10-Q 1 crmq3fy1710-q.htm 10-Q 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 October 31, 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 October 31, 2016, there were approximately 696.7 million shares of the Registrant’s Common Stock outstanding.






INDEX
 
 
 
Page No.
 
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Balance Sheets as of October 31, 2016 and January 31, 2016
 
 
 
 
Consolidated Statements of Operations for the three and nine months ended October 31, 2016 and 2015
 
 
 
 
Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended October 31, 2016 and 2015
 
 
 
 
Consolidated Statements of Cash Flows for the three and nine months ended October 31, 2016 and 2015
 
 
 
 
Notes to 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)
 
 
October 31,
2016
 
January 31,
2016
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,145,736

 
$
1,158,363

Short-term marketable securities
55,071

 
183,018

Accounts receivable, net
1,281,425

 
2,496,165

Deferred commissions
237,729

 
259,187

Prepaid expenses and other current assets
281,593

 
250,594

Total current assets
3,001,554

 
4,347,327

Marketable securities, noncurrent
550,323

 
1,383,996

Property and equipment, net
1,756,673

 
1,715,828

Deferred commissions, noncurrent
167,839

 
189,943

Capitalized software, net
637,877

 
384,258

Goodwill
6,616,999

 
3,849,937

Strategic investments
555,968

 
520,721

Other assets, net
1,100,436

 
370,910

Total assets
$
14,387,669

 
$
12,762,920

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable, accrued expenses and other liabilities
$
1,496,841

 
$
1,349,338

Deferred revenue
3,478,693

 
4,267,667

Total current liabilities
4,975,534

 
5,617,005

Convertible 0.25% senior notes, net
1,109,236

 
1,088,097

Term loan
496,934

 
0

Loan assumed on 50 Fremont
198,201

 
197,998

Deferred revenue, noncurrent
16,440

 
23,886

Other noncurrent liabilities
785,287

 
833,065

Total liabilities
7,581,632

 
7,760,051

Stockholders’ equity:
 
 
 
Common stock
697

 
671

Additional paid-in capital
7,281,753

 
5,705,386

Accumulated other comprehensive loss
(62,943
)
 
(49,917
)
Accumulated deficit (See Note 1)
(413,470
)
 
(653,271
)
Total stockholders’ equity
6,806,037

 
5,002,869

Total liabilities and stockholders’ equity
$
14,387,669

 
$
12,762,920










See accompanying Notes.

3


salesforce.com, inc.
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Subscription and support
$
1,983,981

 
$
1,596,333

 
$
5,645,554

 
$
4,522,939

Professional services and other
160,794

 
115,634

 
452,442

 
334,879

Total revenues
2,144,775

 
1,711,967

 
6,097,996

 
4,857,818

Cost of revenues (1)(2):
 
 
 
 
 
 
 
Subscription and support
411,363

 
303,045

 
1,108,134

 
870,023

Professional services and other
174,159

 
120,638

 
499,948

 
340,846

Total cost of revenues
585,522

 
423,683

 
1,608,082

 
1,210,869

Gross profit
1,559,253

 
1,288,284

 
4,489,914

 
3,646,949

Operating expenses (1)(2):
 
 
 
 
 
 
 
Research and development
311,459

 
239,212

 
863,935

 
695,440

Marketing and sales
997,993

 
818,820

 
2,828,784

 
2,349,449

General and administrative
246,765

 
186,818

 
709,622

 
544,314

Operating lease termination resulting from purchase of 50 Fremont
0

 
0

 
0

 
(36,617
)
Total operating expenses
1,556,217

 
1,244,850

 
4,402,341

 
3,552,586

Income from operations
3,036

 
43,434

 
87,573

 
94,363

Investment income
3,709

 
3,507

 
23,747

 
11,351

Interest expense
(21,946
)
 
(18,249
)
 
(64,665
)
 
(53,020
)
Other income (expense) (1)
1,782

 
(7,093
)
 
(11,500
)
 
(6,064
)
Gain on sales of land and building improvements
0

 
21,792

 
0

 
21,792

Gains on sales of strategic investments
833

 
0

 
13,697

 
0

Income (loss) before benefit from (provision for) income taxes
(12,586
)
 
43,391

 
48,852

 
68,422

Benefit from (provision for) income taxes (3)
(24,723
)
 
(68,548
)
 
182,220

 
(90,339
)
Net income (loss)
$
(37,309
)
 
$
(25,157
)
 
$
231,072

 
$
(21,917
)
Basic net income (loss) per share
$
(0.05
)
 
(0.04
)
 
$
0.34

 
(0.03
)
Diluted net income (loss) per share
$
(0.05
)
 
(0.04
)
 
$
0.33

 
(0.03
)
Shares used in computing basic net income (loss) per share
690,468

 
664,131

 
683,075

 
659,160

Shares used in computing diluted net income (loss) per share
690,468

 
664,131

 
696,257

 
659,160

_______________
(1) Amounts include amortization of purchased intangibles from business combinations, as follows:
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
 
Cost of revenues
$
36,703

 
$
20,296

 
$
84,462

 
$
60,825

 
Marketing and sales
28,064

 
18,966

 
66,601

 
57,995

 
Other non-operating expense
579

 
761

 
1,927

 
2,877

 
(2) Amounts include stock-based expense, as follows
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
 
Cost of revenues
$
26,783

 
$
17,516

 
$
76,912

 
$
49,237

 
Research and development
50,372

 
31,534

 
124,164

 
96,508

 
Marketing and sales
93,718

 
69,561

 
275,515

 
211,819

 
General and administrative
33,878

 
25,706

 
99,389

 
77,092

 
(3) Amounts include a $205.6 million tax benefit recorded during the nine months ended October 31, 2016 as a result of the release of a portion of the valuation allowance related to the Demandware, Inc. acquisition. See Note 8 “Income Taxes.”
See accompanying Notes.

4


salesforce.com, inc.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
(37,309
)
 
$
(25,157
)
 
$
231,072

 
$
(21,917
)
Other comprehensive loss, before tax and net of reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation and other losses
(28,372
)
 
(1,173
)
 
(28,523
)
 
(8,419
)
Unrealized gains (losses) on investments
(16,019
)
 
(2,873
)
 
20,961

 
337

Other comprehensive loss, before tax
(44,391
)
 
(4,046
)
 
(7,562
)
 
(8,082
)
Tax effect
(7,337
)
 
(1,135
)
 
(5,464
)
 
(1,135
)
Other comprehensive loss, net of tax
(51,728
)
 
(5,181
)
 
(13,026
)
 
(9,217
)
Comprehensive income (loss)
$
(89,037
)
 
$
(30,338
)
 
$
218,046

 
$
(31,134
)





























See accompanying Notes.

