Debt

Convertible Senior Notes



	Par Value		Equity Component Recorded at Issuance			Liability Component of Par Value as of
(In thousands)	Par Value		Equity Component Recorded at Issuance			October 31, 2014		January 31, 2014
0.75% Convertible Senior Notes due January 15, 2015	$	181,637	$	125,530	(1)	$	179,755	$	542,159
0.25% Convertible Senior Notes due April 1, 2018	1,150,000		122,421		(2)	1,064,683		1,046,930

___________

(1)This amount represents the equity component recorded at the initial issuance of the 0.75% convertible senior notes. As of October 31, 2014, $1.9 million was reclassified as temporary equity on the condensed consolidated balance sheet as these notes are convertible.

(2)This amount represents the equity component recorded at the initial issuance of the 0.25% convertible senior notes.

In January 2010, the Company issued at par value $575.0 million of 0.75% convertible senior notes (the “0.75% Senior Notes”) due January 15, 2015. Interest is payable semi-annually in arrears on January 15 and July 15 of each year. In March 2013, the Company issued at par value $1.15 billion of 0.25% convertible senior notes (the “0.25% Senior Notes”, and together with the 0.75% Senior Notes, the “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 Notes are governed by indentures between the Company, as issuer, and U.S. Bank National Association, as trustee. The 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. If converted, holders of the 0.75% Senior Notes will receive cash equal to the principal amount and shares of the Company’s common stock for any amounts in excess of the principal amounts.



	Conversion Rate per $1,000 Par Value	Initial Conversion Price per Share		Convertible Date
0.75% Senior Notes	46.8588	$	21.34	October 15, 2014
0.25% Senior Notes	15.0512	$	66.44	January 1, 2018

Throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events, including any cash dividends. Holders of the Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than canceled, extinguished or forfeited.

As of October, 31, 2014, the 0.75% Senior Notes are convertible at the note holder's option.

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.

Holders of the 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 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 Notes in connection with such change of control.

In accounting for the issuances of the Notes, the Company separated the 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 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 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 Notes issuances, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Transaction costs attributable to the liability component are being amortized to expense over the terms of the Notes, and transaction costs attributable to the equity component were netted with the equity component in temporary stockholders’ equity and stockholders’ equity. Additionally, the Company recorded a deferred tax liability of $51.1 million in connection with the 0.75% Senior Notes.

The Notes consisted of the following (in thousands):



	As of
	October 31, 2014			January 31, 2014
Liability component :
Principal:
0.75% Senior Notes (1)	$	181,637		$	568,864
0.25% Senior Notes (1)	1,150,000			1,150,000
Less: debt discount, net
0.75% Senior Notes (2)	(1,882		)	(26,705		)
0.25% Senior Notes (3)	(85,317		)	(103,070		)
Net carrying amount	$	1,244,438		$	1,589,089

(1)The effective interest rates of the 0.75% Senior Notes and 0.25% Senior Notes are 5.86% and 2.53%, respectively. 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 condensed consolidated balance sheets within Convertible 0.75% Senior Notes (which is classified as a current liability, as these notes were convertible) and is amortized over the life of the 0.75% Senior Notes using the effective interest rate method.

(3)Included in the condensed 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.

The total estimated fair values of the Company’s 0.75% Senior Notes and 0.25% Senior Notes at October 31, 2014 were $544.4 million and $1.4 billion, respectively. The fair value was determined based on the closing trading price per $100 of the 0.75% Senior Notes and 0.25% Senior Notes as of the last day of trading for the third quarter of fiscal 2015.

Based on the closing price of the Company’s common stock of $63.99 on October 31, 2014, the if-converted value of the 0.75% Senior Notes exceeded their principal amount by approximately $363.0 million and the if-converted value of the 0.25% Senior Notes was less than their principal amount.

During the three months ended October 31, 2014, a portion of the 0.75% Senior Notes outstanding was converted by noteholders. The Company repaid $89.6 million of principal balance of the 0.75% Senior Notes. The Company also distributed approximately 2.6 million shares of the Company’s common stock to noteholders which represents the conversion value in excess of the principal amount. The Company received approximately 2.6 million shares of the Company’s common stock from the exercise of the convertible note hedges related to the 0.75% Senior Notes. The Company recorded a loss of $1.3 million during the three months ended October 31, 2014 related to the extinguishment of the 0.75% Senior Notes converted by noteholders. This amount represents the difference between the fair market value allocated to the liability component on settlement date and the net carrying amount of the liability component and unamortized debt issuance costs on settlement date.

During the nine months ended October 31, 2014, a portion of the 0.75% Senior Notes outstanding was converted by noteholders. The Company repaid $387.2 million of principal balance of the 0.75% Senior Notes. The Company also distributed approximately 11.7 million shares of the Company’s common stock to noteholders which represents the conversion value in excess of the principal amount. The Company received approximately 11.7 million shares of the Company’s common stock from the exercise of the convertible note hedges related to the 0.75% Senior Notes. The Company recorded a loss of $10.2 million during the nine months ended October 31, 2014 related to the extinguishment of the 0.75% Senior Notes converted by noteholders. This amount represents the difference between the fair market value allocated to the liability component on settlement date and the net carrying amount of the liability component and unamortized debt issuance costs on settlement date.

As of October 31, 2014, the remaining principal balance of the 0.75% Senior Notes outstanding was approximately $181.6 million, which are convertible at the noteholders' option. The remaining principal balance of the 0.75% Senior Notes matures on January 15, 2015 unless earlier purchased by the Company or converted by noteholders.

