10-Q 1 crmq1fy1710-q.htm 10-Q SEC Document

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 April 30, 2016
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 April 30, 2016, there were approximately 677.5 million shares of the Registrant’s Common Stock outstanding.






INDEX
 
 
 
Page No.
 
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Balance Sheets as of April 30, 2016 and January 31, 2016
 
 
 
 
Consolidated Statements of Operations for the three months ended April 30, 2016 and 2015
 
 
 
 
Consolidated Statements of Comprehensive Income (Loss) for the three months ended April 30, 2016 and 2015
 
 
 
 
Consolidated Statements of Cash Flows for the three months ended April 30, 2016 and 2015
 
 
 
 
Notes to the Consolidated Financial Statements
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.



2


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
salesforce.com, inc.
Consolidated Balance Sheets
(in thousands)
 
 
April 30,
2016
 
January 31,
2016
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,799,083

 
$
1,158,363

Short-term marketable securities
232,109

 
183,018

Accounts receivable, net
1,192,965

 
2,496,165

Deferred commissions
243,890

 
259,187

Prepaid expenses and other current assets
306,625

 
250,594

Total current assets
3,774,672

 
4,347,327

Marketable securities, noncurrent
1,684,260

 
1,383,996

Property and equipment, net
1,711,472

 
1,715,828

Deferred commissions, noncurrent
180,245

 
189,943

Capitalized software, net
407,030

 
384,258

Goodwill
4,129,656

 
3,849,937

Strategic investments
520,750

 
520,721

Other assets, net
409,185

 
370,910

Total assets
$
12,817,270

 
$
12,762,920

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable, accrued expenses and other liabilities
$
1,093,197

 
$
1,349,338

Deferred revenue
3,991,906

 
4,267,667

Total current liabilities
5,085,103

 
5,617,005

Convertible 0.25% senior notes, net
1,095,104

 
1,088,097

Loan assumed on 50 Fremont
198,066

 
197,998

Deferred revenue, noncurrent
15,008

 
23,886

Other noncurrent liabilities
839,725

 
833,065

Total liabilities
7,233,006

 
7,760,051

Stockholders’ equity:
 
 
 
Common stock
678

 
671

Additional paid-in capital
6,217,946

 
5,705,386

Accumulated other comprehensive loss
(28,577
)
 
(49,917
)
Accumulated deficit
(605,783
)
 
(653,271
)
Total stockholders’ equity
5,584,264

 
5,002,869

Total liabilities and stockholders’ equity
$
12,817,270

 
$
12,762,920










See accompanying Notes.

3


salesforce.com, inc.
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
Three Months Ended April 30,
 
2016
 
2015
Revenues:
 
 
 
Subscription and support
$
1,775,493

 
$
1,405,287

Professional services and other
141,110

 
105,880

Total revenues
1,916,603

 
1,511,167

Cost of revenues (1)(2):
 
 
 
Subscription and support
335,828

 
274,241

Professional services and other
161,153

 
107,561

Total cost of revenues
496,981

 
381,802

Gross profit
1,419,622

 
1,129,365

Operating expenses (1)(2):
 
 
 
Research and development
260,970

 
222,128

Marketing and sales
895,860

 
736,938

General and administrative
210,806

 
175,811

Operating lease termination resulting from purchase of 50 Fremont
0

 
(36,617
)
Total operating expenses
1,367,636

 
1,098,260

Income from operations
51,986

 
31,105

Investment income
8,122

 
4,561

Interest expense
(22,011
)
 
(16,675
)
Other expense (1)
(13,806
)
 
(918
)
Gains on sales of strategic investments
12,864

 
0

Income before benefit from (provision for) income taxes
37,155

 
18,073

Benefit from (provision for) income taxes
1,604

 
(13,981
)
Net income
$
38,759

 
$
4,092

Basic net income per share
$
0.06

 
$
0.01

Diluted net income per share
$
0.06

 
$
0.01

Shares used in computing basic net income per share
677,514

 
653,809

Shares used in computing diluted net income per share
686,799

 
664,310

_______________
(1) Amounts include amortization of purchased intangibles from business combinations, as follows:
 
 
Three Months Ended April 30,
 
 
2016
 
2015
Cost of revenues
 
$
22,215

 
$
19,690

Marketing and sales
 
15,386

 
20,027

Other non-operating expense
 
706

 
815

(2) Amounts include stock-based expense, as follows:
 
 
Three Months Ended April 30,
 
 
2016
 
2015
Cost of revenues
 
$
26,634

 
$
15,381

Research and development
 
35,168

 
31,242

Marketing and sales
 
95,474

 
70,534

General and administrative
 
31,643

 
25,403






See accompanying Notes.

4


salesforce.com, inc.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
 
 
Three Months Ended April 30,
 
2016
 
2015
Net income
$
38,759

 
$
4,092

Other comprehensive income (loss), before tax and net of reclassification adjustments:
 
 
 
Foreign currency translation and other gains (losses)
10,256

 
(1,855
)
Unrealized gains (losses) on investments
11,084

 
(2,389
)
Other comprehensive income (loss), before tax
21,340

 
(4,244
)
Tax effect
0

 
0

Other comprehensive income (loss), net of tax
21,340

 
(4,244
)
Comprehensive income (loss)
$
60,099

 
$
(152
)






















See accompanying Notes.

5



salesforce.com, inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Three Months Ended April 30,
 
2016
 
2015
Operating activities:
 
 
 
Net income
$
38,759

 
$
4,092

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
132,772

 
127,927

Amortization of debt discount and transaction costs
7,185

 
5,861

Gains on sales of strategic investments
(12,864
)
 
0

50 Fremont lease termination
0

 
(36,617
)
Amortization of deferred commissions
88,514

 
77,155

Expenses related to employee stock plans
188,919

 
142,560

Changes in assets and liabilities, net of business combinations:
 
 
 
Accounts receivable, net
1,307,312

 
979,170

Deferred commissions
(63,519
)
 
(50,092
)
Prepaid expenses and other current assets and other assets
(56,671
)
 
(11,274
)
Accounts payable, accrued expenses and other liabilities
(286,228
)
 
(239,072
)
Deferred revenue
(293,117
)
 
(264,629
)
Net cash provided by operating activities (1)
1,051,062

 
735,081

Investing activities:
 
 
 
Business combinations, net of cash acquired
(1,799
)
 
(12,470
)
Purchase of 50 Fremont land and building
0

 
(425,376
)
Deposit for purchase of 50 Fremont land and building
0

 
115,015

Non-refundable amounts received for sale of land available for sale
0

 
2,852

Strategic investments
(22,061
)
 
(144,462
)
Purchases of marketable securities
(589,336
)
 
(207,225
)
Sales of marketable securities
222,934

 
192,184

Maturities of marketable securities
23,285

 
14,446

Capital expenditures
(83,301
)
 
(71,087
)
Net cash used in investing activities
(450,278
)
 
(536,123
)
Financing activities:
 
 
 
Proceeds from employee stock plans
89,141

 
155,015

Principal payments on capital lease obligations
(49,968
)
 
(16,825
)
Payments on revolving credit facility and term loan
0

 
(300,000
)
Net cash provided by (used in) financing activities (1)
39,173

 
(161,810
)
Effect of exchange rate changes
763

 
(3,309
)
Net increase in cash and cash equivalents
640,720

 
33,839

Cash and cash equivalents, beginning of period
1,158,363

 
908,117

Cash and cash equivalents, end of period
$
1,799,083

 
$
941,956


(1)
During the three months ended April 30, 2016, the Company early adopted Accounting Standards Update No. 2016-09, “Improvements to Employee Share-Based Payment Accounting (Topic 718)” (“ASU 2016-09”), which addresses among other items, updates to the presentation and treatment of excess tax benefits related to stock based compensation. The Company has adopted changes to the consolidated statements of cash flows on a retrospective basis. The impact for the three months ended April 30, 2015 to net cash provided by operating activities and net cash used in financing activities was $4,224.


See accompanying Notes.

6



salesforce.com, inc.
Consolidated Statements of Cash Flows
Supplemental Cash Flow Disclosure
(in thousands)
(unaudited)
 
Three Months Ended April 30,
 
2016
 
2015
Supplemental cash flow disclosure:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
23,750

 
$
4,252

Income taxes, net of tax refunds
$
7,909

 
$
10,581

Non-cash financing and investing activities:
 
 
 
Fixed assets acquired under capital leases
$
585

 
$
2,960

Building - leased facility acquired under financing obligation
$
1,676

 
$
19,966

Fair value of loan assumed on 50 Fremont
$
0

 
$
198,751

Fair value of equity awards assumed
$
11,449

 
$
0

Fair value of common stock issued as consideration for business combination
$
278,372

 
$
0






















See accompanying Notes.

7


salesforce.com, inc.
Notes to Consolidated Financial Statements

1. Summary of Business and Significant Accounting Policies
Description of Business
Salesforce.com, inc. (the “Company”) is a leading provider of enterprise cloud computing solutions, with a focus on customer relationship management, or CRM. The Company introduced its first CRM solution in February 2000, and has since expanded its service offerings with new editions, solutions, features and platform capabilities.
The Company's mission is to help its customers transform themselves into customer-centric companies by empowering them to connect with their customers in entirely new ways. The Company's Customer Success Platform, including sales force automation, customer service and support, marketing automation, community management, analytics, application development, Internet of Things integration and the Company's professional cloud services, provide the next-generation platform of enterprise applications and services to enable customer success.
Fiscal Year
The Company’s fiscal year ends on January 31. References to fiscal 2017, for example, refer to the fiscal year ending January 31, 2017.
Basis of Presentation
The accompanying consolidated balance sheet as of April 30, 2016 and the consolidated statements of operations, the consolidated statements of comprehensive income (loss) and the consolidated statements of cash flows for the three months ended April 30, 2016 and 2015, respectively, are unaudited. The consolidated balance sheet data as of January 31, 2016 was derived from the audited consolidated financial statements that are included in the Company’s fiscal 2016 Form 10-K, which was filed with the Securities and Exchange Commission (the “SEC”) on March 7, 2016. The accompanying statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s fiscal 2016 Form 10-K.
The accompanying 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 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 April 30, 2016, and its results of operations, including its comprehensive income (loss), and its cash flows for the three months ended April 30, 2016 and 2015. All adjustments are of a normal recurring nature. The results for the three months ended April 30, 2016 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending January 31, 2017.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in the Company’s consolidated financial statements and notes thereto.
Significant estimates and assumptions made by management include the determination of:
the best estimate of selling price of the deliverables included in multiple deliverable revenue arrangements,
the fair value of assets acquired and liabilities assumed for business combinations,
the recognition, measurement and valuation of current and deferred income taxes,
the fair value of convertible notes,
the fair value of stock awards issued and related forfeiture rates,
the useful lives of intangible assets, property and equipment and building and structural components, and
the valuation of strategic investments and the determination of other-than-temporary impairments.


