Edgar Filing: SALESFORCE COM INC

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended July 31, 2015



¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 001-32224

salesforce.com, inc.

(Exact name of registrant as specified in its charter)



Delaware	94-3320693
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

The Landmark @ One Market, Suite 300

San Francisco, California 94105

(Address of principal executive offices)

Telephone Number (415) 901-7000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of July 31, 2015, there were approximately 660.0 million shares of the Registrant’s Common Stock outstanding.

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INDEX



		Page No.
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets as of July 31, 2015 and January 31, 2015	3

	Condensed Consolidated Statements of Operations for the three and six months ended July 31, 2015 and 2014	4

	Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended July 31, 2015 and 2014	5

	Condensed Consolidated Statements of Cash Flows for the three and six months ended July 31, 2015 and 2014	6

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61

Item 4.	Controls and Procedures	63

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	64

Item 1A.	Risk Factors	64

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	79

Item 3.	Defaults Upon Senior Securities	79

Item 4.	Mine Safety Disclosures	79

Item 5.	Other Information	79

Item 6.	Exhibits	79

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

salesforce.com, inc.

Condensed Consolidated Balance Sheets

(in thousands)



	July 31, 2015			January 31, 2015
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	1,089,351		$	908,117
Short-term marketable securities	81,118			87,312
Accounts receivable, net	1,067,799			1,905,506
Deferred commissions	211,314			225,386
Prepaid expenses and other current assets	330,291			280,554
Land and building improvements held for sale	136,914			143,197
Total current assets	2,916,787			3,550,072
Marketable securities, noncurrent	896,494			894,855
Property and equipment, net	1,725,184			1,125,866
Deferred commissions, noncurrent	143,871			162,796
Capitalized software, net	414,035			433,398
Goodwill	3,804,288			3,782,660
Strategic investments	477,886			175,774
Other assets, net	415,432			452,546
Restricted cash	0			115,015
Total assets	$	10,793,977		$	10,692,982
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable, accrued expenses and other liabilities	$	1,098,054		$	1,103,335
Deferred revenue	3,014,940			3,286,768
Total current liabilities	4,112,994			4,390,103
Convertible 0.25% senior notes, net	1,082,799			1,070,692
Loan assumed on 50 Fremont	198,813			0
Revolving credit facility	0			300,000
Deferred revenue, noncurrent	20,051			34,681
Other noncurrent liabilities	843,517			922,323
Total liabilities	6,258,174			6,717,799
Stockholders’ equity:
Common stock	660			651
Additional paid-in capital	5,165,892			4,604,485
Accumulated other comprehensive loss	(28,144		)	(24,108		)
Accumulated deficit	(602,605		)	(605,845		)
Total stockholders’ equity	4,535,803			3,975,183
Total liabilities and stockholders’ equity	$	10,793,977		$	10,692,982

See accompanying Notes.

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salesforce.com, inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)



	Three Months Ended July 31,						Six Months Ended July 31,
	2015			2014			2015			2014
Revenues:
Subscription and support	$	1,521,319		$	1,232,587		$	2,926,606		$	2,379,893
Professional services and other	113,365			85,964			219,245			165,430
Total revenues	1,634,684			1,318,551			3,145,851			2,545,323
Cost of revenues (1)(2):
Subscription and support	292,737			218,918			566,978			427,865
Professional services and other	112,647			88,913			220,208			172,271
Total cost of revenues	405,384			307,831			787,186			600,136
Gross profit	1,229,300			1,010,720			2,358,665			1,945,187
Operating expenses (1)(2):
Research and development	234,100			203,109			456,228			391,467
Marketing and sales	793,691			671,958			1,530,629			1,311,313
General and administrative	181,685			169,087			357,496			331,182
Operating lease termination resulting from purchase of 50 Fremont, net	0			0			(36,617		)	0
Total operating expenses	1,209,476			1,044,154			2,307,736			2,033,962
Income (loss) from operations	19,824			(33,434		)	50,929			(88,775		)
Investment income	3,283			2,655			7,844			4,433
Interest expense	(18,096		)	(18,314		)	(34,771		)	(38,673		)
Other income (expense) (1)(3)	1,947			(3,876		)	1,029			(14,723		)
Income (loss) before provisions for income taxes	6,958			(52,969		)	25,031			(137,738		)
Provisions for income taxes	(7,810		)	(8,119		)	(21,791		)	(20,261		)
Net income (loss)	$	(852	)	$	(61,088	)	$	3,240		$	(157,999	)
Basic net income (loss) per share	$	0.00		$	(0.10	)	$	0.00		$	(0.26	)
Diluted net income (loss) per share	$	0.00		$	(0.10	)	$	0.00		$	(0.26	)
Shares used in computing basic net income (loss) per share	659,366			617,016			656,636			614,797
Shares used in computing diluted net income (loss) per share	659,366			617,016			672,231			614,797

_______________

(1) Amounts include amortization of purchased intangibles from business combinations, as follows:



	Three Months Ended July 31,				Six Months Ended July 31,
	2015		2014		2015		2014
Cost of revenues	$	20,839	$	21,271	$	40,529	$	49,943
Marketing and sales	19,002		14,648		39,029		29,613
Other non-operating expense	1,301		0		2,116		0

(2) Amounts include stock-based expense, as follows:



	Three Months Ended July 31,				Six Months Ended July 31,
	2015		2014		2015		2014
Cost of revenues	$	16,340	$	12,977	$	31,721	$	24,787
Research and development	33,732		33,112		64,974		60,396
Marketing and sales	71,724		70,485		142,258		137,618
General and administrative	25,983		25,837		51,386		50,702

(3) Amount includes approximately $8.9 million loss on conversions of our convertible 0.75% senior notes due January 2015 recognized during the six months ended July 31, 2014.

See accompanying Notes.

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salesforce.com, inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)



	Three Months Ended July 31,						Six Months Ended July 31,
	2015			2014			2015			2014
Net income (loss)	$	(852	)	$	(61,088	)	$	3,240		$	(157,999	)
Other comprehensive loss, before tax and net of reclassification adjustments:
Foreign currency translation and other losses	(5,391		)	(5,299		)	(7,246		)	(2,184		)
Unrealized gains (loss) on investments	5,599			1,164			3,210			(4,333		)
Other comprehensive gain (loss), before tax	208			(4,135		)	(4,036		)	(6,517		)
Tax effect	0			0			0			0
Other comprehensive gain (loss), net of tax	208			(4,135		)	(4,036		)	(6,517		)
Comprehensive loss	$	(644	)	$	(65,223	)	$	(796	)	$	(164,516	)

See accompanying Notes.

