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		$	0.001
Granted	1,892,770		0.001
Canceled	(1,746,877	)	0.001
Vested and converted to shares	(3,871,655	)	0.001
Balance as of July 31, 2015	19,418,246		$	0.001	$	1,423,357,432
Expected to vest	16,885,093				$	1,237,677,317

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 the six months ended July 31, 2015 and 2014 was $70.73 and $58.65, respectively.

Common Stock

The following number of shares of common stock were reserved and available for future issuance at July 31, 2015:



Options outstanding	23,449,772
Restricted stock awards and units outstanding	19,418,246
Stock available for future grant:
2013 Equity Incentive Plan	66,729,922
2014 Inducement Equity Incentive Plan	689,111
Amended and Restated 2004 Employee Stock Purchase Plan	8,259,824
Convertible Senior Notes	17,308,880
Warrants	17,308,880
	153,164,635

8. Income Taxes

Effective Tax Rate

The Company computes its year-to-date provision for income taxes by applying the estimated annual effective tax rate to year to date pretax income or loss and adjusts the provision for discrete tax items recorded in the period. For the six months ended July 31, 2015, the Company reported a tax provision of $21.8 million on a pretax income of $25.0 million, which resulted in an effective tax rate of 87 percent. The tax provision recorded was primarily related to income taxes in profitable jurisdictions outside of the U.S.

For the six months ended July 31, 2014, the Company reported a tax provision of $20.3 million on a pretax loss of $137.7 million, which resulted in a negative effective tax rate of 15 percent. The tax provision recorded was primarily related to income taxes in profitable jurisdictions outside the U.S.

Tax Benefits Related to Stock-Based Compensation

The total income tax benefit related to stock-based awards was $87.5 million and $85.3 million for six months ended July 31, 2015 and 2014, respectively, the majority of which was not recognized as a result of the valuation allowance.

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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, Germany, Switzerland and the United Kingdom. To date, the Company has not received any proposed adjustments that would result in a material impact to its income tax provision.

The Company believes that it has provided adequate reserves for its income tax uncertainties in all open tax years. In the next 12 months, as some of the 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 $31.0 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 the three months ended July 31, 2015 and the three and six months ended July 31, 2014 is the same as basic loss per share as there is a net loss in the period and inclusion of potentially issuable shares is anti-dilutive.

A reconciliation of the denominator used in the calculation of basic and diluted earnings/(loss) per share is as follows (in thousands):



	Three Months Ended July 31,						Six Months Ended July 31,
	2015			2014			2015		2014
Numerator:
Net income (loss)	$	(852	)	$	(61,088	)	$	3,240	$	(157,999	)
Denominator:
Weighted-average shares outstanding for basic loss per share	659,366			617,016			656,636		614,797
Effect of dilutive securities:
Convertible senior notes	0			0			728		0
Employee stock awards	0			0			14,867		0
Warrants	0			0			0		0
Adjusted weighted-average shares outstanding and assumed conversions for diluted loss per share	659,366			617,016			672,231		614,797

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):



	Three Months Ended July 31,		Six Months Ended July 31,
	2015	2014	2015	2014
Stock awards	23,637	18,868	8,652	20,116
Convertible senior notes	17,309	30,021	0	30,341
Warrants	17,309	44,253	17,309	44,253

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10. Commitments

Letters of Credit

As of July 31, 2015, the Company had a total of $69.7 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 July 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:
Remaining six months of fiscal 2016	$	27,310		$	161,976	$	1,777
Fiscal 2017	115,866			307,829		16,877
Fiscal 2018	120,070			265,756		21,107
Fiscal 2019	113,472			199,172		21,551
Fiscal 2020	201,508			183,369		21,995
Thereafter	0			1,050,552		252,517
Total minimum lease payments	578,226			$	2,168,654	$	335,824
Less: amount representing interest	(62,613		)
Present value of capital lease obligations	$	515,613

______________

(1) Total Financing Obligation, Building in Progress-Leased Facility noted above represents the total obligation on the lease agreement including amounts allocated to interest noted in Note 3 “Property and Equipment.” As of July 31, 2015, $165.1 million of the total obligation noted above was recorded to Financing obligation, building in progress - leased facility, which the current portion is included in "Accounts payable, accrued expenses, and other liabilities" and the non-current portion is included in “Other noncurrent liabilities” on the condensed consolidated balance sheets.

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 but not paid. Of the total operating lease commitment balance of $2.2 billion, approximately $1.9 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.

11. 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.

In July 2015, the Company and certain of its current and former directors were named as defendants in a purported shareholder derivative action in the Superior Court for the State of California, County of San Francisco. The derivative complaint alleges that excessive compensation was paid to such directors for their service. The derivative complaint includes allegations of breach of fiduciary duty and unjust enrichment and seeks restitution and disgorgement of a portion of the directors' compensation, as well as reform of one of the Company's obsolete equity plans. Because the complaint is derivative in nature, it does not seek monetary damages from the Company.

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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, resolution of all current matters is not expected to have a material adverse impact on the Company’s condensed 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.

12. Related-Party Transactions

In January 1999, the Salesforce.com Foundation, also referred to as the Foundation, was chartered on an idea of leveraging the Company’s people, technology, and resources to help improve communities around the world. The Company calls this integrated philanthropic approach the 1-1-1 model. 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 holds one of the three Foundation board seats. The Company’s chairman, one of the Company’s employees and one of the Company’s board members hold three of Salesforce.org’s ten 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 and Salesforce.org’s inception, the Company has provided at no charge certain resources to those entities employees such as office space, furniture, equipment, facilities, services, and other resources. The value of these items was approximately $0.6 million for the six months ended July 31, 2015.

The resource sharing agreement was recently amended in August 2015 to include resources outside of the United States and is more explicit about the types of resources that the Company will provide.

Additionally, the Company has donated subscriptions of the Company’s services to other qualified non-profit organizations. The Company also allows Salesforce.org to resell the Company’s service to non-profit organizations and certain education entities. The Company does not charge Salesforce.org for these subscriptions, therefore revenue from subscriptions provided to non-profit organizations is donated back to the community through charitable grants made by the Foundation and Salesforce.org. The reseller agreement was recently amended in August 2015 to include additional customer segments and to include certain customers outside the U.S. that the Company has decided not to strategically pursue. The value of the subscriptions pursuant to reseller agreements was approximately $30.1 million for the six months ended July 31, 2015. The Company plans to continue these programs.

During the three months ended July 31, 2015, the Company committed to donate $4.0 million to Foundation to further support its philanthropic mission. This amount will be paid to Foundation during this fiscal year.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on form 10-Q, including the following discussion in“Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”), 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”). 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 intended to identify such forward-looking statements, which may consist of, among other things, trend analyses and statements regarding future events, future financial performance, anticipated growth and industry prospects. These forward-looking statements are based on current expectations, estimates and forecasts, as well as the beliefs and assumptions of our management, and are subject to risks and uncertainties that are difficult to predict, including 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; 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 services and product features; our strategy of acquiring or making investments in complementary businesses, joint ventures, services, technologies and intellectual property rights; our ability to successfully integrate acquired businesses and technologies; our ability to continue to grow and 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 and investments; our reliance on third party hardware, software and platform providers; the effect of evolving government regulations; the valuation of our deferred tax assets; the potential availability of additional tax assets in the future; the impact of expensing stock options and other equity awards; the sufficiency of our capital resources; factors related to our outstanding convertible notes, revolving credit facility and loan associated with 50 Fremont; compliance with our debt covenants and capital lease obligations; and current and potential litigation involving us. These and other risks and uncertainties may cause our actual results to 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 additional detail regarding factors that may cause actual results to be different than those expressed in our forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements 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 customer 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.

