10-Q 1 crm-20141031x10q.htm 10-Q CRM-2014.10.31-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended October 31, 2014
OR
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-32224
 
 
salesforce.com, inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
94-3320693
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
The Landmark @ One Market, Suite 300
San Francisco, California 94105
(Address of principal executive offices)
Telephone Number (415) 901-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes  x   No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x   No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer  ¨
 
 
Non-accelerated filer  ¨  (Do not check if a smaller reporting company)
Smaller reporting company  ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of October 31, 2014, there were approximately 631.0 million shares of the Registrant’s Common Stock outstanding.



INDEX
 
 
 
Page No.
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.



PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
salesforce.com, inc.
Condensed Consolidated Balance Sheets
(in thousands)
 
 
October 31,
2014
 
January 31,
2014
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
846,325

 
$
781,635

Restricted cash
114,935

 
0

Short-term marketable securities
79,779

 
57,139

Accounts receivable, net
794,590

 
1,360,837

Deferred commissions
172,717

 
171,461

Prepaid expenses and other current assets
287,612

 
309,180

Land and building improvements held for sale
143,197

 
0

Total current assets
2,439,155

 
2,680,252

Marketable securities, noncurrent
901,173

 
482,243

Property and equipment, net
1,109,816

 
1,240,746

Deferred commissions, noncurrent
136,699

 
153,459

Capitalized software, net
448,088

 
481,917

Goodwill
3,782,569

 
3,500,823

Other assets, net
595,163

 
613,490

Total assets
$
9,412,663

 
$
9,152,930

Liabilities, temporary equity and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable, accrued expenses and other liabilities
$
935,942

 
$
934,324

Deferred revenue
2,192,655

 
2,473,705

Convertible 0.75% senior notes, net
179,755

 
542,159

Term loan, current
0

 
30,000

Total current liabilities
3,308,352

 
3,980,188

Convertible 0.25% senior notes, net
1,064,683

 
1,046,930

Term loan, noncurrent
0

 
255,000

Revolving credit facility
300,000

 
0

Deferred revenue, noncurrent
31,322

 
48,410

Other noncurrent liabilities
915,810

 
757,187

Total liabilities
5,620,167

 
6,087,715

Temporary equity
1,882

 
26,705

Stockholders’ equity:
 
 
 
Common stock
631

 
610

Additional paid-in capital
4,331,314

 
3,363,377

Accumulated other comprehensive income (loss)
(1,251
)
 
17,680

Accumulated deficit
(540,080
)
 
(343,157
)
Total stockholders’ equity
3,790,614

 
3,038,510

Total liabilities, temporary equity and stockholders’ equity
$
9,412,663

 
$
9,152,930


See accompanying Notes.

1



salesforce.com, inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited) 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Subscription and support
$
1,288,513

 
$
1,004,476

 
$
3,668,406

 
$
2,749,541

Professional services and other
95,142

 
71,558

 
260,572

 
176,220

Total revenues
1,383,655

 
1,076,034

 
3,928,978

 
2,925,761

Cost of revenues (1)(2):
 
 
 
 
 
 
 
Subscription and support
238,746

 
198,809

 
666,611

 
513,267

Professional services and other
94,465

 
69,378

 
266,736

 
181,631

Total cost of revenues
333,211

 
268,187

 
933,347

 
694,898

Gross profit
1,050,444

 
807,847

 
2,995,631

 
2,230,863

Operating expenses (1)(2):
 
 
 
 
 
 
 
Research and development
195,460

 
170,690

 
586,927

 
450,708

Marketing and sales
709,643

 
581,229

 
2,020,956

 
1,528,340

General and administrative
167,383

 
153,859

 
498,565

 
434,143

Total operating expenses
1,072,486

 
905,778

 
3,106,448

 
2,413,191

Loss from operations
(22,042
)
 
(97,931
)
 
(110,817
)
 
(182,328
)
Investment income
2,622

 
1,110

 
7,055

 
8,851

Interest expense
(17,682
)
 
(22,929
)
 
(56,355
)
 
(54,468
)
Gain on sales of land and building improvements
15,625

 
0

 
15,625

 
0

Other expense
(372
)
 
(4,291
)
 
(15,095
)
 
(6,843
)
Loss before benefit from (provision for) income taxes
(21,849
)
 
(124,041
)
 
(159,587
)
 
(234,788
)
Benefit from (provision for) income taxes
(17,075
)
 
(393
)
 
(37,336
)
 
119,236

Net loss
$
(38,924
)
 
$
(124,434
)
 
$
(196,923
)
 
$
(115,552
)
Basic net loss per share
$
(0.06
)
 
$
(0.21
)
 
$
(0.32
)
 
$
(0.19
)
Diluted net loss per share
$
(0.06
)
 
$
(0.21
)
 
$
(0.32
)
 
$
(0.19
)
Shares used in computing basic net loss per share
629,548

 
600,467

 
619,748

 
594,346

Shares used in computing diluted net loss per share
629,548

 
600,467

 
619,748

 
594,346

_______________
(1) Amounts include amortization of purchased intangibles from business combinations, as follows:
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2014
 
2013
 
2014
 
2013
Cost of revenues
$
20,351

 
$
33,844

 
$
70,294

 
$
77,699

Marketing and sales
15,095

 
15,211

 
44,708

 
22,147

(2) Amounts include stock-based expenses, as follows:
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2014
 
2013
 
2014
 
2013
Cost of revenues
$
14,118

 
$
12,119

 
$
38,905

 
$
32,778

Research and development
26,868

 
27,935

 
87,264

 
78,396

Marketing and sales
72,892

 
73,296

 
210,510

 
189,231

General and administrative
25,582

 
28,186

 
76,284

 
66,336



See accompanying Notes.

