|
$
|
3,190
|
|
|
$
|
(13
|
)
|
|
$
|
315,289
|
|
|
$
|
(3,290
|
)
|
The unrealized loss for each individual fixed rate marketable securities was less than
$0.2 million
. The Company does not believe any of the unrealized losses represent an other-than-temporary impairment based on its evaluation of available evidence as of
January 31, 2017
, such as the Company's intent to hold and whether it is more likely than not that the Company will be required to sell the investment before recovery of the investment's amortized basis. The Company expects to receive the full principal and interest on all of these marketable securities.
Investment Income
Investment income consists of interest income, realized gains, and realized losses on the Company’s cash, cash equivalents and marketable securities. The components of investment income are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Interest income
|
|
$
|
21,901
|
|
|
$
|
14,146
|
|
|
$
|
10,129
|
|
Realized gains
|
|
7,858
|
|
|
3,287
|
|
|
517
|
|
Realized losses
|
|
(2,385
|
)
|
|
(2,092
|
)
|
|
(608
|
)
|
Total investment income
|
|
$
|
27,374
|
|
|
$
|
15,341
|
|
|
$
|
10,038
|
|
Reclassification adjustments out of accumulated other comprehensive income (loss) into net income (loss) were immaterial for fiscal
2017
,
2016
and
2015
, respectively.
Strategic Investments
As of
January 31, 2017
, the Company had
six
investments in marketable equity securities with a fair value of
$41.0 million
, which include an unrealized gain of
$24.5 million
. As of
January 31, 2016
, the Company had
six
investments in marketable equity securities with a fair value of
$16.2 million
, which included an unrealized gain of
$8.5 million
. The change in the fair value of the investments in publicly held companies is recorded in the consolidated balance sheets within strategic investments and accumulated other comprehensive loss.
The Company’s interest in non-marketable debt and equity securities consists of noncontrolling equity investments in privately held companies. The Company’s investments in these privately held companies are reported at cost or marked down to fair value when an event or circumstance indicates an other-than-temporary decline in value has occurred. These investments are valued using significant unobservable inputs or data in an inactive market and the valuation requires the Company's judgment due to the absence of market prices and inherent lack of liquidity. Fair value is not estimated if there are no identified events or changes in circumstances that may have an effect on the fair value of the investment.
As of
January 31, 2017
and
2016
, the carrying value of the Company’s non-marketable debt and equity securities was
$526.0 million
and
$504.5 million
, respectively. The estimated fair value of the non-marketable debt and equity securities was approximately
$758.3 million
and
$714.1 million
as of
January 31, 2017
and
January 31, 2016
, respectively. These investments are measured using the cost method of accounting, therefore the unrealized gains of
$232.3 million
and
$209.6 million
as of
January 31, 2017
and
January 31, 2016
, respectively, are not recorded in the consolidated financial statements.
Strategic investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance at
beginning of
year
|
|
Additions
|
|
Sales, dispositions and fair market value adjustments (1)
|
|
Balance at
end of
year
|
Fiscal year ended January 31, 2017
|
|
$
|
520,721
|
|
|
110,329
|
|
|
(64,097
|
)
|
|
$
|
566,953
|
|
Fiscal year ended January 31, 2016
|
|
$
|
175,774
|
|
|
386,219
|
|
|
(41,272
|
)
|
|
$
|
520,721
|
|
(1) Amounts include the release of the cost-basis and the current unrealized gain or loss balance recorded in accumulated other comprehensive loss when shares of a publicly-held investment are sold, disposition-related reductions of a cost-basis investment if a privately-held company within the portfolio is acquired by another company, fair market value adjustments such as cost basis reductions related to impairments that are other-than-temporary and unrealized gains or losses related to investments held in publicly traded companies.
The carrying value of the Company’s strategic investments is affected by various events such as entering into new investments, disposition-related reductions of a cost-basis investment if a privately-held company within the portfolio is acquired by another company, fair market value adjustments including impairments or initial public offerings. The cash inflows from exits and cash outflows from new investments are disclosed as Strategic investments, net, within the investing activities section of the Statement of Cash Flows and any gains or losses or fair market value adjustments are recorded within the operating activities of the Statement of Cash Flows for each of the respective fiscal year periods.
3. Derivatives
Derivative Financial Instruments
The Company enters into foreign currency derivative contracts with financial institutions to reduce the risk that its cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. The Company uses forward currency derivative contracts to minimize the Company’s exposure to balances primarily denominated in British Pound Sterling, the Euro and Japanese Yen. The Company’s foreign currency derivative contracts, which are not designated as hedging instruments, are used to reduce the exchange rate risk associated primarily with intercompany receivables and payables. The Company’s derivative financial instruments program is not designated for trading or speculative purposes. As of
January 31, 2017
and
2016
, the foreign currency derivative contracts that were not settled were recorded at fair value on the consolidated balance sheets.
Foreign currency derivative contracts are marked-to-market at the end of each reporting period with gains and losses recognized as other expense to offset the gains or losses resulting from the settlement or remeasurement of the underlying foreign currency denominated receivables and payables. While the contract or notional amount is often used to express the volume of foreign currency derivative contracts, the amounts potentially subject to credit risk are generally limited to the amounts, if any, by which the counterparties’ obligations under the agreements exceed the obligations of the Company to the counterparties.
Details on outstanding foreign currency derivative contracts related primarily to intercompany receivables and payables are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
2017
|
|
2016
|
Notional amount of foreign currency derivative contracts
|
$
|
1,280,953
|
|
|
$
|
1,274,515
|
|
Fair value of foreign currency derivative contracts
|
$
|
10,205
|
|
|
$
|
(9,294
|
)
|
The fair value of the Company’s outstanding derivative instruments are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments
|
|
|
As of January 31,
|
|
Balance Sheet Location
|
2017
|
|
2016
|
Derivative Assets
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
Foreign currency derivative contracts
|
Prepaid expenses and other current assets
|
$
|
13,238
|
|
|
$
|
4,731
|
|
Derivative Liabilities
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
Foreign currency derivative contracts
|
Accounts payable, accrued expenses and other liabilities
|
$
|
3,033
|
|
|
$
|
14,025
|
|
The effect of the derivative instruments not designated as hedging instruments on the consolidated statements of operations during fiscal
2017
,
2016
and
2015
, respectively, are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments
|
Gains (losses) on Derivative Instruments
Recognized in Other income (expense)
|
|
|
|
Fiscal Year Ended January 31,
|
|
Location
|
|
2017
|
|
2016
|
|
2015
|
Foreign currency derivative contracts
|
Other expense
|
|
$
|
(86,239
|
)
|
|
$
|
(25,786
|
)
|
|
$
|
(1,186
|
)
|
4. Fair Value Measurement
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 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.
Other inputs that are directly or indirectly observable in the marketplace.
Level 3.
Unobservable inputs which are supported by little or no market activity.
The following table presents information about the Company’s assets and liabilities that are measured at fair value as of
January 31, 2017
and indicates the fair value hierarchy of the valuation (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Balances as of
January 31, 2017
|
Cash equivalents (1):
|
|
|
|
|
|
|
|
Time deposits
|
$
|
0
|
|
|
$
|
25,100
|
|
|
$
|
0
|
|
|
$
|
25,100
|
|
Money market mutual funds
|
956,479
|
|
|
0
|
|
|
0
|
|
|
956,479
|
|
Marketable securities:
|
|
|
|
|
|
|
|
Corporate notes and obligations
|
0
|
|
|
320,640
|
|
|
0
|
|
|
320,640
|
|
U.S. treasury securities
|
0
|
|
|
61,823
|
|
|
0
|
|
|
61,823
|
|
Mortgage backed obligations
|
0
|
|
|
74,252
|
|
|
0
|
|
|
74,252
|
|
Asset backed securities
|
0
|
|
|
101,790
|
|
|
0
|
|
|
101,790
|
|
Municipal securities
|
0
|
|
|
33,375
|
|
|
0
|
|
|
33,375
|
|
Foreign government obligations
|
0
|
|
|
10,458
|
|
|
0
|
|
|
10,458
|
|
Foreign currency derivative contracts (2)
|
0
|
|
|
13,238
|
|
|
0
|
|
|
13,238
|
|
Total Assets
|
$
|
956,479
|
|
|
$
|
640,676
|
|
|
$
|
0
|
|
|
$
|
1,597,155
|
|
Liabilities
|
|
|
|
|
|
|
|
Foreign currency derivative contracts (3)
|
$
|
0
|
|
|
$
|
3,033
|
|
|
$
|
0
|
|
|
$
|
3,033
|
|
Total Liabilities
|
$
|
0
|
|
|
$
|
3,033
|
|
|
$
|
0
|
|
|
$
|
3,033
|
|
_____________
(1)
Included in “cash and cash equivalents” in the accompanying consolidated balance sheet as of
January 31, 2017
, in addition to
$625.0 million
of cash.
(2)
Included in “prepaid expenses and other current assets” in the accompanying consolidated balance sheet as of
January 31, 2017
.
(3)
Included in “accounts payable, accrued expenses and other liabilities” in the consolidated balance sheet as of
January 31, 2017
.
The following table presents information about the Company’s assets and liabilities that are measured at fair value as of
January 31, 2016
and indicates the fair value hierarchy of the valuation (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs (Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Balances as of
January 31, 2016
|
Cash equivalents (1):
|
|
|
|
|
|
|
|
Time deposits
|
$
|
0
|
|
|
$
|
236,798
|
|
|
$
|
0
|
|
|
$
|
236,798
|
|
Money market mutual funds
|
216,107
|
|
|
0
|
|
|
0
|
|
|
216,107
|
|
Commercial Paper
|
0
|
|
|
159,230
|
|
|
0
|
|
|
159,230
|
|
Agency and sovereign paper
|
0
|
|
|
13,599
|
|
|
0
|
|
|
13,599
|
|
Marketable securities:
|
|
|
|
|
|
|
|
Corporate notes and obligations
|
0
|
|
|
947,681
|
|
|
0
|
|
|
947,681
|
|
U.S. treasury securities
|
0
|
|
|
157,944
|
|
|
0
|
|
|
157,944
|
|
Mortgage backed obligations
|
0
|
|
|
104,025
|
|
|
0
|
|
|
104,025
|
|
Asset backed securities
|
0
|
|
|
271,252
|
|
|
0
|
|
|
271,252
|
|
Municipal securities
|
0
|
|
|
45,137
|
|
|
0
|
|
|
45,137
|
|
Foreign government obligations
|
0
|
|
|
18,051
|
|
|
0
|
|
|
18,051
|
|
U.S. agency obligations
|
0
|
|
|
16,086
|
|
|
0
|
|
|
16,086
|
|
Covered bonds
|
0
|
|
|
6,838
|
|
|
0
|
|
|
6,838
|
|
Foreign currency derivative contracts (2)
|
0
|
|
|
4,731
|
|
|
0
|
|
|
4,731
|
|
Total Assets
|
$
|
216,107
|
|
|
$
|
1,981,372
|
|
|
$
|
0
|
|
|
$
|
2,197,479
|
|
Liabilities
|
|
|
|
|
|
|
|
Foreign currency derivative contracts (3)
|
$
|
0
|
|
|
$
|
14,025
|
|
|
$
|
0
|
|
|
$
|
14,025
|
|
Total Liabilities
|
$
|
0
|
|
|
$
|
14,025
|
|
|
$
|
0
|
|
|
$
|
14,025
|
|
______________
(1)
Included in “cash and cash equivalents” in the accompanying consolidated balance sheet as of
January 31, 2016
, in addition to
$532.6 million
of cash.