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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 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 Analytics Cloud and Communities 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 quarterly net losses on a U.S. generally accepted accounting principles (“GAAP”) basis. As we continue with our growth plan and absent any one-time gains, we may continue to have net losses on a GAAP basis.

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 approximately nine percent as of July 31, 2015. We expect our attrition rate to remain consistent as we continue to expand our enterprise business and invest in customer success and related programs.

We expect marketing and sales costs, which were 49 percent and 51 percent of our total revenues for the three months ended July 31, 2015 and 2014, respectively and 49 percent and 51 percent for the six months ended July 31, 2015 and 2014, respectively, 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.

In February 2015, we purchased a 41-story office building in San Francisco, California which we refer to as 50 Fremont. We currently occupy approximately 516,000 square feet of the 817,000 total rental square feet in the building. As part of the business combination accounting for the purchase, we recognized a one-time non-cash net gain of $36.6 million during the three months ended April 30, 2015 for the termination of the operating leases that existed prior to the purchase. As described within "Non-GAAP Financial Measures" the one-time non-cash net gain of $36.6 million has been deducted from our GAAP net income (loss) to arrive to our Non-GAAP net income.

During the three and six months ended July 31, 2015, we increased our strategic investments portfolio by $158.6 million and $305.3 million in privately-held companies, respectively, and some of these investments are in development stage companies. We plan to continue to make strategic investments throughout the remainder of fiscal 2016.

Fiscal Year

Our fiscal year ends on January 31. References to fiscal 2016, for example, refer to the fiscal year ending January 31, 2016.

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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 condensed 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 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 of our total revenues for the six months ended July 31, 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 the six months ended July 31, 2015 and 2014.

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):



	Three Months Ended July 31,					Six Months Ended July 31,
	2015		2014		Variance- Percent	2015		2014		Variance- Percent
Sales Cloud	$	671.0	$	610.1	10%	$	1,301.4	$	1,186.7	10%
Service Cloud	445.2		318.7		40%	852.9		613.5		39%
Salesforce1 Platform and Other	247.2		181.4		36%	471.2		346.3		36%
Marketing Cloud	157.9		122.4		29%	301.1		233.4		29%
Total	$	1,521.3	$	1,232.6		$	2,926.6	$	2,379.9

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Subscription and support revenues from Analytics Cloud and Communities Cloud, which were introduced in October 2014, were not significant for the three and six months ended July 31, 2015. The 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 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 the three and six months ended July 31, 2015 and 2014, 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. We estimate that for the remainder of fiscal 2016, subscription and support revenues from the Sales Cloud service offering will continue to be the largest contributor of subscription and support revenue.

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 74 percent of the value of all subscription and support related invoices were issued with annual terms during the three months ended July 31, 2015 in comparison to 70 percent during the same period a year ago. 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 and the related deferred revenue and operating cash flow during the first quarter of our fiscal year are not necessarily indicative of the billing activity that occurs for the following quarters as displayed below (in thousands, except unbilled deferred revenue):



	April 30, 2015		July 31, 2015
Fiscal 2016
Accounts receivable, net	$	926,381	$	1,067,799
Deferred revenue, current and noncurrent	3,056,820		3,034,991
Operating cash flow (1)	730,857		304,411
Unbilled deferred revenue, a non-GAAP measure	6.0 bn		6.2 bn

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	April 30, 2014		July 31, 2014		October 31, 2014		January 31, 2015
Fiscal 2015
Accounts receivable, net	$	684,155	$	834,323	$	794,590	$	1,905,506
Deferred revenue, current and noncurrent	2,324,615		2,352,904		2,223,977		3,321,449
Operating cash flow (1)	473,087		245,893		122,511		332,223
Unbilled deferred revenue, a non-GAAP measure	4.8 bn		5.0 bn		5.4 bn		5.7 bn



	April 30, 2013		July 31, 2013		October 31, 2013		January 31, 2014
Fiscal 2014
Accounts receivable, net	$	502,609	$	599,543	$	604,045	$	1,360,837
Deferred revenue, current and noncurrent	1,733,160		1,789,648		1,734,619		2,522,115
Operating cash flow (1)	283,189		183,183		137,859		271,238
Unbilled deferred revenue, a non-GAAP measure	3.6 bn		3.8 bn		4.2 bn		4.5 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 condensed consolidated balance sheets 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 $6.2 billion as of July 31, 2015 and approximately $5.7 billion as of January 31, 2015. 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 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

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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.

During the six months ended July 31, 2015, we recognized stock-based expense of $290.3 million. As of July 31, 2015, the aggregate stock compensation remaining to be amortized to costs and expenses over a weighted-average period of 2.3 years was $1.2 billion. We expect this stock compensation balance to be amortized as follows: $279.0 million during the remaining six months of fiscal 2016; $430.2 million during fiscal 2017; $304.6 million during fiscal 2018; $157.2 million during fiscal 2019 and $8.9 million during fiscal 2020. The expected amortization reflects only outstanding stock awards as of July 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 and the Purchase of 50 Fremont. Our cost of revenues, operating expenses and other expense 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, acquired leases and customer relationships. We expect this expense to increase as we acquire more businesses.

Critical Accounting Estimates

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed 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 the Notes to the accompanying condensed consolidated financial statements, the following accounting estimates involve a greater degree of judgment and complexity.

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Accordingly, these are the estimates we believe are the most critical to aid in fully understanding and evaluating our condensed 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 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 of our subscription services.

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.

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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 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 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 six months ended July 31, 2015, we deferred $120.8 million of commission expenditures and we amortized $153.8 million to sales expense. During the same period a year ago, we deferred $106.7 million of commission expenditures and we amortized $121.2 million to sales expense. Deferred commissions on our condensed consolidated balance sheets totaled $355.2 million at July 31, 2015 and $388.2 million at January 31, 2015.

Long- Lived Assets and Impairment Assessment. We evaluate 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.

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, Intangibles and Impairment Assessments. 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.

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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 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 condensed 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 or loss and adjust the provision for discrete tax items recorded in the same period. The estimated annual effective tax rate at each interim period represents our best estimate

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based on evaluations of possible future transactions and may be subject to subsequent refinement or revision. We consider the valuation allowance in estimating the annual effective tax rate. As a result, the annual effective tax rate could be volatile and is therefore difficult to forecast in future periods.

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 our business plans and 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.

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 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.

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, we did not record any benefit for the three months ended July 31, 2015. We will continue to monitor developments related to this case and the potential impact of those developments on our current and future financial statements.

Strategic Investments. Our 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 our non-marketable equity and debt securities are recorded at cost value. We use the cost method of accounting due to the fact that we do not have significant influence, as defined in Accounting Standards Codification 323 (“ASC 323”), Investments - Equity Method and Joint Ventures, in any of the underlying privately-held companies.