5


salesforce.com, inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
Operating activities:
 
 
 
 
 
 
 
Net income (loss)
$
(37,309
)
 
$
(25,157
)
 
$
231,072

 
$
(21,917
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
169,346

 
134,236

 
451,479

 
393,838

Amortization of debt discount and transaction costs
7,281

 
7,138

 
21,334

 
20,290

Gain on sales of land and building improvements
0

 
(21,792
)
 
0

 
(21,792
)
Gains on sales of strategic investments
(833
)
 
0

 
(13,697
)
 
0

50 Fremont lease termination
0

 
0

 
0

 
(36,617
)
Abandonment of leasehold improvement
0

 
7,086

 
0

 
7,086

Amortization of deferred commissions
93,230

 
78,934

 
270,527

 
232,768

Expenses related to employee stock plans
204,751

 
144,317

 
575,980

 
434,656

Changes in assets and liabilities, net of business combinations:
 
 
 
 
 
 
 
Accounts receivable, net
42,653

 
15,262

 
1,276,798

 
853,014

Deferred commissions
(92,803
)
 
(80,030
)
 
(226,965
)
 
(200,867
)
Prepaid expenses and other current assets and other assets
40,676

 
33,841

 
(25,723
)
 
4,495

Accounts payable, accrued expenses and other liabilities
57,836

 
57,577

 
(275,058
)
 
12,276

Deferred revenue
(330,516
)
 
(188,898
)
 
(829,695
)
 
(475,357
)
Net cash provided by operating activities (1)
154,312

 
162,514

 
1,456,052

 
1,201,873

Investing activities:
 
 
 
 
 
 
 
Business combinations, net of cash acquired
(32,117
)
 
(27,759
)
 
(2,832,110
)
 
(58,680
)
Proceeds from land and building improvements held for sale
0

 
127,066

 
0

 
127,066

Purchase of 50 Fremont land and building
0

 
0

 
0

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

 
0

 
0

 
115,015

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

 
0

 
0

 
6,284

Strategic investments, net
(16,877
)
 
(30,330
)
 
(39,328
)
 
(325,226
)
Purchases of marketable securities
(111,731
)
 
(200,001
)
 
(986,862
)
 
(543,422
)
Sales of marketable securities
93,391

 
91,153

 
1,927,049

 
414,259

Maturities of marketable securities
14,203

 
7,166

 
64,741

 
23,445

Capital expenditures
(140,653
)
 
(80,041
)
 
(319,984
)
 
(216,011
)
Net cash used in investing activities
(193,784
)
 
(112,746
)
 
(2,186,494
)
 
(882,646
)
Financing activities:
 
 
 
 
 
 
 
Proceeds from term loan, net
0

 
0

 
495,550

 
0

Proceeds from employee stock plans
92,846

 
98,016

 
315,865

 
367,830

Principal payments on capital lease obligations
(10,997
)
 
(10,945
)
 
(73,760
)
 
(68,844
)
Payments on revolving credit facility
0

 
0

 
0

 
(300,000
)
Net cash provided by (used in) financing activities (1)
81,849

 
87,071

 
737,655

 
(1,014
)
Effect of exchange rate changes
(11,867
)
 
(2,872
)
 
(19,840
)
 
(3,012
)
Net increase (decrease) in cash and cash equivalents
30,510

 
133,967

 
(12,627
)
 
315,201

Cash and cash equivalents, beginning of period
1,115,226

 
1,089,351

 
1,158,363

 
908,117

Cash and cash equivalents, end of period
$
1,145,736

 
$
1,223,318

 
$
1,145,736

 
$
1,223,318

1)
During the nine months ended October 31, 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. Excess tax benefits are no longer classified as a reduction of operating cash flows. The Company has adopted changes to the consolidated statements of cash flows on a retrospective basis. The impact for the three and nine months ended October 31, 2015 was an increase of $44,607 and $48,698 to net cash provided by operating activities with a correlating decrease of equal amounts to net cash provided by (used in) financing activities, respectively.
See accompanying Notes.

6


salesforce.com, inc.
Consolidated Statements of Cash Flows
Supplemental Cash Flow Disclosure
(in thousands)
(unaudited)
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
Supplemental cash flow disclosure:
 
 
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
 
 
Interest
$
11,365

 
$
4,085

 
$
41,400

 
$
32,756

Income taxes, net of tax refunds
$
11,220

 
$
8,248

 
$
25,451

 
$
24,450

Non-cash operating, financing and investing activities:
 
 
 
 
 
 
 
Fixed assets acquired under capital leases
$
180

 
$
2,065

 
$
765

 
$
7,191

Building - leased facility acquired under financing obligation
$
0

 
$
38,477

 
$
0

 
$
75,336

Fair value of loan assumed on 50 Fremont
$
0

 
$
0

 
$
0

 
$
198,751

Fair value of equity awards assumed
$
26,406

 
$
0

 
$
47,199

 
$
0

Fair value of common stock issued as consideration for business combinations
$
492,842

 
$
0

 
$
771,214

 
$
0

Non-cash equity liability (See Note 6)
$
(1,473
)
 
$
0

 
$
74,570

 
$
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 includes, among other things, sales force automation, customer service and support, marketing automation, commerce, community management, analytics, application development, Internet of Things integration and professional cloud services, which 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 October 31, 2016 and the consolidated statements of operations, the consolidated statements of comprehensive income (loss) and the consolidated statements of cash flows for the three and nine months ended October 31, 2016 and 2015, respectively, are unaudited.

These financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, the unaudited consolidated financial statements include all adjustments necessary for the fair presentation of the Company’s balance sheet as of October 31, 2016, and its results of operations, including its comprehensive income (loss), and its cash flows for the three and nine months ended October 31, 2016 and 2015. All adjustments are of a normal recurring nature. The results for the three and nine months ended October 31, 2016 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending January 31, 2017.

