Salesforce.com
Annual Report 2015

Plain-text annual report

2 0 1 5 A N N UA L R E P O RT F Y 1 5 H I G H L I G H T S “ Salesforce’s Wave Analytics Cloud ... WORLD’S #1CRM PLATFORM (Source: Gartner, 2014) (Source: Forbes, 2011, 2012, 2014) #1 MOST INNOVATIVE COMPANY IN THE WORLD $5.4 BILLION IN REVENUE 32% REVENUE GROWTH 2.3 BILLION TRANSACTIONS AVERAGED EVERY BUSINESS DAY 2,700 APPEXCHANGE APPS and nearly 3 million installs 840,000 >16,000 EMPLOYEES HOURS CONTRIBUTED TO THE COMMUNITY SINCE INCEPTION Corporate Headquarters The Landmark @ One Market | Suite 300 San Francisco, CA 94105 United States 1-800-NO-SOFTWARE www.salesforce.com /salesforce @salesforce Copyright ©2015, salesforce.com, inc. All rights reserved. Salesforce and salesforce.com are registered trademarks of salesforce.com, inc. Salesforce.com owns other registered and unregistered trademarks. Other names used herein may be trademarks of their respective owners. Note on Forward-Looking StatementsThis annual report contains forward-looking statements within the meaning of the federal securities laws. Results could differ materially. Further information on factors that could affect results is included in the fiscal 2015 Form 10-K, included in this annual report.BOARD OF DIRECTORSMarc Benioff Chairman & Chief Executive OfficerKeith Block Vice Chairman & PresidentCraig Conway Former Chief Executive Officer, PeopleSoft Inc.Alan Hassenfeld Director, Hasbro Inc.Colin Powell General, Former U.S. Secretary of State, Former Chairman, Joint Chiefs of StaffSanford Robertson Principal, Francisco PartnersJohn V. Roos Former U.S. Ambassador to JapanLarry Tomlinson Former Senior Vice President & Treasurer, Hewlett-Packard Co.Robin Washington Executive Vice President and Chief Financial Officer, Gilead Sciences Inc.Maynard Webb Chairman, Yahoo Inc.Susan Wojcicki Chief Executive Officer, YouTubeEXECUTIVE TEAMMarc Benioff Chairman & Chief Executive OfficerParker Harris Co-FounderKeith Block Vice Chairman & PresidentAlex Dayon President, ProductsMark Hawkins Chief Financial Officer & Executive Vice PresidentMaria Martinez President, Sales & Customer SuccessBurke Norton Chief Legal Officer & Executive Vice PresidentJoe Allanson Chief Accounting OfficerINVESTOR RELATIONS investor@salesforce.com, +1-415-536-6250STOCK LISTING Salesforce.com trades on the New York Stock Exchange under the ticker symbol “CRM.”0100k200k300k400k500k600k700k800k900kWave is built for a world in which people have more interactions with datathrough mobile apps than they do through desktop browsers.PETER COFFEEVP for Strategic Research at Salesforce“It doesn’t take a data science degree, it takes 5 buttons.”Alex DayonPresident, Products“I can tell you that every time I show the product, people want it.”announcements of 2014.”enterprise applications... ranks among the most important— InformationWeekThe Year of ANALYTICSA major step forward for enterprise software. — VentureBeat2 0 1 5 A N N U A L R E P O RT F Y 1 5 H I G H L I G H T S “ Salesforce’s Wave Analytics Cloud ... WORLD’S #1CRM PLATFORM (Source: Gartner, 2014) #1 MOST INNOVATIVE COMPANY IN THE WORLD (Source: Forbes, 2011, 2012, 2014) Corporate Headquarters The Landmark @ One Market | Suite 300 San Francisco, CA 94105 United States 1-800-NO-SOFTWARE www.salesforce.com /salesforce @salesforce Copyright ©2015, salesforce.com, inc. All rights reserved. Salesforce and salesforce.com are registered trademarks of salesforce.com, inc. Salesforce.com owns other registered and unregistered trademarks. Other names used herein may be trademarks of their respective owners. $5.4 BILLION IN REVENUE 32% REVENUE GROWTH 2.3 BILLION TRANSACTIONS AVERAGED EVERY BUSINESS DAY 2,700 APPEXCHANGE APPS and nearly 3 million installs WORLDWIDE CORPORATE HEADQUARTERS salesforce.com inc. The Landmark @ One Market Suite 300 San Francisco, CA 94105 USA 840,000 >16,000 EMPLOYEES HOURS CONTRIBUTED TO THE COMMUNITY SINCE INCEPTION Dear stockholders, Fiscal 2015 was another phenomenal year of customer success and growth for Salesforce. We reached $5 billion in annual revenue faster than any other enterprise software company, and now it’s our goal to be the fastest to reach $10 billion. Salesforce is now the sixth largest software company, and the largest enterprise cloud computing company in the world. We believe that we have a tremendous market opportunity ahead, as CRM and analytics become core to the success of every business. Salesforce has achieved a unique position in the industry. Our complete, trusted Customer Success Platform is built from the ground up for cloud, social, mobile, and data science technologies. And with six world-class clouds for sales, service, marketing, community, analytics, and app development, we have six engines for growth. In fact, four of our cloud services, if ranked separately by revenue, would be among the top eight pure-play enterprise cloud companies today. Very few software companies in history have successfully established leadership positions in more than one category. Our more than 150,000 customers and more than 16,000 employees around the world are why we were ranked by Forbes as the world’s Most Innovative Company for the last four years, and recognized by Fortune Magazine as Most Admired Software Company and one of the top ten Best Companies to Work For in the past year. Of all of our results, I’m most proud of our Salesforce Foundation, a separate 501(c)(3) organization. We now have more than 24,000 non-profit and higher education organizations using our software. The Foundation has donated more than $80 million in grants and our employees have volunteered more than 840,000 hours in the last 16 years. And this year, we are well on our way to celebrating one million total hours of volunteering! I would like to extend a sincere thank you to our customers and partners for their inspiration, to our employees for their focus on customer success, and to you, our stockholders, for your continued support. Aloha, ... ranks among the most important enterprise applications announcements of 2014.” — InformationWeek 0 100k 200k 300k 400k 500k 600k 700k 800k 900k The Year of ANALYTICS “I can tell you that every time I show the product, people want it.” Alex Dayon President, Products Wave is built for a world in which people have more interactions with data through mobile apps than they do through desktop browsers. PETER COFFEE VP for Strategic Research at Salesforce r w a rd for ente jor ste p f o a m A r p r i s e s o f t w a r e . — Venture B e a t “It doesn’t take a data science degree, it takes 5 buttons.” Marc Benioff Keith Block Craig Conway Alan Hassenfeld Colin Powell Sanford Robertson John V. Roos Larry Tomlinson Robin Washington Maynard Webb Susan Wojcicki Marc Benioff Parker Harris Keith Block Alex Dayon Mark Hawkins Maria Martinez Burke Norton Joe Allanson BOARD OF DIRECTORS Chairman & Chief Executive Officer Vice Chairman & President Former Chief Executive Officer, PeopleSoft Inc. Director, Hasbro Inc. General, Former U.S. Secretary of State, Former Chairman, Joint Chiefs of Staff Principal, Francisco Partners Former U.S. Ambassador to Japan Chairman, Yahoo Inc. Chief Executive Officer, YouTube Former Senior Vice President & Treasurer, Hewlett-Packard Co. Executive Vice President and Chief Financial Officer, Gilead Sciences Inc. EXECUTIVE TEAM Chairman & Chief Executive Officer Co-Founder Vice Chairman & President President, Products Chief Financial Officer & Executive Vice President President, Sales & Customer Success Chief Legal Officer & Executive Vice President Chief Accounting Officer INVESTOR RELATIONS investor@salesforce.com, +1-415-536-6250 STOCK LISTING Salesforce.com trades on the New York Stock Exchange under the ticker symbol “CRM.” Note on Forward-Looking Statements This annual report contains forward-looking statements within the meaning of the federal securities laws. Results could differ materially. Further information on factors that could affect results is included in the fiscal 2015 Form 10-K, included in this annual report. Anna RosenmanProduct Marketing Director ... ranks among the most important enterprise applications announcements of 2014.” — InformationWeek 0 100k 200k 300k 400k 500k 600k 700k 800k 900k The Year of ANALYTICS “I can tell you that every time I show the product, people want it.” Alex Dayon President, Products Wave is built for a world in which people have more interactions with data through mobile apps than they do through desktop browsers. PETER COFFEE VP for Strategic Research at Salesforce r w a rd for ente r p jor ste p f o a m A r i s e s o f t w a r e . — Venture B e a t “It doesn’t take a data science degree, it takes 5 buttons.” Marc Benioff Keith Block Craig Conway Alan Hassenfeld Colin Powell Sanford Robertson John V. Roos Larry Tomlinson Robin Washington Maynard Webb Susan Wojcicki Marc Benioff Parker Harris Keith Block Alex Dayon Mark Hawkins Maria Martinez Burke Norton Joe Allanson BOARD OF DIRECTORS Chairman & Chief Executive Officer Vice Chairman & President Former Chief Executive Officer, PeopleSoft Inc. Director, Hasbro Inc. General, Former U.S. Secretary of State, Former Chairman, Joint Chiefs of Staff Principal, Francisco Partners Former U.S. Ambassador to Japan Chairman, Yahoo Inc. Chief Executive Officer, YouTube Former Senior Vice President & Treasurer, Hewlett-Packard Co. Executive Vice President and Chief Financial Officer, Gilead Sciences Inc. EXECUTIVE TEAM Chairman & Chief Executive Officer Co-Founder Vice Chairman & President President, Products Chief Financial Officer & Executive Vice President President, Sales & Customer Success Chief Legal Officer & Executive Vice President Chief Accounting Officer INVESTOR RELATIONS investor@salesforce.com, +1-415-536-6250 STOCK LISTING Salesforce.com trades on the New York Stock Exchange under the ticker symbol “CRM.” Note on Forward-Looking Statements This annual report contains forward-looking statements within the meaning of the federal securities laws. Results could differ materially. Further information on factors that could affect results is included in the fiscal 2015 Form 10-K, included in this annual report. Anna RosenmanProduct Marketing Director Dear stockholders, Fiscal 2015 was another phenomenal year of customer success and growth for Salesforce. We reached $5 billion in annual revenue faster than any other enterprise software company, and now it’s our goal to be the fastest to reach $10 billion. Salesforce is now the sixth largest software company, and the largest enterprise cloud computing company in the world. We believe that we have a tremendous market opportunity ahead, as CRM and analytics become core to the success of every business. Salesforce has achieved a unique position in the industry. Our complete, trusted Customer Success Platform is built from the ground up for cloud, social, mobile, and data science technologies. And with six world-class clouds for sales, service, marketing, community, analytics, and app development, we have six engines for growth. In fact, four of our cloud services, if ranked separately by revenue, would be among the top eight pure-play enterprise cloud companies today. Very few software companies in history have successfully established leadership positions in more than one category. Our more than 150,000 customers and more than 16,000 employees around the world are why we were ranked by Forbes as the world’s Most Innovative Company for the last four years, and recognized by Fortune Magazine as Most Admired Software Company and one of the top ten Best Companies to Work For in the past year. Of all of our results, I’m most proud of our Salesforce Foundation, a separate 501(c)(3) organization. We now have more than 24,000 non-profit and higher education organizations using our software. The Foundation has donated more than $80 million in grants and our employees have volunteered more than 840,000 hours in the last 16 years. And this year, we are well on our way to celebrating one million total hours of volunteering! I would like to extend a sincere thank you to our customers and partners for their inspiration, to our employees for their focus on customer success, and to you, our stockholders, for your continued support. Aloha, WORLDWIDE CORPORATE HEADQUARTERS salesforce.com inc. The Landmark @ One Market San Francisco, CA 94105 Suite 300 USA THANK Y U [THIS PAGE INTENTIONALLY LEFT BLANK] UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) È Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ‘ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended January 31, 2015 OR Commission File Number: 001-32224 salesforce.com, inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 94-3320693 (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) Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, par value $0.001 per share Name of each exchange on which registered New York Stock Exchange, Inc. Securities registered pursuant to section 12(g) of the Act: Not applicable Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘ Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of Act. Yes ‘ No È 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 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 È 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 È No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘ 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. (Check one): Large accelerated filer È Non-accelerated filer ‘ (Do not check if a smaller reporting company) ‘ Accelerated filer 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 È Based on the closing price of the Registrant’s Common Stock on the last business day of the Registrant’s most recently completed second fiscal quarter, which was July 31, 2014, the aggregate market value of its shares (based on a closing price of $54.25 per share) held by non-affiliates was approximately $24.4 billion. Shares of the Registrant’s Common Stock held by each executive officer and director and by each entity or person that owned 5 percent or more of the Registrant’s outstanding Common Stock were excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of January 31, 2015, there were approximately 650.6 million shares of the Registrant’s Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s definitive proxy statement for its 2015 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed within 120 days of the Registrant’s fiscal year ended January 31, 2015, are incorporated by reference in Parts II and III of this Report on Form 10-K. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part of this Form 10-K. salesforce.com, inc. INDEX PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4A. Executive Officers of the Registrant PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . Item 8. Consolidated Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART III Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13. Certain Relationships and Related Transactions and Director Independence . . . . . . . . . . . . . . Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Index to Exhibits PART IV Page No. 3 11 27 27 28 28 29 31 33 35 66 68 113 113 114 115 115 115 115 115 116 118 2 FORWARD-LOOKING INFORMATION This Annual Report on Form 10-K, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) in Item 7, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements consist of, among other things, trend analyses, statements regarding future events, future financial performance, our anticipated growth, the effect of general economic and market conditions, the impact of foreign currency exchange rate and interest rate fluctuations on our results, our business strategy and our plan to build our business, including our strategy to be the leading provider of enterprise cloud computing applications and platforms and to lead the industry shift to the “customer company,” our service performance and security, the expenses associated with new data centers, additional data center capacity, real estate and office facilities space, our operating results, new features and services, our strategy of acquiring or making investments in complementary businesses, joint ventures, services and technologies, and intellectual property rights, our ability to successfully integrate acquired businesses and technologies, our ability to continue the growth and to maintain deferred revenue and unbilled deferred revenue, our ability to protect our intellectual property rights, our ability to develop our brands, our ability to realize the benefits from strategic partnerships, the effect of evolving government regulations, the valuation of deferred tax assets, the potential availability of additional tax assets in the future and related matters, the impact of expensing stock options, the sufficiency of our capital resources, factors related to our outstanding convertible notes, revolving credit facility, compliance with our related debt covenants, and capital lease obligations, and current and potential litigation involving us, all of which are based on current expectations, estimates, and forecasts, and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “aims,” “projects,” “intends,” “plans,” “believes,” “estimates,” “seeks,” “assumes,” “may,” “should,” “could,” “foresees,” “forecasts,” variations of such words and similar expressions are also intended to identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified below, under “Risk Factors” and elsewhere in this report, for factors that may cause actual results to be different than those expressed in these forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason. ITEM 1. BUSINESS Overview PART I Salesforce is a leading provider of enterprise cloud computing solutions, with a focus on customer relationship management, or CRM. We introduced our first CRM solution in February 2000, and we have since expanded that offering with new editions, solutions, enhanced features, platform capabilities and a new analytics solution through internal development and acquisitions. Our mission is to help our customers transform themselves into “customer companies” by empowering them to connect with their customers in entirely new ways. With our six core cloud service offerings, including sales force automation, customer service and support, marketing automation, community management, analytics and a cloud platform for building custom applications, we provide a next generation customer success platform. Our service offerings are intuitive and easy-to-use, can be deployed rapidly, customized easily and integrated with other platforms and enterprise applications, or apps. We deliver our solutions as a service via all the major Internet browsers and on leading mobile devices. We sell to businesses of all sizes and in almost every industry worldwide on a subscription basis, primarily through our direct sales efforts and also indirectly through partners. Through our platform and other developer tools, we also encourage third parties to develop additional functionality and new apps that run on our platform, which are sold separately from, or in conjunction with, our service. 3 We were incorporated in Delaware in February 1999. Our principal executive offices are located in San Francisco, California and our principal website address is www.salesforce.com. Our office address is The Landmark @ One Market, Suite 300, San Francisco, California 94105. The Cloud, Social, Mobile and Data Science Revolutions We believe that the convergence of cloud, social, mobile and data science technologies is fundamentally transforming how companies sell, service, market, engage and innovate. Cloud computing has changed the way enterprise business apps are developed and deployed. Organizations no longer need to buy and maintain their own infrastructure of servers, storage and development tools in order to create and run business apps. Instead, companies can gain access to a variety of business apps via an Internet browser or mobile device on an as-needed basis, without the cost and complexity of managing the hardware or software in-house. The broad shift to social networking has transformed the way people engage and collaborate and is accelerating the adoption of technologies that connect people and products through “feeds” and notifications. In addition, the proliferation of mobile phones worldwide continues, and enterprise mobile apps are making it possible for people to conduct business from their phones. As more people and devices become connected, companies are looking for new ways to harness the multitude of data from these connections for new insights to drive business success. Progress in data science and machine learning will move companies beyond just automating business processes to more data-driven, predictive computing. We believe Salesforce is at the forefront of delivering more than a system of record and a system of engagement, but also a system of intelligence for companies of every size and industry to connect with their customers in entirely new ways. Our Six Cloud Service Offerings We provide enterprise cloud computing solutions that include apps and platform services, as well as professional services to facilitate the adoption of our solutions. We offer six core service offerings, all integrated on a single platform, that empower companies to grow sales faster, deliver customer service on multiple devices, market through one-to-one customer journeys, build branded communities for customers, partners and employees, deliver analytics for every business user and develop mobile apps quickly and easily. Our core service offerings are as follows: Sales Cloud. The Sales Cloud is a platform for sales force automation that enables companies to store data, access accurate customer and prospect information, track leads and progress, forecast opportunities and collaborate around any sale on desktop and mobile devices. Our customers use the Sales Cloud to grow their sales pipelines, close more deals, improve sales productivity and gain valuable business insights. The Sales Cloud also offers solutions for partner relationship management (including channel management and partner communities) and complete, accurate customer and contact information. Service Cloud. The Service Cloud is a platform for customer service, enabling companies to effectively address their customer service and support needs. Our customers use the Service Cloud to connect their customer service agents with customers on a multitude of devices and across multiple channels—phone, email, chat, self-service web portals, social networks, online communities and directly within their own products and apps. Marketing Cloud. The Marketing Cloud is a platform for digital marketing that enables companies to plan, personalize and optimize one-to-one customer interactions. Our customers use the Marketing Cloud to map customer journeys to digital marketing interactions across email, mobile, social, web and 4 connected products. With the Marketing Cloud, customer data can also be routed into the Sales Cloud and Service Cloud in the form of leads, contacts and customer service cases to give companies a complete view of their customers. Community Cloud. The Community Cloud, which we announced as a core service offering in October 2014, is a platform for creating trusted, branded destinations for customers, partners and employees to collaborate. It enables companies to engage directly with a specific group of people by giving them access to relevant information, apps and experts. Analytics Cloud. The Analytics Cloud, which we announced as a core service offering in October 2014, is an app and platform for business intelligence. It enables companies to quickly deploy sales, service, marketing and custom analytics apps using any data source. Our customers use the Analytics Cloud to enable any employee to quickly and easily explore business data, uncover new insights, make smarter decisions and take action from anywhere on their mobile device. Salesforce1 Platform. The Salesforce1 Platform is a cloud platform for developing apps. The Salesforce1 Platform is delivered as a service, enabling anyone to build business apps without the burden of managing hardware and software. Our customers, developers and independent software vendors (“ISVs”) use the Salesforce1 Platform to build apps that manage a variety of business processes and can be accessed anytime and on any mobile device. In addition, the Salesforce1 Platform gives customers the ability to create multiple copies of their company’s Salesforce instance in separate environments for a variety of purposes, such as testing and training. Professional Services We offer consulting, deployment, training, implementation and integration services to our customers to facilitate the adoption of our cloud solutions. Our professional service engagements can be billed on a time and materials basis, for a fixed fee or through annual contracts. We offer a number of traditional classroom and online educational classes that address topics such as deploying, using, administering and developing on our service. We offer classes for our partners who deploy our service on behalf of our customers. We bill the traditional classroom and some of the online educational classes on a per person, per class basis. In addition, there is a selection of online educational classes available at no charge to customers that subscribe to our customer service plans. Business Benefits of Using Our Solution The key advantages of our solution include: Secure, private, scalable and reliable. Our service has been designed to provide our customers with privacy and high levels of performance, reliability and security. We have built, and continue to invest in, a comprehensive security infrastructure, including firewalls, intrusion detection systems, and encryption for transmissions over the Internet, which we monitor and test on a regular basis. We built and maintain a multi-tenant application architecture that has been designed to enable our service to scale securely, reliably and cost effectively. Our multi-tenant application architecture maintains the integrity and separation of customer data while still permitting all customers to use the same application functionality simultaneously. Rapid deployment. Our service can be deployed rapidly since our customers do not have to spend time procuring, installing or maintaining the servers, storage, networking equipment, security products or other hardware and software. Ease of integration and configuration. IT professionals are able to integrate and configure our solutions with existing applications quickly and seamlessly. We provide a set of application programming interfaces (“APIs”) that enable customers and independent software developers to both integrate our 5 solution with existing third-party, custom and legacy apps and write their own application services that integrate with our solutions. For example, many of our customers use our Salesforce1 Platform API to move customer-related data from custom-developed and packaged applications into our service on a periodic basis to provide greater visibility into their activities. High levels of user adoption. We have designed our solutions to be intuitive and easy to use. Our solutions contain many tools and features recognizable to users of popular consumer web services, so users are more familiar with our user interface than typical enterprise applications. As a result, our users can often use and gain benefit from our solutions with minimal training. We have also designed our solutions to be used on mobile devices, making it possible for people to conduct business from their phones. Rapid development of apps using the Salesforce1 Platform. Our customers and third-party developers can create apps rapidly because of the ease of use and the benefits of a multi-tenant platform. We provide the capability for business users to easily customize our applications to suit their specific needs, and also support a variety of programming language support so developers can code complex apps spanning multiple business processes and deliver them via multiple mobile devices. Increased innovation. By providing infrastructure and development environments on demand, we provide developers the opportunity to create new and innovative apps without having to invest in hardware and distribution. Developers with ideas for a new app can create, test and support their solutions on the Salesforce1 Platform and make the app accessible for a subscription fee to customers. Lower total cost of ownership. We enable customers to achieve significant up-front savings relative to the traditional enterprise software model. Customers benefit from the predictability of their future costs since they generally pay for the service on a per subscriber basis for the term of the subscription contract. Because we deploy all upgrades on our servers, new features and functionality automatically become part of our service on the upgrade release date and therefore benefit all of our customers immediately. Our Strategy Our objective is to deliver solutions that help companies transform the way they sell, service, market, engage and innovate. Not only do we provide enterprise cloud apps, we also provide an enterprise cloud computing platform upon which our customers and partners can build and customize apps. Key elements of our strategy include: Strengthening our solutions. We offer multiple editions of our solutions at different price points to meet the needs of customers of different sizes and we have designed our solutions to easily accommodate new features and functionality. We intend to continue to extend all editions of our core solutions with new features and functions and increased security through our own development, acquisitions and partnerships. Expanding into new and high-growth categories. As part of our growth strategy, we are delivering innovative solutions in new and high-growth categories, including marketing, communities, business intelligence and cloud platforms. Extending strategic relationships with existing customers. We see a significant opportunity to deepen our relationships with our existing customers. As our customers realize the benefits of our service, we aim to upgrade the customer to premium editions, extend the duration of the customers’ contracts and sell more subscriptions by targeting additional functional areas and business units within the customer organization, and ultimately pursue enterprise-wide deployments. Pursuing new customers. We believe that our offerings provide significant value for businesses of any size. As a result, we will continue to aggressively target businesses of all sizes in top industries and major 6 regions, primarily through our direct sales force. We have steadily increased and plan to continue to increase the number of direct sales professionals we employ, and we intend to develop additional distribution channels for our service. Reducing attrition. Our goal is to have all of our customers renew their subscriptions at the end of their contractual terms. We run customer success and other related programs in an effort to secure renewals of existing customers. Building our business in top software markets globally. We believe that there is a substantial market opportunity for our solutions globally. We plan to continue to aggressively market and sell to customers worldwide via local sales and support professionals with deep expertise in target industries and through partnerships with ISVs and system integrators. Additionally, we plan to increase data center capacity by opening additional data centers in our top global markets. Encouraging the development of third-party apps on our cloud computing platforms. The Salesforce1 Platform enables existing customers, ISVs and third-party developers to create and deliver cloud apps. It is a platform on which apps can be created, tested, published and run. In addition, these apps can be marketed and sold on the AppExchange, our online marketplace for business apps, or sold directly by software vendors. We believe our ecosystem of developers and software vendors will address the business requirements of both current and potential customers. Technology, Development and Operations We deliver our Salesforce solutions as highly scalable, cloud-computing application and platform services on a multi-tenant technology architecture. Multi-tenancy is an architectural approach that allows us to operate a single application instance for multiple organizations, treating all customers as separate tenants who run in virtual isolation from each other. Customers can use and customize an application as though they each have a separate instance, yet their data and customizations remain secure and insulated from the activities of all other tenants. Our multi-tenant services run on a single stack of hardware and software, which is comprised of commercially available hardware and a combination of proprietary and commercially available software. As a result, we are able to spread the cost of delivering our services across our user base. In addition, because we do not have to manage thousands of distinct applications with their own business logic and database schemas, we believe that we can scale our business faster than traditional software vendors. Moreover, we can focus our resources on building new functionality to deliver to our customer base as a whole rather than on maintaining an infrastructure to support each of their distinct applications. Multi-tenancy also allows for faster bug and security fixes, automatic software updates and the ability to deploy major releases and frequent, incremental improvements to our services, benefiting the entire user community. Our services are optimized to run on specific databases and operating systems using the tools and platforms best suited to serve our customers rather than on-premise software that must be written to the different hardware, operating systems and database platforms existing within a customer’s unique systems environment. Our developers build and support solutions and features on a single code base on our chosen technology platform. Our research and development efforts are focused on improving and enhancing the features, functionality and security of our existing service offerings as well as developing new features, functionality and services. From time to time, we supplement our internal research and development activities with outside development resources and acquired technology. As part of our business strategy, we periodically acquire companies or technologies, and we incorporate the acquired technologies into our solutions. Performance, functional depth and the usability of our solutions influence our technology decisions and product direction. Our customers access our services from any geography over the Internet via all of the major Internet browsers and on most major mobile device operating systems. 7 We provide the majority of our services to our customers from infrastructure operated by us but secured within third-party data center hosting facilities located in the United States and other countries. These third-party data center providers provide space, physical security, continuous power and cooling. The remainder of our services operate from cloud computing platform providers who offer Infrastructure as a Service, including servers, storage, databases and networking. Sources of Revenue We derive our revenues primarily from subscription fees for our service. We also derive revenues from premier support, which provides customers with additional support beyond the standard support that is included in the basic subscription fee. We recognize subscription and support revenue ratably over the contract term, beginning on the commencement date of each contract. The majority of our professional services contracts are on a time and materials basis, for which we generally recognize revenue as the services are rendered. 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. 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. Unbilled deferred revenue represents future billings under our subscription agreements that have not been invoiced and, accordingly, are not recorded in deferred revenue. We generally invoice customers in annual installments. Deferred revenue and unbilled deferred revenue are influenced by several factors, including new business seasonality within the year, the specific timing, size and duration of large customer subscription agreements, the timing and compounding effects of customer renewals, varying billing cycles of subscription agreements, invoice timing, foreign currency fluctuations and new business linearity within the quarter. Customers We sell to businesses of all sizes and in almost every industry worldwide. The number of paying subscriptions at each of our customers ranges from one to hundreds of thousands. None of our customers accounted for more than five percent of our revenues in fiscal 2015, 2014 or 2013. Transactions Our transaction volume, representing transactions processed through our solutions and platform, excluding Marketing Cloud and one of our platform service offerings, Heroku, was 585 billion for fiscal 2015, an increase of 59 percent as compared to fiscal 2014. A transaction is a retrieval or update within the Salesforce database, which can be a page load, an information query, or an API call, among others. Our transaction metrics are used to illustrate the growing usage of our service by our customers and to highlight the scalability of our service. We do not believe transaction metrics are key performance indicators of our financial condition. Specifically, there is no direct correlation between the transaction activity and our financial results, such as revenue or expense growth. Additionally, transaction activity cannot be relied upon as an indicator of future financial performance. Sales, Marketing and Customer Support We organize our sales and marketing programs by geographic regions, including the Americas, Europe and Asia Pacific, which includes Japan. The majority of our revenue from the Americas is attributable to customers in the United States. Approximately 28 percent of our revenue comes from customers outside of the Americas. 8 Direct Sales We sell our services primarily through our direct sales force, which is comprised of telephone sales personnel based in regional hubs, and field sales personnel based in territories close to their customers. Both our telephone sales and field sales personnel are supported by sales representatives, who are primarily responsible for generating qualified sales leads. Referral and Indirect Sales We have a network of partners who refer sales leads to us and who then assist in selling to these prospects. This network includes global consulting firms, systems integrators and regional partners. In return, we typically pay these partners a fee based on the first-year subscription revenue generated by the customers whom they refer. Also included in this network are ISVs, whom we typically pay a percentage of the subscription revenue generated by their referrals. We continue to invest in developing additional distribution channels for our subscription service. Marketing Our marketing strategy is to promote our brand and generate demand for our offerings. We use a variety of marketing programs across traditional and social channels to target our prospective and current customers, partners, and developers. Our primary marketing activities include: • Press and industry analyst relations to garner third-party validation and generate positive coverage for our company, offerings and value proposition; • User conferences and events, such as Dreamforce, as well as participation in trade shows and industry events, to create customer and prospect awareness; • Content marketing and engagement on social channels like Facebook, Twitter, LinkedIn and YouTube; • Search engine marketing and advertising to drive traffic to our Web properties; • Web site development to engage and educate prospects and generate interest through product information and demonstrations, free trials, case studies, white papers, and marketing collateral; • Multi-channel marketing campaigns; • Customer testimonials; and • Sales tools and field marketing events to enable our sales organization to more effectively convert leads into customers. Customer Service and Support Our global customer support group responds to both business and technical inquiries about the use of our products via the web, telephone, email, social networks and other channels. We provide standard customer support during regular business hours at no charge to customers who purchase any of our paying subscription editions. We also offer premier customer support for an additional fee, which can include services such as priority access to technical resources, developer support, and system administration. In addition, we offer a mission critical support add-on that is designed to provide customers with responses for incidents from a dedicated team knowledgeable about the customer’s specific enterprise architecture, and which offers instruction to optimize their usage of our products. 9 Seasonality Our fourth quarter has historically been our strongest quarter for new business and renewals, and our first quarter is historically our largest collections and operating cash flow quarter. For a more detailed discussion, see the “Seasonal Nature of Deferred Revenue and Accounts Receivable” discussion in Management’s Discussion and Analysis. Competition The market for our offerings is highly competitive, rapidly evolving and fragmented, and subject to changing technology and frequent introductions of new products and services. Many prospective customers have invested substantial personnel and financial resources to implement and integrate their current enterprise software into their businesses and therefore may be reluctant or unwilling to migrate away from their current solution to an enterprise cloud computing application service. Additionally, third-party developers may be reluctant to build application services on our platform since they have invested in other competing technology platforms. We compete primarily with vendors of packaged business software and companies offering CRM apps. We also compete with internally developed apps. We may encounter competition from enterprise software vendors who may develop toolsets and products that allow customers to build new apps that run on the customers’ current infrastructure or as hosted services. Our current principal competitors include: • On premise offerings from enterprise software application vendors; • Cloud computing application service providers; • • Software companies that provide their product or service free of charge, and only charge a premium for advanced features and functionality; Social media companies; • Traditional platform development environment companies, • Cloud computing development platform companies; and • Internally developed applications (by our potential customers’ information technology (“IT”) departments). We believe that as traditional enterprise software application and platform vendors shift more of their focus to cloud computing, they may become a greater competitive threat. Intellectual Property We rely on a combination of trademark, copyright, trade secret and patent laws in the United States and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brands and maintain programs to protect and grow our rights. We also enter into confidentiality and proprietary rights agreements with our employees, consultants and other third parties and control access to software, services, documentation and other proprietary information. We believe the duration of our patents is adequate relative to the expected lives of our service offerings. Employees As of January 31, 2015, we had more than 16,000 employees. None of our employees in the United States is represented by a labor union, however, for certain foreign subsidiaries, workers’ councils represent our employees. 10 Available Information You can obtain copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other filings with the SEC, and all amendments to these filings, free of charge from our website at http://www.salesforce.com/company/investor/sec-filings/ as soon as reasonably practicable following our filing of any of these reports with the SEC. You can also obtain copies free of charge by contacting our Investor Relations department at our office address listed above. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the Company’s references to the URLs for these websites are intended to be inactive textual references only. ITEM 1A. RISK FACTORS The risks and uncertainties described below are not the only ones facing us. Other events that we do not currently anticipate or that we currently deem immaterial also may affect our results of operations, cash flows and financial condition. Risks Related to Our Business and Industry Defects or disruptions in our services could diminish demand for our services and subject us to substantial liability. Because our services are complex and incorporate a variety of hardware and proprietary and third-party software, our services may have errors or defects that could result in unanticipated downtime for our subscribers and harm to our reputation and our business. Cloud services frequently contain undetected errors when first introduced or when new versions or enhancements are released. We have from time to time found defects in our services and new errors in our services may be detected in the future. In addition, our customers may use our services in unanticipated ways that may cause a disruption in services for other customers attempting to access their data. As we acquire companies, we may encounter difficulty in incorporating the acquired technologies into our services and maintaining the quality standards that are consistent with our brand and reputation. Since our customers use our services for important aspects of their business, any errors, defects, disruptions in service or other performance problems could hurt our reputation and may damage our customers’ businesses. As a result, customers could elect to not renew our services or delay or withhold payment to us. We could also lose future sales or customers may make warranty or other claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or the expense and risk of litigation. Interruptions or delays in services from our third-party data center hosting facilities or cloud computing platform providers could impair the delivery of our services and harm our business. We currently serve our customers from third-party data center hosting facilities and cloud computing platform providers located in the United States and other countries. Any damage to, or failure of, our systems generally could result in interruptions in our services. Interruptions in our services may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our attrition rates and our ability to attract new customers, all of which would reduce our revenue. Our business would also be harmed if our customers and potential customers believe our services are unreliable. As part of our current disaster recovery arrangements, our production environment and all of our customers’ data is currently replicated in near real-time in a facility located in the United States. Companies and products added through acquisition may be served through alternate facilities. We do not control the operation of any of these facilities, and they may be vulnerable to damage or interruption from earthquakes, floods, fires, power loss, 11 telecommunications failures and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Despite precautions taken at these facilities, the occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in our services. Even with disaster recovery arrangements, our services could be interrupted. As we continue to add data centers and add capacity in our existing data centers, we may move or transfer our data and our customers’ data. Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of our services, which may damage our business. If our security measures or those of our third-party data center hosting facilities, cloud computing platform providers, or third-party service partners, are breached, and unauthorized access is obtained to a customer’s data, our data or our IT systems, our services may be perceived as not being secure, customers may curtail or stop using our services, and we may incur significant legal and financial exposure and liabilities. Our services involve the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. While we have security measures in place, they may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise and result in someone obtaining unauthorized access to our IT data, our customers’ data or our data, including our intellectual property and other confidential business information. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers’ data, our data or our IT systems. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, our customers may authorize third-party technology providers to access their customer data, and some of our customers may not have adequate security measures in place to protect their data that is stored on our services. Because we do not control our customers or third-party technology providers, or the processing of such data by third-party technology providers, we cannot ensure the integrity or security of such transmissions or processing. Malicious third parties may also conduct attacks designed to temporarily deny customers access to our services. Any security breach could result in a loss of confidence in the security of our services, damage our reputation, negatively impact our future sales, disrupt our business and lead to legal liability. As we acquire and invest in companies or technologies, we may not realize the expected business or financial benefits and the acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our operating results and the market value of our common stock. As part of our business strategy, we periodically make investments in, or acquisitions of, complementary businesses, joint ventures, services and technologies and intellectual property rights, and we expect that we will continue to make such investments and acquisitions in the future. Acquisitions and investments involve numerous risks, including: • • • • • • potential failure to achieve the expected benefits of the combination or acquisition; difficulties in, and the cost of, integrating operations, technologies, services and personnel; diversion of financial and managerial resources from existing operations; the potential entry into new markets in which we have little or no experience or where competitors may have stronger market positions; potential write-offs of acquired assets or investments, and potential financial and credit risks associated with acquired customers; potential loss of key employees of the acquired company; 12 • • • • • • • • • • • inability to generate sufficient revenue to offset acquisition or investment costs; inability to maintain relationships with customers and partners of the acquired business; difficulty of transitioning the acquired technology onto our existing platforms and maintaining the security standards for such technology consistent with our other services; potential unknown liabilities associated with the acquired businesses; unanticipated expenses related to acquired technology and its integration into our existing technology; negative impact to our results of operations because of the depreciation and amortization of amounts related to acquired intangible assets, fixed assets and deferred compensation, and the loss of acquired deferred revenue and unbilled deferred revenue; delays in customer purchases due to uncertainty related to any acquisition; the need to implement controls, procedures and policies at the acquired company; challenges caused by distance, language and cultural differences; in the case of foreign acquisitions, the challenges associated with integrating operations across different cultures and languages and any currency and regulatory risks associated with specific countries; and the tax effects of any such acquisitions. Any of these risks could harm our business. In addition, if we finance acquisitions by issuing equity or convertible or other debt securities or loans, our existing stockholders may be diluted, or we could face constraints related to the terms of and repayment obligation related to the incurrence of indebtedness that could affect the market price of our common stock. Also, valuations of privately-held companies are inherently complex due to the lack of readily available market data. If we determine that any of our investments in such companies have experienced a decline in fair value, we may be required to record an impairment, which could negatively impact our financial results. Privacy concerns and laws, evolving regulation of cloud computing, cross-border data transfer restrictions and other domestic or foreign regulations may limit the use and adoption of our services and adversely affect our business. Regulation related to the provision of services on the Internet is increasing, as federal, state and foreign governments continue to adopt new laws and regulations addressing data privacy and the collection, processing, storage and use of personal information. In some cases, foreign data privacy laws and regulations, such as the European Union’s Data Protection Directive, and the country-specific regulations that implement that directive, also govern the processing of personal information. Further, laws are increasingly aimed at the use of personal information for marketing purposes, such as the European Union’s e-Privacy Directive, and the country-specific regulations that implement that directive. Such laws and regulations are subject to differing interpretations and may be inconsistent among jurisdictions. These and other requirements could reduce demand for our services or restrict our ability to store and process data or, in some cases, impact our ability to offer our services in certain locations or our customers’ ability to deploy our solutions globally. In addition to government activity, privacy advocacy and other industry groups have established or may establish new self-regulatory standards that may place additional burdens on us. Our customers expect us to meet voluntary certification or other standards established by third parties, such as TRUSTe. If we are unable to maintain these certifications or meet these standards, it could adversely affect our ability to provide our solutions to certain customers and could harm our business. The costs of compliance with and other burdens imposed by laws, regulations and standards may limit the use and adoption of our services and reduce overall demand for it, or lead to significant fines, penalties or liabilities for any noncompliance. 13 Furthermore, concerns regarding data privacy may cause our customers’ customers to resist providing the data necessary to allow our customers to use our services effectively. Even the perception that the privacy of personal information is not satisfactorily protected or does not meet regulatory requirements could inhibit sales of our products or services, and could limit adoption of our cloud-based solutions. Industry-specific regulation and other requirements and standards are evolving and unfavorable industry-specific laws, regulations, interpretive positions or standards could harm our business. Our customers and potential customers conduct business in a variety of industries, including financial services, the public sector, healthcare and telecommunications. Regulators in certain industries have adopted and may in the future adopt regulations or interpretive positions regarding the use of cloud computing and other outsourced services. The costs of compliance with, and other burdens imposed by, industry-specific laws, regulations and interpretive positions may limit our customers’ use and adoption of our services and reduce overall demand for our services. Compliance with these regulations may also require us to devote greater resources to support certain customers, which may increase costs and lengthen sales cycles. For example, some financial services regulators have imposed guidelines for use of cloud computing services that mandate specific controls or require financial services enterprises to obtain regulatory approval prior to outsourcing certain functions. If we are unable to comply with these guidelines or controls, or if our customers are unable to obtain regulatory approval to use our services where required, our business may be harmed. In addition, an inability to satisfy the standards of certain voluntary third-party certification bodies that our customers may expect, such as an attestation of compliance with the Payment Card Industry (PCI) Data Security Standards, may have an adverse impact on our business. Further, there are various statutes and regulations relevant to the direct email marketing and text-messaging industries, including the Telephone Consumer Protection Act (TCPA). The interpretation of many of these statutes and regulations is evolving in the courts and administrative agencies and an inability to comply with them may have an adverse impact on our business. If in the future we are unable to achieve or maintain these industry-specific certifications or other requirements or standards relevant to our customers, it may harm our business. In some cases, industry-specific laws, regulations or interpretive positions may also apply directly to us as a service provider. Any failure or perceived failure by us to comply with such requirements could have an adverse impact on our business. If we experience significant fluctuations in our rate of anticipated growth and fail to balance our expenses with our revenue forecasts, our results could be harmed. Due to the pace of change and innovation in enterprise cloud computing services and the unpredictability of future general economic and financial market conditions and the impact of foreign currency exchange rate fluctuations, we may not be able to accurately forecast our rate of growth. We plan our expense levels and investment on estimates of future revenue and future anticipated rate of growth. We may not be able to adjust our spending appropriately if the addition of new subscriptions or the renewals of existing subscriptions fall short of our expectations. A portion of our expenses may also be fixed in nature for some minimum amount of time, such as with a data center contract or office lease, so it may not be possible to reduce costs in a timely manner or without the payment of fees to exit certain obligations early. As a result, we expect that our revenues, operating results and cash flows may fluctuate significantly on a quarterly basis. Our recent revenue growth rates may not be sustainable and may decline in the future. We believe that historical period-to-period comparisons of our revenues, operating results and cash flows may not be meaningful and should not be relied upon as an indication of future performance. We rely on third-party computer hardware, software and cloud computing platforms that could cause errors in, or failures of, our services and may be difficult to replace. We rely on computer hardware purchased or leased from, software licensed from, and cloud computing platforms provided by, third parties in order to offer our services, including database software and hardware from a variety of vendors. Any errors or defects in third-party hardware, software or cloud computing platforms could 14 result in errors in, or a failure of, our services, which could harm our business. These hardware, software and cloud computing platforms may not continue to be available at reasonable prices, on commercially reasonable terms or at all. Any loss of the right to use any of these hardware, software or cloud computing platforms could significantly increase our expenses and otherwise result in delays in the provisioning of our services until equivalent technology is either developed by us, or, if available, is identified, obtained through purchase or license and integrated into our services. The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed. The market for enterprise applications and platform services is highly competitive, rapidly evolving and fragmented, and subject to changing technology, shifting customer needs and frequent introductions of new products and services. We compete primarily with vendors of packaged CRM software and companies offering on-demand CRM applications. We also compete with internally developed applications and face competition from enterprise software vendors and online service providers who may develop toolsets and products that allow customers to build new applications that run on the customers’ current infrastructure or as hosted services. Our current competitors include: • • • • • • • on premise offerings from enterprise software application vendors; cloud computing application service providers; software companies that provide their product or service free of charge, and only charge a premium for advanced features and functionality; social media companies; traditional platform development environment companies; cloud computing development platform companies; and internally developed applications (by our potential customers’ IT departments). Many of our current and potential competitors enjoy substantial competitive advantages, such as greater name recognition, longer operating histories and larger marketing budgets, as well as substantially greater financial, technical and other resources. In addition, many of our current and potential competitors have established marketing relationships and access to larger customer bases, and have major distribution agreements with consultants, system integrators and resellers. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Furthermore, because of these advantages, even if our services are more effective than the products and services that our competitors offer, potential customers might select competitive products and services in lieu of purchasing our services. For all of these reasons, we may not be able to compete successfully against our current and future competitors. Our quarterly results are likely to fluctuate and our stock price and the value of our common stock could decline substantially. Our quarterly results are likely to fluctuate. For example, our fiscal fourth quarter has historically been our strongest quarter for new business and renewals. The year-over-year compounding effect of this seasonality in billing patterns and overall new business and renewal activity causes the value of invoices that we generate in the fourth quarter to continually increase in proportion to our billings in the other three quarters of our fiscal year. As a result, our fiscal first quarter has become our largest collections and operating cash flow quarter. Additionally, some of the important factors that may cause our revenues, operating results and cash flows to fluctuate from quarter to quarter include: • our ability to retain and increase sales to existing customers, attract new customers and satisfy our customers’ requirements; 15 • • • • • • • • • • • • • • • • • • • • • • • • • • • the attrition rates for our services; the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business; changes in deferred revenue and unbilled deferred revenue balances, which are not reflected in the balance sheet, due to seasonality, the compounding effects of renewals, invoice duration, size, invoice timing and new business linearity between quarters and within a quarter; changes in foreign currency exchange rates; the number of new employees; changes in our pricing policies and terms of contracts, whether initiated by us or as a result of competition; the cost, timing and management effort for the introduction of new features to our services; the costs associated with acquiring new businesses and technologies and the follow-on costs of integration and consolidating the results of acquired businesses; the rate of expansion and productivity of our sales force; the length of the sales cycle for our services; new product and service introductions by our competitors; our success in selling our services to large enterprises; variations in the revenue mix of editions of our services; technical difficulties or interruptions in our services; expenses related to our real estate, our office leases and our data center capacity and expansion; changes in interest rates and our mix of investments, which would impact the return on our investments in cash and marketable securities; conditions, particularly sudden changes, in the financial markets, which have impacted and may continue to impact the value of and liquidity of our investment portfolio; income tax effects; our ability to realize benefits from strategic partnerships, acquisition or investments; expenses related to significant, unusual or discrete events, which are recorded in the period in which the events occur; general economic conditions, which may adversely affect either our customers’ ability or willingness to purchase additional subscriptions or upgrade their services, or delay a prospective customer’s purchasing decision, reduce the value of new subscription contracts, or affect attrition rates; timing of additional investments in our enterprise cloud computing application and platform services and in our consulting services; regulatory compliance costs; the timing of customer payments and payment defaults by customers; extraordinary expenses such as litigation or other dispute-related settlement payments; the impact of new accounting pronouncements; equity issuances, including as consideration in acquisitions or due to the conversion of our outstanding convertible notes at the election of the note holders; 16 • • • the timing of stock awards to employees and the related adverse financial statement impact of having to expense those stock awards on a straight-line basis over their vesting schedules; the timing of commission, bonus, and other compensation payments to employees; and the timing of payroll and other withholding tax expenses, which are triggered by the payment of bonuses and when employees exercise their vested stock awards. Many of these factors are outside of our control, and the occurrence of one or more of them might cause our operating results to vary widely. As such, we believe that historical quarter-to-quarter comparisons of our revenues, operating results, changes in our deferred revenue and unbilled deferred revenue balances and cash flows may not be meaningful and should not be relied upon as an indication of future performance. Additionally, if we fail to meet or exceed the expectations of securities analysts and investors, or if one or more of the securities analysts who cover us adversely change their recommendation regarding our stock, the market price of our common stock could decline. Moreover, our stock price may be based on expectations, estimates and forecasts of our future performance that may be unrealistic or that may not be met. Further, our stock price may fluctuate based on reporting by the financial media, including television, radio and press reports and blogs. Our efforts to expand our services beyond the CRM market and to develop our existing services in order to keep pace with technological developments may not succeed and may reduce our revenue growth rate and harm our business. We derive substantially all of our revenue from subscriptions to our CRM enterprise cloud computing application services, and we expect this will continue for the foreseeable future. The markets for our Analytics Cloud and Community Cloud remain relatively new and it is uncertain whether our efforts will ever result in significant revenue for us. Further, the introduction of new services beyond the CRM market may not be successful, and early stage interest and adoption of such new services may not result in long term success or significant revenue for us. Our efforts to expand our services beyond the CRM market may not succeed and may reduce our revenue growth rate. Additionally, if we are unable to develop enhancements to and new features for our existing or new services that keep pace with rapid technological developments, our business will be harmed. The success of enhancements, new features and services depends on several factors, including the timely completion, introduction and market acceptance of the feature, service or enhancement. Failure in this regard may significantly impair our revenue growth. In addition, because our services are designed to operate on a variety of network hardware and software platforms using a standard browser, we will need to continuously modify and enhance our services to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies. We may not be successful in either developing these modifications and enhancements or in bringing them to market timely. Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies, could increase our research and development or service delivery expenses. Any failure of our services to operate effectively with future network platforms and technologies could reduce the demand for our services, result in customer dissatisfaction and harm our business. Sales to customers outside the United States expose us to risks inherent in international sales. We sell our services throughout the world and are subject to risks and challenges associated with international business. Historically, sales in Europe and Asia Pacific together have represented approximately 30 percent of our total revenues, and we intend to continue to expand our international sales efforts. The risks and challenges associated with sales to customers outside the United States include: • • localization of our services, including translation into foreign languages and associated expenses; laws and business practices favoring local competitors; 17 • • • • • • • • • • • • pressure on the creditworthiness of sovereign nations, particularly in Europe, where we have customers and a balance of our cash, cash equivalents and marketable securities; liquidity issues or political actions by sovereign nations, which could result in decreased values of these balances; foreign currency fluctuations and controls; compliance with multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy, anti-corruption, import/export, antitrust, data protection and industry- specific laws and regulations, including rules related to compliance by our third-party resellers; regional data privacy laws and other regulatory requirements that apply to outsourced service providers and to the transmission of our customers’ data across international borders; treatment of revenue from international sources and changes to tax codes, including being subject to foreign tax laws and being liable for paying withholding income or other taxes in foreign jurisdictions; different pricing environments; difficulties in staffing and managing foreign operations; different or lesser protection of our intellectual property; longer accounts receivable payment cycles and other collection difficulties; natural disasters, acts of war, terrorism, pandemics or security breaches; and regional economic and political conditions. Any of these factors could negatively impact our business and results of operations. Additionally, our international subscription fees are paid either in U.S. dollars or local currency. As a result, fluctuations in the value of the U.S. dollar and foreign currencies may make our services more expensive for international customers, which could harm our business. Because we recognize revenue from subscriptions for our services over the term of the subscription, downturns or upturns in new business may not be immediately reflected in our operating results. We generally recognize revenue from customers ratably over the terms of their subscription agreements, which are typically 12 to 36 months. As a result, most of the revenue we report in each quarter is the result of subscription agreements entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any one quarter may not be reflected in our revenue results for that quarter. Any such decline, however, will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our services, and potential changes in our attrition rate, may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term. If our customers do not renew their subscriptions for our services or reduce the number of paying subscriptions at the time of renewal, our revenue will decline and our business will suffer. If we cannot accurately predict subscription renewals or upgrade rates, we may not meet our revenue targets which may adversely affect the market price of our common stock. Our customers have no obligation to renew their subscriptions for our services after the expiration of their initial subscription period, which is typically 12 to 36 months, and in the normal course of business, some customers have elected not to renew. In addition, our customers may renew for fewer subscriptions, renew for shorter contract lengths, or switch to lower cost offerings of our services. We cannot accurately predict attrition rates given our varied customer base of enterprise and small and medium size business customers and the number 18 of multi-year subscription contracts. Our attrition rates may increase or fluctuate as a result of a number of factors, including customer dissatisfaction with our services, customers’ spending levels, decreases in the number of users at our customers, pricing changes and deteriorating general economic conditions. Our future success also depends in part on our ability to sell additional features and services, more subscriptions or enhanced editions of our services to our current customers. This may also require increasingly sophisticated and costly sales efforts that are targeted at senior management. Similarly, the rate at which our customers purchase new or enhanced services depends on a number of factors, including general economic conditions and that our customers do not react negatively to any price changes related to these additional features and services. If our efforts to upsell to our customers are not successful our business may suffer. If the market for our technology delivery model and enterprise cloud computing services develops more slowly than we expect, our business could be harmed. Our success depends on the willingness of third-party developers to build applications that are complementary to our services. Without the development of these applications, both current and potential customers may not find our services sufficiently attractive. In addition, for those customers who authorize a third-party technology partner access to their data, we do not provide any warranty related to the functionality, security and integrity of the data transmission or processing. Despite contract provisions to protect us, customers may look to us to support and provide warranties for the third-party applications, which may expose us to potential claims, liabilities and obligations for applications we did not develop or sell, all of which could harm our business. Supporting our existing and growing customer base could strain our personnel resources and infrastructure, and if we are unable to scale our operations and increase productivity, we may not be able to successfully implement our business plan. We continue to experience significant growth in our customer base and personnel, which has placed a strain on our management, administrative, operational and financial infrastructure. We anticipate that additional investments in our internal infrastructure, data center capacity, research, customer support and development, and real estate spending will be required to scale our operations and increase productivity, to address the needs of our customers, to further develop and enhance our services, to expand into new geographic areas, and to scale with our overall growth. If we fail to successfully scale our operations and increase productivity, we will be unable to execute our business plan. We regularly upgrade or replace our various software systems. If the implementations of these new applications are delayed, or if we encounter unforeseen problems with our new systems or in migrating away from our existing applications and systems, our operations and our ability to manage our business could be negatively impacted. Our success will depend in part upon the ability of our senior management to manage our projected growth effectively. To do so, we must continue to increase the productivity of our existing employees and to hire, train and manage new employees as needed. To manage the expected domestic and international growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls, our reporting systems and procedures, and our utilization of real estate. The additional investments we are making will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in the short term. As more of our sales efforts are targeted at larger enterprise customers, our sales cycle may become more time-consuming and expensive, we may encounter pricing pressure and implementation and customization challenges, and we may have to delay revenue recognition for some complex transactions, all of which could harm our business and operating results. As we target more of our sales efforts at larger enterprise customers, we may face greater costs, longer sales cycles, greater competition and less predictability in completing some of our sales. In this market segment, the 19 customer’s decision to use our services may be an enterprise-wide decision and, if so, these types of sales would require us to provide greater levels of education regarding the use and benefits of our services, as well as education regarding privacy and data protection laws and regulations to prospective customers with international operations. In addition, larger customers may demand more customization, integration services and features. As a result of these factors, these sales opportunities may require us to devote greater sales support and professional services resources to individual customers, driving up costs and time required to complete sales and diverting our own sales and professional services resources to a smaller number of larger transactions, while potentially requiring us to delay revenue recognition on some of these transactions until the technical or implementation requirements have been met. Pricing and packaging strategies for enterprise and other customers for subscriptions to our existing and future service offerings may not be widely accepted by other new or existing customers. Our adoption of such new pricing and packaging strategies may harm our business. For large enterprise customers, professional services may also be performed by a third party or a combination of our own staff and a third party. Our strategy is to work with third parties to increase the breadth of capability and depth of capacity for delivery of these services to our customers. If a customer is not satisfied with the quality of work performed by us or a third party or with the type of services or solutions delivered, then we could incur additional costs to address the situation, the profitability of that work might be impaired, and the customer’s dissatisfaction with our services could damage our ability to obtain additional work from that customer. In addition, negative publicity related to our customer relationships, regardless of its accuracy, may further damage our business by affecting our ability to compete for new business with current and prospective customers. We have been and may in the future be sued by third parties for various claims including alleged infringement of proprietary rights. We are involved in various legal matters arising from the normal course of business activities. These may include claims, suits, government investigations and other proceedings involving alleged infringement of third- party patents and other intellectual property rights, and commercial, corporate and securities, labor and employment, wage and hour, and other matters. The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. We have received in the past and may receive in the future communications from third parties, including practicing entities and non-practicing entities, claiming that we have infringed their intellectual property rights. In addition, we have been, and may in the future be, sued by third parties for alleged infringement of their claimed proprietary rights. For example, during fiscal 2015, we received a communication from a large technology company alleging that we infringed certain of its patents. While we continue to analyze this claim and no litigation has been filed to date, there can be no assurance that this claim will not lead to litigation in the future. Our technologies may be subject to injunction if they are found to infringe the rights of a third party or we may be required to pay damages, or both. Further, many of our subscription agreements require us to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us of an adverse ruling on such a claim. The outcome of any claims or litigation, regardless of the merits, is inherently uncertain. Any claims and lawsuits, and the disposition of such claims and lawsuits, whether through settlement or licensing discussions, or litigation, could be time-consuming and expensive to resolve, divert management attention from executing our business plan, result in efforts to enjoin our activities, lead to attempts on the part of other parties to pursue similar claims and, in the case of intellectual property claims, require us to change our technology, change our business practices, pay monetary damages or enter into short- or long-term royalty or licensing agreements. 20 Any adverse determination related to intellectual property claims or other litigation could prevent us from offering our services to others, could be material to our financial condition or cash flows, or both, or could otherwise adversely affect our operating results. In addition, depending on the nature and timing of any such dispute, an unfavorable resolution of a legal matter could materially affect our future results of operations or cash flows or both of a particular quarter. In addition, our exposure to risks associated with various claims, including the use of intellectual property, may be increased as a result of acquisitions of other companies. For example, we may have a lower level of visibility into the development process with respect to intellectual property or the care taken to safeguard against infringement risks with respect to the acquired company or technology. In addition, third parties may make infringement and similar or related claims after we have acquired technology that had not been asserted prior to our acquisition. Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand. If we fail to protect our intellectual property rights adequately, our competitors may gain access to our technology, and our business may be harmed. In addition, defending our intellectual property rights may entail significant expense. Any of our patents, trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. While we have some U.S. patents and many U.S. and international patent applications pending, we may be unable to obtain patent protection for the technology covered in our patent applications or the patent protection may not be obtained quickly enough to meet our business needs. In addition, our existing patents and any patents issued in the future may not provide us with competitive advantages, or may be successfully challenged by third parties. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain, and we also may face proposals to change the scope of protection for some intellectual property rights in the U.S. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our services are available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the U.S., and mechanisms for enforcement of intellectual property rights may be inadequate. Also, our involvement in standard setting activity or the need to obtain licenses from others may require us to license our intellectual property. Accordingly, despite our efforts, we may be unable to prevent third parties from using our intellectual property. We may be required to spend significant resources to monitor and protect our intellectual property rights and we may conclude that in at least some instances the benefits of protecting our intellectual property rights may be outweighed by the expense. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel. Our continued success depends on our ability to maintain and enhance our brands. We believe that the brand identities we have developed have significantly contributed to the success of our business. Maintaining and enhancing the Salesforce brand and our other brands are critical to expanding our base of customers, partners and employees. Our brand strength will depend largely on our ability to remain a technology leader and continue to provide high-quality innovative products, services, and features. In order to maintain and enhance our brands, we may be required to make substantial investments that may later prove to be unsuccessful. If we fail to maintain and enhance our brands, or if we incur excessive expenses in our efforts to do so, our business, operating results and financial condition may be materially and adversely affected. We may lose key members of our management team or development and operations personnel, and may be unable to attract and retain employees we need to support our operations and growth. Our success depends substantially upon the continued services of our executive officers and other key members of management, particularly our Chief Executive Officer. From time to time, there may be changes in 21 our executive management team resulting from the hiring or departure of executives. Such changes in our executive management team may be disruptive to our business. We are also substantially dependent on the continued service of our existing development and operations personnel because of the complexity of our services and technologies. We do not have employment agreements with any of our executive officers, key management, development or operations personnel and they could terminate their employment with us at any time. The loss of one or more of our key employees or groups could seriously harm our business. In the technology industry, there is substantial and continuous competition for engineers with high levels of experience in designing, developing and managing software and Internet-related services, as well as competition for sales executives and operations personnel. We may not be successful in attracting and retaining qualified personnel. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed. Any failure in our delivery of high-quality technical support services may adversely affect our relationships with our customers and our financial results. Our customers depend on our support organization to resolve technical issues relating to our applications. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for support services. Increased customer demand for these services, without corresponding revenues, could increase costs and adversely affect our operating results. In addition, our sales process is highly dependent on our applications and business reputation and on positive recommendations from our existing customers. Any failure to maintain high-quality technical support, or a market perception that we do not maintain high-quality support, could adversely affect our reputation, our ability to sell our enterprise cloud computing solutions to existing and prospective customers, and our business, operating results and financial position. Periodic changes to our sales organization can be disruptive and may reduce our rate of growth. We periodically change and make adjustments to our sales organization in response to market opportunities, competitive threats, management changes, product introductions or enhancements, acquisitions, sales performance, increases in sales headcount, cost levels and other internal and external considerations. Any such future sales organization changes may result in a temporary reduction of productivity, which could negatively affect our rate of growth. In addition, any significant change to the way we structure our compensation of our sales organization may be disruptive and may affect our revenue growth. Unanticipated changes in our effective tax rate and additional tax liabilities may impact our operating results We are subject to income taxes in the United States and various jurisdictions outside of the United States. Our effective tax rate could fluctuate due to changes in the mix of earnings and losses in countries with differing statutory tax rates. Our tax expense could also be impacted by changes in non-deductible expenses, changes in excess tax benefits related to exercises and vesting of stock-based expense, changes in the valuation of deferred tax assets and liabilities and our ability to utilize them and the applicability of withholding taxes. We are subject to tax examinations in multiple jurisdictions. While we regularly evaluate new information that may change our judgment resulting in recognition, derecognition or change in measurement of a tax position taken, there can be no assurance that the final determination of any examinations will not have an adverse effect on our operating results and financial position. Our tax provision could also be impacted by changes in federal, state or international tax laws including fundamental tax law changes applicable to corporate multinationals currently being considered by many countries including the United States as well as several European countries. 22 Additionally, we may be subject to additional tax liabilities due to changes in non-income taxes resulting from changes in federal, state or international tax laws, changes in taxing jurisdictions’ administrative interpretations, decisions, policies, and positions, results of tax examinations, settlements or judicial decisions, changes in accounting principles, changes to the business operations, including acquisitions, as well as the evaluation of new information that results in a change to a tax position taken in a prior period. Our debt service obligations and operating lease commitments may adversely affect our financial condition and cash flows from operations. We have a high level of debt, including our 0.25% Senior Notes due April 1, 2018, borrowings under our revolving credit facility and capital lease arrangements. Additionally, we have significant contractual commitments in operating lease arrangements, which are not reflected on our consolidated balance sheet. In addition, we have a financing obligation for a leased facility of which we are deemed the owner for accounting purposes. Our maintenance of this indebtedness could: • • impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes; cause us to dedicate a substantial portion of our cash flows from operations towards debt service obligations and principal repayments; • make us more vulnerable to downturns in our business, our industry or the economy in general; and • due to limitations within the revolving credit facility covenants, restrict our ability to incur additional indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends or make distributions, repurchase stock and enter into restrictive agreements, as defined in the credit agreement. Our ability to meet our expenses and debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors. We will not be able to control many of these factors, such as economic conditions and governmental regulations. Further, our operations may not generate sufficient cash to enable us to service our debt. If we fail to make a payment on our debt, we could be in default on such debt. If we are at any time unable to generate sufficient cash flows from operations to service our indebtedness when payment is due, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing. There can be no assurance that we would be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us. A failure to comply with the covenants and other provisions of our outstanding debt could result in events of default under such instruments, which could permit acceleration of all of our notes and borrowings under our revolving credit facility. Any required repayment of our notes or revolving credit facility as a result of a fundamental change or other acceleration would lower our current cash on hand such that we would not have those funds available for use in our business. Weakened global economic conditions may adversely affect our industry, business and results of operations. Our overall performance depends in part on worldwide economic conditions. The United States and other key international economies have experienced cyclical downturns from time to time in which economic activity was impacted by falling demand for a variety of goods and services, restricted credit, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies and overall uncertainty with respect to the economy. These conditions affect the rate of information technology spending and could adversely affect our customers’ ability or willingness to purchase our enterprise cloud computing services, delay prospective customers’ purchasing decisions, reduce the value or duration of their subscription contracts, or affect attrition rates, all of which could adversely affect our operating results. 