SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☒||Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934|
For the quarterly period ended April 30, 2020
|☐||Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934|
Commission File Number: 001-32224
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction of|
incorporation or organization)
415 Mission Street, 3rd Fl
San Francisco, California 94105
(Address of principal executive offices)
Telephone Number (415) 901-7000
(Registrant’s telephone number, including area code)
|Securities registered pursuant to Section 12(b) of the Act|
|Title of each class||Trading Symbol(s)||Name of each exchange on which registered|
|Common Stock, par value $0.001 per share||CRM||New York Stock Exchange|
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer||☒||Accelerated filer||☐|
|Non-accelerated filer||☐||Smaller reporting company||☐|
|Emerging growth company||☐|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
As of May 29, 2020, there were approximately 901 million shares of the Registrant’s Common Stock outstanding.
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
|April 30, 2020||January 31, 2020|
|Cash and cash equivalents||$||5,772 || ||$||4,145 || |
|Marketable securities||4,030 || ||3,802 || |
|Accounts receivable, net ||3,076 || ||6,174 || |
|Costs capitalized to obtain revenue contracts, net ||881 || ||926 || |
|Prepaid expenses and other current assets||954 || ||916 || |
|Total current assets||14,713 || ||15,963 || |
|Property and equipment, net||2,518 || ||2,375 || |
|Operating lease right-of-use assets, net ||2,983 || ||3,040 || |
|Noncurrent costs capitalized to obtain revenue contracts, net ||1,171 || ||1,348 || |
|Strategic investments || ||1,902 || ||1,963 || |
|Goodwill||25,266 || ||25,134 || |
|Intangible assets acquired through business combinations, net || ||4,488 || ||4,724 || |
|Capitalized software and other assets, net ||582 || ||579 || |
|Total assets||$||53,623 || ||$||55,126 || |
|Liabilities and stockholders’ equity|
Accounts payable, accrued expenses and other liabilities
|$||2,989 || ||$||3,433 || |
Operating lease liabilities, current
|742 || ||750 || |
|9,112 || ||10,662 || |
|Total current liabilities||12,843 || ||14,845 || |
|Noncurrent debt || ||2,673 || ||2,673 || |
|Noncurrent operating lease liabilities||2,422 || ||2,445 || |
|Other noncurrent liabilities ||1,120 || ||1,278 || |
|Total liabilities||19,058 || ||21,241 || |
|Common stock || ||1 || ||1 || |
|Additional paid-in capital||32,739 || ||32,116 || |
|Accumulated other comprehensive loss || ||(135)|| ||(93)|| |
|Retained earnings || ||1,960 || ||1,861 || |
|Total stockholders’ equity||34,565 || ||33,885 || |
|Total liabilities and stockholders’ equity||$||53,623 || ||$||55,126 || |
See accompanying Notes.
Condensed Consolidated Statements of Operations
(in millions, except per share data)
|1||Three Months Ended April 30,|
|Subscription and support||$||4,575 || ||$||3,496 || |
|Professional services and other||290 || ||241 || |
|Total revenues||4,865 || ||3,737 || |
|Cost of revenues (1)(2):|
|Subscription and support ||966 || ||678 || |
|Professional services and other ||288 || ||236 || |
|Total cost of revenues||1,254 || ||914 || |
|Gross profit||3,611 || ||2,823 || |
|Operating expenses (1)(2):|
|Research and development||859 || ||554 || |
|Marketing and sales||2,390 || ||1,697 || |
|General and administrative||502 || ||362 || |
|Total operating expenses||3,751 || ||2,613 || |
|Income (loss) from operations|| ||(140)|| ||210 || |
|Gains on strategic investments, net || ||192 || ||281 || |
|Other expense || ||(5)|| ||(9)|| |
|Income before benefit from (provision for) income taxes|| ||47 || ||482 || |
|Benefit from (provision for) income taxes|| ||52 || ||(90)|| |
|Net income || ||$||99 || ||$||392 || |
|Basic net income per share || ||$||0.11 || ||$||0.51 || |
|Diluted net income per share || ||$||0.11 || ||$||0.49 || |
|Shares used in computing basic net income per share || ||896 || ||771 || |
|Shares used in computing diluted net income per share || ||913 || ||793 || |
(1) Amounts include amortization of intangible assets acquired through business combinations, as follows:
| ||Three Months Ended April 30,|
|Cost of revenues||$||159 || ||$||61 || |
|Marketing and sales||112 || ||68 || |
(2) Amounts include stock-based expense, as follows:
| ||Three Months Ended April 30,|
|Cost of revenues||$||52 || ||$||43 || |
|Research and development||166 || ||81 || |
|Marketing and sales||223 || ||177 || |
|General and administrative||63 || ||42 || |
See accompanying Notes.