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salesforce.com, inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



	Three Months Ended July 31,						Six Months Ended July 31,
	2015			2014			2015			2014
Operating activities:
Net income (loss)	$	(852	)	$	(61,088	)	$	3,240		$	(157,999	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	131,675			107,596			259,602			218,404
Amortization of debt discount and transaction costs	7,291			9,949			13,152			21,740
50 Fremont lease termination, net	0			0			(36,617		)	0
Loss on conversions of convertible senior notes	0			361			0			8,890
Amortization of deferred commissions	76,679			61,300			153,834			121,155
Expenses related to employee stock plans	147,779			142,411			290,339			273,503
Excess tax benefits from employee stock plans	133			6,815			(4,091		)	(2,226		)
Changes in assets and liabilities, net of business combinations:
Accounts receivable, net	(141,418		)	(150,168		)	837,752			526,514
Deferred commissions	(70,745		)	(65,846		)	(120,837		)	(106,742		)
Prepaid expenses and other current assets and other assets	(18,072		)	23,636			(29,346		)	27,913
Accounts payable, accrued expenses and other liabilities	193,771			142,638			(45,301		)	(42,961		)
Deferred revenue	(21,830		)	28,289			(286,459		)	(169,211		)
Net cash provided by operating activities	304,411			245,893			1,035,268			718,980
Investing activities:
Business combinations, net of cash acquired	(18,451		)	0			(30,921		)	0
Purchase of 50 Fremont land and building	0			0			(425,376		)	0
Deposit for purchase of 50 Fremont land and building	0			0			115,015			0
Non-refundable amounts received for sale of land available for sale	3,432			1,000			6,284			31,000
Strategic investments	(150,434		)	(18,807		)	(294,896		)	(35,053		)
Purchases of marketable securities	(136,196		)	(284,928		)	(343,421		)	(535,464		)
Sales of marketable securities	130,922			71,073			323,106			150,385
Maturities of marketable securities	1,833			16,762			16,279			23,960
Capital expenditures	(64,883		)	(71,576		)	(135,970		)	(131,674		)
Net cash used in investing activities	(233,777		)	(286,476		)	(769,900		)	(496,846		)
Financing activities:
Proceeds from employee stock plans	114,799			61,429			269,814			135,224
Excess tax benefits from employee stock plans	(133		)	(6,815		)	4,091			2,226
Payments on convertible senior notes	0			(13,692		)	0			(297,584		)
Principal payments on capital lease obligations	(41,074		)	(40,341		)	(57,899		)	(50,935		)
Payments on revolving credit facility and term loan	0			(7,500		)	(300,000		)	(15,000		)
Net cash provided by (used in) financing activities	73,592			(6,919		)	(83,994		)	(226,069		)
Effect of exchange rate changes	3,169			(5,664		)	(140		)	(2,975		)
Net increase (decrease) in cash and cash equivalents	147,395			(53,166		)	181,234			(6,910		)
Cash and cash equivalents, beginning of period	941,956			827,891			908,117			781,635
Cash and cash equivalents, end of period	$	1,089,351		$	774,725		$	1,089,351		$	774,725

See accompanying Notes.

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salesforce.com, inc.

Condensed Consolidated Statements of Cash Flows

Supplemental Cash Flow Disclosure

(in thousands)

(unaudited)



	Three Months Ended July 31,				Six Months Ended July 31,
	2015		2014		2015		2014
Supplemental cash flow disclosure:
Cash paid during the period for:
Interest	$	20,592	$	8,322	$	28,671	$	16,989
Income taxes, net of tax refunds	$	5,621	$	14,805	$	16,202	$	24,799
Non-cash financing and investing activities:
Fixed assets acquired under capital leases	$	2,166	$	75,449	$	5,126	$	81,335
Building in progress - leased facility acquired under financing obligation	$	14,636	$	20,288	$	36,859	$	33,048
Fair value of loan assumed on 50 Fremont	$	0	$	0	$	198,751	$	0

See accompanying Notes.

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salesforce.com, inc.

Notes to Condensed Consolidated Financial Statements

1. Summary of Business and Significant Accounting Policies

Description of Business

Salesforce.com, inc. (the “Company”) is a leading provider of enterprise 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 2016, for example, refer to the fiscal year ending January 31, 2016.

Basis of Presentation

The accompanying condensed consolidated balance sheet as of July 31, 2015 and the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive loss and the condensed consolidated statements of cash flows for the three and six months ended July 31, 2015 and 2014, respectively, are unaudited. The condensed consolidated balance sheet data as of January 31, 2015 was derived from the audited consolidated financial statements that are included in the Company’s fiscal 2015 Form 10-K, which was filed with the Securities and Exchange Commission (the “SEC”) on March 6, 2015. The accompanying statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s fiscal 2015 Form 10-K.

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements in the Form 10-K, and include all adjustments necessary for the fair presentation of the Company’s balance sheet as of July 31, 2015, and its results of operations, including its comprehensive loss, and its cash flows for the three and six months ended July 31, 2015 and 2014. All adjustments are of a normal recurring nature. The results for the three and six months ended July 31, 2015 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending January 31, 2016.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in the Company’s condensed consolidated financial statements and notes thereto.

Significant estimates and assumptions made by management include the determination of:


•	the best estimate of selling price of the deliverables included in multiple deliverable revenue arrangements,


•	the fair value of assets acquired and liabilities assumed for business combinations,


•	the recognition, measurement and valuation of current and deferred income taxes,


•	the fair value of convertible notes,


•	the fair value of stock awards issued and related forfeiture rates,


•	the useful lives of intangible assets and property and equipment,


•	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).

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Actual results could differ materially from those estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the result of which forms the basis for making judgments about the carrying values of assets and liabilities.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

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 condensed consolidated financial statements.