8


Actual results could differ materially from those estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the result of which forms the basis for making judgments about the carrying values of assets and liabilities.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Segments
The Company operates as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who is the chief executive officer, in deciding how to allocate resources and assessing performance. Over the past few years, the Company has completed 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 all of the Company's offerings operate on a single platform and are deployed in an identical way, and the Company’s chief operating decision maker evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis. Since the Company operates in one operating segment, all required financial segment information can be found in the consolidated financial statements.
Concentrations of Credit Risk and Significant Customers
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and trade accounts receivable. 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 April 30, 2016 and January 31, 2016. No single customer accounted for five percent or more of total revenue during the three months ended April 30, 2016 and 2015.
Geographic Locations
As of April 30, 2016 and January 31, 2016, assets located outside the Americas were 11 percent of total assets.
Revenues by geographical region are as follows (in thousands):
 
 
Three Months Ended April 30,
 
2016
 
2015
Americas
$
1,413,229

 
$
1,115,120

Europe
327,854

 
258,805

Asia Pacific
175,520

 
137,242

 
$
1,916,603

 
$
1,511,167

Americas revenue attributed to the United States was approximately 97 percent and 95 percent during the three months ended April 30, 2016 and 2015, respectively. No other country represented more than ten percent of total revenue during the three months ended April 30, 2016 and 2015.
Revenue Recognition
The Company derives its revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing the Company’s enterprise cloud computing services and from customers paying for additional support beyond the standard support that is included in the basic subscription fees; and (2) related professional services such as process mapping, project management, implementation services and other revenue. “Other revenue” consists primarily of training fees.
The Company commences revenue recognition when all of the following conditions are satisfied:

9


there is persuasive evidence of an arrangement;
the service has been or is being provided to the customer;
the collection of the fees is reasonably assured; and
the amount of fees to be paid by the customer is fixed or determinable.
The Company’s subscription service arrangements are non-cancelable and do not contain refund-type provisions.
Subscription and Support Revenues
Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement date of each contract, which is the date the Company’s service is made available to customers.
Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
Professional Services and Other Revenues
The Company’s professional services contracts are either on a time and material or fixed fee 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.
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.

10


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, size and new business linearity within the quarter.
Deferred revenue that will be recognized during the succeeding twelve month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent.
Deferred Commissions
Deferred commissions are the incremental costs that are directly associated with non-cancelable subscription contracts with customers and consist of sales commissions paid to the Company’s direct sales force.
The commissions are deferred and amortized over the non-cancelable terms of the related customer contracts, which are typically 12 to 36 months. The commission payments are paid in full the month after the customer’s service commences and are a direct and incremental cost of the revenue arrangements. The deferred commission amounts are recoverable through the future revenue streams under the non-cancelable customer contracts. The Company believes this is the preferable method of accounting as the commission charges are so closely related to the revenue from the non-cancelable customer contracts that they should be recorded as an asset and charged to expense over the same period that the subscription revenue is recognized. Amortization of deferred commissions is included in marketing and sales expense in the accompanying consolidated statements of operations.
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 consolidated statements of comprehensive income (loss). Fair value is determined based on quoted market rates when observable or utilizing data points that are observable, such as quoted prices, interest rates and yield curves. Declines in fair value judged to be other-than-temporary on securities available for sale are included as a component of investment income. In order to determine whether a decline in value is other-than-temporary, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value and its intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. The cost of securities sold is based on the specific-identification method. Interest on securities classified as available for sale is also included as a component of investment income.
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.”

11


Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of those assets as follows:
 
Computers, equipment and software
3 to 9 years
Furniture and fixtures
5 years
Leasehold improvements
Shorter of the estimated lease term or 10 years
Building and structural components
Average weighted useful life of 32 years
Building- leased facility
27 years
Building improvements
10 years
When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from their respective accounts and any loss on such retirement is reflected in operating expenses.
Capitalized 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 and Intangible Assets 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.
Long-Lived Assets and Impairment Assessment
The Company evaluates long-lived assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. This includes but is not limited to significant adverse changes in business climate, market conditions, or other events that indicate an asset's carrying amount may not be recoverable. 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. There was no impairment of long-lived assets during the three months ended April 30, 2016 and 2015, respectively.
Business Combinations
The Company uses its best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. The Company continues to collect information and reevaluates these estimates and assumptions quarterly and records any adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations.
In the event that the Company enters into a business combination with an entity in which the Company previously held a strategic investment, significant gains or losses will be disclosed separately within the statements of operations. 

12


Leases and Asset Retirement Obligations
The Company categorizes leases at their inception as either operating or capital leases. In certain lease agreements, the Company may receive rent holidays and other incentives. The Company recognizes lease costs on a straight-line basis once control of the space is achieved, without regard to deferred payment terms such as rent holidays that defer the commencement date of required payments. Additionally, incentives received are treated as a reduction of costs over the term of the agreement.
The Company establishes assets and liabilities for the present value of estimated future costs to retire long-lived assets at the termination or expiration of a lease. Such assets are depreciated over the lease period to operating expense.
In the event the Company is the deemed owner for accounting purposes during construction, the Company records assets and liabilities for the estimated construction costs incurred under build-to-suit lease arrangements to the extent it is involved in the construction of structural improvements or takes construction risk prior to commencement of a lease.
The Company additionally has entered into subleases for unoccupied leased office space. Losses are recognized in the period the sublease is executed. Any sublease payments received in excess of the straight-line rent payments for the sublease are recorded in other income (expense).
Accounting for Stock-Based Expense
The Company recognizes stock-based expenses related to stock options and restricted stock awards on a straight-line basis over the requisite service period of the awards, which is generally the vesting term of four years. The aggregate stock compensation remaining to be amortized to costs and expenses will be recognized over a weighted average period of 2.2 years. The Company recognizes stock-based expenses related to shares issued pursuant to its Amended and Restated 2004 Employee Stock Purchase Plan (“ESPP” or “2004 Employee Stock Purchase Plan”) on a straight-line basis over the offering period, which is 12 months. Stock-based expenses 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 
April 30,
Stock Options
2016
 
2015
Volatility
32.1

%
 
37.4

%
Estimated life
3.5 years

 
 
3.6 years

 
Risk-free interest rate
0.9-1.0

%
 
1.13-1.36

%
Weighted-average fair value per share of grants
$
17.35

 
 
$
19.52

 
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.

ESPP assumptions and the related fair value per share table will only be disclosed in the three month period in which there is ESPP activity, such as an ESPP purchase. The Company's ESPP Plan allows for two purchases during the year. The estimated life of the ESPP will be 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.

13


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.
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.
Foreign Currency Translation
The functional currency of the Company’s major foreign subsidiaries is generally the local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as a separate component on the consolidated statements of comprehensive income (loss). Foreign currency transaction gains and losses are included in net income (loss) for the period. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average exchange rate during the period. Equity transactions are translated using historical exchange rates.
Warranties and Indemnification
The Company’s enterprise cloud computing services are typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable and materially in accordance with the Company’s online help documentation under normal use and circumstances.
The Company’s arrangements generally include certain provisions for indemnifying customers against liabilities if its products or services infringe a third party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of such obligations and has not accrued any material liabilities related to such obligations in the accompanying consolidated financial statements.
The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as the Company’s director or officer or that person’s services provided to any other company or enterprise at the Company’s request. The Company maintains director and officer insurance coverage that would generally enable the Company to recover a portion of any future amounts paid. The Company may also be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.
New Accounting Pronouncements Adopted

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability rather than an asset that is amortized. However, ASU 2015-03 does not address deferred issuance costs for line-of-credit arrangements; therefore, in August 2015, the FASB issued Accounting Standards Update No. 2015-15, “Interest-Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” (“ASU 2015-15”). ASU 2015-15 allows an entity to defer debt issuance costs associated with line-of-credit arrangements, including arrangements with no outstanding borrowings, and classify them as an asset, and amortize them over the term of the arrangements. The recognition and measurement guidance for debt issuance costs is not affected by the standards. The Company adopted the standards in the three months ended April 30, 2016. Upon adoption, the unamortized debt issuance costs previously reported in Other assets, net, with a carrying amount of approximately $7.9 million at January 31, 2016, were reclassified and presented as a deduction of the corresponding liabilities, Convertible 0.25% senior notes, net and Loan assumed on 50 Fremont.