Condensed Consolidated Statements of Comprehensive Income
|1||Three Months Ended April 30,|
|Net income||$||99 || ||$||392 || |
|Other comprehensive loss, net of reclassification adjustments: || |
|Foreign currency translation and other losses || ||(23)|| ||(13)|| |
|Unrealized gains (losses) on marketable securities and privately held debt securities|| ||(25)|| ||8 || |
|Other comprehensive loss, before tax || ||(48)|| ||(5)|| |
|Tax effect||6 || ||(2)|| |
|Other comprehensive loss, net || ||(42)|| ||(7)|| |
|Comprehensive income || ||$||57 || ||$||385 || |
See accompanying Notes.
Condensed Consolidated Statements of Stockholders’ Equity
|Three Months Ended April 30, 2019|
| ||Common Stock||Additional|
|Accumulated Other Comprehensive Loss||Retained Earnings||Total|
|Balance at January 31, 2019||770 || ||$||1 || ||$||13,927 || ||$||(58)|| ||$||1,735 || ||$||15,605 || |
|Common stock issued||5 || ||0 || ||113 || ||0 || ||0 || ||113 || |
|Stock-based expenses ||0 || ||0 || ||343 || ||0 || ||0 || ||343 || |
|Other comprehensive loss, net of tax ||0 || ||0 || ||0 || ||(7)|| ||0 || ||(7)|| |
|Net income||0 || ||0 || ||0 || ||0 || ||392 || ||392 || |
|Balance at April 30, 2019||775 || ||$||1 || ||$||14,383 || ||$||(65)|| ||$||2,127 || ||$||16,446 || |
|Three Months Ended April 30, 2020|
| ||Common Stock||Additional|
|Accumulated Other Comprehensive Loss||Retained Earnings||Total|
|Balance at January 31, 2020||893 || ||$||1 || ||$||32,116 || ||$||(93)|| ||$||1,861 || ||$||33,885 || |
|Common stock issued ||6 || ||0 || ||119 || ||0 || ||0 || ||119 || |
|Stock-based expenses||0 || ||0 || ||504 || ||0 || ||0 || ||504 || |
|Other comprehensive loss, net of tax ||0 || ||0 || ||0 || ||(42)|| ||0 || ||(42)|| |
|Net income||0 || ||0 || ||0 || ||0 || ||99 || ||99 || |
|Balance at April 30, 2020||899 || ||$||1 || ||$||32,739 || ||$||(135)|| ||$||1,960 || ||$||34,565 || |
See accompanying Notes.
Condensed Consolidated Statements of Cash Flows
|1||Three Months Ended April 30,|
|Net income||$||99 || ||$||392 || |
|Adjustments to reconcile net income to net cash provided by operating activities: || |
|Depreciation and amortization||658 || ||437 || |
|Amortization of costs capitalized to obtain revenue contracts, net||247 || ||209 || |
|Expenses related to employee stock plans||504 || ||343 || |
|Gains on strategic investments, net||(192)|| ||(281)|| |
|Changes in assets and liabilities, net of business combinations:|
|Accounts receivable, net||3,094 || ||2,774 || |
|Costs capitalized to obtain revenue contracts, net||(25)|| ||(124)|| |
|Prepaid expenses and other current assets and other assets||(11)|| ||(97)|| |
|Accounts payable||147 || ||15 || |
|Accrued expenses and other liabilities||(904)|| ||(560)|| |
|Operating lease liabilities||(203)|| ||(164)|| |
|Unearned revenue||(1,555)|| ||(979)|| |
|Net cash provided by operating activities || ||1,859 || ||1,965 || |
|Business combinations, net of cash acquired||(103)|| ||(10)|| |
|Purchases of strategic investments||(342)|| ||(159)|| |
|Sales of strategic investments||601 || ||194 || |
|Purchases of marketable securities||(834)|| ||(734)|| |
|Sales of marketable securities||337 || ||86 || |
|Maturities of marketable securities||227 || ||56 || |
|Capital expenditures||(323)|| ||(159)|| |
|Net cash used in investing activities || ||(437)|| ||(726)|| |
|Proceeds from employee stock plans||258 || ||219 || |
|Principal payments on financing obligations ||(48)|| ||(11)|| |
|Repayments of debt||(1)|| ||(1)|| |
|Net cash provided by financing activities || ||209 || ||207 || |
|Effect of exchange rate changes||(4)|| ||(5)|| |
|Net increase in cash and cash equivalents || ||1,627 || ||1,441 || |
|Cash and cash equivalents, beginning of period||4,145 || ||2,669 || |
|Cash and cash equivalents, end of period||$||5,772 || ||$||4,110 || |
See accompanying Notes.