Concentrations of Credit Risk and Significant Customers

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and trade accounts receivable. 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 July 31, 2015 and January 31, 2015. No single customer accounted for five percent or more of total revenue during the three and six months ended July 31, 2015 and 2014.

Geographic Locations

As of July 31, 2015 and January 31, 2015, assets located outside the Americas were 12 percent of total assets.

Revenues by geographical region are as follows (in thousands):



	Three Months Ended July 31,				Six Months Ended July 31,
	2015		2014		2015		2014
Americas	$	1,202,173	$	940,946	$	2,317,293	$	1,817,323
Europe	286,904		246,532		545,709		477,342
Asia Pacific	145,607		131,073		282,849		250,658
	$	1,634,684	$	1,318,551	$	3,145,851	$	2,545,323

Americas revenue attributed to the United States was approximately 95 percent and 94 percent during the three and six months ended July 31, 2015 and 2014, respectively. No other country represented more than ten percent of total revenue during the three and six months ended July 31, 2015 and 2014.

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.

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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.

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.

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Deferred Revenue

The deferred revenue balance does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from subscription services described above and is recognized as the revenue recognition criteria are met. The Company generally invoices customers in annual installments. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, size and new business linearity within the quarter.

Deferred revenue that will be recognized during the succeeding twelve month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent.

Deferred Commissions

Deferred commissions are the incremental costs that are directly associated with non-cancelable subscription contracts with customers and consist of sales commissions paid to the Company’s direct sales force.

The commissions are deferred and amortized over the non-cancelable terms of the related customer contracts, which are typically 12 to 36 months. The commission payments are paid in full the month after the customer’s service commences and are a direct and incremental cost of the revenue arrangements. The deferred commission amounts are recoverable through the future revenue streams under the non-cancelable customer contracts. The Company believes this is the preferable method of accounting as the commission charges are so closely related to the revenue from the non-cancelable customer contracts that they should be recorded as an asset and charged to expense over the same period that the subscription revenue is recognized. Amortization of deferred commissions is included in marketing and sales expense in the accompanying condensed 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 condensed 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.

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	5 years
Leasehold improvements	The remaining lease term or up to 10 years

When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from their respective accounts and any loss on such retirement is reflected in operating expenses.

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Capitalized Internal-Use Software Costs

The Company capitalizes costs related to its enterprise cloud computing services and certain projects for internal use incurred during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life, which is generally three to five years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

Goodwill and Intangible Assets Impairment Assessments

The Company evaluates and tests the recoverability of its goodwill for impairment at least annually during the fourth quarter or more often if and when circumstances indicate that goodwill may not be recoverable.

Intangible assets are amortized over their useful lives. Each period the Company evaluates the estimated remaining useful life of its intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. The carrying amounts of these assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. If the undiscounted cash flows used in the test for recoverability are less than the carrying amount of these assets, then the carrying amount of such assets is reduced to fair value.

Long- Lived Assets and Impairment Assessment

The company evaluates long-lived assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. This includes but is not limited to significant adverse changes in business climate, market conditions, or other events that indicate an asset's carrying amount may not be recoverable. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value.

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 condensed 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 to operating expense.

As the deemed owner for accounting purposes during construction, the Company records assets and liabilities for the estimated construction costs incurred under build-to-suit lease arrangements to the extent it is involved in the construction of structural improvements or takes construction risk prior to commencement of a lease.

The Company additionally has entered into subleases for unoccupied leased office space. Losses are recognized in the period the sublease is executed. Any sublease payments received in excess of the straight-line rent payments for the sublease are recorded in other income (expense).

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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 Amended and Restated 2004 Employee Stock Purchase Plan (“ESPP” or “2004 Employee Stock Purchase Plan”) on a straight-line basis over the offering period, which is 12 months. Stock-based expenses are recognized net of estimated forfeiture activity. The estimated forfeiture rate applied is based on historical forfeiture rates. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option pricing model.

The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions and fair value per share:



	Three Months Ended July 31,						Six Months Ended July 31,
Stock Options	2015			2014			2015			2014
Volatility	35		%	37		%	35-37		%	37		%
Estimated life	3.6 years			3.5 years			3.6 years			3.5 years
Risk-free interest rate	1.31- 1.42		%	1.25- 1.46		%	1.13- 1.42		%	1.20- 1.46		%
Weighted-average fair value per share of grants	$	20.24		$	15.81		$	19.81		$	16.15



	Three Months Ended July 31,						Six Months Ended July 31,
ESPP	2015			2014			2015			2014
Volatility	34		%	34-35		%	34		%	34-35		%
Estimated life	0.75 years			0.75 years			0.75 years			0.75 years
Risk-free interest rate	0.06- 0.27		%	0.07- 0.16		%	0.06- 0.27		%	0.07- 0.16		%
Weighted-average fair value per share of grants	$	19.30		$	14.53		$	19.30		$	14.53

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.

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 condensed consolidated statement of operations in the period that includes the enactment date.

Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the applicable tax law. The Company regularly reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The Company’s judgments regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute its business plans and/or tax planning strategies. Should there be a change in the ability to recover deferred tax assets, the tax provision would increase or decrease in the period in which the assessment is changed.

The Company’s tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, solely based on its technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than 50 percent likely to be realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax provision.

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In July 2015, the United States Tax Court (the “Court”) issued an opinion favorable to Altera Corporation (“Altera”) with respect to Altera’s litigation with the Internal Revenue Service (“IRS”). The litigation relates to the treatment of stock-based compensation expense in an inter-company cost-sharing arrangement with Altera’s foreign subsidiary. In its opinion, the Court accepted Altera’s position of excluding stock-based compensation from its inter-company cost-sharing arrangement. Because there is uncertainty related to the IRS response to the Court’s opinion, the final resolution of this litigation, and the potential favorable benefits to the Company, the Company did not record any benefit for the three months ended July 31, 2015. Management will continue to monitor developments related to this case and the potential impact of those developments on our current and future financial statements.

Foreign Currency Translation

The functional currency of the Company’s major foreign subsidiaries is generally the local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as a separate component on the condensed consolidated 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 condensed consolidated financial statements.

The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as the Company’s director or officer or that person’s services provided to any other company or enterprise at the Company’s request. The Company maintains director and officer insurance coverage that would generally enable the Company to recover a portion of any future amounts paid. The Company may also be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.