If circumstances indicate an other-than-temporary decline in the value of non-marketable equity and debt securities, then an impairment is recorded to reduce the investment cost value to fair value. We evaluate financial results, earnings trends, technology milestones and subsequent financing of these companies, as well as 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 market data.

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Results of Operations

The following tables set forth selected data for each of the periods indicated (in thousands):



	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	)

(1) Amounts related to amortization of purchased intangibles from business combinations, as follows (in thousands):



	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 related to stock-based expenses, as follows (in thousands):



	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.

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Revenues by geography were 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 for the three and six months ended July 31, 2015 and 2014, respectively.

The following tables set forth selected condensed consolidated statements of operations data for each of the periods indicated as a percentage of total revenues:



	Three Months Ended July 31,				Six Months Ended July 31,
	2015		2014		2015		2014
Revenues:
Subscription and support	93	%	93	%	93	%	94	%
Professional services and other	7		7		7		6
Total revenues	100		100		100		100
Cost of revenues (1)(2):
Subscription and support	18		17		18		17
Professional services and other	7		6		7		7
Total cost of revenues	25		23		25		24
Gross profit	75		77		75		76
Operating expenses (1)(2):
Research and development	14		16		14		15
Marketing and sales	49		51		49		51
General and administrative	11		13		11		13
Operating lease termination resulting from purchase of 50 Fremont, net	0		0		(1	)	0
Total operating expenses	74		80		73		79
Income (loss) from operations	1		(3	)	2		(3	)
Investment income	0		0		0		0
Interest expense	(1	)	(1	)	(1	)	(1	)
Other income (expense) (1)	0		0		0		(1	)
Income (loss) before provisions for income taxes	0		(4	)	1		(5	)
Provisions for income taxes	0		(1	)	(1	)	(1	)
Net income (loss)	0	%	(5	)%	0	%	(6	)%

(1) Amortization of purchased intangibles from business combinations as a percentage of total revenues, as follows:



	Three Months Ended July 31,				Six Months Ended July 31,
	2015		2014		2015		2014
Cost of revenues	1	%	2	%	1	%	2	%
Marketing and sales	1		1		1		1
Other non-operating expense	0		0		0		0

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(2) Stock-based expense as a percentage of total revenues, as follows:



	Three Months Ended July 31,				Six Months Ended July 31,
	2015		2014		2015		2014
Cost of revenues	1	%	1	%	1	%	1	%
Research and development	2		3		2		2
Marketing and sales	4		5		4		5
General and administrative	2		2		2		2

Revenues by geography as a percentage of total revenues, as follows:



	Three Months Ended July 31,				Six Months Ended July 31,
	2015		2014		2015		2014
Revenues by geography:
Americas	74	%	71	%	74	%	71	%
Europe	17		19		17		19
Asia Pacific	9		10		9		10
	100	%	100	%	100	%	100	%

Revenues and deferred revenue in constant currency, as follows:



Revenue constant currency growth rates (as compared to the comparable prior periods)	Three Months Ended July 31, 2015 compared to Three Months Ended July 31, 2014	Three Months Ended July 31, 2014 compared to Three Months Ended July 31, 2013
Americas	28%	39%
Europe	29%	36%
Asia Pacific	25%	27%
Total growth	28%	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 quarter being compared to for growth rate calculations presented, rather than the actual exchange rates in effect during that period.



	July 31, 2015 compared to July 31, 2014	January 31, 2015 compared to January 31, 2014
Deferred revenue, current and noncurrent constant currency growth rates (as compared to the comparable prior periods)
Total growth	33%	35%

To present the information above, we convert the deferred revenue balances in local currencies in previous comparable periods using the United States dollar currency exchange rate as on the most recent balance sheet date.

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Three Months Ended July 31, 2015 and 2014

Revenues.



	Three Months Ended July 31,				Variance
(in thousands)	2015		2014		Dollars		Percent
Subscription and support	$	1,521,319	$	1,232,587	$	288,732	23	%
Professional services and other	113,365		85,964		27,401		32	%
Total revenues	$	1,634,684	$	1,318,551	$	316,133	24	%

Total revenues were $1.6 billion for the three months ended July 31, 2015, compared to $1.3 billion during the same period a year ago, an increase of $0.3 billion, or 24 percent. On a constant currency basis, total revenues grew 28 percent. Subscription and support revenues were $1.5 billion, or 93 percent of total revenues, for the three months ended July 31, 2015, compared to $1.2 billion, or 93 percent of total revenues, during the same period a year ago, an increase of $0.3 billion, or 23 percent. The increase in subscription and support revenues was due almost entirely to volume-driven increases from new business, which includes new customers, upgrades and additional subscriptions from existing customers. 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, 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 $113.4 million, or seven percent of total revenues, for the three months ended July 31, 2015, compared to $86.0 million, or seven percent of total revenues, for the same period a year ago, an increase of $27.4 million, or 32 percent. The increase in professional services and other revenues was primarily attributable to higher demand for services from an increased number of customers.

Revenues in Europe and Asia Pacific accounted for $432.5 million, or 26 percent of total revenues, for the three months ended July 31, 2015, compared to $377.6 million, or 29 percent of total revenues, during the same period a year ago, an increase of $54.9 million, or 15 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 and additional resources. Revenues outside of the Americas increased on a total dollar basis in the three months ended July 31, 2015 despite an overall strengthening of the U.S. dollar, which reduced aggregate international revenues by $49.0 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 in comparison to similar periods in the prior year.

Cost of Revenues.



	Three Months Ended July 31,						Variance
(in thousands)	2015			2014			Dollars
Subscription and support	$	292,737		$	218,918		$	73,819
Professional services and other	112,647			88,913			23,734
Total cost of revenues	$	405,384		$	307,831		$	97,553
Percent of total revenues	25		%	23		%

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Cost of revenues was $405.4 million, or 25 percent of total revenues, for the three months ended July 31, 2015, compared to $307.8 million, or 23 percent of total revenues, during the same period a year ago, an increase of $97.6 million. The increase in absolute dollars was primarily due to an increase of $24.1 million in employee-related costs, an increase of $3.4 million in stock-based expenses, an increase of $39.9 million in service delivery costs, primarily due to our efforts to increase data center capacity, an increase of $11.9 million in professional and outside services and third party expenses, an increase of $7.6 million in allocated overhead and an increase of $8.9 million in depreciation of property and equipment. We have increased our headcount by 25 percent since July 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.

Professional services and other revenue exceeded the associated cost of such services by $0.7 million during the three months ended July 31, 2015 compared to a loss in the three months ended July 31, 2014 of $2.9 million. Our revenue associated with professional services continues to show steady growth and helps the adoption of our service offerings.

Research and Development.



	Three Months Ended July 31,						Variance
(in thousands)	2015			2014			Dollars
Research and development	$	234,100		$	203,109		$	30,991
Percent of total revenues	14		%	16		%

Research and development expenses were $234.1 million, or 14 percent of total revenues, for the three months ended July 31, 2015, compared to $203.1 million, or 16 percent of total revenues, during the same period a year ago, an increase of $31.0 million. The increase in absolute dollars was primarily due to an increase of $23.8 million in employee-related costs, an increase of $0.6 million in stock-based expense, an increase of $5.5 million in development and test data center expense and an increase in allocated overhead. We increased our research and development headcount by 20 percent since July 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.