These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2016, filed with the Securities and Exchange Commission (the “SEC”) on March 7, 2016 as updated by the Form 8-K filed with the SEC on September 1, 2016.
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 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, including fiscal 2017, the Company has completed a number of acquisitions. These acquisitions have allowed the Company to expand its offerings, presence and reach in various market segments of the enterprise cloud computing market. While the Company has offerings in multiple enterprise cloud computing market segments, including as a result of the Company's acquisitions, the Company’s business operates in one operating segment because the majority of the Company's offerings operate on a single platform and are deployed in an identical way, and the Company’s chief operating decision maker evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis. Since the Company operates in one operating segment, all required financial segment information can be found in the consolidated financial statements.
Concentrations of Credit Risk and Significant Customers
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and trade accounts receivable. Collateral is not required for accounts receivable. The Company maintains an allowance for doubtful accounts receivable balances. This allowance is based upon historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with delinquent accounts.
No single customer accounted for more than five percent of accounts receivable at October 31, 2016 and January 31, 2016. No single customer accounted for five percent or more of total revenue during the three and nine months ended October 31, 2016 and 2015.
Geographic Locations
As of October 31, 2016 and January 31, 2016, assets located outside the Americas were 9 percent and 11 percent of total assets, respectively.
Revenues by geographical region are as follows (in thousands):
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
Americas
$
1,598,344

 
$
1,258,148

 
$
4,506,774

 
$
3,575,441

Europe
337,497

 
302,704

 
1,012,671

 
848,413

Asia Pacific
208,934

 
151,115

 
578,551

 
433,964

 
$
2,144,775


$
1,711,967


$
6,097,996

 
$
4,857,818

Americas revenue attributed to the United States was approximately 96 percent and 95 percent during the three and nine months ended October 31, 2016 and 2015, respectively. No other country represented more than ten percent of total revenue during the three and nine months ended October 31, 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.

9


The Company commences revenue recognition when all of the following conditions are satisfied:
there is persuasive evidence of an arrangement;
the service has been or is being provided to the customer;
the collection of the fees is reasonably assured; and
the amount of fees to be paid by the customer is fixed or determinable.
The Company’s subscription service arrangements are non-cancelable and do not contain refund-type provisions.
Subscription and Support Revenues
Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement date of each contract, which is the date the Company’s service is made available to customers.
Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
Professional Services and Other Revenues
The Company’s professional services contracts are either on a time and 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, dollar size and new business linearity within the quarter.
Deferred revenue that will be recognized during the succeeding twelve month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent.
Deferred Commissions
Deferred commissions are the incremental costs that are directly associated with non-cancelable subscription contracts with customers and consist of sales commissions paid to the Company’s direct sales force.
The commissions are deferred and amortized over the non-cancelable terms of the related customer contracts, which are typically 12 to 36 months. The commission payments are paid in full the month after the customer’s service commences 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 and nine months ended October 31, 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. To the extent there are losses associated with the sublease, they are recognized in the period the sublease is executed. Gains are recognized over the sublease life. Any sublease payments received in excess of the straight-line rent payments for the sublease are recorded in other income (expense).
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 2.7 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 and ESPP share was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions and fair value per share:
 
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
October 31,
Stock Options
2016
 
 
2015
 
2016
 
2015
Volatility
32.3

%
 
35

%
32.1-32.3

%
 
35-37

%
Estimated life
3.5 years

 
 
3.6 years

 
3.5 years

 
 
3.6 years

 
Risk-free interest rate
0.91-1.07

%
 
1.21-1.27

%
0.89-1.07

%
 
1.13-1.42

%
Weighted-average fair value per share of grants
$
18.75

 
 
$
19.72

 
$
18.75

 
 
$
19.79

 

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, one during the second quarter and one during the fourth quarter. The estimated life of the ESPP will be based on the two purchase periods within each offering period.

The 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

13


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.
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.

14


New Accounting Pronouncements Adopted in Fiscal 2017

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability rather than an asset that is amortized. However, ASU 2015-03 does not address deferred issuance costs for line-of-credit arrangements; therefore, in August 2015, the FASB issued Accounting Standards Update No. 2015-15, “Interest-Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” (“ASU 2015-15”). ASU 2015-15 allows an entity to defer debt issuance costs associated with line-of-credit arrangements, including arrangements with no outstanding borrowings, and classify them as an asset, and amortize them over the term of the arrangements. The recognition and measurement guidance for debt issuance costs is not affected by the standards. 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, Term Loan, and Loan assumed on 50 Fremont.
In September 2015, the FASB issued Accounting Standards Update No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments (Topic 805)” (“ASU 2015-16”), which eliminates the requirement to restate prior period financial statements for measurement period adjustments in business combinations. ASU 2015-16 requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The Company adopted this standard during the three months ended April 30, 2016 and there was no material impact of this on the Company's financial statements.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, “Stock Compensation (Topic 718): Improvements to Employee Shared-Based Payment Accounting” (“ASU 2016-09”), which simplifies and improves several aspects of the accounting for employee share-based payment transactions for public entities. The new guidance requires companies to record excess tax benefits and tax deficiencies as income tax benefit or expense in the statement of operations when the awards vest or are settled, and eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the statement of cash flows. The Company adopted the standard in the three months ended April 30, 2016.  Upon adoption, the Company recognized the previously unrecognized excess tax benefits using the modified retrospective transition method, which resulted in a cumulative-effect adjustment of $8.7 million to accumulated deficit. This adjustment reduced the 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 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 accounting for deferred commissions balances.

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, “Financial Instrument-Overall (Subtopic 825-10)” (“ASU 2016-01”), which requires entities to measure equity investments at fair value and recognize any changes in fair value in net income. However, for equity investments that do not have readily determinable fair values and do not qualify for the existing practical expedient, the investments will be measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The new standard is effective for interim and annual periods beginning after December 15, 2017 and early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-01 on its consolidated financial statements.

15


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 of the adoption of ASU 2016-02 on its consolidated financial statements.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”)”, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The new standard is effective for annual periods beginning after December 15, 2017, with early adoption permitted as of the beginning of a fiscal year. The Company is currently evaluating the impact of the adoption of ASU 2016-16 on its consolidated financial statements.
2. Investments
Marketable Securities
At October 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
$
308,381

 
$
2,262

 
$
(482
)
 
$
310,161

U.S. treasury securities
52,692

 
132

 
(43
)
 
52,781

Mortgage backed obligations
77,723

 
138

 
(198
)
 
77,663

Asset backed securities
111,806

 
310

 
(23
)
 
112,093

Municipal securities
45,388

 
235

 
(33
)
 
45,590

Foreign government obligations
7,090

 
19

 
(3
)
 
7,106

Total marketable securities
$
603,080


$
3,096


$
(782
)

$
605,394

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
 
October 31,
2016
 
January 31,
2016
Recorded as follows:
 
 
 