14


In September 2015, the FASB issued Accounting Standards Update No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments (Topic 805)” (“ASU 2015-16”), which eliminates the requirement to restate prior period financial statements for measurement period adjustments in business combinations. ASU 2015-16 requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The Company adopted this standard during the three months ending April 30, 2016 and there was no material impact of this on the Company's financial statements.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, “Stock Compensation (Topic 718): Improvements to Employee Shared-Based Payment Accounting” (“ASU 2016-09”) which simplifies and improves several aspects of the accounting for employee share-based payment transactions for public entities. The new guidance requires companies to record excess tax benefits and tax deficiencies as income tax benefit or expense in the statement of operations when the awards vest or are settled, and eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the statement of cash flows. The Company early adopted the standard in the three months ended April 30, 2016.  Upon adoption, the Company recognized the previously unrecognized excess tax benefits using the modified retrospective transition method, which resulted in a cumulative-effect adjustment of $8.7 million to accumulated deficit. This adjustment reduced the April 30, 2016 accumulated deficit balance. The previously unrecognized excess tax effects were recorded as a deferred tax asset, which was fully offset by a valuation allowance. Without the valuation allowance, the Company’s deferred tax asset would have increased by $614.5 million. The Company also elected to apply the change in presentation to the statements of cash flows retrospectively and no longer classified the excess tax benefits from employee stock plans as a reduction from operating cash flows for all periods presented.   
Pending Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) which amended the existing FASB Accounting Standards Codification. 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. The FASB deferred the effective date for the new revenue reporting standard for entities reporting under U.S. GAAP for one year. In accordance with the deferral, ASU 2014-09 will be effective for fiscal 2019, including interim periods within that reporting period. 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 to either its revenue results or its deferred commissions balances.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to record most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The new standard is effective for interim and annual periods beginning after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the impact to its consolidated financial statements.


15


2. Investments
Marketable Securities
At April 30, 2016, marketable securities consisted of the following (in thousands):
 
Investments classified as Marketable Securities
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Corporate notes and obligations
$
1,089,511

 
$
5,661

 
$
(1,277
)
 
$
1,093,895

U.S. treasury securities
221,467

 
783

 
(39
)
 
222,211

Mortgage backed obligations
125,778

 
213

 
(174
)
 
125,817

Asset backed securities
334,894

 
481

 
(190
)
 
335,185

Municipal securities
74,987

 
319

 
(86
)
 
75,220

Foreign government obligations
31,898

 
79

 
(3
)
 
31,974

U.S. agency obligations
32,058

 
20

 
(11
)
 
32,067

Total marketable securities
$
1,910,593


$
7,556


$
(1,780
)

$
1,916,369

At January 31, 2016, marketable securities consisted of the following (in thousands):
 
Investments classified as Marketable Securities
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Corporate notes and obligations
$
949,266

 
$
1,398

 
$
(2,983
)
 
$
947,681

U.S. treasury securities
157,625

 
375

 
(56
)
 
157,944

Mortgage backed obligations
104,242

 
106

 
(323
)
 
104,025

Asset backed securities
271,292

 
186

 
(226
)
 
271,252

Municipal securities
44,934

 
209

 
(6
)
 
45,137

Foreign government obligations
18,014

 
42

 
(5
)
 
18,051

U.S. agency obligations
16,076

 
16

 
(6
)
 
16,086

Covered bonds
6,690

 
148

 
0

 
6,838

Total marketable securities
$
1,568,139


$
2,480


$
(3,605
)

$
1,567,014


The duration of the investments classified as marketable securities is as follows (in thousands):
 
 
As of
 
April 30,
2016
 
January 31,
2016
Recorded as follows:
 
 
 
Short-term (due in one year or less)
$
232,109

 
$
183,018

Long-term (due after one year)
1,684,260

 
1,383,996

 
$
1,916,369

 
$
1,567,014



16


As of April 30, 2016, 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
$
272,239

 
$
(813
)
 
$
61,847

 
$
(464
)
 
$
334,086

 
$
(1,277
)
U.S. treasury securities
47,552

 
(39
)
 
0

 
0

 
47,552

 
(39
)
Mortgage backed obligations
52,427

 
(126
)
 
8,986

 
(48
)
 
61,413

 
(174
)
Asset backed securities
106,226

 
(148
)
 
12,371

 
(42
)
 
118,597

 
(190
)
Municipal securities
18,065

 
(86
)
 
0

 
0

 
18,065

 
(86
)
Foreign government obligations
7,650

 
(3
)
 
0

 
0

 
7,650

 
(3
)
U.S. agency obligations
13,481

 
(11
)
 
0

 
0

 
13,481

 
(11
)
 
$
517,640

 
$
(1,226
)
 
$
83,204

 
$
(554
)
 
$
600,844

 
$
(1,780
)
The unrealized losses for each of the fixed rate marketable securities were less than $98,000. 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 April 30, 2016. 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 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.

17


The following table presents information about the Company’s assets and liabilities that are measured at fair value as of April 30, 2016 and indicates the fair value hierarchy of the valuation (in thousands):
 
Description
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
 
Significant  Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balances as of
April 30, 2016
Cash equivalents (1):
 
 
 
 
 
 
 
Time deposits
$
0

 
$
347,815

 
$
0

 
$
347,815

Money market mutual funds
868,519

 
0

 
0

 
868,519

Agency and sovereign paper
0

 
2,904

 
0

 
2,904

Marketable securities:
 
 
 
 
 
 
 
Corporate notes and obligations
0

 
1,093,895

 
0

 
1,093,895

U.S. treasury securities
0

 
222,211

 
0

 
222,211

Mortgage backed obligations
0

 
125,817

 
0

 
125,817

Asset backed securities
0

 
335,185

 
0

 
335,185

Municipal securities
0

 
75,220

 
0

 
75,220

Foreign government obligations
0

 
31,974

 
0

 
31,974

U.S. agency obligations
0

 
32,067

 
0

 
32,067

Foreign currency derivative contracts (2)
0

 
19,871

 
0

 
19,871

Total Assets
$
868,519

 
$
2,286,959

 
$
0

 
$
3,155,478

Liabilities
 
 
 
 
 
 
 
Foreign currency derivative contracts (3)
$
0

 
$
7,973

 
$
0

 
$
7,973

Total Liabilities
$
0

 
$
7,973

 
$
0

 
$
7,973

_____________ 
(1)Included in “cash and cash equivalents” in the accompanying consolidated balance sheet as of April 30, 2016, in addition to $579.8 million of cash.
(2)Included in “prepaid expenses and other current assets” in the accompanying consolidated balance sheet as of April 30, 2016.
(3)Included in “accounts payable, accrued expenses and other liabilities” in the consolidated balance sheet as of April 30, 2016.

18


The following table presents information about the Company’s assets and liabilities that are measured at fair value as of January 31, 2016 and indicates the fair value hierarchy of the valuation (in thousands):
 
Description
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balances as of
January 31, 2016
Cash equivalents (1):
 
 
 
 
 
 
 
Time deposits
$
0

 
$
236,798

 
$
0

 
$
236,798

Money market mutual funds
216,107

 
0

 
0

 
216,107

Commercial paper
0

 
159,230

 
0

 
159,230

Agency and sovereign paper
0

 
13,599

 
0

 
13,599

Marketable securities:
 
 
 
 
 
 
 
Corporate notes and obligations
0

 
947,681

 
0

 
947,681

U.S. treasury securities
0

 
157,944

 
0

 
157,944

Mortgage backed obligations
0

 
104,025

 
0

 
104,025

Asset backed securities
0

 
271,252

 
0

 
271,252

Municipal securities
0

 
45,137

 
0

 
45,137

Foreign government obligations
0

 
18,051

 
0

 
18,051

U.S. agency obligations
0

 
16,086

 
0

 
16,086

Covered bonds
0

 
6,838

 
0

 
6,838

Foreign currency derivative contracts (2)
0

 
4,731

 
0

 
4,731

Total Assets
$
216,107

 
$
1,981,372

 
$
0

 
$
2,197,479

Liabilities
 
 
 
 
 
 
 
Foreign currency derivative contracts (3)
$
0

 
$
14,025

 
$
0

 
$
14,025

Total Liabilities
$
0

 
$
14,025

 
$
0

 
$
14,025

______________ 
(1)Included in “cash and cash equivalents” in the accompanying consolidated balance sheet as of January 31, 2016, in addition to $532.6 million of cash.
(2)Included in “prepaid expenses and other current assets” in the accompanying consolidated balance sheet as of January 31, 2016.
(3)Included in “accounts payable, accrued expenses and other liabilities” in the accompanying consolidated balance sheet as of January 31, 2016.
Derivative Financial Instruments
The Company enters into foreign currency derivative contracts with financial institutions to reduce foreign exchange risk. The Company uses forward currency derivative contracts to minimize the Company’s exposure to balances primarily denominated in British pounds, Euros, Japanese yen, Canadian dollars and Australian dollars. The Company’s foreign currency derivative contracts, which are not designated as hedging instruments, are used to reduce the exchange rate risk associated primarily with intercompany receivables and payables. The Company’s derivative financial instruments program is not designated for trading or speculative purposes. As of April 30, 2016 and January 31, 2016, the foreign currency derivative contracts that were not settled were recorded at fair value on the consolidated balance sheets.
Foreign currency derivative contracts are marked-to-market at the end of each reporting period with gains and losses recognized as other expense to offset the gains or losses resulting from the settlement or remeasurement of the underlying foreign currency denominated receivables and payables. While the contract or notional amount is often used to express the volume of foreign currency derivative contracts, the amounts potentially subject to credit risk are generally limited to the amounts, if any, by which the counterparties’ obligations under the agreements exceed the obligations of the Company to the counterparties.

