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 October 31, 2010
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
(Registrants 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer ¨ | |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of October 31, 2010, there were approximately 131.4 million shares of the Registrants Common Stock outstanding.
salesforce.com, inc.
Page No. | ||||
PART I. FINANCIAL INFORMATION | ||||
Item 1. |
||||
Condensed Consolidated Balance Sheets as of October 31, 2010 and January 31, 2010 |
3 | |||
4 | ||||
5 | ||||
6 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
30 | ||
Item 3. |
49 | |||
Item 4. |
50 | |||
PART II. OTHER INFORMATION | ||||
Item 1. |
51 | |||
Item 1A. |
51 | |||
Item 2. |
68 | |||
Item 3. |
68 | |||
Item 4. |
68 | |||
Item 5. |
68 | |||
Item 6. |
68 | |||
69 |
2
ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
Condensed Consolidated Balance Sheets
(in thousands)
October 31, 2010 |
January 31, 2010 |
|||||||
(unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 630,303 | $ | 1,011,306 | ||||
Short-term marketable securities |
139,545 | 230,659 | ||||||
Accounts receivable, net |
258,764 | 320,956 | ||||||
Deferred commissions |
50,361 | 47,388 | ||||||
Deferred income taxes |
49,620 | 40,116 | ||||||
Prepaid expenses and other current assets |
64,343 | 55,734 | ||||||
Total current assets |
1,192,936 | 1,706,159 | ||||||
Marketable securities, noncurrent |
1,032,592 | 485,083 | ||||||
Fixed assets, net |
116,078 | 89,711 | ||||||
Deferred commissions, noncurrent |
32,856 | 28,140 | ||||||
Deferred income taxes, noncurrent |
30,501 | 27,579 | ||||||
Capitalized software, net |
79,499 | 34,809 | ||||||
Goodwill |
187,038 | 48,955 | ||||||
Other assets, net |
69,194 | 39,765 | ||||||
Total assets |
$ | 2,740,694 | $ | 2,460,201 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 23,320 | $ | 14,791 | ||||
Accrued expenses and other current liabilities |
287,627 | 194,738 | ||||||
Income taxes payable |
9,644 | 8,424 | ||||||
Deferred revenue |
672,454 | 690,177 | ||||||
Total current liabilities |
993,045 | 908,130 | ||||||
0.75% Convertible senior notes due 2015, net |
466,847 | 450,198 | ||||||
Income taxes payable, noncurrent |
18,284 | 17,551 | ||||||
Long-term lease liabilities and other |
27,949 | 13,485 | ||||||
Deferred revenue, noncurrent |
22,103 | 14,171 | ||||||
Total liabilities |
1,528,228 | 1,403,535 | ||||||
salesforce.com stockholders equity: |
||||||||
Common stock |
131 | 127 | ||||||
Additional paid-in capital |
1,041,005 | 938,544 | ||||||
Accumulated other comprehensive gain (loss) |
9,030 | (1,430 | ) | |||||
Retained earnings |
160,122 | 106,561 | ||||||
Total stockholders equity controlling interest |
1,210,288 | 1,043,802 | ||||||
Total stockholders equity noncontrolling interest |
2,178 | 12,864 | ||||||
Total stockholders equity |
1,212,466 | 1,056,666 | ||||||
Total liabilities and stockholders equity |
$ | 2,740,694 | $ | 2,460,201 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
3
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three months ended October 31, |
Nine months ended October 31, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Subscription and support |
$ | 402,948 | $ | 306,870 | $ | 1,122,611 | $ | 882,078 | ||||||||
Professional services and other |
26,139 | 23,679 | 77,661 | 69,456 | ||||||||||||
Total revenues |
429,087 | 330,549 | 1,200,272 | 951,534 | ||||||||||||
Cost of revenues (1): |
||||||||||||||||
Subscription and support |
54,089 | 40,745 | 147,127 | 116,744 | ||||||||||||
Professional services and other |
28,042 | 24,825 | 84,375 | 73,122 | ||||||||||||
Total cost of revenues |
82,131 | 65,570 | 231,502 | 189,866 | ||||||||||||
Gross profit |
346,956 | 264,979 | 968,770 | 761,668 | ||||||||||||
Operating expenses (1): |
||||||||||||||||
Research and development |
47,305 | 32,763 | 130,357 | 95,450 | ||||||||||||
Marketing and sales |
200,544 | 152,166 | 558,812 | 436,647 | ||||||||||||
General and administrative |
63,951 | 49,909 | 181,713 | 139,818 | ||||||||||||
Total operating expenses |
311,800 | 234,838 | 870,882 | 671,915 | ||||||||||||
Income from operations |
35,156 | 30,141 | 97,888 | 89,753 | ||||||||||||
Investment income |
11,699 | 7,503 | 28,309 | 19,780 | ||||||||||||
Interest expense |
(7,374 | ) | (292 | ) | (21,619 | ) | (793 | ) | ||||||||
Other expense |
(921 | ) | (336 | ) | (4,659 | ) | (1,037 | ) | ||||||||
Income before provision for income taxes and noncontrolling interest |
38,560 | 37,016 | 99,919 | 107,703 | ||||||||||||
Provision for income taxes |
(16,192 | ) | (15,573 | ) | (41,092 | ) | (45,426 | ) | ||||||||
Consolidated net income |
22,368 | 21,443 | 58,827 | 62,277 | ||||||||||||
Less: Net income attributable to noncontrolling interest |
(1,296 | ) | (752 | ) | (5,266 | ) | (1,952 | ) | ||||||||
Net income attributable to salesforce.com |
$ | 21,072 | $ | 20,691 | $ | 53,561 | $ | 60,325 | ||||||||
Earnings per sharebasic and diluted: |
||||||||||||||||
Basic net income per share attributable to salesforce.com common shareholders |
$ | 0.16 | $ | 0.17 | $ | 0.41 | $ | 0.49 | ||||||||
Diluted net income per share attributable to salesforce.com common shareholders |
$ | 0.15 | $ | 0.16 | $ | 0.40 | $ | 0.48 | ||||||||
Shares used in computing basic net income per share |
130,888 | 124,561 | 129,461 | 123,871 | ||||||||||||
Shares used in computing diluted net income per share |
137,044 | 128,596 | 135,007 | 126,993 | ||||||||||||
(1) Amounts include stock-based expenses, as follows: |
||||||||||||||||
Cost of revenues |
$ | 2,357 | $ | 2,995 | $ | 8,617 | $ | 9,322 | ||||||||
Research and development |
3,976 | 2,707 | 12,119 | 8,741 | ||||||||||||
Marketing and sales |
11,969 | 9,055 | 36,496 | 28,314 | ||||||||||||
General and administrative |
7,330 | 5,650 | 21,483 | 16,570 |
See accompanying Notes to Condensed Consolidated Financial Statements.