23 Natural disasters and other events beyond our control could materially adversely affect us. Natural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce and the global economy, and thus could have a strong negative effect on us. Our business operations are subject to interruption by natural disasters, fire, power shortages, pandemics and other events beyond our control. Although we maintain crisis management and disaster response plans, such events could make it difficult or impossible for us to deliver our services to our customers, and could decrease demand for our services. The majority of our research and development activities, corporate headquarters, information technology systems, and other critical business operations, are located near major seismic faults in the San Francisco Bay Area. Because we do not carry earthquake insurance for direct quake-related losses, with the exception of the building that we own in San Francisco, and significant recovery time could be required to resume operations, our financial condition and operating results could be materially adversely affected in the event of a major earthquake or catastrophic event. Risks Relating to Our Convertible Senior Notes and Our Common Stock The market price of our common stock is likely to be volatile and could subject us to litigation. The trading prices of the securities of technology companies have been highly volatile. Accordingly, the market price of our notes and common stock has been and is likely to continue to be subject to wide fluctuations. Factors affecting the market price of our notes and common stock include: • • • • • • • • • • • • variations in our operating results, earnings per share, cash flows from operating activities, deferred revenue and other financial metrics and non-financial metrics, and how those results compare to analyst expectations; forward-looking guidance to industry and financial analysts related to future revenue and earnings per share; changes in the estimates of our operating results or changes in recommendations by securities analysts that elect to follow our common stock; announcements of technological innovations, new services or service enhancements, strategic alliances or significant agreements by us or by our competitors; announcements by us or by our competitors of mergers or other strategic acquisitions, or rumors of such transactions involving us or our competitors; announcements of customer additions and customer cancellations or delays in customer purchases; recruitment or departure of key personnel; disruptions in our service due to computer hardware, software, network or data center problems; the economy as a whole, market conditions in our industry and the industries of our customers; trading activity by a limited number of stockholders who together beneficially own a significant portion of our outstanding common stock; the issuance of shares of common stock by us, whether in connection with an acquisition, a capital raising transaction or upon conversion of some or all of our outstanding convertible senior notes; and issuance of debt or other convertible securities. In addition, if the market for technology stocks or the stock market in general experiences uneven investor confidence, the market price of our notes and common stock could decline for reasons unrelated to our business, operating results or financial condition. The market price of our notes and common stock might also decline in reaction to events that affect other companies within, or outside, our industry even if these events do not directly 24 affect us. Some companies that have experienced volatility in the trading price of their stock have been the subject of securities class action litigation. If we are the subject of such litigation, it could result in substantial costs and a diversion of management’s attention and resources. We may issue additional shares of our common stock or instruments convertible into shares of our common stock, including in connection with the conversion of the notes, and thereby materially and adversely affect the market price of our common stock and the trading price of the notes. We are not restricted from issuing additional shares of our common stock or other instruments convertible into, or exchangeable or exercisable for, shares of our common stock during the life of the notes. If we issue additional shares of our common stock or instruments convertible into shares of our common stock, it may materially and adversely affect the market price of our common stock and, in turn, the trading price of the notes. In addition, the conversion of some or all of the notes may dilute the ownership interests of existing holders of our common stock, and any sales in the public market of any shares of our common stock issuable upon such conversion of the notes could adversely affect the prevailing market price of our common stock. In addition, the potential conversion of the notes could depress the market price of our common stock. We may not have the ability to raise the funds necessary to pay the amount of cash due upon conversion of the notes or the fundamental change purchase price due when a holder submits its notes for purchase upon the occurrence of a fundamental change. Upon the occurrence of a fundamental change, holders of the notes may require us to purchase, for cash, all or a portion of their notes. In addition, if a holder converts its notes, we will generally pay such holder an amount of cash before delivering to such holder any shares of our common stock. There can be no assurance that we will have sufficient financial resources, or will be able to arrange financing, to pay the fundamental change purchase price if holders submit their notes for purchase by us upon the occurrence of a fundamental change or to pay the amount of cash due if holders surrender their notes for conversion. In addition, agreements governing any future debt may restrict our ability to make each of the required cash payments even if we have sufficient funds to make them. Furthermore, our ability to purchase the notes or to pay cash upon the conversion of the notes may be limited by law or regulatory authority. If we fail to purchase the notes, to pay interest due on, or to pay the amount of cash due upon conversion, we will be in default under the indenture, which in turn may result in the acceleration of other indebtedness we may then have. If the repayment of the other indebtedness were to be accelerated, we may not have sufficient funds to repay that indebtedness and to purchase the notes or to pay the amount of cash due upon conversion. Our inability to pay for the notes that are tendered for purchase or upon conversion could result in note holders receiving substantially less than the principal amount of the notes, which could harm our reputation, financing opportunities and our business. The fundamental change provisions may delay or prevent an otherwise beneficial takeover attempt of us. The fundamental change purchase rights will allow holders of the notes to require us to purchase all or a portion of their notes upon the occurrence of a fundamental change. The provisions requiring an increase to the conversion rate for conversions in connection with a make-whole fundamental change may, in certain circumstances, delay or prevent a takeover of us and the removal of incumbent management that might otherwise be beneficial to investors. The convertible note hedges and warrant transactions may affect the trading price of the notes and the market price of our common stock. We entered into privately negotiated convertible note hedge transactions with certain hedge counterparties concurrently with the pricing of the notes. We also entered into privately negotiated warrant transactions with the hedge counterparties. Taken together, the convertible note hedge transactions and the warrant transactions are expected, but not guaranteed, to reduce the potential dilution with respect to our common stock upon conversion of the notes. If, however, the price of our common stock, as measured under the terms of the warrant 25 transactions, exceeds the exercise price of the warrant transactions, the warrant transactions will have a dilutive effect on our earnings per share to the extent that the price of our common stock as measured under the warrant transactions exceeds the strike price of the warrant transactions. The hedge counterparties and their respective affiliates periodically modify their hedge positions from time to time following the pricing of the notes (and are particularly likely to do so during any observation period relating to a conversion of the notes) by entering into or unwinding various over-the-counter derivative transactions with respect to our common stock, or by purchasing or selling shares of our common stock or the notes in privately negotiated transactions or open market transactions. The effect, if any, of these transactions and activities on the market price of our common stock or the trading price of the notes will depend in part on market conditions and cannot be ascertained at this time. Any of these activities, however, could adversely affect the market price of our common stock and the trading price of the notes. We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the price of the notes or our common stock. In addition, we do not make any representation that the counterparties to those transactions will engage in these transactions or activities or that these transactions and activities, once commenced, will not be discontinued without notice; the counterparties or their affiliates may choose to engage in, or discontinue engaging in, any of these transactions or activities with or without notice at any time, and their decisions will be in their sole discretion and not within our control. We are subject to counterparty risk with respect to the convertible note hedge transactions. The hedge counterparties are financial institutions or affiliates of financial institutions, and we will be subject to the risk that these hedge counterparties may default under the convertible note hedge transactions. Our exposure to the credit risk of the hedge counterparties will not be secured by any collateral. If one or more of the hedge counterparties to one or more of our convertible note hedge transactions becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under those transactions. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in our stock price and the volatility of our stock. In addition, upon a default by one of the hedge counterparties, we may suffer adverse tax consequences and dilution with respect to our common stock. We can provide no assurances as to the financial stability or viability of any of the hedge counterparties. Provisions in our amended and restated certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the market price of our common stock. Our amended and restated certificate of incorporation and bylaws contain provisions that could depress the market price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions among other things: • • • • • permit the board of directors to establish the number of directors; provide that directors may only be removed “for cause” and only with the approval of holders of 66 2/3 percent of our outstanding capital stock; require super-majority voting to amend some provisions in our amended and restated certificate of incorporation and bylaws; authorize the issuance of “blank check” preferred stock that our board could use to implement a stockholder rights plan (also known as a “poison pill”); prohibit the ability of our stockholders to call special meetings of stockholders; 26 • • • prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at annual stockholder meetings. In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company. Section 203 imposes certain restrictions on merger, business combinations and other transactions between us and holders of 15 percent or more of our common stock. In addition, the fundamental change purchase rights applicable to the notes, which will allow note holders to require us to purchase all or a portion of their notes upon the occurrence of a fundamental change, and the provisions requiring an increase to the conversion rate for conversions in connection with a make-whole fundamental change may in certain circumstances delay or prevent a takeover of us and the removal of incumbent management that might otherwise be beneficial to investors. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES As of January 31, 2015, our executive offices and principal offices for domestic marketing, sales, professional services and development consist of over 1.1 million square feet of leased space in the San Francisco Bay Area. We also lease space in various locations throughout the United States for local sales and professional services personnel. Our foreign subsidiaries lease office space for their operations including local sales and professional services personnel. In addition, we have also entered into the following commitments for additional office space in the San Francisco Bay Area. In December 2012, we entered into a lease agreement for approximately 445,000 rentable square feet of office space at 350 Mission Street in San Francisco, California. The space rented is for the total office space available in the building, which is in the process of being constructed. As a result of our involvement during the construction period, we are considered for accounting purposes to be the owner of the construction project. We do not currently occupy this property and we have excluded the square footage from the total leased space in the San Francisco Bay Area stated above. In April 2014, we entered into an office lease agreement to lease approximately 714,000 rentable square feet of an office building located in San Francisco, California that is under construction. The lease payments associated with the lease will be approximately $560.0 million over the 15.5 year term of the lease, beginning in our first quarter of fiscal 2018. We do not currently occupy this property and we have excluded the square footage from the total leased space in the San Francisco Bay Area stated above. In November 2014, the Company entered into an agreement to purchase real property of approximately 817,000 rentable square feet known as 50 Fremont Street, San Francisco, California. We currently occupy approximately 500,000 square feet of the total available space in 50 Fremont. The purchase closed in February 2015 (see Note 14 “Subsequent Event” in the Notes to the Consolidated Financial Statements for details). We believe that our existing facilities and offices are adequate to meet our current requirements. If we require additional space, we believe that we will be able to obtain such space on acceptable, commercially reasonable terms. 27 ITEM 3. LEGAL PROCEEDINGS In the ordinary course of business, we are or may be involved in various legal proceedings and claims related to alleged infringement of third-party patents and other intellectual property rights, commercial, corporate and securities, labor and employment, class actions, wage and hour, and other claims. We have been, and may in the future be, put on notice or sued by third parties for alleged infringement of their proprietary rights, including patent infringement. During fiscal 2015, the Company received a communication from a large technology company alleging that the Company infringed certain of its patents. The Company continues to analyze this claim. No litigation has been filed to date. There can be no assurance that this claim will not lead to litigation in the future. The resolution of this claim is not expected to have a material adverse effect on the Company’s financial condition, but it could be material to the net income or cash flows or both of a particular quarter. We evaluate all claims and lawsuits with respect to their potential merits, our potential defenses and counterclaims, settlement or litigation potential and the expected effect on us. Our technologies may be subject to injunction if they are found to infringe the rights of a third party. In addition, many of our subscription agreements require us to indemnify our customers for third-party intellectual property infringement claims, which could increase the cost to us of an adverse ruling on such a claim. The outcome of any claims or litigation, regardless of the merits, is inherently uncertain. Any claims and other lawsuits, and the disposition of such claims and lawsuits, whether through settlement or litigation, could be time-consuming and expensive to resolve, divert our attention from executing our business plan, result in efforts to enjoin our activities, lead to attempts by third parties to seek similar claims and, in the case of intellectual property claims, require us to change our technology, change our business practices, pay monetary damages or enter into short- or long-term royalty or licensing agreements. In general, the resolution of a legal matter could prevent us from offering our service to others, could be material to our financial condition or cash flows, or both, or could otherwise adversely affect our operating results. We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. In our opinion, resolution of all current matters is not expected to have a material adverse impact on our consolidated results of operations, cash flows or financial position. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect our future results of operations or cash flows, or both, of a particular quarter. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 28 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The following sets forth certain information regarding our current executive officers (in alphabetical order): Name Age Position Joe Allanson . . . . . . . . . . . . . . . . . . . Marc Benioff . . . . . . . . . . . . . . . . . . . Keith Block . . . . . . . . . . . . . . . . . . . . Alexandre Dayon . . . . . . . . . . . . . . . Parker Harris . . . . . . . . . . . . . . . . . . . Mark Hawkins . . . . . . . . . . . . . . . . . . Maria Martinez . . . . . . . . . . . . . . . . . Burke Norton . . . . . . . . . . . . . . . . . . . President and Vice Chairman President, Products 51 Chief Accounting Officer and Corporate Controller 50 Chairman of the Board of Directors and Chief Executive Officer 53 46 48 Co-Founder 55 Chief Financial Officer 57 48 Chief Legal Officer President, Sales and Customer Success Joe Allanson has served as our Chief Accounting Officer and Corporate Controller since February 2014 and our Senior Vice President, Chief Accountant and Corporate Controller since July 2011. Prior to that, Mr. Allanson served as our Senior Vice President, Corporate Controller since July 2007, and served in various other management positions in finance since joining Salesforce in 2003. Prior to Salesforce, Mr. Allanson spent four years at Autodesk, Inc. and three years at Chiron Corporation in key corporate finance positions. Previously, he worked at Arthur Andersen LLP for 11 years in its Audit and Business Advisory Services group. Mr. Allanson graduated from Santa Clara University with a B.S. in Accounting. Marc Benioff co-founded Salesforce in February 1999 and has served as our Chairman of the Board of Directors since inception. He has served as our Chief Executive Officer since 2001. From 1986 to 1999, Mr. Benioff was employed at Oracle Corporation, where he held a number of positions in sales, marketing and product development, lastly as a Senior Vice President. Mr. Benioff also serves as Chairman of the Board of Directors of The Salesforce.com Foundation. In the past five years, Mr. Benioff served as a member of the Board of Directors of Cisco Systems, Inc. Mr. Benioff received a B.S. in Business Administration from the University of Southern California, where he is also on the Board of Trustees. Keith Block has served as our President, Vice Chairman and as a Director since joining Salesforce in June 2013. Prior to that, Mr. Block was employed at Oracle Corporation from 1986 to June 2012 where he held a number of positions, most recently Executive Vice President, North America. Mr. Block serves on the Board of Trustees at the Concord Museum, the Board of Trustees at Carnegie-Mellon University Heinz Graduate School and the President’s Advisory Council for Carnegie-Mellon University. Mr. Block received both a B.S. in Information Systems and an M.S. in Management & Policy Analysis from Carnegie-Mellon University. Alexandre Dayon has served as our President, Products since March 2014. Prior to that, he was President, Applications and Platform from December 2012 to March 2014, Executive Vice President, Applications from September 2011 to December 2012, Executive Vice President, Product Management from February 2010 to December 2012, and Senior Vice President, Product Management from September 2008 to January 2010. Mr. Dayon joined Salesforce through the acquisition of InStranet, a leading knowledge-base company, where he was a founder and served as CEO. Prior to InStranet, Mr. Dayon was a founding member of Business Objects SA where he led the product group for more than 10 years. Mr. Dayon, who holds several patents, is focused on creating business value out of technology disruption. Mr. Dayon holds a master’s degree in electrical engineering from Ecole Supérieure d’Electricité (SUPELEC) in France. Parker Harris co-founded Salesforce in February 1999 and has served in senior technical positions since inception. From December 2004 to February 2013, Mr. Harris served as our Executive Vice President, Technology. Prior to Saleforce, Mr. Harris was a Vice President at Left Coast Software, a Java consulting firm he co-founded, from October 1996 to February 1999. Mr. Harris received a B.A. from Middlebury College. Mark Hawkins has served as our Chief Financial Officer and Executive Vice President since August 2014. He served as Executive Vice President and Chief Financial Officer and principal financial officer for Autodesk, 29 Inc., a design software and services company, from April 2009 to July 2014. From April 2006 to April 2009, Mr. Hawkins served as Senior Vice President, Finance and Information Technology, and Chief Financial Officer of Logitech International S.A. Previously, Mr. Hawkins held various finance and business-management roles with Dell Inc. and Hewlett-Packard Company. Mr. Hawkins served on the Board of Directors of BMC Software, Inc. from May 2010 through September 2013, at which time BMC was taken private. Mr. Hawkins holds a B.A. in Operations Management from Michigan State University and an M.B.A. in Finance from the University of Colorado. He also completed the Advanced Management Program at Harvard Business School. Maria Martinez has served as our President, Sales and Customer Success since February 2013. Prior to that, Ms. Martinez served as our Executive Vice President, Chief Growth Officer from February 2012 to February 2013 and our Executive Vice President, Customers for Life from February 2010 to February 2012. Prior to Salesforce, Ms. Martinez was at Microsoft Corporation and served as its Corporate Vice President of Worldwide Services. In addition to Microsoft, she was president and CEO of Embrace Networks, and also held senior leadership roles at Motorola, Inc. and AT&T Inc. / Bell Laboratories. Ms. Martinez received a B.S. in Electrical Engineering from the University of Puerto Rico and an M.S. in Computer Engineering from the Ohio State University. Burke Norton has served as our Chief Legal Officer since October 2011. Prior to Salesforce, Mr. Norton was Executive Vice President, General Counsel and Secretary and a member of the office of the chairman at Expedia, Inc. from October 2006 to October 2011. Previously, Mr. Norton was a partner at the law firm of Wilson Sonsini Goodrich & Rosati P.C., where he practiced corporate and securities law, representing clients in the enterprise software, telecommunications, semiconductor, life sciences, entertainment and ecommerce industries. Mr. Norton holds a J.D. from the University of California, Berkeley School of Law. 30 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information for Common Stock Our common stock is traded on the New York Stock Exchange under the symbol “CRM.” The following table sets forth for the indicated periods the high and low sales prices of our common stock as reported by the New York Stock Exchange. Fiscal year ending January 31, 2015 First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal year ending January 31, 2014 First quarter (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . High Low $67.00 $59.49 $64.60 $64.74 $46.99 $47.58 $56.24 $61.49 $48.18 $49.18 $51.04 $53.44 $39.75 $36.09 $42.11 $50.12 (1) On March 20, 2013, our certificate of incorporation was amended to increase the number of authorized shares of common stock from 400.0 million to 1.6 billion in order to provide for a four-for-one stock split of the common stock effected in the form of a stock dividend. The record date for the stock split was April 3, 2013, and the additional shares were distributed on April 17, 2013. Each stockholder of record on the close of business on the record date received three additional shares of common stock for each share held. All per share data presented above reflects the impact of the stock split. Dividend Policy We have never paid any cash dividends on our common stock. Our board of directors currently intends to retain any future earnings to support operations and to finance the growth and development of our business and does not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board and if the board chooses to declare a cash dividend it will be in compliance with the consolidated leverage ratio covenant associated with our revolving credit facility. Stockholders As of January 31, 2015 there were 202 registered stockholders of record of our common stock, including The Depository Trust Company, which holds shares of Salesforce common stock on behalf of an indeterminate number of beneficial owners. Securities Authorized for Issuance under Equity Compensation Plans The information concerning our equity compensation plans is incorporated by reference herein to the section of the Proxy Statement entitled “Equity Compensation Plan Information.” Outstanding Convertible Senior Notes and Warrants In March 2013, we issued at par value $1.15 billion of 0.25% convertible senior notes (the “0.25% Senior Notes”) due April 1, 2018 and we issued 17.3 million warrants to purchase our common stock. See Note 5 “Debt” in the Notes to the Consolidated Financial Statements for more information. 31 Stock Performance Graph The following shall not be deemed incorporated by reference into any of our other filings under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended. The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the Standard & Poor’s 500 Index and the Nasdaq Computer & Data Processing Index for each of the last five fiscal years ended January 31, 2015, assuming an initial investment of $100. Data for the Standard & Poor’s 500 Index and the Nasdaq Computer & Data Processing Index assume reinvestment of dividends. The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock. Comparison of Cumulative Total Return of salesforce.com, inc. 400 300 200 100 - S R A L L O D 1/31/10 1/31/11 1/31/12 1/31/13 1/31/14 1/31/15 salesforce.com S&P 500 Index Nasdaq Computer salesforce.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . S&P 500 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . Nasdaq Computer & Data Processing Index . . . . . 100.00 100.00 100.00 203.20 119.80 132.30 183.80 122.20 140.30 270.80 139.50 146.70 380.90 166.00 187.90 355.30 185.80 222.30 1/31/2010 1/31/2011 1/31/2012 1/31/2013 1/31/2014 1/31/2015 Recent Sales of Unregistered Securities As previously disclosed on a Form 8-K filed on December 19, 2014, on December 17, 2014 the Company entered into agreements with each of Goldman, Sachs & Co., Deutsche Bank AG and Bank of America, N.A. (collectively, the “Counterparties”) to amend and settle early those certain warrant transactions that the Company entered into with the Counterparties on January 12, 2010 and January 15, 2010, whereby the Company sold to the Counterparties warrants to acquire, in the aggregate, up to approximately 26.9 million shares of the Company’s common stock at a strike price of $29.88 per share, subject to anti-dilution adjustments. The final settlement transaction with the Counterparties closed on January 30, 2015 and, in the aggregate, the Company issued 13.3 million shares to the Counterparties. This issuance of shares was made in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended. 32 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with our audited consolidated financial statements and related notes thereto and with Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere in this Form 10-K. The consolidated statement of operations data for fiscal 2015, 2014 and 2013, and the selected consolidated balance sheet data as of January 31, 2015 and 2014 are derived from, and are qualified by reference to, the audited consolidated financial statements and are included in this Form 10-K. The consolidated statement of operations data for fiscal 2012 and 2011 and the consolidated balance sheet data as of January 31, 2013, 2012 and 2011 are derived from audited consolidated financial statements which are not included in this Form 10-K. (in thousands, except per share data) 2015 2014 2013 2012 2011 Fiscal Year Ended January 31, Consolidated Statement of Operations Revenues: Subscription and support . . . . . . . . . . . . . . $5,013,764 $3,824,542 $2,868,808 $2,126,234 $1,551,145 105,994 Professional services and other . . . . . . . . . 1,657,139 Total revenues . . . . . . . . . . . . . . . . . . 140,305 2,266,539 181,387 3,050,195 246,461 4,071,003 359,822 5,373,586 Cost of revenues (1)(2): Subscription and support . . . . . . . . . . . . . . Professional services and other . . . . . . . . . Total cost of revenues . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses (1)(2): Research and development . . . . . . . . . . . . Marketing and sales . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . Total operating expenses . . . . . . . . . . Income (loss) from operations . . . . . . . . . . . . . Investment income . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sales of land and building improvements . . . . . . . . . . . . . . . . . . . . . . . . Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before benefit from (provision for) income taxes and noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefit from (provision for) income taxes . . . . Consolidated net income (loss) . . . . . . . . . . . . . Less: net income attributable to noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. Net income (loss) attributable to 924,638 364,632 1,289,270 4,084,316 711,880 256,548 968,428 3,102,575 494,187 189,392 683,579 2,366,616 360,758 128,128 488,886 1,777,653 208,243 115,570 323,813 1,333,326 792,917 2,757,096 679,936 4,229,949 (145,633) 10,038 (73,237) 623,798 2,168,132 596,719 3,388,649 (286,074) 10,218 (77,211) 429,479 1,614,026 433,821 2,477,326 (110,710) 19,562 (30,948) 295,347 1,169,610 347,781 1,812,738 (35,085) 23,268 (17,045) 187,887 792,029 255,913 1,235,829 97,497 37,735 (24,909) 15,625 (19,878) 0 (4,868) 0 (5,698) 0 (4,455) 0 (6,025) (213,085) (49,603) (262,688) (357,935) 125,760 (232,175) (127,794) (142,651) (270,445) (33,317) 21,745 (11,572) 104,298 (34,601) 69,697 0 0 0 0 (5,223) salesforce.com . . . . . . . . . . . . . . . . . . . . . . . . $ (262,688) $ (232,175) $ (270,445) $ (11,572) $ 64,474 Net earnings per share-basic and diluted (3): Basic net income (loss) per share attributable to salesforce.com common shareholders . . . . . . . . . . . . . . . . . . . . . . $ Diluted net income (loss) per share attributable to salesforce.com common shareholders . . . . . . . . . . . . . . . . . . . . . . $ Shares used in computing basic net (0.42) $ (0.39) $ (0.48) $ (0.02) $ 0.12 (0.42) $ (0.39) $ (0.48) $ (0.02) $ 0.12 income (loss) per share . . . . . . . . . . . . . 624,148 597,613 564,896 541,208 520,888 Shares used in computing diluted net income (loss) per share . . . . . . . . . . . . . 624,148 597,613 564,896 541,208 546,392 33 (1) Amounts include amortization of purchased intangibles from business combinations, as follows: Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . Marketing and sales . . . . . . . . . . . . . . . . . . . . . . . . (2) Amounts include stock-based expenses, as follows: Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . Marketing and sales . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . $ 90,300 64,673 $109,356 37,179 $ 77,249 10,922 $ 60,069 7,250 $15,459 4,209 $ 53,812 121,193 286,410 103,350 $ 45,608 107,420 258,571 91,681 $ 33,757 76,333 199,284 69,976 $ 17,451 45,894 115,730 50,183 $12,158 18,897 56,451 32,923 (3) Fiscal 2013, 2012 and 2011 have been adjusted to reflect the four-for-one stock split effected through a stock dividend which occurred in April 2013. (in thousands) 2015 2014 2013 2012 2011 As of January 31, Consolidated Balance Sheet Data: Cash, cash equivalents and marketable securities (4) . . . . . . . . . . . . . . . . . . . . . . . . $ 1,890,284 $ 1,321,017 $1,758,285 $1,447,174 $1,407,557 (201,542) 3,091,165 (840,031) 10,692,982 (1,299,936) 9,152,930 (627,809) 4,164,154 (901,744) 5,528,956 . . . . . . . . . . . . . . (Negative) working capital Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term obligations excluding deferred revenue and noncontrolling interest (5) . . . Retained earnings (deficit) . . . . . . . . . . . . . . . Total stockholders’ equity controlling 2,263,015 (605,845) 2,059,117 (343,157) 175,732 (110,982) 109,349 159,463 516,506 171,035 interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,975,183 3,038,510 2,317,633 1,587,360 1,276,491 (4) Excludes the restricted cash balance of $115.0 million as of January 31, 2015. (5) Long-term obligations primarily excludes deferred revenue and noncontrolling interest includes the 0.75% convertible senior notes issued in January 2010, the 0.25% convertible senior notes issued in March 2013, the term loan entered into in July 2013, and the revolving credit facility entered into in October 2014. During fiscal 2015, the term loan was paid off and was no longer outstanding as of year end. At January 31, 2015, the 0.75% notes had matured and were no longer outstanding. At January 31, 2014, 2013 and 2012, the 0.75% notes were convertible and accordingly were classified as a current liability. 34 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains forward-looking statements, including, without limitation, our expectations and statements regarding our outlook and future revenues, expenses, results of operations, liquidity, plans, strategies and objectives of management and any assumptions underlying any of the foregoing. Our actual results may differ significantly from those projected in the forward-looking statements. Our forward-looking statements and factors that might cause future actual results to differ materially from our recent results or those projected in the forward-looking statements include, but are not limited to, those discussed in the section titled “Forward-Looking Information” and “Risk Factors” of this Annual Report on Form 10-K. Except as required by law, we assume no obligation to update the forward-looking statements or our risk factors for any reason. Overview We are a leading provider of enterprise cloud computing solutions, with a focus on customer relationship management, or CRM. We introduced our first CRM solution in February 2000 and we have since expanded our offerings with new editions, solutions, enhanced features, platform capabilities and a new analytics solution through internal development and acquisitions. We sell to businesses of all sizes and in almost every industry worldwide on a subscription basis. Our mission is to help our customers transform themselves into “customer companies” by empowering them to connect with their customers in entirely new ways. With our six core cloud service offerings—Sales Cloud, Service Cloud, Marketing Cloud, Communities Cloud, Analytics Cloud and the Salesforce1 Platform— customers have the tools they need to build a next generation customer success platform. Key elements of our strategy include: • • • • • • • strengthening our market-leading solutions; extending distribution into new and high-growth categories; expanding strategic relationships with our existing customers; pursuing new customers; reducing attrition; building our business in top software markets globally, which includes building partnerships that help add customers; and encouraging the development of third-party applications on our cloud computing platforms. We believe the factors that will influence our ability to achieve our objectives include: our prospective customers’ willingness to migrate to enterprise cloud computing services; the availability, performance and security of our service; our ability to continue to release, and gain customer acceptance of, new and improved features; our ability to successfully integrate acquired businesses and technologies; successful customer adoption and utilization of our service; acceptance of our service in markets where we have few customers; the emergence of additional competitors in our market and improved product offerings by existing and new competitors; the location of new data centers; third-party developers’ willingness to develop applications on our platforms; our ability to attract new personnel and retain and motivate current personnel; and general economic conditions which could affect our customers’ ability and willingness to purchase our services, delay the customers’ purchasing decision or affect attrition rates. To address these factors, we will need to, among other things, continue to add substantial numbers of paying subscriptions, upgrade our customers to fully featured versions or arrangements such as an Enterprise License Agreement, provide high quality technical support to our customers, encourage the development of third-party applications on our platforms and continue to focus on retaining customers at the time of renewal. Our plans to 35 invest for future growth include the continuation of the expansion of our data center capacity, the hiring of additional personnel, particularly in direct sales, other customer-related areas and research and development, the expansion of domestic and international selling and marketing activities, specifically in our top markets, continuing to develop our brands, the addition of distribution channels, the upgrade of our service offerings, the development of new services such as the announcement of our Analytics Cloud and Community Cloud, the integration of acquired technologies, the expansion of our Marketing Cloud and Salesforce1 Platform core service offerings, and the additions to our global infrastructure to support our growth. We also regularly evaluate acquisitions or investment opportunities in complementary businesses, joint ventures, services and technologies and intellectual property rights in an effort to expand our service offerings. We expect to continue to make such investments and acquisitions in the future and we plan to reinvest a significant portion of our incremental revenue in future periods to grow our business and continue our leadership role in the cloud computing industry. As a result of our aggressive growth plans, specifically our hiring plan and acquisition activities, we have incurred significant expenses from equity awards and amortization of purchased intangibles which have resulted in net losses on a U.S. generally accepted accounting principles (“GAAP”) basis. As we continue with our growth plan, we may continue to have net losses on a GAAP basis. We remained focused on improving operating margins in fiscal 2015 and expect to remain similarly focused in fiscal 2016. Our operating loss for fiscal 2015 was $145.6 million compared to $286.1 million during the same period a year ago. Our typical subscription contract term is 12 to 36 months, although terms range from one to 60 months, so during any fiscal reporting period only a subset of active subscription contracts is eligible for renewal. We calculate our attrition rate as of the end of each month. Our current attrition rate calculation does not include the Marketing Cloud service offerings. Our attrition rate was between nine and ten percent during the fiscal year ended January 31, 2015, which is consistent with the attrition rate as of January 31, 2014. We expect our attrition rate to remain in this range as we continue to expand our enterprise business and invest in customer success and related programs. We expect marketing and sales costs, which were 51 percent of our total revenues for the fiscal year ended January 31, 2015 and 53 percent for the same period a year ago, to continue to represent a substantial portion of total revenues in the future as we seek to grow our customer base, sell more products to existing customers, and build greater brand awareness. Fiscal Year Our fiscal year ends on January 31. References to fiscal 2015, for example, refer to the fiscal year ending January 31, 2015. Operating Segments We operate as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who in our case is the chief executive officer, in deciding how to allocate resources and assess performance. Over the past few years, we have completed several acquisitions. These acquisitions have allowed us to expand our offerings, presence and reach in various market segments of the enterprise cloud computing market. While we have offerings in multiple enterprise cloud computing market segments, our business operates in one operating segment because all of our offerings operate on a single platform and are deployed in an identical way, and our chief operating decision maker evaluates our financial information and resources and assesses the performance of these resources on a consolidated basis. Since we operate as one operating segment, all required financial segment information can be found in the consolidated financial statements. Sources of Revenues We derive our revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing our enterprise cloud computing services and from customers paying for additional 36 support beyond the standard support that is included in the basic subscription fees; and (2) related professional services such as process mapping, project management, implementation services and other revenue. “Other revenue” consists primarily of training fees. Subscription and support revenues accounted for approximately 93 percent percent of our total revenues for fiscal 2015. Subscription revenues are driven primarily by the number of paying subscribers, varying service types, the price of our service and renewals. We define a “customer” as a separate and distinct buying entity (e.g., a company, a distinct business unit of a large corporation, a partnership, etc.) that has entered into a contract to access our enterprise cloud computing services. We define a “subscription” as a unique user account purchased by a customer for use by its employees or other customer- authorized users, and we refer to each such user as a “subscriber.” The number of paying subscriptions at each of our customers ranges from one to hundreds of thousands. None of our customers accounted for more than five percent of our revenues during fiscal 2015, 2014 or 2013. Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement dates of each contract. The typical subscription and support term is 12 to 36 months, although terms range from one to 60 months. Our subscription and support contracts are non-cancelable, though customers typically have the right to terminate their contracts for cause if we materially fail to perform. We generally invoice our customers in advance, in annual installments, and typical payment terms provide that our customers pay us within 30 days of invoice. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue, or in revenue depending on whether the revenue recognition criteria have been met. In general, we collect our billings in advance of the subscription service period. Professional services and other revenues consist of fees associated with consulting and implementation services and training. Our consulting and implementation engagements are typically billed on a time and materials basis. We also offer a number of training classes on implementing, using and administering our service that are billed on a per person, per class basis. Our typical professional services payment terms provide that our customers pay us within 30 days of invoice. In determining whether professional services can be accounted for separately from subscription and support revenues, we consider a number of factors, which are described in “Critical Accounting Estimates—Revenue Recognition” below. Revenue by Cloud Service Offering We are providing the information below on a supplemental basis to give additional insight into the revenue performance of our individual core service offerings. Subscription and support revenues consisted of the following by core service offering (in millions): Fiscal Year Ended January 31, 2015 Sales Cloud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service Cloud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salesforce1 Platform and Other . . . . . . . . . . . . . . . . . . Marketing Cloud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,443.0 1,320.2 745.3 505.3 $5,013.8 Subscription and support revenues from Analytics Cloud and Communities Cloud were not significant for fiscal 2015. Analytics Cloud revenue is included with Salesforce1 Platform and Other in the table above. Communities Cloud revenue is included in either Sales Cloud, Service Cloud or Salesforce1 Platform and Other revenue depending on the primary service offering purchased. In situations where a customer purchases multiple cloud offerings, such as through an Enterprise License Agreement, we allocate the contract value to each core service offering based on the customer’s estimated 37 product demand plan and the service that was provided at the inception of the contract. We do not update these allocations based on actual product usage during the term of the contract. We have allocated approximately 10 percent of our total subscription and support revenues for fiscal 2015, based on customers’ estimated product demand plans and these allocated amounts are included in the table above. Additionally, some of our core service offerings have similar features and functions. For example, customers may use the Sales Cloud, the Service Cloud or our Salesforce1 Platform to record account and contact information, which are similar features across these core service offerings. Depending on a customer’s actual and projected business requirements, more than one core service offering may satisfy the customer’s current and future needs. We record revenue based on the individual products ordered by a customer, and not according to the customer’s business requirements and usage. In addition, as we introduce new features and functions within each offering, and refine our allocation methodology for changes in our business, we do not expect it to be practical to adjust historical revenue results by core service offering for comparability. Accordingly, comparisons of revenue performance by core service offering over time may not be meaningful. Our Sales Cloud service offering is our most widely distributed service offering and has historically been the largest contributor of subscription and support revenues. As a result, Sales Cloud has the most international exposure and foreign exchange rate exposure, relative to the other cloud service offerings. Conversely, revenue for Marketing Cloud is primarily derived from the Americas, with little impact from foreign exchange rate movement. We estimate that for fiscal 2016, subscription and support revenues from the Sales Cloud service offering will continue to be the largest contributor of subscription and support revenue, and foreign currency will continue to have a more pronounced impact on Sales Cloud subscription and support revenues than revenues from our other cloud service offerings. Seasonal Nature of Deferred Revenue, Accounts Receivable and Operating Cash Flow Deferred revenue primarily consists of billings to customers for our subscription service. Over 90 percent of the value of our billings to customers is for our subscription and support service. We generally invoice our customers in annual cycles. Approximately 80 percent of all subscription and support invoices were issued with annual terms during fiscal 2015 in comparison to nearly 74 percent during fiscal 2014. Occasionally, we bill customers for their multi-year contract on a single invoice which results in an increase in noncurrent deferred revenue. We typically issue renewal invoices in advance of the renewal service period, and depending on timing, the initial invoice for the subscription and services contract and the subsequent renewal invoice may occur in different quarters. This may result in an increase in deferred revenue and accounts receivable. There is a disproportionate weighting towards annual billings in the fourth quarter, primarily as a result of large enterprise account buying patterns. Our fourth quarter has historically been our strongest quarter for new business and renewals. The year on year compounding effect of this seasonality in both billing patterns and overall new and renewal business causes the value of invoices that we generate in the fourth quarter for both new business and renewals to increase as a proportion of our total annual billings. Accordingly, because of this billing activity, our first quarter is historically our largest collections and operating cash flow quarter. The sequential quarterly changes in accounts receivable, related deferred revenue and operating cash flow during the first three quarters of our fiscal year are not necessarily indicative of the billing activity that occurs in the fourth quarter as displayed below (in thousands, except unbilled deferred revenue): Fiscal 2015 Accounts receivable, net . . . . . . . . . . . . . . . . . Deferred revenue, current and noncurrent . . . . Operating cash flow (1) . . . . . . . . . . . . . . . . . . Unbilled deferred revenue, a non-GAAP April 30, 2014 July 31, 2014 October 31, 2014 January 31, 2015 $ 684,155 2,324,615 473,087 $ 834,323 2,352,904 245,893 $ 794,590 2,223,977 122,511 $1,905,506 3,321,449 332,223 measure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 bn 5.0 bn 5.4 bn 5.7 bn 38 Fiscal 2014 Accounts receivable, net . . . . . . . . . . . . . . . . . Deferred revenue, current and noncurrent . . . . Operating cash flow (1) . . . . . . . . . . . . . . . . . . Unbilled deferred revenue, a non-GAAP April 30, 2013 July 31, 2013 October 31, 2013 January 31, 2014 $ 502,609 1,733,160 283,189 $ 599,543 1,789,648 183,183 $ 604,045 1,734,619 137,859 $1,360,837 2,522,115 271,238 measure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 bn 3.8 bn 4.2 bn 4.5 bn Fiscal 2013 . . . . . . . . . . . . . . . . . Accounts receivable, net Deferred revenue, current and noncurrent . . . . Operating cash flow (1) . . . . . . . . . . . . . . . . . . Unbilled deferred revenue, a non-GAAP April 30, 2012 July 31, 2012 October 31, 2012 January 31, 2013 $ 371,395 1,334,716 213,212 $ 446,917 1,337,184 136,197 $ 418,590 1,291,703 105,915 $ 872,634 1,862,995 281,573 measure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 bn 2.8 bn 3.0 bn 3.5 bn (1) Operating cash flow represents net cash provided by operating activities for the three months ended in the periods stated above. Unbilled Deferred Revenue, a Non-GAAP Measure The deferred revenue balance on our consolidated balance sheet does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. Unbilled deferred revenue represents future billings under our subscription agreements that have not been invoiced and, accordingly, are not recorded in deferred revenue. Unbilled deferred revenue was approximately $5.7 billion as of January 31, 2015 and approximately $4.5 billion as of January 31, 2014. Our typical contract length is between 12 and 36 months. We expect that the amount of unbilled deferred revenue will change from quarter to quarter for several reasons, including the specific timing, duration and size of large customer subscription agreements, varying billing cycles of subscription agreements, the specific timing of customer renewals, foreign currency fluctuations, the timing of when unbilled deferred revenue is to be recognized as revenue, and changes in customer financial circumstances. For multi-year subscription agreements billed annually, the associated unbilled deferred revenue is typically high at the beginning of the contract period, zero just prior to renewal, and increases if the agreement is renewed. Low unbilled deferred revenue attributable to a particular subscription agreement is often associated with an impending renewal and may not be an indicator of the likelihood of renewal or future revenue from such customer. Accordingly, we expect that the amount of aggregate unbilled deferred revenue will change from year- to-year depending in part upon the number and dollar amount of subscription agreements at particular stages in their renewal cycle. Such fluctuations are not a reliable indicator of future revenues. Unbilled deferred revenue does not include minimum revenue commitments from indirect sales channels, as we recognize revenue, deferred revenue, and any unbilled deferred revenue upon sell-through to an end user customer. Cost of Revenues and Operating Expenses Cost of Revenues. Cost of subscription and support revenues primarily consists of expenses related to hosting our service and providing support, the costs of data center capacity, depreciation or operating lease expense associated with computer equipment and software, allocated overhead, amortization expense associated with capitalized software related to our services and acquired developed technologies and certain fees paid to various third parties for the use of their technology, services and data. We allocate overhead such as information technology infrastructure, rent and occupancy charges based on headcount. Employee benefit costs and taxes are allocated based upon a percentage of total compensation expense. As such, general overhead expenses are reflected in each cost of revenue and operating expense category. Cost of professional services and other revenues consists primarily of employee-related costs associated with these services, including stock-based 39 expenses, the cost of subcontractors and allocated overhead. The cost of providing professional services is significantly higher as a percentage of the related revenue than for our enterprise cloud computing subscription service due to the direct labor costs and costs of subcontractors. We intend to continue to invest additional resources in our enterprise cloud computing services. For example, we have invested in additional database software and we plan to open additional data centers and expand our current data center capacity in the future. As we acquire new businesses and technologies, the amortization expense associated with this activity will be included in cost of revenues. Additionally, as we enter into new contracts with third parties for the use of their technology, services or data, or as our sales volume grows, the fees paid to use such technology or services may increase. The timing of these additional expenses will affect our cost of revenues, both in terms of absolute dollars and as a percentage of revenues, in the affected periods. Research and Development. Research and development expenses consist primarily of salaries and related expenses, including stock-based expenses, the costs of our development and test data center and allocated overhead. We continue to focus our research and development efforts on adding new features and services, integrating acquired technologies, increasing the functionality and security and enhancing the ease of use of our enterprise cloud computing services. Our proprietary, scalable and secure multi-tenant architecture enables us to provide all of our customers with a service based on a single version of our application. As a result, we do not have to maintain multiple versions, which enables us to have relatively lower research and development expenses as compared to traditional enterprise software companies. We expect that in the future, research and development expenses will increase in absolute dollars and may increase as a percentage of total revenues as we invest in building the necessary employee and system infrastructure required to support the development of new, and improve existing, technologies and the integration of acquired businesses and technologies. Marketing and Sales. Marketing and sales expenses are our largest cost and consist primarily of salaries and related expenses, including stock-based expenses, for our sales and marketing staff, including commissions, payments to partners, marketing programs and allocated overhead. Marketing programs consist of advertising, events, corporate communications, brand building and product marketing activities. We plan to continue to invest in marketing and sales by expanding our domestic and international selling and marketing activities, building brand awareness, attracting new customers and sponsoring additional marketing events. The timing of these marketing events, such as our annual and largest event, Dreamforce, will affect our marketing costs in a particular quarter. We expect that in the future, marketing and sales expenses will increase in absolute dollars and continue to be our largest cost. General and Administrative. General and administrative expenses consist of salaries and related expenses, including stock-based expenses, for finance and accounting, legal, internal audit, human resources and management information systems personnel, legal costs, professional fees, other corporate expenses and allocated overhead. We expect that in the future, general and administrative expenses will increase in absolute dollars as we invest in our infrastructure and we incur additional employee related costs, professional fees and insurance costs related to the growth of our business and international expansion. We expect general and administrative costs as a percentage of total revenues to either remain flat or decrease for the next several quarters. Stock-Based Expenses. Our cost of revenues and operating expenses include stock-based expenses related to equity plans for employees and non-employee directors. We recognize our stock-based compensation as an expense in the statement of operations based on their fair values and vesting periods. These charges have been significant in the past and we expect that they will increase as our stock price increases, as we acquire more companies, as we hire more employees and seek to retain existing employees. 40 During fiscal 2015, we recognized stock-based expense of $564.8 million. As of January 31, 2015, the aggregate stock compensation remaining to be amortized to costs and expenses over a weighted-average period of 2.0 years was $1.4 billion. We expect this stock compensation balance to be amortized as follows: $556.6 million during fiscal 2016; $411.6 million during fiscal 2017; $288.9 million during fiscal 2018; $127.4 million during fiscal 2019 and $0.5 million during fiscal 2020. The expected amortization reflects only outstanding stock awards as of January 31, 2015 and assumes no forfeiture activity. We expect to continue to issue stock-based awards to our employees in future periods. Amortization of Purchased Intangibles from Business Combinations. Our cost of revenues and operating expenses include amortization of acquisition-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. We expect this expense to increase as we acquire more companies. Critical Accounting Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies, which are described in Note 1 “Summary of Business and Significant Accounting Policies” to our consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. Revenue Recognition. We derive our revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing our enterprise cloud computing services and from customers purchasing additional support beyond the standard support that is included in the basic subscription fee; and (2) related professional services such as process mapping, project management, implementation services and other revenue. “Other revenue” consists primarily of training fees. We commence 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. Our 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 our service is made available to customers. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. Professional Services and Other Revenues The majority of our professional services contracts are on a time and material basis. When these services are not combined with subscription revenues as a single unit of accounting, as discussed below, these revenues are 41 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 after the services are performed. Multiple Deliverable Arrangements We enter into arrangements with multiple deliverables that generally include multiple subscriptions, premium support, and professional services. If the deliverables have standalone value upon delivery, we account for each deliverable separately. Subscription services have standalone value as such services are often sold separately. In determining whether professional services have standalone value, we consider 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, we have 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. We determine the relative selling price for a deliverable based on its vendor-specific objective evidence of selling price (“VSOE”), if available, or our best estimate of selling price (“BESP”), if VSOE is not available. We have determined that third-party evidence (“TPE”) is not a practical alternative due to differences in our 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, we have established VSOE as a consistent number of standalone sales of this deliverable have been priced within a reasonably narrow range. We have not established VSOE for our subscription services due to lack of pricing consistency, the introduction of new services and other factors. Accordingly, we use our BESP to determine the relative selling price. We determined BESP by considering our overall pricing objectives and market conditions. Significant pricing practices taken into consideration include our discounting practices, the size and volume of our transactions, the customer demographic, the geographic area where our services are sold, our price lists, our go- to-market strategy, historical standalone sales and contract prices. The determination of BESP is made through consultation with and approval by management, taking into consideration the go-to-market strategy. As our go- to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes in relative selling prices, including both VSOE and BESP. Deferred Revenue. The deferred revenue balance does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from subscription service described above and is recognized as the revenue recognition criteria are met. We generally invoice customers in annual installments. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, size and new business linearity within the quarter. Deferred revenue that will be recognized during the succeeding twelve month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent. Deferred Commissions. We defer commission payments to our direct sales force. The commissions are deferred and amortized to sales expense over the non-cancelable terms of the related subscription contracts with our customers, which are typically 12 to 36 months. The commission payments, which are paid in full the month after the customer’s service commences, 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 42 customer contracts. We believe 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. During the fiscal 2015, we deferred $320.9 million of commission expenditures and we amortized $257.6 million to sales expense. During the same period a year ago, we deferred $265.1 million of commission expenditures and we amortized $194.6 million to sales expense. Deferred commissions on our consolidated balance sheets totaled $388.2 million at January 31, 2015 and $324.9 million at January 31, 2014. Capitalized Internal-Use Software Costs. We are required to follow the guidance of Accounting Standards Codification 350 (“ASC 350”), Intangibles- Goodwill and Other in accounting for the cost of computer software developed for internal-use and the accounting for web-based product development costs. ASC 350 requires companies to capitalize qualifying computer software costs, which are incurred during the application development stage, and amortize these costs on a straight-line basis over the estimated useful life of the respective asset. We deliver our enterprise cloud computing solutions as a service via all the major Internet browsers and on leading major mobile device operating systems. As a result of this software as a service delivery model, we believe we have larger capitalized costs as compared to traditional enterprise software companies as they are required to use a different accounting standard. 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. We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. Goodwill and Long-Lived Assets. We make estimates, assumptions, and judgments when valuing goodwill and other intangible assets in connection with the initial purchase price allocation of an acquired entity, as well as when evaluating the recoverability of our goodwill and other intangible assets on an ongoing basis. These estimates are based upon a number of factors, including historical experience, market conditions, and information obtained from the management of acquired companies. Critical estimates in valuing certain intangible assets include, but are not limited to, historical and projected attrition rates, anticipated growth in revenue from the acquired customers and acquired technology, and the expected use of the acquired assets. These factors are also considered in determining the useful life of acquired intangible assets. The amounts and useful lives assigned to identified intangible assets impacts the amount and timing of future amortization expense. The value of our goodwill and intangible assets could be impacted by future adverse changes such as, but not limited to: a substantial decline in our market capitalization; an adverse action or assessment by a regulator; and unanticipated competition. We evaluate and test the recoverability of our goodwill for impairment at least annually during the fourth quarter or more often if and when circumstances indicate that goodwill may not be recoverable. Each period we evaluate the estimated remaining useful life of our intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. We evaluate long-lived assets, such as property and equipment, and purchased intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such events or changes in circumstances include, but are not limited to, a significant decrease in the fair value of the underlying asset, a significant decrease in the benefits realized from the acquired assets, difficulty and delays in integrating the business or a significant change in the operations of the acquired assets or use of an asset. A long-lived asset is considered impaired if its carrying amount exceeds the estimated future undiscounted cash flows the asset is expected to generate. If a long-lived asset is considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the asset exceeds the fair value of the asset or asset group. Business Combinations. Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired and 43 liabilities assumed and pre-acquisition contingencies. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Examples of critical estimates in valuing certain of the intangible assets and goodwill we have acquired include but are not limited to: • • • • future expected cash flows from subscription and support contracts, professional services contracts, other customer contracts and acquired developed technologies and patents; the acquired company’s trade name, trademark and existing customer relationship, as well as assumptions about the period of time the acquired trade name and trademark will continue to be used in our offerings; uncertain tax positions and tax related valuation allowances assumed; and discount rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. Stock-Based Options and Awards. We recognize the fair value of our stock options and awards on a straight- line basis over the requisite service period of the option or award which is the vesting term of generally four years for stock options and restricted stock awards and one year for shares issued pursuant to our Employee Stock Purchase Plan (“ESPP”). The fair value of each option or ESPP share or stock purchase right is estimated on the date of grant using the Black-Scholes option pricing model. The estimated forfeiture rate applied is based on historical forfeiture rates. We evaluate the forfeiture rates at least annually, or when events or circumstances indicate a change may be needed. This may cause a fluctuation in our stock-based expense in the period of change. Inputs into the Black-Scholes option pricing model include: • The estimated life for the stock options which is estimated based on an actual analysis of expected life. The estimated life for shares issued pursuant to our ESPP is based on the two purchase periods within the 12 month offering period; • The risk free interest rate which 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; • The future stock price volatility which is estimated considering both our observed option-implied volatilities and our historical volatility calculations. We believe this is the best estimate of the expected volatility over the expected life of our stock options and stock purchase rights; and • The probability of performance conditions, if any, that affect the vesting of certain awards being achieved. Expense is only recognized for those shares expected to vest. Income Taxes. We use 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 rates is recognized in the consolidated statements of operations in the period that includes the enactment date. At each of the interim financial reporting periods, we compute our tax provision by applying an estimated annual effective tax rate to year to date ordinary income and adjust the provision for discrete tax items recorded in the same period. The estimated annual effective tax rate at each interim period represents the best estimate based on evaluations of possible future transactions and may be subject to subsequent refinement or revision. Our tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. We recognize 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, based on the technical merits. The tax benefit recognized is 44 measured as the largest amount of benefit which is greater than 50 percent likely to be realized upon settlement with the taxing authority. We recognize interest accrued and penalties related to unrecognized tax benefits in our 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. We regularly review 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. Our judgment regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute the business plans and/or tax planning strategies. Should there be a change in the ability to recover deferred tax assets, our income tax provision would increase or decrease in the period in which the assessment is changed. Strategic Investments. We report our investments in non-marketable equity and debt securities, which consist of minority equity and debt investments in privately-held companies, at cost or fair value when an event or circumstance indicates an other-than-temporary decline in value has occurred. Management evaluates financial results, earnings trends, technology milestones and subsequent financing of these companies, as well as the general market conditions to identify indicators of other-than-temporary impairment. In determining the estimated fair value of our strategic investments in privately-held companies, we utilize the most recent data available to us. Valuations of privately-held companies are inherently complex due to the lack of readily available data. Results of Operations The following tables set forth selected data for each of the periods indicated (in thousands): Fiscal Year Ended January 31, 2015 2014 2013 Revenues: Subscription and support . . . . . . . . . . . . . . . Professional services and other . . . . . . . . . . Total revenues . . . . . . . . . . . . . . . . . . . $5,013,764 359,822 5,373,586 $3,824,542 246,461 4,071,003 $2,868,808 181,387 3,050,195 Cost of revenues (1)(2): Subscription and support . . . . . . . . . . . . . . . Professional services and other . . . . . . . . . . Total cost of revenues . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses (1)(2): Research and development . . . . . . . . . . . . . Marketing and sales . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . Loss from operations . . . . . . . . . . . . . . . . . . . . . . Investment income . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sales of land and building improvements . . . . . . . . . . . . . . . . . . . . . . . . . Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss before benefit from (provision for) income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefit from (provision for) income taxes . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 924,638 364,632 1,289,270 4,084,316 792,917 2,757,096 679,936 4,229,949 (145,633) 10,038 (73,237) 711,880 256,548 968,428 3,102,575 623,798 2,168,132 596,719 3,388,649 (286,074) 10,218 (77,211) 494,187 189,392 683,579 2,366,616 429,479 1,614,026 433,821 2,477,326 (110,710) 19,562 (30,948) 15,625 (19,878) 0 (4,868) 0 (5,698) (213,085) (49,603) $ (262,688) (357,935) 125,760 $ (232,175) (127,794) (142,651) $ (270,445) 45 (1) Cost of revenues and marketing and sales expenses include the following amounts related to amortization of purchased intangibles from business combinations (in thousands): Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marketing and sales . . . . . . . . . . . . . . . . . . . . . . . . . $90,300 64,673 $109,356 37,179 2015 2014 2013 $77,249 10,922 Fiscal Year Ended January 31, (2) Cost of revenues and operating expenses include the following amounts related to stock-based expenses (in thousands): Fiscal Year Ended January 31, 2015 2014 2013 Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . Marketing and sales . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . $ 53,812 121,193 286,410 103,350 $ 45,608 107,420 258,571 91,681 $ 33,757 76,333 199,284 69,976 Revenues by geography were as follows (in thousands): Fiscal Year Ended January 31, 2015 2014 2013 Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,868,329 984,919 520,338 $2,899,837 741,220 429,946 $2,123,736 525,304 401,155 $5,373,586 $4,071,003 $3,050,195 Americas revenue attributed to the United States was approximately 94 percent, 96 percent and 94 percent for fiscal 2015, 2014 and 2013, respectively. No other country represented more than ten percent of total revenue during fiscal 2015, 2014 or 2013. 46 The following tables set forth selected consolidated statements of operations data for each of the periods indicated as a percentage of total revenues: Revenues: Subscription and support . . . . . . . . . . . . . . . . . . . . . . Professional services and other . . . . . . . . . . . . . . . . . . 93% 7 94% 6 94% 6 Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 100 100 Fiscal Year Ended January 31, 2015 2014 2013 Cost of revenues: Subscription and support . . . . . . . . . . . . . . . . . . . . . . Professional services and other . . . . . . . . . . . . . . . . . . Total cost of revenues . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses: Research and development . . . . . . . . . . . . . . . . . . . . . Marketing and sales . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sales of land and building improvements . . . . . . . Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss before benefit from (provision for) income taxes . . . Benefit from (provision for) income taxes . . . . . . . . . . . . . 17 7 24 76 15 51 13 79 (3) 0 (1) 0 0 (4) (1) 18 6 24 76 15 53 15 83 (7) 0 (2) 0 0 (9) 3 16 6 22 78 14 53 15 82 (4) 1 (1) 0 0 (4) (5) Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5)% (6)% (9)% Fiscal Year Ended January 31, 2015 2014 2013 Amortization of purchased intangibles: Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marketing and sales . . . . . . . . . . . . . . . . . . . . . . . . . . 2% 1 3% 1 3% 0 Fiscal Year Ended January 31, 2015 2014 2013 Stock-based expenses: Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . Marketing and sales . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . 1% 2 5 2 1% 3 6 2 1% 3 7 2 Revenues by geography: Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Fiscal Year Ended January 31, 2015 2014 2013 72% 18 10 71% 18 11 70% 17 13 100% 100% 100% Revenue constant currency growth rates (as compared to the comparable prior periods) Fiscal Year Ended January 31, 2015 compared to Fiscal Year Ended January 31, 2014 Fiscal Year Ended January 31, 2014 compared to Fiscal Year Ended January 31, 2013 Fiscal Year Ended January 31, 2013 compared to Fiscal Year Ended January 31, 2012 Americas . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . Asia Pacific . . . . . . . . . . . . . . . . . Total growth . . . . . . . . . . . . . . . . 33% 34% 26% 33% 37% 36% 19% 34% 38% 38% 27% 37% We present constant currency information to provide a framework for assessing how our underlying business performed excluding the effect of foreign currency rate fluctuations. To present this information, current and comparative prior period results for entities reporting in currencies other than United States dollars are converted into United States dollars at the weighted average exchange rate for the year being compared to for growth rate calculations presented, rather than the actual exchange rates in effect during that period. Balance Sheet Data (in thousands): Cash, cash equivalents and marketable securities, excluding restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue, current and noncurrent Principal due on convertible senior notes, term loan, As of January 31, 2015 2014 $1,890,284 3,321,449 $1,321,017 2,522,115 and revolving credit facility . . . . . . . . . . . . . . . . . . 1,450,000 2,003,864 Unbilled deferred revenue was approximately $5.7 billion as of January 31, 2015 and $4.5 billion as of January 31, 2014. Unbilled deferred revenue represents future billings under our non-cancelable subscription agreements that have not been invoiced and, accordingly, are not recorded in deferred revenue. Fiscal Years Ended January 31, 2015 and 2014 Revenues. (in thousands) Fiscal Year Ended January 31, Variance 2015 2014 Dollars Percent Subscription and support Professional services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,013,764 359,822 $3,824,542 246,461 $1,189,222 113,361 Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . $5,373,586 $4,071,003 $1,302,583 31% 46% 32% Total revenues were $5.4 billion for fiscal 2015, compared to $4.1 billion during the same period a year ago, an increase of $1.3 billion, or 32 percent. On a constant currency basis, total revenues grew 33 percent. Subscription and support revenues were $5.0 billion, or 93 percent of total revenues, for fiscal 2015, compared to $3.8 billion, or 94 percent of total revenues, during the same period a year ago, an increase of $1.2 billion, or 31 percent. The increase in subscription and support revenues was primarily attributable to the impact of, in fiscal 2015, including ExactTarget revenue for the full fiscal year, as compared to fiscal 2014, which only included ExactTarget revenue as of its acquisition date in July 2013. Additionally, volume-driven increases from new business, which includes new customers, upgrades and additional subscriptions from existing customers contributed to the increase in subscription and support revenues. Our attrition rate, which is consistent with the prior year, also played a role in the increase in subscription and support revenues. We continue to invest in a variety of customer programs and initiatives, which, along with increasing enterprise adoption, have helped maintain our attrition rate. The net price per user per month for our three primary offerings, Professional Edition, 48 Enterprise Edition and Unlimited Edition, varies from period to period, but has remained within a consistent range over the past eight quarters. Changes in the net price per user per month has not been a significant driver of revenue growth for the periods presented. Professional services and other revenues were $359.8 million, or seven percent of total revenues, for fiscal 2015, compared to $246.5 million, or six percent of total revenues, for the same period a year ago, an increase of $113.4 million, or 46 percent. The increase in professional services and other revenues was primarily attributable to the impact of, in fiscal 2015, including ExactTarget revenue for the full fiscal year, as compared to fiscal 2014, which only included ExactTarget revenue as of its acquisition date in July 2013. Revenues in Europe and Asia Pacific accounted for $1,505.3 million, or 28 percent of total revenues, for fiscal 2015, compared to $1,171.2 million, or 29 percent of total revenues, during the same period a year ago, an increase of $334.1 million, or 29 percent. The increase in revenues on a total dollar basis outside of the Americas was the result of the increasing acceptance of our service, our focus on marketing our services internationally, additional resources and consistent attrition rates as a result of the reasons stated above. Revenues outside of the Americas increased on a total dollar basis in fiscal 2015 despite an overall strengthening of the U.S. dollar, which reduced aggregate international revenues by $31.5 million compared to the same period a year ago. We expect revenues outside of the Americas to continue to be negatively impacted in fiscal 2016 by the strengthening of the U.S. dollar relative to the Euro, Japanese yen, Australian dollar and British pound. Cost of Revenues. (in thousands) Fiscal Year Ended January 31, 2015 2014 Variance Dollars Subscription and support . . . . . . . . . . . . . . . . . . . . . . Professional services and other . . . . . . . . . . . . . . . . . $ 924,638 364,632 $711,880 256,548 $212,758 108,084 Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . $1,289,270 $968,428 $320,842 Percent of total revenues . . . . . . . . . . . . . . . . . . . . . . 24% 24% Cost of revenues was $1,289.3 million, or 24 percent of total revenues, for fiscal 2015, compared to $968.4 million, or 24 percent of total revenues, during the same period a year ago, an increase of $320.8 million. The increase in absolute dollars was primarily due to an increase of $122.3 million in employee-related costs, an increase of $8.2 million in stock-based expenses, an increase of $100.6 million in service delivery costs, primarily due to our efforts to increase data center capacity, an increase of $29.9 million in professional and outside services, an increase of $18.8 million in allocated overhead and an increase of $44.7 million in depreciation of property and equipment, offset by a decrease of $19.1 million in amortization of purchased intangibles. We have increased our headcount by 30 percent since January 31, 2014 to meet the higher demand for services from our customers. We intend to continue to invest additional resources in our enterprise cloud computing services and data center capacity. Additionally, the amortization of purchased intangible assets may increase as we acquire additional businesses and technologies. We also plan to add additional employees in our professional services group to facilitate the adoption of our services. The timing of these expenses will affect our cost of revenues, both in terms of absolute dollars and as a percentage of revenues in future periods. The cost of professional services and other revenues exceeded the related revenue during fiscal 2015 by $4.8 million as compared to $10.1 million during the same period a year ago, primarily due to the impact of including ExactTarget revenue for the full fiscal 2015, as described above, offset by an increase in the cost related to professional services headcount. We expect the cost of professional services to continue to exceed revenue from professional services in future fiscal years. We believe that this investment in professional services facilitates the adoption of our service offerings. 49 Research and Development. (in thousands) Fiscal Year Ended January 31, 2015 2014 Variance Dollars Research and development . . . . . . . . . . . . . . . . . . . . . . Percent of total revenues . . . . . . . . . . . . . . . . . . . . . . . $792,917 $623,798 $169,119 15% 15% Research and development expenses were $792.9 million, or 15 percent of total revenues, for fiscal 2015, compared to $623.8 million, or 15 percent of total revenues, during the same period a year ago, an increase of $169.1 million. The increase in absolute dollars was primarily due to an increase of $132.3 million in employee- related costs, an increase of $13.8 million in stock-based expense, an increase of $14.8 million in development and test data center expense, and an increase in allocated overhead. We increased our research and development headcount by 25 percent since January 31, 2014 in order to improve and extend our service offerings and develop new technologies. We expect that research and development expenses will increase in absolute dollars and may increase as a percentage of revenues in future periods as we continue to add employees and invest in technology to support the development of new, and improve existing, technologies and the integration of acquired technologies. Marketing and Sales. (in thousands) Fiscal Year Ended January 31, 2015 2014 Variance Dollars Marketing and sales . . . . . . . . . . . . . . . . . . . . . . . . Percent of total revenues . . . . . . . . . . . . . . . . . . . . $2,757,096 $2,168,132 $588,964 51% 53% Marketing and sales expenses were $2.8 billion, or 51 percent of total revenues, for fiscal 2015, compared to $2.2 billion, or 53 percent of total revenues, during the same period a year ago, an increase of $589.0 million. The increase in absolute dollars was primarily due to increases of $439.0 million in employee-related costs, including amortization of deferred commissions, $56.4 million in advertising expenses and event costs, $27.8 million stock-based expense, $5.2 million in professional and outside services and $28.0 million in allocated overhead. Our marketing and sales headcount increased by 22 percent since January 31, 2014. The increase in headcount was primarily attributable to hiring additional sales personnel to focus on adding new customers and increasing penetration within our existing customer base. General and Administrative. (in thousands) Fiscal Year Ended January 31, 2015 2014 Variance Dollars General and administrative . . . . . . . . . . . . . . . . . . . . . . Percent of total revenues . . . . . . . . . . . . . . . . . . . . . . . . $679,936 $596,719 $83,217 13% 15% General and administrative expenses were $679.9 million, or 13 percent of total revenues, for fiscal 2015, compared to $596.7 million, or 15 percent of total revenues, during the same period a year ago, a increase of $83.2 million. The increase was primarily due to an increase of $53.1 million in employee-related costs, an increase of $18.9 million in equipment costs and an increase of $11.7 million in stock-based expense, offset by a decrease of $3.0 million in professional and outside services. Our general and administrative headcount increased by 9 percent since January 31, 2014 as we added personnel to support our growth. 50 Loss from operations. (in thousands) Fiscal Year Ended January 31, 2015 2014 Variance Dollars Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . Percent of total revenues . . . . . . . . . . . . . . . . . . . . . . $(145,633) $(286,074) $140,441 (3)% (7)% Loss from operations for fiscal 2015 was $145.6 million and included $564.8 million of stock-based expenses and $155.0 million of amortization of purchased intangibles. During the same period a year ago, loss from operations was $286.1 million and included $503.3 million of stock-based expenses and $146.5 million of amortization of purchased intangibles. Investment income. (in thousands) Fiscal Year Ended January 31, 2015 2014 Variance Dollars Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,038 $10,218 $(180) Investment income consists of income on our cash and marketable securities balances. Investment income was $10.0 million for fiscal 2015 and was $10.2 million during the same period a year ago. Interest expense. (in thousands) Fiscal Year Ended January 31, 2015 2014 Variance Dollars Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percent of total revenues . . . . . . . . . . . . . . . . . . . . . . . . . $(73,237) $(77,211) $3,974 (1)% (2)% Interest expense consists of interest on our convertible senior notes, capital leases, term loan and revolving credit facility. Interest expense, net of interest costs capitalized, was $73.2 million for fiscal 2015 and was $77.2 million during the same period a year ago. The decrease was primarily due to the reduced principal balance on our 0.75% convertible senior notes as a result of early note conversions during fiscal 2015. These notes fully matured on January 15, 2015. Gain on sales of land and building improvements During fiscal 2015, we sold two separate portions of our undeveloped real estate, including a portion of our perpetual parking rights, in San Francisco, California. We recognized a gain of $15.6 million during fiscal 2015, net of closing costs, as a result of this activity. Other expense. (in thousands) Fiscal Year Ended January 31, 2015 2014 Variance Dollars Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(19,878) $(4,868) $(15,010) Other expense primarily consists of non-operating costs such as foreign currency transaction gains and losses, costs associated with real estate transactions and losses on derecognition of debt. The increase in other expense for fiscal 2015 was primarily due to losses totaling $10.3 million related to the extinguishment of the 0.75% Senior Notes converted by noteholders. 