19


Details on outstanding foreign currency derivative contracts related primarily to intercompany receivables and payables are presented below (in thousands):
 
 
As of
 
April 30, 2016
 
January 31, 2016
Notional amount of foreign currency derivative contracts
$
1,513,108

 
$
1,274,515

Fair value of foreign currency derivative contracts
$
11,898

 
$
(9,294
)

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
April 30, 2016
 
January 31, 2016
Derivative Assets
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency derivative contracts
Prepaid expenses and other current assets
$
19,871

 
$
4,731

Derivative Liabilities
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency derivative contracts
Accounts payable, accrued expenses and other liabilities
$
7,973

 
$
14,025


The effect of the derivative instruments not designated as hedging instruments on the consolidated statements of operations during the three months ended April 30, 2016 and 2015, respectively, are summarized below (in thousands):
 
Derivatives Not Designated as Hedging
Instruments
Gains (losses) on Derivative Instruments
Recognized in Income
  
 

Three Months Ended 
 April 30,
 
Location

2016

2015
Foreign currency derivative contracts
Other expense

$
(1,442
)

$
11,459

Strategic Investments
The Company's strategic investments are comprised of marketable equity securities and non-marketable debt and equity securities. Marketable equity securities are measured using quoted prices in their respective active markets and the non-marketable equity and debt securities are recorded at cost. These investments are presented on the consolidated balance sheets within strategic investments.

As of April 30, 2016, the Company had six investments in marketable equity securities with a fair value of $20.4 million, which includes an unrealized gain of $13.1 million. As of January 31, 2016, the Company had six investments in marketable equity securities with a fair value of $16.2 million, which included an unrealized gain of $8.5 million. The change in the fair value of the investments in publicly held companies is recorded in the consolidated balance sheets within strategic investments and accumulated other comprehensive loss.
The Company’s interest in non-marketable debt and equity securities consists of noncontrolling debt and equity investments in privately held companies. The Company’s investments in these privately held companies are reported at cost or marked down to fair value when an event or circumstance indicates an other-than-temporary decline in value has occurred. These investments are valued using significant unobservable inputs or data in an inactive market and the valuation requires the Company's judgment due to the absence of market prices and inherent lack of liquidity.
As of April 30, 2016 and January 31, 2016, the carrying value of the Company’s non-marketable debt and equity securities was $500.3 million and $504.5 million, respectively. The estimated fair value of the non-marketable debt and equity

20


securities was approximately $706.9 million and $714.1 million as of April 30, 2016 and January 31, 2016, respectively. These investments are measured using the cost method of accounting, therefore the unrealized gains of $206.6 million and $209.6 million as of April 30, 2016 and January 31, 2016, respectively, are not recorded in the consolidated financial statements.
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 April 30,
 
2016
 
2015
Interest income
$
7,773

 
$
3,049

Realized gains
1,054

 
2,128

Realized losses
(705
)
 
(616
)
Total investment income
$
8,122

 
$
4,561

Reclassification adjustments out of accumulated other comprehensive income (loss) into net income were immaterial for the three months ended April 30, 2016 and 2015, respectively.
3. Property and Equipment
Property and Equipment
Property and equipment, net consisted of the following (in thousands):
 
As of
 
April 30, 2016
 
January 31, 2016
 
 
 
 
Land
$
183,888

 
$
183,888

Buildings and building improvements
618,510

 
614,081

Computers, equipment and software
1,321,660

 
1,281,766

Furniture and fixtures
85,327

 
82,242

Leasehold improvements
499,108

 
473,688

 
$
2,708,493

 
$
2,635,665

Less accumulated depreciation and amortization
(997,021
)
 
(919,837
)
 
$
1,711,472

 
$
1,715,828

Depreciation and amortization expense totaled $75.6 million and $72.5 million during the three months ended April 30, 2016 and 2015, respectively.
Computers, equipment and software at April 30, 2016 and January 31, 2016 included a total of $748.4 million and $747.1 million acquired under capital lease agreements, respectively. Accumulated amortization relating to computers, equipment and software under capital leases totaled $335.5 million and $310.3 million, respectively, at April 30, 2016 and January 31, 2016. Amortization of assets under capital leases is included in depreciation and amortization expense.
Building - 350 Mission

In December 2013, the Company entered into a lease agreement for approximately 445,000 rentable square feet of office space at 350 Mission Street (“350 Mission”) in San Francisco, California, which is the total office space available in the building. As a result of the Company’s involvement during the construction period, the Company is considered for accounting purposes to be the owner of the construction project. As a result, the Company has capitalized the construction costs as Building with a corresponding current and noncurrent financing obligation liability and has accounted for the underlying land implicitly as an operating lease. As of April 30, 2016, the Company had capitalized $178.8 million of construction costs, based on the construction costs incurred to date by the landlord, and recorded a corresponding current and noncurrent financing obligation liability of $18.1 million and $202.2 million, respectively. As of January 31, 2016, the Company had capitalized $174.6 million of construction costs, based on the construction costs incurred to date by the landlord, and recorded a corresponding current and noncurrent financing obligation liability of $15.4 million and $196.7 million, respectively. The total

21


expected financing obligation in the form of minimum lease payments inclusive of the amounts currently recorded, is $336.9 million, including interest (see Note 10 “Commitments” for future commitment details). The obligation will be settled through monthly lease payments to the landlord which commenced on October 2015. To the extent that operating expenses for 350 Mission are material, the Company, as the deemed accounting owner, will record the operating expenses.
4. Business Combinations
Steelbrick
In February 2016, the Company acquired the outstanding stock of SteelBrick, Inc. (“SteelBrick”), a next generation quote-to-cash platform, delivered 100 percent natively on the Salesforce platform, which offers applications, or apps, for automating the entire deal close process - from generating quotes and configuring orders to collecting cash. The Company has included the financial results of SteelBrick in the consolidated financial statements from the date of acquisition, which have not been material to date. The costs associated with the acquisition were not material.
The preliminary acquisition date fair value consideration transferred for SteelBrick was approximately $314.8 million, which consisted of the following (in thousands, except for share data):
 
Fair Value
Cash
$
1,698

Common stock (4,288,447 shares)
278,372

Fair value of stock options and restricted stock awards assumed
10,989

Fair value of pre-existing relationship
23,726

Total
$
314,785

The fair value of stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of 0.08 was applied to convert SteelBrick's outstanding equity awards for SteelBrick's common stock into equity awards for shares of the Company's common stock.
The Company had a $13.9 million, or approximately six percent, noncontrolling equity investment in SteelBrick prior to the acquisition. The acquisition date fair value of the Company's previously held equity interest was approximately $23.7 million and is included in the measurement of the consideration transferred. The Company recognized a gain of approximately $9.8 million as a result of remeasuring its prior equity interest in SteelBrick held before the business combination. The gain is included in gains on sales of strategic investments on the consolidated statement of operations.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
 
Fair Value
Cash and cash equivalents
$
59,296

Other current and noncurrent tangible assets
3,012

Customer contract asset, current and noncurrent
16,903

Intangible assets
49,160

Goodwill
217,986

Deferred revenue, current and noncurrent
(8,479
)
Customer liability, current and noncurrent
(9,949
)
Other liabilities, current and noncurrent
(2,665
)
Deferred tax liability
(10,479
)
Net assets acquired
$
314,785

The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible assets acquired, liabilities assumed and identifiable intangible assets are based on management's estimates and assumptions. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets. The estimated fair values of assets acquired and liabilities assumed, specifically current and noncurrent income taxes payable and deferred taxes, may be subject to

22


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
$
30,700

4 years
Customer relationships
17,110

7 years
Other purchased intangible assets
1,350

1 year
Total intangible assets subject to amortization
$
49,160


The amount recorded for developed technology represents the estimated fair value of SteelBrick's quote-to-cash and billing technology. The amount recorded for customer relationships represents the fair values of the underlying relationship with SteelBrick customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating SteelBrick's quote-to-cash technology with the Company's other offerings. The majority of the goodwill balance is not deductible for U.S. income tax purposes.
The Company assumed unvested equity awards for shares of SteelBrick's common stock with a fair value of $39.6 million. Of the total consideration, $11.0 million was allocated to the consideration transferred and $28.6 million was allocated to future services and will be expensed over the remaining service periods on a straight-line basis.
MetaMind
In April 2016, the Company acquired MetaMind, Inc. (“MetaMind”) for approximately $32.8 million in cash, net of cash acquired. This amount includes amounts to be paid after an initial holdback period, and assumed equity awards. The primary reason for the acquisition was to extend the Company's intelligence in natural language processing and image recognition across all clouds. The Company has included the financial results of MetaMind in its consolidated financial statements from the date of acquisition, which have not been material to date. The costs associated with the acquisition were not material. In allocating the purchase consideration for MetaMind based on estimated fair values, the Company recorded $31.2 million of goodwill. The goodwill balance is not deductible for U.S. income tax purposes. The estimated fair values of assets acquired and liabilities assumed, specifically current and noncurrent income taxes payable and deferred taxes, may be subject to change as additional information is received and certain tax returns are finalized. Thus, the provisional measurements of fair value 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 Company assumed unvested equity awards for shares of MetaMind's common stock with a fair value of $5.5 million. Of the total consideration, $0.5 million was allocated to the purchase consideration and $5.0 million was allocated to future services and will be expensed over the remaining service periods on a straight-line basis.
The Company's chairman, who held a greater than ten percent ownership interest in MetaMind, received approximately $6.0 million in total proceeds, subject to customary escrow amounts, in connection with this acquisition.
Other Business Combinations
During the three months ended April 30, 2016, the Company acquired two other companies for an aggregate of $41.6 million in cash, net of cash acquired, and has included the financial results of these companies in its consolidated financial statements from the respective dates of acquisition. These transactions, individually and in the aggregate, are not material to the Company. The costs associated with these acquisitions were not material. The Company accounted for these transactions as business combinations. In allocating the purchase consideration for each company based on estimated fair values, the Company recorded $30.6 million of goodwill. The goodwill balance associated with these transactions is not deductible for U.S. income tax purposes. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.

23


5. Debt
Convertible Senior Notes
  
Par Value Outstanding
 
Equity
Component Recorded at Issuance
 
Liability Component of Par Value as of
 
(in thousands)
April 30,
2016
 
 
January 31,
2016
 
0.25% Convertible Senior Notes due April 1, 2018
$
1,150,000

 
$
122,421

(1)
$
1,095,104

(2)
 
$
1,088,097

(2)
___________ 
(1)This amount represents the equity component recorded at the initial issuance of the 0.25% convertible senior notes.
(2)In April 2015, the FASB issued ASU 2015-03 which simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability rather than an asset that is amortized. The Company retrospectively adopted this standard for the prior period presented.