(2)
Included in “prepaid expenses and other current assets” in the accompanying consolidated balance sheet as of
January 31, 2016
.
(3)
Included in “accounts payable, accrued expenses and other liabilities” in the accompanying consolidated balance sheet as of
January 31, 2016
.
5. Property and Equipment
Property and equipment, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
2017
|
|
2016
|
Land
|
$
|
183,888
|
|
|
$
|
183,888
|
|
Buildings and building improvements
|
621,377
|
|
|
614,081
|
|
Computers, equipment and software
|
1,440,986
|
|
|
1,281,766
|
|
Furniture and fixtures
|
112,564
|
|
|
82,242
|
|
Leasehold improvements
|
627,069
|
|
|
473,688
|
|
|
2,985,884
|
|
|
2,635,665
|
|
Less accumulated depreciation and amortization
|
(1,198,350
|
)
|
|
(919,837
|
)
|
|
$
|
1,787,534
|
|
|
$
|
1,715,828
|
|
Depreciation and amortization expense totaled
$322.8 million
,
$302.0 million
and
$246.6 million
during fiscal
2017
,
2016
and
2015
, respectively.
Computers, equipment and software at
January 31, 2017
and
2016
included a total of
$729.0 million
and
$747.1 million
acquired under capital lease agreements, respectively. Accumulated amortization relating to computers, equipment and software under capital leases totaled
$386.9 million
and
$310.3 million
, respectively, at
January 31, 2017
and
2016
. Amortization of assets under capital leases is included in depreciation and amortization expense.
Land
In October 2015, the Company sold approximately
8.8
net acres of undeveloped real estate and the associated perpetual parking rights in San Francisco, California, which were classified as held for sale. The total proceeds from the sale were
$157.1 million
, of which the Company received
$127.1 million
in October 2015 and previously received a nonrefundable deposit in the amount of
$30.0 million
during April 2014. The Company recognized a gain of
$21.8 million
, net of closing costs, on the sale of this portion of the Company’s land and building improvements and perpetual parking rights.
Building- 350 Mission
In December 2013, the Company entered into a lease agreement for approximately
445,000
rentable square feet of office space at 350 Mission Street (“350 Mission”) in San Francisco, California, which is the total office space available in the building. As a result of the Company’s involvement during the construction period, the Company is considered for accounting purposes to be the owner of the construction project. As a result, the Company has capitalized the construction costs as Building with a corresponding current and noncurrent financing obligation liability and has accounted for the underlying land implicitly as an operating lease. As of
January 31, 2017
, construction has been completed for 350 Mission and the Company has capitalized
$178.8 million
of total construction costs, incurred by the landlord, and recorded a corresponding current and noncurrent financing obligation liability of
$19.6 million
and
$200.7 million
, respectively. As of January 31, 2016, the Company had capitalized
$174.6 million
of construction costs, based on the construction costs incurred to date by the landlord, and recorded a corresponding current and noncurrent financing obligation liability of
$15.4 million
and
$196.7 million
, respectively. The total expected financing obligation in the form of minimum lease payments inclusive of the amounts currently recorded, is
$322.3 million
, including interest (see Note 13 “Commitments” for future commitment details). The obligation will be settled through monthly lease payments to the landlord, which commenced on October 2015. To the extent that operating expenses for 350 Mission are material, the Company, as the deemed accounting owner, will record the operating expenses.
6. Business Combinations
Krux
In November 2016, the Company acquired the outstanding stock of Krux Digital, Inc. (“Krux”), for consideration consisting of cash, common stock, and equity awards assumed. Krux is a leading data management platform that unifies, segments and activates audiences to increase engagement with users, prospects and customers. The Company has included the financial results of Krux in the consolidated financial statements from the date of acquisition, which have not been material to date. The transaction costs associated with the acquisition were not material.
The preliminary acquisition date fair value consideration transferred for Krux was approximately
$741.8 million
, which consisted of the following (in thousands, except for share data):
|
|
|
|
|
|
Fair Value
|
Cash
|
$
|
367,995
|
|
Common stock (4,210,773 shares)
|
317,703
|
|
Fair value of stock options and restricted stock awards assumed
|
56,068
|
|
Total
|
$
|
741,766
|
|
The fair value of stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of
0.2
was applied to convert Krux's outstanding equity awards for Krux's common stock into equity awards for shares of the Company's common stock.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
|
|
|
|
|
|
Fair Value
|
Cash and cash equivalents
|
$
|
17,883
|
|
Other current and noncurrent tangible assets
|
12,418
|
|
Intangible assets
|
86,000
|
|
Goodwill
|
642,489
|
|
Deferred revenue, current and noncurrent
|
(7,037
|
)
|
Other liabilities, current and noncurrent
|
(9,308
|
)
|
Deferred tax liability
|
(679
|
)
|
Net assets acquired
|
$
|
741,766
|
|
The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible assets acquired, liabilities assumed and identifiable intangible assets are based on management's estimates and assumptions. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets. The preliminary estimated fair values of assets acquired and liabilities assumed, including current and noncurrent income taxes payable, deferred taxes, and certain identifiable intangible assets, may be subject to change as additional information is received and certain tax returns are finalized. Thus the provisional measurements of fair value set forth above are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
The following table sets forth the components of identifiable intangible assets acquired (in thousands) and their estimated useful lives as of the date of acquisition.
|
|
|
|
|
|
|
Fair Value
|
Useful Life
|
Developed technology
|
$
|
75,000
|
|
3 years
|
Customer relationships
|
10,000
|
|
9 years
|
Other intangibles
|
1,000
|
|
2 years
|
Total intangible assets subject to amortization
|
$
|
86,000
|
|
|
The amount recorded for developed technology represents the estimated fair value of Krux’s data management platform technology. The amount recorded for customer relationships represents the fair values of the underlying relationship with Krux customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating Krux's technology with the Company's other offerings. The goodwill balance is not deductible for U.S. income tax purposes.
The Company assumed equity awards for shares of Krux's common stock with a fair value of
$104.4 million
, of which
$56.1 million
was allocated to the consideration transferred.
BeyondCore
In September 2016, the Company acquired the outstanding stock of BeyondCore, Inc. (“BeyondCore”), for consideration consisting of cash, common stock, and equity awards assumed. BeyondCore is a smart data discovery technology company that automatically explores millions of variable combinations from structured data sources. The Company has included the financial results of BeyondCore in the consolidated financial statements from the date of acquisition, which have not been material to date. The transaction costs associated with the acquisition were not material.
The acquisition date fair value consideration transferred for BeyondCore was approximately
$106.6 million
, which consisted of the following (in thousands, except for share data):
|
|
|
|
|
|
Fair Value
|
Cash
|
$
|
21,053
|
|
Common stock (1,073,432 shares)
|
81,484
|
|
Fair value of stock options and restricted stock awards assumed
|
4,061
|
|
Total
|
$
|
106,598
|
|
The fair value of stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of
0.0464
was applied to convert BeyondCore's outstanding equity awards for BeyondCore's common stock into equity awards for shares of the Company's common stock.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
|
|
|
|
|
|
Fair Value
|
Cash and cash equivalents
|
$
|
2,046
|
|
Other current and noncurrent tangible assets
|
462
|
|
Intangible assets
|
15,600
|
|
Goodwill
|
90,794
|
|
Deferred revenue, current and noncurrent
|
(818
|
)
|
Other liabilities, current and noncurrent
|
(923
|
)
|
Deferred tax liability
|
(563
|
)
|
Net assets acquired
|
$
|
106,598
|
|
The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible assets acquired, liabilities assumed and identifiable intangible assets are based on management's estimates and assumptions. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets. The preliminary estimated fair values of assets acquired and liabilities assumed, including current and noncurrent income taxes payable and deferred taxes may be subject to change as additional information is received and certain tax returns are finalized. Thus the provisional measurements of fair value set forth above are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
The following table sets forth the components of identifiable intangible assets acquired (in thousands) and their estimated useful lives as of the date of acquisition.
|
|
|
|
|
|
|
Fair Value
|
Useful Life
|
Developed technology
|
$
|
14,900
|
|
6 years
|
Customer relationships
|
700
|
|
2 years
|
Total intangible assets subject to amortization
|
$
|
15,600
|
|
|
The amount recorded for developed technology represents the estimated fair value of BeyondCore's smart data analytics technology. The amount recorded for customer relationships represents the fair values of the underlying relationships with BeyondCore customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating BeyondCore's technology with the Company's other offerings. The goodwill balance is not deductible for U.S. income tax purposes.
The Company assumed equity awards for shares of BeyondCore's common stock with a fair value of
$8.6 million
, of which
$4.1 million
was allocated to the consideration transferred.
Quip
In August 2016, the Company acquired the outstanding stock of Quip, Inc. (“Quip”) for consideration consisting of cash, common stock, fair value of equity awards assumed, as well as fair value of the Company's pre-existing relationship. Quip combines content and communication to create living documents to allow work-teams to write, edit and discuss documents,
spreadsheets and checklists in a single experience. The Company acquired Quip for its product offerings and employees. The Company has included the financial results of Quip in the consolidated financial statements from the date of acquisition, which have not been material to date. The transaction costs associated with the acquisition were not material.
The acquisition date fair value consideration transferred for Quip was approximately
$412.0 million
, which consisted of the following (in thousands, except for share data):
|
|
|
|
|
|
Fair Value
|
Cash
|
$
|
2,711
|
|
Common stock (4,796,152 shares)
|
385,131
|
|
Fair value of stock options and restricted stock awards assumed
|
22,345
|
|
Fair value of pre-existing relationship
|
1,833
|
|
Total
|
$
|
412,020
|
|
The fair value of stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of
0.5514
was applied to convert Quip's outstanding equity awards for Quip's common stock into equity awards for shares of the Company's common stock.
The Company had a
$1.0 million
, or approximately
0.3 percent
, noncontrolling equity investment in Quip prior to the acquisition. The acquisition date fair value of the Company's previously held equity interest was approximately
$1.8 million
and is included in the measurement of the consideration transferred. The Company recognized a gain of approximately
$0.8 million
as a result of remeasuring its prior equity interest in Quip held before the business combination. The gain is included in gains from acquisitions of strategic investments in the consolidated statement of operations.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
|
|
|
|
|
|
Fair Value
|
Cash and cash equivalents
|
$
|
27,985
|
|
Other current and noncurrent tangible assets
|
556
|
|
Intangible assets
|
31,200
|
|
Goodwill
|
357,610
|
|
Other liabilities, current and noncurrent
|
(2,491
|
)
|
Deferred tax liability
|
(2,840
|
)
|
Net assets acquired
|
$
|
412,020
|
|
The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible assets acquired, liabilities assumed and identifiable intangible assets are based on management's estimates and assumptions. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets. The preliminary estimated fair values of assets acquired and liabilities assumed, including current and noncurrent income taxes payable and deferred taxes may be subject to change as additional information is received and certain tax returns are finalized. Thus the provisional measurements of fair value set forth above are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
The following table sets forth the components of identifiable intangible assets acquired (in thousands) and their estimated useful lives as of the date of acquisition.
|
|
|
|
|
|
|
Fair Value
|
Useful Life
|
Developed technology
|
$
|
18,590
|
|
5 years
|
Customer relationships
|
12,460
|
|
10 years
|
Other purchased intangible assets
|
150
|
|
3 years
|
Total intangible assets subject to amortization
|
$
|
31,200
|
|
|
The amount recorded for developed technology represents the estimated fair value of Quip's productivity technology. The amount recorded for customer relationships represents the fair values of the underlying relationship with Quip customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating Quip's technology with the Company's other offerings. The goodwill balance is not deductible for U.S. income tax purposes.