2


salesforce.com, inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2014
 
2013
 
2014
 
2013
Net loss
$
(38,924
)
 
$
(124,434
)
 
$
(196,923
)
 
$
(115,552
)
Other comprehensive income (loss), before tax and net of reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation and other gains (losses)
(13,692
)
 
5,590

 
(15,876
)
 
(1,601
)
Unrealized gains (losses) on investments
1,278

 
(450
)
 
(3,055
)
 
1,388

Other comprehensive income (loss), before tax
(12,414
)
 
5,140

 
(18,931
)
 
(213
)
Tax effect
0

 
427

 
0

 
(118
)
Other comprehensive income (loss), net of tax
(12,414
)
 
5,567

 
(18,931
)
 
(331
)
Comprehensive loss
$
(51,338
)
 
$
(118,867
)
 
$
(215,854
)
 
$
(115,883
)
See accompanying Notes.


3


salesforce.com, inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2014
 
2013
 
2014
 
2013
Operating activities:
 
 
 
 
 
 
 
Net loss
$
(38,924
)
 
$
(124,434
)
 
$
(196,923
)
 
$
(115,552
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
111,954

 
114,347

 
330,358

 
254,610

Amortization of debt discount and transaction costs
9,420

 
13,343

 
31,160

 
36,207

Gain on sales of land and building improvements
(15,625
)
 
0

 
(15,625
)
 
0

Loss on conversions of convertible senior notes
1,340

 
0

 
10,230

 
0

Amortization of deferred commissions
65,371

 
48,008

 
186,526

 
139,864

Expenses related to employee stock plans
139,460

 
141,536

 
412,963

 
366,741

Excess tax benefits from employee stock plans
(1,221
)
 
(1,578
)
 
(3,447
)
 
(2,166
)
Changes in assets and liabilities, net of business combinations:
 
 
 
 
 
 
 
Accounts receivable, net
39,792

 
(4,502
)
 
566,306

 
332,090

Deferred commissions
(64,280
)
 
(57,968
)
 
(171,022
)
 
(120,798
)
Prepaid expenses and other current assets and other assets
6,588

 
23,822

 
34,501

 
14,542

Accounts payable, accrued expenses and other liabilities
(1,933
)
 
40,404

 
(44,894
)
 
(126,154
)
Deferred revenue
(129,431
)
 
(55,119
)
 
(298,642
)
 
(175,153
)
Net cash provided by operating activities
122,511

 
137,859

 
841,491

 
604,231

Investing activities:
 
 
 
 
 
 
 
Business combinations, net of cash acquired
38,071

 
0

 
38,071

 
(2,614,732
)
Proceeds from land activity, net
192,240

 
0

 
223,240

 
0

Deposit for purchase of building and land
(114,935
)
 
0

 
(114,935
)
 
0

Strategic investments
(12,852
)
 
(9,017
)
 
(47,905
)
 
(17,831
)
Purchases of marketable securities
(154,560
)
 
(99,050
)
 
(690,024
)
 
(419,795
)
Sales of marketable securities
46,908

 
16,820

 
197,293

 
1,022,470

Maturities of marketable securities
22,288

 
427

 
46,248

 
21,031

Capital expenditures
(73,426
)
 
(72,702
)
 
(205,100
)
 
(229,261
)
Net cash used in investing activities
(56,266
)
 
(163,522
)
 
(553,112
)
 
(2,238,118
)
Financing activities:
 
 
 
 
 
 
 
Proceeds from borrowings on convertible senior notes, net
0

 
0

 
0

 
1,132,750

Proceeds from issuance of warrants
0

 
0

 
0

 
84,800

Purchase of convertible note hedge
0

 
0

 
0

 
(153,800
)
Proceeds from term loan, net
0

 
0

 
0

 
298,500

Proceeds from revolving credit facility, net
297,325

 
0

 
297,325

 
0

Proceeds from employee stock plans
91,337

 
110,710

 
226,561

 
217,429

Excess tax benefits from employee stock plans
1,221

 
1,578

 
3,447

 
2,166

Payments on convertible senior notes
(89,645
)
 
0

 
(387,229
)
 
0

Principal payments on capital lease obligations
(10,345
)
 
(12,440
)
 
(61,280
)
 
(33,047
)
Payments on term loan
(270,000
)
 
(7,500
)
 
(285,000
)
 
(7,500
)
Net cash provided by (used in) financing activities
19,893

 
92,348

 
(206,176
)
 
1,541,298

Effect of exchange rate changes
(14,538
)
 
5,184

 
(17,513
)
 
(2,906
)
Net increase (decrease) in cash and cash equivalents
71,600

 
71,869

 
64,690

 
(95,495
)
Cash and cash equivalents, beginning of period
774,725

 
579,881

 
781,635

 
747,245

Cash and cash equivalents, end of period
$
846,325

 
$
651,750

 
$
846,325

 
$
651,750

Supplemental cash flow disclosure:
 
 
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
 
 
Interest
$
4,285

 
$
7,200

 
$
21,274

 
$
12,391

Income taxes, net of tax refunds
$
6,187

 
$
6,105

 
$
30,986

 
$
25,626

Non-cash financing and investing activities:
 
 
 
 
 
 
 
Fixed assets acquired under capital leases
$
38,604

 
$
13,857

 
$
119,939

 
$
487,531

Building in progress - leased facility acquired under financing obligation
$
29,756

 
$
0

 
$
62,804

 
$
0

Fair value of equity awards assumed
$
1,050

 
$
0

 
$
1,050

 
$
19,037

Fair value of common stock issued as consideration for business combinations
$
338,033

 
$
0

 
$
338,033

 
$
0

See accompanying Notes.