Condensed Consolidated Statements of Cash Flows
Supplemental Cash Flow Disclosure
| ||Three Months Ended April 30,|
|Supplemental cash flow disclosure:|
|Cash paid during the period for:|
|Interest||$||46 || ||$||50 || |
|Income taxes, net of tax refunds||$||58 || ||$||18 || |
See accompanying Notes.
Notes to Condensed Consolidated Financial Statements
1. Summary of Business and Significant Accounting Policies
Description of Business
Salesforce.com, inc. (the “Company”) is a leading provider of enterprise software, delivered through the cloud, with a focus on customer relationship management, or CRM. The Company introduced its first CRM solution in 2000, and has since expanded its service offerings into new areas and industries with new editions, features and platform capabilities.
The Company's core mission is to empower its customers to connect with their customers in entirely new ways through cloud, mobile, social, blockchain, voice, advanced analytics and artificial intelligence (“AI”) technologies. Salesforce’s Customer 360 is an integrated platform that unites sales, service, marketing, commerce, integration, analytics and more to give companies a single, shared view of their customers.
The Company’s fiscal year ends on January 31. References to fiscal 2021, for example, refer to the fiscal year ending January 31, 2021.
Basis of Presentation
The accompanying condensed consolidated balance sheet as of April 30, 2020 and the condensed consolidated statements of operations, condensed consolidated statements of comprehensive income, condensed consolidated statements of stockholders' equity and condensed consolidated statements of cash flows for the three months ended April 30, 2020 and 2019 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 condensed consolidated financial statements include all adjustments necessary for the fair presentation of the Company’s balance sheet as of April 30, 2020, and its results of operations, including its comprehensive income, stockholders' equity and its cash flows for the three months ended April 30, 2020 and 2019. All adjustments are of a normal recurring nature. The results for the three months ended April 30, 2020 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending January 31, 2021.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2020, filed with the Securities and Exchange Commission (the “SEC”) on March 5, 2020.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in the Company’s condensed consolidated financial statements and notes thereto.
Significant estimates and assumptions made by management include the determination of:
•the fair value of assets acquired and liabilities assumed for business combinations;
•the standalone selling price (“SSP”) of performance obligations for revenue contracts with multiple performance obligations;
•the valuation of privately-held strategic investments, including impairments;
•the recognition, measurement and valuation of current and deferred income taxes and uncertain tax positions;
•the average period of benefit associated with costs capitalized to obtain revenue contracts;
•the useful lives of intangible assets; and
•the fair value of certain stock awards issued.
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.
In December 2019, the novel coronavirus and resulting disease (“COVID-19”) was reported and in March 2020 the World Health Organization declared it a pandemic. The extent of the impact of COVID-19 on the Company’s operational and financial performance will depend on certain developments, including the duration of the outbreak, impact on the Company’s
customers and its sales cycles, and impact on the Company’s employees, as discussed in more detail in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. During the three months ended April 30, 2020, this uncertainty resulted in a higher level of judgment related to the Company’s estimates and assumptions concerning variable consideration related to revenue recognition, allowances for credit losses, impairment of strategic investments, contract termination costs related to customer and employee events and operating lease right of use assets impairment. As of the date of issuance of the financial statements, the Company is not aware of any specific event or circumstance that would require it to update its estimates, judgments, or revise the carrying value of its assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and such changes will be recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from these estimates and any such differences may be material to the Company’s financial statements.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
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 (“CODM”), in deciding how to allocate resources and assess performance. Over the past few years, 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, and operates in multiple countries, the Company’s business operates in one operating segment because most of the Company's offerings operate on its single Customer 360 Platform and most of the Company's products are deployed in a nearly identical way, and the Company’s CODM evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis.
In February 2020, former co-CEO and director Keith Block resigned his positions from the Company. Prior to his resignation, Mr. Block was identified as a co-CODM along with Marc Benioff, CEO and Chair of the Board. Upon Mr. Block’s resignation, Mr. Benioff assumed all Mr. Block’s responsibilities and, as of the first quarter of fiscal 2021, is the sole individual that evaluates the operating results of the Company to assess performance and allocate resources. Accordingly, the Company determined that the chief executive officer also serves as the CODM for the purposes of segment reporting. Despite the change in the chief operating decision maker, the Company determined no change to segment reporting was necessary as there was no change in the components of the Company for which separate financial information is regularly evaluated.