4
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended October 31, |
Nine Months Ended October 31, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Operating activities: |
||||||||||||||||
Consolidated net income |
$ | 22,368 | $ | 21,443 | $ | 58,827 | $ | 62,277 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||||||
Depreciation and amortization |
19,710 | 13,601 | 52,008 | 37,890 | ||||||||||||
Amortization of debt discount and transaction costs |
6,655 | | 17,639 | | ||||||||||||
Amortization of deferred commissions |
19,959 | 15,698 | 57,554 | 45,959 | ||||||||||||
Expenses related to stock-based awards |
25,632 | 20,407 | 78,715 | 62,947 | ||||||||||||
Excess tax benefits from employee stock plans |
(14,578 | ) | (7,401 | ) | (46,768 | ) | (32,536 | ) | ||||||||
Changes in assets and liabilities: |
||||||||||||||||
Accounts receivable, net |
(30,212 | ) | (22,515 | ) | 67,326 | 75,355 | ||||||||||
Deferred commissions |
(25,687 | ) | (18,013 | ) | (65,243 | ) | (43,018 | ) | ||||||||
Prepaid expenses and other current assets |
(16,583 | ) | (12,892 | ) | (6,463 | ) | (14,711 | ) | ||||||||
Other assets |
(5,263 | ) | (506 | ) | (9,405 | ) | (624 | ) | ||||||||
Accounts payable |
2,575 | 2,228 | 6,500 | (762 | ) | |||||||||||
Accrued expenses and other current liabilities |
57,926 | 27,045 | 95,320 | 35,165 | ||||||||||||
Deferred revenue |
11,538 | (3,575 | ) | (12,691 | ) | (48,591 | ) | |||||||||
Net cash provided by operating activities |
74,040 | 35,520 | 293,319 | 179,351 | ||||||||||||
Investing activities: |
||||||||||||||||
Business combinations, net of cash acquired |
(3,834 | ) | (4,500 | ) | (155,337 | ) | (4,500 | ) | ||||||||
Land activity |
(8,000 | ) | | (8,000 | ) | | ||||||||||
Investments in privately-held companies |
(4,000 | ) | (3,700 | ) | (6,500 | ) | (4,400 | ) | ||||||||
Purchases of marketable securities |
(296,557 | ) | (218,056 | ) | (1,518,996 | ) | (980,519 | ) | ||||||||
Sales of marketable securities |
518,641 | 121,413 | 868,595 | 438,679 | ||||||||||||
Maturities of marketable securities |
58,256 | 55,400 | 200,768 | 119,566 | ||||||||||||
Capital expenditures |
(20,790 | ) | (10,389 | ) | (60,311 | ) | (42,445 | ) | ||||||||
Net cash provided by (used in) investing activities |
243,716 | (59,832 | ) | (679,781 | ) | (473,619 | ) | |||||||||
Financing activities: |
||||||||||||||||
Purchase of subsidiary stock |
(150,970 | ) | | (152,243 | ) | | ||||||||||
Proceeds from the exercise of stock options |
44,353 | 18,559 | 115,996 | 32,866 | ||||||||||||
Excess tax benefits from employee stock plans |
14,578 | 7,401 | 46,768 | 32,536 | ||||||||||||
Principal payments on capital lease obligations |
(3,116 | ) | (2,398 | ) | (7,157 | ) | (5,904 | ) | ||||||||
Net cash provided by (used in) financing activities |
(95,155 | ) | 23,562 | 3,364 | 59,498 | |||||||||||
Effect of exchange rate changes |
(2,223 | ) | (2,531 | ) | 2,095 | (6,176 | ) | |||||||||
Net increase (decrease) in cash and cash equivalents |
220,378 | (3,281 | ) | (381,003 | ) | (240,946 | ) | |||||||||
Cash and cash equivalents, beginning of period |
409,925 | 246,169 | 1,011,306 | 483,834 | ||||||||||||
Cash and cash equivalents, end of period |
$ | 630,303 | $ | 242,888 | $ | 630,303 | $ | 242,888 | ||||||||
Supplemental cash flow disclosure: |
||||||||||||||||
Cash paid (received) during the period for: |
||||||||||||||||
Interest |
$ | 1,378 | $ | 292 | $ | 3,980 | $ | 793 | ||||||||
Income taxes, net of tax refunds |
$ | 4,260 | $ | 6,446 | $ | (530 | ) | $ | 27,520 | |||||||
Non-cash financing and investing activities |
||||||||||||||||
Fixed assets acquired under capital leases |
$ | 6,765 | $ | 3,105 | $ | 12,929 | $ | 17,897 |
See accompanying Notes to Condensed Consolidated Financial Statements.
5
Notes to Condensed Consolidated Financial Statements
1. Summary of Business and Significant Accounting Policies
Description of Business
Salesforce.com, inc. (the Company) is a leading provider of enterprise cloud computing applications. The Company provides a comprehensive customer and collaboration relationship management (CRM) service to businesses of all sizes and industries worldwide and provides a technology platform for customers and developers to build and run applications. The Company offers its services on a subscription basis.
Fiscal Year
The Companys fiscal year ends on January 31. References to fiscal 2011, for example, refer to the fiscal year ending January 31, 2011.
Basis of Presentation
The accompanying condensed consolidated balance sheet as of October 31, 2010 and the condensed consolidated statements of operations and the condensed consolidated statements of cash flows for the three and nine months ended October 31, 2010 and 2009, respectively, are unaudited. The condensed consolidated balance sheet data as of January 31, 2010 was derived from the audited consolidated financial statements which are included in the Companys Form 10-K for the fiscal year ended January 31, 2010, which was filed with the Securities and Exchange Commission (the SEC) on March 11, 2010. The accompanying statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Companys fiscal 2010 Form 10-K.
