Document
Table of Contents

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, 2017
OR
¨
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, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer   
¨
 
 
 
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)
Smaller reporting company  
¨
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨   No  x
As of July 31, 2017, there were approximately 718.7 million shares of the Registrant’s Common Stock outstanding.


Table of Contents


INDEX
 
 
 
Page No.
 
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Balance Sheets as of July 31, 2017 and January 31, 2017
 
 
 
 
Consolidated Statements of Operations for the three and six months ended July 31, 2017 and 2016
 
 
 
 
Consolidated Statements of Comprehensive Income for the three and six months ended July 31, 2017 and 2016
 
 
 
 
Consolidated Statements of Cash Flows for the three and six months ended July 31, 2017 and 2016
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.



2

Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
salesforce.com, inc.
Consolidated Balance Sheets
(in thousands)
 
 
July 31,
2017
 
January 31,
2017
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,949,110

 
$
1,606,549

Marketable securities
1,552,135

 
602,338

Accounts receivable, net
1,569,322

 
3,196,643

Deferred commissions
302,528

 
311,770

Prepaid expenses and other current assets
438,246

 
279,527

Total current assets
5,811,341

 
5,996,827

Property and equipment, net
1,866,576

 
1,787,534

Deferred commissions, noncurrent
224,232

 
227,849

Capitalized software, net
140,703

 
141,671

Strategic investments
657,687

 
566,953

Goodwill
7,294,381

 
7,263,846

Intangible assets acquired through business combinations, net
965,887

 
1,113,374

Other assets, net
457,996

 
486,869

Total assets
$
17,418,803

 
$
17,584,923

Liabilities, temporary equity and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable, accrued expenses and other liabilities
$
1,576,822

 
$
1,752,664

Deferred revenue
4,818,634

 
5,542,802

Convertible 0.25% senior notes, net
1,130,729

 
0

Total current liabilities
7,526,185

 
7,295,466

Convertible 0.25% senior notes, net
0

 
1,116,360

Term loan
497,796

 
497,221

Loan assumed on 50 Fremont
198,403

 
198,268

Revolving credit facility
0

 
196,542

Other noncurrent liabilities
727,882

 
780,939

Total liabilities
8,950,266

 
10,084,796

Temporary equity:
 
 

Convertible 0.25% senior notes (See Note 8)
17,223

 
0

Stockholders’ equity:
 
 
 
Common stock
719

 
708

Additional paid-in capital
8,889,441

 
8,040,170

Accumulated other comprehensive income (loss)
17,535

 
(75,841
)
Accumulated deficit
(456,381
)
 
(464,910
)
Total stockholders’ equity
8,451,314

 
7,500,127

Total liabilities, temporary equity and stockholders’ equity
$
17,418,803

 
$
17,584,923








See accompanying Notes.

3

Table of Contents

salesforce.com, inc.
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Subscription and support
$
2,368,499

 
$
1,886,080

 
$
4,569,407

 
$
3,661,573

Professional services and other
193,090

 
150,538

 
379,761

 
291,648

Total revenues
2,561,589

 
2,036,618

 
4,949,168

 
3,953,221

Cost of revenues (1)(2):
 
 
 
 
 
 
 
Subscription and support
493,879

 
376,456

 
956,800

 
727,557

Professional services and other
176,788

 
149,123

 
364,422

 
295,003

Total cost of revenues
670,667

 
525,579

 
1,321,222

 
1,022,560

Gross profit
1,890,922

 
1,511,039

 
3,627,946

 
2,930,661

Operating expenses (1)(2):
 
 
 
 
 
 
 
Research and development
386,447

 
291,506

 
762,528

 
552,476

Marketing and sales
1,170,749

 
934,931

 
2,280,253

 
1,830,791

General and administrative
282,933

 
252,051

 
543,254

 
462,857

Total operating expenses
1,840,129

 
1,478,488

 
3,586,035

 
2,846,124

Income from operations
50,793

 
32,551

 
41,911

 
84,537

Investment income
8,754

 
11,916

 
14,020

 
20,038

Interest expense
(21,629
)
 
(20,708
)
 
(43,825
)
 
(42,719
)
Other income (expense) (1)
(7,465
)
 
524

 
(4,616
)
 
(13,282
)
Gains from acquisitions of strategic investments
0

 
0

 
0

 
12,864

Income before benefit from (provision for) income taxes
30,453

 
24,283

 
7,490

 
61,438

Benefit from (provision for) income taxes
(12,717
)
 
205,339

 
1,039

 
206,943

Net income
$
17,736

 
$
229,622

 
$
8,529

 
$
268,381

Basic net income per share
$
0.02

 
$
0.34

 
$
0.01

 
$
0.40

Diluted net income per share
$
0.02

 
$
0.33

 
$
0.01

 
$
0.39

Shares used in computing basic net income per share
712,039

 
681,126

 
709,157

 
678,929

Shares used in computing diluted net income per share
729,386

 
695,968

 
726,222

 
691,714

_______________
(1) Amounts include amortization of purchased intangibles from business combinations, as follows:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Cost of revenues
$
43,483

 
$
25,544

 
$
87,069

 
$
47,759

Marketing and sales
30,563

 
23,151

 
61,207

 
38,537

Other non-operating expense
376

 
642

 
751

 
1,348

(2) Amounts include stock-based expense, as follows:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Cost of revenues
$
32,202

 
$
23,495

 
$
63,712

 
$
50,129

Research and development
66,644

 
38,624

 
130,559

 
73,792

Marketing and sales
120,550

 
86,323

 
239,546

 
181,797

General and administrative
37,089

 
33,868

 
74,237

 
65,511





See accompanying Notes.

4

Table of Contents

salesforce.com, inc.
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Net income
$
17,736

 
$
229,622

 
$
8,529

 
$
268,381

Other comprehensive income, before tax and net of reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation and other gains (losses)
16,384

 
(10,407
)
 
30,408

 
(151
)
Unrealized gains (losses) on marketable securities and strategic investments
(8,362
)
 
25,896

 
62,968

 
36,980

Other comprehensive income, before tax
8,022

 
15,489

 
93,376

 
36,829

Tax effect
0

 
1,873

 
0

 
1,873

Other comprehensive income, net of tax
8,022

 
17,362

 
93,376

 
38,702

Comprehensive income
$
25,758

 
$
246,984

 
$
101,905

 
$
307,083






























See accompanying Notes.

5

Table of Contents

salesforce.com, inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Operating activities:
 
 
 
 
 
 
 
Net income
$
17,736

 
$
229,622

 
$
8,529

 
$
268,381

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
192,257

 
149,361

 
377,365

 
282,133

Amortization of debt discount and issuance costs
7,753

 
6,868

 
15,470

 
14,053

Gains from acquisitions of strategic investments
0

 
0

 
0

 
(12,864
)
Amortization of deferred commissions
107,868

 
88,783

 
214,010

 
177,297

Expenses related to employee stock plans
256,485

 
182,310

 
508,054

 
371,229

Changes in assets and liabilities, net of business combinations:
 
 
 
 
 
 
 
Accounts receivable, net
(129,447
)
 
(73,167
)
 
1,628,060

 
1,234,145

Deferred commissions
(116,703
)
 
(70,643
)
 
(201,152
)
 
(134,162
)
Prepaid expenses and other current assets and other assets
32,296

 
(9,728
)
 
(151,115
)
 
(66,399
)
Accounts payable, accrued expenses and other liabilities
187,042

 
(46,666
)
 
(114,200
)
 
(332,894
)
Deferred revenue
(224,018
)
 