New Accounting 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. The FASB deferred the effective date for the new revenue reporting standard for entities reporting under U.S. GAAP for one year. In accordance with the deferral, ASU 2014-09 will be effective for fiscal 2019, including interim periods within that reporting period. The Company is currently in the process of assessing the adoption methodology, which allows the amendment to be applied retrospectively to each prior period presented, or with the cumulative effect recognized as of the date of initial application. The Company is also evaluating the impact of the adoption of ASU 2014-09 on its condensed consolidated financial statements and has not determined whether the effect will be material to either its revenue results or its deferred commissions balances.

Reclassification

Certain reclassifications to the fiscal 2015 balances were made to conform to the current period presentation in the Balance Sheet. These reclassifications include strategic investments and other assets, net.

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2. Investments

Marketable Securities

At July 31, 2015, marketable securities consisted of the following (in thousands):



Investments classified as Marketable Securities	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Corporate notes and obligations	$	579,895	$	816	$	(992	)	$	579,719
U.S. treasury securities	108,471		193		(7		)	108,657
Mortgage backed obligations	59,620		93		(406		)	59,307
Asset backed securities	166,818		93		(150		)	166,761
Municipal securities	36,388		102		(44		)	36,446
Foreign government obligations	2,091		16		(1		)	2,106
U.S. agency obligations	14,172		11		(3		)	14,180
Covered bonds	10,224		212		0			10,436
Total marketable securities	$	977,679	$	1,536	$	(1,603	)	$	977,612

At January 31, 2015, marketable securities consisted of the following (in thousands):



Investments classified as Marketable Securities	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Corporate notes and obligations	$	605,724	$	3,031	$	(481	)	$	608,274
U.S. treasury securities	73,226		257		(1		)	73,482
Mortgage backed obligations	44,181		159		(415		)	43,925
Asset backed securities	120,049		131		(43		)	120,137
Municipal securities	36,447		115		(25		)	36,537
Foreign government obligations	12,023		278		0			12,301
U.S. agency obligations	19,488		26		(4		)	19,510
Covered bonds	66,816		1,185		0			68,001
Total marketable securities	$	977,954	$	5,182	$	(969	)	$	982,167

The duration of the investments classified as marketable securities is as follows (in thousands):



	As of
	July 31, 2015		January 31, 2015
Recorded as follows:
Short-term (due in one year or less)	$	81,118	$	87,312
Long-term (due after one year)	896,494		894,855
	$	977,612	$	982,167

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As of July 31, 2015, the following marketable securities were in an unrealized loss position (in thousands):



	Less than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate notes and obligations	$	322,777	$	(930	)	$	17,977	$	(62	)	$	340,753	$	(992	)
U.S. treasury securities	14,002		(7		)	0		0			14,002		(7		)
Mortgage backed obligations	36,878		(227		)	14,998		(179		)	51,876		(406		)
Asset backed securities	98,740		(127		)	6,230		(23		)	104,970		(150		)
Municipal securities	8,683		(27		)	6,046		(17		)	14,729		(44		)
Foreign government obligations	1,579		(1		)	0		0			1,579		(1		)
U.S. agency obligations	2,172		(3		)	0		0			2,172		(3		)
	$	484,831	$	(1,322	)	$	45,251	$	(281	)	$	530,081	$	(1,603	)

The unrealized losses for each of the fixed rate marketable securities were less than $36,000. 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 July 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 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.

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The following table presents information about the Company’s assets and liabilities that are measured at fair value as of July 31, 2015 and indicates the fair value hierarchy of the valuation (in thousands):



Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Balances as of July 31, 2015
Cash equivalents (1):
Time deposits	$	0	$	122,970		$	0	$	122,970
Money market mutual funds	289,410		0			0		289,410
Marketable securities:
Corporate notes and obligations	0		579,719			0		579,719
U.S. treasury securities	0		108,657			0		108,657
Mortgage backed obligations	0		59,307			0		59,307
Asset backed securities	0		166,761			0		166,761
Municipal securities	0		36,446			0		36,446
Foreign government obligations	0		2,106			0		2,106
U.S. agency obligations	0		14,180			0		14,180
Covered bonds	0		10,436			0		10,436
Foreign currency derivative contracts (2)	0		3,621			0		3,621
Total Assets	$	289,410	$	1,104,203		$	0	$	1,393,613
Liabilities
Foreign currency derivative contracts (3)	$	0	$	(2,213	)	$	0	$	(2,213	)
Total Liabilities	$	0	$	(2,213	)	$	0	$	(2,213	)

_____________

(1)Included in “cash and cash equivalents” in the accompanying condensed consolidated balance sheet as of July 31, 2015, in addition to $677.0 million of cash.

(2)Included in “prepaid expenses and other current assets” in the accompanying condensed consolidated balance sheet as of July 31, 2015.

(3)Included in “accounts payable, accrued expenses and other liabilities” in the condensed consolidated balance sheet as of July 31, 2015.

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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	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
Cash equivalents (1):
Time deposits	$	0	$	292,487	$	0	$	292,487
Money market mutual funds	13,983		0		0		13,983
Marketable securities:
Corporate notes and obligations	0		608,274		0		608,274
U.S. treasury securities	0		73,482		0		73,482
Mortgage backed obligations	0		43,925		0		43,925
Asset backed securities	0		120,137		0		120,137
Municipal securities	0		36,537		0		36,537
Foreign government obligations	0		12,301		0		12,301
U.S. agency obligations	0		19,510		0		19,510
Covered bonds	0		68,001		0		68,001
Foreign currency derivative contracts (2)	0		10,611		0		10,611
Total Assets	$	13,983	$	1,285,265	$	0	$	1,299,248
Liabilities
Foreign currency derivative contracts (3)	$	0	$	5,694	$	0	$	5,694
Total Liabilities	$	0	$	5,694	$	0	$	5,694

______________

(1)Included in “cash and cash equivalents” in the accompanying condensed consolidated balance sheet as of January 31, 2015, in addition to $601.6 million of cash.

(2)Included in “prepaid expenses and other current assets” in the accompanying condensed consolidated balance sheet as of January 31, 2015.