Short-term (due in one year or less)
$
55,071

 
$
183,018

Long-term (due after one year)
550,323

 
1,383,996

 
$
605,394

 
$
1,567,014


16


As of October 31, 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
$
59,612

 
$
(473
)
 
$
4,594

 
$
(9
)
 
$
64,206

 
$
(482
)
U.S. treasury securities
20,294

 
(43
)
 
0

 
0

 
20,294

 
(43
)
Mortgage backed obligations
40,964

 
(195
)
 
224

 
(3
)
 
41,188

 
(198
)
Asset backed securities
24,713

 
(17
)
 
1,862

 
(6
)
 
26,575

 
(23
)
Municipal securities
6,689

 
(33
)
 
0

 
0

 
6,689

 
(33
)
Foreign government obligations
4,092

 
(3
)
 
0

 
0

 
4,092

 
(3
)
 
$
156,364

 
$
(764
)
 
$
6,680

 
$
(18
)
 
$
163,044

 
$
(782
)
The unrealized losses for each of the fixed rate marketable securities were less than $143,000. The Company does not believe any of the unrealized losses represent an other-than-temporary impairment based on its evaluation of available evidence as of October 31, 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 October 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 October 31, 2016
Cash equivalents (1):
 
 
 
 
 
 
 
Time deposits
$
0

 
$
110,796

 
$
0

 
$
110,796

Money market mutual funds
206,156

 
0

 
0

 
206,156

Marketable securities:
 
 
 
 
 
 
 
Corporate notes and obligations
0

 
310,161

 
0

 
310,161

U.S. treasury securities
0

 
52,781

 
0

 
52,781

Mortgage backed obligations
0

 
77,663

 
0

 
77,663

Asset backed securities
0

 
112,093

 
0

 
112,093

Municipal securities
0

 
45,590

 
0

 
45,590

Foreign government obligations
0

 
7,106

 
0

 
7,106

Foreign currency derivative contracts (2)
0

 
1,372

 
0

 
1,372

Total assets
$
206,156

 
$
717,562

 
$
0

 
$
923,718

Liabilities
 
 
 
 
 
 
 
Foreign currency derivative contracts (3)
$
0

 
$
4,838

 
$
0

 
$
4,838

Total liabilities
$
0

 
$
4,838

 
$
0

 
$
4,838

_____________ 
(1)Included in “cash and cash equivalents” in the accompanying consolidated balance sheet as of October 31, 2016, in addition to $828.8 million of cash.
(2)Included in “prepaid expenses and other current assets” in the accompanying consolidated balance sheet as of October 31, 2016.
(3)Included in “accounts payable, accrued expenses and other liabilities” in the consolidated balance sheet as of October 31, 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 Pound Sterling, the Euro and Japanese Yen. The Company’s foreign currency derivative contracts, which are not designated as hedging instruments, are used to reduce the exchange rate risk associated primarily with intercompany receivables and payables. The Company’s derivative financial instruments program is not designated for trading or speculative purposes. As of October 31, 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
 
October 31, 2016
 
January 31, 2016
Notional amount of foreign currency derivative contracts
$
1,217,458

 
$
1,274,515

Fair value of foreign currency derivative contracts
$
(3,466
)
 
$
(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
October 31, 2016
 
January 31, 2016
Derivative Assets
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency derivative contracts
Prepaid expenses and other current assets
$
1,372

 
$
4,731

Derivative Liabilities
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency derivative contracts
Accounts payable, accrued expenses and other liabilities
$
4,838

 
$
14,025


The effect of the derivative instruments not designated as hedging instruments on the consolidated statements of operations during the three and nine months ended October 31, 2016 and 2015, respectively, are summarized below (in thousands):
Derivatives Not Designated as Hedging
Instruments
Losses on Derivative Instruments
Recognized in Other income (expense)
  
 

Three Months Ended 
 October 31,
 
Location

2016

2015
Foreign currency derivative contracts
Other income (expense)

$
(39,624
)
 
$
(2,888
)
 
Derivatives Not Designated as Hedging
Instruments
Income (loss) on Derivative Instruments
Recognized in Other income (expense)
  
 

Nine Months Ended 
 October 31,
 
Location

2016

2015
Foreign currency derivative contracts
Other income (expense)

$
(86,528
)

$
9,773


20


Investment Income
Investment income consists of interest income, realized gains and realized losses on the Company’s cash, cash equivalents and marketable securities. The components of investment income are presented below (in thousands):
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
Interest income
$
3,642

 
$
3,700

 
$
17,961

 
$
9,919

Realized gains
210

 
257

 
7,771

 
3,197

Realized losses
(143
)
 
(450
)
 
(1,985
)
 
(1,765
)
Total investment income
$
3,709

 
$
3,507

 
$
23,747

 
$
11,351

Reclassification adjustments out of accumulated other comprehensive income (loss) into net income were immaterial for the three and nine months ended October 31, 2016 and 2015, respectively.
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 October 31, 2016, the Company had five investments in marketable equity securities with a fair value of $42.4 million, which includes an unrealized gain of $26.5 million. As of January 31, 2016, the Company had six investments in marketable equity securities with a fair value of $16.2 million, which included an unrealized gain of $8.5 million. The change in the fair value of the investments in publicly held companies is recorded in the consolidated balance sheets within strategic investments and accumulated other comprehensive loss.
The Company’s interest in non-marketable debt and equity securities consists of noncontrolling 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 October 31, 2016 and January 31, 2016, the carrying value of the Company’s non-marketable debt and equity securities was $513.5 million and $504.5 million, respectively. The estimated fair value of the non-marketable debt and equity securities was approximately $752.1 million and $714.1 million as of October 31, 2016 and January 31, 2016, respectively. These investments are measured using the cost method of accounting; therefore, the unrealized gains of $238.6 million and $209.6 million as of October 31, 2016 and January 31, 2016, respectively, are not recorded in the consolidated financial statements.
The carrying value of the Company’s strategic investments is impacted by various events such as entering into new investments, disposition-related reductions of a cost-basis investment if a privately-held company within the portfolio is acquired by another company, fair market value adjustments or initial public offerings. The cash inflows from exits and cash outflows from new investments are disclosed as Strategic investments, net, within the investing activities section of the Statement of Cash Flows and any gains or losses or fair market value adjustments are recorded within the operating activities of the Statement of Cash Flows for each of the respective fiscal quarter periods. 