4


salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements
1. Summary of Business and Significant Accounting Policies
Description of Business
Salesforce.com, inc. (the “Company”) is a leading provider of enterprise cloud computing services. The Company is dedicated to helping customers of all sizes and industries worldwide transform themselves into “customer companies” by empowering them to connect with their customers, partners, employees and products in entirely new ways. The Company provides customers with the solutions they need to build a next generation social front office with social and mobile cloud technologies.
Fiscal Year
The Company’s fiscal year ends on January 31. References to fiscal 2015, for example, refer to the fiscal year ending January 31, 2015.
Basis of Presentation
The accompanying condensed consolidated balance sheet as of October 31, 2014 and the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive loss and the condensed consolidated statements of cash flows for the three and nine months ended October 31, 2014 and 2013, respectively, are unaudited. The condensed consolidated balance sheet data as of January 31, 2014 was derived from the audited consolidated financial statements which are included in the Company’s Form 10-K for the fiscal year ended January 31, 2014, which was filed with the Securities and Exchange Commission (the “SEC”) on March 5, 2014. The accompanying statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s fiscal 2014 Form 10-K.
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements in the Form 10-K, and include all adjustments necessary for the fair presentation of the Company’s balance sheet as of October 31, 2014, and its results of operations, including its comprehensive loss, and its cash flows for the three and nine months ended October 31, 2014 and 2013. All adjustments are of a normal recurring nature. The results for the three and nine months ended October 31, 2014 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending January 31, 2015.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in the Company’s condensed consolidated financial statements and notes thereto.
Significant estimates and assumptions made by management include the determination of:
the 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 recognition and measurement of loss contingencies,
the fair value of convertible notes,
the fair value of stock awards issued and related forfeiture rates,
the valuation of strategic investments and the determination of other-than-temporary impairments,
the estimate of real estate sublease rental rates and market conditions, and
the assessment of recoverability of long-lived assets (property and equipment, goodwill and identified intangibles).
Actual results could differ materially from those estimates.

5


Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Segments
The Company operates as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who is the chief executive officer, in deciding how to allocate resources and assessing performance. Over the past few years, the Company has completed several 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, the Company’s business operates in one operating segment because the Company’s chief operating decision maker evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis. Since the Company operates in one operating segment, all required financial segment information can be found in the condensed consolidated financial statements.
Concentrations of Credit Risk and Significant Customers
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, restricted cash and trade accounts receivable. Although the Company deposits its cash with multiple financial institutions, its deposits, at times, may exceed federally insured limits. Collateral is not required for accounts receivable. 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.
No single customer accounted for more than five percent of accounts receivable at October 31, 2014 and January 31, 2014. No single customer accounted for five percent or more of total revenue during the three and nine months ended October 31, 2014 and 2013.
Geographic Locations
As of October 31, 2014 and January 31, 2014, assets located outside the Americas were 12 percent of total assets.
Revenues by geographical region are as follows (in thousands):
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2014
 
2013
 
2014
 
2013
Americas
$
995,331

 
$
769,400

 
$
2,812,654

 
$
2,079,043

Europe
252,982

 
194,932

 
730,324

 
531,463

Asia Pacific
135,342

 
111,702

 
386,000

 
315,255

 
$
1,383,655


$
1,076,034


$
3,928,978

 
$
2,925,761

Americas revenue attributed to the United States was approximately 94 percent and 96 percent for the three months ended October 31, 2014 and 2013, respectively, and approximately 94 percent and 96 percent for the nine months ended October 31, 2014 and 2013, respectively. No other country represented more than ten percent of total revenue during the three and nine months ended October 31, 2014 and 2013.

6


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 majority of the Company’s professional services contracts are on a time and material basis. When these services are not combined with subscription revenues as a single unit of accounting, as discussed below, these revenues are recognized as the services are rendered for time and material contracts, and when the milestones are achieved and accepted by the customer for fixed price contracts. 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 upon delivery, 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.

7


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 and new business linearity within the quarter.
Deferred revenue that will be recognized during the succeeding 12 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 condensed 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
Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such determination at each balance sheet date. Securities are classified as available for sale and are carried at fair value, with the change in unrealized gains and losses, net of tax, reported as a separate component on the condensed consolidated statements of comprehensive 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.
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”.

8


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:
 
Computer, equipment and software
3 to 9 years
Furniture and fixtures
5 years
Leasehold improvements
Shorter of the estimated lease term or 10 years
Building improvements
Amortized over the estimated useful lives of the respective assets when they are ready for their intended use
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 Internal-Use Software Costs
The Company capitalizes costs related to its enterprise cloud computing services and certain projects for internal use incurred during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life, which is generally three to five years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Goodwill, Intangible Assets, Long-Lived Assets and Impairment Assessments
The Company evaluates and tests the recoverability of its goodwill for impairment at least annually during the fourth quarter or more often if and when circumstances indicate that goodwill may not be recoverable.
Intangible assets are amortized over their 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. The carrying amounts of these assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets 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 the recoverability of its long-lived assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value.
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 condensed consolidated 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.