(3)Included in “accounts payable, accrued expenses and other liabilities” in the accompanying condensed consolidated balance sheet as of January 31, 2015.

Derivative Financial Instruments

The Company enters into foreign currency derivative contracts with financial institutions to reduce foreign exchange risk. The Company uses forward currency derivative contracts to minimize the Company’s exposure to balances primarily denominated in British pounds, Euros, Japanese yen, Canadian dollars and Australian dollars. The Company’s foreign currency derivative contracts, which are not designated as hedging instruments, are used to reduce the exchange rate risk associated primarily with intercompany receivables and payables. The Company’s derivative financial instruments program is not designated for trading or speculative purposes. As of July 31, 2015 and January 31, 2015, the foreign currency derivative contracts that were not settled were recorded at fair value on the condensed consolidated balance sheets.

Foreign currency derivative contracts are marked-to-market at the end of each reporting period with gains and losses recognized as other expense to offset the gains or losses resulting from the settlement or remeasurement of the underlying foreign currency denominated receivables and payables. While the contract or notional amount is often used to express the volume of foreign currency derivative contracts, the amounts potentially subject to credit risk are generally limited to the amounts, if any, by which the counterparties’ obligations under the agreements exceed the obligations of the Company to the counterparties.

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Details on outstanding foreign currency derivative contracts related primarily to intercompany receivables and payables are presented below (in thousands):



	As of
	July 31, 2015		January 31, 2015
Notional amount of foreign currency derivative contracts	$	762,454	$	942,086
Fair value of foreign currency derivative contracts	$	1,408	$	4,917

The fair value of the Company’s outstanding derivative instruments are summarized below (in thousands):



		Fair Value of Derivative Instruments
		As of
	Balance Sheet Location	July 31, 2015		January 31, 2015
Derivative Assets
Derivatives not designated as hedging instruments:
Foreign currency derivative contracts	Prepaid expenses and other current assets	$	3,621	$	10,611
Derivative Liabilities
Derivatives not designated as hedging instruments:
Foreign currency derivative contracts	Accounts payable, accrued expenses and other liabilities	$	2,213	$	5,694

The effect of the derivative instruments not designated as hedging instruments on the condensed consolidated statements of operations during the three and six months ended July 31, 2015 and 2014, respectively, are summarized below (in thousands):



Derivatives Not Designated as Hedging Instruments	Gains (Losses) on Derivative Instruments Recognized in Income
		Three Months Ended July 31,
	Location	2015		2014
Foreign currency derivative contracts	Other expense	$	9,494	$	(2,914	)


Derivatives Not Designated as Hedging Instruments	Gains (Losses) on Derivative Instruments Recognized in Income
		Six Months Ended July 31,
	Location	2015		2014
Foreign currency derivative contracts	Other expense	$	14,069	$	(2,006	)

Strategic Investments

The Company's strategic investments are composed of marketable equity securities and non-marketable equity and debt securities. Marketable equity securities are measured using quoted prices in their respective active markets and the non-marketable equity and debt securities are recorded at cost value.

As of July 31, 2015, the Company had six investments in marketable equity securities that have a fair value of $28.2 million, which includes an unrealized gain of $20.4 million. As of January 31, 2015, the Company had four investments in marketable equity securities that had a fair value of $17.8 million, which included an unrealized gain of $13.1 million. As these are investments in publicly-held companies and are recorded at fair value, the unrealized gain is recorded in the condensed consolidated balance sheets within strategic investments and accumulated other comprehensive loss.

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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.

As of July 31, 2015 and January 31, 2015, the cost of the Company’s investments in privately-held companies was $449.7 million and $158.0 million, respectively. These investments are presented on the condensed consolidated balance sheets within strategic investments. The estimated fair value of the Company's investments in privately-held companies was approximately $631.0 million and $280.0 million as of July 31, 2015 and January 31, 2015, respectively. Due to the fact that the Company’s investments in privately-held companies are measured using the cost method of accounting, the unrealized gains of $181.3 million and $122.0 million as of July 31, 2015 and January 31, 2015, respectively, are not recorded on the condensed consolidated balance sheets within strategic investments and accumulated other comprehensive loss.

Investment Income

Investment income consists of interest income, realized gains, and realized losses on the Company’s cash, cash equivalents and marketable securities. The components of investment income are presented below (in thousands):



	Three Months Ended July 31,						Six Months Ended July 31,
	2015			2014			2015			2014
Interest income	$	3,169		$	2,567		$	6,219		$	4,331
Realized gains	813			229			2,940			346
Realized losses	(699		)	(141		)	(1,315		)	(244		)
Total investment income	$	3,283		$	2,655		$	7,844		$	4,433

Reclassification adjustments out of accumulated other comprehensive loss into net income (loss) were immaterial for the three and six months ended July 31, 2015 and 2014, respectively.

3. Property and Equipment

Property and Equipment

Property and equipment consisted of the following (in thousands):



	As of
	July 31, 2015			January 31, 2015
Land	$	183,888		$	0
Buildings	581,036			125,289
Computers, equipment and software	1,231,106			1,171,762
Furniture and fixtures	77,240			71,881
Leasehold improvements	419,040			376,761
	$	2,492,310		$	1,745,693
Less accumulated depreciation and amortization	(767,126		)	(619,827		)
	$	1,725,184		$	1,125,866

Depreciation and amortization expense totaled $76.7 million and $60.7 million during the three months ended July 31, 2015 and 2014, respectively. and totaled $149.2 million and $117.1 million during the six months ended July 31, 2015 and 2014, respectively.

Computers, equipment and software at July 31, 2015 and January 31, 2015 included a total of $740.6 million and $734.7 million acquired under capital lease agreements, respectively. Accumulated amortization relating to computers, equipment and software under capital leases totaled $259.6 million and $206.7 million, respectively, at July 31, 2015 and January 31, 2015. Amortization of assets under capital leases is included in depreciation and amortization expense.