21


3. Property and Equipment
Property and Equipment
Property and equipment, net consisted of the following (in thousands):
 
As of
 
October 31, 2016
 
January 31, 2016
Land
$
183,888

 
$
183,888

Buildings and building improvements
619,419

 
614,081

Computers, equipment and software
1,390,751

 
1,281,766

Furniture and fixtures
101,558

 
82,242

Leasehold improvements
586,040

 
473,688

 
2,881,656

 
2,635,665

Less accumulated depreciation and amortization
(1,124,983
)
 
(919,837
)
 
$
1,756,673

 
$
1,715,828

Depreciation and amortization expense totaled $83.5 million and $77.4 million during the three months ended October 31, 2016 and 2015, respectively, and totaled $239.2 million and $226.6 million during the nine months ended October 31, 2016 and 2015, respectively.
Computers, equipment and software at October 31, 2016 and January 31, 2016 included a total of $729.3 million and $747.1 million acquired under capital lease agreements, respectively. Accumulated amortization relating to computers, equipment and software under capital leases totaled $364.8 million and $310.3 million, respectively, at October 31, 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 October 31, 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 $19.5 million and $201.3 million, respectively. As of January 31, 2016, the Company had capitalized $174.6 million of construction costs, based on the construction costs incurred to date by the landlord, and recorded a corresponding current and noncurrent financing obligation liability of $15.4 million and $196.7 million, respectively. The total expected financing obligation in the form of minimum lease payments inclusive of the amounts currently recorded, is $327.7 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
BeyondCore
In September 2016, the Company acquired the outstanding stock of BeyondCore, Inc. (“BeyondCore”), for consideration consisting of cash, common stock, and equity awards assumed. BeyondCore is a smart data discovery technology company that automatically explores millions of variable combinations from structured data sources. The Company has included the financial results of BeyondCore in the consolidated financial statements from the date of acquisition, which have not been material to date. The transaction costs associated with the acquisition were not material.
The preliminary acquisition date fair value consideration transferred for BeyondCore was approximately $106.6 million, which consisted of the following (in thousands, except for share data):

22


 
Fair Value
Cash
$
21,053

Common stock (1,073,432 shares)
81,484

Fair value of stock options and restricted stock awards assumed
4,061

Total
$
106,598

The fair value of stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of 0.0464 was applied to convert BeyondCore's outstanding equity awards for BeyondCore's common stock into equity awards for shares of the Company's common stock.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
 
Fair Value
Cash and cash equivalents
$
2,046

Other current and noncurrent tangible assets
462

Intangible assets
15,600

Goodwill
90,794

Deferred revenue, current and noncurrent
(818
)
Other liabilities, current and noncurrent
(923
)
Deferred tax liability
(563
)
Net assets acquired
$
106,598

The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible assets acquired, liabilities assumed and identifiable intangible assets are based on management's estimates and assumptions. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets. The preliminary estimated fair values of assets acquired and liabilities assumed, including current and noncurrent income taxes payable and deferred taxes and identifiable intangible assets, may be subject to change as additional information is received and certain tax returns are finalized. Thus the provisional measurements of fair value set forth above are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
The following table sets forth the components of identifiable intangible assets acquired (in thousands) and their estimated useful lives as of the date of acquisition.
 
Fair Value
Useful Life
Developed technology
$
14,900

6 years
Customer relationships
700

2 years
Total intangible assets subject to amortization
$
15,600


The amount recorded for developed technology represents the estimated fair value of BeyondCore's smart data analytics technology. The amount recorded for customer relationships represents the fair values of the underlying relationship with BeyondCore customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating BeyondCore's technology with the Company's other offerings. The goodwill balance is not deductible for U.S. income tax purposes.
The Company assumed equity awards for shares of BeyondCore's common stock with a fair value of $8.6 million, of which $4.1 million was allocated to the consideration transferred.
Quip
In August 2016, the Company acquired the outstanding stock of Quip, Inc. (“Quip”) for consideration consisting of cash, common stock, fair value of equity awards assumed, as well as fair value of the Company's pre-existing relationship. Quip combines content and communication to create living documents to allow work-teams to write, edit and discuss documents,

23


spreadsheets and checklists in a single experience. The Company acquired Quip for its product offerings and employees. The Company has included the financial results of Quip in the consolidated financial statements from the date of acquisition, which have not been material to date. The transaction costs associated with the acquisition were not material.
The preliminary acquisition date fair value consideration transferred for Quip was approximately $412.0 million, which consisted of the following (in thousands, except for share data):
 
Fair Value
Cash
$
2,711

Common stock (4,796,152 shares)
385,131

Fair value of stock options and restricted stock awards assumed
22,345

Fair value of pre-existing relationship
1,833

Total
$
412,020

The fair value of stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of 0.5514 was applied to convert Quip's outstanding equity awards for Quip's common stock into equity awards for shares of the Company's common stock.
The Company had a $1.0 million, or approximately 0.3 percent, noncontrolling equity investment in Quip prior to the acquisition. The acquisition date fair value of the Company's previously held equity interest was approximately $1.8 million and is included in the measurement of the consideration transferred. The Company recognized a gain of approximately $0.8 million as a result of remeasuring its prior equity interest in Quip held before the business combination. The gain is included in gains on sales of strategic investments in the consolidated statement of operations.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
 
Fair Value
Cash and cash equivalents
$
27,985

Other current and noncurrent tangible assets
556

Intangible assets
31,200

Goodwill
357,610

Other liabilities, current and noncurrent
(2,491
)
Deferred tax liability
(2,840
)
Net assets acquired
$
412,020

The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible assets acquired, liabilities assumed and identifiable intangible assets are based on management's estimates and assumptions. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets. The preliminary estimated fair values of assets acquired and liabilities assumed, including current and noncurrent income taxes payable and deferred taxes and identifiable intangible assets, may be subject to change as additional information is received and certain tax returns are finalized. Thus the provisional measurements of fair value set forth above are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
The following table sets forth the components of identifiable intangible assets acquired (in thousands) and their estimated useful lives as of the date of acquisition.
 