The Company assumed equity awards for shares of Quip's common stock with a fair value of
$68.0 million
, of which
$22.3 million
was allocated to the consideration transferred.
Demandware
In July 2016, the Company acquired for cash the outstanding stock of Demandware, Inc. (“Demandware”), an industry-leading provider of enterprise cloud commerce solutions in the digital commerce market. The Company acquired Demandware to, among other things,
expand the Company's position in customer relationship management and to pursue the digital commerce market with the new Salesforce Commerce Cloud.
The Company has included the financial results of Demandware in the consolidated financial statements from the date of acquisition. The transaction costs associated with the acquisition were
$15.5 million
and are recorded in general and administrative expense. The acquisition date fair value of the consideration transferred for Demandware was approximately
$2.9 billion
, including the proceeds from the term loan of
$500.0 million
(see Note 8), which consisted of the following (in thousands):
|
|
|
|
|
|
Fair Value
|
Cash
|
$
|
2,920,336
|
|
Fair value of stock options and restricted stock awards assumed
|
9,344
|
|
Total
|
$
|
2,929,680
|
|
The estimated fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of
0.9545
was applied to convert Demandware’s outstanding equity awards for Demandware’s common stock into equity awards for shares of the Company’s common stock.
The following table summarizes the preliminary estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
|
|
|
|
|
|
Fair Value
|
Cash and cash equivalents
|
$
|
139,259
|
|
Marketable securities
|
37,230
|
|
Accounts receivable
|
56,982
|
|
Other current assets
|
13,545
|
|
Customer contract asset, noncurrent
|
327,830
|
|
Intangible assets
|
633,277
|
|
Property and equipment
|
29,463
|
|
Other noncurrent assets
|
4,579
|
|
Goodwill
|
1,985,269
|
|
Accounts payable, accrued expenses and other liabilities
|
(51,870
|
)
|
Deferred revenue, current and noncurrent
|
(22,647
|
)
|
Other liabilities, noncurrent
|
(12,935
|
)
|
Deferred tax liability
|
(210,302
|
)
|
Net assets acquired
|
$
|
2,929,680
|
|
The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets. The preliminary estimated fair values of assets acquired and liabilities assumed, specifically, the current and noncurrent income taxes payable and deferred taxes, may be subject to change as additional information is received and certain tax returns are finalized. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
During fiscal 2017, and subsequent to the initial purchase accounting, the Company identified additional information that existed as of the date of the acquisition related to the valuation of the customer relationship assets and therefore adjusted the measurement of the fair value of these assets. As a result of the updated valuation, the Company recorded measurement period adjustments, which included a decrease to the fair value of the customer relationship asset of
$168.8 million
. Additionally, these measurement period adjustments resulted in a corresponding decrease to the deferred tax liability recognized of
$61.2 million
. The net effect of these changes resulted in a corresponding increase to goodwill of
$100.4 million
. These adjustments are reflected in the table above.
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands):
|
|
|
|
|
|
|
Fair Value
|
Useful Life
|
Developed technology
|
$
|
242,550
|
|
2 to 5 years
|
Customer relationships
|
384,590
|
|
3 to 10 years
|
Other purchased intangible assets
|
6,137
|
|
3 to 10 years
|
Total intangible assets subject to amortization
|
$
|
633,277
|
|
|
Developed technology represents the fair value of Demandware’s e-commerce technology. Customer relationships represent the fair values of the underlying relationships with Demandware customers. Other purchased intangible assets also includes intangibles such as trademarks and favorable leases, which span over lease terms varying from
1
to
10
years. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating Demandware’s e-commerce technology with the Company’s other offerings. The majority of the goodwill balance is not deductible for U.S. income tax purposes.
The Company assumed equity awards with an estimated fair value of
$135.2 million
, of which
$9.3 million
was allocated to the purchase consideration.
The Demandware acquisition was significant to our consolidated financial statements and their results are included in the consolidated financial statements from the date of acquisition. The amounts of revenue and earnings of Demandware included in the Company’s consolidated statement of operations from the acquisition date of July 11, 2016 through
January 31, 2017
are as follows (in thousands):
|
|
|
|
|
Total revenues
|
$
|
120,383
|
|
Pretax loss
|
(102,524
|
)
|
Net loss
|
(103,149
|
)
|
SteelBrick
In February 2016, the Company acquired the outstanding stock of SteelBrick, Inc. (“SteelBrick”) for consideration consisting of cash and common stock. SteelBrick is a next generation quote-to-cash platform, delivered
100 percent
natively on the Salesforce platform, which offers applications, or apps, for automating the entire deal close process - from generating quotes and configuring orders to collecting cash. The Company has included the financial results of SteelBrick in the consolidated financial statements from the date of acquisition, which have not been material to date. The transaction costs associated with the acquisition were not material.
The acquisition date fair value consideration transferred for SteelBrick was approximately
$314.8 million
, which consisted of the following (in thousands, except for share data):
|
|
|
|
|
|
Fair Value
|
Cash
|
$
|
1,698
|
|
Common stock (4,288,447 shares)
|
278,372
|
|
Fair value of stock options and restricted stock awards assumed
|
10,989
|
|
Fair value of pre-existing relationship
|
23,726
|
|
Total
|
$
|
314,785
|
|
The fair value of stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of
0.08
was applied to convert SteelBrick's outstanding equity awards for SteelBrick's common stock into equity awards for shares of the Company's common stock.
The Company had a
$13.9 million
, or approximately
six
percent, noncontrolling equity investment in SteelBrick prior to the acquisition. The acquisition date fair value of the Company's previously held equity interest was approximately
$23.7 million
and is included in the measurement of the consideration transferred. The Company recognized a gain of approximately
$9.8 million
as a result of remeasuring its prior equity interest in SteelBrick held before the business combination. The gain is included in gains from acquisitions of strategic investments on the Consolidated Statement of Operations.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
|
|
|
|
|
|
Fair Value
|
Cash and cash equivalents
|
$
|
59,296
|
|
Other current and noncurrent tangible assets
|
3,012
|
|
Customer contract asset, noncurrent
|
6,954
|
|
Intangible assets
|
49,160
|
|
Goodwill
|
217,986
|
|
Deferred revenue, current and noncurrent
|
(8,479
|
)
|
Other liabilities, current and noncurrent
|
(2,665
|
)
|
Deferred tax liability
|
(10,479
|
)
|
Net assets acquired
|
$
|
314,785
|
|
The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible assets acquired, liabilities assumed and identifiable intangible assets are based on management's estimates and assumptions.
The following table sets forth the components of identifiable intangible assets acquired (in thousands) and their estimated useful lives as of the date of acquisition.
|
|
|
|
|
|
|
Fair Value
|
Useful Life
|
Developed technology
|
$
|
30,700
|
|
4 years
|
Customer relationships
|
17,110
|
|
7 years
|
Other purchased intangible assets
|
1,350
|
|
1 year
|
Total intangible assets subject to amortization
|
$
|
49,160
|
|
|
The amount recorded for developed technology represents the estimated fair value of SteelBrick's quote-to-cash and billing technology. The amount recorded for customer relationships represents the fair values of the underlying relationship with SteelBrick customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating SteelBrick's quote-to-cash technology with the Company's other offerings. The majority of the goodwill balance is not deductible for U.S. income tax purposes.
The Company assumed equity awards for shares of SteelBrick's common stock with a fair value of
$39.6 million
, of which
$11.0 million
was allocated to the consideration transferred.
MetaMind
In April 2016, the Company acquired MetaMind, Inc. (“MetaMind”) for approximately
$32.8 million
in cash, net of cash acquired. This amount includes amounts to be paid after an initial holdback period, and assumed equity awards. The primary reason for the acquisition was to extend the Company's intelligence in natural language processing and image recognition across all clouds. The Company has included the financial results of MetaMind, which have not been material to date, in its consolidated financial statements from the date of acquisition. The transaction costs associated with the acquisition were not material. In allocating the purchase consideration for MetaMind based on estimated fair values, the Company recorded
$31.2 million
of goodwill and
$1.9 million
of identifiable intangible assets. The goodwill balance is not deductible for U.S. income tax purposes. The estimated fair values of assets acquired and liabilities assumed, specifically current and noncurrent income taxes payable and deferred taxes, may be subject to change as additional information is received and certain tax returns are finalized. Thus, the provisional measurements of fair value are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
The Company assumed equity awards for shares of MetaMind's common stock with a fair value of
$5.5 million
, of which
$0.5 million
was allocated to the purchase consideration.
The Company's chairman, who held a greater than
ten
percent ownership interest in MetaMind, received approximately
$6.0 million
in total proceeds, subject to customary escrow amounts, in connection with this acquisition.
Other Fiscal 2017 Business Combinations
During fiscal
2017
, the Company acquired
seven
other companies for an aggregate of
$108.7 million
in cash, net of cash acquired, and has included the financial results of these companies in its consolidated financial statements from the respective dates of acquisition. These transactions, individually and in the aggregate, are not material to the Company. The costs associated with these acquisitions were not material. The Company accounted for these transactions as business combinations. In allocating the purchase consideration for each company based on estimated fair values, the Company recorded
$108.2 million
of goodwill and
$34.2 million
of identifiable intangible assets. Amounts allocated to the remaining acquired tangible assets and liabilities were not material. The majority of the goodwill balance associated with these transactions is not deductible for U.S. income tax purposes. The Company expects to finalize the valuations as soon as practicable, but not later than one year from the acquisition dates.
Fiscal Year
2016
50 Fremont
In February 2015, the Company acquired 50 Fremont Street, a
41
-story building totaling approximately
817,000
rentable square feet located in San Francisco, California (“50 Fremont”). At the time of the acquisition, the Company was leasing approximately
500,000
square feet of the available space in 50 Fremont. The Company acquired 50 Fremont for the purpose of expanding its global headquarters in San Francisco. Pursuant to the acquisition agreement, the Company also acquired existing third-party leases and other intangible property, terminated the Company’s existing office leases with the seller and assumed the seller's outstanding loan on 50 Fremont. In accordance with Accounting Standards Codification 805 (“ASC 805”), Business Combinations, the Company accounted for the building purchase as a business combination.
The purchase consideration for the corporate headquarters building was as follows (in thousands):
|
|
|
|
|
|
Fair Value
|
Cash
|
$
|
435,189
|
|
Loan assumed on 50 Fremont
|
200,000
|
|
Prorations due to ownership transfer midmonth
|
2,411
|
|
Total purchase consideration
|
$
|
637,600
|
|
The following table summarizes the fair values of net tangible and intangible assets acquired (in thousands):
|
|
|
|
|
|
Fair Value
|
Building
|
$
|
435,390
|
|
Land
|
183,888
|
|
Termination of salesforce operating lease
|
9,483
|
|
Acquired lease intangibles
|
7,590
|
|
Loan assumed on 50 Fremont fair market value adjustment
|
1,249
|
|
Total
|
$
|
637,600
|
|
To fund the purchase of 50 Fremont, the Company used
$115.0 million
of restricted cash that the Company had on the balance sheet as of January 31, 2015.