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In April 2014, the Company entered into an agreement to sell 8.8 net acres of undeveloped real estate in San Francisco, California, and a portion of associated perpetual parking rights, for which the Company received a nonrefundable deposit in the amount of $30.0 million. As of July 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, net of $6.3 million reimbursed for property taxes and other items, as land and building improvements held for sale in the current assets section of the accompanying condensed consolidated balance sheets. 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. Until the land sale, the Company records the operating expenses. As of July 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 December 2012, the Company entered into a lease agreement for approximately 445,000 rentable square feet of office space at 350 Mission Street (“350 Mission”) in San Francisco, California. 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 July 31, 2015, the Company had capitalized $145.5 million of construction costs, based on the construction costs incurred to date by the landlord, and recorded a corresponding current financing and noncurrent financing obligation liability of $7.5 million and $157.6 million, respectively. The financing obligation carrying value also includes $16.7 million of tenant improvement obligations and approximately $3.0 million of imputed interest. 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 in phases as the office space becomes ready for occupancy. To the extent that operating expenses for 350 Mission are material, the Company, as the deemed accounting owner, will record the operating expenses. In April 2015, the building was placed into service and depreciation commenced.

There was no impairment of long-lived assets during the three months ended July 31, 2015 and 2014, respectively.

4. Business Combinations

50 Fremont

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”). At the time of the acquisition, the Company was leasing approximately 500,000 square feet of the available space in 50 Fremont. As of July 31, 2015, the Company occupied approximately 516,000 square feet. The Company acquired 50 Fremont for the purpose of expanding its global headquarters in San Francisco. Pursuant to the acquisition agreement, the Company also acquired existing third-party leases and other intangible property, terminated the Company’s existing office leases with the seller and assumed the seller's outstanding loan on 50 Fremont. In accordance with ASC 805, Business Combinations, the Company accounted for the building purchase as a business combination.

The purchase consideration for the corporate headquarters building was as follows (in thousands):



	Fair Value
Cash	$	435,189
Loan assumed on 50 Fremont	200,000
Prorations due to ownership transfer midmonth	2,411
Total purchase consideration	$	637,600

The following table summarizes the fair values of net tangible and intangible assets acquired (in thousands):



	Fair Value
Building	$	435,390
Land	183,888
Termination of salesforce operating lease	9,483
Acquired lease intangibles	7,590
Loan assumed on 50 Fremont fair market value adjustment	1,249
Total	$	637,600

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To fund the purchase of 50 Fremont, the Company used $115.0 million of restricted cash that the Company had on the balance sheet as of January 31, 2015.

In connection with the purchase, the Company recognized a net non-cash gain totaling approximately $36.6 million on the termination of the lease signed in January 2012. This amount reflects a gain of $46.1 million for the reversal of tenant incentives provided from the previous landlord at the inception of the lease and a loss of $9.5 million related to the termination of the Company's operating lease. The tax impact as a result of the difference between tax and book basis of the building is insignificant after considering the impact of the Company's valuation allowance. The amounts above have been included in the Company's condensed consolidated statements of operations and condensed consolidated balance sheets. The Company has included the rental income from third party leases with other tenants in the building, and the proportionate share of building expenses for those leases, in other expense in the Company's condensed consolidated results of operations from the date of acquisition. These amounts are recorded in other expense as this net rental income is not part of our core operations. These amounts were not material for the periods presented. The Company expects to finalize the depreciable life of the building as soon as practicable, but not later than one year from the acquisition date.

Other Business Combinations

During the six months ended July 31, 2015, the Company acquired two companies for an aggregate of $31.3 million in cash, net of cash acquired, and has included the financial results of these companies in its condensed consolidated financial statements from the respective dates of acquisition. The Company accounted for these transactions as business combinations. In allocating the purchase consideration for each company based on estimated fair values, the Company recorded $21.6 million of goodwill. The goodwill balance is not deductible for U.S. income tax purposes.

In August 2015, the Company completed the acquisition of Kerensen Consulting, pursuant to a Share Purchase Agreement dated as of June 24, 2015. The total purchase price was approximately $24.2 million.

Goodwill

Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Goodwill amounts are not amortized, but rather tested for impairment at least annually during the fourth quarter.

Goodwill consisted of the following (in thousands):



Balance as of January 31, 2015	$	3,782,660
Other business combinations	21,628
Balance as of July 31, 2015	$	3,804,288

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5. Debt

Convertible Senior Notes



	Par Value Outstanding		Equity Component Recorded at Issuance			Liability Component of Par Value as of
(In thousands)	Par Value Outstanding		Equity Component Recorded at Issuance			July 31, 2015		January 31, 2015
0.25% Convertible Senior Notes due April 1, 2018	$	1,150,000	$	122,421	(1)	$	1,082,799	$	1,070,692

___________

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

In March 2013, the Company issued at par value $1.15 billion of 0.25% convertible senior notes (the “0.25% Senior Notes”, or the “Notes”) due April 1, 2018, unless earlier purchased by the Company or converted. Interest is payable semi-annually, in arrears on April 1 and October 1 of each year.

The 0.25% Senior Notes are governed by an indenture between the Company, as issuer, and U.S. Bank National Association, as trustee. The 0.25% Senior Notes are unsecured and do not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by the Company.

If converted, holders of the 0.25% Senior Notes will receive cash equal to the principal amount, and at the Company’s election, cash, shares of the Company’s common stock, or a combination of cash and shares, for any amounts in excess of the principal amounts.

Certain terms of the conversion features of the 0.25% Senior Notes are as follows:



	Conversion Rate per $1,000 Par Value	Initial Conversion Price per Share		Convertible Date
0.25% Senior Notes	15.0512	$	66.44	January 1, 2018

Throughout the term of the 0.25% Senior Notes, the conversion rate may be adjusted upon the occurrence of certain events, including any cash dividends. Holders of the 0.25% Senior Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than canceled, extinguished or forfeited.

Holders may convert the 0.25% Senior Notes under the following circumstances:


•	during any fiscal quarter, if, for at least 20 trading days during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sales price of the Company’s common stock for such trading day is greater than or equal to 130% of the applicable conversion price on such trading day;


•	in certain situations, when the trading price of the 0.25% Senior Notes is less than 98% of the product of the sale price of the Company’s common stock and the conversion rate;


•	upon the occurrence of specified corporate transactions described under the 0.25% Senior Notes indenture, such as a consolidation, merger or binding share exchange; or


•	at any time on or after the convertible date noted above.

Holders of the 0.25% Senior Notes have the right to require the Company to purchase with cash all or a portion of the Notes upon the occurrence of a fundamental change, such as a change of control, at a purchase price equal to 100% of the 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.