Concentrations of Credit Risk, Significant Customers and Investments
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable. Collateral is not required for accounts receivable. The Company maintains an allowance for its doubtful accounts receivable due to estimated credit losses. This allowance is based upon historical loss patterns, the number of days that billings are past due, an evaluation of the potential risk of loss associated with delinquent accounts and current market conditions and reasonable and supportable forecasts of future economic conditions to inform adjustments to historical loss patterns. Receivables are written-off and charged against the recorded allowance when the Company has exhausted collection efforts without success.
No single customer accounted for more than five percent of accounts receivable at April 30, 2020 and January 31, 2020. No single customer accounted for five percent or more of total revenue during the three months ended April 30, 2020 and 2019. As of April 30, 2020 and January 31, 2020, assets located outside the Americas were 11 percent and 12 percent of total assets, respectively. As of April 30, 2020 and January 31, 2020, assets located in the United States were 87 percent and 87 percent of total assets, respectively.
The Company is also exposed to concentrations of risk in its strategic investment portfolio. As of April 30, 2020, the Company held five investments with carrying values that were individually greater than five percent of its total strategic investments, all of which were privately held. As of January 31, 2020, the Company held five investments that were individually greater than five percent of its total strategic investments, of which one was publicly traded and four were privately held.
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 (collectively, “Cloud Services”), software licenses, 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 and implementation services. Other revenue consists primarily of training fees.
Revenue is recognized upon transfer of control of promised products and services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. If the consideration promised in a contract includes a variable amount, for example, overage fees, contingent fees or service level penalties, the Company includes an estimate of the amount it expects to receive for the total transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur.
The Company determines the amount of revenue to be recognized through the application of the following steps:
•Identification of the contract, or contracts with a customer;
•Identification of the performance obligations in the contract;
•Determination of the transaction price;
•Allocation of the transaction price to the performance obligations in the contract; and
•Recognition of revenue when or as the Company satisfies the performance obligations.
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 comprised of fees that provide customers with access to Cloud Services, software licenses and related support and updates during the term of the arrangement.
Cloud Services allow customers to use the Company's multi-tenant software without taking possession of the software. Revenue is generally recognized ratably over the contract term.
With the May 2018 acquisition of MuleSoft, Inc. (“MuleSoft”) and the August 2019 acquisition of Tableau Software, Inc. (“Tableau”), subscription and support revenues also includes revenues associated with software licenses. These licenses for on-premises software provide the customer with a right to use the software as it exists when made available. Customers purchase these term licenses through a subscription. Revenues from distinct licenses are generally recognized upfront when the software is made available to the customer. In cases where the Company allocates revenue to software updates and support revenue, the allocated revenue is recognized as the updates are provided, which is generally ratably over the contract term.
The Company typically invoices its customers annually. Typical payment terms provide that customers pay within 30 days of invoice. Amounts that have been invoiced are recorded in accounts receivable and in unearned revenue or revenue, depending on whether transfer of control to customers has occurred.
Professional Services and Other Revenues
The Company’s professional services contracts are either on a time and materials, fixed fee or subscription basis. These revenues are recognized as the services are rendered for time and materials contracts, on a proportional performance basis for fixed price contracts or ratably over the contract term for subscription professional services contracts. Training revenues are recognized as the services are performed.
Significant Judgments - Contracts with Multiple Performance Obligations
The Company enters into contracts with its customers that may include promises to transfer multiple Cloud Services, software licenses, premium support and professional services. A performance obligation is a promise in a contract with a customer to transfer products or services that are distinct. Determining whether products and services are distinct performance obligations that should be accounted for separately or combined as one unit of accounting may require significant judgment.
Cloud Services and software licenses are distinct because such offerings are often sold separately. In determining whether professional services are distinct, 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 start date and the contractual dependence of the service on the customer’s satisfaction with the professional services work. To date, the Company has concluded that professional services included in contracts with multiple performance obligations generally are distinct.
The Company allocates the transaction price to each performance obligation on a relative SSP basis. The SSP is the price at which the Company would sell a promised product or service separately to a customer. Judgment is required to determine the SSP for each distinct performance obligation.
The Company determines SSP 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, the Company's go-to-market strategy, historical sales and contract prices. In instances where the Company does not sell or price a product or service
separately, the Company determines relative fair value using information that may include market conditions or other observable inputs. As the Company’s go-to-market strategies evolve, the Company may modify its pricing practices in the future, which could result in changes to SSP.
In certain cases, the Company is able to establish SSP based on observable prices of products or services sold or priced separately in comparable circumstances to similar customers. The Company uses a single amount to estimate SSP when it has observable prices.