(206,062
)
 
(724,168
)
 
(499,179
)
Net cash provided by operating activities
331,269

 
250,678

 
1,560,853

 
1,301,740

Investing activities:
 
 
 
 
 
 
 
Business combinations, net of cash acquired
0

 
(2,798,194
)
 
(19,781
)
 
(2,799,993
)
Strategic investments, net
(42,958
)
 
(390
)
 
(43,416
)
 
(22,451
)
Purchases of marketable securities
(501,333
)
 
(285,795
)
 
(1,199,894
)
 
(875,131
)
Sales of marketable securities
139,628

 
1,610,724

 
243,465

 
1,833,658

Maturities of marketable securities
9,420

 
27,253

 
13,270

 
50,538

Capital expenditures
(128,388
)
 
(96,030
)
 
(284,990
)
 
(179,331
)
Net cash used in investing activities
(523,631
)
 
(1,542,432
)
 
(1,291,346
)
 
(1,992,710
)
Financing activities:
 
 
 
 
 
 
 
Proceeds from term loan, net
0

 
495,550

 
0

 
495,550

Proceeds from employee stock plans
183,009

 
133,878

 
342,816

 
223,019

Principal payments on capital lease obligations
(65,731
)
 
(12,795
)
 
(75,174
)
 
(62,763
)
Payments on revolving credit facility
0

 
0

 
(200,000
)
 
0

Net cash provided by financing activities
117,278

 
616,633

 
67,642

 
655,806

Effect of exchange rate changes
(710
)
 
(8,736
)
 
5,412

 
(7,973
)
Net increase (decrease) in cash and cash equivalents
(75,794
)
 
(683,857
)
 
342,561

 
(43,137
)
Cash and cash equivalents, beginning of period
2,024,904

 
1,799,083

 
1,606,549

 
1,158,363

Cash and cash equivalents, end of period
$
1,949,110

 
$
1,115,226

 
$
1,949,110

 
$
1,115,226

See accompanying Notes.

6

Table of Contents

salesforce.com, inc.
Consolidated Statements of Cash Flows
Supplemental Cash Flow Disclosure
(in thousands)
(unaudited)
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Supplemental cash flow disclosure:
 
 
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
 
 
Interest
$
20,543

 
$
6,285

 
$
27,265

 
$
30,035

Income taxes, net of tax refunds
$
9,335

 
$
6,322

 
$
26,682

 
$
14,231

Non-cash investing and financing activities:
 
 
 
 
 
 
 
Fixed assets acquired under capital leases
$
0

 
$
0

 
$
2,471

 
$
585

Fair value of equity awards assumed
$
0

 
$
9,344

 
$
0

 
$
20,793

Fair value of common stock issued as consideration for business combinations
$
0

 
$
0

 
$
6,193

 
$
278,372

Non-cash equity liability (See Note 9)
$
5,476

 
$
76,043

 
$
12,961

 
$
76,043
























See accompanying Notes.

7

Table of Contents

salesforce.com, inc.
Notes to Consolidated Financial Statements

1. Summary of Business and Significant Accounting Policies
Description of Business
Salesforce.com, inc. ("the Company") is a leading provider of enterprise software, delivered through the cloud, with a focus on customer relationship management, or CRM. The Company introduced its first CRM solution in 2000, and has since expanded its service offerings into new areas and industries with new editions, features and platform capabilities.
The Company's core mission is to empower its customers to connect with their customers in entirely new ways through cloud, mobile, social, Internet of Things (“IoT”) and artificial intelligence technologies.
The Company's Customer Success Platform is a comprehensive portfolio of service offerings providing sales force automation, customer service and support, marketing automation, digital commerce, community management, analytics, application development, IoT integration, collaborative productivity tools and its professional cloud services.
Fiscal Year
The Company’s fiscal year ends on January 31. References to fiscal 2018, for example, refer to the fiscal year ending January 31, 2018.
Basis of Presentation
The accompanying consolidated balance sheet as of July 31, 2017 and the consolidated statements of operations, the consolidated statements of comprehensive income and the consolidated statements of cash flows for the three and six months ended July 31, 2017 and 2016, respectively, are unaudited.
These financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, the unaudited consolidated financial statements include all adjustments necessary for the fair presentation of the Company’s balance sheet as of July 31, 2017, and its results of operations, including its comprehensive income, and its cash flows for the three and six months ended July 31, 2017 and 2016. All adjustments are of a normal recurring nature. The results for the three and six months ended July 31, 2017 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending January 31, 2018.
These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2017, filed with the Securities and Exchange Commission (the “SEC”) on March 6, 2017.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in the Company’s consolidated financial statements and notes thereto.
Significant estimates and assumptions made by management include the determination of:
the best estimate of selling price of the deliverables included in multiple deliverable revenue arrangements;
the fair value of assets acquired and liabilities assumed for business combinations;
the recognition, measurement and valuation of current and deferred income taxes;
the fair value of certain stock awards issued;
the useful lives of intangible assets, property and equipment and building and structural components; and
the valuation of strategic investments and the determination of other-than-temporary impairments.
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.

8

Table of Contents

Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
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 a number of acquisitions. These acquisitions have allowed the Company to expand its offerings, presence and reach in various market segments of the enterprise cloud computing market. While the Company has offerings in multiple enterprise cloud computing market segments, including as a result of the Company's acquisitions, the Company’s business operates in one operating segment because the majority of the Company's offerings operate on a single platform and are deployed in an identical way, and the Company’s chief operating decision maker evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis. Since the Company operates in one operating segment, all required financial segment information can be found in the consolidated financial statements.
Concentrations of Credit Risk and Significant Customers
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable. In addition, in connection with the Company's 0.25% Senior Notes (as defined in Note 8 "Debt"), the Company entered into convertible note hedge transactions with respect to its common stock which are exposed to concentrations of credit risk. Collateral is not required for accounts receivable or the note hedge transactions. The Company maintains an allowance for its doubtful accounts receivable. 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. Receivables are written-off and charged against its recorded allowance when the Company has exhausted collection efforts without success.
No single customer accounted for more than five percent of accounts receivable at July 31, 2017 and January 31, 2017. No single customer accounted for five percent or more of total revenue during the three and six months ended July 31, 2017 and 2016.
Geographic Locations
As of July 31, 2017 and January 31, 2017, assets located outside the Americas were 13 percent and 12 percent of total assets, respectively. As of July 31, 2017 and January 31, 2017, assets located in the United States were 85 percent and 86 percent of total assets, respectively.
Revenues by geographical region are as follows (in thousands):
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Americas
$
1,854,169

 
$
1,495,201

 
$
3,609,527

 
$
2,908,430

Europe
464,371

 
347,320

 
873,986

 
675,174

Asia Pacific
243,049

 
194,097

 
465,655

 
369,617

 
$
2,561,589


$
2,036,618


$
4,949,168

 
$
3,953,221

Revenues by geography are determined based on the region of the Salesforce contracting entity, which may be different than the region of the customer. Americas revenue attributed to the United States was approximately 96 percent during the three and six months ended July 31, 2017 and 2016. No other country represented more than ten percent of total revenue during the three and six months ended July 31, 2017 and 2016.
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.

9

Table of Contents

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 Company’s professional services contracts are either on a time and materials, fixed fee or subscription basis. These revenues are recognized as the services are rendered for time and materials contracts, when the milestones are achieved and accepted by the customer or on a proportional performance basis for fixed price contracts and ratably over the contract term for subscription professional services contracts. The milestone method for revenue recognition is used when there is substantive uncertainty at the date the contract is entered into whether the milestone will be achieved. 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 at contract inception, 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.