	Three Months Ended July 31,						Variance
(in thousands)	2015			2014			Dollars
Marketing and sales	$	793,691		$	671,958		$	121,733
Percent of total revenues	49		%	51		%

Marketing and sales expenses were $793.7 million, or 49 percent of total revenues, for the three months ended July 31, 2015, compared to $672.0 million, or 51 percent of total revenues, during the same period a year ago, an increase of $121.7 million. The increase in absolute dollars was primarily due to an increase of $66.3 million in employee-related costs of which $15.4 million was due to increased amortization of deferred commissions, an increase of $1.2 million in stock-based expense, an increase of $37.7 million in advertising expenses and event costs, an increase of $4.4 million due to amortization of purchased intangibles, and an increase of $11.1 million in allocated overhead. Our marketing and sales headcount increased by 15 percent since July 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.

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General and Administrative.



	Three Months Ended July 31,						Variance
(in thousands)	2015			2014			Dollars
General and administrative	$	181,685		$	169,087		$	12,598
Percent of total revenues	11		%	13		%

General and administrative expenses were $181.7 million, or 11 percent of total revenues, for the three months ended July 31, 2015, compared to $169.1 million, or 13 percent of total revenues, during the same period a year ago, an increase of $12.6 million. The increase was primarily due to an increase of $6.9 million in employee-related costs and an increase of $3.3 million in professional services expense. Our general and administrative headcount increased by seven percent since July 31, 2014 as we added personnel to support our growth.

Income (loss) from operations.



	Three Months Ended July 31,						Variance
(in thousands)	2015			2014			Dollars
Income (loss) from operations	$	19,824		$	(33,434	)	$	53,258
Percent of total revenues	1		%	(3		)%

Income from operations for the three months ended July 31, 2015 was $19.8 million and included $147.8 million of stock-based expenses and $39.8 million of amortization of purchased intangibles. During the same period a year ago, loss from operations was $33.4 million and included $142.4 million of stock-based expenses and $35.9 million of amortization of purchased intangibles.

Investment income.



	Three Months Ended July 31,				Variance
(in thousands)	2015		2014		Dollars
Investment income	$	3,283	$	2,655	$	628

Investment income consists of income on our cash and marketable securities balances. Investment income was $3.3 million for the three months ended July 31, 2015 and was $2.7 million during the same period a year ago. The increase was due to earnings on higher cash and marketable securities balances.

Interest expense.



	Three Months Ended July 31,						Variance
(in thousands)	2015			2014			Dollars
Interest expense	$	(18,096	)	$	(18,314	)	$	218
Percent of total revenues	(1		)%	(1		)%

Interest expense consists of interest on our convertible senior notes, capital leases, loan assumed on 50 Fremont. Interest expense, net of interest costs capitalized, was $18.1 million for the three months ended July 31, 2015 and was $18.3 million during the same period a year ago. The decrease was primarily due to the maturity of our 0.75% convertible senior notes during fiscal 2015.

Other income (expense).



	Three Months Ended July 31,					Variance
(in thousands)	2015		2014			Dollars
Other income (expense)	$	1,947	$	(3,876	)	$	5,823

Other income (expense) primarily consists of non-operating costs such as foreign currency transaction gains and losses and activity associated with real estate transactions. Other income (expense) for the three months ended July 31, 2015 as compared to the same period a year ago, increased primarily due to activity associated with real estate transactions.

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Provisions for income taxes.



	Three Months Ended July 31,						Variance
(in thousands)	2015			2014			Dollars
Provisions for income taxes	$	(7,810	)	$	(8,119	)	$	309
Effective tax rate	112		%	(15		)%

We reported a tax provision of $7.8 million on a pretax income of $7.0 million, which resulted in an effective tax rate of 112 percent for the three months ended July 31, 2015. We had a tax provision primarily related to income taxes in profitable jurisdictions outside of the U.S.

We recorded a tax provision of $8.1 million with a pretax loss of $53.0 million, which resulted in a negative effective tax rate of 15 percent for the three months ended July 31, 2014. We recorded a tax provision primarily due to income taxes in profitable jurisdictions outside of the U.S.

Six Months Ended July 31, 2015 and 2014

Revenues.



	Six Months Ended July 31,				Variance
(in thousands)	2015		2014		Dollars		Percent
Subscription and support	$	2,926,606	$	2,379,893	$	546,713	23	%
Professional services and other	219,245		165,430		53,815		33	%
Total revenues	$	3,145,851	$	2,545,323	$	600,528	24	%

Total revenues were $3.1 billion for the six months ended July 31, 2015, compared to $2.5 billion during the same period a year ago, an increase of $0.6 billion, or 24 percent. Subscription and support revenues were $2.9 billion, or 93 percent of total revenues, for the six months ended July 31, 2015, compared to $2.4 billion, or 94 percent of total revenues, during the same period a year ago, an increase of $546.7 million, or 23 percent. The increase in subscription and support revenues was primarily caused by volume-driven increases from new business, which includes new customers, upgrades and additional subscriptions from existing customers. We continue to invest in a variety of customer programs and initiatives, which, along with increasing enterprise adoption, have helped reduce our attrition rate. 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 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 $219.2 million, or seven percent of total revenues, for the six months ended July 31, 2015, compared to $165.4 million, or six percent of total revenues, for the same period a year ago, an increase of $53.8 million, or 33 percent. The increase in professional services and other revenues was due primarily to the higher demand for services from an increased number of customers.

Revenues in Europe and Asia Pacific accounted for $828.6 million, or 26 percent of total revenues, for the six months ended July 31, 2015, compared to $728.0 million, or 29 percent of total revenues, during the same period a year ago, an increase of $100.6 million, or 14 percent. The increase in revenues outside of the Americas was the result of the increasing acceptance of our service, our focus on marketing our services internationally and additional resources. Revenues outside of the Americas increased on a total dollar basis in the six months ended July 31, 2015 despite an overall strengthening of the U.S. dollar, which reduced aggregate international revenues by $100.7 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 in comparison to similar periods in the prior year.

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Cost of Revenues.



	Six Months Ended July 31,						Variance
(in thousands)	2015			2014			Dollars
Subscription and support	$	566,978		$	427,865		$	139,113
Professional services and other	220,208			172,271			47,937
Total cost of revenues	$	787,186		$	600,136		$	187,050
Percent of total revenues	25		%	24		%

Cost of revenues was $787.2 million, or 25 percent of total revenues, for the six months ended July 31, 2015, compared to $600.1 million, or 24 percent of total revenues, during the same period a year ago, an increase of $187.1 million. The increase in absolute dollars was primarily due to an increase of $50.3 million in employee-related costs, an increase of $6.9 million in stock-based expenses, an increase of $76.3 million in service delivery costs, primarily due to our efforts to increase data center capacity, an increase of $27.4 million in professional and outside services and third party expenses, an increase of $19.7 million in depreciation and amortization expenses, which includes a decrease of $9.4 million in amortization of purchased intangible assets, and an increase in allocated overhead. We have increased our headcount by 24 percent since July 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 will 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.