If SSP is not directly observable, for example when pricing is highly variable, the Company uses a range of SSP. The Company determines the SSP range using information that may include pricing practices or other observable inputs. The Company typically has more than one SSP for individual products and services due to the stratification of those products and services by customer size and geography.
Costs Capitalized to Obtain Revenue Contracts
The Company capitalizes incremental costs of obtaining a non-cancelable subscription and support revenue contract. The capitalized amounts consist primarily of sales commissions paid to the Company’s direct sales force. Capitalized amounts also include (1) amounts paid to employees other than the direct sales force who earn incentive payouts under annual compensation plans that are tied to the value of contracts acquired, (2) commissions paid to employees upon renewals of subscription and support contracts, (3) the associated payroll taxes and fringe benefit costs associated with the payments to the Company’s employees, and to a lesser extent (4) success fees paid to partners in emerging markets where the Company has a limited presence.
Costs capitalized related to new revenue contracts are amortized on a straight-line basis over four years, which, although longer than the typical initial contract period, reflects the average period of benefit, including expected contract renewals. In arriving at this average period of benefit, the Company evaluated both qualitative and quantitative factors which included the estimated life cycles of its offerings and its customer attrition. Additionally, the Company amortizes capitalized costs for renewals and success fees paid to partners over two years.
The capitalized amounts are recoverable through future revenue streams under all non-cancelable customer contracts. The Company periodically evaluates whether there have been any changes in its business, the market conditions in which it operates or other events which would indicate that its amortization period should be changed or if there are potential indicators of impairment.
Amortization of capitalized costs to obtain revenue contracts is included in marketing and sales expense in the accompanying condensed consolidated statements of operations.
During the three months ended April 30, 2020, the Company capitalized $25 million of costs to obtain revenue contracts and amortized $247 million to marketing and sales expense. During the three months ended April 30, 2020, the Company offered its direct sales force a partial minimum commission guarantee that would pay the greater of actual commissions earned or a fixed amount of their variable compensation that would have been otherwise paid if incremental new business was not impacted by the COVID-19 pandemic. As these payments were guaranteed and not a cost to obtain a revenue contract, the amounts were immediately expensed and reflected in the Company’s condensed consolidated statement of operations. During the same period a year ago, the Company capitalized $124 million of costs to obtain revenue contracts and amortized $209 million to marketing and sales expense. Costs capitalized to obtain a revenue contract, net on the Company's condensed consolidated balance sheets totaled $2.1 billion at April 30, 2020 and $2.3 billion at January 31, 2020. There were no impairments of costs to obtain revenue contracts for the three months ended April 30, 2020 and 2019, respectively.
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.
The Company considers all of its marketable debt securities as available for use in current operations, including those with maturity dates beyond one year, and therefore classifies these securities within current assets on the condensed consolidated balance sheets. Securities are classified as available for sale and are carried at fair value, with the change in unrealized gains and losses, net of tax, reported as a separate component on the condensed consolidated statements of comprehensive income until realized. 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. Securities with an amortized cost basis in excess of estimated fair value are assessed to determine what amount of the excess, if any, is caused by expected credit losses, as required by new accounting pronouncement ASU 2016-13 discussed in further detail below. Expected credit losses on securities are recognized in other income (expense), net on the condensed consolidated statements of operations, and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive loss in stockholders' equity. For the
purposes of computing realized and unrealized gains and losses, the cost of securities sold is based on the specific-identification method. Interest on securities classified as available for sale is included as a component of investment income.
The Company holds strategic investments in privately held debt and equity securities and publicly held equity securities in which the Company does not have a controlling interest.
Privately held equity securities which the Company does not have a controlling financial interest in but does exercise significant influence over the investee are accounted for under the equity method. Privately held equity securities not accounted for under the equity method are recorded at cost and adjusted for observable transactions for same or similar investments of the same issuer (referred to as the measurement alternative) or impairment. All gains and losses on privately held equity securities, realized and unrealized, are recorded through gains on strategic investments, net on the condensed consolidated statement of operations. Privately held debt securities are recorded at fair value with changes in fair value recorded through accumulated other comprehensive income on the condensed consolidated balance sheet.
Valuations of privately held securities are inherently complex due to the lack of readily available market data and require the Company's use of judgment. The carrying value is not adjusted for the Company's privately held equity securities if there are no observable price changes in a same or similar security from the same issuer or if there are no identified events or changes in circumstances that may indicate impairment, as discussed below. In determining the estimated fair value of its strategic investments in privately held companies, the Company utilizes the most recent data available to the Company. The Company assesses its privately held debt and equity securities in its strategic investment portfolio at least quarterly for impairment. The Company’s impairment analysis encompasses an assessment of both qualitative and quantitative factors including the investee's financial metrics, market acceptance of the investee's product or technology and the rate at which the investee is using its cash. If the investment is considered impaired, the Company recognizes an impairment through the condensed consolidated statement of operations and establishes a new carrying value for the investment.