10

Table of Contents

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, dollar size and new business linearity within the quarter.
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 consolidated statements of operations.
During the six months ended July 31, 2017, the Company deferred $201.2 million of commission expenditures and amortized $214.0 million to sales expense. During the same period a year ago, the Company deferred $134.2 million of commission expenditures and amortized $177.3 million to sales expense. Deferred commissions on the Company's consolidated balance sheets totaled $526.8 million at July 31, 2017 and $539.6 million at January 31, 2017.
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
The Company considers all of its marketable debt securities as available for use in current operations, including those with maturity dates beyond one year, and therefore classifies these securities within current assets on the consolidated balance sheets. Securities are classified as available for sale and are carried at fair value, with the change in unrealized gains and losses, net of tax, reported as a separate component on the consolidated statements of comprehensive income until realized. Fair value is determined based on quoted market rates when observable or utilizing data points that are observable, such as quoted prices, interest rates and yield curves. Declines in fair value judged to be other-than-temporary on securities available for sale are included as a reduction to 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. For the purposes of computing realized and unrealized gains and losses, the cost of securities sold is based on the specific-identification method. Interest on securities classified as available for sale is also included as a component of investment income.
Strategic Investments
The Company holds certain marketable equity and non-marketable debt and equity securities within its strategic investments portfolio. Marketable equity securities are measured using quoted prices in their respective active markets, non-marketable debt securities are recorded at their estimated fair value and the non-marketable equity securities are recorded at cost.
Marketable equity securities and non-marketable debt securities, which consist of noncontrolling debt investments in privately held companies, are recorded at fair value with changes in fair value recorded through accumulated other comprehensive income. Equity investments without readily determinable fair values for which the Company does not have the ability to exercise significant influence are accounted for using the cost method of accounting. Under the cost method of accounting, the non-marketable securities are carried at cost and are adjusted only for other-than-temporary impairments, certain distributions and additional investments. 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

11

Table of Contents

liquidity. The estimated fair value is based on quantitative and qualitative factors including, but not limited to, subsequent financing activities by the investee and projected discounted cash flows. Fair value is not estimated for non-marketable equity securities if there are no identified events or changes in circumstances that may have an effect on the fair value of the investment.
The carrying value of the Company’s strategic investments is impacted by various events such as entering into new investments, dispositions due to acquisitions, fair market value adjustments or initial public offerings. The cash inflows from exits and cash outflows for new investments are disclosed as strategic investments within the investing activities section of the statement of cash flows and any gains or losses are recorded within the operating activities of the statements of cash flows for each of the respective fiscal quarter periods. 
Derivative Financial Instruments
The Company enters into foreign currency derivative contracts with financial institutions to reduce foreign exchange risk. The Company uses forward currency derivative contracts to minimize the Company’s exposure to balances primarily denominated in the Euro, British Pound Sterling, Japanese Yen, Canadian Dollar and Australian Dollar. The Company’s foreign currency derivative contracts, which are not designated as hedging instruments, are used to reduce the exchange rate risk associated primarily with intercompany receivables and payables. The Company’s derivative financial instruments program is not designated for trading or speculative purposes. As of July 31, 2017 and January 31, 2017, the foreign currency derivative contracts that were not settled were recorded at fair value on the consolidated balance sheets.
Foreign currency derivative contracts are marked-to-market at the end of each reporting period with gains and losses recognized as other expense to offset the gains or losses resulting from the settlement or remeasurement of the underlying foreign currency denominated receivables and payables. While the contract or notional amount is often used to express the volume of foreign currency derivative contracts, the amounts potentially subject to credit risk are generally limited to the amounts, if any, by which the counterparties’ obligations under the agreements exceed the obligations of the Company to the counterparties.
Fair Value Measurement
The Company measures its cash and 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 4 “Fair Value Measurement.”
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of those assets as follows:
Computers, equipment and software
3 to 9 years
Furniture and fixtures
5 years
Leasehold improvements
Shorter of the estimated lease term or 10 years
Building and structural components
Average weighted useful life of 32 years
Building - leased facility
27 years
Building improvements
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.
Capitalized Software Costs
The Company capitalizes costs related to its enterprise cloud computing services and certain projects for internal use incurred during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life, which is generally 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.

12

Table of Contents

Intangible Assets acquired through Business Combinations
Intangible assets are amortized over their estimated useful lives. Each period, the Company evaluates the estimated remaining useful life of its intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization.
Impairment Assessment
The Company evaluates intangible assets and long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This includes but is not limited to significant adverse changes in business climate, market conditions, or other events that indicate an asset's carrying amount may not be recoverable. Recoverability of these assets is measured by comparing the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. If the undiscounted cash flows used in the test for recoverability are less than the carrying amount of these assets, the carrying amount of such assets is reduced to fair value.
The Company evaluates and tests the recoverability of its goodwill for impairment at least annually during its fourth quarter of each fiscal year or more often if and when circumstances indicate that goodwill may not be recoverable.
There was no impairment of intangible assets, long-lived assets or goodwill during the three and six months ended July 31, 2017 and 2016.
Business Combinations
The Company uses its best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. The Company continues to collect information and reevaluates these estimates and assumptions quarterly and records any adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations.
In the event the Company acquires an entity with which the Company has a preexisting relationship, the Company will recognize a gain or loss to settle that relationship as of the acquisition date, which is recorded in other income (expense) within the statements of operations. In the event that the Company acquires an entity in which the Company previously held a strategic investment, the difference between the fair value of the shares as of the date of the acquisition and the carrying value of the strategic investment is recorded as a gain or loss and disclosed separately within the 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.
In the event the Company is 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. To the extent there are losses associated with the sublease, they are recognized in the period the sublease is executed. Gains are recognized over the sublease life. Any sublease payments received in excess of the straight-line rent payments for the sublease are recorded in other income (expense).

13

Table of Contents

Accounting for Stock-Based Expense
The Company recognizes stock-based expenses related to stock options and restricted stock awards on a straight-line basis, net of forfeitures, 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 related to performance share grants are measured based on grant date fair value and expensed on a straight-line basis over the service period of the awards, which is generally the vesting term of three years.
The Company, at times, grants unvested restricted shares to employee stockholders of certain acquired companies in lieu of cash consideration. These awards are generally subject to continued post-acquisition employment. Therefore, the Company accounts for them as post-acquisition stock-based expense. The Company recognizes stock-based expense equal to the grant date fair value of the restricted stock awards on a straight-line basis over the requisite service period of the awards, which is generally four years
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the consolidated statements of operations in the period that includes the enactment date.
The Company’s tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, solely based on its technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than 50 percent likely to be realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax provision.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the applicable tax law. The Company regularly reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The Company’s judgments regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute its business plans and/or tax planning strategies. Should there be a change in the ability to recover deferred tax assets, the tax provision would increase or decrease in the period in which the assessment is changed.
Foreign Currency Translation
The functional currency of the Company’s major foreign subsidiaries is generally the local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as a separate component on the consolidated statements of comprehensive income. Foreign currency transaction gains and losses are included in Other income (expense) in the consolidated statements of operations for the period. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average exchange rate during the period. Equity transactions are translated using historical exchange rates.
Warranties and Indemnification
The Company’s enterprise cloud computing services are typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable and materially in accordance with the Company’s online help documentation under normal use and circumstances.
The Company’s arrangements generally include certain provisions for indemnifying customers against liabilities if its products or services infringe a third party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of such obligations and has not accrued any material liabilities related to such obligations in the accompanying consolidated financial statements.