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. 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 Companys management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements in the Form 10-K, and include all adjustments necessary for the fair presentation of the Companys statement of financial position as of October 31, 2010, and its results of operations and its cash flows for the three and nine months ended October 31, 2010 and 2009. All adjustments are of a normal recurring nature. The results for the three and nine months ended October 31, 2010 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending January 31, 2011.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in the Companys consolidated financial statements and notes thereto.
Significant estimates and assumptions made by management include the determination of the provision for income taxes, whether an other-than-temporary decline has occurred in the fair value of certain investments in marketable securities and investments in privately-held companies, the fair value of stock awards issued and the allocation of the preliminary purchase consideration for the acquisition of businesses. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
6
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
Additionally, the Company holds a controlling interest in Kabushiki Kaisha salesforce.com (Salesforce Japan). During the three months ended October 31, 2010, the Company increased its ownership interest in Salesforce Japan from 73 percent to 96 percent (see Note 5).
Given the Companys controlling interest in Salesforce Japan, the accounts of Salesforce Japan have been consolidated with the accounts of the Company, and a noncontrolling interest has been recorded for the noncontrolling investors interests in the net assets and operations of Salesforce Japan to the extent of noncontrolling investors individual investments.
Segments
The Company operates in one segment.
Foreign Currency Translation
The functional currency of the Companys major foreign subsidiaries is generally the local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as part of a separate component of stockholders equity. Foreign currency transaction gains and losses are included in net income. 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.
Concentrations of Credit Risk and Significant Customers
The Companys financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and trade accounts receivable. Although the Company deposits its cash with multiple financial institutions, its deposits, at times, may exceed federally insured limits. Collateral is not required for accounts receivable. The Company maintains an allowance for doubtful accounts receivable balances. The allowance is based upon historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with delinquent accounts.
No customer accounted for more than 5 percent of accounts receivable at October 31, 2010 and January 31, 2010. No single customer accounted for 5 percent or more of total revenue in the three and nine months ended October 31, 2010 and 2009, respectively.
As of October 31, 2010 and January 31, 2010, assets located outside the Americas were 15 percent and 12 percent of total assets, respectively.
Revenues by geographical region are as follows (in thousands):
Three months ended October 31, |
Nine months ended October 31, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Americas |
$ | 292,540 | $ | 232,802 | $ | 826,493 | $ | 679,460 | ||||||||
Europe |
76,464 | 60,761 | 208,851 | 168,355 | ||||||||||||
Asia Pacific |
60,083 | 36,986 | 164,928 | 103,719 | ||||||||||||
$ | 429,087 | $ | 330,549 | $ | 1,200,272 | $ | 951,534 | |||||||||
7
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at fair value.
Marketable Securities
Management determines the appropriate classification of investments in marketable securities at the time of purchase and reevaluates such determination at each balance sheet date. Securities are classified as available for sale and are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders equity. Fair value is determined based on quoted market rates when observable or utilizing data points that are observable, such as quoted prices, interest rates and yield curves. Declines in fair value judged to be other-than-temporary on securities available for sale are included as a component of investment income. 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. In order to determine whether a decline in value is other-than-temporary, we evaluate, among other factors: the duration and extent to which the fair value has been less than the carrying value, our financial condition and business outlook, including key operational and cash flow metrics, current market conditions and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair market value.
Fair Value Measurement
The Company reports its financial and non-financial assets and liabilities that are re-measured and reported at fair value at each reporting period. The Company measures its cash equivalents, marketable securities, foreign currency derivative contracts and contingent considerations related to acquisitions at fair value. All of the Companys cash equivalents, marketable securities and foreign currency derivative contracts are classified within Level 1 or Level 2, which are described below. This is because the Companys cash equivalents and marketable securities are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.
The Company established a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1. |
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
Level 2. |
Include other inputs that are directly or indirectly observable in the marketplace. | |
Level 3. |
Unobservable inputs which are supported by little or no market activity. |
8
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
The following table presents information about the Companys assets and liabilities that are measured at fair value as of October 31, 2010 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) |
Balance as
of October 31, 2010 |
||||||||||||
Cash equivalents (1): |
||||||||||||||||
Time deposits |
$ | 26,068 | $ | | $ | | $ | 26,068 | ||||||||
Money market mutual funds |
91,636 | | | 91,636 | ||||||||||||
Marketable securities: |
||||||||||||||||
Corporate notes and obligations |
| 812,443 | | 812,443 | ||||||||||||
Government obligations |
3,277 | | | 3,277 | ||||||||||||
U.S. treasury securities |
25,622 | | | 25,622 | ||||||||||||
U.S. agency obligations |
| 122,210 | | 122,210 | ||||||||||||
Mortgage backed securities |
| 60,006 | | 60,006 | ||||||||||||
Collateralized mortgage obligations |
| 126,640 | | 126,640 | ||||||||||||
Municipal securities |
| 19,629 | | 19,629 | ||||||||||||
Marketable equity securities |
2,310 | | | 2,310 | ||||||||||||
Foreign currency derivative contracts (2) |
| 575 | | 575 | ||||||||||||
Total Assets |
$ | 148,913 | $ | 1,141,503 | $ | | $ | 1,290,416 | ||||||||