51 Benefit from (provision for) income taxes. (in thousands) Fiscal Year Ended January 31, 2015 2014 Variance Dollars Benefit from (provision for) income taxes . . . . . . . . . Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(49,603) $125,760 $(175,363) (23)% 35% We reported a tax provision of $49.6 million on a pretax loss of $213.1 million, which resulted in a negative effective tax rate of 23 percent for the fiscal 2015. We had a tax provision primarily due to income taxes in profitable jurisdictions outside the U.S., which was partially offset by tax benefits from current year losses incurred by ExactTarget in certain state jurisdictions. We recorded a tax benefit of $125.8 million with a pretax loss of $357.9 million, which resulted in an effective tax rate of 35 percent for fiscal 2014. Due to the ExactTarget acquisition, a deferred tax liability was established for the book-tax basis difference related to purchased intangibles. The net deferred tax liability from acquisitions provided an additional source of income to support the realizability of our pre-existing deferred tax assets. As a result, we released a portion of the valuation allowance that was established in fiscal 2013 and recorded a tax benefit of $143.1 million for fiscal 2014. We had a valuation allowance against our U.S. deferred tax assets as we considered our cumulative loss in recent years as a significant piece of negative evidence. We regularly assess the need for a valuation allowance against our deferred tax assets by considering both positive and negative evidence related to the likelihood of the realization of the deferred tax assets to determine if it is more-likely-than-not that some or all of the deferred tax assets will be realized. Due to the valuation allowance, the effective tax rate could be volatile and is therefore difficult to forecast in future periods. Fiscal Years Ended January 31, 2014 and 2013 Revenues. (in thousands) Fiscal Year Ended January 31, Variance 2014 2013 Dollars Percent Subscription and support . . . . . . . . . . . . . . . . . . Professional services and other . . . . . . . . . . . . . . $3,824,542 246,461 $2,868,808 181,387 $ 955,734 65,074 Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,071,003 $3,050,195 $1,020,808 33% 36% 33% Total revenues were $4.1 billion for fiscal 2014, compared to $3.1 billion during fiscal 2013, an increase of $1.0 billion, or 33 percent. Subscription and support revenues were $3.8 billion, or 94 percent of total revenues, for fiscal 2014, compared to $2.9 billion, or 94 percent of total revenues, during fiscal 2013, an increase of $955.7 million, or 33 percent. The increase in subscription and support revenues was due almost entirely to volume-driven increases from new customers, upgrades and additional subscriptions from existing customers and a decline in attrition rates as compared to fiscal 2013. We have continued to invest in a variety of customer programs and initiatives, which, along with longer contract durations and increasing enterprise adoption, have helped reduce our attrition rates. The net price per user per month for our three primary offerings, Professional Edition, Enterprise Edition and Unlimited Edition, varies from period to period, but has remained within a consistent range. The net price per user per month has not been a significant driver of revenue growth for the periods presented. Professional services and other revenues were $246.5 million, or six percent of total revenues, for fiscal 2014, compared to $181.4 million, or six percent of total revenues, for fiscal 2013, an increase of $65.1 million, or 36 percent. The increase in professional services and other revenues was due primarily to the higher demand for services from an increased number of customers. 52 Revenues in Europe and Asia Pacific accounted for $1,171.2 million, or 29 percent of total revenues, for fiscal 2014, compared to $926.5 million, or 30 percent of total revenues, during fiscal 2013, an increase of $244.7 million, or 26 percent. The increase in revenues outside of the Americas on a total dollar basis was the result of the increasing acceptance of our service, our focus on marketing our service internationally and reduced attrition rates. Revenues outside of the Americas increased on a total dollar basis in fiscal 2014 despite an overall strengthening of the U.S. dollar, which reduced aggregate international revenues by $24.4 million compared to fiscal 2013. Cost of Revenues. (in thousands) Fiscal Year Ended January 31, 2014 2013 Variance Dollars Subscription and support . . . . . . . . . . . . . . . . . . . . . . . Professional services and other . . . . . . . . . . . . . . . . . . $711,880 256,548 $494,187 189,392 $217,693 67,156 Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . $968,428 $683,579 $284,849 Percent of total revenues . . . . . . . . . . . . . . . . . . . . . . . 24% 22% Cost of revenues was $968.4 million, or 24 percent of total revenues, for fiscal 2014, compared to $683.6 million, or 22 percent of total revenues, during fiscal 2013, an increase of $284.8 million. The increase in absolute dollars was primarily due to an increase of $102.8 million in employee-related costs, an increase of $48.9 million in service delivery costs, primarily due to our efforts in increasing data center capacity, an increase of $80.4 million in depreciation and amortization expenses, $32.1 million of which related to the amortization of acquired developed technology, an increase of $16.1 million in subcontractor and professional services expense, an increase of $23.1 million in allocated overhead and an increase of $11.9 million in stock-based expenses. We increased our customer support and professional services headcount by 58 percent since January 31, 2013 to meet the higher demand for services from our customers, of which the majority was due to the acquisition of ExactTarget. In June 2013, we entered into a large capital lease agreement for software for a period of nine years, which consists of the contractual term of six years and a renewal option of three years. A portion of the depreciation expense on this asset was allocated to cost of revenues which is included in the amount above. Research and Development. (in thousands) Fiscal Year Ended January 31, 2014 2013 Variance Dollars Research and development . . . . . . . . . . . . . . . . . . . . . . Percent of total revenues . . . . . . . . . . . . . . . . . . . . . . . $623,798 $429,479 $194,319 15% 14% Research and development expenses were $623.8 million, or 15 percent of total revenues, for fiscal 2014, compared to $429.5 million, or 14 percent of total revenues, during fiscal 2013, an increase of $194.3 million. The increase in absolute dollars was due to an increase of $114.9 million in employee-related costs, an increase of $31.1 million in stock-based expenses, an increase of $16.0 million in depreciation and amortization expenses, an increase of $17.2 million in allocated overhead and an increase of $14.8 million in test data lab costs. We increased our research and development headcount by 31 percent since January 31, 2013 in order to improve and extend our service offerings and develop new technologies. The majority of the increase in headcount was due to the acquisition of ExactTarget. In June 2013, we entered into a large capital lease agreement for software for a period of nine years, which consists of the contractual term of six years and a renewal option of three years. A portion of the depreciation expense on this asset was allocated to research and development which is included in the amount above. 53 Marketing and Sales. (in thousands) Fiscal Year Ended January 31, 2014 2013 Variance Dollars Marketing and sales . . . . . . . . . . . . . . . . . . . . . . . . Percent of total revenues . . . . . . . . . . . . . . . . . . . . $2,168,132 $1,614,026 $554,106 53% 53% Marketing and sales expenses were $2.2 billion, or 53 percent of total revenues, for fiscal 2014, compared to $1.6 billion, or 53 percent of total revenues, during fiscal 2013, an increase of $554.1 million. The increase in absolute dollars was primarily due to an increase of $357.1 million in employee-related costs, an increase of $59.3 million in stock-based expenses, an increase of $57.2 million in advertising, marketing and event costs and an increase of $49.8 million in allocated overhead. Our marketing and sales headcount increased by 33 percent since January 31, 2013. The increase in headcount was primarily attributable to the hiring of additional sales personnel to focus on adding new customers and increasing penetration within our existing customer base, while a portion of the increase was due to the acquisition of ExactTarget. General and Administrative. (in thousands) Fiscal Year Ended January 31, 2014 2013 Variance Dollars General and administrative . . . . . . . . . . . . . . . . . . . . . . Percent of total revenues . . . . . . . . . . . . . . . . . . . . . . . . $596,719 $433,821 $162,898 15% 15% General and administrative expenses were $596.7 million, or 15 percent of total revenues, for fiscal 2014, compared to $433.8 million, or 15 percent of total revenues, during fiscal 2013, an increase of $162.9 million. The increase was primarily due to an increase of $70.6 million in employee-related costs, an increase of $21.7 million in stock-based expenses, an increase of $48.3 million in professional and outside services, which included transaction fees associated with the ExactTarget acquisition, and an increase in depreciation and amortization expense. Our general and administrative headcount increased by 28 percent since January 31, 2013 as we added personnel to support our growth. The majority of the increase in headcount was due to the acquisition of ExactTarget. Loss from operations. (in thousands) Fiscal Year Ended January 31, 2014 2013 Variance Dollars Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . Percent of total revenues . . . . . . . . . . . . . . . . . . . . . . . . $(286,074) $(110,710) $(175,364) (7)% (4)% Loss from operations for fiscal 2014, was $286.1 million and included $503.3 million of stock-based expenses and $146.5 million of amortization of purchased intangibles. During fiscal 2013, operating loss was $110.7 million and included $379.4 million of stock-based expenses and $88.2 million of amortization of purchased intangibles. 54 Investment income. (in thousands) Fiscal Year Ended January 31, 2014 2013 Variance Dollars Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percent of total revenues . . . . . . . . . . . . . . . . . . . . . . . . $10,218 $19,562 $(9,344) 0% 1% Investment income consists of income on cash and marketable securities balances. Investment income was $10.2 million for fiscal 2014, and was $19.6 million during fiscal 2013. The decrease was primarily due to the decrease in marketable securities balances. Interest expense. (in thousands) Fiscal Year Ended January 31, 2014 2013 Variance Dollars Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percent of total revenues . . . . . . . . . . . . . . . . . . . . . . . . $(77,211) $(30,948) $(46,263) (2)% (1)% Interest expense consists of interest on our convertible senior notes, term loan and capital leases. Interest expense, net of interest costs capitalized, was $77.2 million for fiscal 2014 and was $30.9 million for fiscal 2013. The increase was primarily due to interest expense associated with the March 2013 issuance of $1.15 billion of 0.25% convertible senior notes, the $300.0 million term loan that was entered into in connection with the acquisition of ExactTarget and the large capital lease agreement for software which we entered into in June 2013. Benefit from (provision for) Income Taxes. (in thousands) Fiscal Year Ended January 31, 2014 2013 Variance Dollars Benefit from (provision for) income taxes . . . . . . . . . . Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $125,760 $(142,651) $268,411 35% (112)% We reported a tax benefit of $125.8 million with a pretax loss of $357.9 million, which resulted in an effective tax rate of 35 percent for fiscal 2014. Due to the ExactTarget acquisition, a deferred tax liability was established for the book-tax basis difference related to purchased intangibles. The net deferred tax liability from acquisitions provided an additional source of income to support the realizability of our pre-existing deferred tax assets and as a result, we released a portion of the valuation allowance that was established in fiscal 2013 and recorded a tax benefit of $143.1 million for fiscal 2014. We recorded a tax provision of $142.7 million on a pretax loss of $127.8 million, which resulted in a negative effective tax rate of 112 percent for fiscal 2013. Our effective tax rate substantially differed from the federal statutory tax rate of 35 percent primarily due to the tax charge of $186.8 million to establish a valuation allowance for a significant portion of our deferred tax assets. We regularly assess the need for a valuation allowance against our deferred tax assets by considering both positive and negative evidence related to the likelihood of the realization of the deferred tax assets to determine if it is more-likely-than-not that some or all of the deferred tax assets will be realized. In our evaluation, we considered our cumulative loss in recent years and our forecasted future losses as significant pieces of negative evidence. During fiscal 2013, we determined that the negative evidence outweighed the positive evidence and a valuation allowance for a significant portion of our deferred tax assets was established that resulted in a tax expense of $186.8 million. 55 Liquidity and Capital Resources At January 31, 2015, our principal sources of liquidity were cash, cash equivalents and marketable securities totaling $1.9 billion, which excludes restricted cash of $115.0 million, and accounts receivable of $1.9 billion. Net cash provided by operating activities was $1.2 billion during fiscal 2015 and $875.5 million during the same period a year ago. Cash provided by operating activities has historically been affected by the amount of net loss adjusted for non-cash expense items such as depreciation and amortization, amortization of purchased intangibles from business combinations, amortization of debt discount, and the expense associated with stock- based awards; the reclassification of excess tax benefits from employee stock plans to cash flows from financing activities; the timing of employee related costs including commissions and bonus payments; the timing of collections from our customers, which is our largest source of operating cash flows; and changes in working capital accounts. Our working capital accounts consist of accounts receivables and prepaid assets and other current assets. Claims against working capital include accounts payable, accrued expenses and other current liabilities and our convertible notes. Our working capital may be impacted by factors in future periods, certain amounts and timing of which are seasonal, such as billings to customers for subscriptions and support services and the subsequent collection of those billings. As described above in “Seasonal Nature of Deferred Revenue and Accounts Receivable,” our fourth quarter has historically been our strongest quarter for new business and renewals. The year on year compounding effect of this seasonality in both billing patterns and overall business causes the value of invoices that we generate in the fourth quarter to increase as a proportion of our total annual billings. We generally invoice our customers for our subscription and services contracts in advance in annual installments. We typically issue renewal invoices in advance of the renewal service period, and depending on timing, the initial invoice for the subscription and services contract and the subsequent renewal invoice may occur in different quarters. Such invoice amounts are initially reflected in accounts receivable and deferred revenue, which is reflected on the balance sheet. The operating cash flow benefit of increased billing activity generally occurs in the subsequent quarter when we collect from our customers. As such, our first quarter has become our largest collections and operating cash flow quarter. Net cash provided by operating activities during fiscal 2015 increased $298.2 million over the same period a year ago primarily due to higher net income after adjusting for depreciation and amortization, loss on conversions of convertible senior notes, stock-based expenses and the timing of payments against accounts payable, accrued expenses and other current liabilities. Net cash used in investing activities was $698.4 million during fiscal 2015 and $2.4 billion during the same period a year ago. The net cash used in investing activities during fiscal 2015 primarily related to capital expenditures, including new office build-outs, investment of cash balances and strategic investments offset by proceeds from sales and maturities of marketable securities. Net cash used in investing activities during fiscal 2015 decreased by $1.7 billion over the same period a year ago primarily due to cash used for the acquisitions of ExactTarget, Inc. and EdgeSpring, Inc. during fiscal 2014, offset by cash proceeds from sales of land and building improvements totaling $223.2 million and cash acquired of $38.1 million from business combinations during fiscal 2015. Additionally, we made deposits totaling $126.4 million for the purchase of building and land during fiscal 2015. Net cash used in financing activities was $310.5 million during fiscal 2015 as compared to net cash provided by financing activities of $1.6 billion during the same period a year ago. Net cash used in financing activities during fiscal 2015 consisted primarily of $568.9 million in principal payments on our 0.75% convertible senior notes, $70.7 million of principal payments on capital leases and $285.0 million of payments on our term loan, offset by $309.0 million from proceeds from equity plans and $297.3 million from our revolving 56 credit facility. Net cash flows used in financing activities during fiscal 2015 changed $1.9 billion from the same period a year ago primarily due to $1.1 billion of proceeds from the issuance of convertible senior notes and related hedge transactions during fiscal 2014, and an increase of $562.9 million in principal payments on our 0.75% convertible senior notes during fiscal 2015. In January 2010, we issued $575.0 million of 0.75% convertible senior notes due January 15, 2015 (the “0.75% Senior Notes”) and concurrently entered into convertible notes hedges (the “0.75% Note Hedges”) and separate warrant transactions (the “0.75% Warrants”). On January 15, 2015, the 0.75% Senior Notes matured. Upon maturity of the 0.75% Senior Notes, we delivered cash up to the remaining principal amount of the 0.75% Senior Notes and shares of our common stock for the excess conversion value greater than the principal amount of the 0.75% Senior Notes. As of January 31, 2015, there is no remaining principal balance of the 0.75% Senior Notes outstanding. As a result of the conversions and maturity of the 0.75% Senior Notes during fiscal 2015, the Company exercised its rights on the 0.75% Note Hedges, and the 0.75% Note Hedges expired. Additionally, in fiscal 2015 the Company entered into agreements with each of the 0.75% Warrant counterparties to amend and settle the 0.75% Warrants prior to their scheduled expiration beginning in April 2015. As a result, the Company issued, in the aggregate, approximately 13.3 million shares to the counterparties to settle, via a net share settlement, the entirety of the 0.75% Warrants. In March 2013, we issued $1.15 billion of 0.25% convertible senior notes due April 1, 2018 (the “0.25% Senior Notes”) and concurrently entered into convertible notes hedges (the “0.25% Note Hedges”) and separate warrant transactions (the “0.25% Warrants”). The 0.25% Senior Notes will mature on April 1, 2018, unless earlier converted. Upon conversion of any 0.25% Senior Notes, we will deliver cash up to the principal amount of the 0.25% Senior Notes and, with respect to any excess conversion value greater than the principal amount of the 0.25% Senior Notes, shares of our common stock, cash, or a combination of both. The 0.25% Senior Notes will be convertible if during any 20 trading days during the 30 consecutive trading days of any fiscal quarter, our common stock trades at a price exceeding 130% of the conversion price of $66.44 per share applicable to the 0.25% Senior Notes. The 0.25% Senior Notes have not yet been convertible at the holders’ option. The 0.25% Senior Notes are classified as a noncurrent liability on our consolidated balance sheet as of January 31, 2015. Our common stock did not trade at a price exceeding 130% of the conversion price of $66.44 per share applicable to the 0.25% Senior Notes during the fiscal quarter ended January 31, 2015. Accordingly, the 0.25% Senior Notes will not be convertible at the holders’ option for the quarter ending April 30, 2015, and will remain classified as a noncurrent liability on our consolidated balance sheet. In July 2013, we entered into a credit agreement (the “Prior Credit Agreement”) with Bank of America, N.A. and certain other lenders, which provided for a $300.0 million term loan (the “Term Loan”). The Term Loan bore interest at our option under either a LIBOR-based formula or a base rate formula, each as set forth in the Prior Credit Agreement. On October 6, 2014, we repaid the Term Loan in full and terminated the Prior Credit Agreement. In October 2014, we entered into a credit agreement (the “Credit Agreement”) which provides for a $650.0 million unsecured revolving credit facility (the “Credit Facility”) that matures in October 2019. Immediately upon closing, we borrowed $300.0 million under the Credit Facility, approximately $262.5 million of which was used to repay in full the indebtedness under our Term Loan. We may use any future borrowings under the Credit Facility for working capital, capital expenditures and other general corporate purposes, including permitted acquisitions. We may borrow amounts under the Credit Facility at any time during the term of the Credit Agreement. We may also prepay the borrowings under the Credit Facility, in whole or in part, at any time without premium or penalty, subject to certain conditions, and amounts repaid or prepaid may be reborrowed. Borrowings under the Credit Facility bear interest, at our option at either a base rate formula or a LIBOR based formula, each as set forth in the Credit Agreement. Additionally, we are obligated to pay an ongoing commitment fee at a rate between 0.125% and 0.25%. Interest and the commitment fee are payable in arrears quarterly. 57 The Credit Agreement contains certain customary affirmative and negative covenants, including a consolidated leverage ratio covenant, a consolidated interest coverage ratio covenant, a limit on our ability to incur additional indebtedness, dispose of assets, make certain acquisition transactions, pay dividends or distributions, and certain other restrictions on our activities each defined specifically in the Credit Agreement. We were in compliance with the Credit Agreement’s covenants as of January 31, 2015. The weighted average interest rate on borrowings under the Credit Facility was 1.7% for the period beginning October 6, 2014 and ended January 31, 2015. As of January 31, 2015, outstanding borrowings under the Credit Facility were $300.0 million. In August 2014, we sold approximately 3.7 net acres of our undeveloped real estate in San Francisco for a total of $72.5 million. Separately, in September 2014, we sold approximately 1.5 net acres of our undeveloped real estate for a total of $125.0 million. We have 8.8 net acres remaining for sale as of January 31, 2015. In February 2015, we acquired 50 Fremont Street, a 41-story building totaling approximately 817,000 rentable square feet located in San Francisco, California (“50 Fremont”). We acquired 50 Fremont for the purpose of expanding our global headquarters in San Francisco. As of January 31, 2015, we were leasing approximately 500,000 square feet of the available space in 50 Fremont. See Note 14, “Subsequent Event” in the Notes to the Consolidated Financial Statements. The total purchase price for 50 Fremont was $629.3 million. To pay for 50 Fremont, we used $115.0 million of restricted cash and assumed a $200.0 million loan secured by the property with the remainder paid in cash. Our cash, cash equivalents and marketable securities are comprised primarily of corporate notes and other obligations, U.S. treasury securities, U.S. agency obligations, government obligations, collateralized mortgage obligations, mortgage backed securities, time deposits, money market mutual funds and municipal securities. As of January 31, 2015, we have a total of $63.8 million in letters of credit outstanding in favor of certain landlords for office space. To date, no amounts have been drawn against the letters of credit, which renew annually and expire at various dates through December 2030. We do not have any special purpose entities, and other than operating leases for office space and computer equipment, we do not engage in off-balance sheet financing arrangements. Our principal commitments consist of obligations under leases for office space, co-location data center facilities, and our development and test data center, as well as leases for computer equipment, software, furniture and fixtures. At January 31, 2015, the future non-cancelable minimum payments under these commitments were as follows (in thousands): Contractual Obligations Capital lease obligations, including interest . . . . Operating lease obligations: Facilities space . . . . . . . . . . . . . . . . . . . . . . Computer equipment and furniture and Payments Due by Period Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years $ 651,344 $104,825 $232,241 $ 314,278 $ 0 2,027,140 178,552 351,882 372,336 1,124,370 fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . 251,834 110,995 139,854 985 0.25% Convertible Senior Notes, including interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revolving Credit Facility . . . . . . . . . . . . . . . . . . Financing obligation—building in progress— leased facility . . . . . . . . . . . . . . . . . . . . . . . . . . Contractual commitments . . . . . . . . . . . . . . . . . . 1,160,422 300,000 335,824 18,823 2,875 0 1,777 1,316 6,109 0 1,151,438 300,000 37,984 2,598 43,546 14,909 252,517 0 0 0 0 $4,745,387 $400,340 $770,668 $2,197,492 $1,376,887 58 The majority of our operating lease agreements provide us with the option to renew. Our future operating lease obligations would change if we exercised these options and if we entered into additional operating lease agreements as we expand our operations. The financing obligation above represents the total obligation for our lease of approximately 445,000 rentable square feet of office space in San Francisco, California. As of January 31, 2015, $125.3 million of the total obligation noted above was recorded to Financing obligation, building in progress—leased facility, which is included in “Other noncurrent liabilities” on the consolidated balance sheets. In April 2014, we entered into an office lease agreement to lease approximately 714,000 rentable square feet of an office building located in San Francisco, California that is under construction. The lease payments associated with the lease will be approximately $560.0 million over the 15.5 year term of the lease, beginning in our first quarter of fiscal 2018, which is reflected above under Operating Leases. Subsequent to January 31, 2015, we acquired 50 Fremont. As of January 31, 2015, we had been leasing approximately 500,000 square feet of 50 Fremont (see Note 14 “Subsequent Event” in the Notes to the Consolidated Financial Statements). The lease, which was signed in January 2012, is reflected above under Operating lease obligations, and the commitment totals $238.5 million. The operating lease commitment is as follows: $16.1 million during fiscal 2016; $16.6 million during fiscal 2017; $17.1 million during fiscal 2018; $17.6 million during fiscal 2019; $18.1 million during fiscal 2020; and $153.0 thereafter. Beginning in the quarter ending April 30, 2015, this commitment will be removed from operating lease obligations. During fiscal 2015 and in future fiscal years, we have made and expect to continue to make additional investments in our infrastructure to scale our operations and increase productivity. We plan to upgrade or replace various internal systems to scale with the overall growth of the Company. Additionally, we expect capital expenditures to be higher in absolute dollars and remain consistent as a percentage of total revenues in future periods as a result of continued office build-outs, other leasehold improvements and data center investments. In the future, we may enter into arrangements to acquire or invest in complementary businesses or joint ventures, services and technologies, and intellectual property rights. We may be required to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all. We believe our existing cash, cash equivalents and short-term marketable securities and cash provided by operating activities will be sufficient to meet our working capital, capital expenditure and debt repayment needs over the next 12 months. New Accounting Pronouncement In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) which amended the existing FASB Accounting Standards Codification. This standard establishes a principle for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. The standard also provides guidance on the recognition of costs related to obtaining and fulfilling customer contracts. ASU 2014-09 is effective for fiscal 2018, including interim periods within that reporting period. Early adoption is not permitted. We are 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. We are also evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements and have not determined whether the effect will be material to either our revenue results or our deferred commissions balances. 59 Non-GAAP Financial Measures Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings,” defines and prescribes the conditions for use of non-GAAP financial information. Our measures of non-GAAP gross profit, non-GAAP operating profit, non-GAAP net income and non-GAAP earnings per share each meet the definition of a non-GAAP financial measure. Non-GAAP gross profit, Non-GAAP operating profit and Non-GAAP net income We use the non-GAAP measures of non-GAAP gross profit, non-GAAP operating profit and non-GAAP net income to provide an additional view of operational performance by excluding expenses and benefits that are not directly related to performance in any particular period. In addition to our GAAP measures we use these non- GAAP measures when planning, monitoring, and evaluating our performance. We believe that these non-GAAP measures reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business, as they exclude certain expenses and benefits. These items are excluded because the decisions which gave rise to them are not made to increase revenue in a particular period, but are made for our long-term benefit over multiple periods and we are not able to change or affect these items in any particular period. We define non-GAAP net income as our total net income excluding the following components, which we believe are not reflective of our ongoing operational expenses. In each case, for the reasons set forth below, we believe that excluding the component provides useful information to investors and others in understanding and evaluating the impact of certain items to our operating results and future prospects in the same manner as us, in comparing financial results across accounting periods and to those of peer companies and to better understand the impact of these items on our gross margin and operating performance. Additionally, as significant, unusual or discrete events occur, the results may be excluded in the period in which the events occur. • Stock-Based Expense. 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 expense varies for reasons that are generally unrelated to operational decisions and performance in any particular period. • Amortization of Purchased Intangibles. The Company views amortization of acquisition-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, as items arising from pre-acquisition activities determined at the time of an acquisition. While it is continually viewed 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 $575.0 million of convertible senior notes that were issued in a private placement in January 2010 and the Company’s $1.15 billion of convertible senior notes that were issued in a private placement in March 2013. The imputed interest rates were approximately 5.86% for the notes issued in January 2010 and approximately 2.53% for the notes issued in March 2013, while the coupon interest rates were 0.75% and 0.25%, respectively. 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. Management believes that the exclusion of the non-cash interest expense provides investors an enhanced view of the Company’s operational performance. 60 • Non-Cash Gains/Losses on Conversions of Debt. Upon settlement of the Company’s convertible senior notes, we attribute the fair value of the consideration transferred to the liability and equity components of the convertible senior notes. The difference between the fair value of consideration attributed to the liability component and the carrying value of the liability as of settlement date is recorded as a non- cash gain or loss on the statement of operations. Management believes that the exclusion of the non- cash gain/loss provides investors an enhanced view of the company’s operational performance. • Gain on sales of land and building improvements. The Company views the non-operating gains associated with the sales of the land and building improvements to be a discrete item. Management believes that the exclusion of the gains provides investors an enhanced view of the Company’s operational performance. • Income Tax Effects and Adjustments. During fiscal 2014, the Company’s non-GAAP tax provision excluded the tax effects of expense items described above and certain tax items not directly related to the current fiscal year’s ordinary operating results. Examples of such tax items included, but are not limited to, changes in the valuation allowance related to deferred tax assets, certain acquisition-related costs and unusual or infrequently occurring items. Management believes the exclusion of these income tax adjustments provides investors with useful supplemental information about the Company’s operational performance. During fiscal 2015, the Company began to compute and utilize 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 non-recurring and period-specific items such as changes in the tax valuation allowance and tax effects of acquisitions-related costs, since each of these items can vary in size and frequency. When projecting this long-term rate, the Company evaluated a three-year financial projection that excludes the impact of the following items: Stock-Based Expenses, Amortization of Purchased Intangibles, Amortization of Debt Discount, Gains/Losses on Conversions of Debt, and Gains/Losses on sales of land and building improvements. The projected rate also assumes no new acquisitions in the three-year period, and takes into account other factors including the Company’s current tax structure, its existing tax positions in various jurisdictions and key legislation in major jurisdictions where the Company operates. The non-GAAP tax rate for fiscal 2015 is 36.5%. The Company intends to re-evaluate this long-term rate on an annual basis or if any significant events that may materially affect this long-term rate occur. This long-term rate could be subject to change for a variety of reasons, for example, significant changes in the geographic earnings mix including acquisition activity, or fundamental tax law changes in major jurisdictions where the Company operates. We define non-GAAP gross profit as our total revenues less cost of revenues, as reported on our consolidated statement of operations, excluding the portions of stock-based expenses and amortization of purchased intangibles that are included in cost of revenues. We define non-GAAP operating profit as our non-GAAP gross profit less operating expenses, as reported on our consolidated statement of operations, excluding the portions of stock-based expenses and amortization of purchased intangibles that are included in operating expenses. Non-GAAP earnings per share Management uses the non-GAAP earnings per share to provide an additional view of performance by excluding items that are not directly related to performance in any particular period in the earnings per share calculation. We define non-GAAP earnings per share as our non-GAAP net income, which excludes the above components, which we believe are not reflective of our ongoing operational expenses, divided by basic or diluted shares outstanding. 61 Limitations on the use of non-GAAP financial measures A limitation of our non-GAAP financial measures of non-GAAP gross profit, non-GAAP operating profit, non-GAAP net income and non-GAAP earnings per share is that they do not have uniform definitions. Our definitions will likely differ from the definitions used by other companies, including peer companies, and therefore comparability may be limited. Thus, our non-GAAP measures of non-GAAP gross profit, non-GAAP operating profit, non-GAAP net income and non-GAAP earnings per share should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP. Additionally, in the case of stock-based expense, if we did not pay a portion of compensation in the form of stock-based expense, the cash salary expense included in costs of revenues and operating expenses would be higher which would affect our cash position. We compensate for these limitations by reconciling non-GAAP gross profit, non-GAAP operating profit, non-GAAP net income and non-GAAP earnings per share to the most comparable GAAP financial measure. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view our non-GAAP financial measures in conjunction with the most comparable GAAP financial measures. Our reconciliation of the non-GAAP financial measures of gross profit, operating profit, net income and earnings per share to the most comparable GAAP measure, “gross profit,” “loss from operations,” “net income (loss)” and “net income (loss) per share” for fiscal years 2015, 2014 and 2013 are as follows (in thousands, except for share numbers): Non-GAAP gross profit GAAP gross profit . . . . . . . . . . . . . . . . . . . . . . . . Plus: Fiscal Year Ended January 31, 2015 2014 2013 $4,084,316 $3,102,575 $2,366,616 Amortization of purchased intangibles . . . . Stock-based expenses . . . . . . . . . . . . . . . . . 90,300 53,812 109,356 45,608 77,249 33,757 Non-GAAP gross profit . . . . . . . . . . . . . . . . . . . $4,228,428 $3,257,539 $2,477,622 Non-GAAP operating profit GAAP loss from operations . . . . . . . . . . . . . . . . . . . Plus: Fiscal Year Ended January 31, 2015 2014 2013 $(145,633) $(286,074) $(110,710) Amortization of purchased intangibles . . . . . . Stock-based expenses . . . . . . . . . . . . . . . . . . . . 154,973 564,765 146,535 503,280 88,171 379,350 Non-GAAP operating profit . . . . . . . . . . . . . . . . . . . $ 574,105 $ 363,741 $ 356,811 62 Non-GAAP net income GAAP net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: Fiscal Year Ended January 31, 2015 2014 2013 $(262,688) $(232,175) $(270,445) Amortization of purchased intangibles . . . . . . Stock-based expenses . . . . . . . . . . . . . . . . . . . . Amortization of debt discount, net . . . . . . . . . . Loss on conversion of debt . . . . . . . . . . . . . . . . 154,973 564,765 36,575 10,326 146,535 503,280 46,728 214 88,171 379,350 23,837 0 Less: Gain on sales of land and building improvements . . . . . . . . . . . . . . . . . . . . . . . . (15,625) 0 0 Income tax effects and adjustments of Non- GAAP items . . . . . . . . . . . . . . . . . . . . . . . . . (146,741) (242,729) 21,629 Non-GAAP net income . . . . . . . . . . . . . . . . . . . . . . $ 341,585 $ 221,853 $ 242,542 Non-GAAP diluted earnings per share GAAP diluted loss per share . . . . . . . . . . . . . . . . . . . . Plus: Amortization of purchased intangibles . . . . . . . . Stock-based expenses . . . . . . . . . . . . . . . . . . . . . . Amortization of debt discount, net . . . . . . . . . . . . Loss on conversion of debt . . . . . . . . . . . . . . . . . . Less: Gain on sales of land and building Fiscal Year Ended January 31, 2014 2015 2013 $ (0.42) $ (0.39) $ (0.48) 0.24 0.87 0.06 0.02 0.23 0.79 0.07 0.00 improvements . . . . . . . . . . . . . . . . . . . . . . . . . . (0.02) 0.00 Income tax effects and adjustments of Non- GAAP items . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.23) (0.35) Non-GAAP diluted earnings per share . . . . . . . . . . . . . $ 0.52 $ 0.35 $ 0.15 0.64 0.04 0.00 0.00 0.06 0.41 Shares used in computing diluted net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 651,534 635,688 596,280 Non-GAAP operating profit for the year ended January 31, 2015 was $574.1 million and $363.7 million for the same period a year ago, an improvement of $210.4 million or 58 percent. During fiscal 2015 we remained focused on improving non-GAAP operating profit and expect to remain similarly focused in fiscal 2016. 63 The effects of dilutive securities were not included in the GAAP calculation of diluted earnings/loss per share for the years ended January 31, 2015, 2014 and 2013 because we had a net loss for those periods and the effect would have been anti-dilutive. The following table reflects the effect of the dilutive securities on the basic share count used in the GAAP earnings/loss per share calculation to derive the share count used for the non- GAAP diluted earnings per share: Fiscal Year Ended January 31, Supplemental Diluted Sharecount Information (in thousands): 2015 2014 2013 Weighted-average shares outstanding for GAAP basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 624,148 597,613 564,896 Effect of dilutive securities: Convertible senior notes . . . . . . . . . . . . . . . . . . . . . . . Warrants associated with the convertible senior note hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee stock awards . . . . . . . . . . . . . . . . . . . . . . . 5,381 14,550 11,360 9,536 12,469 9,658 13,867 5,132 14,892 Adjusted weighted-average shares outstanding and assumed conversions for Non-GAAP diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 651,534 635,688 596,280 Supplemental Tax Expense (Benefit) Information: As described above, beginning in February 2014, which was the start of our fiscal 2015, we changed the methodology used to calculate our non-GAAP tax expense. We have computed and are utilizing a fixed long- term projected non-GAAP tax rate of 36.5 percent for fiscal 2015. We moved to this long-term projected non- GAAP tax rate in order to provide better consistency across the interim reporting periods by eliminating the effects of non-recurring and period-specific items. As a result, we believe that starting in fiscal 2015, providing a tabular reconciliation of the non-GAAP financial measure of tax expense (benefit) to the comparable GAAP measure is not appropriate given our new methodology. During the third quarter of fiscal 2013, we recorded for GAAP purposes a valuation allowance against a significant portion of our U.S. deferred tax assets. During fiscal 2014, we recorded a partial valuation allowance release, primarily in connection with the acquisition of ExactTarget. The increasing number of tax adjustments reflected below was the result of the GAAP valuation allowance and the Company’s increasing acquisition activities. The following table for fiscal 2014 and 2013 reflects the calculation of our non-GAAP tax expense: Non-GAAP tax expense (in thousands): GAAP Tax Expense (Benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . GAAP to Non-GAAP Adjustments—tax effects of: Stock-based expenses, amortization of purchased intangibles and amortization of debt discount, net (1) . . Deferred tax asset partial valuation (reserve) release (2) . . State income tax credits not benefited (3) . . . . . . . . . . . . . . Acquisitions-related costs (4) . . . . . . . . . . . . . . . . . . . . . . . Other, net (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-GAAP Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal Year Ended January 31, 2014 2013 (125,760) 142,651 229,277 25,048 5,325 (19,708) 2,787 242,729 116,969 169,501 (186,806) 0 0 (4,324) (21,629) 121,022 (1) The Company excluded stock-based expenses, amortization of purchased intangibles, and amortization of debt discount, net, in reporting its non-GAAP net income. Accordingly, the Company excluded the related tax effects of these items. The related tax effects were computed by applying the relevant statutory tax rate to these items for each respective jurisdiction. 