14

Table of Contents

The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as the Company’s director or officer or that person’s services provided to any other company or enterprise at the Company’s request. The Company maintains director and officer insurance coverage that would generally enable the Company to recover a portion of any future amounts paid. The Company may also be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.
New Accounting Pronouncements Adopted in Fiscal 2018
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2017-01, "Business Combinations (Topic 805) Clarifying the Definition of a Business" ("ASU 2017-01") which amended the existing FASB Accounting Standards Codification. The standard provides additional guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 is effective for fiscal 2019 with early adoption permitted. The Company early adopted the standard in the first quarter of fiscal 2018 on a prospective basis. Since the Company has not acquired any material businesses since the start of the year, this standard has had no impact on the Company's financial statements.
In May 2017, the FASB issued Accounting Standards Update No. 2017-09, "Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting" ("ASU 2017-09") which amended the existing FASB Accounting Standards Codification. The standard provides clarity and reduces the cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. ASU 2017-09 is effective for fiscal 2019 with early adoption permitted. The Company early adopted the standard in the second quarter of fiscal 2018 on a prospective basis and does not expect it to have any impact on the Company's financial statements.
Pending Accounting Pronouncements
In May 2014, the 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, replaces existing revenue recognition guidance with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. The standard also provides guidance on the recognition of costs related to obtaining customer contracts. ASU 2014-09, as amended, will be effective for the beginning of fiscal 2019, including interim periods within that reporting period.
The Company currently anticipates adopting the standard using the full retrospective method to restate each prior reporting period presented. The Company's ability to adopt this standard using the full retrospective method is dependent upon system readiness for both revenue and commissions and the completion of the analysis of information necessary to restate prior period financial statements.
The Company is continuing to assess the impact of adopting ASU 2014-09 on its financial position, results of operations and related disclosures and has not yet determined whether the effect of the revenue portion will be material. Additionally, as the Company continues to assess the new standard along with industry trends and additional interpretive guidance, the Company may adjust its implementation plan accordingly.
The Company believes that the new standard will impact the following policies and disclosures:
removal of the current limitation on contingent revenue will result in revenue being recognized earlier for certain contracts;
allocation of subscription and support revenue across different clouds and to professional services revenue;
estimation of variable consideration for arrangements with overage fees;
required disclosures including information about the remaining transaction price and when the Company expects to recognize revenue; and
accounting for deferred commissions including costs that qualify for deferral and the amortization period.
The commission accounting under the new standard is significantly different than the Company's current commission capitalization policy. The new standard will result in additional types of costs being capitalized. Additionally, all amounts capitalized will be amortized over a period longer than the Company's current policy of amortizing the deferred amounts over the specific revenue contract terms. While the Company has not yet finalized its assessment of the impact the new commission accounting policy will have on its financial position and results of operations, the Company believes it will be material.
The Company does not expect the adoption of ASU 2014-09 to have any impact on its operating cash flows.

15

Table of Contents

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, "Financial Instrument-Overall (Subtopic 825-10)" ("ASU 2016-01"), which requires entities to measure equity instruments at fair value and recognize any changes in fair value in net income. The guidance provides for electing the measurement alternative or defaulting to the fair value option. The Company plans to elect the measurement alternative for equity investments that do not have readily determinable fair values. These investments will be measured at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer, which are recorded in net income. For those investments with readily determinable fair values, the Company will record the investments at fair value on a quarterly basis and record the change in net income. The new standard is effective for interim and annual periods beginning after December 15, 2017 and early adoption is permitted. The Company plans to adopt the new standard in its first quarter of fiscal 2019 and expects the adoption of ASU 2016-01 will impact its strategic investments portfolio. The Company is currently evaluating the impact to its consolidated financial statements and expects it could have a material impact, including additional volatility to other income (expense) within the Company's statements of operations, in future periods.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which requires lessees to record most leases on their balance sheets but recognize the expenses on their statements of operations in a manner similar to current accounting rules. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The new standard is effective for interim and annual periods beginning after December 15, 2018 on a modified retrospective basis and early adoption is permitted. The Company expects its leases designated as operating leases in Note 13, “Commitments,” will be reported on the consolidated balance sheets upon adoption. The Company is currently evaluating the impact to its consolidated financial statements as it relates to other aspects of the business. While the Company has not yet finalized its assessment, the Company currently plans to adopt the new standard in its first quarter of fiscal 2020.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory" ("ASU 2016-16"), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The new standard is effective for annual periods beginning after December 15, 2017, with early adoption permitted as of the beginning of a fiscal year. The Company plans to adopt the new standard in its first quarter of fiscal 2019 and does not expect it to have a material impact on its consolidated financial statements.
Reclassifications
Certain reclassifications to fiscal 2017 balances were made to conform to the current period presentation in the consolidated balance sheets and consolidated statement of operations. These reclassifications include cost of revenues professional services and other, cost of revenues subscription and support, deferred revenue and deferred revenue, noncurrent.
2. Investments
Marketable Securities
At July 31, 2017, 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
$
952,187

 
$
3,659

 
$
(593
)
 
$
955,253

U.S. treasury securities
114,816

 
128

 
(195
)
 
114,749

Mortgage backed obligations
107,789

 
141

 
(354
)
 
107,576

Asset backed securities
206,874

 
202

 
(108
)
 
206,968

Municipal securities
61,909

 
117

 
(137
)
 
61,889

Foreign government obligations
56,562

 
94

 
(25
)
 
56,631

U.S. agency obligations
2,995

 
5

 
0

 
3,000

Covered bonds
46,078

 
5

 
(14
)
 
46,069

Total marketable securities
$
1,549,210


$
4,351


$
(1,426
)

$
1,552,135


16

Table of Contents

At January 31, 2017, 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
$
321,284

 
$
887

 
$
(1,531
)
 
$
320,640

U.S. treasury securities
62,429

 
68

 
(674
)
 
61,823

Mortgage backed obligations
74,882

 
39

 
(669
)
 
74,252

Asset backed securities
101,913

 
74

 
(197
)
 
101,790

Municipal securities
33,523

 
35

 
(183
)
 
33,375

Foreign government obligations
10,491

 
3

 
(36
)
 
10,458

Total marketable securities
$
604,522


$
1,106


$
(3,290
)

$
602,338

The contractual maturities of the investments classified as marketable securities are as follows (in thousands):
 
As of
 
July 31,
2017
 
January 31,
2017
Due within 1 year
$
283,148

 
$
104,631

Due in 1 year through 5 years
1,261,051

 
494,127

Due in 5 years through 10 years
7,936

 
3,580

 
$
1,552,135

 
$
602,338

As of July 31, 2017, 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
$
197,097

 
$
(593
)
 
$
0

 
$
0

 
$
197,097

 
$
(593
)
U.S. treasury securities
75,471

 
(195
)
 
0

 
0

 
75,471

 
(195
)
Mortgage backed obligations
71,945

 
(324
)
 
2,520

 
(30
)
 
74,465

 
(354
)
Asset backed securities
88,623

 
(101
)
 
941

 
(7
)
 
89,564

 
(108
)
Municipal securities
33,555

 
(137
)
 
0

 
0

 
33,555

 
(137
)
Foreign government obligations
8,878

 
(25
)
 
0

 
0

 
8,878

 
(25
)
Covered bonds
24,467

 
(14
)
 
0

 
0

 
24,467

 
(14
)
 
$
500,036

 
$
(1,389
)
 
$
3,461

 
$
(37
)
 
$
503,497

 
$
(1,426
)
The unrealized losses for each of the fixed rate marketable securities were less than $62,000. 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, 2017, such as the Company's intent to hold and whether it is more likely than not that the Company will be required to sell the investment before recovery of the investment's amortized basis. The Company expects to receive the full principal and interest on all of these marketable securities.
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,
 
2017
 
2016
 
2017
 
2016
Interest income
$
8,748

 
$
6,546

 
$
14,395

 
$
14,319

Realized gains
353

 
6,507

 
512

 
7,561

Realized losses
(347
)
 
(1,137
)
 
(887
)
 
(1,842
)
Total investment income
$
8,754

 
$
11,916

 
$
14,020

 
$
20,038

Reclassification adjustments out of accumulated other comprehensive income into net income were immaterial for the three and six months ended July 31, 2017 and 2016.