9


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.
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.
Accounting for Stock-Based Compensation
The Company recognizes stock-based expenses related to stock options and restricted stock awards on a straight-line basis 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 are recognized net of estimated forfeiture activity. 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.
The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions and fair value per share:
 
 
Three Months Ended 
 October 31,
 
 
Nine Months Ended 
 October 31,
 
Stock Options
2014
 
 
2013
 
 
2014
 
 
2013
 
Volatility
37

%
 
39

%
 
37

%
 
39-43

%
Estimated life
3.5 years

 
 
3.5 years

 
 
3.5 years

 
 
3.2 years

 
Risk-free interest rate
1.34-1.53

%
 
1.03-1.21

%
 
1.20-1.53

%
 
0.48-1.21

%
Weighted-average fair value per share of grants
$
17.32

 
 
$
14.52

 
 
$
16.46

 
 
$
11.98

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended 
 October 31,
 
 
Nine Months Ended 
 October 31,
 
ESPP
2014
 
 
2013
 
 
2014
 
 
2013
 
Volatility
n/a
 
 
n/a
 
 
34-35

%
 
31-32

%
Estimated life
n/a
 
 
n/a
 
 
0.75 years

 
 
0.75 years

 
Risk-free interest rate
n/a
 
 
n/a
 
 
0.07-0.16

%
 
0.07-0.10

%
Weighted-average fair value per share of grants
n/a
 
 
n/a
 
 
$
14.53

 
 
$
9.69

 
There were no stock purchase rights granted under the ESPP in the three months ended October 31, 2014 and 2013 as these stock purchase rights are only granted in June and December.
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.
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.

10


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 condensed consolidated statements of comprehensive loss. Foreign currency transaction gains and losses are included in net 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 liabilities related to such obligations in the accompanying condensed consolidated financial statements.
The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as the Company’s director or officer or that person’s services provided to any other company or enterprise at the Company’s request. The Company maintains director and officer insurance coverage that would generally enable the Company to recover a portion of any future amounts paid. The Company may also be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.
New Accounting Pronouncement
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 establishes a principle for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. The standard also provides guidance on the recognition of costs related to obtaining and fulfilling customer contracts. ASU 2014-09 is effective for fiscal 2018, including interim periods within that reporting period.  Early adoption is not permitted. The Company is currently in the process of assessing the adoption methodology, which allows the amendment to be applied retrospectively to each prior period presented, or with the cumulative effect recognized as of the date of initial application. The Company is also evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements and has not determined whether the effect will be material.



11


2. Investments
Marketable Securities
At October 31, 2014, 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
$
596,671

 
$
2,186

 
$
(439
)
 
$
598,418

U.S. treasury securities
56,563

 
94

 
(28
)
 
56,629

Mortgage backed obligations
46,629

 
192

 
(302
)
 
46,519

Asset backed securities
125,599

 
88

 
(43
)
 
125,644

Municipal securities
38,976

 
38

 
(79
)
 
38,935

Foreign government obligations
20,031

 
309

 
0

 
20,340

U.S. agency obligations
17,987

 
12

 
(16
)
 
17,983

Covered bonds
75,089

 
1,395

 
0

 
76,484

Total marketable securities
$
977,545


$
4,314


$
(907
)

$
980,952

At January 31, 2014, 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
$
340,706

 
$
1,314

 
$
(170
)
 
$
341,850

U.S. treasury securities
16,016

 
28

 
0

 
16,044

Mortgage backed obligations
24,888

 
281

 
(93
)
 
25,076

Asset backed securities
38,213

 
39

 
(35
)
 
38,217

Municipal securities
2,000

 
1

 
(3
)
 
1,998

Foreign government obligations
24,305

 
171

 
(2
)
 
24,474

U.S. agency obligations
14,726

 
9

 
(10
)
 
14,725

Covered bonds
76,282

 
717

 
(1
)
 
76,998

Total marketable securities
$
537,136


$
2,560


$
(314
)

$
539,382

The duration of the investments classified as marketable securities is as follows (in thousands):
 
 
As of
 
October 31,
2014
 
January 31,
2014
Recorded as follows:
 
 
 
Short-term (due in one year or less)
$
79,779

 
$
57,139

Long-term (due after one year)
901,173

 
482,243

 
$
980,952

 
$
539,382


12


As of October 31, 2014, 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
$
206,762

 
$
(410
)
 
$
3,276

 
$
(29
)
 
$
210,038

 
$
(439
)
U.S. treasury securities
25,671

 
(28
)
 
0

 
0

 
25,671

 
(28
)
Mortgage backed obligations
30,652

 
(281
)
 
1,399

 
(21
)
 
32,051

 
(302
)
Asset backed securities
45,589

 
(38
)
 
2,357

 
(5
)
 
47,946

 
(43
)
Municipal securities
22,391

 
(79
)
 
0

 
0

 
22,391

 
(79
)
U.S. agency obligations
9,980

 
(16
)
 
0

 
0

 
9,980

 
(16
)
 
$
341,045

 
$
(852
)
 
$
7,032

 
$
(55
)
 
$
348,077

 
$
(907
)
The unrealized loss for each of these fixed rate marketable securities ranged from less than $1,000 to $44,000. The Company does not believe any of the unrealized losses represent an other-than-temporary impairment based on its evaluation of available evidence as of October 31, 2014. The Company expects to receive the full principal and interest on all of these marketable securities.
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's restricted cash balance of $114.9 million at October 31, 2014 was held in a money market account and is not included in the following table.
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.