Liabilities |
||||||||||||||||
Foreign currency derivative contracts (3) |
$ | | $ | 627 | $ | | $ | 627 | ||||||||
Contingent considerations (related to acquisitions) (3) |
| | 16,820 | 16,820 | ||||||||||||
Total Liabilites |
$ | | $ | 627 | $ | 16,820 | $ | 17,447 | ||||||||
(1) | Included in cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheet as of October 31, 2010, in addition to $512.6 million of cash. |
(2) | Included in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheet as of October 31, 2010. |
(3) | Included in accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheet as of October 31, 2010. |
9
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
The following table presents information about the Companys assets and liabilities that are measured at fair value on a recurring basis as of January 31, 2010 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) |
Balance as
of January 31, 2010 |
||||||||||||
Cash equivalents (1): |
||||||||||||||||
Time deposits |
$ | 11,410 | $ | | $ | | $ | 11,410 | ||||||||
Money market mutual funds |
123,868 | | | 123,868 | ||||||||||||
U.S. treasury securities |
399,140 | | | 399,140 | ||||||||||||
U.S. agency obligations |
| 364,197 | | 364,197 | ||||||||||||
Marketable securities: |
||||||||||||||||
Corporate notes and obligations |
| 337,574 | | 337,574 | ||||||||||||
U.S. agency obligations |
| 163,455 | | 163,455 | ||||||||||||
U.S. treasury securities |
136,660 | | 136,660 | |||||||||||||
Mortgage backed securities |
| 40,865 | | 40,865 | ||||||||||||
Collateralized mortgage obligations |
| 37,188 | | 37,188 | ||||||||||||
Foreign currency derivative contracts (2) |
| 1,593 | | 1,593 | ||||||||||||
Total Assets |
$ | 671,078 | $ | 944,872 | $ | | $ | 1,615,950 | ||||||||
Liabilities |
||||||||||||||||
Foreign currency derivative contracts (3) |
$ | | $ | 402 | $ | | $ | 402 | ||||||||
Total Liabilities |
$ | | $ | 402 | $ | | $ | 402 | ||||||||
(1) | Included in cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheet as of January 31, 2010, in addition to $112.7 million of cash. |
(2) | Included in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheet as of January 31, 2010. |
(3) | Included in accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheet as of January 31, 2010. |
Derivative Financial Instruments
The Company enters into foreign currency derivative contracts with financial institutions to reduce the risk that its cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. The Company uses foreign currency derivative contracts to minimize the Companys exposure of balances denominated in Euros, Canadian dollar, Swiss francs, Australian dollars, Singapore dollars, Japanese yen and British pound sterlings. The Companys program is not designated for trading or speculative purposes. As of October 31, 2010 and January 31, 2010 the foreign currency derivative contracts that were not settled are recorded at fair value on the condensed consolidated balance sheet.
The Companys 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. Foreign currency derivative contracts are marked-to-market at the end of each reporting period with gains and losses recognized as other income (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
10
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
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.
Details on outstanding foreign currency derivative contracts related primarily to intercompany receivables and payables are presented below (in thousands):
October 31, 2010 |
January 31, 2010 |
|||||||
Notional amount of foreign currency derivative contracts |
$ | 157,049 | $ | 74,705 | ||||
Fair value of foreign currency derivative contracts |
(52 | ) | 1,191 |
The fair value of outstanding derivative instruments is summarized below (in thousands):
Balance Sheet Location |
Fair Value of Derivative Instruments | |||||||||
As of October 31, 2010 |
As of January 31, 2010 |
|||||||||
Derivative Assets |
||||||||||
Derivatives not designated as hedging instruments: |
||||||||||
Foreign currency derivative contracts |
Prepaid expenses and other current assets | $ | 575 | $ | 1,593 | |||||
Derivative Liabilities |
||||||||||
Derivatives not designated as hedging instruments: |
||||||||||
Foreign currency derivative contracts |
Accrued expenses and other current liabilities | $ | 627 | $ | 402 | |||||
The effect of the derivative instruments not designated as hedging instruments on the Condensed Statements of Operations for the three and nine months ended October 31, 2010 and October 31, 2009, respectively are summarized below (in thousands):
Derivatives Not Designated as Hedging Instruments |
Gains (Losses) Recognized in Income
on |
|||||||||
Location |
Three months ended October 31, |
|||||||||
2010 | 2009 | |||||||||
Foreign currency derivative contracts |
Other expense | $ | (52 | ) | $ | 513 | ||||
Derivatives Not Designated as Hedging Instruments |
Losses Recognized in Income on |
|||||||||
Location |
Nine months ended October 31, |
|||||||||
2010 | 2009 | |||||||||
Foreign currency derivative contracts |
Other expense | $ | (1,057 | ) | $ | (151 | ) | |||
11
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
Investment Income
Investment income consists of interest income, realized gains, and realized losses on the Companys cash, cash equivalents and marketable securities.
The components of investment income are presented below (in thousands):
Three months ended October 31, |
Nine months ended October 31, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Interest income |
$ | 8,447 | $ | 5,821 | $ | 21,597 | $ | 16,173 | ||||||||
Realized gains |
4,333 | 1,951 | 8,986 | 5,137 | ||||||||||||
Realized losses |
(1,081 | ) | (269 | ) | (2,274 | ) | (1,530 | ) | ||||||||
Total investment income |
$ | 11,699 | $ | 7,503 | $ | 28,309 | $ | 19,780 | ||||||||
Interest Expense
Interest expense consists of interest on the Companys capital lease commitments and convertible senior notes. As described in Note 2, in accounting for the senior notes at the time of issuance in January 2010, the par value of the senior notes was allocated between liabilities and equity. The portion allocated to liabilities was based upon an imputed, nonconvertible debt market interest rate of 5.86 percent. The allocation created an imputed debt discount of approximately $125.0 million which is being accreted to interest expense over the 5 year term of the senior notes using the effective interest rate. The 5.86 percent imputed interest rate includes the contractual interest rate of 0.75 percent.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss), which includes certain changes in equity that are excluded from net income. Specifically, cumulative foreign currency translation adjustments and unrealized gains and losses on marketable securities, net of tax, are included in accumulated other comprehensive gain (loss). Comprehensive income has been reflected in stockholders equity.
