Delaware | 001-32224 | 94-3320693 | ||
(State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification No.) |
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ |
(d) | Exhibits |
99.1 | Press Release dated May 18, 2017 |
Dated: | May 18, 2017 | salesforce.com, inc. | |
/S/ MARK J. HAWKINS | |||
Mark J. Hawkins Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
Exhibit Number | Exhibit Title | |
99.1 | Press Release dated May 18, 2017 |
• | First Quarter Revenue of $2.39 Billion, up 25% Year-Over-Year, 25% in Constant Currency |
• | First Quarter Operating Cash Flow of $1.23 Billion, up 17% Year-Over-Year |
• | Deferred Revenue of $5.04 Billion, up 26% Year-Over-Year, 27% in Constant Currency |
• | Unbilled Deferred Revenue of Approximately $9.6 Billion, up 26% Year-Over-Year |
• | Initiates Second Quarter Revenue Guidance of $2.51 Billion to $2.52 Billion |
• | Raises FY18 GAAP Earnings Per Share Guidance to $0.06 to $0.08 |
• | Raises FY18 Non-GAAP Earnings Per Share Guidance to $1.28 to $1.30 |
Fiscal 2018 | |||||||
Q2 | FY2018 | ||||||
GAAP diluted EPS Range* | $0.00 - $0.01 | $0.06 - $0.08 | |||||
Plus | |||||||
Amortization of purchased intangibles | $ | 0.10 | $ | 0.39 | |||
Stock-based expense | $ | 0.33 | $ | 1.34 | |||
Amortization of debt discount, net | $ | 0.01 | $ | 0.04 | |||
Less | |||||||
Income tax effects and adjustments** | $ | (0.13 | ) | $ | (0.55 | ) | |
Non-GAAP diluted EPS | $0.31 - $0.32 | $1.28 - $1.30 | |||||
Shares used in computing basic net income per share (millions) | 713 | 716 | |||||
Shares used in computing diluted net income per share (millions) | 729 | 733 |
Three Months Ended April 30, | |||||||||||||
2017 | As a % of Total Revenues | 2016 | As a % of Total Revenues | ||||||||||
Revenues: | |||||||||||||
Subscription and support | $ | 2,200,908 | 92 | % | $ | 1,775,493 | 93 | % | |||||
Professional services and other | 186,671 | 8 | 141,110 | 7 | |||||||||
Total revenues | 2,387,579 | 100 | 1,916,603 | 100 | |||||||||
Cost of revenues (1)(2): | |||||||||||||
Subscription and support | 462,921 | 19 | 351,101 | 18 | |||||||||
Professional services and other | 187,634 | 8 | 145,880 | 8 | |||||||||
Total cost of revenues | 650,555 | 27 | 496,981 | 26 | |||||||||
Gross profit | 1,737,024 | 73 | 1,419,622 | 74 | |||||||||
Operating expenses (1)(2): | |||||||||||||
Research and development | 376,081 | 16 | 260,970 | 14 | |||||||||
Marketing and sales | 1,109,504 | 46 | 895,860 | 46 | |||||||||
General and administrative | 260,321 | 11 | 210,806 | 11 | |||||||||
Total operating expenses | 1,745,906 | 73 | 1,367,636 | 71 | |||||||||
Income (loss) from operations | (8,882 | ) | 0 | 51,986 | 3 | ||||||||
Investment income | 5,266 | 0 | 8,122 | 0 | |||||||||
Interest expense | (22,196 | ) | (1 | ) | (22,011 | ) | (1 | ) | |||||
Other income (expense) (1) | 2,849 | 0 | (13,806 | ) | (1 | ) | |||||||
Gains from acquisitions of strategic investments | 0 | 0 | 12,864 | 1 | |||||||||
Income (loss) before benefit from income taxes | (22,963 | ) | (1 | ) | 37,155 | 2 | |||||||
Benefit from income taxes | 13,756 | 1 | 1,604 | 0 | |||||||||
Net income (loss) | $ | (9,207 | ) | 0 | % | $ | 38,759 | 2 | % | ||||
Basic net income (loss) per share | $ | (0.01 | ) | $ | 0.06 | ||||||||
Diluted net income (loss) per share | $ | (0.01 | ) | $ | 0.06 | ||||||||
Shares used in computing basic net income (loss) per share | 706,174 | 677,514 | |||||||||||
Shares used in computing diluted net income (loss) per share | 706,174 | 686,799 |
(1) | Amounts include amortization of purchased intangibles from business combinations, as follows: |
Three Months Ended April 30, | |||||||||||||
2017 | As a % of Total Revenues | 2016 | As a % of Total Revenues | ||||||||||
Cost of revenues | $ | 43,586 | 2 | % | $ | 22,215 | 1 | % | |||||
Marketing and sales | 30,644 | 1 | 15,386 | 1 | |||||||||
Other non-operating expense | 375 | 0 | 706 | 0 |