17

Table of Contents

Strategic Investments
As of July 31, 2017, the Company had four investments in marketable equity securities with a fair value of $119.1 million, which included an unrealized gain of $64.7 million. As of January 31, 2017, the Company had six investments in marketable equity securities with a fair value of $41.0 million, which included an unrealized gain of $24.5 million. The change in the fair value of the investments in publicly held companies is recorded in the consolidated balance sheets within strategic investments and accumulated other comprehensive income.
As of July 31, 2017 and January 31, 2017, the carrying value of the Company’s non-marketable debt and equity securities was $538.5 million and $526.0 million, respectively. The estimated fair value of the non-marketable debt and equity securities was approximately $762.1 million and $758.3 million as of July 31, 2017 and January 31, 2017, respectively.
3. Derivatives
Details on outstanding foreign currency derivative contracts are presented below (in thousands):
 
As of
 
July 31, 2017
 
January 31, 2017
Notional amount of foreign currency derivative contracts
$
1,268,065

 
$
1,280,953

Fair value of foreign currency derivative contracts
$
(2,827
)
 
$
10,205

The fair value of the Company’s outstanding derivative instruments not designated as hedging instruments are summarized below (in thousands):
 
 
As of
  
Balance Sheet Location
July 31, 2017
 
January 31, 2017
Derivative Assets
 
 
 
 
Foreign currency derivative contracts
Prepaid expenses and other current assets
$
5,111

 
$
13,238

Derivative Liabilities
 
 
 
 
Foreign currency derivative contracts
Accounts payable, accrued expenses and other liabilities
$
7,938

 
$
3,033

Gains/losses on derivative instruments not designated as hedging instruments recorded in Other income (expense) in the consolidated statements of operations during the three and six months ended July 31, 2017 and 2016, respectively, are summarized below (in thousands):
  
Three Months Ended 
 July 31,
 
Six Months Ended 
 July 31,
 
2017
 
2016
 
2017
 
2016
Foreign currency derivative contracts
$
3,420

 
$
(33,836
)
 
$
10,279

 
$
(47,176
)
4. Fair Value Measurement
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.    Significant other inputs that are directly or indirectly observable in the marketplace.

Level 3.    Significant unobservable inputs which are supported by little or no market activity.
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.

18

Table of Contents

The following table presents information about the Company’s assets and liabilities that are measured at fair value as of July 31, 2017 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, 2017
Cash equivalents (1):
 
 
 
 
 
 
 
Time deposits
$
0

 
$
457,739

 
$
0

 
$
457,739

Money market mutual funds
773,617

 
0

 
0

 
773,617

Marketable securities:
 
 
 
 
 
 
 
Corporate notes and obligations
0

 
955,253

 
0

 
955,253

U.S. treasury securities
0

 
114,749

 
0

 
114,749

Mortgage backed obligations
0

 
107,576

 
0

 
107,576

Asset backed securities
0

 
206,968

 
0

 
206,968

Municipal securities
0

 
61,889

 
0

 
61,889

Foreign government obligations
0

 
56,631

 
0

 
56,631

U.S. agency obligations
0

 
3,000

 
0

 
3,000

Covered bonds
0

 
46,069

 
0

 
46,069

Foreign currency derivative contracts (2)
0

 
5,111

 
0

 
5,111

Total assets
$
773,617

 
$
2,014,985

 
$
0

 
$
2,788,602

Liabilities:
 
 
 
 
 
 
 
Foreign currency derivative contracts (3)
0

 
7,938

 
0

 
7,938

Total liabilities
$
0

 
$
7,938

 
$
0

 
$
7,938

___________ 
(1)Included in “cash and cash equivalents” in the accompanying consolidated balance sheet as of July 31, 2017, in addition to $717.8 million of cash.
(2)Included in “prepaid expenses and other current assets” in the accompanying consolidated balance sheet as of July 31, 2017.
(3)Included in “accounts payable, accrued expenses and other liabilities” in the accompanying consolidated balance sheet as of July 31, 2017.

19

Table of Contents

The following table presents information about the Company’s assets and liabilities that are measured at fair value as of January 31, 2017 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, 2017
Cash equivalents (1):
 
 
 
 
 
 
 
Time deposits
$
0

 
$
25,100

 
$
0

 
$
25,100

Money market mutual funds
956,479

 
0

 
0

 
956,479

Marketable securities:
 
 
 
 
 
 
 
Corporate notes and obligations
0

 
320,640

 
0

 
320,640

U.S. treasury securities
0

 
61,823

 
0

 
61,823

Mortgage backed obligations
0

 
74,252

 
0

 
74,252

Asset backed securities
0

 
101,790

 
0

 
101,790

Municipal securities
0

 
33,375

 
0

 
33,375

Foreign government obligations
0

 
10,458

 
0

 
10,458

Foreign currency derivative contracts (2)
0

 
13,238

 
0

 
13,238

Total assets
$
956,479

 
$
640,676

 
$
0

 
$
1,597,155

Liabilities:
 
 
 
 
 
 
 
Foreign currency derivative contracts (3)
0

 
3,033

 
0

 
3,033

Total liabilities
$
0

 
$
3,033

 
$
0

 
$
3,033

______________ 
(1)Included in “cash and cash equivalents” in the accompanying consolidated balance sheet as of January 31, 2017, in addition to $625.0 million of cash.
(2)Included in “prepaid expenses and other current assets” in the accompanying consolidated balance sheet as of January 31, 2017.
(3)Included in “accounts payable, accrued expenses and other liabilities” in the accompanying consolidated balance sheet as of January 31, 2017.
5. Property and Equipment
Property and Equipment
Property and equipment, net consisted of the following (in thousands):
 
As of
 
July 31, 2017
 
January 31, 2017
Land
$
183,888

 
$
183,888

Buildings and building improvements
623,411

 
621,377

Computers, equipment and software
1,555,572

 
1,440,986

Furniture and fixtures
125,858

 
112,564

Leasehold improvements
741,466

 
627,069

 
3,230,195

 
2,985,884

Less accumulated depreciation and amortization
(1,363,619
)
 
(1,198,350
)
 
$
1,866,576

 
$
1,787,534

Depreciation and amortization expense totaled $94.9 million and $80.1 million during the three months ended July 31, 2017 and 2016, respectively, and $183.0 million and $155.7 million during the six months ended July 31, 2017 and 2016, respectively.
Computers, equipment and software at July 31, 2017 and January 31, 2017 included a total of $729.6 million and $729.0 million acquired under capital lease agreements, respectively. Accumulated amortization relating to computers, equipment and software acquired under capital leases totaled $430.4 million and $386.9 million, respectively, at July 31, 2017 and January 31, 2017. Amortization of assets acquired under capital leases is included in depreciation and amortization expense.