Comprehensive income consisted of the following (in thousands):
Three months ended October 31, |
Nine months ended October 31, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Consolidated net income |
$ | 22,368 | $ | 21,443 | $ | 58,827 | $ | 62,277 | ||||||||
Less: net income attributable to noncontrolling interest |
(1,296 | ) | (752 | ) | (5,266 | ) | (1,952 | ) | ||||||||
Translation and other adjustments |
(2,299 | ) | (2,947 | ) | 3,698 | (6,532 | ) | |||||||||
Unrealized gain on marketable securities |
3,474 | 1,724 | 6,762 | 6,198 | ||||||||||||
Comprehensive income attributable to salesforce.com |
$ | 22,247 | $ | 19,468 | $ | 64,021 | $ | 59,991 | ||||||||
The components of accumulated other comprehensive gain (loss) were as follows (in thousands):
October 31, 2010 |
January 31, 2010 |
|||||||
Foreign currency translation and other adjustments |
$ | (3,368 | ) | $ | (7,066 | ) | ||
Net unrealized gain on marketable securities and cash equivalents |
12,398 | 5,636 | ||||||
$ | 9,030 | $ | (1,430 | ) | ||||
12
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
Net Income Per Share
Basic net income per share attributable to salesforce.com is computed by dividing net income attributable to salesforce.com by the weighted-average number of common shares outstanding for the fiscal period. Diluted net income per share attributable to salesforce.com is computed giving effect to all potential dilutive common stock, including options, restricted stock units, warrants and the convertible senior notes. The dilutive effect of outstanding awards is reflected in diluted earnings per share by application of the treasury stock method.
A reconciliation of the denominator used in the calculation of basic and diluted net income per share attributable to salesforce.com is as follows (in thousands):
Three months ended October 31, |
Nine months ended October 31, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Numerator: |
||||||||||||||||
Net income attributable to salesforce.com |
$ | 21,072 | $ | 20,691 | $ | 53,561 | $ | 60,325 | ||||||||
Denominator: |
||||||||||||||||
Weighted-average shares outstanding for basic earnings per share |
130,888 | 124,561 | 129,461 | 123,871 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
0.75% convertible senior notes |
1,513 | | 993 | | ||||||||||||
Employee stock awards |
4,643 | 4,035 | 4,553 | 3,122 | ||||||||||||
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share |
137,044 | 128,596 | 135,007 | 126,993 | ||||||||||||
The following were excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact. The dilutive securities are excluded when, for example, their exercise prices, unrecognized compensation and tax benefits are greater than the average fair values of the Companys common stock (in thousands).
Three months ended October 31, |
Nine months ended October 31, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Stock awards |
164 | 3,751 | 514 | 4,611 | ||||||||||||
Warrants |
6,736 | | 6,736 | |
Income Taxes
The Company uses the 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 and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not expected to be realized.
The total income tax benefit recognized in the accompanying condensed consolidated statements of operations related to stock-based compensation was $28.7 million and $22.8 million for the nine months ended October 31, 2010 and 2009 respectively.
13
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
Effective Tax Rate
The Company computes its provision for income taxes by applying the estimated annual effective tax rate to income from recurring operations and adjusts the provision for discrete tax items recorded in the period. The Companys effective tax rate of 41 percent for the nine months ended October 31, 2010 was higher than the federal statutory rate of 35 percent primarily due to state income taxes, foreign tax rate differential, non-deductible expenses as a result of acquisitions and the unfavorable impact of a change in California tax law, which were partially offset by California tax credits. Similarly, the Companys effective tax rate of 42 percent for the nine months ended October 31, 2009 was higher than the federal statutory rate of 35 percent primarily due to state income taxes, foreign tax rate differential and the unfavorable impact of a change in California tax law, which were partially offset by federal and California tax credits.
Unrecognized Tax Benefits and Other Considerations
The Company records liabilities related to its uncertain tax positions. During the nine months ended October 31, 2010, the Company recorded a discrete favorable tax item relating to certain decreases in unrecognized tax benefits as a result of a favorable court ruling in transfer pricing matters and lapsing of the statutes of limitations.
The Companys existing tax positions will continue to generate an increase in tax liabilities or unrecognized tax benefits. The Company does not believe that it is reasonably possible that there will be a significant increase or decrease in unrecognized tax benefits over the next twelve months. However, an adverse resolution of one or more uncertain tax positions in any period could have a material impact on the results of operations for that period.
Tax positions for the Company and its subsidiaries are subject to income tax audits by multiple tax jurisdictions throughout the world. During the quarter ended October 31, 2010, the National Tax Agency of Japan completed the examination of the Companys fiscal 2010 tax return for Japan. No material adjustment was made as a result of the examination.
Revenue Recognition
The Company derives its revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing its enterprise cloud computing application service, and from customers purchasing additional support beyond the standard support that is included in the basic subscription fee; and (2) related professional services and other revenue. Other revenue consists primarily of training fees. The Company recognizes revenue when all of the following conditions are met:
| There is persuasive evidence of an arrangement; |
| The service has been 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 Companys arrangements do not contain general rights of return.
Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement date of each contract. 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.
14
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
Professional services and other revenues, when sold with subscription and support offerings, are accounted for separately when these services have value to the customer on a standalone basis and there is objective and reliable evidence of fair value of each deliverable. When accounted for separately, revenues are recognized as the services are rendered for time and material contracts, and when the milestones are achieved and accepted by the customer for fixed price contracts. The majority of the Companys consulting contracts are on a time and materials basis. Training revenues are recognized after the services are performed. For revenue arrangements with multiple deliverables, such as an arrangement that includes subscription, premium support, consulting or training services, the Company allocates the total amount the customer will pay to the separate units of accounting based on their relative fair values, as determined by the price of the undelivered items when sold separately.
In determining whether the consulting services can be accounted for separately from subscription and support revenues, the Company considers the following factors for each consulting agreement: availability of the consulting services from other vendors, whether objective and reliable evidence for fair value exists for the undelivered elements, the nature of the consulting services, the timing of when the consulting contract was signed in comparison to the subscription service start date, and the contractual dependence of the subscription service on the customers satisfaction with the consulting work. If a consulting arrangement does not qualify for separate accounting, the Company recognizes the consulting revenue ratably over the remaining term of the subscription contract. Additionally, in these situations, the Company defers only the direct costs of the consulting arrangement and amortizes those costs over the same time period as the consulting revenue is recognized. As of October 31, 2010 and January 31, 2010, the deferred cost on the accompanying condensed consolidated balance sheet totaled $27.8 million and $19.1 million, respectively. These deferred costs are included in prepaid expenses and other current assets and other assets.