(2) | Amounts include stock-based expense, as follows: |
Three Months Ended April 30, | |||||||||||||
2017 | As a % of Total Revenues | 2016 | As a % of Total Revenues | ||||||||||
Cost of revenues | $ | 31,510 | 1 | % | $ | 26,634 | 1 | % | |||||
Research and development | 63,915 | 3 | 35,168 | 2 | |||||||||
Marketing and sales | 118,996 | 5 | 95,474 | 5 | |||||||||
General and administrative | 37,148 | 2 | 31,643 | 2 |
April 30, 2017 | January 31, 2017 | ||||||
(unaudited) | |||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 2,024,904 | $ | 1,606,549 | |||
Marketable securities | 1,194,646 | 602,338 | |||||
Accounts receivable, net | 1,439,875 | 3,196,643 | |||||
Deferred commissions | 297,419 | 311,770 | |||||
Prepaid expenses and other current assets | 447,647 | 279,527 | |||||
Total current assets | 5,404,491 | 5,996,827 | |||||
Property and equipment, net | 1,846,413 | 1,787,534 | |||||
Deferred commissions, noncurrent | 220,507 | 227,849 | |||||
Capitalized software, net | 141,685 | 141,671 | |||||
Strategic investments | 639,191 | 566,953 | |||||
Goodwill | 7,290,025 | 7,263,846 | |||||
Intangible assets acquired through business combinations, net | 1,041,384 | 1,113,374 | |||||
Other assets, net | 475,234 | 486,869 | |||||
Total assets | $ | 17,058,930 | $ | 17,584,923 | |||
Liabilities and stockholders’ equity | |||||||
Current liabilities: | |||||||
Accounts payable, accrued expenses and other liabilities | $ | 1,459,686 | $ | 1,752,664 | |||
Deferred revenue | 5,042,652 | 5,542,802 | |||||
Convertible 0.25% senior notes, net | 1,123,525 | 0 | |||||
Total current liabilities | 7,625,863 | 7,295,466 | |||||
Convertible 0.25% senior notes, net | 0 | 1,116,360 | |||||
Term loan | 497,509 | 497,221 | |||||
Loan assumed on 50 Fremont | 198,336 | 198,268 | |||||
Revolving credit facility | 0 | 196,542 | |||||
Other noncurrent liabilities | 802,734 | 780,939 | |||||
Total liabilities | 9,124,442 | 10,084,796 | |||||
Stockholders’ equity: | |||||||
Common stock | 712 | 708 | |||||
Additional paid-in capital | 8,398,380 | 8,040,170 | |||||
Accumulated other comprehensive income (loss) | 9,513 | (75,841 | ) | ||||
Accumulated deficit | (474,117 | ) | (464,910 | ) | |||
Total stockholders’ equity | 7,934,488 | 7,500,127 | |||||
Total liabilities and stockholders’ equity | $ | 17,058,930 | $ | 17,584,923 |
Three Months Ended April 30, | |||||||
2017 | 2016 | ||||||
Operating activities: | |||||||
Net income (loss) | $ | (9,207 | ) | $ | 38,759 | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||
Depreciation and amortization | 185,108 | 132,772 | |||||
Amortization of debt discount and issuance costs | 7,717 | 7,185 | |||||
Gains from acquisitions of strategic investments | 0 | (12,864 | ) | ||||
Amortization of deferred commissions | 106,142 | 88,514 | |||||
Expenses related to employee stock plans | 251,569 | 188,919 | |||||
Changes in assets and liabilities, net of business combinations: | |||||||
Accounts receivable, net | 1,757,507 | 1,307,312 | |||||
Deferred commissions | (84,449 | ) | (63,519 | ) | |||
Prepaid expenses and other current assets and other assets | (183,411 | ) | (56,671 | ) | |||
Accounts payable, accrued expenses and other liabilities | (301,242 | ) | (286,228 | ) | |||
Deferred revenue | (500,150 | ) | (293,117 | ) | |||
Net cash provided by operating activities | 1,229,584 | 1,051,062 | |||||
Investing activities: | |||||||
Business combinations, net of cash acquired | (19,781 | ) | (1,799 | ) | |||
Strategic investments, net | (458 | ) | (22,061 | ) | |||
Purchases of marketable securities | (698,561 | ) | (589,336 | ) | |||
Sales of marketable securities | 103,837 | 222,934 | |||||
Maturities of marketable securities | 3,850 | 23,285 | |||||
Capital expenditures | (156,602 | ) | (83,301 | ) | |||
Net cash used in investing activities | (767,715 | ) | (450,278 | ) | |||