20

Table of Contents

Building - 350 Mission
In December 2013, 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, which is the total office space available in the building. As a result of the Company’s involvement during the construction period, the Company is considered for accounting purposes to be the owner of 350 Mission. As a result, the Company has capitalized the construction costs as Building with a corresponding current and noncurrent financing obligation liability and has accounted for the underlying land implicitly as an operating lease. As of July 31, 2017, the Company had capitalized $178.8 million of construction costs, based on the construction costs incurred to date by the landlord, and recorded a corresponding current and noncurrent financing obligation liability of $19.8 million and $199.5 million, respectively. As of January 31, 2017, the Company had capitalized $178.8 million of construction costs, based on the construction costs incurred to date by the landlord, and recorded a corresponding current and noncurrent financing obligation liability of $19.6 million and $200.7 million, respectively. The total expected financing obligation in the form of minimum lease payments inclusive of the amounts currently recorded is $311.7 million, including interest (see Note 13 “Commitments” for future commitment details). The obligation will be settled through monthly lease payments to the landlord, which commenced in October 2015. To the extent that operating expenses for 350 Mission are material, the Company, as the deemed accounting owner, will record the operating expenses.
6. Business Combinations
In February 2017, the Company acquired Sequence, Inc. for an aggregate of $26.0 million in cash and equity, net of cash acquired, and has included the financial results of the company in its consolidated financial statements from the date of acquisition. The costs associated with this acquisition were not material. The Company accounted for this acquisition as a business combination. In allocating the purchase consideration based on estimated fair values, the Company recorded $2.7 million of intangible assets and $23.0 million of goodwill. The goodwill balance associated with this business combination is deductible for U.S. income tax purposes. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
The Company finalized its purchase accounting for several acquisitions in the three months ended July 31, 2017 resulting in adjustments to goodwill, intangible assets and other balance sheet accounts.
7. Intangible Assets Acquired Through Business Combinations and Goodwill
Intangible assets acquired through business combinations
Intangible assets acquired through business combinations are as follows (in thousands):
 
 
Intangible Assets, Gross
 
Accumulated Amortization
 
Intangible Assets, Net
 
Weighted
Average
Useful Life
 
 
Jan 31, 2017
 
Additions
 
July 31, 2017
 
Jan 31, 2017
 
Expense
 
July 31, 2017
 
Jan 31, 2017
 
July 31, 2017
 
Acquired developed technology
 
$
1,092,161

 
$
0

 
$
1,092,161

 
$
(577,929
)
 
$
(86,362
)
 
$
(664,291
)
 
$
514,232

 
$
427,870

 
3.2
Customer relationships
 
843,614

 
1,690

 
845,304

 
(254,035
)
 
(60,204
)
 
(314,239
)
 
589,579

 
531,065

 
4.9
Trade names and trademarks
 
45,950

 
0

 
45,950

 
(41,349
)
 
(1,020
)
 
(42,369
)
 
4,601

 
3,581

 
1.8
Territory rights and other
 
15,786

 
0

 
15,786

 
(12,256
)
 
(840
)
 
(13,096
)
 
3,530

 
2,690

 
8.5
50 Fremont lease intangibles
 
7,713

 
0

 
7,713

 
(6,281
)
 
(751
)
 
(7,032
)
 
1,432

 
681

 
2.9
Total
 
$
2,005,224

 
$
1,690

 
$
2,006,914

 
$
(891,850
)
 
$
(149,177
)
 
$
(1,041,027
)
 
$
1,113,374

 
$
965,887

 
4.1
Amortization of intangible assets and unfavorable lease liabilities, which are not reflected in the table above, resulting from business combinations for the three months ended July 31, 2017 and 2016 was $74.4 million and $49.3 million, respectively, and for the six months ended July 31, 2017 and 2016 was $149.0 million and $87.6 million, respectively.

21

Table of Contents

The expected future amortization expense for intangible assets as of July 31, 2017 is as follows (in thousands):
Fiscal Period:
 
 
Remaining six months of Fiscal 2018
 
$
139,173

Fiscal 2019
 
266,233

Fiscal 2020
 
225,039

Fiscal 2021
 
169,481

Fiscal 2022
 
111,353

Thereafter
 
54,608

Total amortization expense
 
$
965,887

Goodwill
Goodwill represents the excess of the purchase price in a business combination over the fair value of net assets acquired. Goodwill amounts are not amortized, but rather tested for impairment at least annually during the fourth quarter.
The changes in the carrying amounts of goodwill, which is generally not deductible for tax purposes, were as follows (in thousands):
Balance as of January 31, 2017
 
$
7,263,846

Sequence, Inc. acquisition
 
22,982

Adjustments of acquisition date fair values, including the effect of foreign currency translation
 
7,553

Balance as of July 31, 2017
 
$
7,294,381

8. Debt
Convertible Senior Notes
  
Par Value Outstanding
 
Equity
Component Recorded at Issuance
 
Liability Component of Par Value as of
(in thousands)
July 31,
2017
 
January 31,
2017
0.25% Convertible Senior Notes due April 1, 2018
$
1,150,000

 
$
122,421

(1)
$
1,130,729

 
$
1,116,360

___________ 
(1)This amount represents the equity component recorded at the initial issuance of the 0.25% convertible senior notes. As of July 31, 2017, $17.2 million was reclassified to temporary equity on the accompanying consolidated balance sheet as these notes are convertible for the three months ending October 31, 2017 based on the conversion criteria below.

In March 2013, the Company issued at par value $1.15 billion of 0.25% convertible senior notes (the “0.25% Senior Notes”, or “Notes”) due April 1, 2018, unless earlier purchased by the Company or converted and are therefore classified as current on the consolidated balance sheet as of July 31, 2017 as they are due within one year. 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

22

Table of Contents

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 (as described in the indenture).
Holders of the 0.25% Senior Notes have the right to require the Company to purchase with cash all or a portion of the Notes upon the occurrence of a fundamental change, such as a change of control, at a purchase price equal to 100% of the principal amount of the 0.25% Senior Notes plus accrued and unpaid interest. Following certain corporate transactions that constitute a change of control, the Company will increase the conversion rate for a holder who elects to convert the 0.25% Senior Notes in connection with such change of control.
In accounting for the issuances of the 0.25% Senior Notes, the Company separated the 0.25% Senior Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 0.25% Senior Notes as a whole. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the 0.25% Senior Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In any period when holders of the 0.25% Senior Notes are eligible to exercise their conversion option, the equity component related to convertible debt instruments is required to be reclassified from permanent equity to temporary equity. Therefore, if in any future period the holders of the 0.25% Senior Notes are able to exercise their conversion rights, then the difference between (1) the amount of cash deliverable upon conversion (i.e., par value of debt) and (2) the carrying value of the debt component will be reclassified from permanent equity to temporary equity, and will continue to be reported as temporary equity for any period in which the debt remains currently convertible.
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 stockholders’ equity.
The 0.25% Senior Notes consisted of the following (in thousands):
 
As of
 
July 31,
2017
 
January 31,
2017
Liability component:
 
 
 
Principal (1)
$
1,150,000

 
$
1,150,000

Less: debt discount, net (2)
(17,223
)
 
(29,954
)
Less: debt issuance cost
(2,048
)
 
(3,686
)
Net carrying amount
$
1,130,729

 
$
1,116,360

(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 consolidated balance sheets within Convertible 0.25% Senior Notes (which is classified as a current liability as of July 31, 2017 and a noncurrent liability as of January 31, 2017) and is amortized over the life of the 0.25% Senior Notes using the effective interest rate method.