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In accounting for the transaction costs related to the 0.25% Senior Notes issuance, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Transaction costs attributable to the liability component are being amortized to expense over the terms of the 0.25% Senior Notes, and transaction costs attributable to the equity component were netted with the equity component in temporary stockholders’ equity and stockholders’ equity.

The 0.25% Senior Notes consisted of the following (in thousands):



	As of
	July 31, 2015			January 31, 2015
Liability component :
Principal:
0.25% Senior Notes (1)	$	1,150,000		$	1,150,000
Less: debt discount, net
0.25% Senior Notes (2)	(67,201		)	(79,308		)
Net carrying amount	$	1,082,799		$	1,070,692

(1)The effective interest rate of the 0.25% Senior Notes is 2.53%. The interest rate is based on the interest rates of similar liabilities at the time of issuance that did not have an associated convertible feature.

(2)Included in the condensed 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 value of the Company’s 0.25% Senior Notes at July 31, 2015 was $1.4 billion. The fair value was determined based on the closing trading price per $100 of the 0.25% Senior Notes as of the last day of trading for the second quarter of fiscal 2016.

Based on the closing price of the Company’s common stock of $73.30 on July 31, 2015, the if-converted value of the 0.25% Senior Notes exceeded their principal amount by approximately $118.7 million. Based on the terms of the 0.25% Senior Notes, the Senior Notes were not convertible for the three months ended July 31, 2015.

Note Hedges

To minimize the impact of potential economic dilution upon conversion of the Notes, the Company entered into convertible note hedge transactions with respect to its common stock (the “0.25% Note Hedges”).



(in thousands, except for shares)	Date	Purchase		Shares
0.25% Note Hedges	March 2013	$	153,800	17,308,880

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

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Warrants



	Date	Proceeds (in thousands)		Shares	Strike Price
0.25% Warrants	March 2013	$	84,800	17,308,880	$	90.40

In March 2013, the Company also entered into a warrants transaction (the “0.25% Warrants”), whereby the Company sold warrants to acquire, subject to anti-dilution adjustments, shares of the Company’s common stock. The 0.25% Warrants were anti-dilutive for the periods presented. The 0.25% Warrants are separate transactions entered into by the Company and are not part of the terms of the 0.25% Senior Notes or the 0.25% Note Hedges. Holders of the 0.25% Senior Notes and 0.25% Note Hedges will not have any rights with respect to the 0.25% Warrants.

Revolving Credit Facility

In October 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 in October 2019 (the “Credit Facility”). Immediately upon closing, the Company borrowed $300.0 million under the Credit Facility. The Borrowings under the Credit Facility bear interest, at the Company’s option at either a base rate, as defined in the Credit Agreement, plus a margin of 0.00% to 0.75% or LIBOR plus a margin of 1.00% to 1.75%. The Company is obligated to pay ongoing commitment fees at a rate between 0.125% and 0.25%. Such interest rate margins and commitment fees are based on the Company’s consolidated leverage ratio for the preceding four fiscal quarter periods. Interest and the commitment fees are payable in arrears quarterly. The Company may use amounts borrowed under the Credit Facility for working capital, capital expenditures and other general corporate purposes, including permitted acquisitions. Subject to certain conditions stated in the Credit Agreement, the Company may borrow amounts under the Credit Facility at any time during the term of the Credit Agreement. The Company may also prepay borrowings under the Credit Agreement, in whole or in part, at any time without premium or penalty, subject to certain conditions, and amounts repaid or prepaid may be reborrowed.

The Credit Agreement contains certain customary affirmative and negative covenants, including a consolidated leverage ratio covenant, a consolidated interest coverage ratio covenant, a limit on the Company’s ability to incur additional indebtedness, dispose of assets, make certain acquisition transactions, pay dividends or distributions, and certain other restrictions on the Company’s activities each defined specifically in the Credit Agreement. The Company was in compliance with the Credit Agreement’s covenants as of July 31, 2015.

In March 2015, the Company paid down $300.0 million of outstanding borrowings under the Credit Facility. There are currently no outstanding borrowings held under the Credit Facility as of July 31, 2015.

The weighted average interest rate on borrowings under the Credit Facility was 1.6% for the period beginning in October 2014 and ended March 31, 2015.

Loan Assumed on 50 Fremont

The Company assumed a $200.0 million loan with the acquisition of 50 Fremont (the “Loan”). The Loan bears an interest rate of 3.75% per annum and is due in June 2023. The Loan requires interest only payments with the remaining principal due at maturity. For the three and six months ended July 31, 2015, total interest expense recognized was $1.9 million and $3.5 million respectively. The Loan can be prepaid at any time subject to a yield maintenance fee. The agreement governing the Loan contains certain customary affirmative and negative covenants that the Company was in compliance with as of July 31, 2015.

Interest Expense on Convertible Senior Notes, Revolving Credit Facility and Loan Secured by 50 Fremont

The following table sets forth total interest expense recognized related to the 0.25% Senior Notes, the Credit Facility and the Loan prior to capitalization of interest (in thousands):



	Three Months Ended July 31,				Six Months Ended July 31,
	2015		2014		2015		2014
Contractual interest expense	$	2,843	$	2,684	$	6,193	$	5,587
Amortization of debt issuance costs	1,032		1,130		2,050		2,358
Amortization of debt discount	6,110		9,216		12,169		20,200
	$	9,985	$	13,030	$	20,412	$	28,145

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6. Other Balance Sheet Accounts

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):



	As of
	July 31, 2015		January 31, 2015
Deferred income taxes, net	$	45,032	$	35,528
Prepaid income taxes	20,763		21,514
Customer contract asset	6,172		16,620
Other taxes receivable	28,625		27,540
Prepaid expenses and other current assets	229,699		179,352
	$	330,291	$	280,554

Customer contract asset reflects future billings of amounts that are contractually committed by ExactTarget’s existing customers as of the acquisition date in July 2013 that will be billed in the next 12 months. As the Company bills these customers this balance will reduce and accounts receivable will increase.