In connection with the purchase, the Company recognized a net non-cash gain totaling approximately
$36.6 million
on the termination of the lease signed in January 2012. This amount reflects a gain of
$46.1 million
for the reversal of tenant incentives provided from the previous landlord at the inception of the lease and a loss of
$9.5 million
related to the termination of the Company's operating lease. The tax impact as a result of the difference between tax and book basis of the building is insignificant after considering the impact of the Company's valuation allowance. The amounts above have been included in the Company's consolidated statements of operations and consolidated balance sheet. The Company has included the rental income from third party leases with other tenants in the building, and the proportionate share of building expenses for those leases in other expense in the Company's consolidated results of operations from the date of acquisition. These amounts are recorded in other expense as this net rental income is not part of our core operations. These amounts were not material for the periods presented.
Other Fiscal
2016
Business Combinations
During fiscal
2016
, the Company acquired several companies for an aggregate of
$60.1 million
in cash, net of cash acquired, and has included the financial results of these companies in its consolidated financial statements from the respective dates of acquisition. These transactions, individually and in aggregate, are not material to the Company. The costs associated with these acquisitions were not material. The Company accounted for these transactions as business combinations. In allocating the purchase consideration for each company based on estimated fair values, the Company recorded
$68.7 million
of goodwill. Some of the goodwill balance associated with these transactions is deductible for U.S. income tax purposes.
Unaudited Pro Forma Results of Acquirees
The Company has included the financial results of each of the acquirees in the consolidated financial statements from the respective dates of acquisition; the revenues and the results of each of the acquirees, except for Demandware, have not been material both individually or in the aggregate to the Company's fiscal 2017 and 2016 results.
The following unaudited pro forma financial information summarizes the combined results of operations for the Company, Demandware and other acquisitions, as though the companies were combined as of the beginning of the Company’s fiscal 2016. The unaudited pro forma financial information was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
2017
|
|
2016
|
Total revenues
|
$
|
8,470,154
|
|
|
$
|
6,813,535
|
|
Pretax loss
|
(167,950
|
)
|
|
(362,882
|
)
|
Net loss
|
(239,169
|
)
|
|
(212,342
|
)
|
The pro forma financial information for all periods presented has been calculated after adjusting the results of Demandware and other acquisitions to reflect the business combination accounting effects resulting from these acquisitions including the amortization expense from acquired intangible assets and the stock-based compensation expense for unvested stock options and restricted stock awards assumed as though the acquisition occurred as of the beginning of the Company’s fiscal year 2016. The historical financial information has been adjusted to give effect to pro forma events that are directly attributable to the business combinations and factually supportable. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of the Company’s fiscal 2016.
The pro forma financial information for fiscal 2017 and 2016 combines the historical results of the Company, the adjusted historical results of Demandware and other acquisitions for fiscal 2017 and 2016, due to differences in reporting periods and considering the date the Company acquired Demandware and other acquisitions, and the effects of the pro forma adjustments described above.
7. Intangible Assets Acquired Through Business Combinations and Goodwill
Intangible assets acquired through business combinations
Intangible assets acquired through business combinations are as follows as of
January 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets, Gross
|
|
Accumulated Amortization
|
|
Intangible Assets, Net
|
|
Weighted
Average
Useful Life
|
|
|
Jan 31, 2016
|
|
Additions
|
|
Jan 31, 2017
|
|
Jan 31, 2016
|
|
Expense
|
|
Jan 31, 2017
|
|
Jan 31, 2016
|
|
Jan 31, 2017
|
|
Acquired developed technology
|
|
$
|
684,260
|
|
|
$
|
407,901
|
|
|
$
|
1,092,161
|
|
|
$
|
(451,889
|
)
|
|
$
|
(126,040
|
)
|
|
$
|
(577,929
|
)
|
|
$
|
232,371
|
|
|
$
|
514,232
|
|
|
3.6
|
Customer relationships
|
|
410,763
|
|
|
432,851
|
|
|
843,614
|
|
|
(160,866
|
)
|
|
(93,169
|
)
|
|
(254,035
|
)
|
|
249,897
|
|
|
589,579
|
|
|
5.4
|
Trade name and trademark
|
|
38,980
|
|
|
6,970
|
|
|
45,950
|
|
|
(38,980
|
)
|
|
(2,369
|
)
|
|
(41,349
|
)
|
|
0
|
|
|
4,601
|
|
|
2.3
|
Territory rights and other
|
|
12,372
|
|
|
3,414
|
|
|
15,786
|
|
|
(8,585
|
)
|
|
(3,671
|
)
|
|
(12,256
|
)
|
|
3,787
|
|
|
3,530
|
|
|
7.3
|
50 Fremont lease intangibles
|
|
7,713
|
|
|
0
|
|
|
7,713
|
|
|
(3,762
|
)
|
|
(2,519
|
)
|
|
(6,281
|
)
|
|
3,951
|
|
|
1,432
|
|
|
2.1
|
Total
|
|
$
|
1,154,088
|
|
|
$
|
851,136
|
|
|
$
|
2,005,224
|
|
|
$
|
(664,082
|
)
|
|
$
|
(227,768
|
)
|
|
$
|
(891,850
|
)
|
|
$
|
490,006
|
|
|
$
|
1,113,374
|
|
|
4.5
|
Amortization of intangibles for fiscal 2017, 2016, and 2015 classified in the Consolidated Statements of Operations were
$227.8 million
,
$161.7 million
,
$155.0 million
, respectively.
The expected future amortization expense for intangible assets as of
January 31, 2017
is as follows (in thousands):
|
|
|
|
|
Fiscal Period:
|
|
Fiscal 2018
|
$
|
287,950
|
|
Fiscal 2019
|
265,806
|
|
Fiscal 2020
|
224,612
|
|
Fiscal 2021
|
169,055
|
|
Fiscal 2022
|
110,926
|
|
Thereafter
|
55,025
|
|
Total amortization expense
|
$
|
1,113,374
|
|
Goodwill
Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Goodwill amounts are not amortized, but rather tested for impairment at least annually during the fourth quarter.
The changes in the carrying amounts of goodwill, which is generally not deductible for tax purposes, were as follows (in thousands):
|
|
|
|
|
Balance as of January 31, 2015
|
$
|
3,782,660
|
|
Other acquisitions
|
68,655
|
|
Adjustments of acquisition date fair values:
|
(1,378
|
)
|
Balance as of January 31, 2016
|
3,849,937
|
|
SteelBrick
|
217,986
|
|
MetaMind
|
31,242
|
|
Demandware
|
1,884,886
|
|
Quip
|
357,610
|
|
BeyondCore
|
90,794
|
|
Krux
|
642,489
|
|
Other acquisitions
|
108,164
|
|
Adjustments of acquisition date fair values:
|
|
Demandware
|
100,383
|
|
Other business combinations and adjustments
|
(19,645
|
)
|
Balance as of January 31, 2017
|
$
|
7,263,846
|
|
8. Debt
Convertible Senior Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par Value Outstanding
|
|
Equity
Component Recorded at Issuance
|
|
Liability Component of Par Value as of January 31,
|
(in thousands)
|
2017
|
|
2016
|
0.25% Convertible Senior Notes due April 1, 2018
|
$
|
1,150,000
|
|
|
$
|
122,421
|
|
(1)
|
$
|
1,116,360
|
|
|
$
|
1,088,097
|
|
___________
(1)
This amount represents the equity component recorded at the initial issuance of the
0.25%
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”) due
April 1, 2018
, unless earlier purchased by the Company or converted. Interest is payable semi-annually, in arrears on April 1 and October 1 of each year.
The
0.25%
Senior Notes are governed by an indenture between the Company, as issuer, and U.S. Bank National Association, as trustee. The
0.25%
Senior Notes are unsecured and do not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by the Company.
If converted, holders of the
0.25%
Senior Notes will receive cash equal to the principal amount, and at the Company’s election, cash, shares of the Company’s common stock, or a combination of cash and shares, for any amounts in excess of the principal amounts.
Certain terms of the conversion features of the
0.25%
Senior Notes are as follows:
|
|
|
|
|
|
|
|
|
|
|
Conversion
Rate per $1,000
Par Value
|
|
Initial
Conversion
Price per
Share
|
|
Convertible Date
|
0.25% Senior Notes
|
15.0512
|
|
|
$
|
66.44
|
|
|
January 1, 2018
|
Throughout the term of the
0.25%
Senior Notes, the conversion rate may be adjusted upon the occurrence of certain events, including any cash dividends. Holders of the
0.25%
Senior Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than canceled, extinguished or forfeited.
Holders may convert the
0.25%
Senior Notes under the following circumstances:
|
|
•
|
during any fiscal quarter, if, for at least
20
trading days during the
30
consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sales price of the Company’s common stock for such trading day is greater than or equal to
130%
of the applicable conversion price on such trading day share of common stock on such last trading day;
|
|
|
•
|
in certain situations, when the trading price of the
0.25%
Senior Notes is less than
98%
of the product of the sale price of the Company’s common stock and the conversion rate;
|
|
|
•
|
upon the occurrence of specified corporate transactions described under the
0.25%
Senior Notes indenture, such as a consolidation, merger or binding share exchange; or
|
|
|
•
|
at any time on or after the convertible date noted above (as described in the indenture).
|
Holders of the
0.25%
Senior Notes have the right to require the Company to purchase with cash all or a portion of the Notes upon the occurrence of a fundamental change, such as a change of control, at a purchase price equal to
100%
of the principal amount of the
0.25%
Senior Notes plus accrued and unpaid interest. Following certain corporate transactions that constitute a change of control, the Company will increase the conversion rate for a holder who elects to convert the
0.25%
Senior Notes in connection with such change of control.
In accounting for the issuances of the
0.25%
Senior Notes, the Company separated the
0.25%
Senior Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the
0.25%
Senior Notes as a whole. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the
0.25%
Senior Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the
0.25%
Senior Notes issuance, the Company allocated the total amount incurred to the liability and equity components based on its relative values. Transaction costs attributable to the liability component are being amortized to expense over the terms of the
0.25%
Senior Notes, and transaction costs attributable to the equity component were netted with the equity component in stockholders’ equity.
The
0.25%
Senior Notes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
2017
|
|
2016
|
Liability component :
|
|
|
|
Principal (1)
|
$
|
1,150,000
|
|
|
$
|
1,150,000
|
|
Less: debt discount, net (2)
|
(29,954
|
)
|
|
(54,941
|
)
|
Less: debt issuance cost (3)
|
(3,686
|
)
|
|
(6,962
|
)
|
Net carrying amount
|
$
|
1,116,360
|
|
|
$
|
1,088,097
|
|
(1)
The effective interest rates of the
0.25%
Senior Notes is
2.53%
. These interest rates were based on the interest rates of a similar liability at the time of issuance that did not have an associated convertible feature.
(2)
Included in the consolidated balance sheets within Convertible
0.25%
Senior Notes (which is classified as a noncurrent liability) and is amortized over the life of the
0.25%
Senior Notes using the effective interest rate method.
(3)
In April 2015, the FASB issued ASU 2015-03 which simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability rather than an asset that is amortized. The Company retrospectively adopted this standard for the prior period presented.