Research and Development.



	Six Months Ended July 31,						Variance
(in thousands)	2015			2014			Dollars
Research and development	$	456,228		$	391,467		$	64,761
Percent of total revenues	14		%	15		%

Research and development expenses were $456.2 million, or 14 percent of total revenues, for the six months ended July 31, 2015, compared to $391.5 million, or 15 percent of total revenues, during the same period a year ago, an increase of $64.8 million. The increase in absolute dollars was primarily due to an increase of approximately $50.0 million in employee-related costs, an increase of $4.6 million in stock-based expenses, an increase of $8.3 million in our development and test data center, an increase of $0.7 million in depreciation and amortization expenses and increases in allocated overhead. We increased our research and development headcount by 21 percent since July 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 invest in additional employees and technology to support the development of new, and improve existing, technologies and the integration of acquired technologies.

Marketing and Sales.



	Six Months Ended July 31,						Variance
(in thousands)	2015			2014			Dollars
Marketing and sales	$	1,530,629		$	1,311,313		$	219,316
Percent of total revenues	49		%	51		%

Marketing and sales expenses were $1,530.6 million, or 49 percent of total revenues, for the six months ended July 31, 2015, compared to $1,311.3 million, or 51 percent of total revenues, during the same period a year ago, an increase of $219.3 million. The increase was primarily due to increases of $131.0 million in employee-related costs, including amortization of deferred commissions, $4.6 million in stock-based expenses, $50.6 million in advertising expenses, $8.4 million related to the amortization of purchased intangible assets and $16.8 million in allocated overhead. Our marketing and sales headcount increased by 16 percent since July 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.

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General and Administrative.



	Six Months Ended July 31,						Variance
(in thousands)	2015			2014			Dollars
General and administrative	$	357,496		$	331,182		$	26,314
Percent of total revenues	11		%	13		%

General and administrative expenses were $357.5 million, or 11 percent of total revenues, for the six months ended July 31, 2015, compared to $331.2 million, or 13 percent of total revenues, during the same period a year ago, an increase of $26.3 million. The increase was primarily due to an increase of $18.2 million in employee-related costs and an increase of $0.7 million in stock-based expenses. Our general and administrative headcount increased by eight percent since July 31, 2014 as we added personnel to support our growth.

Operating lease termination resulting from purchase of 50 Fremont, net.



	Six Months Ended July 31,						Variance
(in thousands)	2015			2014			Dollars
Operating lease termination resulting from purchase of 50 Fremont, net	$	(36,617	)	$	0		$	(36,617	)
Percent of total revenues	(1		)%	0		%

Operating lease termination resulting from purchase of 50 Fremont, net for the six months ended July 31, 2015 was $36.6 million. In connection with the purchase, we recognized a net non-cash gain totaling approximately $36.6 million on the termination of the lease signed in January 2012.

Income (loss) from operations.



	Six Months Ended July 31,						Variance
(in thousands)	2015			2014			Dollars
Income (loss) from operations	$	50,929		$	(88,775	)	$	139,704
Percent of total revenues	2		%	(3		)%

Income (loss) from operations for the six months ended July 31, 2015 was $50.9 million and included a gain of $36.6 million related to the purchase of 50 Fremont, $290.3 million of stock-based expenses and $79.6 million of amortization of purchased intangibles. During the same period a year ago, loss from operations was $88.8 million and included $273.5 million of stock-based expenses and $79.6 million of amortization of purchased intangibles.

Investment income.



	Six Months Ended July 31,				Variance
(in thousands)	2015		2014		Dollars
Investment income	$	7,844	$	4,433	$	3,411

Investment income consists of income on our cash and marketable securities balances. Investment income was $7.8 million for the six months ended July 31, 2015 and was $4.4 million during the same period a year ago. The increase was primarily due to earnings on higher cash and marketable securities balances.

Interest expense.

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	Six Months Ended July 31,						Variance
(in thousands)	2015			2014			Dollars
Interest expense	$	(34,771	)	$	(38,673	)	$	3,902
Percent of total revenues	(1		)%	(1		)%

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 $34.8 million for the six months ended July 31, 2015 and was $38.7 million during the same period a year ago. The decrease in interest expense was due to the pay down of our revolver with an offset in interest due on our loan assumed on 50 Fremont as well as interest expense associated with our obligation related to 350 Mission.

Other income (expense).



	Six Months Ended July 31,						Variance
(in thousands)	2015			2014			Dollars
Other income (expense)	$	1,029		$	(14,723	)	$	15,752
Percent of total revenues	0		%	(1		)%

Other income (expense) primarily consists of foreign currency transaction gains and losses, costs associated with real estate transactions and losses on derecognition of debt. Other expense increased primarily due to the loss of approximately $8.9 million recognized as a result of conversions of our convertible 0.75% senior notes during the six months ended July 31, 2014.

Provisions for income taxes.



	Six Months Ended July 31,						Variance
(in thousands)	2015			2014			Dollars
Provisions for income taxes	$	(21,791	)	$	(20,261	)	$	(1,530	)
Effective tax rate	87		%	(15		)%

We recognized a tax provision of $21.8 million on a pretax income of $25.0 million, which resulted in an effective tax rate of 87 percent for the six months ended July 31, 2015. We had a tax provision primarily due to income taxes in profitable jurisdictions outside the U.S.

We recorded a tax provision of $20.3 million with a pretax loss of $137.7 million, which resulted in a negative effective tax rate of 15 percent for the six months ended July 31, 2014. The tax provision recorded was primarily due to income taxes in profitable jurisdictions outside the U.S.

Liquidity and Capital Resources

At July 31, 2015, our principal sources of liquidity were cash, cash equivalents and marketable securities totaling $2.1 billion and accounts receivable of $1.1 billion.

Net cash provided by operating activities was $1,035.3 million during the six months ended July 31, 2015 and $719.0 million during the same period a year ago. Cash provided by operating activities has historically been affected by the amount of net income (loss) adjusted for non-cash expense items such as depreciation and amortization, amortization of purchased intangibles from business combinations, amortization of debt discount, discrete items such as the non-cash gain from the termination of 50 Fremont lease, net and the expense associated with stock-based awards; the reclassification of excess tax benefits from the 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, deferred commissions, prepaid assets and other current assets. Claims against working capital include accounts payable, accrued expenses, deferred revenue, and other current liabilities and payments related to our convertible senior notes and loan secured by 50 Fremont. Our working capital may be

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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, Accounts Receivable and Operating Cash Flow,” our fourth quarter has historically been our strongest quarter for new business and renewals, and correspondingly the first quarter for cash collections. The year on year compounding effect of this seasonality in both billing patterns and overall business causes both the value of invoices that we generate in the fourth quarter and cash collections in the first 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 sheets. 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.

Our operating cash flow can significantly fluctuate quarter to quarter due to the excess tax benefits from employee stock plans. The excess tax benefits from employee stock plans is a reclassification between the operating cash flow and the cash flows from financing activities. The excess tax benefit amount, which relates to the exercising and vesting of stock-based awards, is dependent on taxable income by tax jurisdiction. Because taxable income is inherently difficult to forecast, for items such as temporary differences and timing of employee stock option exercises, our operating cash flow results may vary from quarter to quarter due to the reclassification.