Financing activities: | |||||||
Proceeds from employee stock plans | 159,807 | 89,141 | |||||
Principal payments on capital lease obligations | (9,443 | ) | (49,968 | ) | |||
Payments on revolving credit facility | (200,000 | ) | 0 | ||||
Net cash provided by (used in) financing activities | (49,636 | ) | 39,173 | ||||
Effect of exchange rate changes | 6,122 | 763 | |||||
Net increase in cash and cash equivalents | 418,355 | 640,720 | |||||
Cash and cash equivalents, beginning of period | 1,606,549 | 1,158,363 | |||||
Cash and cash equivalents, end of period | $ | 2,024,904 | $ | 1,799,083 |
Apr 30, 2017 | Jan 31, 2017 | Oct 31, 2016 | Jul 31, 2016 | Apr 30, 2016 | Jan 31, 2016 | |||||||||||||||||||
Full Time Equivalent Headcount (1) | 26,213 | 25,178 | 23,939 | 23,247 | 21,119 | 19,742 | ||||||||||||||||||
Financial data (in thousands): | ||||||||||||||||||||||||
Cash, cash equivalents and marketable securities | $ | 3,219,550 | $ | 2,208,887 | $ | 1,751,130 | $ | 1,719,946 | $ | 3,715,452 | $ | 2,725,377 | ||||||||||||
Strategic investments | $ | 639,191 | $ | 566,953 | $ | 555,968 | $ | 548,258 | $ | 520,750 | $ | 520,721 | ||||||||||||
Deferred revenue (2) | $ | 5,042,652 | $ | 5,542,802 | $ | 3,495,133 | $ | 3,823,561 | $ | 4,006,914 | $ | 4,291,553 | ||||||||||||
Unbilled deferred revenue, a non-GAAP measure (3) | $ | 9,600,000 | $ | 9,000,000 | $ | 8,600,000 | $ | 8,000,000 | $ | 7,600,000 | $ | 7,100,000 | ||||||||||||
Principal due on our outstanding debt obligations (4) | $ | 1,850,000 | $ | 2,050,000 | $ | 1,850,000 | $ | 1,850,000 | $ | 1,350,000 | $ | 1,350,000 |
April 30, 2017 | January 31, 2017 | |||||||
Prepaid Expenses and Other Current Assets | ||||||||
Prepaid income taxes | $ | 69,134 | $ | 26,932 | ||||
Other taxes receivable | 33,687 | 34,177 | ||||||
Prepaid expenses and other current assets | 344,826 | 218,418 | ||||||
$ | 447,647 | $ | 279,527 | |||||
Property and Equipment, net | ||||||||
Land | $ | 183,888 | $ | 183,888 | ||||
Buildings and building improvements | 621,950 | 621,377 | ||||||
Computers, equipment and software | 1,503,140 | 1,440,986 | ||||||
Furniture and fixtures | 122,435 | 112,564 | ||||||
Leasehold improvements | 696,902 | 627,069 | ||||||
3,128,315 | 2,985,884 | |||||||
Less accumulated depreciation and amortization | (1,281,902 | ) | (1,198,350 | ) | ||||
$ | 1,846,413 | $ | 1,787,534 | |||||
Intangible Assets Acquired Through Business Combinations, net | ||||||||
Acquired developed technology | $ | 471,016 | $ | 514,232 | ||||
Customer relationships | 562,125 | 589,579 | ||||||
Trade name and trademark | 4,091 | 4,601 | ||||||
Territory rights and other | 3,096 | 3,530 | ||||||
50 Fremont lease intangibles | 1,056 | 1,432 | ||||||
$ | 1,041,384 | $ | 1,113,374 |
Other Assets, net | ||||||||
Deferred income taxes, noncurrent, net | $ | 29,312 | $ | 28,939 | ||||
Long-term deposits | 23,874 | 23,597 | ||||||
Domain names and patents, net of accumulated amortization | 34,784 | 39,213 | ||||||
Customer contract asset | 255,387 | 281,733 | ||||||
Other | 131,877 | 113,387 | ||||||
$ | 475,234 | $ | 486,869 | |||||
Accounts Payable, Accrued Expenses and Other Liabilities | ||||||||
Accounts payable | $ | 128,065 | $ | 115,257 | ||||
Accrued compensation | 434,899 | 730,390 | ||||||
Non-cash equity liability | 60,870 | 68,355 | ||||||
Accrued other liabilities | 562,848 | 521,405 | ||||||
Accrued income and other taxes payable | 192,434 | 239,699 | ||||||
Accrued professional costs | 38,098 | 38,254 | ||||||
Accrued rent | 22,777 | 19,710 | ||||||
Financing obligation - leased facility, current | 19,695 | 19,594 | ||||||
$ | 1,459,686 | $ | 1,752,664 | |||||
Other Noncurrent Liabilities | ||||||||
Deferred income taxes and income taxes payable | $ | 106,303 | $ | 99,378 | ||||
Financing obligation - leased facility | 200,129 | 200,711 | ||||||
Long-term lease liabilities and other | 496,302 | 480,850 | ||||||