In March 2013, the Company issued at par value $1.15 billion of 0.25% convertible senior notes (the “0.25% Senior Notes”, or 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 0.25% Senior Notes are governed by an indenture between the Company, as issuer, and U.S. Bank National Association, as trustee. The 0.25% Senior Notes are unsecured and do not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by the Company.
If converted, holders of the 0.25% Senior Notes will receive cash equal to the principal amount, and at the Company’s election, cash, shares of the Company’s common stock, or a combination of cash and shares, for any amounts in excess of the principal amounts.
Certain terms of the conversion features of the 0.25% Senior Notes are as follows:
 
Conversion
Rate per $1,000
Par Value
 
Initial
Conversion
Price per
Share
 
Convertible Date
0.25% Senior Notes
15.0512

 
$
66.44

 
January 1, 2018
Throughout the term of the 0.25% Senior Notes, the conversion rate may be adjusted upon the occurrence of certain events, including any cash dividends. Holders of the 0.25% Senior Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than canceled, extinguished or forfeited.
Holders may convert the 0.25% Senior Notes under the following circumstances:
during any fiscal quarter, if, for at least 20 trading days during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sales price of the Company’s common stock for such trading day is greater than or equal to 130% of the applicable conversion price on such trading day;
in certain situations, when the trading price of the 0.25% Senior Notes is less than 98% of the product of the sale price of the Company’s common stock and the conversion rate;
upon the occurrence of specified corporate transactions described under the 0.25% Senior Notes indenture, such as a consolidation, merger or binding share exchange; or
at any time on or after the convertible date noted above.
Holders of the 0.25% Senior Notes have the right to require the Company to purchase with cash all or a portion of the Notes upon the occurrence of a fundamental change, such as a change of control, at a purchase price equal to 100% of the principal amount of the 0.25% Senior Notes plus accrued and unpaid interest. Following certain corporate transactions that constitute a change of control, the Company will increase the conversion rate for a holder who elects to convert the 0.25% Senior Notes in connection with such change of control.
In accounting for the issuances of the 0.25% Senior Notes, the Company separated the 0.25% Senior Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 0.25% Senior

24


Notes as a whole. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the 0.25% Senior Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the 0.25% Senior Notes issuance, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Transaction costs attributable to the liability component are being amortized to expense over the terms of the 0.25% Senior Notes, and transaction costs attributable to the equity component were netted with the equity component in temporary stockholders’ equity and stockholders’ equity.
The 0.25% Senior Notes consisted of the following (in thousands):
 
 
As of
 
April 30,
2016
 
January 31,
2016
Liability component :
 
 
 
Principal (1)
$
1,150,000

 
$
1,150,000

Less: debt discount, net (2)
(48,753
)
 
(54,941
)
Less: debt issuance cost (3)
(6,143
)
 
(6,962
)
Net carrying amount
$
1,095,104

 
$
1,088,097

(1)The effective interest rate of the 0.25% Senior Notes is 2.53%. The interest rate is based on the interest rates of similar liabilities at the time of issuance that did not have an associated convertible feature.
(2)Included in the consolidated balance sheets within Convertible 0.25% Senior Notes (which is classified as a noncurrent liability) and is amortized over the life of the 0.25% Senior Notes using the effective interest rate method.
(3)In April 2015, the FASB issued ASU 2015-03 which simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability rather than an asset that is amortized. The Company retrospectively adopted this standard for the prior period presented.
The total estimated fair value of the Company’s 0.25% Senior Notes at April 30, 2016 was $1.5 billion. The fair value was determined based on the closing trading price per $100 of the 0.25% Senior Notes as of the last day of trading for the first quarter of fiscal 2017.
Based on the closing price of the Company’s common stock of $75.80 on April 29, 2016, the if-converted value of the 0.25% Senior Notes exceeded their principal amount by approximately $162.0 million. Based on the terms of the 0.25% Senior Notes, the Senior Notes were not convertible for the three months ended April 30, 2016.
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 “0.25% Note Hedges”).
 
(in thousands, except for shares)
Date
 
Purchase
 
Shares
0.25% Note Hedges
March 2013
 
$
153,800

 
17,308,880

The 0.25% Note Hedges cover shares of the Company’s common stock at a strike price that corresponds to the initial conversion price of the 0.25% Senior Notes, also subject to adjustment, and are exercisable upon conversion of the Notes. The 0.25% Note Hedges will expire upon the maturity of the 0.25% Senior Notes. The 0.25% Note Hedges are intended to reduce the potential economic dilution upon conversion of the 0.25% Senior Notes in the event that the market value per share of the Company’s common stock, as measured under the 0.25% Senior Notes, at the time of exercise is greater than the conversion price of the 0.25% Senior Notes. The 0.25% Note Hedges are separate transactions and are not part of the terms of the 0.25% Senior Notes. Holders of the 0.25% Senior Notes will not have any rights with respect to the 0.25% Note Hedges. The 0.25% Note Hedges do not impact earnings per share.

25


Warrants
 
Date
 
Proceeds
(in thousands)
 
Shares
 
Strike
Price
0.25% Warrants
March 2013
 
$
84,800

 
17,308,880

 
$
90.40

In March 2013, the Company also entered into a warrants transaction (the “0.25% Warrants”), whereby the Company sold warrants to acquire, subject to anti-dilution adjustments, shares of the Company’s common stock. The 0.25% Warrants were anti-dilutive for the periods presented. The 0.25% Warrants are separate transactions entered into by the Company and are not part of the terms of the 0.25% Senior Notes or the 0.25% Note Hedges. Holders of the 0.25% Senior Notes and 0.25% Note Hedges will not have any rights with respect to the 0.25% Warrants.
Revolving Credit Facility
Since October 2014, the Company maintains a 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 in October 2019 (the “Credit Facility”). The 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 April 30, 2016.
There are currently no outstanding borrowings held under the Credit Facility as of April 30, 2016. The Company continues to pay a fee of 0.15% on the undrawn amount of the Credit Facility.
Loan Assumed on 50 Fremont
The Company assumed a $200.0 million loan with the acquisition of 50 Fremont (the “Loan”). The Loan bears an interest rate of 3.75% per annum and is due in June 2023. The Loan initially requires interest only payments. Beginning in fiscal year 2019, principal and interest payments are required, with the remaining principal due at maturity. For the three months ended April 30, 2016, total interest expense recognized was $1.9 million. The Loan can be prepaid at any time subject to a yield maintenance fee. The agreement governing the Loan contains certain customary affirmative and negative covenants that the Company was in compliance with as of April 30, 2016.
Interest Expense on Convertible Senior Notes, Revolving Credit Facility and Loan Secured by 50 Fremont
The following table sets forth total interest expense recognized related to the 0.25% Senior Notes, the Credit Facility and the Loan prior to capitalization of interest (in thousands):
 
 
Three Months Ended April 30,
 
2016
 
2015
Contractual interest expense
$
2,814

 
$
3,350

Amortization of debt issuance costs
1,028

 
1,018

Amortization of debt discount
6,226

 
6,059

 
$
10,068

 
$
10,427


26


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
 
April 30,
2016
 
January 31,
2016
Prepaid income taxes
24,329

 
22,044

Other taxes receivable
28,117

 
27,341

Prepaid expenses and other current assets
254,179

 
201,209

 
$
306,625

 
$
250,594

Capitalized Software, net
Capitalized software consisted of the following (in thousands):
 
 
As of
 
April 30,
2016
 
January 31,
2016
Capitalized internal-use software development costs, net of accumulated amortization of $201,292 and $186,251, respectively
$
131,376

 
$
123,065

Acquired developed technology, net of accumulated amortization of $505,147 and $481,118, respectively
275,654

 
261,193

 
$
407,030

 
$
384,258

Capitalized internal-use software amortization expense totaled $15.0 million and $11.3 million for the three months ended April 30, 2016 and 2015, respectively. Acquired developed technology amortization expense totaled $24.0 million and $21.9 million for the three months ended April 30, 2016 and 2015, respectively.
The Company capitalized $1.8 million and $1.6 million of stock-based expenses related to capitalized internal-use software development for the three months ended April 30, 2016 and 2015, respectively.
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.
Goodwill consisted of the following (in thousands):
Balance as of January 31, 2016
$
3,849,937

Steelbrick
217,986

MetaMind
31,242

Other business combinations
30,554

Finalization of acquisition date fair values
(63
)
Balance as of April 30, 2016
$
4,129,656


27


Other Assets, net
Other assets consisted of the following (in thousands):
 
As of
 
April 30,
2016
 
January 31,
2016
Deferred income taxes, noncurrent, net
$
17,597

 
$
15,986

Long-term deposits
23,650

 
19,469

Purchased intangible assets, net of accumulated amortization of $228,704 and $212,248, respectively
267,722

 
258,580

Acquired intellectual property, net of accumulated amortization of $24,186 and $22,439, respectively
10,564

 
10,565

Other (1)
89,652

 
66,310

 
$
409,185

 
$
370,910

(1) In April 2015, the FASB issued ASU 2015-03 which simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability rather than an asset that is amortized. The Company retrospectively adopted this standard for the prior period presented, which resulted in an adjustment of $7.9 million to Other.
Purchased intangible assets amortization expense for the three months ended April 30, 2016 and 2015 was $16.5 million and $20.0 million, respectively. Acquired intellectual property amortization expense at both three months ended April 30, 2016 and 2015 was $1.7 million.
Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable, accrued expenses and other liabilities consisted of the following (in thousands):
 
 
As of
 
April 30,
2016
 
January 31,
2016
Accounts payable
$
54,583

 
$
71,481

Accrued compensation
386,410

 
554,502

Accrued other liabilities
433,631

 
454,287

Accrued income and other taxes payable
154,550

 
205,781

Accrued professional costs
30,095

 
33,814

Accrued rent
15,789

 
14,071

Financing obligation - leased facility, current (2)
18,139

 
15,402

 
$
1,093,197

 
$
1,349,338

Other Noncurrent Liabilities
Other noncurrent liabilities consisted of the following (in thousands):
 
 
As of
 
April 30,
2016
 
January 31,
2016
Deferred income taxes and income taxes payable
$
85,579

 
$
85,996

Financing obligation - leased facility (2)
202,246

 
196,711

Long-term lease liabilities and other
551,900

 
550,358

 
$
839,725

 
$
833,065

(2) As of January 31, 2016, 350 Mission was in construction. In March 2016, construction was completed on the building.