The total estimated fair values of the Company’s
0.25%
Senior Notes at
January 31, 2017
was
$1.5 billion
. The fair value was determined based on the closing trading price per
$100
of the
0.25%
Senior Notes as of the last day of trading for fiscal
2017
.
Based on the closing price of the Company’s common stock of
$79.10
on January 31, 2017, the if-converted value of the
0.25%
Senior Notes exceeded their principal amount by approximately
$219.1 million
. Based on the terms of the
0.25%
Senior Notes, the Senior Notes were not convertible at any time during the fiscal year ended
January 31, 2017
.
Note Hedges
To minimize the impact of potential economic dilution upon conversion of the Notes, the Company entered into convertible note hedge transactions with respect to its common stock (the “Note Hedges”).
|
|
|
|
|
|
|
|
|
|
(in thousands, except for shares)
|
Date
|
|
Purchase
|
|
Shares
|
0.25% Note Hedges
|
March 2013
|
|
$
|
153,800
|
|
|
17,308,880
|
|
The Note Hedges cover shares of the Company’s common stock at a strike price that corresponds to the initial conversion price of the respective Notes, also subject to adjustment, and are exercisable upon conversion of the Notes. The Note Hedges will expire upon the maturity of the Notes. The Note Hedges are intended to reduce the potential economic dilution upon conversion of the Notes in the event that the market value per share of the Company’s common stock, as measured under the Notes, at the time of exercise is greater than the conversion price of the Notes. The Note Hedges are separate transactions and are not part of the terms of the Notes. Holders of the Notes will not have any rights with respect to the Note Hedges. The Note Hedges do not impact earnings per share.
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Proceeds
(in thousands)
|
|
Shares
|
|
Strike
Price
|
0.25% Warrants
|
March 2013
|
|
$
|
84,800
|
|
|
17,308,880
|
|
|
$
|
90.40
|
|
In March 2013, the Company also entered into a warrants transaction (the “
0.25%
Warrants”), whereby the Company sold warrants to acquire, subject to anti-dilution adjustments, shares of the Company’s common stock. The
0.25%
Warrants were anti-dilutive for the periods presented. The
0.25%
Warrants are separate transactions entered into by the Company and are not part of the terms of the
0.25%
Senior Notes or the
0.25%
Note Hedges. Holders of the
0.25%
Senior Notes and
0.25%
Note Hedges will not have any rights with respect to the
0.25%
Warrants.
Term Loan
In July 2016, the Company entered into a credit agreement (the “Term Loan Credit Agreement”) with Bank of America, N.A. and certain other institutional lenders for a
$500.0 million
term loan facility (the “Term Loan”) that matures on July 11, 2019. The Term Loan will bear interest, at the Company’s option, at either a base rate plus a spread of
0.00%
to
0.75%
or an adjusted LIBOR rate plus a spread of
1.00%
to
1.75%
, in each case with such spread being determined based on the Company’s consolidated leverage ratio for the preceding four fiscal quarter period.
In July 2016, the Company borrowed the full
$500.0 million
under the Term Loan. All of the net proceeds of the Term Loan were for the purposes of partially funding the acquisition of Demandware.
Interest on the Term Loan is due and payable in arrears quarterly for loans bearing interest at a rate based on the base rate and at the end of an interest period in the case of loans bearing interest at the adjusted LIBOR rate.
All outstanding amounts under the Term Loan Credit Agreement will be due and payable on July 11, 2019. The Company may prepay the Term Loan, in whole or in part, at any time without premium or penalty, subject to certain conditions, and amounts repaid or prepaid may not be reborrowed. The Company’s obligations under the Term Loan Credit Agreement are required to be guaranteed by certain of its subsidiaries meeting certain thresholds set forth in the Term Loan Credit Agreement.
The Term Loan Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends or make distributions and repurchase stock. The Company is also required to maintain compliance with a consolidated leverage ratio and a consolidated interest coverage ratio. The Term Loan Credit Agreement includes customary events of default. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Term Loan Credit Agreement at a per annum rate equal to
2.00%
above the applicable interest rate for any overdue principal and
2.00%
above the rate applicable for base rate loans for any other overdue amounts. The occurrence of an event of default
could result in the acceleration of obligations under the Term Loan Credit Agreement. The Company was in compliance with the Term Loan Credit Agreement’s covenants as of
January 31, 2017
.
The weighted average interest rate on the Term Loan was
1.8%
for the fiscal year ended
January 31, 2017
. Accrued interest on the Term Loan was
$5.2 million
as of
January 31, 2017
. As of
January 31, 2017
, the outstanding principal portion was
$500.0 million
, all of which was classified as noncurrent.
Revolving Credit Facility
In July 2016, the Company entered into an Amended and Restated Credit Agreement (the
“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 (the “Credit Facility”) that matures in July 2021. The Revolving Loan Credit Agreement amended and restated the Company’s existing revolving credit facility dated October 2014. The Company may use the proceeds of future borrowings under the Credit Facility for refinancing other indebtedness, working capital, capital expenditures and other general corporate purposes, including permitted acquisitions.
The borrowings under the Credit Facility bear interest, at the Company’s option, at a base rate plus a spread of
0.00%
to
0.75%
or an adjusted LIBOR rate plus a spread of
1.00%
to
1.75%
, in each case with such spread being determined based on the Company’s consolidated leverage ratio for the preceding four fiscal quarter period. Interest is due and payable in arrears quarterly for loans bearing interest at a rate based on the base rate and at the end of an interest period in the case of loans bearing interest at the adjusted LIBOR rate. Regardless of what amounts, if any, are outstanding under the Credit Facility, the Company is also obligated to pay an ongoing commitment fee at a rate of
0.125%
to
0.25%
, with such rate being based on the Company’s consolidated leverage ratio for the preceding four fiscal quarter period, payable in arrears quarterly.
The Revolving Loan Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends or make distributions and repurchase stock. The Company is also required to maintain compliance with a consolidated leverage ratio and a consolidated interest coverage ratio. The Revolving Loan Credit Agreement includes customary events of default. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Revolving Loan Credit Agreement at a per annum rate equal to
2.00%
above the applicable interest rate for any overdue principal and
2.00%
above the rate applicable for base rate loans for any other overdue amounts. The occurrence of an event of default could result in the acceleration of obligations under the Revolving Loan Credit Agreement. The Company was in compliance with the Revolving Loan Credit Agreement’s covenants as of
January 31, 2017
.
In the fourth quarter of fiscal 2017, the Company drew upon
$750.0 million
of the Credit Facility and subsequently paid down
$550.0 million
of outstanding borrowings under the Credit Facility. There were
$200.0 million
outstanding borrowings under the Credit Facility as of
January 31, 2017
. The weighted average interest rate on the borrowings under the Credit Facility was
1.9%
for fiscal 2017. The Company continues to pay a fee on the undrawn amount of the Credit Facility.
Loan Assumed on 50 Fremont
The Company assumed a
$200.0 million
loan with the acquisition of 50 Fremont (the “Loan”). The Loan bears an interest rate of
3.75%
per annum and is due in June 2023. The Loan initially requires interest only payments. Beginning in fiscal year 2019, principal and interest payments are required, with the remaining principal due at maturity. For the fiscal year 2017 and 2016, total interest expense recognized was
$7.5 million
and
$7.3 million
, respectively. The Loan can be prepaid at any time subject to a yield maintenance fee. The agreement governing the Loan contains certain customary affirmative and negative covenants that the Company was in compliance with as of
January 31, 2017
.
Interest Expense on Convertible Senior Notes, Term Loan, Revolving Credit Facility and Loan Assumed on 50 Fremont
The following table sets forth total interest expense recognized related to the Notes, the Term Loan, the Credit Facility and the Loan Assumed on 50 Fremont prior to capitalization of interest (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Contractual interest expense
|
|
$
|
19,023
|
|
|
$
|
11,879
|
|
|
$
|
10,224
|
|
Amortization of debt issuance costs
|
|
5,403
|
|
|
4,105
|
|
|
4,622
|
|
Amortization of debt discount
|
|
25,137
|
|
|
24,504
|
|
|
36,575
|
|
|
|
$
|
49,563
|
|
|
$
|
40,488
|
|
|
$
|
51,421
|
|
9. Other Balance Sheet Accounts
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
2017
|
|
2016
|
Prepaid income taxes
|
$
|
26,932
|
|
|
$
|
22,044
|
|
Other taxes receivable
|
34,177
|
|
|
27,341
|
|
Prepaid expenses and other current assets
|
218,418
|
|
|
201,209
|
|
|
$
|
279,527
|
|
|
$
|
250,594
|
|
Included in prepaid expenses and other current assets are value-added tax and sales tax receivables associated with the sale of the Company's services to third parties. Value-added tax and sales tax receivables totaled
$34.2 million
and
$27.3 million
at
January 31, 2017
and
2016
, respectively.
Capitalized Software, net
Capitalized software, net at
January 31, 2017
and
2016
was
$141.7 million
and
$123.1 million
, respectively. Accumulated amortization relating to capitalized software, net totaled
$250.9 million
and
$186.3 million
, respectively, at
January 31, 2017
and
2016
.
Capitalized internal-use software amortization expense totaled
$64.6 million
,
$49.9 million
,
$35.7 million
for fiscal
2017
,
2016
and
2015
, respectively.
The Company capitalized
$7.2 million
,
$6.1 million
and
$5.3 million
of stock-based expenses related to capitalized internal-use software development during fiscal
2017
,
2016
and
2015
, respectively.
Other Assets, net
Other assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
2017
|
|
2016
|
Deferred income taxes, noncurrent, net
|
$
|
28,939
|
|
|
$
|
15,986
|
|
Long-term deposits
|
23,597
|
|
|
19,469
|
|
Domain names and patents, net of accumulated amortization of $41,783 and $25,254, respectively
|
39,213
|
|
|
40,332
|
|
Customer contract asset (Note 6)
|
281,733
|
|
|
93
|
|
Other (1)
|
113,387
|
|
|
66,217
|
|
|
$
|
486,869
|
|
|
$
|
142,097
|
|
(1) In April 2015, the FASB issued ASU 2015-03 which simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability rather than an asset that is amortized. The
Company retrospectively adopted this standard for the prior period presented, which resulted in a decrease in the carrying value of
$7.9 million
to Other as of
January 31, 2016
.
Domain names and patents amortization expense for fiscal
2017
,
2016
and
2015
was
$16.5 million
,
$15.5 million
,
$11.9 million
respectively.
Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable, accrued expenses and other liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
2017
|
|
2016
|
Accounts payable
|
$
|
115,257
|
|
|
$
|
71,481
|
|
Accrued compensation
|
730,390
|
|
|
554,502
|
|
Non-cash equity liability (1)
|
68,355
|
|
|
0
|
|
Accrued other liabilities
|
521,405
|
|
|
454,287
|
|
Accrued income and other taxes payable
|
239,699
|
|
|
205,781
|
|
Accrued professional costs
|
38,254
|
|
|
33,814
|
|
Accrued rent
|
19,710
|
|
|
14,071
|
|
Financing obligation- leased facility, current (2)
|
19,594
|
|
|
15,402
|
|
|
$
|
1,752,664
|
|
|
$
|
1,349,338
|
|
Other Noncurrent Liabilities
Other noncurrent liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
2017
|
|
2016
|
Deferred income taxes and income taxes payable
|
$
|
99,378
|
|
|
$
|
85,996
|
|
Financing obligation - leased facility (2)
|
200,711
|
|
|
196,711
|
|
Long-term lease liabilities and other
|
480,850
|
|
|
550,358
|
|
|
$
|
780,939
|
|
|
$
|
833,065
|
|
(1) Non-cash equity liability represents the purchase price of shares issued to non-executive employees, as to shares exceeding previously registered ESPP shares at the time of sale to the extent the shares had not been subsequently sold by the employee purchaser. The Company expects this liability will be relieved within a year or earlier as the shares are subsequently sold.