$ | 802,734 | $ | 780,939 |
Subscription and support revenue by cloud service offering (in millions): | Three Months Ended April 30, | ||||||
2017 | 2016 | ||||||
Sales Cloud | $ | 829.6 | $ | 724.6 | |||
Service Cloud | 651.2 | 540.1 | |||||
Salesforce Platform and Other | 431.1 | 325.9 | |||||
Marketing and Commerce Cloud | 289.0 | 184.9 | |||||
$ | 2,200.9 | $ | 1,775.5 |
Three Months Ended April 30, | |||||||
2017 | 2016 | ||||||
Total revenues by geography (in thousands): | |||||||
Americas | $ | 1,755,358 | $ | 1,413,229 | |||
Europe | 409,615 | 327,854 | |||||
Asia Pacific | 222,606 | 175,520 | |||||
$ | 2,387,579 | $ | 1,916,603 | ||||
Total revenues by geography as a percentage of total revenues: | |||||||
Americas | 74 | % | 74 | % | |||
Europe | 17 | 17 | |||||
Asia Pacific | 9 | 9 | |||||
100 | % | 100 | % |
Revenue constant currency growth rates (as compared to the comparable prior periods) | Three Months Ended
April 30, 2017
compared to Three Months
Ended April 30, 2016 | Three Months Ended
January 31, 2017
compared to Three Months
Ended January 31, 2016 | Three Months Ended
April 30, 2016
compared to Three Months
Ended April 30, 2015 | ||
Americas | 24% | 29% | 27% | ||
Europe | 29% | 26% | 33% | ||
Asia Pacific | 26% | 30% | 29% | ||
Total growth | 25% | 28% | 28% |
April 30, 2017
compared to
April 30, 2016 | January 31, 2017
compared to
January 31, 2016 | April 30, 2016
compared to
April 30, 2015 | |||
Deferred revenue constant currency growth rates (as compared to the comparable prior periods) | |||||
Total growth | 27% | 29% | 32% |
Three Months Ended April 30, | |||||
2017 | 2016 | ||||
Weighted-average shares outstanding for basic earnings per share | 706,174 | 677,514 | |||
Effect of dilutive securities: (1) | |||||
Convertible senior notes (2) | 3,390 | 945 | |||
Employee stock awards | 11,986 | 8,340 | |||
Adjusted weighted-average shares outstanding and assumed conversions for Non-GAAP diluted earnings per share | 721,550 | 686,799 |
(1) | The effect of these dilutive securities were not included in the GAAP calculation of diluted net loss per share for the three months ended April 30, 2017 because the effect would have been anti-dilutive. |
(2) | The 0.25% senior notes were not convertible, however there was a dilutive effect for shares outstanding for all periods presented. |
Three Months Ended April 30, | |||||||
2017 | 2016 | ||||||
Operating cash flow | |||||||
GAAP net cash provided by operating activities | $ | 1,229,584 | $ | 1,051,062 | |||
Less: | |||||||
Capital expenditures | (156,602 | ) | (83,301 | ) | |||
Free cash flow | $ | 1,072,982 | $ | 967,761 |
Three Months Ended April 30, | |||||||
2017 | 2016 | ||||||
Net income (loss) | $ | (9,207 | ) | $ | 38,759 | ||
Other comprehensive income, before tax and net of reclassification adjustments: | |||||||
Foreign currency translation and other losses | 14,024 | 10,256 | |||||
Unrealized gains on investments | 71,330 | 11,084 | |||||
Other comprehensive income, before tax | 85,354 | 21,340 | |||||
Tax effect | 0 | 0 | |||||
Other comprehensive income, net of tax | 85,354 | 21,340 | |||||
Comprehensive income | $ | 76,147 | $ | 60,099 |
Three Months Ended April 30, | |||||||
2017 | 2016 | ||||||
Non-GAAP gross profit | |||||||
GAAP gross profit | $ | 1,737,024 | $ | 1,419,622 | |||
Plus: | |||||||
Amortization of purchased intangibles (a) | 43,586 | 22,215 | |||||
Stock-based expense (b) | 31,510 | 26,634 | |||||
Non-GAAP gross profit | $ | 1,812,120 | $ | 1,468,471 | |||
Non-GAAP operating expenses | |||||||
GAAP operating expenses | $ | 1,745,906 | $ | 1,367,636 | |||
Less: | |||||||
Amortization of purchased intangibles (a) | (30,644 | ) | (15,386 | ) | |||
Stock-based expense (b) | (220,059 | ) | (162,285 | ) | |||
Non-GAAP operating expenses | $ | 1,495,203 | $ | 1,189,965 | |||
Non-GAAP income from operations | |||||||