64 (2) During fiscal 2013, the Company evaluated both positive and negative evidence related to the likelihood of the realization of the deferred tax assets and determined that the negative evidence outweighed the positive evidence due to the cumulative GAAP loss in recent years and forecasted future GAAP losses. As a result, a valuation allowance was established against a significant portion of the deferred tax assets in Q3 fiscal 2013. However, a valuation allowance would not be necessary on a non-GAAP basis given the Company’s non-GAAP operating income. As a result, the Company excluded its GAAP valuation allowance recorded during the period when computing its non-GAAP tax expense. (3) During fiscal 2014, California mandated a change to the way it apportioned income to the state, which significantly reduced the Company’s California income tax expense. Accordingly, for computing non- GAAP tax expense, the Company did not recognize tax benefits related to certain California research and development tax credits as the Company believed these credits may not be realized given the lowered California income tax expense. (4) During fiscal 2014, the Company excluded certain tax effects related to acquisitions in computing its non- GAAP tax expense. The majority of this adjustment was attributable to non-cash tax costs associated with the transfer of purchased intangibles. This non-cash tax item was excluded because the decisions which gave rise to these non-cash tax costs were neither made to increase revenue nor directly related to performance in any particular period, but were made for the Company’s long term benefit over multiple periods. The remainder of this adjustment included the tax effects of legal and accounting fees incurred to facilitate transactions, which amount was not material. The related tax effects were computed by applying the relevant statutory tax rate to these items for each respective jurisdiction. (5) Other, net included multiple items that were immaterial either on an individual basis or an aggregate basis. 65 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Currency Exchange Risk Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, British Pound Sterling, Canadian Dollar, Australian Dollar and Japanese Yen. We seek to minimize the impact of certain foreign currency fluctuations by hedging certain balance sheet exposures with foreign currency forward contracts. Any gain or loss from settling these contracts is offset by the loss or gain derived from the underlying balance sheet exposures. In accordance with our policy, the hedging contracts we enter into have maturities of less than three months. Additionally, by policy, we do not enter into any hedging contracts for trading or speculative purposes. Interest Rate Sensitivity We had cash, cash equivalents and marketable securities totaling $1.9 billion at January 31, 2015. This amount was invested primarily in money market funds, time deposits, corporate notes and bonds, government securities and other debt securities with credit ratings of at least BBB or better. The cash, cash equivalents and short-term marketable securities are held for general corporate purposes including possible acquisitions of, or investments in, complementary businesses, services or technologies, working capital and capital expenditures. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes. Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However because we classify our debt securities as “available for sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary. Our fixed-income portfolio is subject to interest rate risk. An immediate increase or decrease in interest rates of 100-basis points at January 31, 2015 could result in a $13.5 million market value reduction or increase of the same amount. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur. Fluctuations in the value of our investment securities caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive income, and are realized only if we sell the underlying securities. As of January 31, 2015, we had restricted cash totaling $115.0 million that was held in a money market account, which is subject to market risk due to changes in interest rates. At January 31, 2014, we had cash, cash equivalents and marketable securities totaling $1.3 billion. The fixed-income portfolio was also subject to interest rate risk. Changes in interest rates of 100-basis points would have resulted in market value changes of $8.8 million. Market Risk and Market Interest Risk In March 2013, we issued at par value $1.15 billion of 0.25% convertible senior notes (the “0.25% Senior Notes”) (collectively the “Notes”). Holders of the 0.25% Senior Notes may convert the 0.25% Senior Notes prior to maturity upon the occurrence of certain circumstances. Upon conversion, we would pay the holder an amount of cash equal to the principal amounts of the Notes. For the 0.25% Senior Notes, the amounts in excess of the principal amounts, if any, may be paid in cash or stock at our option. Concurrent with the issuance of the Notes, we entered into separate note hedging transactions and the sale of warrants. These separate transactions were completed to reduce the potential economic dilution from the conversion of the Notes. 66 The 0.25% Senior Notes have a fixed annual interest rate of 0.25%, and therefore we do not have economic interest rate exposure on the Notes. However, the value of the Notes are exposed to interest rate risk. Generally, the fair values of our fixed interest rate Notes will increase as interest rates fall and decrease as interest rates rise. In addition, the fair value of our 0.25% Notes is affected by our stock price. The principal balance of our 0.25% Senior Notes was $1.15 billion as of January 31, 2015. The total estimated fair value of our 0.25% Senior Notes at January 31, 2015 was $1.3 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 fourth quarter of fiscal 2015, which was $110.87. In October 2014, we entered into a credit agreement (the “Credit Agreement”) which provides for a $650.0 million unsecured revolving credit facility that matures in October 2019 (the “Credit Facility”). Immediately upon closing, we borrowed $300.0 million under the Credit Facility. Borrowings under the Credit Facility bear interest, at our option, at either a base rate formula, as defined in the Credit Agreement, or a LIBOR based formula, each as set forth in the Credit Agreement. Additionally, we are obligated to pay an ongoing commitment fee at a rate between 0.125% and 0.25%. Interest and the commitment fees are payable in arrears quarterly. By entering into the Credit Agreement, we have assumed risks associated with variable interest rates based upon a variable base rate, as defined in the Credit Agreement, or LIBOR. The weighted average interest rate on the Credit Facility was 1.7% for the period beginning October 6, 2014 and ended January 31, 2015. Changes in the overall level of interest rates affect the interest expense that we recognize in our statements of operations. We deposit our cash with multiple financial institutions, therefore our deposits, at times, may exceed federally insured limits. The bank counterparties to the derivative contracts potentially expose us to credit-related losses in the event of their nonperformance. To mitigate that risk, we only contract with counterparties who meet the minimum requirements under our counterparty risk assessment process. We monitor ratings, credit spreads and potential downgrades on at least a quarterly basis. Based on our on-going assessment of counterparty risk, we adjust our exposure to various counterparties. We generally enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. However, we do not have any master netting arrangements in place with collateral features. We have an investment portfolio that includes strategic investments in public and privately-held companies, many of which are in the development stage. When our ownership interests are less than 20 percent and we do not have the ability to exert significant influence, we account for investments in non-marketable equity and debt securities of the privately-held companies using the cost method of accounting. Otherwise, we account for the investments using the equity method of accounting. Our portfolio consists of investments in approximately 100 companies, with our investments in these companies ranging from $0.2 million to $40.0 million. As of January 31, 2015 and January 31, 2014 the carrying value of our investments in privately-held companies was $158.0 million and $77.0 million, respectively. The estimated fair value of our investments in privately-held companies was $280.0 million as of January 31, 2015. 67 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The following financial statements are filed as part of this Annual Report on Form 10-K: Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Comprehensive Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page No. 69 71 72 73 74 75 76 68 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of salesforce.com, inc. We have audited the accompanying consolidated balance sheets of salesforce.com, inc. as of January 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended January 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15(c). These financial statements and schedule are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of salesforce.com, inc. at January 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), salesforce.com inc.’s internal control over financial reporting as of January 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework and our report dated March 5, 2015 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP San Jose, California March 5, 2015 69 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of salesforce.com, inc. We have audited salesforce.com, inc.’s internal control over financial reporting as of January 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework (the COSO criteria). salesforce.com, inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, salesforce.com, inc. maintained, in all material respects, effective internal control over financial reporting as of January 31, 2015, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of salesforce.com, inc. as of January 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended January 31, 2015 of salesforce.com, inc. and our report dated March 5, 2015 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP San Jose, California March 5, 2015 70 salesforce.com, inc. Consolidated Balance Sheets (in thousands, except per share data) Assets Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, net of allowance for doubtful accounts of $8,146 and $4,769 at January 31, 2015 and 2014, respectively . . . . . . . . . . . . . . . . . . . . . Deferred commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land and building improvements held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marketable securities, noncurrent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred commissions, noncurrent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capitalized software, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 31, 2015 January 31, 2014 $ 908,117 87,312 $ 781,635 57,139 1,905,506 225,386 280,554 143,197 3,550,072 894,855 1,125,866 162,796 433,398 3,782,660 628,320 115,015 1,360,837 171,461 309,180 0 2,680,252 482,243 1,240,746 153,459 481,917 3,500,823 613,490 0 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,692,982 $9,152,930 Liabilities, temporary equity and stockholders’ equity Current liabilities: Accounts payable, accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Convertible 0.75% senior notes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Term loan, current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,103,335 3,286,768 0 0 $ 934,324 2,473,705 542,159 30,000 Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Convertible 0.25% senior notes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Term loan, noncurrent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue, noncurrent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,390,103 1,070,692 0 300,000 34,681 922,323 3,980,188 1,046,930 255,000 0 48,410 757,187 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,717,799 6,087,715 Temporary equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity: Preferred stock, $0.001 par value; 5,000 shares authorized and none issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock, $0.001 par value; 1,600,000 shares authorized, 650,596 and 610,143 issued and outstanding at January 31, 2015 and 2014, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital Accumulated other comprehensive income (loss) Accumulated deficit 0 0 26,705 0 651 4,604,485 (24,108) (605,845) 610 3,363,377 17,680 (343,157) Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,975,183 3,038,510 Total liabilities, temporary equity and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . $10,692,982 $9,152,930 See accompanying Notes. 71 salesforce.com, inc. Consolidated Statements of Operations (in thousands, except per share data) Fiscal Year Ended January 31, 2015 2014 2013 Revenues: Subscription and support Professional services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,013,764 359,822 5,373,586 $3,824,542 246,461 4,071,003 $2,868,808 181,387 3,050,195 Cost of revenues (1)(2): Subscription and support Professional services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses (1)(2): Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marketing and sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sales of land and building improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss before benefit from (provision for) income taxes . . . . . . . . . . . . . . . . . . . . . . . . Benefit from (provision for) income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 924,638 364,632 1,289,270 4,084,316 711,880 256,548 968,428 3,102,575 494,187 189,392 683,579 2,366,616 792,917 2,757,096 679,936 4,229,949 (145,633) 10,038 (73,237) 15,625 (19,878) (213,085) (49,603) 429,479 623,798 1,614,026 2,168,132 433,821 596,719 2,477,326 3,388,649 (110,710) (286,074) 19,562 10,218 (30,948) (77,211) 0 0 (5,698) (4,868) (127,794) (357,935) (142,651) 125,760 $ (262,688) $ (232,175) $ (270,445) Basic net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares used in computing basic net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares used in computing diluted net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ (0.42) $ (0.42) $ (0.39) $ (0.39) $ 624,148 624,148 597,613 597,613 (0.48) (0.48) 564,896 564,896 (1) Amounts include amortization of purchased intangibles from business combinations, as follows: Fiscal Year Ended January 31, 2015 2014 2013 Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marketing and sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,300 64,673 $ 109,356 37,179 $ 77,249 10,922 (2) Amounts include stock-based expenses, as follows: Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marketing and sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53,812 121,193 286,410 103,350 $ 45,608 107,420 258,571 91,681 $ 33,757 76,333 199,284 69,976 Fiscal Year Ended January 31, 2015 2014 2013 See accompanying Notes. 72 salesforce.com, inc. Consolidated Statements of Comprehensive Loss (in thousands) Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss), before tax and net of reclassification adjustments: Fiscal Year Ended January 31, 2015 2014 2013 $(262,688) $(232,175) $(270,445) Foreign currency translation and other gains (losses) . . . . . . . . . . . . . . Unrealized gains (losses) on investments . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss), before tax . . . . . . . . . . . . . . . . . . . . . . . Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43,276) 1,488 (41,788) 0 Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . (41,788) (4,930) 8,120 3,190 (2,647) 543 4,783 (329) 4,454 0 4,454 Comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(304,476) $(231,632) $(265,991) See accompanying Notes. 73 salesforce.com, inc. Consolidated Statements of Stockholders’ Equity (in thousands) Common Stock Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Income/(Loss) Retained Earnings (Accumulated Deficit) Total Stockholders’ Equity Balances at January 31, 2012 . . . . . . . . . . . . . . . . . . . . . 548,146 $548 $1,414,666 $ 12,683 $ 159,463 $1,587,360 Exercise of stock options and stock grants to board members for board services . . . . . . . . . . . 20,237 20 278,986 Vested restricted stock units converted to shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares issued related to business combinations . . . Shares issued under employee stock plans . . . . . . Tax benefits from employee stock plans . . . . . . . . Stock-based expenses . . . . . . . . . . . . . . . . . . . . . . Temporary equity reclassification . . . . . . . . . . . . . Other comprehensive income, net of tax . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,564 7,727 2,953 0 0 0 0 0 7 8 3 0 0 0 0 0 (6) 240,020 69,067 7,189 375,841 25,129 0 0 0 0 0 0 0 0 0 4,454 0 0 279,006 0 0 0 0 0 0 0 (270,445) 1 240,028 69,070 7,189 375,841 25,129 4,454 (270,445) Balances at January 31, 2013 . . . . . . . . . . . . . . . . . . . . . 585,627 $586 $2,410,892 $ 17,137 $(110,982) $2,317,633 Exercise of stock options and stock grants to board members for board services . . . . . . . . . . . 9,952 10 197,012 Vested restricted stock units converted to shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares issued related to business combinations . . . Shares issued under employee stock plans . . . . . . Tax benefits from employee stock plans . . . . . . . . Stock-based expenses . . . . . . . . . . . . . . . . . . . . . . Temporary equity reclassification . . . . . . . . . . . . . Equity component of the convertible notes issuance, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of convertible note hedges . . . . . . . . . . . Issuance of warrants . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income, net of tax . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,265 2,367 2,932 0 0 0 0 0 0 0 0 9 2 3 0 0 0 0 0 0 0 0 0 81,191 92,482 8,048 494,615 26,907 121,230 (153,800) 84,800 0 0 0 0 0 0 0 0 0 0 0 0 543 0 0 0 0 0 0 0 0 0 0 0 0 (232,175) 197,022 9 81,193 92,485 8,048 494,615 26,907 121,230 (153,800) 84,800 543 (232,175) Balances at January 31, 2014 . . . . . . . . . . . . . . . . . . . . . 610,143 $610 $3,363,377 $ 17,680 $(343,157) $3,038,510 Exercise of stock options and stock grants to board members for board services . . . . . . . . . . . 7,413 Vested restricted stock units converted to shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares issued related to business combinations . . . Shares issued under employee stock plans . . . . . . Tax benefits from employee stock plans . . . . . . . . Settlement of 0.75% convertible notes and related warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based expenses . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss, net of tax . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,259 7,185 3,264 0 13,332 0 0 0 8 9 7 4 0 13 0 0 0 182,270 0 339,076 127,816 7,730 22,736 561,480 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (41,788) 0 0 0 0 (262,688) 182,278 9 339,083 127,820 7,730 22,749 561,480 (41,788) (262,688) Balances at January 31, 2015 . . . . . . . . . . . . . . . . . . . . . 650,596 $651 $4,604,485 $(24,108) $(605,845) $3,975,183 See accompanying Notes. 74 salesforce.com, inc. Consolidated Statements of Cash Flows (in thousands) Fiscal Year Ended January 31, 2015 2014 2013 $ (262,688) $ (232,175) $ (270,445) Operating activities: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of debt discount and transaction costs . . . . . . . . . . . . . . . . . . . . . Gain on sales of land and building improvements . . . . . . . . . . . . . . . . . . . . . . Loss on conversions of convertible senior notes . . . . . . . . . . . . . . . . . . . . . . . . Amortization of deferred commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expenses related to employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess tax benefits from employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . Changes in assets and liabilities, net of business combinations: Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets and other assets . . . . . . . . . . . . Accounts payable, accrued expenses and other liabilities . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . Investing activities: Business combinations, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from land activity, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit for purchase of building and land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Strategic investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturities of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing activities: Proceeds from borrowings on convertible senior notes, net . . . . . . . . . . . . . . . . . . . Proceeds from issuance of warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of convertible note hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from term loan, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from revolving credit facility, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess tax benefits from employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments on convertible senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal payments on capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments on term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . Effect of exchange rate changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 448,296 39,620 (15,625) 10,326 257,642 564,765 (7,730) (544,610) (320,904) 45,819 159,973 798,830 1,173,714 38,071 223,240 (126,435) (93,725) (780,540) 243,845 87,638 (290,454) (698,360) 0 0 0 0 297,325 308,989 7,730 (568,862) (70,663) (285,000) (310,481) (38,391) 126,482 781,635 $ 908,117 Supplemental cash flow disclosure: Cash paid during the period for: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes, net of tax refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 24,684 36,219 Non-cash financing and investing activities: Fixed assets acquired under capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Building in progress—leased facility acquired under financing obligation . . . Fair value of equity awards assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of common stock issued as consideration for business $ 124,099 85,118 $ 1,050 $ combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 338,033 See accompanying Notes. 75 369,423 49,582 0 214 194,553 503,280 (8,144) (424,702) (265,080) 105,218 (29,043) 612,343 875,469 216,795 24,086 0 0 154,818 379,350 (14,933) (183,242) (232,591) (9,718) 193,358 479,419 736,897 (2,617,302) 0 0 (31,160) (558,703) 1,038,284 36,436 (299,110) (2,431,555) (579,745) (4,106) 0 (9,695) (1,021,287) 706,893 144,623 (175,601) (938,918) 1,132,750 84,800 (153,800) 298,500 0 289,931 8,144 (5,992) (41,099) (15,000) 1,598,234 (7,758) 34,390 747,245 781,635 21,503 28,870 492,810 40,171 19,037 69,533 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 0 0 0 0 0 351,366 14,933 0 (31,754) 0 334,545 7,437 139,961 607,284 747,245 6,890 53,089 33,392 0 37,898 202,161 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 services. The Company is dedicated to helping customers of all sizes and industries worldwide transform themselves into “customer companies” by empowering them to connect with their customers, partners, employees and products in entirely new ways. The Company provides customers with the solutions they need to build a next generation social front office with social and mobile cloud technologies. Fiscal Year The Company’s fiscal year ends on January 31. References to fiscal 2015, for example, refer to the fiscal year ending January 31, 2015. Basis of Presentation On March 20, 2013, the Company’s certificate of incorporation was amended to increase the number of authorized shares of common stock from 400.0 million to 1.6 billion in order to provide for a four-for-one stock split of the common stock effected in the form of a stock dividend. The record date for the stock split was April 3, 2013, and the additional shares were distributed on April 17, 2013. Each stockholder of record on the close of business on the record date received three additional shares of common stock for each share held. All share and per share data presented herein reflect the impact of the increase in authorized shares and the stock split, as appropriate. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in the Company’s consolidated financial statements and notes thereto. Significant estimates and assumptions made by management include the determination of: • • • • • • • the best estimate of selling price of the deliverables included in multiple deliverable revenue arrangements, the fair value of assets acquired and liabilities assumed for business combinations, the recognition, measurement and valuation of current and deferred income taxes, the fair value of convertible notes, the fair value of stock awards issued and related forfeiture rates, the valuation of strategic investments and the determination of other-than-temporary impairments, and the assessment of determination of impairment of long-lived assets (property and equipment, goodwill and identified intangibles). Actual results could differ materially from those estimates. 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. 76 Segments The Company operates as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who is the chief executive officer, in deciding how to allocate resources and assessing performance. Over the past few years, the Company has completed several acquisitions. These acquisitions have allowed the Company to expand its offerings, presence and reach in various market segments of the enterprise cloud computing market. While the Company has offerings in multiple enterprise cloud computing market segments, the Company’s business operates in one operating segment because all of the Company’s offerings operate on a single platform and are deployed in an identical way, and the Company’s chief operating decision maker evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis. Since the Company operates in one operating segment, all required financial segment information can be found in the consolidated financial statements. Concentrations of Credit Risk and Significant Customers The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, restricted cash and trade accounts receivable. Although the Company deposits its cash with multiple financial institutions, its deposits, at times, may exceed federally insured limits. Collateral is not required for accounts receivable. The Company maintains an allowance for doubtful accounts receivable balances. This allowance is based upon historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with delinquent accounts. No single customer accounted for more than five percent of accounts receivable at January 31, 2015 and January 31, 2014. No single customer accounted for five percent or more of total revenue during fiscal 2015, 2014 and 2013. Geographic Locations As of January 31, 2015 and 2014, assets located outside the Americas were 12 percent and 12 percent of total assets, respectively. Revenues by geographical region are as follows (in thousands): Fiscal Year Ended January 31, 2015 2014 2013 Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,868,329 984,919 520,338 $2,899,837 741,220 429,946 $2,123,736 525,304 401,155 $5,373,586 $4,071,003 $3,050,195 Americas revenue attributed to the United States was approximately 94 percent, 96 percent and 94 percent in fiscal 2015, 2014 and 2013, respectively. No other country represented more than ten percent of total revenue during fiscal 2015, 2014 or 2013. 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. 77 The Company commences revenue recognition when all of the following conditions are satisfied: • • • • there is persuasive evidence of an arrangement; the service has been or is being provided to the customer; the collection of the fees is reasonably assured; and the amount of fees to be paid by the customer is fixed or determinable. The Company’s subscription service arrangements are non-cancelable and do not contain refund-type provisions. Subscription and Support Revenues Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement date of each contract, which is the date the Company’s service is made available to customers. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. Professional Services and Other Revenues The majority of the Company’s professional services contracts are on a time and material basis. When these services are not combined with subscription revenues as a single unit of accounting, as discussed below, these revenues are recognized as the services are rendered for time and material contracts, and when the milestones are achieved and accepted by the customer for fixed price contracts. Training revenues are recognized as the services are performed. Multiple Deliverable Arrangements The Company enters into arrangements with multiple deliverables that generally include multiple subscriptions, premium support and professional services. If the deliverables have standalone value upon delivery, the Company accounts for each deliverable separately. Subscription services have standalone value as such services are often sold separately. In determining whether professional services have standalone value, the Company considers the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the subscription service start date and the contractual dependence of the subscription service on the customer’s satisfaction with the professional services work. To date, the Company has concluded that all of the professional services included in multiple deliverable arrangements executed have standalone value. Multiple deliverables included in an arrangement are separated into different units of accounting and the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. The Company determines the relative selling price for a deliverable based on its vendor-specific objective evidence of selling price (“VSOE”), if available, or its best estimate of selling price (“BESP”), if VSOE is not available. The Company has determined that third-party evidence of selling price (“TPE”) is not a practical alternative due to differences in its service offerings compared to other parties and the availability of relevant third-party pricing information. The amount of revenue allocated to delivered items is limited by contingent revenue, if any. For certain professional services, the Company has established VSOE as a consistent number of standalone sales of these deliverables have been priced within a reasonably narrow range. The Company has not established VSOE for its subscription services due to lack of pricing consistency, the introduction of new services and other factors. Accordingly, the Company uses its BESP to determine the relative selling price for its subscription services. 78 The Company determines BESP by considering its overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the Company’s discounting practices, the size and volume of the Company’s transactions, the customer demographic, the geographic area where services are sold, price lists, its go-to-market strategy, historical standalone sales and contract prices. The determination of BESP is made through consultation with and approval by the Company’s management, taking into consideration the go- to-market strategy. As the Company’s go-to-market strategies evolve, the Company may modify its pricing practices in the future, which could result in changes in relative selling prices, including both VSOE and BESP. Deferred Revenue The deferred revenue balance does not represent the total contract value of annual or multi-year, non- cancelable subscription agreements. Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from subscription services described above and is recognized as the revenue recognition criteria are met. The Company generally invoices customers in annual installments. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, 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. 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 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. 79 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”. Property and Equipment Property and equipment are stated at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of those assets as follows: Computer, equipment and software . . . . . . . . . . . . . . . . . . . . . 3 to 9 years Furniture and fixtures . . . . . . . . . . . . . 5years Leasehold improvements . . . . . . . . . . Shorter of the estimated lease term or 10 years Building improvements . . . . . . . . . . . Amortized over the estimated useful lives of the respective assets when they are ready for their intended use When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from their respective accounts and any loss on such retirement is reflected in operating expenses. Capitalized Internal-Use Software Costs The Company capitalizes costs related to its enterprise cloud computing services and certain projects for internal use incurred during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life, which is generally three to five years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. Goodwill, Intangible Assets, Long-Lived Assets and Impairment Assessments The Company evaluates and tests the recoverability of its goodwill for impairment at least annually during the fourth quarter or more often if and when circumstances indicate that goodwill may not be recoverable. Intangible assets are amortized over their useful lives. Each period the Company evaluates the estimated remaining useful life of its intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. The carrying amounts of these assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. If the undiscounted cash flows used in the test for recoverability are less than the carrying amount of these assets, then the carrying amount of such assets is reduced to fair value. The Company evaluates the recoverability of its long-lived assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. 80 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. 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 into operating expense, and the recorded liabilities are accreted to the future value of the estimated retirement costs. The Company records assets and liabilities for the estimated construction costs incurred under build-to-suit lease arrangements to the extent it is involved in the construction of structural improvements or takes construction risk prior to commencement of a lease. Accounting for Stock-Based 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 Company recognizes stock-based expenses related to shares issued pursuant to its 2004 Employee Stock Purchase Plan (“ESPP”) on a straight-line basis over the offering period, which is 12 months. Stock-based expenses are recognized net of estimated forfeiture activity. The estimated forfeiture rate applied is based on historical forfeiture rates. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option pricing model. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions and fair value per share: Stock Options Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated life . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . . . Weighted-average fair value per share of Fiscal Year Ended January 31, 2015 2014 2013 37% 37 - 43% 43 - 51% 3.6years 3.4 years 1.12 - 1.53% 0.48 - 1.21% 0.43 - 0.77% 3.7 years grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17.20 $ 14.08 $ 12.94 81 ESPP Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated life . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . . . Weighted-average fair value per share of Fiscal Year Ended January 31, 2015 2014 2013 32 - 35% 31 - 35% 39 - 46% 0.75 years 0.75 years 0.07 - 0.23% 0.07 - 0.10% 0.03 - 0.22% 0.75 years grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14.56 $ 10.30 $ 11.39 The Company estimated its future stock price volatility considering both its observed option-implied volatilities and its historical volatility calculations. Management believes this is the best estimate of the expected volatility over the expected life of its stock options and stock purchase rights. The estimated life for the stock options was based on an analysis of historical exercise activity. The estimated life of the ESPP was based on the two purchase periods within each offering period. The risk-free interest rate is based on the rate for a U.S. government security with the same estimated life at the time of the option grant and the stock purchase rights. Advertising Expenses Advertising is expensed as incurred. Advertising expense was $203.6 million, $155.8 million and $110.7 million for fiscal 2015, 2014 and 2013, respectively. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the consolidated statement of operations in the period that includes the enactment date. The Company’s tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, solely based on its technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than 50 percent likely to be realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax provision. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the applicable tax law. The Company regularly reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The Company’s judgments regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute its business plans and/or tax planning strategies. Should there be a change in the ability to recover deferred tax assets, the tax provision would increase or decrease in the period in which the assessment is changed. Foreign Currency Translation The functional currency of the Company’s major foreign subsidiaries is generally the local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are 82 recorded as a separate component on the consolidated statements of comprehensive loss. Foreign currency transaction gains and losses are included in net loss for the period. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average exchange rate during the period. Equity transactions are translated using historical exchange rates. Warranties and Indemnification The Company’s enterprise cloud computing services are typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable and materially in accordance with the Company’s online help documentation under normal use and circumstances. The Company’s arrangements generally include certain provisions for indemnifying customers against liabilities if its products or services infringe a third party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of such obligations and has not accrued any liabilities related to such obligations in the accompanying consolidated financial statements. The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as the Company’s director or officer or that person’s services provided to any other company or enterprise at the Company’s request. The Company maintains director and officer insurance coverage that would generally enable the Company to recover a portion of any future amounts paid. The Company may also be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions. New Accounting Pronouncement In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) which amended the existing FASB Accounting Standards Codification. This standard establishes a principle for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. The standard also provides guidance on the recognition of costs related to obtaining and fulfilling customer contracts. ASU 2014-09 is effective for fiscal 2018, including interim periods within that reporting period. Early adoption is not permitted. The Company is currently in the process of assessing the adoption methodology, which allows the amendment to be applied retrospectively to each prior period presented, or with the cumulative effect recognized as of the date of initial application. The Company is also evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements and has not determined whether the effect will be material to either its revenue results or its deferred commissions balances. Reclassifications Certain reclassifications to the fiscal 2014 balances were made to conform to the current period presentation in the Statement of Cash Flows. These reclassifications include loss on conversions and amortization of debt discount. 83 2. Investments Marketable Securities At January 31, 2015, marketable securities consisted of the following (in thousands): Investments classified as Marketable Securities Corporate notes and obligations . . . . . . . . . . . . . . . U.S. treasury securities . . . . . . . . . . . . . . . . . . . . . . Mortgage backed obligations . . . . . . . . . . . . . . . . . Asset backed securities . . . . . . . . . . . . . . . . . . . . . . Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . Foreign government obligations . . . . . . . . . . . . . . . U.S. agency obligations . . . . . . . . . . . . . . . . . . . . . . Covered bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortized Cost $605,724 73,226 44,181 120,049 36,447 12,023 19,488 66,816 Total marketable securities . . . . . . . . . . . . . . . . . . . $977,954 Unrealized Gains Unrealized Losses $3,031 257 159 131 115 278 26 1,185 $5,182 $(481) (1) (415) (43) (25) 0 (4) 0 $(969) At January 31, 2014, marketable securities consisted of the following (in thousands): Investments classified as Marketable Securities Corporate notes and obligations . . . . . . . . . . . . . . . U.S. treasury securities . . . . . . . . . . . . . . . . . . . . . . Mortgage backed obligations . . . . . . . . . . . . . . . . . Asset backed securities . . . . . . . . . . . . . . . . . . . . . . Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . Foreign government obligations . . . . . . . . . . . . . . . U.S. agency obligations . . . . . . . . . . . . . . . . . . . . . . Covered bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortized Cost $340,706 16,016 24,888 38,213 2,000 24,305 14,726 76,282 Total marketable securities . . . . . . . . . . . . . . . . . . . $537,136 Unrealized Gains Unrealized Losses $1,314 28 281 39 1 171 9 717 $2,560 $(170) 0 (93) (35) (3) (2) (10) (1) $(314) Fair Value $608,274 73,482 43,925 120,137 36,537 12,301 19,510 68,001 $982,167 Fair Value $341,850 16,044 25,076 38,217 1,998 24,474 14,725 76,998 $539,382 The duration of the investments classified as marketable securities is as follows (in thousands): Recorded as follows: Short-term (due in one year or less) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term (due after one year) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of January 31, 2015 January 31, 2014 $ 87,312 894,855 $ 57,139 482,243 $982,167 $539,382 As of January 31, 2015, the following marketable securities were in an unrealized loss position (in thousands): Less than 12 Months 12 Months or Greater Total Corporate notes and obligations . . . . . . . . U.S. treasury securities . . . . . . . . . . . . . . . Mortgage backed obligations . . . . . . . . . . . Asset backed securities . . . . . . . . . . . . . . . Municipal securities . . . . . . . . . . . . . . . . . . U.S. agency obligations . . . . . . . . . . . . . . . Unrealized Losses Fair Value Unrealized Losses $(468) (1) (397) (39) (24) (4) $(933) $2,650 0 1,461 1,633 999 0 $6,743 $(13) 0 (18) (4) (1) 0 $(36) Fair Value $188,366 3,005 32,314 54,429 11,551 1,996 $291,661 Unrealized Losses $(481) (1) (415) (43) (25) (4) $(969) Fair Value $185,716 3,005 30,853 52,796 10,552 1,996 $284,918 84 The unrealized loss for each of these fixed rate marketable securities were less than $100,000. 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 January 31, 2015. The Company expects to receive the full principal and interest on all of these marketable securities. Fair Value Measurement All of the Company’s cash equivalents, marketable securities and foreign currency derivative contracts are classified within Level 1 or Level 2 because the Company’s cash equivalents, marketable securities and foreign currency derivative contracts are valued using quoted market prices or alternative pricing sources and models utilizing observable market inputs. The Company’s restricted cash balance of $115.0 million at January 31, 2015 was held in a money market account and is not included in the following table. The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value: Level 1. Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2. Other inputs that are directly or indirectly observable in the marketplace. Level 3. Unobservable inputs which are supported by little or no market activity. The following table presents information about the Company’s assets and liabilities that are measured at fair value as of January 31, 2015 and indicates the fair value hierarchy of the valuation (in thousands): Description Cash equivalents (1): 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, 2015 Time deposits . . . . . . . . . . . . . . . . . . . Money market mutual funds . . . . . . . . $ 0 13,983 $ 292,487 0 $ Marketable securities: Corporate notes and obligations . . . . . U.S. treasury securities . . . . . . . . . . . . Mortgage backed obligations . . . . . . . Asset backed securities . . . . . . . . . . . . Municipal securities . . . . . . . . . . . . . . Foreign government obligations . . . . . U.S. agency obligations . . . . . . . . . . . . Covered bonds . . . . . . . . . . . . . . . . . . . Foreign currency derivative contracts (2) . . . 