Deferred Revenue
Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from the Companys subscription service described above and is recognized as the revenue recognition criteria are met. The Company generally invoices its customers in annual or quarterly installments. Accordingly, the deferred revenue balance does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. Deferred revenue also includes certain deferred professional services fees which are recognized as revenue ratably over the subscription contract term. The Company defers the professional service fees in situations where the professional services and subscription contracts are accounted for as a single unit of accounting. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent. Approximately 8 percent and 6 percent of total deferred revenue as of October 31, 2010 and January 31, 2010, respectively related to deferred professional services revenue.
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 Companys direct sales force. The commissions are deferred and amortized over the non-cancelable terms of the related customer contracts, which are typically 12 to 24 months. The commission payments are paid in full the month after the customers service commences. The deferred commission amounts are recoverable through the future revenue streams under the non-cancelable customer contracts. The Company believes this is the preferable method of accounting as the commission charges are so closely related to the revenue from the non-cancelable customer contracts that they should be recorded as an asset and charged to expense over the same period that the subscription revenue is recognized. Amortization of deferred commissions is included in marketing and sales expense in the accompanying condensed consolidated statements of operations.
15
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
Accounting for Stock-Based Compensation
The Company recognizes share-based expenses on a straight-line over the requisite service period of the awards, which is the vesting term of four years. Stock-based expenses are recognized net of estimated forfeiture activity.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions and fair value per share:
Three months ended October 31, |
Nine months ended October 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Volatility |
45 50 | % | 52 | % | 45 50 | % | 52 60 | % | ||||||||
Weighted-average estimated life |
3.8 years | 4 years | 3.8 years | 4 years | ||||||||||||
Weighted-average risk-free interest rate |
0.98 1.08 | % | 2.16 2.26 | % | 0.98 2.11 | % | 1.78 2.39 | % | ||||||||
Dividend yield |
| | | | ||||||||||||
Weighted-average fair value per share of grants |
$ | 40.89 | $ | 23.03 | $ | 31.36 | $ | 20.24 |
Since November 2009, the weighted-average estimated life was based on an actual analysis of expected life. Prior to November 2009, the weighted-average estimated life assumption of 4 years was based on the average of the vesting term and the 5 year contractual lives of options awarded. The weighted average risk free interest rate is based on the rate for a 4 year U.S. government security at the time of the option grant.
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 4 year weighted-average expected life of its option grants.
During the three months ended October 31, 2010 and 2009, the Company capitalized $0.8 million and $1.0 million, respectively, of stock based expenses related to capitalized internal-use software development and deferred professional services costs and capitalized $2.1 million for each of the nine months ended October 31, 2010 and 2009.
During the nine months ended October 31, 2010, the Company recognized stock-based expense of $78.7 million. As of October 31, 2010, the aggregate stock compensation remaining to be amortized to costs and expenses was $237.7 million. The Company expects this stock compensation balance to be amortized as follows: $29.3 million during the remaining three months of fiscal 2011; $101.4 million during fiscal 2012; $64.7 million during fiscal 2013; $38.2 million during fiscal 2014 and $4.1 million during fiscal 2015. The expected amortization reflects only outstanding stock awards as of October 31, 2010 and assumes no forfeiture activity. The Company expects to continue to issue share-based awards to its employees in future periods.
Goodwill, Intangible Assets and Impairment Assessments
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. The goodwill balance is assigned to a reporting unit which is generally the consolidated group. Goodwill is tested for impairment at least annually (more frequently if certain indicators are present). In the event that the Company determines that the carrying value of goodwill is less than fair value, the Company will incur an impairment charge for the amount of the difference during the quarter in which the determination is made.
Intangible assets are amortized over their useful lives. Each period the Company evaluates the estimated remaining useful life of its intangible assets and whether events or changes in circumstances warrant a revision to
16
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
the remaining period of amortization. The carrying amounts of these assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. In the event that the Company determines certain assets are not fully recoverable, the Company will incur an impairment charge for those assets or portion thereof during the quarter in which the determination is made.
Warranties and Indemnification
The Companys enterprise cloud computing application service is typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable and materially in accordance with the Companys online help documentation under normal use and circumstances.
The Companys arrangements generally include certain provisions for indemnifying customers against liabilities if its products or services infringe a third-partys intellectual property rights. To date, the Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations in the accompanying condensed consolidated financial statements.
The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the persons service as a director or officer, including any action by the Company, arising out of that persons services as the Companys director or officer or that persons services provided to any other company or enterprise at the Companys request. The Company maintains director and officer insurance coverage that would generally enable the Company to recover a portion of any future amounts paid. The Company may also be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.
New Accounting Pronouncement
In September 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangementsa consensus of the FASB Emerging Issues Task Force (ASU 2009-13). It updates the existing multiple-element revenue arrangements guidance currently included under ASC 605-25, which originated primarily from the guidance in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21). The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. ASU 2009-13 will be effective for the first annual reporting period beginning on or after June 15, 2010. The Company believes the future impact of this new accounting pronouncement will not be material to consolidated net income.
Subsequent Events
The Company evaluated subsequent events through the date this Quarterly Report on Form 10-Q was filed with the SEC.
On November 1, 2010, the Company completed the purchase of approximately 14 acres of undeveloped land in San Francisco, California, including entitlements and improvements associated with the land and parking rights in an existing garage for approximately $278.0 million in cash. The Company has not set a date for construction yet, but the Company plans to use the land to build a facility that will become its new global headquarters.