13


The following table presents information about the Company’s assets and liabilities that are measured at fair value as of October 31, 2014 and indicates the fair value hierarchy of the valuation (in thousands):
 
Description
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
 
Significant  Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balances as of
October 31, 2014
Cash equivalents (1):
 
 
 
 
 
 
 
Time deposits
$
0

 
$
129,590

 
$
0

 
$
129,590

Money market mutual funds
40,368

 
0

 
0

 
40,368

Marketable securities:
 
 
 
 
 
 
 
Corporate notes and obligations
0

 
598,418

 
0

 
598,418

U.S. treasury securities
0

 
56,629

 
0

 
56,629

Mortgage backed obligations
0

 
46,519

 
0

 
46,519

Asset backed securities
0

 
125,644

 
0

 
125,644

Municipal securities
0

 
38,935

 
0

 
38,935

Foreign government obligations
0

 
20,340

 
0

 
20,340

U.S. agency obligations
0

 
17,983

 
0

 
17,983

Covered bonds
0

 
76,484

 
0

 
76,484

Foreign currency derivative contracts (2)
0

 
667

 
0

 
667

Total Assets
$
40,368

 
$
1,111,209

 
$
0

 
$
1,151,577

Liabilities
 
 
 
 
 
 
 
Foreign currency derivative contracts (3)
$
0

 
$
1,558

 
$
0

 
$
1,558

Total Liabilities
$
0

 
$
1,558

 
$
0

 
$
1,558

_____________ 
(1)Included in “cash and cash equivalents” in the accompanying condensed consolidated balance sheet as of October 31, 2014, in addition to $676.4 million of cash.
(2)Included in “prepaid expenses and other current assets” in the accompanying condensed consolidated balance sheet as of October 31, 2014.
(3)Included in “accounts payable, accrued expenses and other liabilities” in the condensed consolidated balance sheet as of October 31, 2014.

14


The following table presents information about the Company’s assets and liabilities that are measured at fair value as of January 31, 2014 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, 2014
Cash equivalents (1):
 
 
 
 
 
 
 
Time deposits
$
0

 
$
212,700

 
$
0

 
$
212,700

Money market mutual funds
87,898

 
0

 
0

 
87,898

Marketable securities:
 
 
 
 
 
 
 
Corporate notes and obligations
0

 
341,850

 
0

 
341,850

U.S. treasury securities
0

 
16,044

 
0

 
16,044

Mortgage backed obligations
0

 
25,076

 
0

 
25,076

Asset backed securities
0

 
38,217

 
0

 
38,217

Municipal securities
0

 
1,998

 
0

 
1,998

Foreign government obligations
0

 
24,474

 
0

 
24,474

U.S. agency obligations
0

 
14,725

 
0

 
14,725

Covered bonds
0

 
76,998

 
0

 
76,998

Foreign currency derivative contracts (2)
0

 
1,598

 
0

 
1,598

Total Assets
$
87,898

 
$
753,680

 
$
0

 
$
841,578

Liabilities
 
 
 
 
 
 
 
Foreign currency derivative contracts (3)
$
0

 
$
1,801

 
$
0

 
$
1,801

Total Liabilities
$
0

 
$
1,801

 
$
0

 
$
1,801

______________ 
(1)Included in “cash and cash equivalents” in the accompanying condensed consolidated balance sheet as of January 31, 2014, in addition to $481.0 million of cash.
(2)Included in “prepaid expenses and other current assets” in the accompanying condensed consolidated balance sheet as of January 31, 2014.
(3)Included in “accounts payable, accrued expenses and other liabilities” in the accompanying condensed consolidated balance sheet as of January 31, 2014.
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 Euros, Japanese yen, Canadian dollars and British pounds. The Company’s foreign currency derivative contracts, which are not designated as hedging instruments, are used to reduce the exchange rate risk associated primarily with intercompany receivables and payables. The Company’s derivative financial instruments program is not designated for trading or speculative purposes. As of October 31, 2014 and January 31, 2014, the foreign currency derivative contracts that were not settled were recorded at fair value on the condensed consolidated balance sheets.
Foreign currency derivative contracts are marked-to-market at the end of each reporting period with gains and losses recognized as other expense to offset the gains or losses resulting from the settlement or remeasurement of the underlying foreign currency denominated receivables and payables. While the contract or notional amount is often used to express the volume of foreign currency derivative contracts, the amounts potentially subject to credit risk are generally limited to the amounts, if any, by which the counterparties’ obligations under the agreements exceed the obligations of the Company to the counterparties.