0 0 0 0 0 0 0 0 0 608,274 73,482 43,925 120,137 36,537 12,301 19,510 68,001 10,611 Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . $13,983 $1,285,265 Liabilities Foreign currency derivative contracts (3) . . . Total Liabilities . . . . . . . . . . . . . . . . . . . . . . $ $ 0 0 $ $ 5,694 5,694 $ $ $ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 $ 292,487 13,983 608,274 73,482 43,925 120,137 36,537 12,301 19,510 68,001 10,611 $1,299,248 $ $ 5,694 5,694 (1) (2) (3) Included in “cash and cash equivalents” in the accompanying consolidated balance sheet as of January 31, 2015, in addition to $601.6 million of cash. Included in “prepaid expenses and other current assets” in the accompanying consolidated balance sheet as of January 31, 2015. Included in “accounts payable, accrued expenses and other liabilities” in the consolidated balance sheet as of January 31, 2015. 85 The following table presents information about the Company’s assets and liabilities that are measured at fair value as of January 31, 2014 and indicates the fair value hierarchy of the valuation (in thousands): Description Cash equivalents (1): Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Balances as of January 31, 2014 Time deposits . . . . . . . . . . . . . . . . . . . . Money market mutual funds . . . . . . . . . $ 0 87,898 $212,700 0 $ Marketable securities: Corporate notes and obligations . . . . . . U.S. treasury securities . . . . . . . . . . . . . Mortgage backed obligations . . . . . . . . Asset backed securities . . . . . . . . . . . . . Municipal securities . . . . . . . . . . . . . . . Foreign government obligations . . . . . . U.S. agency obligations . . . . . . . . . . . . Covered bonds . . . . . . . . . . . . . . . . . . . . Foreign currency derivative contracts (2) . . . 0 0 0 0 0 0 0 0 0 341,850 16,044 25,076 38,217 1,998 24,474 14,725 76,998 1,598 Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . $87,898 $753,680 Liabilities Foreign currency derivative contracts (3) . . . Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . $ $ 0 0 $ $ 1,801 1,801 $ $ $ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 $212,700 87,898 341,850 16,044 25,076 38,217 1,998 24,474 14,725 76,998 1,598 $841,578 $ $ 1,801 1,801 (1) (2) (3) Included in “cash and cash equivalents” in the accompanying consolidated balance sheet as of January 31, 2014, in addition to $481.0 million of cash. Included in “prepaid expenses and other current assets” in the accompanying consolidated balance sheet as of January 31, 2014. Included in “accounts payable, accrued expenses and other liabilities” in the accompanying consolidated balance sheet as of January 31, 2014. Derivative Financial Instruments The Company enters into foreign currency derivative contracts with financial institutions to reduce the risk that its cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. The Company uses forward currency derivative contracts to minimize the Company’s exposure to balances primarily denominated in Euros, Japanese yen, Canadian dollars, Australian dollars and British pounds. The Company’s foreign currency derivative contracts, which are not designated as hedging instruments, are used to reduce the exchange rate risk associated primarily with intercompany receivables and payables. The Company’s derivative financial instruments program is not designated for trading or speculative purposes. As of January 31, 2015 and 2014, 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. 86 Details on outstanding foreign currency derivative contracts related primarily to intercompany receivables and payables are presented below (in thousands): Notional amount of foreign currency derivative contracts . . . . . . . . . . . . Fair value of foreign currency derivative contracts . . . . . . . . . . . . . . . . . $942,086 4,917 $ $563,060 (203) $ The fair value of the Company’s outstanding derivative instruments are summarized below (in thousands): As of January 31, 2015 2014 Fair Value of Derivative Instruments As of January 31, Balance Sheet Location 2015 2014 Derivative Assets Derivatives not designated as hedging instruments: Foreign currency derivative contracts . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets $10,611 $1,598 Derivative Liabilities Derivatives not designated as hedging instruments: Foreign currency derivative contracts . . . . . . . . . . . . . . . . . . . . . Accounts payable, accrued expenses and other liabilities $ 5,694 $1,801 The effect of the derivative instruments not designated as hedging instruments on the consolidated statements of operations during fiscal 2015, 2014 and 2013, respectively, are summarized below (in thousands): Derivatives Not Designated as Hedging Instruments Gains (Losses) on Derivative Instruments Recognized in Income Location 2015 2014 2013 Fiscal Year Ended January 31, Foreign currency derivative contracts . . . . . Other income (expense) $(1,186) $108 $16,591 Strategic Investments As of January 31, 2015, the Company has four investments in marketable equity securities measured using quoted prices in their respective active markets and certain interests in non-marketable equity and debt securities that are collectively considered strategic investments. As of January 31, 2015, the fair value of the Company’s marketable equity securities of $17.8 million includes an unrealized gain of $13.1 million. As of January 31, 2014, the Company had three investments in marketable equity securities that had a fair value of $15.5 million, which included an unrealized gain of $13.3 million. These investments are recorded at fair value in other assets, net on the consolidated balance sheets. The Company’s interest in non-marketable equity and debt securities consists of noncontrolling equity and debt investments in privately-held companies. The Company’s investments in these privately-held companies are reported at cost or marked down to fair value when an event or circumstance indicates an other-than-temporary decline in value has occurred. These investments are valued using significant unobservable inputs or data in an inactive market and the valuation requires the Company’s judgment due to the absence of market prices and inherent lack of liquidity. 87 As of January 31, 2015 and 2014, the carrying value of the Company’s investments in privately-held companies was $158.0 million and $77.0 million, respectively. These investments are recorded in other assets, net on the consolidated balance sheets. The estimated fair value of the Company’s investments in privately-held companies was $280.0 million as of January 31, 2015. 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): Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,129 517 (608) $ 9,512 5,952 (5,246) $17,903 5,007 (3,348) Total investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,038 $10,218 $19,562 Fiscal Year Ended January 31, 2015 2014 2013 Reclassification adjustments out of accumulated other comprehensive loss into net income (loss) were immaterial for fiscal 2015, 2014 and 2013, respectively. 3. Property and Equipment Property and equipment consisted of the following (in thousands): Land and building improvements . . . . . . . . . . . . . . . . . . . . Computers, equipment and software . . . . . . . . . . . . . . . . . Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . Building in progress—leased facility . . . . . . . . . . . . . . . . . Less accumulated depreciation and amortization . . . . . . . . As of January 31, 2015 2014 $ 0 1,171,762 71,881 376,761 125,289 $ 297,835 931,171 58,956 296,390 40,171 1,745,693 (619,827) 1,624,523 (383,777) $1,125,866 $1,240,746 Depreciation and amortization expense totaled $246.6 million, $185.9 million and $101.1 million during fiscal 2015, 2014 and 2013, respectively. Computers, equipment and software at January 31, 2015 and 2014 included a total of $734.7 million and $612.0 million acquired under capital lease agreements, respectively. Accumulated amortization relating to computers, equipment and software under capital leases totaled $206.7 million and $109.1 million, respectively, at January 31, 2015 and 2014. Amortization of assets under capital leases is included in depreciation and amortization expense. In November 2010, the Company purchased approximately 14 net acres of undeveloped real estate in San Francisco, California, including entitlements and improvements associated with the land. In addition to the amounts reflected in the table above, the Company recorded $23.3 million in purchased intangible assets related to perpetual parking rights associated with an existing parking garage situated on the land. The Company capitalized pre-construction activities related to the development of the land, including interest costs and property taxes since the November 2010 purchase. During the first quarter of fiscal 2013, the Company suspended pre- construction activity. 88 In April 2014, the Company entered into an agreement to sell 8.8 net acres of the undeveloped real estate and a portion of the perpetual parking rights, for which the Company received a nonrefundable deposit in the amount of $30.0 million. As of January 31, 2015, these 8.8 net acres and perpetual parking rights met the criteria to be classified as held for sale. As a result, the Company classified this portion of the Company’s land and building improvements, which totaled $137.7 million, and the perpetual parking rights of $5.5 million, as held for sale on the accompanying consolidated balance sheet. The sale of this portion of the Company’s undeveloped real estate is expected to close within twelve months and is subject to certain closing conditions. As of January 31, 2015, the fair value of the Company’s land, building improvements and perpetual parking rights, based on the expected sale proceeds, exceeds the carrying value. In August 2014, the Company sold approximately 3.7 net acres of its undeveloped real estate, which had been classified as held for sale, for a total of $72.5 million. The Company recognized a gain of $7.8 million, net of closing costs, on the sale of this portion of the Company’s land and building improvements. Separately, in September 2014, the Company sold the approximately 1.5 net acres of its remaining undeveloped real estate, which had been classified as held for sale, and the remaining portion of the perpetual parking rights, for a total of $125.0 million. The Company recognized a gain of $7.8 million, net of closing costs, on the sale of this portion of the Company’s land, building improvements and perpetual parking rights. In November 2014, the Company entered into an agreement to purchase real property of approximately 817,000 rentable square feet known as 50 Fremont Street, San Francisco, California for approximately $640.0 million. The Company deposited $114.9 million of the proceeds from the sale of the undeveloped real estate described above into a like-kind exchange account for purposes of purchasing the real property. This deposit is classified as restricted cash on the consolidated balance sheet as of January 31, 2015. The purchase closed in February 2015 (see Note 14 “Subsequent Event” for details). In December 2012, the Company entered into a lease agreement for approximately 445,000 rentable square feet of office space at 350 Mission Street in San Francisco, California. The space rented is for the total office space available in the building, which is in the process of being constructed. As a result of the Company’s involvement during the construction period, the Company is considered for accounting purposes to be the owner of the construction project. As of January 31, 2015, the Company had capitalized $125.3 million of construction costs, based on the construction costs incurred to date by the landlord, and recorded a corresponding noncurrent financing obligation liability of $125.3 million. As of January 31, 2014, the Company had capitalized $40.2 million of construction costs, based on the construction costs incurred to date by the landlord, and recorded a corresponding noncurrent financing obligation liability of $40.2 million. The total expected financing obligation associated with this lease upon completion of the construction of the building, inclusive of the amounts currently recorded, is $335.8 million, including interest (see Note 10 “Commitments” for future commitment details). The obligation will be settled through monthly lease payments to the landlord once the office space is ready for occupancy. There was no impairment of long-lived assets during fiscal 2015, 2014 or 2013. 89 4. Business Combinations RelateIQ, Inc. On August 1, 2014, the Company acquired the outstanding stock of RelateIQ, Inc. (“RelateIQ”), a relationship intelligence platform company that uses data science and machine learning to automatically capture data from email, calendars and smartphone calls and provide data science-driven insights in real time. The Company acquired RelateIQ for the assembled workforce and expected synergies with the Company’s current offerings. The Company has included the financial results of RelateIQ in the consolidated financial statements from the date of acquisition, which have not been material to date. The acquisition date fair value of the consideration transferred for RelateIQ was approximately $340.2 million, which consisted of the following (in thousands, except share data): Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock (6,320,735 shares) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of stock options and restricted stock awards assumed . . . . . Fair Value $ 1,123 338,033 1,050 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $340,206 The fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of 0.12 was applied to convert RelateIQ’s outstanding equity awards for RelateIQ’s common stock into equity awards for shares of the Company’s common stock. The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands): Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current and noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair Value $ 39,194 16,200 289,857 (4,700) (345) Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $340,206 The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible assets acquired, liabilities assumed and identifiable intangible assets are based on management’s estimates and assumptions. The following table sets forth the components of identifiable intangible assets acquired (in thousands) and their estimated useful lives as of the date of acquisition: Developed technology . . . . . . . . . . . . . . . . . . . . . Customer relationships and other purchased Fair Value Useful Life $14,470 7 years intangible assets . . . . . . . . . . . . . . . . . . . . . . . . 1,730 1-3 years Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,200 The amount recorded for developed technology represents the estimated fair value of RelateIQ’s relationship intelligence technology. The amount recorded for customer relationships represent the fair values of the underlying relationships with RelateIQ customers. The goodwill balance is primarily attributed to the 90 assembled workforce and expanded market opportunities when integrating RelateIQ’s relationship intelligence technology with the Company’s other offerings. The goodwill balance is not deductible for U.S. income tax purposes. The Company assumed unvested equity awards for shares of RelateIQ’s common stock with a fair value of $33.9 million. Of the total consideration, $1.1 million was allocated to the purchase consideration and $32.8 million was allocated to future services and will be expensed over the remaining service periods on a straight-line basis. Fiscal Year 2014 ExactTarget On July 12, 2013, the Company acquired for cash the outstanding stock of ExactTarget, a leading global provider of cross-channel, digital marketing solutions that empower organizations of all sizes to communicate with their customers through the digital channels they use most. The Company acquired ExactTarget to, among other things, create a world-class marketing platform across the channels of email, social, mobile and the web. The Company has included the financial results of ExactTarget in the consolidated financial statements from the date of acquisition. The acquisition date fair value of the consideration transferred for ExactTarget was approximately $2.6 billion, including the proceeds from the Term Loan of $300.0 million (see Note 5 “Debt”), which consisted of the following (in thousands): Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of equity awards assumed . . . . . . . . . . . . . . . . . $2,567,098 17,428 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,584,526 Fair value 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 0.84 was applied to convert ExactTarget’s outstanding equity awards for ExactTarget’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): Cash, cash equivalents and marketable securities . . . . . . . . Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer contract asset, current and noncurrent . . . . . . . . Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable, accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue, current and noncurrent . . . . . . . . . . . . . Customer liability, current and noncurrent . . . . . . . . . . . . . Other liabilities, noncurrent . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair Value $ 91,549 63,320 20,355 205,033 64,782 4,379 706,064 1,848,653 (65,636) (46,615) (144,792) (3,104) (159,462) Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,584,526 91 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 were 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. During fiscal 2015, the Company finalized its assessment of fair value of the assets and liabilities assumed at acquisition date. The adjustments made were not material and are not reflected above. The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands): Fair Value Useful Life Developed technologies . . . . . . . . . . . . . . . . . . . . . . . . . . Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . Trade name and trademark . . . . . . . . . . . . . . . . . . . . . . . Other purchased intangible assets . . . . . . . . . . . . . . . . . . $307,200 362,200 29,400 7,264 4 - 7 years 6 - 8 years 10 years 3 - 4 years Total intangible assets subject to amortization . . . . $706,064 Developed technologies represent the estimated fair value of ExactTarget’s digital marketing technology. Customer relationships represent the estimated fair values of the underlying relationships with ExactTarget customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating ExactTarget’s digital marketing technology with the Company’s other offerings. The goodwill balance is not deductible for U.S. income tax purposes. The Company assumed unvested options and restricted stock with an estimated fair value of $102.2 million. Of the total consideration, $17.4 million was allocated to the purchase consideration and $84.8 million was allocated to future services and will be expensed over the remaining service periods on a straight-line basis. EdgeSpring On June 12, 2013, the Company acquired for cash and the Company’s common stock the outstanding stock of EdgeSpring, Inc. (“EdgeSpring”), a provider of an end-to-end business intelligence exploration platform used to build analytic applications. The Company acquired EdgeSpring to, among other things, expand its analytical capabilities and offerings. The Company has included the financial results of EdgeSpring in the consolidated financial statements from the date of acquisition, which have not been material to date. The acquisition date fair value of the consideration transferred for EdgeSpring was approximately $133.7 million, which consisted of the following (in thousands, except share data): Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock (1,850,258 shares) . . . . . . . . . . . . . . . . . . . . . Fair value of stock options and restricted stock awards Fair Value $ 62,580 69,533 assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,609 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $133,722 The fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of 0.17 was applied to convert EdgeSpring’s outstanding equity awards for EdgeSpring’s common stock into equity awards for shares of the Company’s common stock. 92 The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands): Current and noncurrent tangible assets . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current and noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair Value $ 4,462 32,300 107,165 (666) (9,539) Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $133,722 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 were based on management’s estimates and assumptions. During fiscal 2015, the Company finalized its assessment of fair value of the assets and liabilities assumed at acquisition date. The adjustments made were not material and are not reflected above. The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands): Developed technology . . . . . . . . . . . . . . . . . . . . . . . . Customer relationships . . . . . . . . . . . . . . . . . . . . . . . Trade name and trademark . . . . . . . . . . . . . . . . . . . . $31,030 560 710 5-6 years 5years 5years Total intangible assets subject to amortization . . . $32,300 Fair Value Useful Life Developed technology represents the estimated fair value of EdgeSpring’s end-to-end business intelligence exploration technology. Customer relationships represent the fair values of the underlying relationships with EdgeSpring customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating EdgeSpring’s business intelligence technology with the Company’s other offerings. The goodwill balance is not deductible for U.S. income tax purposes. The Company assumed unvested equity awards for shares of EdgeSpring’s common stock with a fair value of $4.7 million. Of the total consideration, $1.6 million was allocated to the purchase consideration and $3.1 million was allocated to future services and will be expensed over the remaining service periods on a straight-line basis. Other Fiscal 2014 Business Combinations During fiscal 2014, the Company acquired three other companies for an aggregate of $31.7 million in cash, net of cash acquired, and has included the financial results of these companies in its consolidated financial statements from the date of each respective acquisition. The Company accounted for these transactions as business combinations. In allocating the purchase consideration based on estimated fair values, the Company recorded $14.6 million of acquired intangible assets with useful lives of three to five years, $20.6 million of goodwill, $2.8 million of net tangible assets, including cash acquired, and $4.4 million of deferred tax liabilities. Some of this goodwill balance is deductible for U.S. income tax purposes. 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. 93 Goodwill consisted of the following (in thousands): Balance as of January 31, 2013 . . . . . . . . . . . . . . . . . . . . . . EdgeSpring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ExactTarget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finalization of acquisition date fair values . . . . . . . . . Balance as of January 31, 2014 . . . . . . . . . . . . . . . . . . . . . . RelateIQ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finalization of acquisition date fair values . . . . . . . . . $1,529,378 107,165 1,848,653 20,646 (5,019) $3,500,823 289,857 (8,020) Balance as of January 31, 2015 . . . . . . . . . . . . . . . . . . . . . . $3,782,660 There was no impairment of goodwill during fiscal 2015, 2014 or 2013. Intangible Assets Intangible assets acquired resulting from business combinations are as follows as of January 31, 2015 (in thousands): Gross Fair Value Accumulated Amortization Net Book Value Acquired developed technology . . . . . . . . . . . . Customer relationships . . . . . . . . . . . . . . . . . . . Trade name and trademark . . . . . . . . . . . . . . . . Territory rights and other . . . . . . . . . . . . . . . . . $ 674,160 409,603 38,980 12,355 $(371,997) (107,245) (17,142) (6,522) $302,163 302,358 21,838 5,833 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,135,098 $(502,906) $632,192 Weighted Average Remaining Useful Life 4.3 6.1 1.0 3.1 5.0 During fiscal 2015, the Company revised the remaining useful life of some of its trade name and trademark intangible assets. The remaining carrying amount of these intangible assets was amortized over that revised remaining useful life prospectively, which resulted in additional amortization expense of $4.5 million recognized in the three months ended Janaury 31, 2015. Intangible assets acquired resulting from business combinations were as follows as of January 31, 2014 (in thousands): Gross Fair Value Accumulated Amortization Net Book Value Acquired developed technology . . . . . . . . . . . . Customer relationships . . . . . . . . . . . . . . . . . . . Trade name and trademark . . . . . . . . . . . . . . . . Territory rights . . . . . . . . . . . . . . . . . . . . . . . . . $ 659,770 409,135 38,930 11,125 $(281,766) (53,669) (8,721) (3,963) $378,004 355,466 30,209 7,162 $1,118,960 $(348,119) $770,841 Weighted Average Remaining Useful Life 4.9 7.0 9.0 3.8 6.0 94 The expected future amortization expense for purchased intangible assets as of January 31, 2015 is as follows (in thousands): Fiscal Period: Fiscal 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $154,776 125,144 114,041 100,533 73,191 64,507 Total amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . $632,192 5. Debt Convertible Senior Notes (In thousands) 0.75% Convertible Senior Notes due January 15, 2015 . . . . . . . . . . . . . . . . . . . . 0.25% Convertible Senior Notes due April 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Par Value Outstanding Equity Component Recorded at Issuance Liability Component of Par Value as of January 31, 2015 2014 $ 0 $125,530(1) $ 0 $ 542,159 1,150,000 122,421(2) 1,070,692 1,046,930 (1) This amount represents the equity component recorded at the initial issuance of the 0.75% convertible senior notes. (2) This amount represents the equity component recorded at the initial issuance of the 0.25% convertible senior notes. In January 2010, the Company issued at par value $575.0 million of 0.75% convertible senior notes (the “0.75% Senior Notes”) due January 15, 2015 unless earlier converted. During the twelve months ended January 31, 2015, the outstanding balance of the 0.75% Senior Notes matured, and the Company repaid $568.9 million in cash of principal balance of the 0.75% Senior Notes. The Company also distributed approximately 17.1 million shares of the Company’s common stock to noteholders during the twelve months ended January 31, 2015, which represents the conversion value in excess of the principal amount. The Company received approximately 17.1 million shares of the Company’s common stock from the exercise of the note hedges related to the 0.75% Senior Notes during this same period. The Company recorded a loss of $10.3 million in the twelve months ended January 31, 2015 related to the extinguishment of the 0.75% Senior Notes converted by noteholders. This amount represents the difference between the fair market value allocated to the liability component on the respective settlement dates and the net carrying amount of the liability component and unamortized debt issuance costs on the respective settlement dates. In March 2013, the Company issued at par value $1.15 billion of 0.25% convertible senior notes (the “0.25% Senior 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. 95 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 share of common stock on such last trading day; in certain situations, when the trading price of the 0.25% Senior Notes is less than 98% of the product of the sale price of the Company’s common stock and the conversion rate; upon the occurrence of specified corporate transactions described under the 0.25% Senior Notes indenture, such as a consolidation, merger or binding share exchange; or at any time on or after the convertible date noted above. Holders of the 0.25% Senior Notes have the right to require the Company to purchase with cash all or a portion of the Notes upon the occurrence of a fundamental change, such as a change of control, at a purchase price equal to 100% of the principal amount of the 0.25% Senior Notes plus accrued and unpaid interest. Following certain corporate transactions that constitute a change of control, the Company will increase the conversion rate for a holder who elects to convert the 0.25% Senior Notes in connection with such change of control. In accounting for the issuances of the 0.25% Senior Notes, the Company separated the 0.25% Senior Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 0.25% Senior 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 its 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. 96 The 0.25% Senior Notes and the 0.75% Senior Notes (the “Notes”), consisted of the following (in thousands): As of January 31, 2015 January 31, 2014 Liability component : Principal: 0.75% Senior Notes (1) . . . . . . . . . . . . . . . . 0.25% Senior Notes (1) . . . . . . . . . . . . . . . . $ 0 1,150,000 $ 568,864 1,150,000 Less: debt discount, net 0.75% Senior Notes . . . . . . . . . . . . . . . . . . . 0.25% Senior Notes (2) . . . . . . . . . . . . . . . . 0 (79,308) (26,705) (103,070) Net carrying amount . . . . . . . . . . . . . . . . . . . . . . . . . . $1,070,692 $1,589,089 (1) The effective interest rates of the 0.75% Senior Notes and 0.25% Senior Notes are 5.86% and 2.53%, (2) respectively. These interest rates were based on the interest rates of a similar liability at the time of issuance that did not have an associated convertible feature. 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. The total estimated fair values of the Company’s 0.25% Senior Notes at January 31, 2015 was $1.3 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 fiscal 2015. Based on the closing price of the Company’s common stock of $56.45 on January 31, 2015, the if-converted value of the 0.25% Senior Notes was less than their principal amount. Note Hedges To minimize the impact of potential economic dilution upon conversion of the Notes, the Company entered into convertible note hedge transactions with respect to its common stock (the “Note Hedges”). (in thousands, except for shares) Date Purchase Shares 0.75% Note Hedges . . . . . . . . . . . . . . . . . . . . . . 0.25% Note Hedges . . . . . . . . . . . . . . . . . . . . . . January 2010 March 2013 $126,500 $153,800 26,943,812 17,308,880 The Note Hedges cover shares of the Company’s common stock at a strike price that corresponds to the initial conversion price of the respective Notes, also subject to adjustment, and are exercisable upon conversion of the Notes. The Note Hedges will expire upon the maturity of the Notes. The Note Hedges are intended to reduce the potential economic dilution upon conversion of the Notes in the event that the market value per share of the Company’s common stock, as measured under the Notes, at the time of exercise is greater than the conversion price of the Notes. The Note Hedges are separate transactions and are not part of the terms of the Notes. Holders of the Notes will not have any rights with respect to the Note Hedges. The Note Hedges do not impact earnings per share. As a result of the conversions and maturity of the 0.75% Senior Notes during fiscal 2015, the Company exercised its rights on the 0.75% Note Hedges and received approximately 17.1 million shares of the Company’s common stock during the twelve months ended January 31, 2015 and the 0.75% Note Hedges expired. 97 Warrants 0.75% Warrants . . . . . . . . . . . . . . . . . . . . . . . 0.25% Warrants . . . . . . . . . . . . . . . . . . . . . . . January 2010 March 2013 $59,300 $84,800 Date Proceeds (in thousands) Shares 26,943,812 17,308,880 Strike Price $29.88 $90.40 Separately, in January 2010 and March 2013, the Company also entered into warrant transactions (the “0.75% Warrants” and the “0.25% Warrants”, respectively) (collectively, the “Warrants”), whereby the Company sold warrants to acquire, subject to anti-dilution adjustments, shares of the Company’s common stock. The Warrants were anti-dilutive for the periods presented. The Warrants are separate transactions entered into by the Company and are not part of the terms of the Notes or Note Hedges. Holders of the Notes and Note Hedges will not have any rights with respect to the Warrants. In December 2014, the Company entered into agreements with each of the 0.75% Warrant counterparties to amend and settle early the 0.75% Warrants prior to their scheduled expiration beginning in April 2015. As a result of this amendment to settle early with the 0.75% Warrant counterparties, the Company issued, in the aggregate, approximately 13.3 million shares to the counterparties to settle, via a net share settlement, the entirety of the 0.75% Warrants. Term Loan On July 11, 2013, the Company entered into a credit agreement (the “Prior Credit Agreement”) with Bank of America, N.A. and certain other lenders. The Prior Credit Agreement provided for a $300.0 million term loan (the “Term Loan”) maturing on July 11, 2016 (the “Term Loan Maturity Date”), which was entered into in conjunction with and for purposes of funding the acquisition of ExactTarget in fiscal 2014. The Term Loan bore interest at the Company’s option at either a base rate plus a spread of 0.50% to 1.00% or an adjusted LIBOR rate as defined in the Prior Credit Agreement plus a spread of 1.50% to 2.00%. The Term Loan was payable in quarterly installments equal to $7.5 million beginning on September 30, 2013, with the remaining outstanding principal amount of the Term Loan being due and payable on the Term Loan Maturity Date. On October 6, 2014, the Company repaid the Term Loan in full and the Prior Credit Agreement was terminated. Revolving Credit Facility On October 6, 2014, the Company entered into an agreement (the “Credit Agreement”) with Wells Fargo, N.A. and certain other institutional lenders that provides for a $650.0 million unsecured revolving credit facility that matures on October 6, 2019 (the “Credit Facility”). Immediately upon closing, the Company borrowed $300.0 million under the Credit Facility, approximately $262.5 million of which was used to repay in full the indebtedness under the Company’s Term Loan, as described above. Borrowings under the Credit Facility bear interest, at the Company’s option at either a base rate, as defined in the Credit Agreement, plus a margin of 0.00% to 0.75% or LIBOR plus a margin of 1.00% to 1.75%. The Company is obligated to pay ongoing commitment fees at a rate between 0.125% and 0.25%. Such interest rate margins and commitment fees are based on the Company’s consolidated leverage ratio for the preceding four fiscal quarter periods. Interest and the commitment fees are payable in arrears quarterly. The Company may use amounts borrowed under the Credit Facility for working capital, capital expenditures and other general corporate purposes, including permitted acquisitions. Subject to certain conditions stated in the Credit Agreement, the Company may borrow amounts under the Credit Facility at any time during the term of the Credit Agreement. The Company may also prepay borrowings under the Credit Agreement, in whole or in part, at any time without premium or penalty, subject to certain conditions, and amounts repaid or prepaid may be reborrowed. The Credit Agreement contains certain customary affirmative and negative covenants, including a consolidated leverage ratio covenant, a consolidated interest coverage ratio covenant, a limit on the Company’s 98 ability to incur additional indebtedness, dispose of assets, make certain acquisition transactions, pay dividends or distributions, and certain other restrictions on the Company’s activities each defined specifically in the Credit Agreement. The Company was in compliance with the Credit Agreement’s covenants as of January 31, 2015. The weighted average interest rate on borrowings under the Credit Facility was 1.7% for the period beginning October 6, 2014 and ended January 31, 2015. As of January 31, 2015, outstanding borrowings under the Credit Facility were $300.0 million, which is recorded as a noncurrent liability on the accompanying consolidated balance sheet. Interest Expense on Convertible Senior Notes, Term Loan and Revolving Credit Facility The following table sets forth total interest expense recognized related to the Notes, the Term Loan and the Credit Facility prior to capitalization of interest (in thousands): Fiscal Year Ended January 31, 2015 2014 2013 Contractual interest expense . . . . . . . . . . . . . . . . . . . Amortization of debt issuance costs . . . . . . . . . . . . . . Amortization of debt discount . . . . . . . . . . . . . . . . . . $10,224 4,622 36,575 $10,195 4,470 46,942 $ 4,313 1,324 25,131 $51,421 $61,607 $30,768 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 January 31, 2015 January 31, 2014 Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . Prepaid income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer contract asset . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . $ 35,528 21,514 16,620 206,892 $ 49,279 23,571 77,368 158,962 $280,554 $309,180 Customer contract asset reflects future billings of amounts that are contractually committed by ExactTarget’s existing customers as of the acquisition date that will be billed in the next 12 months. As the Company bills these customers this balance will reduce and accounts receivable will increase. Included in prepaid expenses and other current assets are value-added tax and sales tax receivables associated with the sale of the Company’s services to third parties. Value-added tax and sales tax receivables totaled $27.5 million and $28.6 million at January 31, 2015 and 2014, respectively. 99 Capitalized Software, net Capitalized software consisted of the following (in thousands): Capitalized internal-use software development costs, net of accumulated amortization of $136,314 and $101,687, respectively . . . . . . . . . . . . . . . . . . . . . . . . Acquired developed technology, net of accumulated amortization of $392,736 and $294,628, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of January 31, 2015 January 31, 2014 $ 96,617 $ 72,915 336,781 409,002 $433,398 $481,917 Capitalized internal-use software amortization expense totaled $35.7 million, $29.2 million and $22.1 million for fiscal 2015, 2014 and 2013, respectively. Acquired developed technology amortization expense totaled $98.4 million, $114.7 million and $80.0 million for fiscal 2015, 2014 and 2013, respectively. The Company capitalized $5.3 million, $3.5 million and $3.4 million of stock-based expenses related to capitalized internal-use software development and deferred professional services during fiscal 2015, 2014 and 2013, respectively. Other Assets, net Other assets consisted of the following (in thousands): Deferred income taxes, noncurrent, net . . . . . . . . . . . . . Long-term deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchased intangible assets, net of accumulated amortization of $130,968 and $66,399, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired intellectual property, net of accumulated amortization of $15,695 and $11,304, respectively . . Strategic investments . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer contract asset . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of January 31, 2015 January 31, 2014 $ 9,275 19,715 $ 9,691 17,970 329,971 416,119 15,879 175,774 1,447 76,259 11,957 92,489 18,182 47,082 $628,320 $613,490 Customer contract asset reflects the noncurrent portion of future billings that are contractually committed by ExactTarget’s existing customers as of the acquisition date. In November 2010, the Company recorded $23.3 million of perpetual parking rights associated with an existing parking garage situated on the Company’s undeveloped real estate to purchased intangible assets. During fiscal 2015, the Company sold a portion of these perpetual parking rights and reclassified the remaining parking rights to assets held for sale. The Company has entered into an agreement to sell the remaining portion of the perpetual parking rights and expects the sale to close within twelve months, subject to certain closing conditions. 100 Purchased intangible assets amortization expense for fiscal 2015, 2014 and 2013 was $64.6 million, $37.6 million and $10.9 million, respectively. Acquired intellectual property amortization expense for fiscal 2015, 2014 and 2013 was $5.0 million, $4.2 million and $3.9 million, respectively. Accounts Payable, Accrued Expenses and Other Liabilities Accounts payable, accrued expenses and other liabilities consisted of the following (in thousands): As of January 31, 2015 January 31, 2014 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . Accrued other liabilities . . . . . . . . . . . . . . . . . . . . . . . . Accrued income and other taxes payable . . . . . . . . . . . Accrued professional costs . . . . . . . . . . . . . . . . . . . . . . Customer liability, current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued rent $ 95,537 457,102 321,032 184,844 16,889 13,084 14,847 $ 64,988 397,002 235,543 153,026 15,864 53,957 13,944 $1,103,335 $934,324 Customer liability reflects the legal obligation to provide future services that are contractually committed by ExactTarget’s existing customers but unbilled as of the acquisition date. As these services are invoiced, this balance will reduce and deferred revenue will increase. Other Noncurrent Liabilities Other noncurrent liabilities consisted of the following (in thousands): Deferred income taxes and income taxes payable . . . . . Customer liability, noncurrent . . . . . . . . . . . . . . . . . . . . Financing obligation, building in progress—leased facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term lease liabilities and other As of January 31, 2015 January 31, 2014 $ 94,396 1,026 $108,760 13,953 125,289 701,612 40,171 594,303 $922,323 $757,187 Customer liability, noncurrent reflects the noncurrent fair value of the legal obligation to provide future services that are contractually committed by ExactTarget’s existing customers but unbilled as of the acquisition date. 7. Stockholders’ Equity The Company maintains the following stock plans: the ESPP, the 2013 Equity Incentive Plan and the 2014 Inducement Equity Incentive Plan (the “2014 Inducement Plan”). The expiration of the 1999 Stock Option Plan (“1999 Plan”) in fiscal 2010 did not affect awards outstanding, which continue to be governed by the terms and conditions of the 1999 Plan. On July 10, 2014, the Company adopted the 2014 Inducement Plan with a reserve of 335,000 shares of common stock for future issuance solely for the granting of inducement stock options and equity awards to new employees, including employees of acquired companies. In addition, approximately 319,000 shares of common 101 stock that remained available for grant under the 2006 Inducement Equity Incentive Plan (the “Prior Inducement Plan”) as of July 9, 2014 were added to the 2014 Inducement Plan share reserve and the Prior Inducement Plan was terminated. Further, any shares of common stock subject to outstanding awards under the Prior Inducement Plan that expire, are forfeited, or are repurchased by the Company will also become available for future grant under the 2014 Inducement Plan. Termination of the Prior Inducement Plan did not affect the outstanding awards previously issued thereunder. The 2014 Inducement Plan was adopted without stockholder approval in reliance on the “employment inducement exemption” provided under the New York Stock Exchange Listed Company Manual. In September 2011, the Company’s Board of Directors amended and restated the ESPP. In conjunction with the amendment of the ESPP, the Company’s Board of Directors determined that the offerings under the ESPP would commence, beginning with a twelve month offering period starting in December 2011. As of January 31, 2015, $28.7 million has been withheld on behalf of employees for future purchases under the ESPP and is recorded in accounts payable, accrued expenses and other liabilities. Employees purchased 3.3 million shares for $127.8 million and 2.9 million shares for $92.5 million, in fiscal 2015 and 2014, respectively, under the ESPP. Prior to February 1, 2006, options issued under the Company’s stock option plans generally had a term of 10 years. From February 1, 2006 through July 3, 2013, options issued had a term of five years. After July 3, 2013, options issued have a term of seven years. Stock activity excluding the ESPP is as follows: Options Outstanding Shares Available for Grant Outstanding Stock Options Weighted- Average Exercise Price Aggregate Intrinsic Value (in thousands) 55,852,536 28,604,045 $34.26 Balance as of January 31, 2014 . . . . . . Increase in shares authorized: 2013 Equity Incentive Plan . . . . . . . . . . . . . . . . . . 3,943,052 0 0.00 2014 Inducement Equity Incentive Plan . . . . . . . . . . 2011 Relate IQ Plan . . . . . . . Options granted under all plans . . Restricted stock activity . . . . . . . . Stock grants to board and advisory board members . . . . . . Exercised . . . . . . . . . . . . . . . . . . . Plan shares expired . . . . . . . . . . . . Canceled . . . . . . . . . . . . . . . . . . . . 1,007,381 291,361 (9,506,412) (18,781,110) 0 0 9,506,412 0 (226,883) 0 (3,135,270) 1,344,883 0 (7,307,213) 0 (1,344,883) Balance as of January 31, 2015 . . . . . . 30,789,538 29,458,361 Vested or expected to vest . . . . . . . . . . Exercisable as of January 31, 2015 . . . 