Capitalized Software, net

Capitalized software consisted of the following (in thousands):



	As of
	July 31, 2015		January 31, 2015
Capitalized internal-use software development costs, net of accumulated amortization of $159,880 and $136,314, respectively	$	109,022	$	96,617
Acquired developed technology, net of accumulated amortization of $437,137 and $392,736, respectively	305,013		336,781
	$	414,035	$	433,398

Capitalized internal-use software amortization expense totaled $12.2 million and $8.3 million for the three months ended July 31, 2015 and 2014, respectively, and totaled $23.5 million and $16.6 million for the six months ended July 31, 2015 and 2014, respectively. Acquired developed technology amortization expense totaled $22.5 million and $23.1 million for the three months ended July 31, 2015 and 2014, respectively, and totaled $44.4 million and $54.3 million for the six months ended July 31, 2015 and 2014, respectively.

The Company capitalized $1.5 million and $1.1 million of stock-based expenses related to capitalized internal-use software development during the three months ended July 31, 2015 and 2014, respectively, and totaled $3.1 million and $2.1 million for the six months ended July 31, 2015 and 2014, respectively.

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Other Assets, net

Other assets consisted of the following (in thousands):



	As of
	July 31, 2015		January 31, 2015
Deferred income taxes, noncurrent, net	$	8,576	$	9,275
Long-term deposits	18,627		19,715
Purchased intangible assets, net of accumulated amortization of $171,668 and $130,968, respectively	296,861		329,971
Acquired intellectual property, net of accumulated amortization of $19,136 and $15,695, respectively	13,868		15,879
Customer contract asset	136		1,447
Other	77,364		76,259
	$	415,432	$	452,546

Customer contract asset reflects future billings of amounts that were contractually committed by ExactTarget's existing customers as of the acquisition date in July 2013. As the Company bills these customers, this balance will decrease and accounts receivable will increase.

Purchased intangible assets amortization expense for the three months ended July 31, 2015 and 2014 was $20.7 million and $14.8 million, respectively and for the six months ended July 31, 2015 and 2014 was $40.7 million and $30.0 million, respectively. Acquired intellectual property amortization expense for the three months ended July 31, 2015 and 2014 was $1.7 million and $1.2 million, respectively and for the six months ended July 31, 2015 and 2014 was $3.4 million and $2.3 million, respectively.

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Accounts Payable, Accrued Expenses and Other Liabilities

Accounts payable, accrued expenses and other liabilities consisted of the following (in thousands):



	As of
	July 31, 2015		January 31, 2015
Accounts payable	$	99,286	$	95,537
Accrued compensation	345,833		457,102
Accrued other liabilities	462,573		321,032
Accrued income and other taxes payable	131,475		184,844
Accrued professional costs	28,781		16,889
Customer liability, current (1)	9,645		13,084
Accrued rent	12,933		14,847
Financing obligation, building in progress-leased facility, current	7,528		0
	$	1,098,054	$	1,103,335

(1) Customer liability reflects the legal obligation to provide future services that are contractually committed to ExactTarget’s existing customers but unbilled as of the acquisition date in July 2013. As these services are invoiced, this balance will decrease and deferred revenue will increase.

Other Noncurrent Liabilities

Other noncurrent liabilities consisted of the following (in thousands):



	As of
	July 31, 2015		January 31, 2015
Deferred income taxes and income taxes payable	$	111,294	$	94,396
Customer liability, noncurrent (1)	97		1,026
Financing obligation, building in progress-leased facility	157,562		125,289
Long-term lease liabilities and other	574,564		701,612
	$	843,517	$	922,323

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. Offerings under the ESPP commenced in December 2011.

As of July 31, 2015, $31.7 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.

Prior to February 1, 2006, options issued under the Company’s stock option plans generally had a term of 10 years. From February 1, 2006 through July 2013, options issued had a term of five years. After July 2013, options issued have a term of seven years.

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Stock activity excluding the ESPP is as follows:



			Options Outstanding
	Shares Available for Grant		Outstanding Stock Options		Weighted- Average Exercise Price		Aggregate Intrinsic Value
Balance as of January 31, 2015	30,789,538		29,458,361		$	44.36
Increase in shares authorized:
2013 Equity Incentive Plan	38,559,416		0		0.00
2014 Inducement Equity Incentive Plan	165,563		0		0.00
Options granted under all plans	(998,298	)	998,298		69.57
Restricted stock activity	(1,061,113	)	0		0.00
Stock grants to board and advisory board members	(101,886	)	0		0.00
Exercised	0		(5,615,494	)	34.23
Plan shares expired	(1,325,580	)	0		0.00
Canceled	1,391,393		(1,391,393	)	45.80
Balance as of July 31, 2015	67,419,033		23,449,772		$	47.77	$	598,841,287
Vested or expected to vest			21,847,908		$	47.14	$	571,811,541
Exercisable as of July 31, 2015			8,330,075		$	36.49	$	306,602,667

The total intrinsic value of the options exercised during the six months ended July 31, 2015 and 2014 was $198.2 million and $115.4 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 4.45 years.

As of July 31, 2015, options to purchase 8,330,075 shares were vested at a weighted average exercise price of $36.49 per share and had a remaining weighted-average contractual life of approximately 2.8 years. The total intrinsic value of these vested options as of July 31, 2015 was $306.6 million.

The following table summarizes information about stock options outstanding as of July 31, 2015:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted- Average Remaining Contractual Life (Years)	Weighted- Average Exercise Price		Number of Shares	Weighted- Average Exercise Price
$0.86 to $29.38	3,346,006	2.6	$	23.74	2,702,490	$	23.83
$29.67 to $39.09	5,345,529	2.0	37.47		3,606,196	37.24
$40.19 to $52.14	600,044	4.5	43.27		191,939	43.70
$52.30	4,216,122	5.3	52.30		1,479,702	52.30
$53.60 to $57.79	1,646,449	5.8	55.21		316,347	54.97
$59.34	6,639,011	6.3	59.34		0	0.00
$59.37 to $75.01	1,656,611	6.5	65.93		33,401	63.39
	23,449,772	4.5	$	47.77	8,330,075	$	36.49

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Restricted stock activity is as follows:



	Restricted Stock Outstanding
	Outstanding	Weighted- Average Exercise Price	Aggregate Intrinsic Value (in thousands)
Balance as of January 31, 2015	23,144,008