28


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.
As of April 30, 2016, $93.9 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 2013, options issued had a term of five years. After July 2013, options issued have a term of seven years.
During fiscal 2016, the Company granted a performance-based restricted stock unit award to the Chairman of the Board and Chief Executive Officer subject to vesting based on a performance-based condition and a service-based condition. At the end of the three year service period based on the Company's share price performance, as it relates to the performance condition, these performance-based restricted stock units will vest simultaneously.
Stock activity excluding the ESPP is as follows:
 
 
 
Options Outstanding
 
Shares
Available for
Grant
 
Outstanding
Stock
Options
 
Weighted-
Average
Exercise Price
 
Aggregate
Intrinsic Value
Balance as of January 31, 2016
46,879,908

 
26,258,798

 
$
56.26

 
 
Increase in shares authorized:
 
 
 
 
 
 
 
2013 Equity Incentive Plan
80,332

 


 


 
 
2014 Inducement Equity Incentive Plan
11,049

 


 


 
 
Assumed equity plans
584,392

 


 


 

Options granted under all plans
(867,292
)
 
867,292

 
40.58

 
 
Restricted stock activity
(1,821,324
)
 


 


 
 
Performance restricted stock units
0

 


 


 

Stock grants to board and advisory board members
(44,026
)
 


 


 
 
Exercised
0

 
(854,362
)
 
38.23

 
 
Plan shares expired
(28,916
)
 


 


 
 
Canceled
250,573

 
(250,573
)
 
67.73

 
 
Balance as of April 30, 2016
45,044,696

 
26,021,155

 
$
56.22

 
$
538,367,465

Vested or expected to vest
 
 
23,947,836

 
$
55.11

 
$
519,312,755

Exercisable as of April 30, 2016
 
 
10,372,672

 
$
43.12

 
$
338,995,305

The total intrinsic value of the options exercised during the three months ended April 30, 2016 and 2015 was $28.6 million and $113.3 million, respectively. The intrinsic value is the difference between the current market value of the stock and the exercise price of the stock option.
The weighted-average remaining contractual life of vested and expected to vest options is approximately 4.7 years.
As of April 30, 2016, options to purchase 10,372,672 shares were vested at a weighted average exercise price of $43.12 per share and had a remaining weighted-average contractual life of approximately 3.3 years. The total intrinsic value of these vested options as of April 30, 2016 was $339.0 million.

29


The following table summarizes information about stock options outstanding as of April 30, 2016:
 
 
 
Options Outstanding
 
Options Exercisable
Range of Exercise
Prices
 
Number
Outstanding
 
Weighted-
Average
Remaining
Contractual Life
(Years)
 
Weighted-
Average
Exercise
Price
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
$0.86 to $37.95
 
4,461,075

 
2.3
 
$
27.45

 
3,691,607

 
$
28.16

$38.03 to $52.14
 
2,480,093

 
2.0
 
39.87

 
1,934,518

 
39.57

$52.30
 
3,684,201

 
4.6
 
52.30

 
2,012,682

 
52.30

$53.60 to $57.79
 
1,414,340

 
5.1
 
55.31

 
514,062

 
55.35

$59.34
 
6,138,145

 
5.6
 
59.34

 
2,015,280

 
59.34

$59.37 to $77.86
 
2,326,108

 
6.2
 
68.62

 
204,523

 
65.72

$80.99
 
5,517,193

 
6.6
 
80.99

 
0

 
0.00

 
 
26,021,155

 
4.8
 
$
56.22

 
10,372,672

 
$
43.12

Restricted stock activity is as follows: 
 
Restricted Stock Outstanding
 
Outstanding
 
Weighted-
Average
Exercise Price
 
Aggregate
Intrinsic
Value
Balance as of January 31, 2016
21,294,585

 
$
0.001

 
 
Granted- restricted stock units and awards
1,468,220

 
0.001

 
 
Canceled
(512,280
)
 
0.001

 
 
Vested and converted to shares
(1,840,948
)
 
0.001

 
 
Balance as of April 30, 2016
20,409,577

 
$
0.001

 
$
1,547,045,937

Expected to vest
17,223,868

 
 
 
$
1,305,569,194

The restricted stock, which upon vesting entitles the holder to one share of common stock for each share of restricted stock, has an exercise price of $0.001 per share, which is equal to the par value of the Company’s common stock, and generally vests over 4 years.
The weighted-average grant date fair value of the restricted stock issued for the three months ended April 30, 2016 and 2015 was $69.29 and $67.17, respectively.
Common Stock
The following number of shares of common stock were reserved and available for future issuance at April 30, 2016:
 
Options outstanding
26,021,155

Restricted stock awards and units and performance stock units outstanding
20,409,577

Stock available for future grant:
 
2013 Equity Incentive Plan
44,462,309

2014 Inducement Equity Incentive Plan
446,533

Amended and Restated 2004 Employee Stock Purchase Plan
6,844,796

Acquired equity plans
135,854

Convertible Senior Notes
17,308,880

Warrants
17,308,880

 
132,937,984


30


8. Income Taxes
Effective Tax Rate
The Company computes its year-to-date provision for income taxes by applying the estimated annual effective tax rate to year to date pretax income or loss and adjusts the provision for discrete tax items recorded in the period. For the three months ended April 30, 2016, the Company reported a tax benefit of $1.6 million on a pretax income of $37.2 million, which resulted in a negative effective tax rate of 4 percent. The Company recorded a net tax benefit due to income taxes in profitable jurisdictions outside of the United States offset by a discrete tax benefit from a partial release of the valuation allowance in connection with certain acquisitions. The net deferred tax liability from the acquisitions provided a source of additional income to support the realizability of the Company's pre-existing deferred tax assets and as a result, the Company released a portion of its valuation allowance.
As described in Note 1 “Summary of Business and Significant Accounting Policies,” the Company early adopted ASU 2016-09 in the three months ended April 30, 2016. As a result of adopting ASU 2016-09 and the Company's current valuation allowance position, the Company did not record a current tax expense associated with the United States jurisdiction.
For the three months ended April 30, 2015, the Company reported a tax provision of $14.0 million on a pretax income of $18.1 million, which resulted in an effective tax rate of 77 percent. The tax provision recorded was primarily related to income taxes in profitable jurisdictions outside the United States.
Tax Benefits Related to Stock-Based Compensation
The income tax benefit related to stock-based compensation was $51.4 million and $43.7 million for three months ended April 30, 2016 and 2015, respectively, the majority of which was not recognized as a result of the valuation allowance.
Unrecognized Tax Benefits and Other Considerations
The Company records liabilities related to its uncertain tax positions. Tax positions for the Company and its subsidiaries are subject to income tax audits by multiple tax jurisdictions throughout the world. Certain prior year tax returns are currently being examined by various taxing authorities in countries including the United States, Canada, France, Switzerland and the United Kingdom. The Company believes that it has provided adequate reserves for its income tax uncertainties in all open tax years. However, the outcome of the tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner inconsistent with management's expectations, the Company could adjust its provision for income taxes in the future. Based on the information to-date, as some of the ongoing examinations are completed and tax positions in these tax years meet the conditions of being effectively settled or as applicable statute of limitations lapse, the Company anticipates it is reasonably possible that a decrease of unrecognized tax benefits up to approximately $15.0 million may occur in the next 12 months.

31


9. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding for the fiscal period. Diluted earnings/loss per share is computed by giving effect to all potential weighted average dilutive common stock, including options, restricted stock units, warrants and the convertible senior notes. The dilutive effect of outstanding awards and convertible securities is reflected in diluted earnings per share by application of the treasury stock method.
A reconciliation of the denominator used in the calculation of basic and diluted earnings per share is as follows (in thousands): 
 
Three Months Ended April 30,
 
2016
 
2015
Numerator:
 
 
 
Net income
$
38,759

 
$
4,092

Denominator:
 
 
 
Weighted-average shares outstanding for basic income per share
677,514

 
653,809

Effect of dilutive securities:
 
 
 
Convertible senior notes
945

 
0

Employee stock awards
8,340

 
10,501

Warrants
0

 
0

Adjusted weighted-average shares outstanding and assumed conversions for diluted income per share
686,799

 
664,310

The weighted-average number of shares outstanding used in the computation of diluted earnings per share does not include the effect of the following potential outstanding common stock. The effects of these potentially outstanding shares were not included in the calculation of diluted earnings per share because the effect would have been anti-dilutive (in thousands): 
 
Three Months Ended April 30,
 
2016
 
2015
Employee stock awards
21,321

 
8,801

Convertible senior notes
0

 
17,309

Warrants
17,309

 
17,309


32


10. Commitments
Letters of Credit
As of April 30, 2016, the Company had a total of $83.8 million in letters of credit outstanding substantially in favor of certain landlords for office space. These letters of credit renew annually and expire at various dates through December 2030.
Leases
The Company leases facilities space and certain fixed assets under non-cancelable operating and capital leases with various expiration dates.
As of April 30, 2016, the future minimum lease payments under non-cancelable operating and capital leases are as follows (in thousands):
 