27,308,293 11,253,182 0.00 0.00 57.87 0.00 0.00 24.17 0.00 34.80 $44.36 $43.65 $34.37 $379,380,854 $369,299,016 $248,524,393 The total intrinsic value of the options exercised during fiscal 2015, 2014 and 2013 was $250.3 million, $292.3 million and $506.9 million, respectively. The intrinsic value is the difference between the current market value of the stock and the exercise price of the stock option. The weighted-average remaining contractual life of vested and expected to vest options is approximately 4.3 years. 102 As of January 31, 2015, options to purchase 11,253,182 shares were vested at a weighted average exercise price of $34.37 per share and had a remaining weighted-average contractual life of approximately 2.5 years. The total intrinsic value of these vested options as of January 31, 2015 was $248.5 million. The following table summarizes information about stock options outstanding as of January 31, 2015: Range of Exercise Prices Number Outstanding $0.58 to $27.06 . . . . . . . $27.56 to $35.87 . . . . . . $36.28 to $39.09 . . . . . . $40.19 to $52.14 . . . . . . $52.30 . . . . . . . . . . . . . . $53.60 to $57.79 . . . . . . $59.34 to $63.66 . . . . . . 4,664,939 4,517,449 4,854,143 714,631 5,023,786 2,107,390 7,576,023 29,458,361 Options Outstanding Weighted-Average Remaining Contractual Life (Years) 2.9 1.4 2.8 4.9 5.8 6.3 6.8 4.4 Options Exercisable Weighted-Average Exercise Price Number of Shares Weighted-Average Exercise Price $22.13 34.72 38.43 43.10 52.30 55.12 59.46 $44.36 3,282,371 3,856,881 2,432,030 199,032 1,396,493 66,323 20,052 11,253,182 $21.81 35.06 38.45 43.25 52.30 54.28 59.37 $34.37 Restricted stock activity is as follows: Restricted Stock Outstanding Balance as of January 31, 2013 . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . Vested and converted to shares . . . . . . . . Balance as of January 31, 2014 . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . Vested and converted to shares . . . . . . . . Outstanding 26,782,620 10,884,991 (3,616,383) (9,397,650) 24,653,578 11,170,913 (3,174,976) (9,505,507) Balance as of January 31, 2015 . . . . . . . . . . . . 23,144,008 Expected to vest . . . . . . . . . . . . . . . . . . . . . . . . 19,758,223 Weighted- Average Exercise Price Aggregate Intrinsic Value (in thousands) $0.001 0.001 0.001 0.001 $0.001 0.001 0.001 0.001 $0.001 $1,306,479 $1,115,352 The restricted stock, which upon vesting entitles the holder to one share of common stock for each share of restricted stock, has an exercise price of $0.001 per share, which is equal to the par value of the Company’s common stock, and generally vests over 4 years. The weighted-average grant date fair value of the restricted stock issued for fiscal 2015, 2014 and 2013 was $58.89, $46.99 and $37.71, respectively. 103 Common Stock The following number of shares of common stock were reserved and available for future issuance at January 31, 2015: Options outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock awards and units outstanding . . . . . . . . . Stock available for future grant: 2013 Equity Incentive Plan . . . . . . . . . . . . . . . . . . . . 2014 Inducement Equity Incentive Plan . . . . . . . . . . 2004 Employee Stock Purchase Plan . . . . . . . . . . . . Convertible senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,458,361 23,144,008 30,202,139 587,399 2,849,542 17,308,880 17,308,880 120,859,209 During fiscal years 2015, 2014 and 2013, certain board members received stock grants totaling 83,127 shares of common stock, 108,800 shares of common stock and 102,400 shares of common stock, respectively for board services pursuant to the terms described in the 2013 Plan and previously, the 2004 Outside Directors Stock Plan. The expense related to these awards, which was expensed immediately at the time of the issuance, totaled $5.0 million, $4.5 million and $3.8 million for fiscal 2015, 2014 and 2013, respectively. Preferred Stock The Company’s board of directors has the authority, without further action by stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series. The Company’s board of directors may designate the rights, preferences, privileges and restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preference, sinking fund terms, and number of shares constituting any series or the designation of any series. The issuance of preferred stock could have the effect of restricting dividends on the Company’s common stock, diluting the voting power of its common stock, impairing the liquidation rights of its common stock, or delaying or preventing a change in control. The ability to issue preferred stock could delay or impede a change in control. As of January 31, 2015 and 2014, no shares of preferred stock were outstanding. 8. Income Taxes Effective Tax Rate The domestic and foreign components of loss before provision for (benefit from) income taxes consisted of the following (in thousands): Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(211,253) (1,832) $(326,392) (31,543) $ (90,743) (37,051) $(213,085) $(357,935) $(127,794) Fiscal Year Ended January 31, 2015 2014 2013 104 The provision for (benefit from) income taxes consisted of the following (in thousands): Fiscal Year Ended January 31, 2015 2014 2013 Current: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 893 1,388 50,493 52,774 $ (10,431) (245) 39,784 $ 12,896 3,021 30,261 29,108 46,178 Deferred: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,771 (10,830) (1,112) (128,798) (22,012) (4,058) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,171) (154,868) 72,656 28,538 (4,721) 96,473 Provision for (benefit from) for income taxes . . . $ 49,603 $(125,760) $142,651 During fiscal 2015, 2014 and 2013, the Company recorded net tax benefits that resulted from allocating certain tax effects related to exercises of stock options and vesting of restricted stock directly to stockholders’ equity in the amount of $7.7 million, $8.0 million and $7.2 million, respectively. During fiscal 2013, the Company established a valuation allowance for a significant portion of its deferred tax assets and recognized a tax expense of $186.8 million. During fiscal 2014, the Company recorded a partial release of its valuation allowance primarily in connection with the acquisition of ExactTarget. Due to the ExactTarget acquisition, a deferred tax liability was recorded for the book-tax basis difference related to purchased intangibles. The net deferred tax liability from acquisitions provided an additional source of income to support the realizability of the Company’s pre-existing deferred tax assets and as a result, the Company released a portion of its valuation allowance and recorded a tax benefit of $143.1 million for fiscal 2014. In fiscal 2015, the Company recorded income taxes in profitable jurisdictions outside the U.S., which was partially offset by tax benefits from current year losses incurred by ExactTarget in certain state jurisdictions. A reconciliation of income taxes at the statutory federal income tax rate to the provision for (benefit from) income taxes included in the accompanying consolidated statements of operations is as follows (in thousands): U.S. federal taxes at statutory rate . . . . . . . . . . . . . . . State, net of the federal benefit . . . . . . . . . . . . . . . . . . Foreign taxes in excess of the U.S. statutory rate . . . . Change in valuation allowance . . . . . . . . . . . . . . . . . . Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . Tax expense/(benefit) from acquisitions . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal Year Ended January 31, 2015 $ (74,580) (5,332) 29,880 100,143 (28,056) 26,224 2,341 (1,017) 2014 $(125,277) (10,780) 33,412 (25,048) (22,293) 21,407 1,811 1,008 2013 $ (44,729) (969) 16,931 186,806 (17,670) 4,807 (3,568) 1,043 $ 49,603 $(125,760) $142,651 In December 2014, the Tax Increase Prevention Act of 2014 was signed into law, which retroactively renewed expired provisions including research and development tax credits through the end of calendar year 2014. The enacted law change did not impact the Company’s tax provision as the retroactive benefit of the research tax credits was fully offset by an increase in valuation allowance. The Company receives certain tax incentives in Switzerland and Singapore in the form of reduced tax rates. The tax reduction program in Switzerland expired in fiscal 2015, and the program in Singapore will expire in fiscal 2016. 105 Deferred Income Taxes Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands): Deferred tax assets: Net operating loss carryforwards . . . . . . . . . . . . . . Deferred stock-based expense . . . . . . . . . . . . . . . . Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred rent expense . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . Basis difference on investment . . . . . . . . . . . . . . . . Financing obligation . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets, net of valuation allowance . . . . . . . Deferred tax liabilities: As of January 31, 2015 2014 $ 252,858 96,753 152,715 58,849 92,506 15,664 24,637 84,095 20,017 798,094 (293,097) $ 259,465 82,840 107,381 47,063 79,235 8,522 11,999 63,673 17,762 677,940 (180,223) 504,997 497,717 Deferred commissions . . . . . . . . . . . . . . . . . . . . . . Purchased intangibles . . . . . . . . . . . . . . . . . . . . . . . Unrealized gains on investments . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (107,197) (213,920) (1,793) (171,908) (3,157) (87,625) (259,409) (5,232) (144,752) (3,599) Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . (497,975) (500,617) Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,022 $ (2,900) At January 31, 2015, for federal income tax purposes, the Company had net operating loss carryforwards of approximately $2.1 billion, which expire in fiscal 2021 through fiscal 2035, federal research and development tax credits of approximately $110.6 million, which expire in fiscal 2020 through fiscal 2035, foreign tax credits of approximately $21.5 million, which expire in fiscal 2019 through fiscal 2025, and minimum tax credits of $0.7 million, which have no expiration date. For California income tax purposes, the Company had net operating loss carryforwards of approximately $843.3 million which expire beginning in fiscal 2016 through fiscal 2035, California research and development tax credits of approximately $92.0 million, which do not expire, and $9.5 million of enterprise zone tax credits, which expire in fiscal 2025. For other states income tax purposes, the Company had net operating loss carryforwards of approximately $934.7 million which expire beginning in fiscal 2016 through fiscal 2035 and tax credits of approximately $9.5 million, which expire beginning in fiscal 2021 through fiscal 2025. Utilization of the Company’s net operating loss carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carryforwards before utilization. The Company regularly assesses the need for a valuation allowance against its deferred tax assets by considering both positive and negative evidence related to the likelihood of the realization of its deferred taxes to determine if it is more-likely-than-not that some or all of its deferred tax assets will be realized. The Company recorded a valuation allowance as it considered its cumulative loss in recent years as a significant piece of negative evidence. During fiscal 2015, the valuation allowance increased by $112.9 million, primarily due to research tax credits and other US deferred tax assets. The Company will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions going forward and adjust the valuation allowance accordingly. 106 The excess tax benefits associated with stock option exercises are recorded directly to stockholders’ equity only when such benefits are realized following the tax law ordering approach. As a result, the excess tax benefits included in net operating loss carryforwards but are not reflected in deferred tax assets for fiscal 2015 and 2014 are $527.2 million and $408.8 million, respectively. Tax Benefits Related to Stock-Based Expense The total income tax benefit related to stock-based awards was $170.8 million, $147.8 million and $113.9 million for fiscal 2015, 2014 and 2013, respectively, the majority of which was not recognized as a result of the valuation allowance. Unrecognized Tax Benefits and Other Considerations The Company records liabilities related to its uncertain tax positions. Tax positions for the Company and its subsidiaries are subject to income tax audits by multiple tax jurisdictions throughout the world. Certain prior year tax returns are currently being examined by various taxing authorities in countries including the United States, Japan, Germany, Swtizerland and the United Kingdom. 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, based on the 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 had gross unrecognized tax benefits of $146.2 million, $102.3 million and $75.1 million as of January 31, 2015, 2014 and 2013 respectively. A reconciliation of the beginning and ending balance of total unrecognized tax benefits for fiscal years 2015, 2014 and 2013 is as follows (in thousands): Balance as of February 1, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax positions taken in prior period: Gross increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross decreases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax positions taken in current period: Gross increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lapse of statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency translation effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal Year Ended January 31, 2015 2014 2013 $102,275 $ 75,144 $51,971 17,938 (1,967) 34,226 0 (1,224) (5,060) 8,420 (4,466) 7,304 (4,460) 27,952 0 (5,205) 430 24,401 (121) (4,159) 208 Balance as of January 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $146,188 $102,275 $75,144 For fiscal 2015, 2014 and 2013 total unrecognized tax benefits in an amount of $44.6 million, $34.9 million and $32.3 million respectively, if recognized, would reduce income tax expense and the Company’s effective tax rate after considering the impact of the change in valuation allowance in the U.S. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the income tax provision. The Company accrued penalties and interest in the amount of $1.3 million, $0.6 million and $0.3 million in income tax expense during fiscal 2015, 2014 and 2013, respectively. The balance in the non-current income tax payable related to penalties and interest was $4.6 million, $3.3 million and $1.7 million as of January 31, 2015, 2014 and 2013, respectively. The Company has operations and taxable presence in multiple jurisdictions in the U.S. and outside of the U.S. Tax positions for the Company and its subsidiaries are subject to income tax audits by multiple tax jurisdictions around the world. The Company currently considers U.S. federal and state, Canada, Japan, 107 Germany, France and the United Kingdom to be major tax jurisdictions. The Company’s U.S. federal and state tax returns since February 1999, which was the inception of the Company, remain open to examination. With some exceptions, tax years prior to fiscal 2008 in jurisdictions outside of U.S. are generally closed. However, in Japan and United Kingdom, the Company is no longer subject to examinations for years prior to fiscal 2010 and fiscal 2011, respectively. The Company is currently under audit by the U.S. Internal Revenue Service and California Franchise Tax Board for fiscal 2011 to 2012 and fiscal 2009 to 2010, respectively. Additionally, examinations are conducted in other international jurisdictions, including Japan, Germany, Switzerland and the United Kingdom. The Company regularly evaluates its uncertain tax positions and the likelihood of outcomes from these tax examinations. Significant judgment and estimates are necessary in the determination of income tax reserves. Although it is often difficult to predict the outcomes of tax examinations, the Company believes that it has provided adequate reserves for its income tax uncertainties. In the next twelve months, as some of these ongoing examinations are completed and tax positions in these tax years meet the conditions of being effectively settled, the Company anticipates it is reasonably possible that a decrease of unrecognized tax benefits up to approximately $23 million may occur. 9. Earnings/Loss Per Share Basic earnings/loss per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the fiscal period. Diluted earnings/loss per share is computed by giving effect to all potential weighted average dilutive common stock, including options, restricted stock units, warrants and the convertible senior notes. The dilutive effect of outstanding awards and convertible securities is reflected in diluted earnings per share by application of the treasury stock method. Diluted loss per share for fiscal 2015, 2014 and 2013 are the same as basic loss per share as there is a net loss in these periods and inclusion of potentially issuable shares is anti-dilutive. A reconciliation of the denominator used in the calculation of basic and diluted loss per share is as follows (in thousands): Numerator: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Denominator: Weighted-average shares outstanding for basic loss Fiscal Year Ended January 31, 2015 2014 2013 $(262,688) $(232,175) $(270,445) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 624,148 597,613 564,896 Effect of dilutive securities: Convertible senior notes . . . . . . . . . . . . . . . . . .. Employee stock awards . . . . . . . . . . . . . . . . . . .. Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 0 0 0 0 0 0 0 0 0 Adjusted weighted-average shares outstanding and assumed conversions for diluted loss per share . . . . 624,148 597,613 564,896 108 The weighted-average number of shares outstanding used in the computation of basic and diluted earnings/ loss per share does not include the effect of the following potential outstanding common stock. The effects of these potentially outstanding shares were not included in the calculation of diluted earnings/loss per share because the effect would have been anti-dilutive (in thousands): Stock awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Convertible senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,157 25,953 37,517 19,664 43,965 44,253 30,068 26,940 26,944 Fiscal Year Ended January 31, 2013 2014 2015 10. Commitments Letters of Credit As of January 31, 2015, the Company had a total of $63.8 million in letters of credit outstanding substantially in favor of certain landlords for office space. These letters of credit renew annually and expire at various dates through December 2030. Leases The Company leases facilities space and certain fixed assets under non-cancelable operating and capital leases with various expiration dates. As of January 31, 2015, the future minimum lease payments under non-cancelable operating and capital leases are as follows (in thousands): Capital Leases Operating Leases Financing Obligation, Building in Progress-Leased Facility(1) Fiscal Period: Fiscal 2016 . . . . . . . . . . . . . . . . . . . . . Fiscal 2017 . . . . . . . . . . . . . . . . . . . . . Fiscal 2018 . . . . . . . . . . . . . . . . . . . . . Fiscal 2019 . . . . . . . . . . . . . . . . . . . . . Fiscal 2020 . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . $104,825 113,982 118,259 112,807 201,471 0 $ 289,547 267,377 224,359 186,936 186,385 1,124,370 $ 1,777 16,877 21,107 21,551 21,995 252,517 Total minimum lease payments . . . . . 651,344 $2,278,974 $335,824 Less: amount representing interest . . (84,477) Present value of capital lease obligations . . . . . . . . . . . . . . . . . . . $566,867 (1) Total Financing Obligation, Building in Progress-Leased Facility noted above represents the total obligation on the lease agreement noted in Note 3 “Property and Equipment” and includes $125.3 million that was recorded to Financing obligation, building in progress-leased facility, which is included in Other noncurrent liabilities on the balance sheet. The Company’s agreements for the facilities and certain services provide the Company with the option to renew. The Company’s future contractual obligations would change if the Company exercised these options. The terms of the lease agreements provide for rental payments on a graduated basis. The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred 109 but not paid. Of the total operating lease commitment balance of $2.3 billion, approximately $2.0 billion is related to facilities space. The remaining commitment amount is related to computer equipment, other leases, data center capacity and our development and test data center. In April 2014, the Company entered into an office lease agreement to lease approximately 714,000 rentable square feet of an office building located in San Francisco, California that is under construction. The lease payments associated with the lease will be approximately $560.0 million over the 15.5 year term of the lease, beginning in the Company’s first quarter of fiscal 2018, which is reflected above under Operating Leases. In February 2015, the Company acquired an office building totaling approximately 817,000 rentable square feet. As of January 31, 2015, approximately 500,000 square feet of the building was being leased by the Company (see Note 14 “Subsequent Event”). The lease, which was signed in January 2012, is reflected above under Operating Leases, and the commitment totals $238.5 million. The operating lease commitment is as follows: $16.1 million during fiscal 2016; $16.6 million during fiscal 2017; $17.1 million during fiscal 2018; $17.6 million during fiscal 2019; $18.1 million during fiscal 2020; and $153.0 million thereafter. Beginning in the quarter ending April 30, 2015, this commitment will be excluded from future operating lease obligations. Rent expense for fiscal 2015, 2014 and 2013 was $162.8 million, $123.6 million and $88.3 million, respectively. In December 2014, the Company entered into an agreement with a third party provider under which the Company will purchase certain infrastructure services for three years. The agreement provides that the Company will pay $33.0 million in fiscal 2016 and $36.0 million in both fiscal 2017 and 2018 for infrastructure services under the agreement. 11. Employee Benefit Plan The Company has a 401(k) plan covering all eligible employees in the United States and Canada. Since January 1, 2006, the Company has been contributing to the plan. Total Company contributions during fiscal 2015, 2014 and 2013, were $38.1 million, $27.9 million and $22.1 million, respectively. 12. Legal Proceedings and Claims In the ordinary course of business, the Company is or may be involved in various legal proceedings and claims related to alleged infringement of third-party patents and other intellectual property rights, commercial, corporate and securities, labor and employment, class actions, wage and hour, and other claims. The Company has been, and may in the future be, put on notice and/or sued by third parties for alleged infringement of their proprietary rights, including patent infringement. During fiscal 2015, the Company received a communication from a large technology company alleging that the Company infringed certain of its patents. The Company continues to analyze this claim. No litigation has been filed to date. There can be no assurance that this claim will not lead to litigation in the future. The resolution of this claim is not expected to have a material adverse effect on the Company’s financial condition, but it could be material to the net income or cash flows or both of a particular quarter. In general, the resolution of a legal matter could prevent the Company from offering its service to others, could be material to the Company’s financial condition or cash flows, or both, or could otherwise adversely affect the Company’s operating results. The Company makes a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. In management’s opinion, 110 resolution of all current matters is not expected to have a material adverse impact on the Company’s consolidated results of operations, cash flows or financial position. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect the Company’s future results of operations or cash flows, or both, of a particular quarter. 13. Related-Party Transactions In January 1999, the Salesforce.com Foundation, which recently became a private Foundation, also referred to as the Foundation, was chartered to build philanthropic programs that are focused on youth and technology. Beginning in 2008, Salesforce.org, which is a non-profit mutual benefit corporation, was established to resell the Company’s services to nonprofit organizations and certain higher education organizations. The Company’s chairman is the chairman of both the Foundation and Salesforce.org. The Company’s chairman, one of the Company’s employees and one of the Company’s board members hold three of the Foundation’s nine board seats. The Company’s chairman and one of the Company’s employees hold two of Salesforce.org’s six board seats. The Company does not control the Foundation’s or Salesforce.org’s activities, and accordingly, the Company does not consolidate either of the related entities’ statement of activities with its financial results. Since the Foundation’s inception, the Company has provided at no charge certain resources to Foundation employees such as office space. The value of these items was approximately $1.3 million for fiscal 2015. Additionally, the Company has donated subscriptions to the Company’s service to other qualified non-profit organizations. The Company also allows Salesforce.org to resell the Company’s service to non-profit organizations and certain higher education entities. The Company does not charge Salesforce.org for these subscriptions, so revenue from subscriptions provided to non-profit organizations is provided to the Foundation to fund its charitable work. The value of the subscriptions pursuant to reseller agreements was approximately $45.4 million for fiscal 2015. The Company plans to continue these programs. 14. Subsequent Event In February 2015, the Company acquired 50 Fremont Street, a 41-story building totaling approximately 817,000 rentable square feet located in San Francisco, California (“50 Fremont”). The Company acquired 50 Fremont for the purpose of expanding its global headquarters in San Francisco. The acquisition will be accounted for as a business combination. As of January 31, 2015, the Company was leasing approximately 500,000 square feet of the available space in 50 Fremont. Beginning with the fiscal quarter ended April 30, 2015, the Company will include the financial results of 50 Fremont in its condensed consolidated financial statements from the date of acquisition. The total purchase price for 50 Fremont of $629.3 million included $322.6 million in cash, $115.0 million of proceeds from a like-kind exchange account from the sale of the undeveloped real estate described in Note 3 “Property and Equipment,” and the assumption of a $200.0 million loan secured by 50 Fremont. In connection with the purchase, the Company will recognize a non-cash gain totaling approximately $42.0 million on the termination of the lease signed in January 2012 and the preliminary tax impact is insignificant after considering the impact of the valuation allowance. 111 15. Selected Quarterly Financial Data (Unaudited) Selected summarized quarterly financial information for fiscal 2015 and 2014 is as follows: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Fiscal Year (in thousands, except per share data) Fiscal 2015 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . Loss from operations . . . . . . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic net loss per share . . . . . . . . . . . . . . . . . Diluted net loss per share . . . . . . . . . . . . . . . Fiscal 2014 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . Loss from operations . . . . . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . Basic net income (loss) per share . . . . . . . . . Diluted net income (loss) per share . . . . . . . . $1,226,772 934,467 (55,341) (96,911) $1,318,551 1,010,720 (33,434) (61,088) $1,383,655 1,050,444 (22,042) (38,924) $1,444,608 1,088,685 (34,816) (65,765) $ $ (0.16) $ (0.16) $ (0.10) $ (0.10) $ (0.06) $ (0.06) $ (0.10) $ (0.10) $ $5,373,586 4,084,316 (145,633) (262,688) (0.42) (0.42) $1,076,034 807,847 (97,931) (124,434) $1,145,242 871,712 (103,746) (116,623) $ $ (0.21) $ (0.21) $ (0.19) $ (0.19) $ $4,071,003 3,102,575 (286,074) (232,175) (0.39) (0.39) $ 892,633 683,639 (44,540) (67,721) $ $ (0.12) $ (0.12) $ $ 957,094 739,377 (39,857) 76,603 0.13 0.12 112 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Annual Report on Form 10-K. In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based on management’s evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. (b) Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of January 31, 2015 based on the guidelines established in the Internal Control—Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of January 31, 2015. We reviewed the results of management’s assessment with our Audit Committee. The effectiveness of our internal control over financial reporting as of January 31, 2015 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report which is included in Item 8 of this Annual Report on Form 10-K. (c) Changes in Internal Control over Financial Reporting There was no change in our internal control over financial reporting that occurred during the quarter ended January 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 113 (d) Inherent Limitations on Effectiveness of Controls Our management, including our chief executive officer and chief financial officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. ITEM 9B. OTHER INFORMATION None. 114 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information concerning our directors, compliance with Section 16(a) of the Exchange Act, our Audit Committee and any changes to the process by which stockholders may recommend nominees to the Board required by this Item are incorporated herein by reference to information contained in the Proxy Statement, including “Directors and Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance.” The information concerning our executive officers required by this Item is incorporated by reference herein to the section of this Annual Report on Form 10-K in Part I, entitled “Executive Officers of the Registrant.” We have adopted a code of ethics, our Code of Conduct, which applies to all employees, including our principal executive officer, Marc Benioff, chief financial officer, Mark Hawkins, principal accounting officer, Joe Allanson, and all other executive officers. The Code of Conduct is available on our website at http://www.salesforce.com/company/investor/governance/. A copy may also be obtained without charge by contacting Investor Relations, salesforce.com, inc., The Landmark @ One Market, Suite 300, San Francisco, California 94105 or by calling (415) 901-7000. We plan to post on our website at the address described above future amendments and waivers of our Code of Conduct as permitted under applicable NYSE and SEC rules. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to information contained in the Proxy Statement, including “Compensation Discussion and Analysis,” “Committee Reports,” “Directors and Corporate Governance” and “Executive Compensation and Other Matters.” ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item is incorporated herein by reference to information contained in the Proxy Statement, including “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” and “Equity Compensation Plan Information.” ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE The information required by this Item is incorporated herein by reference to information contained in the Proxy Statement, including “Directors and Corporate Governance” and “Employment Contracts and Certain Transactions.” ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item is incorporated herein by reference to information contained in the Proxy Statement, including “Ratification of Appointment of Independent Auditors.” 115 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as a part of this Annual Report on Form 10-K: 1. Financial Statements: The information concerning our financial statements, and Report of Independent Registered Public Accounting Firm required by this Item is incorporated by reference herein to the section of this Annual Report on Form 10-K in Item 8, entitled “Consolidated Financial Statements and Supplementary Data.” 2. Financial Statement Schedules: Schedule II Valuation and Qualifying Accounts is filed as part of this Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements and Notes thereto. The Financial Statement Schedules not listed have been omitted because they are not applicable or are not required or the information required to be set forth herein is included in the Consolidated Financial Statements or Notes thereto. 3. Exhibits: See “Index to Exhibits.” (b) Exhibits. The exhibits listed below in the accompanying “Index to Exhibits” are filed or incorporated by reference as part of this Annual Report on Form 10-K. (c) Financial Statement Schedules. 116 salesforce.com, inc. Schedule II Valuation and Qualifying Accounts Description Fiscal year ended January 31, 2015 Balance at Beginning of Year Additions Deductions Write-offs Balance at End of Year Allowance for doubtful accounts . . . . $4,769,000 $6,867,000 $(3,490,000) $8,146,000 Fiscal year ended January 31, 2014 Allowance for doubtful accounts . . . . $1,853,000 $7,963,000 $(5,047,000) $4,769,000 Fiscal year ended January 31, 2013 Allowance for doubtful accounts . . . . $1,273,000 $6,350,000 $(5,770,000) $1,853,000 117 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SIGNATURES Dated: March 5, 2015 Dated: March 5, 2015 salesforce.com, inc. By: /S/ MARK HAWKINS Mark Hawkins Executive Vice President and Chief Financial Officer salesforce.com, inc. By: /S/ JOE ALLANSON Joe Allanson Senior Vice President, Chief Accounting Officer and Corporate Controller (Principal Accounting Officer) POWER OF ATTORNEY AND SIGNATURES KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Marc Benioff, Mark Hawkins, Burke Norton and Joe Allanson, his or her attorney-in- fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney- in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ MARC BENIOFF Marc Benioff /s/ MARK HAWKINS Mark Hawkins /s/ JOE ALLANSON Joe Allanson /s/ KEITH BLOCK Keith Block Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) March 5, 2015 Executive Vice President and Chief March 5, 2015 Financial Officer (Principal Financial Officer) Senior Vice President, Chief Accounting March 5, 2015 Officer and Corporate Controller (Principal Accounting Officer) Director, President and Vice Chairman March 5, 2015 118 Signature Title Date March 5, 2015 March 5, 2015 March 5, 2015 March 5, 2015 March 5, 2015 March 5, 2015 March 5, 2015 March 5, 2015 March 5, 2015 /s/ CRAIG CONWAY Craig Conway /s/ ALAN HASSENFELD Alan Hassenfeld /s/ COLIN POWELL Colin Powell /s/ SANFORD R. ROBERTSON Sanford R. Robertson /s/ JOHN V. ROOS John V. Roos /s/ LAWRENCE TOMLINSON Lawrence Tomlinson /s/ ROBIN WASHINGTON Robin Washington /s/ MAYNARD WEBB Maynard Webb /s/ SUSAN WOJCICKI Susan Wojcicki Director Director Director Director Director Director Director Director Director 119 [THIS PAGE INTENTIONALLY LEFT BLANK] Index to Exhibits Provided Herewith Incorporated by Reference Form SEC File No. Exhibit Filing Date 8-K 001-32224 2.1 6/4/2013 Exhibit No. 2.1 3.1 3.2 4.1 4.2 10.1* 10.2* 10.3* 10.4* 10.5* 10.6* 10.7* 10.8 10.9 10.10* 10.11* 10.12* Exhibit Description Acquisition Agreement dated as of June 3, 2013, by and among salesforce.com, inc., Excalibur Acquisition Corp. and ExactTarget, Inc. Amended and Restated Certificate of Incorporation of salesforce.com, inc. Amended and Restated Bylaws of salesforce.com, inc. Specimen Common Stock Certificate Indenture dated March 18, 2013 between salesforce.com, inc. and U.S. Bank National Association including the form of 0.25% Convertible Senior Notes due 2018 therein Form of Indemnification Agreement between salesforce.com, inc. and its officers and directors 1999 Stock Option Plan, as amended 2004 Equity Incentive Plan, as amended 2004 Employee Stock Purchase Plan, as amended 2004 Outside Directors Stock Plan, as amended 2006 Inducement Equity Incentive Plan, as amended Kokua Bonus Plan, as amended and restated December 5, 2014, effective February 1, 2015 X Resource Sharing Agreement dated as of January 29, 2009 between salesforce.com, inc., salesforce.com foundation, and salesforce.org Reseller Agreement dated as of January 30, 2009 between salesforce.com, inc. and salesforce.org, as amended Form of Offer Letter for Executive Officers and schedule of omitted details thereto Form of Change of Control and Retention Agreement as entered into with Marc Benioff Form of Change of Control and Retention Agreement as entered into with non-CEO Executive Officers 8-K 001-32224 3.1 6/11/2013 8-K 001-32224 3.2 6/11/2013 S-1/A 333-111289 8-K 001-32224 4.2 4.1 4/20/2004 3/18/2013 S-1/A 333-111289 10.1 4/20/2004 10-K 10-Q 10-Q 001-32224 001-32224 10.2 10.1 3/15/2006 8/22/2008 001-32224 10.3 11/29/2011 10-K 001-32224 10.5 3/23/2011 8-K 001-32224 10.1 6/8/2012 10-K 001-32224 10.10 3/9/2009 10-Q 001-32224 10.1 5/25/2012 10-K 001-32224 10.11 3/9/2012 10-K 001-32224 10.13 3/9/2009 10-K 001-32224 10.14 3/9/2009 Exhibit No. 10.13 10.14 10.15* 10.16* 10.17 10.18 10.19* 10.20* 10.21* 10.22 10.23* 10.24 10.25 10.26* Exhibit Description Provided Herewith Incorporated by Reference Form SEC File No. Exhibit Filing Date Form of Convertible Bond Hedge Confirmation Form of Warrant Confirmation Employment Offer Letter, dated May 2, 2013 between salesforce.com, inc. and Keith Block 2013 Equity Incentive Plan and related forms of equity award agreements Credit Agreement, dated as of July 11, 2013, by and among salesforce.com, inc., the guarantors from time to time party thereto, the lenders from time to time party thereto and Bank of America, N.A., as Administrative Agent Office Lease dated as of April 10, 2014 by and between salesforce.com, inc. and Transbay Tower LLC Transition Services Agreement dated February 27, 2014 by and between salesforce.com and Graham Smith 2014 Inducement Equity Incentive Plan and related forms of equity award agreements Employment Offer Letter, dated June 11, 2014, between salesforce.com, inc. and Mark Hawkins Amendment No. 1 to Credit Agreement, dated as of June 30, 2014, by and among salesforce.com, inc., the guarantors from time to time party thereto and Bank of America, N.A., as Administrative Agent RelateIQ, Inc. 2011 Stock Plan and related forms of equity award agreements Credit Agreement, dated as of October 6, 2014, by and among salesforce.com, inc., the guarantors from time to time party thereto, the lenders from time to time party thereto and Wells Fargo Bank, N.A., as Administrative Agent. Purchase and Sale Agreement, dated November 10, 2014, between salesforce.com, inc. and 50 Fremont Tower, LLC Leave of Absence Agreement, dated November 24, 2014, between salesforce.com, inc. and George Hu 8-K 001-32224 10.2 3/18/2013 8-K 8-K 001-32224 001-32224 10.3 10.1 3/18/2013 6/11/2013 8-K 001-32224 10.2 6/11/2013 8-K 001-32224 10.1 7/15/2013 10-Q 001-32224 10.2 5/30/2014 10-Q 001-32224 10.3 5/30/2014 8-K 001-32224 10.1 7/11/2014 8-K 001-32224 10.2 6/30/2014 10-Q 001-32224 10.3 8/26/2014 S-8 333-198361 4.1 8/26/2014 8-K 001-32224 10.10 10/6/2014 10-Q 001-32224 10.2 11/26/2014 10-Q 001-32224 10.3 11/26/2014 Exhibit No. 10.27 10.28 10.29 21.1 23.1 24.1 31.1 31.2 32.1 Exhibit Description Provided Herewith Incorporated by Reference Form SEC File No. Exhibit Filing Date 8-K 001-32224 10.1 12/19/2014 8-K 001-32224 10.2 12/19/2014 8-K 001-32224 10.3 12/19/2014 Letter Agreement between salesforce.com, inc. and Goldman, Sachs & Co., dated December 17, 2014 Letter Agreement between salesforce.com, inc. and Deutsche Bank AG, London Branch, dated December 17, 2014 Settlement Agreement between salesforce.com, inc. and Bank of America, N.A., dated December 17, 2014 List of Subsidiaries Consent of Independent Registered Public Accounting Firm Power of Attorney (incorporated by reference to the signature page of this Annual Report on Form 10-K) Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X X X X X X 101.INS XBRL Instance Document 101.SCH 101.CAL XBRL Taxonomy Extension Schema Document XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Extension Definition 101.LAB 101.PRE XBRL Taxonomy Extension Label Linkbase Document XBRL Taxonomy Extension Presentation Linkbase Document * Indicates a management contract or compensatory plan or arrangement. [THIS PAGE INTENTIONALLY LEFT BLANK] THANK Y U [THIS PAGE INTENTIONALLY LEFT BLANK] Dear stockholders, Fiscal 2015 was another phenomenal year of customer success and growth for Salesforce. We reached $5 billion in annual revenue faster than any other enterprise software company, and now it’s our goal to be the fastest to reach $10 billion. Salesforce is now the sixth largest software company, and the largest enterprise cloud computing company in the world. We believe that we have a tremendous market opportunity ahead, as CRM and analytics become core to the success of every business. Salesforce has achieved a unique position in the industry. Our complete, trusted Customer Success Platform is built from the ground up for cloud, social, mobile, and data science technologies. And with six world-class clouds for sales, service, marketing, community, analytics, and app development, we have six engines for growth. In fact, four of our cloud services, if ranked separately by revenue, would be among the top eight pure-play enterprise cloud companies today. Very few software companies in history have successfully established leadership positions in more than one category. Our more than 150,000 customers and more than 16,000 employees around the world are why we were ranked by Forbes as the world’s Most Innovative Company for the last four years, and recognized by Fortune Magazine as Most Admired Software Company and one of the top ten Best Companies to Work For in the past year. Of all of our results, I’m most proud of our Salesforce Foundation, a separate 501(c)(3) organization. We now have more than 24,000 non-profit and higher education organizations using our software. The Foundation has donated more than $80 million in grants and our employees have volunteered more than 840,000 hours in the last 16 years. And this year, we are well on our way to celebrating one million total hours of volunteering! I would like to extend a sincere thank you to our customers and partners for their inspiration, to our employees for their focus on customer success, and to you, our stockholders, for your continued support. Aloha, WORLDWIDE CORPORATE HEADQUARTERS salesforce.com inc. The Landmark @ One Market Suite 300 San Francisco, CA 94105 USA ... ranks among the most important enterprise applications announcements of 2014.” — InformationWeek 0 100k 200k 300k 400k 500k 600k 700k 800k 900k The Year of ANALYTICS “I can tell you that every time I show the product, people want it.” Alex Dayon President, Products Wave is built for a world in which people have more interactions with data through mobile apps than they do through desktop browsers. PETER COFFEE VP for Strategic Research at Salesforce r w a rd for ente jor ste p f o a m A r p r i s e s o f t w a r e . — Venture B e a t “It doesn’t take a data science degree, it takes 5 buttons.” BOARD OF DIRECTORS Marc Benioff Keith Block Craig Conway Alan Hassenfeld Colin Powell Sanford Robertson John V. Roos Larry Tomlinson Robin Washington Maynard Webb Susan Wojcicki Chairman & Chief Executive Officer Vice Chairman & President Former Chief Executive Officer, PeopleSoft Inc. Director, Hasbro Inc. General, Former U.S. Secretary of State, Former Chairman, Joint Chiefs of Staff Principal, Francisco Partners Former U.S. Ambassador to Japan Former Senior Vice President & Treasurer, Hewlett-Packard Co. Executive Vice President and Chief Financial Officer, Gilead Sciences Inc. Chairman, Yahoo Inc. Chief Executive Officer, YouTube EXECUTIVE TEAM Marc Benioff Parker Harris Keith Block Alex Dayon Mark Hawkins Maria Martinez Burke Norton Joe Allanson Chairman & Chief Executive Officer Co-Founder Vice Chairman & President President, Products Chief Financial Officer & Executive Vice President President, Sales & Customer Success Chief Legal Officer & Executive Vice President Chief Accounting Officer INVESTOR RELATIONS investor@salesforce.com, +1-415-536-6250 STOCK LISTING Salesforce.com trades on the New York Stock Exchange under the ticker symbol “CRM.” Note on Forward-Looking Statements This annual report contains forward-looking statements within the meaning of the federal securities laws. Results could differ materially. Further information on factors that could affect results is included in the fiscal 2015 Form 10-K, included in this annual report. Anna RosenmanProduct Marketing Director 2 0 1 5 A N N UA L R E P O RT F Y 1 5 H I G H L I G H T S “ Salesforce’s Wave Analytics Cloud ... WORLD’S #1CRM PLATFORM (Source: Gartner, 2014) (Source: Forbes, 2011, 2012, 2014) #1 MOST INNOVATIVE COMPANY IN THE WORLD $5.4 BILLION IN REVENUE 32% REVENUE GROWTH 2.3 BILLION TRANSACTIONS AVERAGED EVERY BUSINESS DAY 2,700 APPEXCHANGE APPS and nearly 3 million installs 840,000 >16,000 EMPLOYEES HOURS CONTRIBUTED TO THE COMMUNITY SINCE INCEPTION Corporate Headquarters The Landmark @ One Market | Suite 300 San Francisco, CA 94105 United States 1-800-NO-SOFTWARE www.salesforce.com /salesforce @salesforce Copyright ©2015, salesforce.com, inc. All rights reserved. Salesforce and salesforce.com are registered trademarks of salesforce.com, inc. Salesforce.com owns other registered and unregistered trademarks. Other names used herein may be trademarks of their respective owners. 

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