(2) As of January 31, 2016, 350 Mission was in construction. In March 2016, construction was completed on the building. See Note 5 “Property and Equipment” for further discussion.
10. Stockholders’ Equity
The Company maintains the following stock plans: the ESPP, the 2013 Equity Incentive Plan and the 2014 Inducement Equity Incentive Plan (the “2014 Inducement Plan”). The expiration of the 1999 Stock Option Plan (“1999 Plan”) in fiscal 2010 did not affect awards outstanding, which continue to be governed by the terms and conditions of the 1999 Plan.
On July 10, 2014, the Company adopted the 2014 Inducement Plan with a reserve of
335,000
shares of common stock for future issuance solely for the granting of inducement stock options and equity awards to new employees, including employees of acquired companies. In addition, approximately
319,000
shares of common stock that remained available for grant under the 2006 Inducement Equity Incentive Plan (the “Prior Inducement Plan”) as of July 9, 2014 were added to the 2014 Inducement Plan share reserve and the Prior Inducement Plan was terminated. Further, any shares of common stock subject to outstanding awards under the Prior Inducement Plan that expire, are forfeited, or are repurchased by the Company will also become available for future grant under the 2014 Inducement Plan. Termination of the Prior Inducement Plan did not affect the outstanding awards previously issued thereunder. The 2014 Inducement Plan was adopted without stockholder approval in reliance on the “employment inducement exemption” provided under the New York Stock Exchange Listed Company Manual.
In September 2011, the Company’s Board of Directors amended and restated the ESPP. In conjunction with the amendment of the ESPP, the Company’s Board of Directors determined that the offerings under the ESPP would commence, beginning with a twelve month offering period starting in December 2011. As of
January 31, 2017
,
$48.4 million
has been withheld on behalf of employees for future purchases under the ESPP and is recorded in accounts payable, accrued expenses and other liabilities. Employees purchased
3.2 million
shares for
$126.1 million
and
3.0 million
shares for
$155.0 million
, in fiscal
2017
and
2016
, respectively, under the ESPP.
Prior to February 1, 2006, options issued under the Company’s stock option plans generally had a term of
10 years
. From February 1, 2006 through July 3, 2013, options issued had a term of
five
years. After July 3, 2013, options issued have a term of
seven years
years.
The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions and fair value per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
Stock Options
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Volatility
|
|
31.4 -32.3
|
|
%
|
|
32-37
|
|
%
|
|
37
|
|
%
|
|
Estimated life
|
|
3.5 years
|
|
|
|
3.5 years
|
|
|
|
3.6 years
|
|
|
|
Risk-free interest rate
|
|
0.89-1.55%
|
|
%
|
|
1.09-1.42
|
|
%
|
|
1.12-1.53
|
|
%
|
|
Weighted-average fair value per share of grants
|
|
$
|
19.13
|
|
|
|
$
|
20.22
|
|
|
|
$
|
17.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
ESPP
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Volatility
|
|
28.2-35.2
|
|
%
|
|
30-34
|
|
%
|
|
32-35
|
|
%
|
|
Estimated life
|
|
0.75 years
|
|
|
|
0.75 years
|
|
|
|
0.75 years
|
|
|
|
Risk-free interest rate
|
|
0.47-0.98
|
|
%
|
|
0.06-0.76
|
|
%
|
|
0.07-0.23
|
|
%
|
|
Weighted-average fair value per share of grants
|
|
$
|
20.18
|
|
|
|
$
|
19.49
|
|
|
|
$
|
14.56
|
|
|
|
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 estimated life of the ESPP was based on the
two
purchase periods within each offering period. The risk-free interest rate is based on the rate for a U.S. government security with the same estimated life at the time of the option grant and the stock purchase rights.
The estimated forfeiture rate applied is based on historical forfeiture rates. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of
zero
in the option pricing model.
During fiscal 2017 and 2016, the Company granted performance-based restricted stock unit awards to the Chairman of the Board and Chief Executive Officer as well as to other executive officers subject to vesting based on a performance-based condition and a service-based condition. These performance-based restricted stock units will vest simultaneously if the performance condition is achieved.
Stock activity excluding the ESPP is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Shares
Available for
Grant
|
|
Outstanding
Stock
Options
|
|
Weighted-
Average
Exercise Price
|
|
Aggregate
Intrinsic Value (in thousands)
|
Balance as of January 31, 2016
|
46,879,908
|
|
|
26,258,798
|
|
|
$
|
56.26
|
|
|
|
Increase in shares authorized:
|
|
|
|
|
|
|
|
2013 Equity Incentive Plan
|
191,592
|
|
|
0
|
|
|
0
|
|
|
|
2014 Inducement Plan
|
2,287,652
|
|
|
0
|
|
|
0
|
|
|
|
Assumed equity plans
|
4,923,185
|
|
|
0
|
|
|
0
|
|
|
|
Options granted under all plans
|
(10,726,140
|
)
|
|
10,726,140
|
|
|
57.24
|
|
|
|
Restricted stock activity
|
(27,461,541
|
)
|
|
0
|
|
|
0
|
|
|
|
Performance restricted stock units
|
(448,729
|
)
|
|
0
|
|
|
0
|
|
|
|
Stock grants to board and advisory board members
|
(210,479
|
)
|
|
0
|
|
|
0
|
|
|
|
Exercised
|
0
|
|
|
(5,457,123
|
)
|
|
35.91
|
|
|
|
Plan shares expired
|
(78,365
|
)
|
|
0
|
|
|
0
|
|
|
|
Canceled
|
1,174,739
|
|
|
(1,174,739
|
)
|
|
66.20
|
|
|
|
Balance as of January 31, 2017
|
16,531,822
|
|
|
30,353,076
|
|
|
$
|
59.88
|
|
|
$
|
594,313
|
|
Vested or expected to vest
|
|
|
27,676,715
|
|
|
$
|
58.89
|
|
|
$
|
569,222
|
|
Exercisable as of January 31, 2017
|
|
|
12,180,819
|
|
|
$
|
49.82
|
|
|
$
|
359,591
|
|
The total intrinsic value of the options exercised during fiscal
2017
,
2016
and
2015
was
$224.3 million
,
$291.3 million
and
$250.3 million
respectively. The intrinsic value is the difference between the current market value of the stock and the exercise price of the stock option.
The weighted-average remaining contractual life of vested and expected to vest options is approximately
5.2
years.
As of
January 31, 2017
, options to purchase
12,180,819
shares were vested at a weighted average exercise price of
$49.82
per share and had a remaining weighted-average contractual life of approximately
4.1 years
. The total intrinsic value of these vested options as of
January 31, 2017
was
$359.6 million
.
During fiscal
2017
, the Company recognized stock-based expense of
$820.4 million
. As of
January 31, 2017
, the aggregate stock compensation remaining to be amortized to costs and expenses was
$2.6 billion
. It is expected that this stock compensation balance will be amortized as follows:
$980.5 million
during fiscal
2018
;
$762.9 million
during fiscal
2019
;
$540.5 million
during fiscal
2020
;
$249.7 million
during fiscal
2021
;
$17.4 million
during fiscal
2022
;
$17.2 million
during fiscal
2023
;
$8.0 million
during fiscal
2024
. The expected amortization reflects only outstanding stock awards as of
January 31, 2017
and assumes no forfeiture activity.
The aggregate stock compensation remaining to be amortized to costs and expenses will be recognized over a weighted average period of
2.1 years
.
The following table summarizes information about stock options outstanding as of
January 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise
Prices
|
|
Number
Outstanding
|
|
Weighted-
Average
Remaining
Contractual Life
(Years)
|
|
Weighted-
Average
Exercise
Price
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
|
$0.86 to $39.09
|
|
5,365,871
|
|
|
4.4
|
|
$
|
21.83
|
|
|
3,937,735
|
|
|
$
|
26.53
|
|
$40.19 to $54.36
|
|
4,296,003
|
|
|
3.8
|
|
51.78
|
|
|
3,082,048
|
|
|
51.62
|
|
$52.22 to $58.86
|
|
557,788
|
|
|
4.6
|
|
57.05
|
|
|
295,043
|
|
|
56.97
|
|
$59.34
|
|
5,707,488
|
|
|
4.8
|
|
59.34
|
|
|
2,895,013
|
|
|
59.34
|
|
$59.37 to $75.01
|
|
2,164,797
|
|
|
5.8
|
|
68.85
|
|
|
396,998
|
|
|
68.69
|
|
$75.57
|
|
6,106,407
|
|
|
6.8
|
|
75.57
|
|
|
0
|
|
|
0.00
|
|
$76.48 to $82.55
|
|
6,154,722
|
|
|
5.9
|
|
80.75
|
|
|
1,573,982
|
|
|
80.95
|
|
|
|
30,353,076
|
|
|
5.3
|
|
$
|
59.88
|
|
|
12,180,819
|
|
|
$
|
49.82
|
|
Restricted stock activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Outstanding
|
|
Outstanding
|
|
Weighted-
Average
Exercise Price
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
Balance as of January 31, 2015
|
23,144,008
|
|
|
$
|
0.001
|
|
|
|
Granted- restricted stock units and awards
|
9,736,623
|
|
|
0.001
|
|
|
|
Granted- performance stock units
|
191,382
|
|
|
0.001
|
|
|
|
Canceled
|
(2,715,332
|
)
|
|
0.001
|
|
|
|
Vested and converted to shares
|
(9,062,096
|
)
|
|
0.001
|
|
|
|
Balance as of January 31, 2016
|
21,294,585
|
|
|
$
|
0.001
|
|
|
|
Granted- restricted stock units and awards
|
16,392,948
|
|
|
0.001
|
|
|
|
Granted- performance stock units
|
208,711
|
|
|
0.001
|
|
|
|
Canceled
|
(2,017,842
|
)
|
|
0.001
|
|
|
|
Vested and converted to shares
|
(8,424,904
|
)
|
|
0.001
|
|
|
|
Balance as of January 31, 2017
|
27,453,498
|
|
|
$
|
0.001
|
|
|
$
|
2,171,572
|
|
Expected to vest
|
22,960,255
|
|
|
|
|
$
|
1,816,156
|
|
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
4
years.
The weighted-average grant date fair value of the restricted stock issued for fiscal
2017
,
2016
and
2015
was
$75.99
,
$73.61
and
$58.89
, respectively.
Common Stock
The following number of shares of common stock were reserved and available for future issuance at
January 31, 2017
:
|
|
|
|
Options outstanding
|
30,353,076
|
|
Restricted stock awards and units and performance stock units outstanding
|
27,453,498
|
|
Stock available for future grant:
|
|
2013 Equity Incentive Plan
|
15,987,951
|
|
2014 Inducement Plan
|
461,465
|
|
Amended and Restated 2004 Employee Stock Purchase Plan
|
3,663,369
|
|
Assumed Equity Plans
|
82,406
|
|
Convertible senior notes
|
17,308,880
|
|
Warrants
|
17,308,880
|
|
|
112,619,525
|
|
During fiscal years
2017
,
2016
and
2015
, certain board members received stock grants totaling
62,632
shares of common stock,
67,041
shares of common stock and
83,127
shares of common stock, respectively for board services pursuant to the terms described in the 2013 Plan and previously, the 2004 Outside Directors Stock Plan. The expense related to these awards, which was expensed immediately at the time of the issuance, totaled
$4.7 million
,
$4.8 million
and
$5.0 million
for fiscal
2017
,
2016
and
2015
, respectively.