Publicly held equity securities are measured at fair value with changes recorded through gains on strategic investments, net on the condensed consolidated statement of operations.
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 the Euro, British Pound Sterling, Japanese Yen, Canadian Dollar and Australian Dollar. 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. The Company generally enters into master netting arrangements with the financial institutions with which it contracts for such derivative contracts, which permit net settlement of transactions with the same counterparty, thereby reducing credit-related losses in the event of the financial institutions' nonperformance. As of April 30, 2020 and January 31, 2020, the outstanding foreign currency derivative contracts were recorded at fair value on the condensed consolidated balance sheets.
Foreign currency derivative contracts are marked-to-market at the end of each reporting period with gains and losses recognized as other expense to offset the gains or losses resulting from the settlement or remeasurement of the underlying foreign currency denominated receivables and payables. While the contract or notional amount is often used to express the volume of foreign currency derivative contracts, the amounts potentially subject to credit risk are generally limited to the amounts, if any, by which the counterparties’ obligations under the agreements exceed the obligations of the Company to the counterparties.
Fair Value Measurement
The Company measures its cash and cash equivalents, marketable securities and foreign currency derivative contracts at fair value. In addition, the Company measures its strategic investments, including its publicly held equity securities, privately held debt securities and privately held equity securities for which there has been an observable price change in a same or similar security, at fair value. The additional disclosures regarding the Company’s fair value measurements are included in Note 5 “Fair Value Measurement.”
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|
Shorter of the estimated lease term or 10 years
|Building and building improvements|
10 to 40 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 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 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. to
Intangible Assets Acquired through Business Combinations
Intangible assets are amortized over their estimated 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. Management tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
The Company evaluates intangible assets and long-lived assets for possible impairment whenever events or changes in 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. Recoverability of these assets is measured by comparing 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, the carrying amount of such assets is reduced to fair value.
The Company evaluates and tests the recoverability of its goodwill for impairment at least annually during its fourth quarter of each fiscal year or more often if and when circumstances indicate that goodwill may not be recoverable.
There were no material impairments of capitalized software, intangible assets, long-lived assets or goodwill during the three months ended April 30, 2020 and 2019, respectively.
The Company uses its best estimates and assumptions to 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 recorded in connection with a business combination as of the acquisition date. The Company continues to collect information and reevaluates these estimates and assumptions quarterly and records any adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s condensed consolidated statement of operations.
In the event the Company acquires an entity with which the Company has a preexisting relationship, the Company will generally recognize a gain or loss to settle that relationship as of the acquisition date within operating income on the condensed consolidated statements of operations. In the event that the Company acquires an entity in which the Company previously held a strategic investment, the difference between the fair value of the shares as of the date of the acquisition and the carrying value of the strategic investment is recorded as a gain or loss and recorded within net gains (or losses) on strategic investments in the condensed consolidated statement of operations.
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and current and noncurrent operating lease liabilities on the Company’s condensed consolidated balance sheets. Finance leases are included in property and equipment, accrued expenses and other liabilities, and other noncurrent liabilities on the Company’s condensed consolidated balance sheets.
ROU assets represent the Company's right to use an underlying asset for the lease term and the corresponding lease liabilities represent its obligation to make lease payments arising from the lease. Lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The lease ROU asset is reduced for tenant incentives and excludes any initial direct costs incurred. As the Company’s leases do not provide an implicit rate, the net present value of future minimum lease payments is determined using the Company’s incremental borrowing rate. The Company's incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, in an economic environment where the leased asset is located. The Company’s lease terms may include options to extend or terminate the lease. These options are reflected in the ROU asset and lease liability when it is reasonably certain that the Company will exercise the option. The Company reassesses the lease term if and when a significant event or change in circumstances occurs within the control of the Company, such as construction of significant leasehold improvements that are expected to have economic value when the option becomes exercisable.
Lease expenses for minimum lease payments for operating leases are recognized on a straight-line basis over the lease term. Amortization expense of the ROU asset for finance leases is recognized on a straight-line basis over the lease term and interest expense for finance leases is recognized based on the incremental borrowing rate.
The Company has lease agreements with lease and non-lease components, which it has elected to combine for all asset classes. In addition, the Company does not recognize ROU assets or lease liabilities for leases with a term of 12 months or less for all of its asset classes.
On the lease commencement date 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 amortized over the lease term to operating expense.