 
Capital
Leases
 
Operating
Leases
 
Financing Obligation -Leased Facility(1)
Fiscal Period:
 
 
 
 
 
Remaining nine months of fiscal 2017
$
50,960

 
$
287,083

 
$
14,518

Fiscal 2018
122,765

 
351,971

 
21,437

Fiscal 2019
115,797

 
299,254

 
21,881

Fiscal 2020
201,579

 
239,804

 
22,325

Fiscal 2021
37

 
223,280

 
22,770

Thereafter
0

 
1,233,948

 
233,927

Total minimum lease payments
491,138

 
$
2,635,340

 
$
336,858

Less: amount representing interest
(42,438
)
 

 

Present value of capital lease obligations
$
448,700

 

 

______________ 
(1) Total Financing Obligation, Building -Leased Facility noted above represents the total obligation on the lease agreement including amounts allocated to interest noted in Note 3 “Property and Equipment.” As of April 30, 2016, $220.3 million of the total obligation noted above was recorded to Financing obligation, building - leased facility, of which the current portion is included in "Accounts payable, accrued expenses and other liabilities" and the non-current portion is included in “Other noncurrent liabilities” on the consolidated balance sheets.
The Company’s agreements for the facilities and certain services provide the Company with the option to renew. The Company’s future contractual obligations would change if the Company exercised these options.
The terms of the lease agreements provide for rental payments on a graduated basis. The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not paid. Of the total operating lease commitment balance of $2.6 billion, approximately $2.3 billion is related to facilities space. The remaining commitment amount is related to computer equipment and furniture and fixtures.
Other Purchase Commitments
In April 2016, the Company entered into an agreement with a third party provider for certain infrastructure services for a period of four years. The agreement provides that the Company will pay $70.0 million in fiscal 2017, $96.0 million in fiscal 2018, $108.0 million in fiscal 2019 and $126.0 million in fiscal 2020.
11. Legal Proceedings and Claims

In the ordinary course of business, the Company is or may be involved in various legal proceedings and claims related to alleged infringement of third-party patents and other intellectual property rights, commercial, corporate and securities, labor and employment, class actions, wage and hour, and other claims. The Company has been, and may in the future be put on notice and/or sued by third parties for alleged infringement of their proprietary rights, including patent infringement.

During fiscal 2015, the Company received a communication from a large technology company alleging that the Company infringed certain of its patents. No litigation has been filed to date.  There can be no assurance that this claim will not lead to litigation in the future.  The resolution of this claim is not expected to have a material adverse effect on the Company's financial condition, but it could be material to operating results or cash flows or both of a particular quarter. 

33


 
In general, the resolution of a legal matter could prevent the Company from offering its service to others, could be material to the Company’s financial condition or cash flows, or both, or could otherwise adversely affect the Company’s operating results.

The Company makes a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. In management’s opinion, resolution of all current matters is not expected to have a material adverse impact on the Company’s consolidated results of operations, cash flows or financial position. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect the Company’s future results of operations or cash flows, or both, of a particular quarter.
12. Related-Party Transactions
In January 1999, the Salesforce.com Foundation, also referred to as the Foundation, was chartered on an idea of leveraging the Company’s people, technology, and resources to help improve communities around the world. The Company calls this integrated philanthropic approach the 1-1-1 model. Beginning in 2008, Salesforce.org, which is a non-profit public benefit corporation, was established to resell the Company's services to nonprofit organizations and certain higher education organizations.
The Company’s chairman is the chairman of both the Foundation and Salesforce.org. The Company’s chairman holds one of the three Foundation board seats. The Company’s chairman, one of the Company’s employees and one of the Company’s board members hold three of Salesforce.org’s nine board seats. The Company does not control the Foundation’s or Salesforce.org's activities, and accordingly, the Company does not consolidate either of the related entities' statement of activities with its financial results.
Since the Foundation’s and Salesforce.org’s inception, the Company has provided at no charge certain resources to those entities employees such as office space, furniture, equipment, facilities, services, and other resources. The value of these items was approximately $0.8 million for the three months ended April 30, 2016.
The resource sharing agreement was amended in August 2015 to include resources outside of the United States and is more explicit about the types of resources that the Company will provide.
Additionally, the Company has donated subscriptions of the Company’s services to other qualified non-profit organizations. The Company also allows Salesforce.org to resell the Company’s service to non-profit organizations and certain education entities. The Company does not charge Salesforce.org for these subscriptions, therefore revenue from subscriptions provided to non-profit organizations is donated back to the community through charitable grants made by the Foundation and Salesforce.org. The reseller agreement was amended in August 2015 to include additional customer segments and certain customers outside the U.S. and in October 2015 to add an addendum with model clauses for the processing of personal data transferred from the European Economic Area. The value of the subscriptions pursuant to reseller agreements was approximately $27.8 million for the three months ended April 30, 2016. The Company plans to continue these programs.
As described in Note 4 “Business Combinations,” the Company's chairman held an ownership interest in an acquisition that was completed by the Company during the three months ended April 30, 2016.


34



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Words such as “expects,” “anticipates,” “aims,” “projects,” “intends,” “plans,” “believes,” “estimates,” “seeks,” “assumes,” “may,” “should,” “could,” “would,” “foresees,” “forecasts,” “predicts,” “targets,” variations of such words and similar expressions are intended to identify such forward-looking statements, which may consist of, among other things, trend analyses and statements regarding future events, future financial performance, anticipated growth and industry prospects. These forward-looking statements are based on current expectations, estimates and forecasts, as well as the beliefs and assumptions of our management, and are subject to risks and uncertainties that are difficult to predict, including the effect of general economic and market conditions; the impact of foreign currency exchange rate and interest rate fluctuations on our results; our business strategy and our plan to build our business, including our strategy to be the leading provider of enterprise cloud computing applications and platforms; our service performance and security; the expenses associated with new data centers and third party infrastructure providers; additional data center capacity; real estate and office facilities space; our operating results; new services and product features; our strategy of acquiring or making investments in complementary businesses, joint ventures, services, technologies and intellectual property rights; our ability to successfully integrate acquired businesses and technologies; our ability to continue to grow and maintain deferred revenue and unbilled deferred revenue; our ability to protect our intellectual property rights; our ability to develop our brands; our ability to realize the benefits from strategic partnerships and investments; our reliance on third- party hardware, software and platform providers; the effect of evolving government regulations; the valuation of our deferred tax assets; the potential availability of additional tax assets in the future; the impact of expensing stock options and other equity awards; the sufficiency of our capital resources; factors related to our outstanding convertible notes, revolving credit facility and loan associated with 50 Fremont; compliance with our debt covenants and capital lease obligations; and current and potential litigation involving us. These and other risks and uncertainties may cause our actual results to differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified below under “Risk Factors” and elsewhere in this report for additional detail regarding factors that may cause actual results to be different than those expressed in our forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Overview
We are a leading provider of enterprise cloud computing solutions, with a focus on customer relationship management, or CRM. We introduced our first CRM solution in February 2000, and we have since expanded our service offerings with new editions, solutions, features and platform capabilities.
Our mission is to help our customers transform themselves into customer-centric companies by empowering them to connect with their customers in entirely new ways. Our Customer Success Platform, including sales force automation, customer service and support, marketing automation, community management, analytics, application development, and Internet of Things (“IoT”) integration and our professional cloud services, provides the next-generation platform of enterprise applications, or apps, and services to enable customer success.
We believe that the convergence of cloud, social, mobile, data science and IoT technologies is fundamentally transforming how companies sell, service, market and innovate to connect with their customers. With our service offerings —Sales Cloud, Service Cloud, Marketing Cloud, Community Cloud, Analytics Cloud, IoT Cloud and App Cloud —customers have the tools they need to build a next generation customer success platform. Key elements of our strategy include:
strengthening our market-leading solutions;
expanding strategic relationships with customers;
extending distribution into new and high-growth product categories;
expanding our world-class sales organization;
reducing customer attrition;
building our business in top software markets globally, which includes building partnerships that help add customers; and
encouraging the development of third-party applications on our cloud computing platforms.

35


We believe the factors that will influence our ability to achieve our objectives include: our prospective customers’ willingness to migrate to enterprise cloud computing services; the availability, performance and security of our service; our ability to continue to release, and gain customer acceptance of, new and improved features; our ability to successfully integrate acquired businesses and technologies; successful customer adoption and utilization of our service; acceptance of our service in markets where we have few customers; the emergence of additional competitors in our market and improved product offerings by existing and new competitors; the location of new data centers; third-party developers’ willingness to develop applications on our platforms; our ability to attract new personnel and retain and motivate current personnel; and general economic conditions which could affect our customers’ ability and willingness to purchase our services, delay the customers’ purchasing decision or affect attrition rates.
To address these factors, we will need to, among other things, continue to add substantial numbers of paying subscriptions, upgrade our customers to fully featured versions or arrangements such as an Enterprise License Agreement, provide high quality technical support to our customers, encourage the development of third-party applications on our platforms and continue to focus on retaining customers at the time of renewal. Our plans to invest for future growth include the continuation of the expansion of our data center capacity, the hiring of additional personnel, particularly in direct sales, other customer-related areas and research and development, the expansion of domestic and international selling and marketing activities, specifically in our top markets, continuing to develop our brands, the addition of distribution channels, the upgrade of our service offerings, the development of new services, the integration of acquired technologies, the expansion of our Marketing Cloud and App Cloud core service offerings, and the additions to our global infrastructure to support our growth.
We also regularly evaluate acquisitions or investment opportunities in complementary businesses, joint ventures, services and technologies and intellectual property rights in an effort to expand our service offerings. We expect to continue to make such investments and acquisitions in the future and we plan to reinvest a significant portion of our incremental revenue in future periods to grow our business and continue our leadership role in the cloud computing industry. As a result of our aggressive growth plans, specifically our hiring plan and acquisition activities, we have incurred significant expenses from equity awards and amortization of purchased intangibles. As we continue with our growth plan and absent any one-time gains, we may continue to incur similar expenses in the future.
Our typical subscription contract term is 12 to 36 months, although terms range from one to 60 months, so during any fiscal reporting period only a subset of active subscription contracts is eligible for renewal. We calculate our attrition rate as of the end of each month. Our current attrition rate calculation does not include the Marketing Cloud service offerings. Our attrition rate was between eight and nine percent as of April 30, 2016. We expect our attrition rate to remain consistent as we continue to expand our enterprise business and invest in customer success and related programs.
We expect marketing and sales costs, which were 46 percent and 49 percent for the three months ended April 30, 2016 and 2015, respectively, to continue to represent a substantial portion of total revenues in the future as we seek to grow our customer base, sell more products to existing customers, and build greater brand awareness.
Fiscal Year
Our fiscal year ends on January 31. References to fiscal 2017, for example, refer to the fiscal year ending January 31, 2017.
Operating Segments
We operate as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who in our case is the chief executive officer, in deciding how to allocate resources and assess performance. Over the past few years, we have completed several acquisitions. These acquisitions have allowed us to expand our offerings, presence and reach in various market segments of the enterprise cloud computing market. While we have offerings in multiple enterprise cloud computing market segments, our business operates in one operating segment because all of our offerings operate on a single platform and are deployed in an identical way, and our chief operating decision maker evaluates our financial information and resources and assesses the performance of these resources on a consolidated basis. Since we operate as one operating segment, all required financial segment information can be found in the consolidated financial statements.