Net cash provided by operating activities during the six months ended July 31, 2015 increased $316.3 million over the same period a year ago primarily due to higher collections from our fourth quarter billing activity than in the prior year and higher net income after adjusting for depreciation and amortization, discrete items such as the gain on office lease termination and 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 $769.9 million during the six months ended July 31, 2015 and $496.8 million during the same period a year ago. The net cash used in investing activities during the six months ended July 31, 2015 primarily related to the purchase of 50 Fremont, strategic investments and capital expenditures including new office build-outs and investment of cash balances offset by proceeds from sales and maturities of marketable securities.

Net cash used in financing activities was $84.0 million during the six months ended July 31, 2015 as compared to net cash used in financing activities of $226.1 million during the same period a year ago. Net cash used in financing activities during the six months ended July 31, 2015 consisted primarily of $57.9 million of principal payments on capital leases and $300.0 million of payments on our revolving credit facility, offset by $269.8 million from proceeds from equity plans.

In March 2013, we issued $1.15 billion of 0.25% convertible senior notes due in April 2018 (the “Notes”) and concurrently entered into convertible notes hedges (the “0.25% Note Hedges”) and separate warrant transactions (the “Warrants”). The Notes will mature in April 2018, unless earlier converted. Upon conversion of any Notes, we will deliver cash up to the principal amount of the Notes and, with respect to any excess conversion value greater than the principal amount of the Notes, shares of our common stock, cash, or a combination of both.

The 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 Notes, in certain situations, when the trading price of the 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 indenture for the Notes, such as a consolidation, merger or binding share exchange, or at any time on or after the convertible date, January 1, 2018.

The Notes have not yet been convertible at the holders’ option. The Notes are classified as a noncurrent liability on our condensed consolidated balance sheet as of July 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 Notes during the fiscal quarter ended July 31, 2015. Accordingly, the Notes will not be convertible at the holders’ option for the quarter ending October 31, 2015, and therefore will remain classified as a noncurrent liability on our condensed consolidated balance sheets as of July 31, 2015.

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. In March 2015, we paid down the $300.0 million of outstanding borrowings held under the Credit Facility and related interest in full. We may use any future

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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.

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 July 31, 2015.

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.

The total purchase price for 50 Fremont was $637.6 million. In financing the purchase price, we used $115.0 million of restricted cash on hand and assumed a $200.0 million loan secured by the property with the remainder paid in cash. For the three and six months ended July 31, 2015, total interest expense we recognized was $1.9 million and $3.5 million respectively.

During the year we acquired two companies totaling $33.1 million. Subsequent to July 31, 2015, we acquired Kerensen Consulting totaling $24.2 million.

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 July 31, 2015, we have a total of $69.7 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 July 31, 2015, the future non-cancelable minimum payments under these commitments were as follows (in thousands):



	Capital Leases			Operating Leases		Financing Obligation, Building in Progress-Leased Facility
Fiscal Period:
Remaining six months of fiscal 2016	$	27,310		$	161,976	$	1,777
Fiscal 2017	115,866			307,829		16,877
Fiscal 2018	120,070			265,756		21,107
Fiscal 2019	113,472			199,172		21,551
Fiscal 2020	201,508			183,369		21,995
Thereafter	0			1,050,552		252,517
Total minimum lease payments	578,226			$	2,168,654	$	335,824
Less: amount representing interest	(62,613		)
Present value of capital lease obligations	$	515,613

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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 July 31, 2015, $165.1 million of the total obligation noted above was recorded to Financing obligation, building in progress - leased facility, which the current portion is included in "Accounts payable, accrued expenses, and other liabilities" and the non-current portion is included in “Other noncurrent liabilities” on the condensed consolidated balance sheets.

During the remaining six months of fiscal 2016 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. 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. 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 condensed consolidated financial statements and have not determined whether the effect will be material to either our revenue results or our deferred commissions balances.

Non-GAAP Financial Measures for Statement of Operations and Sharecount Information

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.

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.

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•

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 and Acquired Leases. 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, customer relationships and acquired lease intangibles, as items arising from pre-acquisition activities determined at the time of an acquisition. While these intangible assets are continually evaluated for impairment, amortization of the cost of purchased intangibles is a static expense, one that is not typically affected by operations during any particular period.

•

Amortization of Debt Discount. Under GAAP, certain convertible debt instruments that may be settled in cash (or other assets) on conversion are required to be separately accounted for as liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, for GAAP purposes we are required to recognize imputed interest expense on the Company’s $1.15 billion of convertible senior notes due 2018 that were issued in a private placement in March 2013. The imputed interest rate was approximately 2.53% for the convertible notes due 2018, while the actual coupon interest rate of the notes was 0.25%. The difference between the imputed interest expense and the coupon interest expense, net of the interest amount capitalized, is excluded from management’s assessment of the Company’s operating performance because management believes that this non-cash expense is not indicative of ongoing operating performance. Management believes that the exclusion of the non-cash interest expense provides investors an enhanced view of the Company’s operational performance.

•

Non-Cash Gains/Losses on Conversion 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 at Mission Bay to be a discrete item. Management believes that the exclusion of the gains provides investors an enhanced view of the Company’s operational performance.


•	Lease Termination Resulting from Purchase of Office Building. The Company views the non-cash, one-time gain associated with the termination of its lease at 50 Fremont 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 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 non-cash items: stock-based expense, amortization of purchased intangibles, amortization of acquired leases, amortization of debt discount, gains/losses on sales of land and building improvements, gains/losses on conversions of debt, and termination of office leases. 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 both fiscal 2016 and 2015 is 36.5%. The Company re-evaluates this long-term rate on an annual basis or if any significant events that may materially affect this long-term rate occur. 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 condensed consolidated statement of operations, excluding the portions of stock-based expenses and amortization of purchased intangibles that are included in cost of revenues.

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We define non-GAAP operating profit as our non-GAAP gross profit less operating expenses, as reported on our condensed consolidated statement of operations, excluding the portions of stock-based expenses, amortization of purchased intangibles and gain resulting from termination of our office lease 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.