GAAP income (loss) from operations | $ | (8,882 | ) | $ | 51,986 | ||
Plus: | |||||||
Amortization of purchased intangibles (a) | 74,230 | 37,601 | |||||
Stock-based expense (b) | 251,569 | 188,919 | |||||
Non-GAAP income from operations | $ | 316,917 | $ | 278,506 | |||
Non-GAAP non-operating loss (c) | |||||||
GAAP non-operating loss | $ | (14,081 | ) | $ | (14,831 | ) | |
Plus: | |||||||
Amortization of debt discount, net | 6,383 | 6,226 | |||||
Amortization of acquired lease intangible | 375 | 706 | |||||
Less: | |||||||
Gains from acquisitions of strategic investments | 0 | (12,864 | ) | ||||
Non-GAAP non-operating loss | $ | (7,323 | ) | $ | (20,763 | ) | |
Non-GAAP net income | |||||||
GAAP net income (loss) | $ | (9,207 | ) | $ | 38,759 | ||
Plus: | |||||||
Amortization of purchased intangibles (a) | 74,230 | 37,601 | |||||
Amortization of acquired lease intangible | 375 | 706 | |||||
Stock-based expense (b) | 251,569 | 188,919 | |||||
Amortization of debt discount, net | 6,383 | 6,226 | |||||
Less: | |||||||
Gains from acquisitions of strategic investments | 0 | (12,864 | ) | ||||
Income tax effects and adjustments | (120,566 | ) | (91,814 | ) | |||
Non-GAAP net income | $ | 202,784 | $ | 167,533 |
Three Months Ended April 30, | |||||||
2017 | 2016 | ||||||
Non-GAAP diluted earnings per share | |||||||
GAAP diluted net income (loss) per share | $ | (0.01 | ) | $ | 0.06 | ||
Plus: | |||||||
Amortization of purchased intangibles | 0.10 | 0.05 | |||||
Amortization of acquired lease intangible | 0.00 | 0.00 | |||||
Stock-based expense | 0.35 | 0.28 | |||||
Amortization of debt discount, net | 0.01 | 0.01 | |||||
Less: | |||||||
Gains from acquisitions of strategic investments | 0.00 | (0.02 | ) | ||||
Income tax effects and adjustments | (0.17 | ) | (0.14 | ) | |||
Non-GAAP diluted earnings per share | $ | 0.28 | $ | 0.24 | |||
Shares used in computing Non-GAAP diluted net income per share | 721,550 | 686,799 |
a) | Amortization of purchased intangibles were as follows: |
Three Months Ended April 30, | |||||||
2017 | 2016 | ||||||
Cost of revenues | $ | 43,586 | $ | 22,215 | |||
Marketing and sales | 30,644 | 15,386 | |||||
$ | 74,230 | $ | 37,601 |
b) | Stock-based expense was as follows: |
Three Months Ended April 30, | |||||||
2017 | 2016 | ||||||
Cost of revenues | $ | 31,510 | $ | 26,634 | |||
Research and development | 63,915 | 35,168 | |||||
Marketing and sales | 118,996 | 95,474 | |||||
General and administrative | 37,148 | 31,643 | |||||
$ | 251,569 | $ | 188,919 |
c) | GAAP non-operating loss consists of investment income, interest expense, other expense and gains from acquisitions of strategic investments. |
Three Months Ended April 30, | |||||||
2017 | 2016 | ||||||
GAAP Basic Net Income (Loss) Per Share | |||||||
Net income (loss) | $ | (9,207 | ) | $ | 38,759 | ||
Basic net income (loss) per share | $ | (0.01 | ) | $ | 0.06 | ||
Shares used in computing basic net income (loss) per share | 706,174 | 677,514 | |||||
Three Months Ended April 30, | |||||||
2017 | 2016 | ||||||
Non-GAAP Basic Net Income Per Share | |||||||
Non-GAAP net income | $ | 202,784 | $ | 167,533 | |||
Basic Non-GAAP net income per share | $ | 0.29 | $ | 0.25 | |||
Shares used in computing basic Non-GAAP net income per share | 706,174 | 677,514 | |||||
Three Months Ended April 30, | |||||||
2017 | 2016 | ||||||
GAAP Diluted Net Income (Loss) Per Share | |||||||
Net income (loss) | $ | (9,207 | ) | $ | 38,759 | ||
Diluted net income (loss) per share | $ | (0.01 | ) | $ | 0.06 | ||
Shares used in computing diluted net income (loss) per share | 706,174 | 686,799 | |||||
Three Months Ended April 30, | |||||||
2017 | 2016 | ||||||
Non-GAAP Diluted Net Income Per Share | |||||||
Non-GAAP net income | $ | 202,784 | $ | 167,533 | |||
Diluted Non-GAAP net income per share | $ | 0.28 | $ | 0.24 | |||
Shares used in computing diluted Non-GAAP net income per share | 721,550 | 686,799 |