The Company additionally has entered into subleases for unoccupied leased office space. Any impairments to the ROU asset, leasehold improvements or other assets as a result of a sublease are recognized in the period the sublease is executed and recorded as an operating expense. Any sublease payments received in excess of the straight-line rent payments for the sublease are recorded as an offset to operating expenses and recognized over the sublease life.
Stock-based expenses related to stock options are measured based on grant date at fair value using the Black-Scholes option pricing model and restricted stock awards based on grant date at fair value using the closing stock price. The Company recognizes stock-based expenses related to stock options and restricted stock awards on a straight-line basis, net of estimated forfeitures, over the requisite service period of the awards, which is generally the vesting term of four years.
Stock-based expenses related to the Company’s Amended and Restated 2004 Employee Stock Purchase Plan (“ESPP” or “2004 Employee Stock Purchase Plan”) are measured based on grant date at fair value using the Black-Scholes option pricing model. The Company recognizes stock-based expenses related to shares issued pursuant to the 2004 Employee Stock Purchase Plan on a straight-line basis over the offering period, which is 12 months. The ESPP allows employees to purchase shares of the Company's common stock at a 15 percent discount from the lower of the Company’s stock price on (i) the first day of the offering period or on (ii) the last day of the purchase period and also allows employees to reduce their percentage election once during a month purchase period (December 15 and June 15 of each fiscal year), but not increase that election until the next one-year offering period. The ESPP also includes a re-set provision for the purchase price if the stock price on the purchase date is less than the stock price on the offering date.
Stock-based expenses related to performance share grants, which are awarded to executive officers and other members of senior management, are measured based on grant date at fair value using a Monte Carlo simulation model and expensed on a straight-line basis, net of estimated forfeitures, over the service period of the awards, which is generally the vesting term of three years.
The Company, at times, grants unvested restricted shares to employee stockholders of certain acquired companies in lieu of cash consideration. These awards are generally subject to continued post-acquisition employment. Therefore, the Company accounts for them as post-acquisition stock-based expense. The Company recognizes stock-based expense equal to the grant date fair value of the restricted stock awards on a straight-line basis over the requisite service period of the awards, which is generally four years.
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the condensed consolidated statements of operations in the period that includes the enactment date.
The Company’s tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, solely based on its technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than 50 percent likely to be realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax provision.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the applicable tax law. The Company regularly reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The Company’s judgments regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute its business plans. Should there be a change in the ability to recover deferred tax assets, the tax provision would increase or decrease in the period in which the assessment is changed.
Foreign Currency Translation
The functional currency of the Company’s major foreign subsidiaries is generally the local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as a separate component on the condensed consolidated statement of comprehensive income. Foreign currency transaction gains and losses are included in other income in the condensed consolidated statement of operations 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 condensed consolidated financial statements.
The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as the Company’s director or officer or that person’s services provided to any other company or enterprise at the Company’s request. The Company maintains director and officer insurance coverage that would generally enable the Company to recover a portion of any future amounts paid. The Company may also be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.
New Accounting Pronouncements Adopted in Fiscal 2021
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, which includes the Company's accounts receivables, certain financial instruments and contract assets. ASU 2016-13 replaces the prior incurred loss impairment model with an expected loss methodology, which results in more timely recognition of credit losses. Effective on February 1, 2020, the Company adopted the provisions and expanded disclosure requirements described in ASU 2016-13. The adoption of ASU 2016-13 was not material.
Accounting Pronouncements Pending Adoption
In December 2019, the FASB issued Accounting Standards Update No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”),” which modifies and eliminates certain exceptions to the general principles of ASC 740, Income taxes. The new standard is effective for interim and annual periods beginning after December 15, 2020, and early adoption is permitted. The Company is currently evaluating the impact of the adoption to its consolidated financial statements.
Disaggregation of Revenue
Subscription and Support Revenue by the Company's service offerings
Subscription and support revenues consisted of the following (in millions):
| ||Three Months Ended April 30,|
|Sales Cloud||$||1,245 || ||$||1,073 || |
|Service Cloud||1,252 || ||1,020 || |
|Salesforce Platform and Other||1,364 || ||842 || |
|Marketing and Commerce Cloud||714 || ||561 || |
|$||4,575 || ||$||3,496 || |
Total Revenue by Geographic Locations
Revenues by geographical region consisted of the following (in millions):
| ||Three Months Ended April 30,|
|Americas||$||3,370 || ||$||2,617 || |
|Europe||1,034 || ||755 || |
|Asia Pacific||461 || ||365 || |
|$||4,865 || ||$||3,737 || |
Revenues by geography are determined based on the region of the Company's contracting entity, which may be different than the region of the customer. Americas revenue attributed to the United States was approximately 96 percent during the three months ended April 30, 2020 and 2019, respectively. No other country represented more than ten percent of total revenue during the three months ended April 30, 2020 and 2019, respectively.