15


Details on outstanding foreign currency derivative contracts related primarily to intercompany receivables and payables are presented below (in thousands):
 
 
As of
 
October 31,
2014
 
January 31,
2014
Notional amount of foreign currency derivative contracts
$
661,238

 
$
563,060

Fair value of foreign currency derivative contracts
$
(891
)
 
$
(203
)

The fair value of the Company’s outstanding derivative instruments are summarized below (in thousands):
 
 
 
Fair Value of Derivative Instruments
 
 
As of
  
Balance Sheet Location
October 31, 2014
 
January 31, 2014
Derivative Assets
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency derivative contracts
Prepaid expenses and other current assets
$
667

 
$
1,598

Derivative Liabilities
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency derivative contracts
Accounts payable, accrued expenses and other liabilities
$
1,558

 
$
1,801


The effect of the derivative instruments not designated as hedging instruments on the condensed consolidated statements of operations during the three and nine months ended October 31, 2014 and 2013, respectively, are summarized below (in thousands):
 
Derivatives Not Designated as Hedging Instruments
Gains (Losses) on Derivative Instruments
Recognized in Income
 
 
 
Three Months Ended 
 October 31,
 
Location
 
2014
 
2013
Foreign currency derivative contracts
Other expense
 
$
(3,068
)
 
$
4,523

 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments
Gains (Losses) on Derivative Instruments
Recognized in Income
  
 
 
Nine Months Ended 
 October 31,
 
Location
 
2014
 
2013
Foreign currency derivative contracts
Other expense
 
$
(2,964
)
 
$
2,468

Strategic Investments
The Company has three investments in marketable equity securities measured using quoted prices in their respective active markets and certain interests in non-marketable equity and debt securities that are collectively considered strategic investments. As of October 31, 2014, the fair value of the Company’s marketable equity securities of $11.2 million includes an unrealized gain of $9.3 million. As of January 31, 2014, the Company had three investments in marketable equity securities that had a fair value of $15.5 million, which included an unrealized gain of $13.3 million. These investments are recorded at fair value in other assets, net on the condensed consolidated balance sheets.

16


The Company’s interest in non-marketable equity and debt securities consists of noncontrolling equity and debt 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.
As of October 31, 2014 and January 31, 2014, the carrying value of the Company’s investments in privately-held companies was $121.0 million and $77.0 million, respectively. These investments are recorded in other assets, net on the condensed consolidated balance sheets. The estimated fair value of the Company's investments in privately-held companies was $230.0 million as of October 31, 2014.
Investment Income
Investment income consists of interest income, realized gains, and realized losses on the Company’s cash, cash equivalents and marketable securities. The components of investment income are presented below (in thousands):
 
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2014
 
2013
 
2014
 
2013
Interest income
$
2,720

 
$
1,258

 
$
7,051

 
$
8,029

Realized gains
78

 
332

 
424

 
5,732

Realized losses
(176
)
 
(480
)
 
(420
)
 
(4,910
)
Total investment income
$
2,622

 
$
1,110


$
7,055

 
$
8,851

Reclassification adjustments out of accumulated other comprehensive loss into net income (loss) were immaterial for the three and nine months ended October 31, 2014 and 2013.
3. Property and Equipment
Property and equipment consisted of the following (in thousands):
 
As of
 
October 31,
2014
 
January 31,
2014
Property and equipment, net
 
 
 
Land and building improvements
$
0

 
$
297,835

Computers, equipment and software
1,133,701

 
931,171

Furniture and fixtures
69,542

 
58,956

Leasehold improvements
362,170

 
296,390

Building in progress—leased facility
102,975

 
40,171

 
1,668,388

 
1,624,523

Less accumulated depreciation and amortization
(558,572
)
 
(383,777
)
 
$
1,109,816

 
$
1,240,746

 
 
 
 
Land and building improvements held for sale (including perpetual parking rights)
$
143,197

 
$
0

Depreciation and amortization expense totaled $64.6 million and $55.7 million for the three months ended October 31, 2014 and 2013, respectively, and totaled $181.7 million and $128.1 million for the nine months ended October 31, 2014 and 2013, respectively.
Computers, equipment and software at October 31, 2014 and January 31, 2014 included a total of $731.3 million and $612.0 million acquired under capital lease agreements, respectively. Accumulated amortization relating to computers, equipment and software under capital leases totaled $180.8 million and $109.1 million, respectively, at October 31, 2014 and January 31, 2014. Amortization of assets under capital leases is included in depreciation and amortization expense.