36


Sources of Revenues
We derive our revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing our enterprise cloud computing services and from customers paying for additional support beyond the standard support that is included in the basic subscription fees; and (2) related professional services such as process mapping, project management, implementation services and other revenue. “Other revenue” consists primarily of training fees. Subscription and support revenues accounted for approximately 93 percent of our total revenues for the three months ended April 30, 2016. Subscription revenues are driven primarily by the number of paying subscribers, varying service types, the price of our service and renewals. We define a “customer” as a separate and distinct buying entity (e.g., a company, a distinct business unit of a large corporation, a partnership, etc.) that has entered into a contract to access our enterprise cloud computing services. We define a “subscription” as a unique user account purchased by a customer for use by its employees or other customer-authorized users, and we refer to each such user as a “subscriber.” The number of paying subscriptions at each of our customers ranges from one to hundreds of thousands. None of our customers accounted for more than five percent of our revenues during the three months ended April 30, 2016 and 2015.
Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement dates of each contract. The typical subscription and support term is 12 to 36 months, although terms range from one to 60 months. Our subscription and support contracts are non-cancelable, though customers typically have the right to terminate their contracts for cause if we materially fail to perform. We generally invoice our customers in advance, in annual installments, and typical payment terms provide that our customers pay us within 30 days of invoice. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue, or in revenue depending on whether the revenue recognition criteria have been met. In general, we collect our billings in advance of the subscription service period.
Professional services and other revenues consist of fees associated with consulting and implementation services and training. Our consulting and implementation engagements are billed on either a time and materials or fixed fee basis. We also offer a number of training classes on implementing, using and administering our service that are billed on a per person, per class basis. Our typical professional services payment terms provide that our customers pay us within 30 days of invoice.
In determining whether professional services can be accounted for separately from subscription and support revenues, we consider a number of factors, which are described in “Critical Accounting Estimates—Revenue Recognition” below.

37


Revenue by Cloud Service Offering
We are providing the information below on a supplemental basis to give additional insight into the revenue performance of our individual core service offerings.
Subscription and support revenues consisted of the following by core service offering (in millions):
 
Three Months Ended April 30,
 
 
 
2016
 
2015
 
Variance- Percent
Sales Cloud
$
724.6

 
$
630.4

 
15%
Service Cloud
540.1

 
407.7

 
32%
App Cloud and Other
325.9

 
224.0

 
45%
Marketing Cloud
184.9

 
143.2

 
29%
Total
$
1,775.5

 
$
1,405.3

 

Subscription and support revenues from the Analytics Cloud, Communities Cloud and IoT Cloud were not significant for the three months ended April 30, 2016. The IoT cloud was launched in September 2015. Analytics Cloud revenue is included with App Cloud and Other in the table above. Community Cloud revenue is included in either Sales Cloud, Service Cloud or App Cloud and Other revenue depending on the primary service offering purchased.
In situations where a customer purchases multiple cloud offerings, such as through an Enterprise License Agreement, we allocate the contract value to each core service offering based on the customer’s estimated product demand plan and the service that was provided at the inception of the contract. We do not update these allocations based on actual product usage during the term of the contract. We have allocated approximately 13 percent and 10 percent of our total subscription and support revenues for the three months ended April 30, 2016 and 2015, respectively, based on customers’ estimated product demand plans and these allocated amounts are included in the table above.
Additionally, some of our service offerings have similar features and functions. For example, customers may use the Sales Cloud, the Service Cloud or our App Cloud to record account and contact information, which are similar features across these core service offerings. Depending on a customer’s actual and projected business requirements, more than one core service offering may satisfy the customer’s current and future needs. We record revenue based on the individual products ordered by a customer, and not according to the customer’s business requirements and usage. In addition, as we introduce new features and functions within each offering, and refine our allocation methodology for changes in our business, we do not expect it to be practical to adjust historical revenue results by service offering for comparability. Accordingly, comparisons of revenue performance by core service offering over time may not be meaningful.
Our Sales Cloud service offering is our most widely distributed service offering and has historically been the largest contributor of subscription and support revenues. As a result, Sales Cloud has the most international exposure and foreign exchange rate exposure, relative to the other cloud service offerings. Conversely, revenue for Marketing Cloud is primarily derived from the Americas, with little impact from foreign exchange rate movement.
Seasonal Nature of Deferred Revenue, Accounts Receivable and Operating Cash Flow
Deferred revenue primarily consists of billings to customers for our subscription service. Over 90 percent of the value of our billings to customers is for our subscription and support service. We generally invoice our customers in annual cycles. Approximately 80 percent of the value of all subscription and support related invoices were issued with annual terms during the three months ended April 30, 2016 in comparison to 75 percent during the same period a year ago. Occasionally, we bill customers for their multi-year contract on a single invoice which results in an increase in noncurrent deferred revenue. We typically issue renewal invoices in advance of the renewal service period, and depending on timing, the initial invoice for the subscription and services contract and the subsequent renewal invoice may occur in different quarters. This may result in an increase in deferred revenue and accounts receivable. There is a disproportionate weighting towards annual billings in the fourth quarter, primarily as a result of large enterprise account buying patterns. Our fourth quarter has historically been our strongest quarter for new business and renewals. The year on year compounding effect of this seasonality in both billing patterns and overall new and renewal business causes the value of invoices that we generate in the fourth quarter for both new business and renewals to increase as a proportion of our total annual billings. Accordingly, because of this billing activity, our first quarter is our largest collections and operating cash flow quarter.
The sequential quarterly changes in accounts receivable and the related deferred revenue and operating cash flow during the first quarter of our fiscal year are not necessarily indicative of the billing activity that occurs for the following quarters as

38


displayed below (in thousands, except unbilled deferred revenue):
 
April 30,
2016
Fiscal 2017
 
Accounts receivable, net
$
1,192,965

Deferred revenue, current and noncurrent
4,006,914

Operating cash flow (1)
1,051,062

Unbilled deferred revenue, a non-GAAP measure
7.6 bn


 
April 30,
2015
 
July 31,
2015
 
October 31,
2015
 
January 31,
2016
Fiscal 2016
 
 
 
 
 
 
 
Accounts receivable, net
$
926,381

 
$
1,067,799

 
$
1,060,726

 
$
2,496,165

Deferred revenue, current and noncurrent
3,056,820

 
3,034,991

 
2,846,510

 
4,291,553

Operating cash flow (1)
735,081

 
304,278

 
162,514

 
470,208

Unbilled deferred revenue, a non-GAAP measure
6.0 bn

 
6.2 bn

 
6.7 bn

 
7.1 bn


 
April 30,
2014
 
July 31,
2014
 
October 31,
2014
 
January 31,
2015
Fiscal 2015
 
 
 
 
 
 
 
Accounts receivable, net
$
684,155

 
$
834,323

 
$
794,590

 
$
1,905,506

Deferred revenue, current and noncurrent
2,324,615

 
2,352,904

 
2,223,977

 
3,321,449

Operating cash flow (1)
482,128

 
239,078

 
123,732

 
336,506

Unbilled deferred revenue, a non-GAAP measure
4.8 bn

 
5.0 bn

 
5.4 bn

 
5.7 bn

 
(1)
Operating cash flow represents net cash provided by operating activities for the three months ended in the periods stated above. In the first quarter of fiscal year 2017, we early adopted Accounting Standards Update No. 2016-09, “Stock Compensation (Topic 718): Improvements to Employee Shared-Based Payment Accounting” (“ASU 2016-09”), which addresses among other items, updates to the presentation and treatment of excess tax benefits related to stock based compensation on the Statements of Cash Flows. We have adopted changes to the statement of cash flows on a retrospective basis and have accordingly updated the operating cash flow amounts presented above.

Unbilled Deferred Revenue, a Non-GAAP Measure
The GAAP deferred revenue balance on our consolidated balance sheets does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. Unbilled deferred revenue is a non-GAAP operational measure that represents future billings under our subscription agreements that have not been invoiced and, accordingly, are not recorded in deferred revenue. Unbilled deferred revenue amounts by quarter are reflected in the table above. Our typical contract length is between 12 and 36 months. We expect that the amount of unbilled deferred revenue will change from quarter to quarter for several reasons, including the specific timing, duration and size of large customer subscription agreements, varying billing cycles of