As described in Note 1, subscription and support revenue is generally recognized ratably over the contract term beginning on the commencement date of each contract. License revenue is recognized as the licenses are delivered. The Company records a contract asset when revenue recognized on a contract exceeds the billings. The Company's standard billing terms are annual in advance. Contract assets were $454 million as of April 30, 2020 as compared to $449 million as of January 31, 2020, and are included in prepaid expenses and other current assets on the condensed consolidated balance sheet. Impairments of contract assets were immaterial during the three months ended April 30, 2020 and 2019, respectively.
Unearned revenue represents amounts that have been invoiced in advance of revenue recognition and is recognized as revenue when transfer of control to customers has occurred or services have been provided. The unearned revenue balance does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. The Company generally invoices customers in annual installments. The unearned revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, dollar size and new business linearity within the quarter.
The change in unearned revenue was as follows (in millions):
|Three Months Ended April 30,|
|Unearned revenue, beginning of period||$||10,662 || ||$||8,564 || |
|Billings and other (1)||3,305 || ||2,714 || |
|Contribution from contract asset||5 || ||44 || |
|Revenue recognized ratably over time||(4,453)|| ||(3,488)|| |
|Revenue recognized over time as delivered||(191)|| ||(172)|| |
|Revenue recognized at a point in time||(221)|| ||(77)|| |
|Unearned revenue from business combinations||5 || ||0 || |
|Unearned revenue, end of period||$||9,112 || ||$||7,585 || |
(1) Other includes, for example, the impact of foreign currency translation.
Revenue recognized ratably over time is generally billed in advance and includes Cloud Services, the related support and advisory services.
Revenue recognized over time as delivered includes professional services billed on a time and materials basis, fixed fee professional services and training classes that are primarily billed, delivered and recognized within the same reporting period.
Revenue recognized at a point in time substantially consists of on-premise software licenses.
Remaining Performance Obligation
Remaining performance obligation represents contracted revenue that has not yet been recognized and includes unearned revenue and unbilled amounts that will be recognized as revenue in future periods. Transaction price allocated to the remaining performance obligation is influenced by several factors, including seasonality, the timing of renewals, the timing of software license deliveries, average contract terms and foreign currency exchange rates. Unbilled portions of the remaining performance obligation denominated in foreign currencies are revalued each period based on the period end exchange rates. Unbilled portions of the remaining performance obligation are subject to future economic risks including bankruptcies, regulatory changes and other market factors.
The Company excludes amounts related to performance obligations that are billed and recognized as they are delivered. This primarily consists of professional services contracts that are on a time-and-materials basis.
The majority of the Company's noncurrent remaining performance obligation is expected to be recognized in the next 13 to 36 months.
Remaining performance obligation consisted of the following (in billions):
|As of April 30, 2020 ||$||14.5 || ||$||14.8 || ||$||29.3 || |
|As of January 31, 2020||$||15.0 || ||$||15.8 || ||$||30.8 || |
At April 30, 2020, marketable securities consisted of the following (in millions):
|Investments classified as Marketable Securities||Amortized|
|Corporate notes and obligations||$||2,312 || ||$||9 || ||$||(28)|| ||$||2,293 || |
|U.S. treasury securities||172 || ||2 || ||0 || ||174 || |
|Mortgage backed obligations||269 || ||5 || ||0 || ||274 || |
|Asset backed securities||890 || ||3 || ||(4)|| ||889 || |
|Municipal securities||165 || ||1 || ||0 || ||166 || |
|Foreign government obligations||92 || ||1 || ||0 || ||93 || |
|U.S. agency obligations||12 || ||0 || ||0 || ||12 || |
|Time deposits||1 || ||0 || ||0 || ||1 || |
|Covered bonds||128 || ||0 || ||0 || ||128 || |
|Total marketable securities||$||4,041 || ||$||21 || ||$||(32)|| ||$||4,030 || |
At January 31, 2020, marketable securities consisted of the following (in millions):
|Investments classified as Marketable Securities||Amortized|
|Corporate notes and obligations||$||2,199 || ||$||9 || ||$||(1)|| ||$||2,207 || |
|U.S. treasury securities||182 || ||1 || ||0 || ||183 || |
|Mortgage backed obligations||225 || ||1 || ||0 || ||226 || |
|Asset backed securities||779 || ||2 || ||0 || ||781 || |
|Municipal securities||157 || ||1 || ||0 || ||158 || |
|Foreign government obligations||69 || ||0 || ||0 || |