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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,” “income(loss) from operations,” “net income (loss)” and “net income (loss) per share” for the three and six months ended July 31, 2015 and 2014 are as follows (in thousands, except for share numbers):



	Three Months Ended July 31,				Six Months Ended July 31,
	2015		2014		2015		2014
Gross profit
GAAP gross profit	$	1,229,300	$	1,010,720	$	2,358,665	$	1,945,187
Plus:
Amortization of purchased intangibles	20,839		21,271		40,529		49,943
Stock-based expense	16,340		12,977		31,721		24,787
Non-GAAP gross profit	$	1,266,479	$	1,044,968	$	2,430,915	$	2,019,917



	Three Months Ended July 31,					Six Months Ended July 31,
	2015		2014			2015			2014
Income from operations
GAAP income (loss) from operations	$	19,824	$	(33,434	)	$	50,929		$	(88,775	)
Plus:
Amortization of purchased intangibles	39,841		35,919			79,558			79,556
Stock-based expense	147,779		142,411			290,339			273,503
Less:
Operating lease termination resulting from purchase of 50 Fremont, net	0		0			(36,617		)	0
Non-GAAP income from operations	$	207,444	$	144,896		$	384,209		$	264,284

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	Three Months Ended July 31,						Six Months Ended July 31,
	2015			2014			2015			2014
Net income
GAAP net income (loss)	$	(852	)	$	(61,088	)	$	3,240		$	(157,999	)
Plus:
Amortization of purchased intangibles	39,841			35,919			79,558			79,556
Amortization of acquired lease intangible	1,301			0			2,116			0
Stock-based expense	147,779			142,411			290,339			273,503
Amortization of debt discount, net	6,110			9,216			12,169			20,200
Loss on conversion of debt	0			361			0			8,890
Less:
Operating lease termination resulting from purchase of 50 Fremont, net	0			0			(36,617		)	0
Income tax effects and adjustments	(65,916		)	(41,134		)	(114,207		)	(68,949		)
Non-GAAP net income	$	128,263		$	85,685		$	236,598		$	155,201



	Three Months Ended July 31,						Six Months Ended July 31,
	2015			2014			2015			2014
Non-GAAP diluted earnings per share
GAAP diluted income (loss) per share (a)	$	0.00		$	(0.10	)	$	0.00		$	(0.26	)
Plus:
Amortization of purchased intangibles	0.06			0.06			0.12			0.12
Amortization of acquired lease intangible	0.00			0.00			0.00			0.00
Stock-based expenses	0.22			0.22			0.43			0.42
Amortization of debt discount, net	0.01			0.01			0.02			0.03
Loss on conversion of debt	0.00			0.00			0.00			0.01
Less:
Operating lease termination resulting from purchase of 50 Fremont, net	0.00			0.00			(0.05		)	0.00
Income tax effects and adjustments of Non-GAAP items	(0.10		)	(0.06		)	(0.17		)	(0.08		)
Non-GAAP diluted earnings per share	$	0.19		$	0.13		$	0.35		$	0.24
Shares used in computing diluted net income per share	672,627			647,790			672,231			648,356

a) Reported GAAP loss per share was calculated using the basic share count. Non-GAAP diluted earnings per share was calculated using the diluted share count.

Non-GAAP net income for the quarter ended July 31, 2015 was $128.3 million and $85.7 million for the same period a year ago, an increase of $42.6 million or 50 percent. During the first six months of fiscal 2016 we remained focused on improving non-GAAP operating income and expect to remain similarly focused for the remaining six months of fiscal 2016.

The effects of dilutive securities were not included in the GAAP calculation of diluted earnings/loss per share for the three months ended July 31, 2015 because we had a net loss for the period 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:

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	Three Months Ended July 31,		Six Months Ended July 31,
Supplemental Diluted Sharecount Information (in thousands):	2015	2014	2015	2014
Weighted-average shares outstanding for GAAP basic earnings per share	659,366	617,016	656,636	614,797
Effect of dilutive securities (1):
Convertible senior notes (2)	1,456	7,698	728	8,097
Warrants associated with the convertible senior note hedges (2)	0	12,066	0	12,643
Employee stock awards	11,805	11,010	14,867	12,819
Adjusted weighted-average shares outstanding and assumed conversions for Non-GAAP diluted earnings per share	672,627	647,790	672,231	648,356


(1)	The effects of these dilutive securities were not included in the GAAP calculation of diluted net loss per share for the three months ended July 31, 2015 and 2014 and six months ended July 31, 2014 because the effect would have been anti-dilutive.


(2)	Upon maturity in fiscal 2015, the convertible 0.75% senior notes and associated warrants were settled. The 0.25% senior notes were not convertible, therefore no dilutive effect for shares outstanding for the three and six months ended July 31, 2015


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk

We primarily conduct our business in the following locations: the United States, Europe, Canada, Asia Pacific and Japan. The expanding global scope of our business exposes us to risk of fluctuations in foreign currency markets. This exposure is the result of selling in multiple currencies, growth in our international investments, including data center expansion, additional headcount in foreign countries, and operating in countries where the functional currency is the local currency. Specifically, our results of operations and cash flows are subject to fluctuations in the following currencies: the Euro, British Pound Sterling, Canadian Dollar, Australian Dollar and Japanese Yen against the United States Dollar. These exposures may change over time as business practices evolve and economic conditions change. Changes in foreign currency exchange rates could have an adverse impact on our financial results and cash flows. For example, revenue for the second quarter was $1.63 billion, an increase of 24 percent year over year, and 28 percent in constant currency. Deferred revenue on the balance sheet as of July 31, 2015 was $3.03 billion, an increase of 29 percent year over year, and 33 percent in constant currency.

Foreign Currency Transaction Risk

Our foreign currency exposures typically arise from selling annual and multi-year subscriptions in multiple currencies, customer trade account receivables, intercompany transfer pricing arrangements and other intercompany transactions. Our foreign currency management objective is to minimize the effect of fluctuations in foreign exchange rates on selected assets or liabilities without exposing us to additional risk associated with transactions that could be regarded as speculative.

We pursue our objective by utilizing foreign currency forward contracts to offset foreign exchange risk. Our foreign currency forward contracts are generally short-term in duration. We neither use these foreign currency forward contracts for trading purposes nor do we currently designate these forward contracts as hedging instruments pursuant to Accounting Standards Codification 815 (“ASC 815”), Derivatives and Hedging. Accordingly, we record the fair values of these contracts as of the end of our reporting period to our consolidated balance sheet with changes in fair values recorded to our consolidated statement of operations. Given the short duration of the forward contracts, the amount recorded is not significant. Our ultimate realized gain or loss with respect to foreign currency exposures will generally depend on the size and type of cross-currency transactions that we enter into, the currency exchange rates associated with these exposures and changes in those rates, the net realized gain or loss on our foreign currency forward contracts and other factors.

Foreign Currency Translation Risk

Fluctuations in foreign currencies impact the amount of total assets, liabilities, revenues, operating expense and cash flows that we report for our foreign subsidiaries upon the translation of these amounts into U.S. Dollars. As the U.S. Dollar strengthened against certain international currencies over the past several months, the amounts of revenue and deferred revenue that we reported in U.S. Dollars for foreign subsidiaries that transact in international currencies were lower relative to what we would have reported using a constant currency rate. We report in Management's Discussion and Analysis our revenue and deferred revenue growth rates on both an absolute dollar and constant currency basis.

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Interest Rate Sensitivity

We had cash, cash equivalents and marketable securities totaling $2.1 billion at July 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 July 31, 2015 could result in a $12.3 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.

At January 31, 2015, we had cash, cash equivalents and marketable securities totaling $1.9 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 $13.5 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 “Notes”). Holders of the Notes may convert the 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. 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.

The 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 Notes was $1.15 billion as of July 31, 2015. The total estimated fair value of our Notes at July 31, 2015 was $1.4 billion. The fair value was determined based on the closing trading price per $100 of the Notes as of the last day of trading for the second quarter of fiscal 2016, which was $125.69.