Preferred Stock
The Company’s board of directors has the authority, without further action by stockholders, to issue up to
5,000,000
shares of preferred stock in one or more series. The Company’s board of directors may designate the rights, preferences, privileges and restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preference, sinking fund terms, and number of shares constituting any series or the designation of any series. The issuance of preferred stock could have the effect of restricting dividends on the Company’s common stock, diluting the voting power of its common stock, impairing the liquidation rights of its common stock, or delaying or preventing a change in control. The ability to issue preferred stock could delay or impede a change in control. As of
January 31, 2017
and
2016
,
no
shares of preferred stock were outstanding.
11. Income Taxes
The domestic and foreign components of income (loss) before provision for (benefit from) income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Domestic
|
|
$
|
65,432
|
|
|
$
|
(49,558
|
)
|
|
$
|
(211,253
|
)
|
Foreign
|
|
(40,049
|
)
|
|
113,837
|
|
|
(1,832
|
)
|
|
|
$
|
25,383
|
|
|
$
|
64,279
|
|
|
$
|
(213,085
|
)
|
The provision for (benefit from) income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
153
|
|
|
$
|
40,723
|
|
|
$
|
893
|
|
State
|
|
4,626
|
|
|
13,023
|
|
|
1,388
|
|
Foreign
|
|
71,878
|
|
|
57,347
|
|
|
50,493
|
|
Total
|
|
76,657
|
|
|
111,093
|
|
|
52,774
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
(182,848
|
)
|
|
1,453
|
|
|
8,771
|
|
State
|
|
(35,808
|
)
|
|
(426
|
)
|
|
(10,830
|
)
|
Foreign
|
|
(12,250
|
)
|
|
(415
|
)
|
|
(1,112
|
)
|
Total
|
|
(230,906
|
)
|
|
612
|
|
|
(3,171
|
)
|
Provision for (benefit from) income taxes
|
|
$
|
(154,249
|
)
|
|
$
|
111,705
|
|
|
$
|
49,603
|
|
As described in Note 1 “Summary of Business and Significant Accounting Policies”, the Company early adopted ASU 2016-09 in fiscal 2017. The excess tax benefits resulted from the vesting or the settlement of the stock awards recorded in the consolidated statement of operations during fiscal 2017 were immaterial, after considering the change in the Company's valuation allowance. Prior to the adoption of ASU 2016-09, the Company recorded the excess tax benefits of
$59.5 million
and
$7.7 million
directly to stockholders' equity, in fiscal
2016
and
2015
respectively.
In fiscal 2017, the Company recorded a net tax benefit of
$154.2 million
. The most significant component of this tax amount was the benefit of
$210.3 million
resulting from a partial release of its valuation allowance in connection with the acquisition of Demandware. The net deferred tax liability from acquisitions provided an additional source of income to support the realizability of the Company's pre-existing deferred tax assets and as a result, the Company released a portion of its valuation allowance. The tax benefit associated with the release of the valuation allowance was partially offset by income taxes in profitable jurisdictions outside the United States. In addition, as a result of adopting ASU 2016-09 and the Company's valuation allowance position, it did not record significant current tax expense for the United States. In fiscal 2016, the Company recorded income taxes in profitable jurisdictions outside the United States and current tax expense in the United States. The Company had U.S. current tax expense as a result of taxable income before considering certain excess tax benefits from stock options and vesting of restricted stock. In fiscal
2015
, the Company recorded income taxes in profitable jurisdictions outside the United States, which was partially offset by tax benefits from losses incurred by ExactTarget in certain state jurisdictions.
A reconciliation of income taxes at the statutory federal income tax rate to the provision for (benefit from) income taxes included in the accompanying consolidated statements of operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
2016
|
|
2015
|
U.S. federal taxes at statutory rate
|
|
$
|
8,884
|
|
|
$
|
22,498
|
|
|
$
|
(74,580
|
)
|
State, net of the federal benefit
|
|
838
|
|
|
(5,260
|
)
|
|
(5,332
|
)
|
Foreign taxes in excess of the U.S. statutory rate (1)
|
|
61,912
|
|
|
(25,780
|
)
|
|
29,880
|
|
Change in valuation allowance
|
|
(128,797
|
)
|
|
139,565
|
|
|
100,143
|
|
Tax credits
|
|
(50,216
|
)
|
|
(48,943
|
)
|
|
(28,056
|
)
|
Non-deductible expenses
|
|
47,836
|
|
|
26,841
|
|
|
26,224
|
|
Tax expense from acquisitions
|
|
568
|
|
|
1,584
|
|
|
2,341
|
|
Excess tax benefits related to shared based compensation (2)
|
|
(95,030
|
)
|
|
0
|
|
|
0
|
|
Other, net
|
|
(244
|
)
|
|
1,200
|
|
|
(1,017
|
)
|
Provision for (benefit from) income taxes
|
|
$
|
(154,249
|
)
|
|
$
|
111,705
|
|
|
$
|
49,603
|
|
(1) In fiscal 2016, most of the Altera related tax benefits was reflected in the foreign taxes in excess of the U.S. statutory rate, which was partially offset by a change in valuation allowance.
(2) In fiscal 2017, due to the early adoption of ASU 2016-09, the excess tax benefits resulted from the vesting or the settlement of the stock awards were recorded in the tax provision, which was offset by the valuation allowance in the U.S. jurisdiction.
The Company received certain tax incentives in Switzerland and Singapore in the form of reduced tax rates. The tax reduction program in Switzerland expired in fiscal 2015, and the program in Singapore expired in fiscal 2016.
Deferred Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of January 31,
|
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
1,018,080
|
|
|
$
|
260,015
|
|
Deferred stock-based expense
|
|
133,921
|
|
|
89,532
|
|
Tax credits
|
|
240,925
|
|
|
211,997
|
|
Deferred rent expense
|
|
65,779
|
|
|
49,790
|
|
Accrued liabilities
|
|
141,008
|
|
|
122,950
|
|
Deferred revenue
|
|
0
|
|
|
14,261
|
|
Basis difference on strategic and other investments
|
|
42,034
|
|
|
26,202
|
|
Financing obligation
|
|
140,539
|
|
|
127,198
|
|
Deferred cost sharing adjustment
|
|
30,351
|
|
|
30,351
|
|
Non-cash equity liability
|
|
26,155
|
|
|
0
|
|
Other
|
|
21,432
|
|
|
22,845
|
|
Total deferred tax assets
|
|
1,860,224
|
|
|
955,141
|
|
Less valuation allowance
|
|
(948,386
|
)
|
|
(439,971
|
)
|
Deferred tax assets, net of valuation allowance
|
|
911,838
|
|
|
515,170
|
|
Deferred tax liabilities:
|
|
|
|
|
Deferred commissions
|
|
(139,641
|
)
|
|
(121,071
|
)
|
Purchased intangibles
|
|
(408,203
|
)
|
|
(160,200
|
)
|
Unrealized gains on investments
|
|
(8,547
|
)
|
|
(2,858
|
)
|
Depreciation and amortization
|
|
(251,782
|
)
|
|
(224,435
|
)
|
Deferred revenue
|
|
(98,997
|
)
|
|
0
|
|
Other
|
|
0
|
|
|
(2,207
|
)
|
Total deferred tax liabilities
|
|
(907,170
|
)
|
|
(510,771
|
)
|
Net deferred tax assets
|
|
$
|
4,668
|
|
|
$
|
4,399
|
|
At
January 31, 2017
, for federal income tax purposes, the Company had net operating loss carryforwards of approximately
$2.7 billion
, which expire in fiscal 2021 through fiscal 2038, federal research and development tax credits of approximately
$196.1 million
, which expire in fiscal 2020 through fiscal 2037, foreign tax credits of approximately
$42.8 million
, which expire in fiscal 2019 through fiscal 2027, and minimum tax credits of
$0.7 million
, which have no expiration date. For California income tax purposes, the Company had net operating loss carryforwards of approximately
$890.2 million
which expire beginning in fiscal 2018 through fiscal 2038, California research and development tax credits of approximately
$157.3 million
, which do not expire, and
$9.5 million
of enterprise zone tax credits, which expire in fiscal 2025. For other states income tax purposes, the Company had net operating loss carryforwards of approximately
$1.1 billion
which expire beginning in fiscal 2018 through fiscal 2037 and tax credits of approximately
$17.1 million
, which expire beginning in fiscal 2021 through fiscal 2027. Utilization of the Company’s net operating loss carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carryforwards before utilization.
The Company regularly assesses the realizability of its deferred tax assets and establishes a valuation allowance if it is more-likely-than-not that some or all of its deferred tax assets will not be realized. The Company evaluates and weighs all available positive and negative evidence such as historic results, future reversals of existing deferred tax liabilities, projected
future taxable income, as well as prudent and feasible tax-planning strategies. Generally, more weight is given to objectively verifiable evidence, such as the cumulative loss in recent years. During fiscal 2017, the valuation allowance increased by
$508.4 million
. The net increase was primarily a result of the early adoption of ASU 2016-09, which was offset by the partial release of the valuation allowance in connection with the acquisitions. The Company will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions going forward. The Company will adjust its valuation allowance in the event sufficient positive evidence overcomes the negative evidence of losses in recent years, for example, if the trend in increasing taxable income continues.
Tax Benefits Related to Stock-Based Expense
The total income tax benefit related to stock-based awards was
$228.8 million
,
$180.2 million
and
$170.8 million
for fiscal
2017
,
2016
and
2015
, respectively, the majority of which was not recognized as a result of the valuation allowance.
Unrecognized Tax Benefits and Other Considerations
The Company records liabilities related to its uncertain tax positions. Tax positions for the Company and its subsidiaries are subject to income tax audits by multiple tax jurisdictions throughout the world. Certain prior year tax returns are currently being examined by various taxing authorities in countries including the United States and France. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than
50 percent
likely to be realized upon settlement with the taxing authority. The Company had gross unrecognized tax benefits of
$231.3 million
,
$172.7 million
, and
$146.2 million
as of
January 31, 2017
,
2016
and
2015
respectively.