Fair Value
Useful Life
Developed technology
$
18,590

5 years
Customer relationships
12,460

10 years
Other purchased intangible assets
150

3 years
Total intangible assets subject to amortization
$
31,200



24


The amount recorded for developed technology represents the estimated fair value of Quip's productivity technology. The amount recorded for customer relationships represents the fair values of the underlying relationship with Quip customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating Quip's technology with the Company's other offerings. The goodwill balance is not deductible for U.S. income tax purposes.
The Company assumed equity awards for shares of Quip's common stock with a fair value of $68.0 million, of which $22.3 million was allocated to the consideration transferred.
Demandware
In July 2016, the Company acquired for cash the outstanding stock of Demandware, Inc. (“Demandware”), an industry-leading provider of enterprise cloud commerce solutions in the digital commerce market. The Company acquired Demandware to, among other things, expand the Company's position in customer relationship management and to pursue the digital commerce market with the new Salesforce Commerce Cloud. The Company has included the financial results of Demandware in the consolidated financial statements from the date of acquisition. The transaction costs associated with the acquisition were $15.5 million and are recorded in general and administrative expense. The acquisition date fair value of the consideration transferred for Demandware was approximately $2.9 billion, including the proceeds from the term loan of $500.0 million (see Note 5), which consisted of the following (in thousands):
 
Fair Value
Cash
$
2,920,336

Fair value of stock options and restricted stock awards assumed
9,344

Total
$
2,929,680

The estimated fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of 0.9545 was applied to convert Demandware’s outstanding equity awards for Demandware’s common stock into equity awards for shares of the Company’s common stock.
The following table summarizes the preliminary estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
 
Fair Value
Cash and cash equivalents
$
139,259

Marketable securities
37,230

Accounts receivable
56,982

Other current assets
13,545

Customer contract asset, noncurrent
327,830

Intangible assets
633,277

Property and equipment
29,463

Other noncurrent assets
4,579

Goodwill
1,985,269

Accounts payable, accrued expenses and other liabilities
(51,870
)
Deferred revenue, current and noncurrent
(22,647
)
Other liabilities, noncurrent
(12,935
)
Deferred tax liability
(210,302
)
Net assets acquired
$
2,929,680


The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets. The preliminary estimated fair values of assets acquired and liabilities assumed, specifically, the current and noncurrent income taxes payable and deferred taxes, may be subject to change as additional information is received and certain tax returns are finalized. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.

25


In the second quarter of fiscal 2017, the Company accounted for acquired subscription contracts as two units of account, a customer contract asset and a customer contract liability. In the current quarter, the Company concluded that the acquired contracts should more appropriately be accounted for as a single unit of account and as such, the fair value of the contractual relationship with customers has been presented as a single, noncurrent intangible asset, customer contract asset. As a result of this change, the customer contract asset and the customer contract liability both decreased by $393.9 million.

During the third quarter of fiscal 2017, the Company obtained additional information as it relates to the valuation of the customer relationship assets and therefore adjusted the measurement of the fair value of these assets. As a result of the updated valuation, the Company recorded measurement period adjustments, which included a decrease the fair value of the customer relationship asset by $168.8 million. Additionally, these measurement period adjustments resulted in a corresponding decrease to the deferred tax liability recognized of $61.2 million. The net effect of these changes resulted in a corresponding increase to goodwill of $100.4 million.
The following table sets forth the components of identifiable intangible assets acquired and their preliminary estimated useful lives as of the date of acquisition (in thousands):
 
Fair Value
Useful Life
Developed technology
$
242,550

2 to 5 years
Customer relationships
384,590

3 to 10 years
Other purchased intangible assets
6,137

3 to 10 years
Total intangible assets subject to amortization
$
633,277


Developed technology represents the preliminary estimated fair value of Demandware’s e-commerce technology. Customer relationships represent the preliminary estimated fair values of the underlying relationships with Demandware customers. Other purchased intangible assets also includes intangibles such as trademarks and favorable leases, which span over lease terms varying from 1 to 10 years. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating Demandware’s e-commerce technology with the Company’s other offerings. The majority of the goodwill balance is not deductible for U.S. income tax purposes.
The Company assumed equity awards with an estimated fair value of $135.2 million, of which $9.3 million was allocated to the purchase consideration.
The amounts of revenue and earnings of Demandware included in the Company’s consolidated statement of operations from the acquisition date of July 11, 2016 through October 31, 2016 are as follows (in thousands):
Total revenues
$
57,878

Pretax loss
(81,763
)
Net loss
(82,061
)

26


The following pro forma financial information summarizes the combined results of operations for the Company and Demandware, as though the companies were combined as of the beginning of the Company’s fiscal 2016.
The unaudited pro forma financial information was as follows (in thousands):
 
Nine Months Ended October 31,
 
2016
 
2015
Total revenues
$
6,176,166

 
$
4,958,491

Pretax loss
(100,817
)
 
(200,844
)
Net loss
(138,714
)
 
(37,097
)
The pro forma financial information for all periods presented has been calculated after adjusting the results of Demandware to reflect the business combination accounting effects resulting from this acquisition including the amortization expense from acquired intangible assets and the stock-based compensation expense for unvested stock options and restricted stock awards assumed as though the acquisition occurred as of the beginning of the Company’s fiscal year 2016. The historical financial information has been adjusted to give effect to pro forma events that are directly attributable to the business combination and factually supportable. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the Company’s fiscal 2016.
The pro forma financial information for the nine months ended October 31, 2016 and 2015 combines the historical results of the Company for the nine months ended October 31, 2016 and 2015, the adjusted historical results of Demandware for the nine months ended September 30, 2016 and 2015, due to differences in reporting periods and considering the date the Company acquired Demandware, and the effects of the pro forma adjustments described above.
SteelBrick
In February 2016, the Company acquired the outstanding stock of SteelBrick, Inc. (“SteelBrick”) for consideration consisting of cash and common stock. SteelBrick is a next generation quote-to-cash platform, delivered 100 percent natively on the Salesforce platform, which offers applications, or apps, for automating the entire deal close process - from generating quotes and configuring orders to collecting cash. The Company has included the financial results of SteelBrick in the consolidated financial statements from the date of acquisition, which have not been material to date. The transaction costs associated with the acquisition were not material.
The acquisition date fair value consideration transferred for SteelBrick was approximately $314.8 million, which consisted of the following (in thousands, except for share data):
 
Fair Value
Cash
$
1,698

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

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

Fair value of pre-existing relationship
23,726

Total
$
314,785

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

27


The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
 
Fair Value
Cash and cash equivalents
$
59,296

Other current and noncurrent tangible assets
3,012

Customer contract asset, noncurrent
6,954

Intangible assets
49,160

Goodwill
217,986

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

The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible assets acquired, liabilities assumed and identifiable intangible assets are based on management's estimates and assumptions.
The following table sets forth the components of identifiable intangible assets acquired (in thousands) and their estimated useful lives as of the date of acquisition.
 