23

Table of Contents

The total estimated fair value of the Company's 0.25% Senior Notes at July 31, 2017 was $1.6 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 2018.
Based on the closing price of the Company’s common stock of $90.80 on July 31, 2017, the if-converted value of the 0.25% Senior Notes exceeded their principal amount by approximately $421.6 million.
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 (“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.
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 (“0.25% Warrants”), whereby the Company sold warrants to acquire, subject to anti-dilution adjustments, shares of the Company’s common stock. If the 0.25% Warrants are not exercised on their exercise dates, which are in fiscal 2019, they will expire. If the market value per share of the Company's common stock exceeds the applicable exercise price of the 0.25% Warrants, the 0.25% Warrants will have a dilutive effect on the Company's earnings per share if the Company has achieved profitability at that time. 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.
Term Loan
In July 2016, the Company entered into a credit agreement (“Term Loan Credit Agreement”) with Bank of America, N.A. and certain other institutional lenders for a $500.0 million term loan facility (“Term Loan”) that matures on July 11, 2019. The Term Loan will bear interest, at the Company’s option, at either a base rate plus a spread of 0.00% to 0.75% or an adjusted LIBOR rate plus a spread of 1.00% to 1.75%, in each case with such spread being determined based on the Company’s consolidated leverage ratio for the preceding four fiscal quarter period.
In July 2016, the Company borrowed the full $500.0 million under the Term Loan. All of the net proceeds of the Term Loan were for the purpose of partially funding the acquisition of Demandware.
Interest on the Term Loan is due and payable in arrears quarterly for loans bearing interest at a rate based on the base rate and at the end of an interest period in the case of loans bearing interest at the adjusted LIBOR rate.
All outstanding amounts under the Term Loan Credit Agreement will be due and payable on July 11, 2019. The Company may prepay the Term Loan, in whole or in part, at any time without premium or penalty, subject to certain conditions, and amounts repaid or prepaid may not be reborrowed. The Company’s obligations under the Term Loan Credit Agreement are required to be guaranteed by certain of its subsidiaries meeting certain thresholds set forth in the Term Loan Credit Agreement.
The Term Loan Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends or make distributions and repurchase stock. The Company is also required to maintain compliance with a consolidated leverage

24

Table of Contents

ratio and a consolidated interest coverage ratio. The Term Loan Credit Agreement includes customary events of default. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Term Loan Credit Agreement at a per annum rate equal to 2.00% above the applicable interest rate for any overdue principal and 2.00% above the rate applicable for base rate loans for any other overdue amounts. The occurrence of an event of default could result in the acceleration of obligations under the Term Loan Credit Agreement. The Company was in compliance with the Term Loan Credit Agreement’s covenants as of July 31, 2017.
The weighted average interest rate on the Term Loan was 2.1% for the three months ended July 31, 2017. Accrued interest on the Term Loan was $0.4 million as of July 31, 2017. As of July 31, 2017, the noncurrent outstanding principal portion was $500.0 million.
Revolving Credit Facility
In July 2016, the Company entered into an Amended and Restated Credit Agreement (“Revolving Loan Credit Agreement”) with Wells Fargo Bank, National Association, and certain other institutional lenders that provides for $1.0 billion unsecured revolving credit facility (“Credit Facility”) that matures in July 2021. The Revolving Loan Credit Agreement amended and restated the Company’s existing revolving credit facility dated October 2014. The Company may use the proceeds of future borrowings under the Credit Facility for refinancing other indebtedness, working capital, capital expenditures and other general corporate purposes, including permitted acquisitions.
The borrowings under the Credit Facility bear interest, at the Company’s option, at a base rate plus a spread of 0.00% to 0.75% or an adjusted LIBOR rate plus a spread of 1.00% to 1.75%, in each case with such spread being determined based on the Company’s consolidated leverage ratio for the preceding four fiscal quarter period. Interest is due and payable in arrears quarterly for loans bearing interest at a rate based on the base rate and at the end of an interest period in the case of loans bearing interest at the adjusted LIBOR rate. Regardless of what amounts, if any, are outstanding under the Credit Facility, the Company is also obligated to pay an ongoing commitment fee on undrawn amounts at a rate of 0.125% to 0.25%, with such rate being based on the Company’s consolidated leverage ratio for the preceding four fiscal quarter period, payable in arrears quarterly.
The Revolving Loan Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends or make distributions and repurchase stock. The Company is also required to maintain compliance with a consolidated leverage ratio and a consolidated interest coverage ratio. The Revolving Loan Credit Agreement includes customary events of default. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Revolving Loan Credit Agreement at a per annum rate equal to 2.00% above the applicable interest rate for any overdue principal and 2.00% above the rate applicable for base rate loans for any other overdue amounts. The occurrence of an event of default could result in the acceleration of obligations under the Revolving Loan Credit Agreement. The Company was in compliance with the Revolving Loan Credit Agreement’s covenants as of July 31, 2017.
In February 2017, the Company paid down the remaining $200.0 million of outstanding borrowings under the Credit Facility. There were no outstanding borrowings under the Credit Facility as of July 31, 2017. The Company continues to pay a commitment fee on the available amount of the Credit Facility.
Loan Assumed on 50 Fremont
The Company assumed a $200.0 million loan with the acquisition of 50 Fremont (“Loan”). The Loan bears an interest rate of 3.75% per annum and is due in June 2023. For the remainder of fiscal 2018, the Loan requires interest only payments. Beginning in fiscal 2019, principal and interest payments are required, with the remaining principal due at maturity. For the three months ended July 31, 2017 and 2016, total interest expense recognized was $1.9 million and $1.9 million, respectively. For the six months ended July 31, 2017 and 2016, total interest expense recognized was $3.8 million and $3.8 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, 2017.

25

Table of Contents

Interest Expense on Convertible Senior Notes, Term Loan, Revolving Credit Facility and Loan Assumed on 50 Fremont
The following table sets forth total interest expense recognized related to the 0.25% Senior Notes, the Term Loan, the Credit Facility and the Loan prior to capitalization of interest (in thousands):
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Contractual interest expense
$
5,596

 
$
3,377

 
$
11,278

 
$
6,191

Amortization of debt issuance costs
1,332

 
1,701

 
2,664

 
2,729

Amortization of debt discount
6,423

 
6,264

 
12,806

 
12,490

 
$
13,351

 
$
11,342

 
$
26,748

 
$
21,410

9. 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,
2017
 
January 31,
2017
Prepaid income taxes
$
75,031

 
$
26,932

Other taxes receivable
36,634

 
34,177

Prepaid expenses and other current assets
326,581

 
218,418

 
$
438,246

 
$
279,527

Capitalized Software, net
Capitalized software, net at July 31, 2017 and January 31, 2017 was $140.7 million and $141.7 million, respectively. Accumulated amortization relating to capitalized software, net totaled $287.9 million and $250.9 million, respectively, at July 31, 2017 and January 31, 2017.
Capitalized internal-use software amortization expense totaled $19.0 million and $15.9 million for the three months ended July 31, 2017 and 2016, respectively and $37.0 million and $30.9 million for the six months ended July 31, 2017 and 2016, respectively.
The Company capitalized $2.0 million and $1.6 million of stock-based expenses related to capitalized internal-use software development during the three months ended July 31, 2017 and 2016, respectively, and $3.9 million and $3.4 million for the six months ended July 31, 2017 and 2016, respectively.
Other Assets, net
Other assets consisted of the following (in thousands):
 
As of
 
July 31,
2017
 
January 31,
2017
Deferred income taxes, noncurrent, net
$
29,926

 
$
28,939

Long-term deposits
24,305

 
23,597

Domain names and patents, net
30,662

 
39,213

Customer contract asset (1)
229,597

 
281,733

Other
143,506

 
113,387

 
$
457,996

 
$
486,869

(1) Customer contract asset reflects the fair value of future billings of amounts that are contractually committed by acquired companies' existing customers as of the acquisition date.
Domain names and patents amortization expense was $4.3 million and $4.6 million for the three months ended July 31, 2017 and 2016, respectively, and $8.7 million and $7.8 million for the six months ended July 31, 2017 and 2016, respectively.