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”). 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. As of July 31, 2015 there was no outstanding borrowing amount under the Credit Agreement.

In February 2015, we 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. 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 we were in compliance with as of July 31, 2015.

We deposit our cash with multiple financial institutions. 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

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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 over 130 privately-held companies, primarily comprised of independent software vendors and system integrators. We invest in early-to-late stage enterprise cloud companies for strategic reasons and to support key business initiatives such as bringing mobile applications to enterprise customers. We invest in both domestic and international companies and currently hold investments in ten countries, including the United Kingdom, Japan, Canada and Germany. Our investments in these companies range from $0.2 million to over $70.0 million, with 13 investments individually equal to or in excess of $10 million. As of July 31, 2015 and January 31, 2015 the carrying value of our investments in privately-held companies was $449.7 million and $158.0 million, respectively. The estimated fair value of our investments in privately-held companies was $631.0 million and $280.0 million as of July 31, 2015 and January 31, 2015, respectively. The financial success of our investment in any company is typically dependent on a liquidity event, such as a public offering, acquisition or other favorable market event reflecting appreciation to the cost of our initial investment. 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 be material. We have in the past written off the full value of specific investments. Similar situations could occur in the future and negatively impact our financial results. All of our investments are subject to a risk of total loss of investment capital.


ITEM 4.	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 report.

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

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that evaluation, our principal executive officer and principal financial officer concluded that there has not been any material change in our internal control over financial reporting during the quarter covered by this report that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION


ITEM 1.	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.

In July 2015, we and certain of our current and former directors were named as defendants in a purported shareholder derivative action in the Superior Court for the State of California, County of San Francisco. The derivative complaint alleges that excessive compensation was paid to such directors for their service. The derivative complaint includes allegations of breach of fiduciary duty and unjust enrichment and seeks restitution and disgorgement of a portion of the directors' compensation, as well as reform of one of our obsolete equity plans. Because the complaint is derivative in nature, it does not seek monetary damages from us.

During fiscal 2015, we received a communication from a large technology company alleging that we infringed certain of its patents. We continue 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 our 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 condensed 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 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

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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, 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;

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•	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;


•	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.

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.

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

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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 and results. Further, there are various statutes, regulations, and rulings relevant to the direct email marketing and text-messaging industries, including the Telephone Consumer Protection Act (TCPA) and related Federal Communication Commission (FCC) orders. The interpretation of many of these statutes, regulations, and rulings is evolving in the courts and administrative agencies and an inability to comply may have an adverse impact on our business and results. If in the future we are unable to achieve or maintain industry-specific certifications or other requirements or standards relevant to our customers, it may harm our business and adversely affect our results.

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 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

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•	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;


•	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 and timing, new business linearity between quarters and within a quarter and fluctuations due to foreign currency movements;


•	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;


•	other than temporary impairments in the value of our strategic investments in early-to-late stage privately held companies, which could be material in a particular quarter;


•	expenses related to significant, unusual or discrete events, which are recorded in the period in which the events occur;

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•	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;


•	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 Communities 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;

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•	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 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 increases or 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.

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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.

We are subject to risks associated with our strategic investments. Other-than-temporary impairments in the value of our investments could negatively impact our financial results.

We invest in early-to-late stage companies for strategic reasons and to support key business initiatives, and may not realize a return on our strategic investments. Many such companies generate net losses and the market for their products, services or technologies may be slow to develop, and, therefore, are dependent on the availability of later rounds of financing from banks or investors on favorable terms to continue their operations. The financial success of our investment in any company is typically dependent on a liquidity event, such as a public offering, acquisition or other favorable market event reflecting appreciation to the cost of our initial investment. The capital markets for public offerings and acquisitions are dynamic and the likelihood of liquidity events for the companies we have invested in could significantly worsen. Further, 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 value, we may be required to record an other than temporary impairment, which could be material. We have in the past written off the full value of specific investments. Similar situations could occur in the future and negatively impact our financial results. All of our investments are subject to a risk of total loss of investment capital.

We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows from changes in the value of the U.S. dollar versus local currencies.

We conduct our business in the following locations: United States, Europe, Canada, Asia Pacific and Japan. The expanding global scope of our business exposes us to risk of fluctuations in foreign currency markets. This exposure is the result of selling in multiple currencies, growth in our international investments, including data center expansion, additional headcount in foreign locations, and operating in countries where the functional currency is the local currency. Specifically, our results of operations and cash flows are subject to fluctuations in the following currencies: the Euro, British Pound Sterling, Canadian Dollar, Australian Dollar and Japanese Yen against the U.S. Dollar. These exposures may change over time as business practices evolve and economic conditions change. The fluctuations of currencies in which we conduct business can both increase and decrease our overall revenue and expenses for any given fiscal period. Such volatility, even when it increases our revenues or decreases our expenses, impacts our ability to accurately predict our future results and earnings.

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. 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.

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. If we fail to successfully scale our operations and increase productivity, we will be unable to execute our business plan.

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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 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, class action, 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.

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.

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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 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.

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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 court decisions and fundamental tax law changes applicable to corporate multinationals currently being considered by many countries including the United States as well as several European countries.

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, the loan we assumed when we purchased 50 Fremont, and capital lease arrangements. Additionally, we have significant contractual commitments in operating lease arrangements, which are not reflected on our condensed consolidated balance sheets. 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

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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.

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.

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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 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.

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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 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;

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•	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;


•	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.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5.	OTHER INFORMATION

Not applicable.


ITEM 6.	EXHIBITS

The documents listed in the Index to Exhibits of this quarterly report on Form 10-Q are incorporated by reference or are filed with this quarterly report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).

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SIGNATURES

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.




Dated: August 24, 2015
	salesforce.com, inc.

	By:	/S/ MARK J. HAWKINS
		Mark J. Hawkins
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Dated: August 24, 2015
	salesforce.com, inc.

	By:	/S/ JOE ALLANSON
		Joe Allanson
		Executive Vice President, Chief Accounting Officer and Corporate Controller (Principal Accounting Officer)

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Index to Exhibits

Exhibit

No.

Exhibit Description

Provided

Herewith

Incorporated by Reference

Form

SEC File No.

Exhibit

Filing Date

3.1

Amended and Restated Certificate of Incorporation of salesforce.com, inc.

8-K

001-32224

3.1

06/11/2013

3.2

Amended and Restated Bylaws of salesforce.com, inc.

8-K

001-32224

3.2

06/11/2013

10.1

Amended and Restated 2013 Equity Incentive Plan and related forms of agreement

8-K

001-32224

10.1

06/09/2015

10.2

Amended and Restated 2004 Employee Stock Purchase Plan

8-K

001-32224

10.2

06/09/2015

10.3

Amendment No. 1 to Credit Agreement, dated June 17, 2015, by and among salesforce.com, inc., the guarantors from time to time party thereto and Wells Fargo Bank, N.A., as Administrative Agent

10.4

Reseller Agreement, dated August 1, 2015, between salesforce.com, inc. and Salesforce.org

10.5

Resource Sharing Agreement, dated as of August 1, 2015, by and between salesforce.com, inc., the salesforce.com foundation and Salesforce.org

31.1

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

31.2

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

32.1

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

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Extension Definition

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document