17
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
2. Balance Sheet Accounts
Marketable Securities
At October 31, 2010, marketable securities consisted of the following (in thousands):
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value | |||||||||||||
Corporate notes and obligations |
$ | 796,870 | $ | 15,839 | $ | (266 | ) | $ | 812,443 | |||||||
U.S. agency obligations |
121,683 | 530 | (3 | ) | 122,210 | |||||||||||
U.S. treasury securities |
25,488 | 134 | | 25,622 | ||||||||||||
Collateralized mortgage obligations |
124,691 | 2,092 | (143 | ) | 126,640 | |||||||||||
Mortgage backed securities |
59,535 | 881 | (410 | ) | 60,006 | |||||||||||
Government obligations |
3,203 | 74 | | 3,277 | ||||||||||||
Municipal securities |
19,596 | 94 | (61 | ) | 19,629 | |||||||||||
Marketable equity securities |
785 | 1,525 | | 2,310 | ||||||||||||
$ | 1,151,851 | $ | 21,169 | $ | (883 | ) | $ | 1,172,137 | ||||||||
At January 31, 2010, marketable securities consisted of the following (in thousands):
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value | |||||||||||||
Corporate notes and obligations |
$ | 329,750 | $ | 7,889 | $ | (65 | ) | $ | 337,574 | |||||||
U.S. treasury securities |
136,606 | 170 | (116 | ) | 136,660 | |||||||||||
Mortgage backed securities |
40,187 | 719 | (41 | ) | 40,865 | |||||||||||
Collateralized mortgage obligations |
36,785 | 436 | (33 | ) | 37,188 | |||||||||||
U.S. agency obligations |
162,896 | 571 | (12 | ) | 163,455 | |||||||||||
$ | 706,224 | $ | 9,785 | $ | (267 | ) | $ | 715,742 | ||||||||
October 31, 2010 |
January 31, 2010 |
|||||||||||||||
Recorded as follows (in thousands): |
||||||||||||||||
Short-term (due in one year or less) |
|
$ | 139,545 | $ | 230,659 | |||||||||||
Long-term |
|
1,032,592 | 485,083 | |||||||||||||
$ | 1,172,137 | $ | 715,742 | |||||||||||||
As of October 31, 2010, the following investments 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 |
$ | 63,150 | $ | (257 | ) | $ | 398 | $ | (9 | ) | $ | 63,548 | $ | (266 | ) | |||||||||
Collateralized mortgage obligations |
28,825 | (143 | ) | | | 28,825 | (143 | ) | ||||||||||||||||
Mortgage backed securities |
26,877 | (410 | ) | | | 26,877 | (410 | ) | ||||||||||||||||
U.S. agency obligations |
14,004 | (3 | ) | | | 14,004 | (3 | ) | ||||||||||||||||
Municipal securities |
4,130 | (61 | ) | | | 4,130 | (61 | ) | ||||||||||||||||
$ | 136,986 | $ | (874 | ) | $ | 398 | $ | (9 | ) | $ | 137,384 | $ | (883 | ) | ||||||||||
18
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
The unrealized loss for each of these fixed rate marketable securities ranged from less than $1,000 to $109,000. 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 October 31, 2010. The Company expects to receive the full principal and interest on all of these marketable securities.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
October 31, 2010 |
January 31, 2010 |
|||||||
Deferred professional services costs |
$ | 17,415 | $ | 13,420 | ||||
Prepaid expenses and other current assets |
46,928 | 42,314 | ||||||
$ | 64,343 | $ | 55,734 | |||||
Fixed Assets
Fixed assets consisted of the following (in thousands):
October 31, 2010 |
January 31, 2010 |
|||||||
Computers, equipment and software |
$ | 104,773 | $ | 87,608 | ||||
Furniture and fixtures |
18,535 | 17,325 | ||||||
Leasehold improvements |
88,054 | 71,882 | ||||||
211,362 | 176,815 | |||||||
Less accumulated depreciation and amortization |
(95,284 | ) | (87,104 | ) | ||||
$ | 116,078 | $ | 89,711 | |||||
Depreciation and amortization expense totaled $11.0 million and $8.4 million for the three months ended October 31, 2010 and 2009, respectively, and $28.9 million and $22.5 million for the nine months ended October 31, 2010 and 2009, respectively.
Fixed assets at October 31, 2010 and January 31, 2010 included $38.2 million and $27.1 million, respectively, acquired under capital lease agreements. Accumulated amortization relating to equipment and software under capital leases totaled $15.7 million and $11.0 million at October 31, 2010 and January 31, 2010, respectively. Amortization of assets under capital leases is included in depreciation and amortization expense.
Capitalized Software
Capitalized software consisted of the following (in thousands):
October 31, 2010 |
January 31, 2010 |
|||||||
Capitalized internal-use software development costs, net of accumulated amortization of $30,929 and $21,392, respectively |
$ | 27,931 | $ | 22,675 | ||||
Acquired developed technology, net of accumulated amortization of $31,383 and $20,932, respectively |
51,568 | 12,134 | ||||||
$ | 79,499 | $ | 34,809 | |||||
19
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
Capitalized internal use software amortization expense totaled $3.3 million and $2.5 million for the three months ended October 31, 2010 and 2009, respectively. Acquired developed technology amortization expense for the three months ended October 31, 2010 and 2009, was $4.9 million and $2.0 million, respectively. Capitalized internal use software amortization expense totaled $9.5 million and $7.0 million for the nine months ended October 31, 2010 and 2009, respectively. Acquired developed technology amortization expense for the nine months ended October 31, 2010 and 2009 was $10.4 million and $5.7 million, respectively.
Other Assets, net
Other assets consisted of the following (in thousands):
October 31, 2010 |
January 31, 2010 |
|||||||
Deferred professional services costs, noncurrent portion |
$ | 10,347 | $ | 5,639 | ||||
Long-term deposits |
12,372 | 11,084 | ||||||
Deposit related to land purchase |
8,000 | | ||||||
Purchased intangible assets, net of accumulated amortization of $8,721 and $5,694, respectively |
8,716 | 6,613 | ||||||
Acquired patents and domain names, net of accumulated amortization of $467 and $121, respectively |
4,153 | 133 | ||||||
Investments in privately-held companies |
10,678 | 6,288 | ||||||
Other |
14,928 | 10,008 | ||||||
$ | 69,194 | $ | 39,765 | |||||
Purchased intangible assets amortization expense for the three months ended October 31, 2010 and 2009, was $1.0 million and $0.8 million, respectively and for the nine months ended October 31, 2010 and 2009 was $3.0 million and $2.4 million, respectively.
In October 2010, the Company paid a third party escrow agent $8.0 million as a deposit for the purchase of undeveloped land, parking rights in an existing garage, and other entitlements and improvements associated with the land. On November 1, 2010 the Company purchased this undeveloped land of which this $8.0 million was part of those proceeds (see Note 1).
Goodwill
Goodwill represents the excess of the purchase consideration in a business combination over the fair value of net tangible and intangible assets acquired. Goodwill amounts are not amortized, but rather tested for impairment at least annually during the fourth quarter. There was no impairment of goodwill for the nine months ended October 31, 2010.