26

Table of Contents

Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable, accrued expenses and other liabilities consisted of the following (in thousands):
 
As of
 
July 31,
2017
 
January 31,
2017
Accounts payable
$
148,279

 
$
115,257

Accrued compensation
517,433

 
730,390

Non-cash equity liability (1)
55,394

 
68,355

Accrued other liabilities
452,398

 
419,299

Accrued income and other taxes payable
196,670

 
239,699

Accrued professional costs
46,579

 
38,254

Accrued rent
21,384

 
19,710

Capital lease obligation, current
118,888

 
102,106

Financing obligation - leased facility, current
19,797

 
19,594

 
$
1,576,822

 
$
1,752,664

(1) Non-cash equity liability represents the purchase price of shares issued to non-executive employees, for those shares exceeding previously registered ESPP shares at the time of sale to the extent the shares had not been subsequently sold by the employee purchaser. The Company expects this liability will be relieved within a year or earlier as the shares are subsequently sold.
Other Noncurrent Liabilities
Other noncurrent liabilities consisted of the following (in thousands):
 
As of
 
July 31,
2017
 
January 31,
2017
Deferred income taxes and income taxes payable
$
111,404

 
$
99,378

Financing obligation - leased facility
199,539

 
200,711

Long-term lease liabilities and other
416,939

 
480,850

 
$
727,882

 
$
780,939

10. Stockholders’ Equity
The Company maintains the following stock plans: the ESPP, the 2013 Equity Incentive Plan and the 2014 Inducement Equity Incentive Plan (“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.
As of July 31, 2017, $52.8 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 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.
The fair value of each stock option grant and ESPP share 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
2017
 
2016
 
2017
 
2016
Volatility
30.8

%
 
32.3

%
 
30.8 - 31.4

%
 
32.1 - 32.3

%
Estimated life
3.5 years

 
 
3.5 years

 
 
3.5 years

 
 
3.5 years

 
Risk-free interest rate
1.6

%
 
0.9 - 1.1

%
 
1.4 - 1.6

%
 
0.9 - 1.1

%
Weighted-average fair value per share of grants
$
22.20

 
 
$
20.22

 
 
$
21.08

 
 
$
18.76

 

27

Table of Contents

 
Three Months Ended 
 July 31,
ESPP
2017
 
2016
Volatility
26.8 - 27.6

%
 
34.0

%
Estimated life
0.75 years

 
 
0.75 years

 
Risk-free interest rate
1.1 - 1.2

%
 
0.5 - 0.6

%
Weighted-average fair value per share of grants
$
21.13

 
 
$
21.93

 
The Company estimated its future stock price volatility considering both its observed option-implied volatilities and its historical volatility calculations. Management believes this is the best estimate of the expected volatility over the expected life of its stock options and stock purchase rights.
The estimated life for the stock options was based on an analysis of historical exercise activity. The risk-free interest rate is based on the rate for a U.S. government security with the same estimated life at the time of the option grant and the stock purchase rights.
ESPP assumptions and the related fair value per share table will only be disclosed in the three month period in which there is ESPP activity, such as an ESPP purchase. The Company's ESPP allows for two purchases during the year, one during the second quarter and one during the fourth quarter. The estimated life of the ESPP will be based on the two purchase periods within each offering period.
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.
During fiscal 2016, the Company granted a performance-based restricted stock unit award to the Chairman of the Board and Chief Executive Officer and during fiscal 2017, the Company granted performance-based restricted stock unit awards to certain executive officers, including the Chairman of the Board and Chief Executive Officer. The performance-based restricted stock unit awards are subject to vesting based on a performance-based condition and a service-based condition. At the end of the three-year service period, based on the Company's share price performance, these performance-based restricted stock units will vest in a percentage of the target number of shares between 0 and 200%, depending on the extent the performance condition is achieved.
Stock activity excluding the ESPP is as follows:
 
 
 
Options Outstanding
 
Shares
Available for
Grant
 
Outstanding
Stock
Options
 
Weighted-
Average
Exercise Price
 
Aggregate
Intrinsic Value (in thousands)
Balance as of January 31, 2017
16,531,822

 
30,353,076

 
$
59.88

 
 
Increase in shares authorized:
 
 
 
 
 
 
 
2013 Equity Incentive Plan
37,009,109

 
0

 
0.00

 
 
2014 Inducement Plan
15,233

 
0

 
0.00

 
 
Options granted under all plans
(624,256
)
 
624,256

 
84.36

 
 
Restricted stock activity
(1,783,395
)
 
0

 
0.00

 
 
Stock grants to board and advisory board members
(114,550
)
 
0

 
0.00

 
 
Exercised
0

 
(5,241,224
)
 
41.31

 
 
Plan shares expired
(32,469
)
 
0

 
0.00

 
 
Canceled
686,925

 
(686,925
)
 
71.54

 
 
Balance as of July 31, 2017
51,688,419

 
25,049,183

 
$
64.06

 
$
669,906

Vested or expected to vest
 
 
23,264,036

 
$
63.45

 
$
636,380

Exercisable as of July 31, 2017
 
 
10,102,024

 
$
56.48

 
$
346,679

The total intrinsic value of the options exercised during the six months ended July 31, 2017 and 2016 was $234.6 million and $124.8 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 5 years.

28

Table of Contents

As of July 31, 2017, options to purchase 10,102,024 shares were vested at a weighted average exercise price of $56.48 per share and had a remaining weighted-average contractual life of approximately 4.3 years. The total intrinsic value of these vested options as of July 31, 2017 was $346.7 million.
During the six months ended July 31, 2017, the Company recognized stock-based expense related to its equity plans for employees and non-employee directors of $508.1 million. As of July 31, 2017, the aggregate stock compensation remaining to be amortized to costs and expenses was approximately $2.2 billion. The Company will amortize this stock compensation balance as follows: $487.8 million during the remaining six months of fiscal 2018; $770.7 million during fiscal 2019; $561.3 million during fiscal 2020; $283.8 million during fiscal 2021; $27.1 million during fiscal 2022 and $25.2 million thereafter. The expected amortization reflects only outstanding stock awards as of July 31, 2017 and assumes no forfeiture activity.
The aggregate stock compensation remaining to be amortized to costs and expenses will be recognized over a weighted average period of 1.9 years.
The following table summarizes information about stock options outstanding as of July 31, 2017:
 
 
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 $52.30
 
5,359,081

 
4.5
 
$
35.63

 
4,089,957

 
$
40.90

$53.60 to $58.86
 
795,195

 
4.0
 
55.57

 
457,494

 
55.62

$59.34
 
5,102,948

 
4.3
 
59.34

 
3,109,676

 
59.34

$59.37 to $75.01
 
1,691,499

 
5.4
 
69.42

 
389,487

 
69.47

$75.57
 
5,834,266