Fair Value
Useful Life
Developed technology
$
30,700

4 years
Customer relationships
17,110

7 years
Other purchased intangible assets
1,350

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


The amount recorded for developed technology represents the estimated fair value of SteelBrick's quote-to-cash and billing technology. The amount recorded for customer relationships represents the fair values of the underlying relationship with SteelBrick customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating SteelBrick's quote-to-cash technology with the Company's other offerings. The majority of the goodwill balance is not deductible for U.S. income tax purposes.
The Company assumed equity awards for shares of SteelBrick's common stock with a fair value of $39.6 million, of which $11.0 million was allocated to the consideration transferred.
MetaMind
In April 2016, the Company acquired MetaMind, Inc. (“MetaMind”) for approximately $32.8 million in cash, net of cash acquired. This amount includes amounts to be paid after an initial holdback period, and assumed equity awards. The primary reason for the acquisition was to extend the Company's intelligence in natural language processing and image recognition across all clouds. The Company has included the financial results of MetaMind, which have not been material to date, in its consolidated financial statements from the date of acquisition. The transaction costs associated with the acquisition were not material. In allocating the purchase consideration for MetaMind based on estimated fair values, the Company recorded $31.2 million of goodwill. 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 equity awards for shares of MetaMind's common stock with a fair value of $5.5 million, of which $0.5 million was allocated to the purchase consideration.
The Company's chairman, who held a greater than ten percent ownership interest in MetaMind, received approximately $6.0 million in total proceeds, subject to customary escrow amounts, in connection with this acquisition.

28


Other Business Combinations
During the nine months ended October 31, 2016, the Company acquired six other companies for an aggregate of $96.7 million in cash, net of cash acquired, and has included the financial results of these companies in its consolidated financial statements from the respective dates of acquisition. These transactions, individually and in the aggregate, are not material to the Company. The costs associated with these acquisitions were not material. The Company accounted for these transactions as business combinations. In allocating the purchase consideration for each company based on estimated fair values, the Company recorded $100.4 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 valuations as soon as practicable, but not later than one year from the acquisition dates.
5. Debt
Convertible Senior Notes
  
Par Value Outstanding
 
Equity
Component Recorded at Issuance
 
Liability Component of Par Value as of
 
(in thousands)
October 31,
2016
 
 
January 31,
2016
 
0.25% Convertible Senior Notes due April 1, 2018
$
1,150,000

 
$
122,421

(1)
$
1,109,236

 
 
$
1,088,097

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

In March 2013, the Company issued at par value $1.15 billion of 0.25% convertible senior notes (the “0.25% Senior Notes”, 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

29


principal amount of the 0.25% Senior Notes plus accrued and unpaid interest. Following certain corporate transactions that constitute a change of control, the Company will increase the conversion rate for a holder who elects to convert the 0.25% Senior Notes in connection with such change of control.
In accounting for the issuances of the 0.25% Senior Notes, the Company separated the 0.25% Senior Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 0.25% Senior Notes as a whole. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the 0.25% Senior Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the 0.25% Senior Notes issuance, the Company allocated the total amount incurred to the liability and equity components based on 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
 
October 31,
2016
 
January 31,
2016
Liability component :
 
 
 
Principal (1)
$
1,150,000

 
$
1,150,000

Less: debt discount, net (2)
(36,260
)
 
(54,941
)
Less: debt issuance cost (3)
(4,504
)
 
(6,962
)
Net carrying amount
$
1,109,236

 
$
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 October 31, 2016 was $1.4 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 third quarter of fiscal 2017.
Based on the closing price of the Company’s common stock of $75.16 on October 31, 2016, the if-converted value of the 0.25% Senior Notes exceeded their principal amount by approximately $150.9 million. Based on the terms of the 0.25% Senior Notes, the Senior Notes were not convertible for the three and nine months ended October 31, 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%

30


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

 
17,308,880

 
$
90.40

In March 2013, the Company also entered into a warrants transaction (the “0.25% Warrants”), whereby the Company sold warrants to acquire, subject to anti-dilution adjustments, shares of the Company’s common stock. The 0.25% Warrants were anti-dilutive for the periods presented. The 0.25% Warrants are separate transactions entered into by the Company and are not part of the terms of the 0.25% Senior Notes or the 0.25% Note Hedges. Holders of the 0.25% Senior Notes and 0.25% Note Hedges will not have any rights with respect to the 0.25% Warrants.
Term Loan
In July 2016, the Company entered into a credit agreement (the “Term Loan Credit Agreement”) with Bank of America, N.A. and certain other institutional lenders for a $500.0 million term loan facility (the “Term Loan”) that matures on July 11, 2019. The Term Loan will bear interest, at the Company’s option, at either a base rate plus a spread of 0.00% to 0.75% or an adjusted LIBOR rate plus a spread of 1.00% to 1.75%, in each case with such spread being determined based on the Company’s consolidated leverage ratio for the preceding four fiscal quarter period.
In July 2016, the Company borrowed the full $500.0 million under the Term Loan. All of the net proceeds of the Term Loan were for the purposes of partially funding the acquisition of Demandware.
Interest on the Term Loan is due and payable in arrears quarterly for loans bearing interest at a rate based on the base rate and at the end of an interest period in the case of loans bearing interest at the adjusted LIBOR rate.
All outstanding amounts under the Term Loan Credit Agreement will be due and payable on July 11, 2019. The Company may prepay the Term Loan, in whole or in part, at any time without premium or penalty, subject to certain conditions, and amounts repaid or prepaid may not be reborrowed. The Company’s obligations under the Term Loan Credit Agreement are required to be guaranteed by certain of its subsidiaries meeting certain thresholds set forth in the Term Loan Credit Agreement.
The Term Loan Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends or make distributions and repurchase stock. The Company is also required to maintain compliance with a consolidated leverage ratio and a consolidated interest coverage ratio. The Term Loan Credit Agreement includes customary events of default. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Term Loan Credit Agreement at a per annum rate equal to 2.00% above the applicable interest rate for any overdue principal and 2.00% above the rate applicable for base rate loans for any other overdue amounts. The occurrence of an event of default could result in the acceleration of obligations under the Term Loan Credit Agreement. The Company was in compliance with the Term Loan Credit Agreement’s covenants as of October 31, 2016.
The weighted average interest rate on the Term Loan was 1.8% as of October 31, 2016. Accrued interest on the Term Loan was $2.8 million as of October 31, 2016. As of October 31, 2016, the noncurrent outstanding principal portion was $500.0 million.
Revolving Credit Facility
In July 2016, the Company entered into an Amended and Restated Credit Agreement (the “Revolving Loan Credit Agreement”) with Wells Fargo Bank, National Association, and certain other institutional lenders that provides for $1.0 billion unsecured revolving credit facility (the “Credit Facility”) that matures in July 2021. The Revolving Loan Credit Agreement amended and restated the Company’s existing revolving credit facility dated October 2014. The Company may use the proceeds of future borrowings under the Credit Facility for refinancing other indebtedness, working capital, capital expenditures and other general corporate purposes, including permitted acquisitions.
The borrowings under the Credit Facility bear interest, at the Company’s option, at a base rate plus a spread of 0.00% to 0.75% or an adjusted LIBOR rate plus a spread of 1.00% to 1.75%, in each case with such spread being determined based on the Company’s consolidated leverage ratio for the preceding four fiscal quarter period. Interest is due and payable in arrears