• | Stock-Based Expenses: The company’s compensation strategy includes the use of stock-based compensation to attract and retain employees and executives. It is principally aimed at aligning their interests with those of our stockholders and at long-term employee retention, rather than to motivate or reward operational performance for any particular period. Thus, stock-based compensation expense varies for reasons that are generally unrelated to operational decisions and performance in any particular period. |
• | Amortization of Purchased Intangibles and Acquired Leases: The company views amortization of acquisition- and building-related intangible assets, such as the amortization of the cost associated with an acquired company’s research and development efforts, trade names, customer lists and customer relationships, and acquired lease intangibles, as items arising from pre-acquisition activities determined at the time of an acquisition. While these intangible assets are continually evaluated for impairment, amortization of the cost of purchased intangibles is a static expense, one that is not typically affected by operations during any particular period. |
• | Amortization of Debt Discount: Under GAAP, certain convertible debt instruments that may be settled in cash (or other assets) on conversion are required to be separately accounted for as liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, for GAAP purposes we are required to recognize imputed interest expense on the company’s $1.15 billion of convertible senior notes due 2018 that were issued in a private placement in March 2013. The imputed interest rate was approximately 2.5% for the convertible notes due 2018, while the actual coupon interest rate of the notes is 0.25%. The difference between the imputed interest expense and the coupon interest expense, net of the interest amount capitalized, is excluded from management’s assessment of the company’s operating performance because management believes that this non-cash expense is not indicative of ongoing operating performance. |
• | Gains from Acquisitions of Strategic Investments: The company views gains on sales of its strategic investments resulting from acquisitions initiated by the company in which an equity interest was previously held as discrete events and not indicative of operational performance during any particular period. |
• | Income Tax Effects and Adjustments: The company utilizes a fixed long-term projected non-GAAP tax rate in order to provide better consistency across the interim reporting periods by eliminating the effects of items such as changes in the tax valuation allowance and tax effects of acquisitions-related costs, since each of these can vary in size and frequency. When projecting this long-term rate, the company evaluated a three-year financial projection that excludes the direct impact of the following non-cash items: stock-based expenses, amortization of purchased intangibles, amortization of acquired leases, amortization of debt discount, gains/losses on the sales of land and building improvements, gains from acquisitions of strategic investments, and termination of office leases. The projected rate also assumes no new acquisitions in the three-year period, and considers other factors including the company’s tax structure, its tax positions in various jurisdictions and key legislation in major jurisdictions where the company operates. This long-term rate could be subject to change for a variety of reasons, such as significant changes in the geographic earnings mix including acquisition activity, or fundamental tax law changes in major jurisdictions where the company operates. The company re-evaluates this long-term rate on an annual basis or if any significant events that may materially affect this long-term rate occur. The non-GAAP tax rate for fiscal 2018 is 34.5 percent. |