17


In November 2010, the Company purchased approximately 14 net acres of undeveloped real estate in San Francisco, California, including entitlements and improvements associated with the land. In addition to the amounts reflected in the table above, the Company recorded $23.3 million in purchased intangible assets related to perpetual parking rights associated with an existing parking garage situated on the land. The Company capitalized pre-construction activities related to the development of the land, including interest costs and property taxes since the November 2010 purchase. During the first quarter of fiscal 2013, the Company suspended pre-construction activity.
In April 2014, the Company entered into an agreement to sell 8.8 net acres of the undeveloped real estate and a portion of the perpetual parking rights, for which the Company received a nonrefundable deposit in the amount of $30.0 million. As of October 31, 2014, these 8.8 net acres and perpetual parking rights met the criteria to be classified as held for sale. As a result, the Company classified this portion of the Company's land and building improvements, which totaled $137.7 million, and the perpetual parking rights of $5.5 million, as held for sale on the accompanying condensed consolidated balance sheet. The sale of this portion of the Company's undeveloped real estate is expected to close within twelve months and is subject to certain closing conditions. As of October 31, 2014, the fair value of the Company's land, building improvements and perpetual parking rights, based on the expected sale proceeds, exceeds the carrying value.
In August 2014, the Company sold approximately 3.7 net acres of its undeveloped real estate, which had been classified as held for sale, for a total of $72.5 million. The Company recognized a gain of $7.8 million, net of closing costs, on the sale of this portion of the Company’s land and building improvements.
Separately, in September 2014, the Company sold the approximately 1.5 net acres of its remaining undeveloped real estate, which had been classified as held for sale, and the remaining portion of the perpetual parking rights, for a total of $125.0 million. The Company recognized a gain of $7.8 million, net of closing costs, on the sale of this portion of the Company’s land, building improvements and perpetual parking rights.
Subsequent to October 31, 2014, the Company entered into an agreement to purchase real property of approximately 817,000 rentable square feet known as 50 Fremont Street, San Francisco, California for approximately $640.0 million. The transaction is expected to close in the Company’s first quarter of fiscal 2016, subject to customary closing conditions. The Company deposited $114.9 million of the proceeds from the sale of the undeveloped real estate described above into a like-kind exchange account for purposes of purchasing the real property. This deposit is classified as restricted cash on the condensed consolidated balance sheet.
In December 2012, the Company entered into a lease agreement for approximately 445,000 rentable square feet of office space at 350 Mission Street in San Francisco, California. The space rented is for the total office space available in the building, which is in the process of being constructed. 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 of October 31, 2014, the Company had capitalized $103.0 million of construction costs, based on the construction costs incurred to date by the landlord, and recorded a corresponding noncurrent financing obligation liability of $103.0 million. As of January 31, 2014, the Company had capitalized $40.2 million of construction costs, based on the construction costs incurred to date by the landlord, and recorded a corresponding noncurrent financing obligation liability of $40.2 million. The total expected financing obligation associated with this lease upon completion of the construction of the building, inclusive of the amounts currently recorded, is $335.8 million (See Note 10 “Commitments” for future commitment details). The obligation will be settled through monthly lease payments to the landlord once the office space is ready for occupancy.
There was no impairment of long-lived assets during the three and nine months ended October 31, 2014 and 2013, respectively.
4. Business Combinations
RelateIQ, Inc.
On August 1, 2014, the Company acquired the outstanding stock of RelateIQ, Inc. (“RelateIQ”), a relationship intelligence platform company that uses data science and machine learning to automatically capture data from email, calendars and smartphone calls and provide data-science-driven insights in real time. The Company acquired RelateIQ for the assembled workforce and expected synergies with the Company’s current offerings. The Company has included the financial results of RelateIQ in the condensed consolidated financial statements from the date of acquisition, which have not been material to date. The acquisition date fair value of the consideration transferred for RelateIQ was approximately $340.2 million, which consisted of the following (in thousands, except share data):


18


 
Fair Value
Cash
$
1,123

Common stock (6,320,735 shares)
338,033

Fair value of stock options and restricted stock awards assumed
1,050

Total
$
340,206


The fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of 0.12 was applied to convert RelateIQ’s outstanding equity awards for RelateIQ’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
$
39,194

Intangible assets
16,200

Goodwill
289,857

Current and noncurrent liabilities
(4,700
)
Deferred tax liability
(345
)
Net assets acquired
$
340,206


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 estimated fair values of 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
$
14,470

 
7 years
Customer relationships and other purchased intangible assets
1,730

 
1-3 years
Total
$
16,200

 
 

The amount recorded for developed technology represents the estimated fair value of RelateIQ’s relationship intelligence technology. The amount recorded for customer relationships represent the fair values of the underlying relationships with RelateIQ customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating RelateIQ’s relationship intelligence technology with the Company’s other offerings. The goodwill balance is not deductible for U.S. income tax purposes.
The Company assumed unvested equity awards for shares of RelateIQ’s common stock with a fair value of $33.9 million. Of the total consideration, $1.1 million was allocated to the purchase consideration and $32.8 million was allocated to future services and will be expensed over the remaining service periods on a straight-line basis.
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.

19


Goodwill consisted of the following (in thousands):
Balance as of January 31, 2014
$
3,500,823

RelateIQ
289,857

Finalization of acquisition date fair values
(8,111
)
Balance as of October 31, 2014
$
3,782,569

5. Debt
Convertible Senior Notes
  
Par Value
 
Equity
Component Recorded at Issuance
 
Liability Component of Par Value as of
(In thousands)
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;

20


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.

21


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

22


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



23


6. Other Balance Sheet Accounts
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
 
 
As of
 
October 31,
2014
 
January 31,
2014
Deferred income taxes, net
$
45,738

 
$
49,279

Prepaid income taxes
20,847

 
23,571

Customer contract asset
28,073

 
77,368

Prepaid expenses and other current assets
192,954

 
158,962

 
$
287,612

 
$
309,180

Customer contract asset reflects future billings of amounts that are contractually committed by ExactTarget’s existing customers as of the acquisition date that will be billed in the next 12 months. As the Company bills these customers this balance will reduce and accounts receivable will increase.
Capitalized Software, net
Capitalized software consisted of the following (in thousands):
 
 
As of
 
October 31,
2014
 
January 31,
2014
Capitalized internal-use software development costs, net of accumulated amortization of $127,842 and $101,687, respectively
$
89,106

 
$
72,915

Acquired developed technology, net of accumulated amortization of $370,535 and $294,628, respectively
358,982

 
409,002

 
$
448,088

 
$
481,917

Capitalized internal-use software amortization expense totaled $9.5 million and $7.4 million for the three months ended October 31, 2014 and 2013, respectively, and totaled $26.2 million and $21.2 million for the nine months ended October 31, 2014 and 2013, respectively. Acquired developed technology amortization expense totaled $22.5 million and $35.3 million for the three months ended October 31, 2014 and 2013, respectively, and totaled $75.9 million and $81.4 million for the nine months ended October 31, 2014 and 2013, respectively.
The Company capitalized $1.5 million and $0.9 million of stock-based expenses related to capitalized internal-use software development and deferred professional services during the three months ended October 31, 2014 and 2013, respectively. The Company capitalized $3.6 million and $2.7 million of stock-based expenses related to capitalized internal-use software development and deferred professional services during the nine months ended October 31, 2014 and 2013, respectively.