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
0.75% Note Hedges	January 2010	$	126,500	26,943,812
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 Company initially recorded a deferred tax asset of $51.4 million in connection with the 0.75% Note Hedges. The Note Hedges do not impact earnings per share. As a result of the conversions of the 0.75% Senior Notes, the Company exercised its rights on the 0.75% Note Hedges and received approximately 2.6 million shares of the Company's common stock during the three months ended October 31, 2014 and received approximately 11.7 million shares of the Company's common stock during the nine months ended October 31, 2014.

Warrants



	Date	Proceeds (in thousands)		Shares	Strike Price
0.75% Warrants	January 2010	$	59,300	26,943,812	$	29.88
0.25% Warrants	March 2013	$	84,800	17,308,880	$	90.40

Separately, in January 2010 and March 2013, the Company also entered into warrant transactions (the “0.75% Warrants” and the “0.25% Warrants”, respectively) (collectively, the “Warrants”), whereby the Company sold warrants to acquire, subject to anti-dilution adjustments, shares of the Company’s common stock. As the average market value per share of the Company’s common stock for the reporting period, as measured under the 0.75% Warrants, exceeds the strike price of the 0.75% Warrants, the 0.75% Warrants would have a dilutive effect on the Company’s earnings/loss per share if the Company were to report net income for the three month and nine month periods ended October 31, 2014. The Warrants were anti-dilutive for the periods presented. The Warrants are separate transactions entered into by the Company and are not part of the terms of the Notes or Note Hedges. Holders of the Notes and Note Hedges will not have any rights with respect to the Warrants.

Term Loan

On July 11, 2013, the Company entered into a credit agreement (the “Prior Credit Agreement”) with Bank of America, N.A. and certain other lenders. The Prior Credit Agreement provided for a $300.0 million term loan (the “Term Loan”) maturing on July 11, 2016 (the “Term Loan Maturity Date”), which was entered into in conjunction with and for purposes of funding the acquisition of ExactTarget in fiscal 2014. The Term Loan bore interest at the Company’s option at either a base rate plus a spread of 0.50% to 1.00% or an adjusted LIBOR rate as defined in the Prior Credit Agreement plus a spread of 1.50% to 2.00%.

The Term Loan was payable in quarterly installments equal to $7.5 million beginning on September 30, 2013, with the remaining outstanding principal amount of the Term Loan being due and payable on the Term Loan Maturity Date. On October 6, 2014, the Company repaid the Term Loan in full and the Prior Credit Agreement was terminated.

The weighted average interest rate on the Term Loan was 1.7% for the period beginning August 1, 2014 and ended October 6, 2014.

Revolving Credit Facility

On October 6, 2014, the Company entered into an agreement (the “Credit Agreement”) with Wells Fargo, N.A. and certain other institutional lenders that provides for a $650.0 million unsecured revolving credit facility that matures on October 6, 2019 (the “Credit Facility”). Immediately upon closing, the Company borrowed $300.0 million under the Credit Facility, approximately $262.5 million of which was used to repay in full the indebtedness under the Company's Term Loan, as described above. Borrowings under the Credit Facility bear interest, at the Company’s option at either a base rate, as defined in the Credit Agreement, plus a margin of 0.00% to 0.75% or LIBOR plus a margin of 1.00% to 1.75%. The Company is obligated to pay ongoing commitment fees at a rate between 0.125% and 0.25%. Such interest rate margins and commitment fees are based on the Company’s consolidated leverage ratio for the preceding four fiscal quarter periods. Interest and the commitment fees are payable in arrears quarterly. The Company may use amounts borrowed under the Credit Facility for working capital, capital expenditures and other general corporate purposes, including permitted acquisitions. Subject to certain conditions stated in the Credit Agreement, the Company may borrow amounts under the Credit Facility at any time during the term of the Credit Agreement. The Company may also prepay borrowings under the Credit Agreement, in whole or in part, at any time without premium or penalty, subject to certain conditions, and amounts repaid or prepaid may be reborrowed.

The Credit Agreement contains certain customary affirmative and negative covenants, including a consolidated leverage ratio covenant, a consolidated interest coverage ratio covenant, a limit on the Company’s ability to incur additional indebtedness, dispose of assets, make certain acquisition transactions, pay dividends or distributions, and certain other restrictions on the Company’s activities each defined specifically in the Credit Agreement. The Company was in compliance with the Credit Agreement’s covenants as of October 31, 2014.

The weighted average interest rate on borrowings under the Credit Facility was 1.7% for the period beginning October 6, 2014 and ended October 31, 2014. As of October 31, 2014, outstanding borrowings under the Credit Facility were $300.0 million, which is recorded as a noncurrent liability on the accompanying condensed consolidated balance sheet.

Interest Expense on Convertible Senior Notes, Term Loan and Revolving Credit Facility

The following table sets forth total interest expense recognized related to the Notes, the Term Loan and the Credit Facility prior to capitalization of interest (in thousands):



	Three Months Ended October 31,				Nine Months Ended October 31,
	2014		2013		2014		2013
Contractual interest expense	$	2,190	$	3,329	$	7,777	$	6,922
Amortization of debt issuance costs	1,132		1,275		3,490		3,195
Amortization of debt discount	8,637		12,547		28,837		34,139
	$	11,959	$	17,151	$	40,104	$	44,256