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quarterly for loans bearing interest at a rate based on the base rate and at the end of an interest period in the case of loans bearing interest at the adjusted LIBOR rate. Regardless of what amounts, if any, are outstanding under the Credit Facility, the Company is also obligated to pay an ongoing commitment fee at a rate of 0.125% to 0.25%, with such rate being based on the Company’s consolidated leverage ratio for the preceding four fiscal quarter period, payable in arrears quarterly.
The Revolving Loan Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends or make distributions and repurchase stock. The Company is also required to maintain compliance with a consolidated leverage ratio and a consolidated interest coverage ratio. The Revolving Loan Credit Agreement includes customary events of default. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Revolving Loan Credit Agreement at a per annum rate equal to 2.00% above the applicable interest rate for any overdue principal and 2.00% above the rate applicable for base rate loans for any other overdue amounts. The occurrence of an event of default could result in the acceleration of obligations under the Revolving Loan Credit Agreement. The Company was in compliance with the Revolving Loan Credit Agreement’s covenants as of October 31, 2016.
There were no outstanding borrowings under the Credit Facility as of October 31, 2016. The Company continues to pay a commitment fee on the undrawn amount of the Credit Facility. In November 2016, the Company borrowed $750.0 million under the Credit Facility, in part to fund the acquisition of Krux Digital, Inc. See Note 13 “Subsequent Events.”
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 October 31, 2016 and 2015, total interest expense recognized was $1.8 million and $1.9 million, respectively. For the nine months ended October 31, 2016 and 2015, total interest expense recognized was $5.6 million and $5.4 million, respectively. The Loan can be prepaid at any time subject to a yield maintenance fee. The agreement governing the Loan contains certain customary affirmative and negative covenants that the Company was in compliance with as of October 31, 2016.
Interest Expense on Convertible Senior Notes, Term Loan, Revolving Credit Facility and Loan Assumed on 50 Fremont
The following table sets forth total interest expense recognized related to the 0.25% Senior Notes, the Term Loan, the Credit Facility and the Loan prior to capitalization of interest (in thousands):
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
Contractual interest expense
$
5,207

 
$
2,843

 
$
11,398

 
$
9,036

Amortization of debt issuance costs
1,342

 
1,027

 
4,071

 
3,077

Amortization of debt discount
6,304

 
6,148

 
18,794

 
18,317

 
$
12,853

 
$
10,018

 
$
34,263

 
$
30,430


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6. Other Balance Sheet Accounts
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
 
 
As of
 
October 31,
2016
 
January 31,
2016
Prepaid income taxes
$
22,766

 
$
22,044

Customer contract asset (1)
0

 
1,423

Other taxes receivable
25,829

 
27,341

Prepaid expenses and other current assets
232,998

 
199,786

 
$
281,593

 
$
250,594

(1) As of October 31, 2016, the customer contract asset has been presented as a long term intangible asset. For further information see Note 4  “Business Combinations.”
Capitalized Software, net
Capitalized software consisted of the following (in thousands):
 
 
As of
 
October 31,
2016
 
January 31,
2016
Capitalized internal-use software development costs, net of accumulated amortization of $233,706 and $186,251, respectively
$
137,989

 
$
123,065

Acquired developed technology, net of accumulated amortization of $571,023 and $481,118, respectively
499,888

 
261,193

 
$
637,877

 
$
384,258

Capitalized internal-use software amortization expense totaled $16.6 million and $12.9 million for the three months ended October 31, 2016 and 2015, respectively and totaled $47.5 million and $36.4 million for the nine months ended October 31, 2016 and 2015, respectively. Acquired developed technology amortization expense totaled $38.4 million and $22.1 million for the three months ended October 31, 2016 and 2015, respectively and totaled $89.9 million and $66.5 million for the nine months ended October 31, 2016 and 2015, respectively.
The Company capitalized $1.7 million and $1.3 million of stock-based expenses related to capitalized internal-use software development during the three months ended October 31, 2016 and 2015, respectively, and $5.1 million and $4.4 million for the nine months ended October 31, 2016 and 2015, respectively.

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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

Demandware
1,884,886

Quip
357,610

BeyondCore
90,794

Other business combinations
100,389

Adjustments of acquisition date fair values:
 
SteelBrick
651

Demandware
100,383

Other business combinations
(16,879
)
Balance as of October 31, 2016
$
6,616,999

Other Assets, net
Other assets consisted of the following (in thousands):
 
As of
 
October 31,
2016
 
January 31,
2016
Deferred income taxes, noncurrent, net
$
22,095

 
$
15,986

Long-term deposits
25,346

 
19,469

Purchased intangible assets, net of accumulated amortization of $281,846 and $212,248, respectively
622,667

 
258,580

Acquired intellectual property, net of accumulated amortization of $27,331 and $22,439, respectively
11,122

 
10,565

Customer contract asset, noncurrent (1)
308,484

 
93

Other (2)
110,722

 
66,217

 
$
1,100,436

 
$
370,910

(1) As of October 31, 2016, the customer contract asset has been presented as a long term intangible asset. For further information see Note 4  “Business Combinations.”
(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, which resulted in a decrease in the carrying value of $7.9 million to Other as of January 31, 2016.
Purchased intangible assets amortization expense for the three months ended October 31, 2016 and 2015 was $29.3 million and $20.1 million, respectively and for the nine months ended October 31, 2016 and 2015 was $69.6 million and $60.8 million, respectively. Acquired intellectual property amortization expense for the three months ended October 31, 2016 and 2015 was $1.6 million and $1.7 million, respectively and for the nine months ended October 31, 2016 and 2015 was $4.9 million and $5.1 million, respectively.

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Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable, accrued expenses and other liabilities consisted of the following (in thousands): 
 
As of
 
October 31,
2016
 
January 31,
2016
Accounts payable