24


Other Assets, net
Other assets consisted of the following (in thousands):
 
As of
 
October 31,
2014
 
January 31,
2014
Deferred income taxes, noncurrent, net
$
8,128

 
$
9,691

Long-term deposits
19,597

 
17,970

Purchased intangible assets, net of accumulated amortization of $111,273 and $66,399, respectively
349,665

 
416,119

Acquired intellectual property, net of accumulated amortization of $14,216 and $11,304, respectively
10,844

 
11,957

Strategic investments
132,150

 
92,489

Customer contract asset
3,747

 
18,182

Other
71,032

 
47,082

 
$
595,163

 
$
613,490


Customer contract asset reflects the noncurrent portion of future billings that are contractually committed by ExactTarget’s existing customers as of the acquisition date.

In November 2010, the Company recorded $23.3 million of perpetual parking rights associated with an existing parking garage situated on the Company's undeveloped real estate to purchased intangible assets. During the nine months ended October 31, 2014, the Company sold a portion of these perpetual parking rights and reclassified the remaining parking rights to assets held for sale. The Company has entered into an agreement to sell the remaining portion of the perpetual parking rights and expects the sale to close within twelve months, subject to certain closing conditions.
Purchased intangible assets amortization expense for the three months ended October 31, 2014 and 2013 was $14.9 million and $15.4 million, respectively, and for the nine months ended October 31, 2014 and 2013 was $44.9 million and $22.4 million, respectively. Acquired intellectual property amortization expense for the three months ended October 31, 2014 and 2013 was $1.2 million and $1.0 million, respectively, and for the nine months ended October 31, 2014 and 2013 was $3.6 million and $3.1 million, respectively.
Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable, accrued expenses and other liabilities consisted of the following (in thousands):
 
 
As of
 
October 31,
2014
 
January 31,
2014
Accounts payable
$
88,794

 
$
64,988

Accrued compensation
339,982

 
397,002

Accrued other liabilities
314,311

 
235,543

Accrued income and other taxes payable
141,388

 
153,026

Accrued professional costs
17,597

 
15,864

Customer liability, current
19,737

 
53,957

Accrued rent
14,133

 
13,944

 
$
935,942

 
$
934,324

Customer liability reflects the legal obligation to provide future services that are contractually committed by ExactTarget’s existing customers but unbilled as of the acquisition date. As these services are invoiced, this balance will reduce and deferred revenue will increase.

25


Other Noncurrent Liabilities
Other noncurrent liabilities consisted of the following (in thousands):
 
 
As of
 
October 31,
2014
 
January 31,
2014
Deferred income taxes and income taxes payable
$
106,759

 
$
108,760

Customer liability, noncurrent
2,546

 
13,953

Financing obligation, building in progress-leased facility
102,975

 
40,171

Long-term lease liabilities and other
703,530

 
594,303

 
$
915,810

 
$
757,187


Customer liability, noncurrent reflects the noncurrent fair value of the legal obligation to provide future services that are contractually committed by ExactTarget’s existing customers but unbilled as of the acquisition date.

7. 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.
As of October 31, 2014, $60.7 million has been withheld on behalf of employees for future purchases under the ESPP and is recorded in accounts payable, accrued expenses and other liabilities.
Prior to February 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.

26


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, 2014
55,852,536

 
28,604,045

 
$
34.26

 
 
Increase in shares authorized:
 
 
 
 
 
 
 
2013 Equity Incentive Plan
3,132,662

 
0

 
0.00

 
 
2014 Inducement Equity Incentive Plan
654,957

 
0

 
0.00

 
 
2011 Relate IQ Plan
291,361

 
0

 
0.00

 
 
Options granted under all plans
(2,606,374
)
 
2,606,374

 
53.99

 
 
Restricted stock activity
(6,307,825
)
 
0

 
0.00

 
 
Stock grants to board and advisory board members
(177,674
)
 
0

 
0.00

 
 
Exercised
0

 
(5,680,848
)
 
22.57

 
 
Plan shares expired
(2,582,861
)
 
0

 
0.00

 
 
Canceled
1,035,115

 
(1,035,115
)
 
33.49

 
 
Balance as of October 31, 2014
49,291,897

 
24,494,456

 
39.11

 
$
609,478

Vested or expected to vest
 
 
23,057,598

 
$
38.59

 
$
585,703

Exercisable as of October 31, 2014
 
 
10,185,611

 
$
31.18

 
$
334,162

The total intrinsic value of the options exercised during the nine months ended October 31, 2014 and 2013 was $202.0 million and $218.0 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 3.8 years.
As of October 31, 2014, options to purchase 10,185,611 shares were vested at a weighted average exercise price of $31.18 per share and had a remaining weighted-average contractual life of approximately 2.2 years. The total intrinsic value of these vested options as of October 31, 2014 was $334.2 million.
The following table summarizes information about stock options outstanding as of October 31, 2014:
 
 
 
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
$0.58 to $27.06
 
5,368,871

 
3.1
 
$
21.39

 
3,508,231

 
$
20.72

$27.56 to $34.63
 
1,004,893

 
3.6
 
30.86