A reconciliation of the beginning and ending balance of total unrecognized tax benefits for fiscal years
2017
,
2016
and
2015
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Balance as of February 1, 2016
|
|
$
|
172,741
|
|
|
$
|
146,188
|
|
|
$
|
102,275
|
|
Tax positions taken in prior period:
|
|
|
|
|
|
|
Gross increases
|
|
18,254
|
|
|
7,456
|
|
|
17,938
|
|
Gross decreases
|
|
(1,131
|
)
|
|
(7,264
|
)
|
|
(1,967
|
)
|
Tax positions taken in current period:
|
|
0
|
|
|
|
|
|
Gross increases
|
|
57,872
|
|
|
38,978
|
|
|
34,226
|
|
Settlements
|
|
(15,598
|
)
|
|
(8,684
|
)
|
|
0
|
|
Lapse of statute of limitations
|
|
(1,261
|
)
|
|
(781
|
)
|
|
(1,224
|
)
|
Currency translation effect
|
|
440
|
|
|
(3,152
|
)
|
|
(5,060
|
)
|
Balance as of January 31, 2017
|
|
$
|
231,317
|
|
|
$
|
172,741
|
|
|
$
|
146,188
|
|
For fiscal
2017
,
2016
and
2015
total unrecognized tax benefits in an amount of
$73.0 million
,
$56.2 million
and
$44.6 million
, respectively, if recognized, would reduce income tax expense and the Company’s effective tax rate after considering the impact of the change in valuation allowance in the U.S.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the income tax provision. The Company accrued penalties and interest in the amount of
$0.2 million
,
$1.3 million
and
$1.3 million
in income tax expense during fiscal
2017
,
2016
and
2015
, respectively. The balance in the non-current income tax payable related to penalties and interest was
$6.7 million
,
$6.3 million
and
$4.6 million
as of
January 31, 2017
,
2016
and
2015
, respectively.
The Company has operations and taxable presence in multiple jurisdictions in the U.S. and outside of the U.S. Tax positions for the Company and its subsidiaries are subject to income tax audits by multiple tax jurisdictions around the world. The Company currently considers U.S. federal and state, Canada, Japan, Australia, Germany, France and the United Kingdom to be major tax jurisdictions. The Company’s U.S. federal and state tax returns since February 1999, which was the inception of the Company, remain open to examination. With some exceptions, tax years prior to fiscal 2011 in jurisdictions outside of U.S. are generally closed. However, in Japan and United Kingdom, the Company is no longer subject to examinations for years prior to fiscal 2014 and fiscal 2015, respectively.
The Company is currently under audit by the U.S. Internal Revenue Service for fiscal 2011 to 2012. Additionally, examinations are conducted in other international jurisdictions, including France. During fiscal 2017, the Company completed examinations or effectively settled on tax positions with various taxing authorities and accordingly, decreased unrecognized tax
benefits by
$15.6 million
resulting from settlements. The Company regularly evaluates its uncertain tax positions and the likelihood of outcomes from these tax examinations. Significant judgment and estimates are necessary in the determination of income tax reserves. The Company believes that it has provided adequate reserves for its income tax uncertainties. However, 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. However, in general, any adjustments resulting from the U.S. audits should not have an impact to the Company's tax provision due to its valuation allowance. In the next twelve months, as some of these ongoing examinations are completed and tax positions in these tax years meet the conditions of being effectively settled, the Company anticipates it is reasonably possible that a decrease of unrecognized tax benefits up to approximately
$12.0 million
may occur.
12. Earnings/Loss Per Share
Basic earnings/loss per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the fiscal period. Diluted earnings/loss per share is computed by giving effect to all potential weighted average dilutive common stock, including options, restricted stock units, warrants and the convertible senior notes. The dilutive effect of outstanding awards and convertible securities is reflected in diluted earnings per share by application of the treasury stock method. Diluted loss per share for fiscal
2016
and
2015
are the same as basic loss per share as there is a net loss in these periods and inclusion of potentially issuable shares is anti-dilutive.
A reconciliation of the denominator used in the calculation of basic and diluted loss per share is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
179,632
|
|
|
$
|
(47,426
|
)
|
|
$
|
(262,688
|
)
|
Denominator:
|
|
|
|
|
|
|
Weighted-average shares outstanding for basic earnings (loss) per share
|
|
687,797
|
|
|
661,647
|
|
|
624,148
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Convertible senior notes
|
|
1,906
|
|
|
0
|
|
|
0
|
|
Employee stock awards
|
|
10,514
|
|
|
0
|
|
|
0
|
|
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings (loss) per share
|
|
700,217
|
|
|
661,647
|
|
|
624,148
|
|
The weighted-average number of shares outstanding used in the computation of basic and diluted earnings/loss 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/loss per share because the effect would have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Employee Stock awards
|
|
10,527
|
|
|
26,615
|
|
|
22,157
|
|
Convertible senior notes
|
|
0
|
|
|
17,309
|
|
|
25,953
|
|
Warrants
|
|
17,309
|
|
|
17,309
|
|
|
37,517
|
|
13. Commitments
Letters of Credit
As of
January 31, 2017
, the Company had a total of
$83.3 million
in letters of credit outstanding substantially in favor of certain landlords for office space. These letters of credit renew annually and expire at various dates through December 2030.
Leases
The Company leases facilities space and certain fixed assets under non-cancelable operating and capital leases with various expiration dates.
As of
January 31, 2017
, the future minimum lease payments under non-cancelable operating and capital leases are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Leases
|
|
Operating
Leases
|
|
Financing Obligation -Leased Facility(1)
|
Fiscal Period:
|
|
|
|
|
|
Fiscal 2018
|
$
|
119,342
|
|
|
$
|
463,250
|
|
|
$
|
21,437
|
|
Fiscal 2019
|
115,791
|
|
|
413,435
|
|
|
21,881
|
|
Fiscal 2020
|
201,578
|
|
|
332,127
|
|
|
22,325
|
|
Fiscal 2021
|
36
|
|
|
266,253
|
|
|
22,770
|
|
Fiscal 2022
|
0
|
|
|
241,266
|
|
|
23,214
|
|
Thereafter
|
0
|
|
|
1,202,817
|
|
|
210,713
|
|
Total minimum lease payments
|
436,747
|
|
|
$
|
2,919,148
|
|
|
$
|
322,340
|
|
Less: amount representing interest
|
(39,531
|
)
|
|
|
|
|
Present value of capital lease obligations
|
$
|
397,216
|
|
|
|
|
|
______________
(1) Total Financing Obligation -Leased Facility noted above represents the total obligation on the lease agreement noted in Note 5 “Property and Equipment.” As of January 31, 2017,
$220.3 million
of the total
$322.3 million
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 non-current portion is included in “Other noncurrent liabilities” on the consolidated balance sheets.
The Company’s agreements for the facilities and certain services provide the Company with the option to renew. The Company’s future contractual obligations would change if the Company exercised these options.
The terms of the lease agreements provide for rental payments on a graduated basis. The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not paid. Of the total operating lease commitment balance of
$2.9 billion
, approximately
$2.5 billion
is related to facilities space. The remaining commitment amount is related to computer equipment and furniture and fixtures.
Rent expense for fiscal
2017
,
2016
and
2015
was
$226.0 million
,
$174.6 million
and
$162.8 million
, respectively.
Other Purchase Commitments
In April 2016, the Company entered into an agreement with a third party provider for certain infrastructure services for a period of
four years
. The agreement provides that the Company will pay
$96.0 million
in fiscal 2018,
$108.0 million
in fiscal 2019 and
$126.0 million
in fiscal 2020.
14. Employee Benefit Plan
The Company has a 401(k) plan covering all eligible employees in the United States and a Registered Retirement Savings plan covering all eligible employees in Canada. Since January 1, 2006, the Company has been contributing to the plans. Total Company contributions during fiscal
2017
,
2016
and
2015
, were
$56.4 million
,
$45.6 million
and
$38.1 million
, respectively.
15. Legal Proceedings and Claims
In the ordinary course of business, the Company is or may be involved in various legal proceedings and claims related to alleged infringement of third-party patents and other intellectual property rights, commercial, corporate and securities, labor and employment, class actions, wage and hour, and other claims. The Company has been, and may in the future be, put on notice and/or sued by third parties for alleged infringement of their proprietary rights, including patent infringement.
In general, the resolution of a legal matter could prevent the Company from offering its service to others, could be material to the Company’s financial condition or cash flows, or both, or could otherwise adversely affect the Company’s operating results.
The Company makes a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted
to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. In management’s opinion, resolution of all current matters is not expected to have a material adverse impact on the Company’s consolidated results of operations, cash flows or financial position. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect the Company’s current or future results of operations or cash flows in a particular quarter.
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
$3.3 million
for the fiscal year 2017.
The resource sharing agreement was amended in August 2015 to include resources outside of the United States and is more explicit about the types of resources that the Company will provide.
Additionally, the Company has donated 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 higher education entities. The Company does not charge Salesforce.org for these subscriptions, therefore revenue from subscriptions provided to non-profit organizations is donated back to the community through charitable grants made by the Foundation and Salesforce.org. For instance, the reseller agreement was amended in August 2015 to include additional customer segments and certain customers outside the U.S. and was amended in October 2015 to add an addendum with model clauses for the processing of personal data transferred from the European Economic Area. The value of the subscriptions pursuant to reseller agreements, as amended, was approximately
$112.4 million
for the fiscal year 2017. The Company plans to continue these programs.
As described in Note 6 “Business Combinations,” the Company's Chairman held an ownership interest in an acquisition that was completed by the Company in April 2016.
17. Subsequent Events
In February 2017, the Company paid down the remaining
$200.0 million
of outstanding borrowings under the Credit Facility. As of the filing date, there were
no
outstanding borrowings under the Credit Facility.
In February 2017, the Company acquired the outstanding stock of Sequence, Inc. (“Sequence”), a consulting firm that helps lead design-driven transformation by creating connected customer experiences. The Company acquired Sequence for its employees and product offerings. Beginning with the fiscal quarter ended April 30, 2017, the Company will include the financial results of Sequence in its condensed consolidated financial statements from the date of the acquisition. The total estimated consideration for Sequence was approximately
$18.0 million
.
18. Selected Quarterly Financial Data (Unaudited)
Selected summarized quarterly financial information for fiscal
2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
2nd
Quarter
|
|
3rd
Quarter
|
|
4th
Quarter
|
|
Fiscal Year
|
|
|
(in thousands, except per share data)
|
Fiscal 2017
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,916,603
|
|
|
$
|
2,036,618
|
|
|
$
|
2,144,775
|
|
|
$
|
2,293,988
|
|
|
$
|
8,391,984
|
|
Gross profit
|
|
1,419,622
|
|
|
1,511,039
|
|
|
1,559,253
|
|
|
1,668,031
|
|
|
6,157,945
|
|
Income (loss) from operations
|
|
51,986
|
|
|
32,551
|
|
|
3,036
|
|
|
(23,345
|
)
|
|
64,228
|
|
Net income (loss)
|
|
$
|
38,759
|
|
|
$
|
229,622
|
|
|
$
|
(37,309
|
)
|
|
$
|
(51,440
|
)
|
|
$
|
179,632
|
|
Basic net income (loss) per share
|
|
$
|
0.06
|
|
|
$
|
0.34
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
0.26
|
|
Diluted net income (loss) per share
|
|
$
|
0.06
|
|
|
$
|
0.33
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
0.26
|
|
Fiscal 2016
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,511,167
|
|
|
$
|
1,634,684
|
|
|
$
|
1,711,967
|
|
|
$
|
1,809,398
|
|
|
$
|
6,667,216
|
|
Gross profit
|
|
1,129,365
|
|
|
1,229,300
|
|
|
1,288,284
|
|
|
1,365,719
|
|
|
5,012,668
|
|
Income from operations
|
|
31,105
|
|
|
19,824
|
|
|
43,434
|
|
|
20,560
|
|
|
114,923
|
|
Net income (loss)
|
|
$
|
4,092
|
|
|
$
|
(852
|
)
|
|
$
|
(25,157
|
)
|
|
$
|
(25,509
|
)
|
|
$
|
(47,426
|
)
|
Basic net income (loss) per share
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.07
|
)
|
Diluted net income (loss) per share
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.07
|
)
|