Goodwill consisted of the following (in thousands):
Total | ||||
Balance as of January 31, 2010 |
$ | 48,955 | ||
Jigsaw Data Corporation |
133,254 | |||
Other acquisition activity |
4,829 | |||
Balance as of October 31, 2010 |
$ | 187,038 | ||
20
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
In the third quarter of fiscal 2011, the Company acquired a privately-held company for $3.8 million in cash. The Company accounted for this transaction as a business combination. Of the $3.8 million purchase price, the Company allocated $1.9 million to acquired developed technology with a useful life of 3 years and the remainder to goodwill.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
October 31, 2010 |
January 31, 2010 |
|||||||
Accrued compensation |
$ | 104,919 | $ | 90,223 | ||||
Accrued other liabilities |
114,134 | 46,188 | ||||||
Accrued other taxes payable |
30,885 | 27,757 | ||||||
Accrued professional costs |
15,837 | 10,740 | ||||||
Accrued rent |
21,852 | 19,830 | ||||||
$ | 287,627 | $ | 194,738 | |||||
0.75% Convertible Senior Notes
In January 2010, the Company issued at par value $575.0 million of 0.75% convertible senior notes due January 15, 2015 (the Notes). Interest is payable semi-annually in arrears on January 15 and July 15 of each year, commencing July 15, 2010.
The Notes are governed by an Indenture dated as of January 19, 2010, between the Company, as issuer, and U.S. Bank National Association, as trustee. The Notes 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. The Notes are unsecured and rank senior in right of payment to the Companys future indebtedness that is expressly subordinated in right of payment to the Notes and rank equal in right of payment to the Companys existing and future unsecured indebtedness that is not so subordinated and are effectively subordinated in right of payment to any of the Companys cash equal to the principal amount of the Notes, and secured indebtedness to the extent of the value of the assets securing such indebtedness and are structurally subordinated to all existing and future indebtedness and liabilities incurred by our subsidiaries, including trade payables.
If converted, holders will receive cash equal to the principal amount of the Notes, and at the Companys election, cash and/or shares of the Companys common stock for any amounts in excess of the principal amounts.
The initial conversion rate is 11.7147 shares of common stock per $1,000 principal amount of Notes, subject to anti-dilution adjustments. The initial conversion price is approximately $85.36 per share of common stock. Throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events, including for any cash dividends. Holders of the 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 cancelled, extinguished or forfeited. Holders may convert their Notes under the following circumstances:
| during any fiscal quarter commencing after April 30, 2010, 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 Companys common stock for such trading day is greater than or equal to 130 percent of the applicable conversion price on such trading day share of common stock on such last trading day; |
21
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
| in certain situations, when the trading price of the Notes is less than 98 percent of the product of the sale price of the Companys common stock and the conversion rate; |
| upon the occurrence of specified corporate transactions described under the Indenture, such as a consolidation, merger or binding share exchange; or |
| at any time on or after October 15, 2014. |
As of October 31, 2010, the Notes are not yet convertible up to 6.7 million shares of the Companys common stock.
Holders of the 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 percent of the principal amount of the Notes plus accrued and unpaid interest. In certain circumstances, 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 Notes in connection with such change of control.
In accounting for the issuance of the Notes, the Company separated the 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 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 Note. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the Note issuance, the Company allocated the total amount incurred to the liability and equity components. Transaction costs attributable to the liability component are being amortized to expense over the term of the Notes, and transaction costs attributable to the equity component were netted with the equity component in additional paid-in capital. Debt issuance costs, net of amortization, were $5.6 million as of October 31, 2010 and equity issuance costs were $1.8 million. Additionally, the Company in January 2010 recorded a deferred tax liability of $51.1 million in connection with the Notes. The Notes consisted of the following (in thousands):
As of October 31, 2010 |
||||
Equity component (1) |
$ | 125,530 | ||
Liability component: |
||||
Principal |
$ | 575,000 | ||
Less: debt discount, net (2) |
$ | (108,153 | ) | |
Net carrying amount |
$ | 466,847 | ||
(1) | Included in the condensed consolidated balance sheets within additional paid-in capital, net of the $1.8 million in equity issuance costs. |
(2) | Included in the condensed consolidated balance sheets within 0.75% convertible senior notes and is |
amortized over the remaining life of the Notes using the effective interest rate method.
As of October 31, 2010, the remaining life of the Notes is approximately 4 years.
22
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
The following table sets forth total interest expense recognized related to the Notes (in thousands):
Nine months ended October 31, 2010 |
||||
Contractual interest expense |
$ | 3,234 | ||
Amortization of debt issuance costs |
990 | |||
Amortization of debt discount |
16,649 | |||
$ | 20,873 | |||
Effective interest rate of the liability component |
5.86 | % |
Note Hedges
To minimize the impact of potential economic dilution upon conversion of the Notes, the Company entered into convertible note hedge transactions with respect to its common stock (the Note Hedges). The Company paid an aggregate amount of $126.5 million for the Note Hedges. The Note Hedges cover approximately 6.7 million shares of the Companys common stock at a strike price that corresponds to the initial conversion price of the Notes, also subject to adjustment, and are exercisable upon conversion of the Notes. The Note Hedges will expire upon the maturity of the Notes. The Note Hedges are intended to reduce the potential economic dilution upon conversion of the Notes in the event that the market value per share of the Companys common stock, as measured under the Notes, at the time of exercise is greater than the conversion price of the Notes. The Note Hedges are separate transactions and are not part of the terms of the Notes. Holders of the Notes will not have any rights with respect to the Note Hedges. The Company in January 2010 recorded a deferred tax asset of $51.4 million in connection with these Note Hedges.
Warrants
Separately, the Company in January 2010 also entered into warrant transactions (the Warrants), whereby the Company sold warrants to acquire, subject to anti-dilution adjustments, up to 6.7 million shares of the Companys common stock at a strike price of $119.51 per share. The Company received aggregate proceeds of $59.2 million from the sale of the Warrants. If the market value per share of the Companys common stock, as measured under the Warrants, exceeds the strike price of the Warrants, the Warrants will have a dilutive effect on the Companys earnings per share. The Warrants are separate transactions, entered into by the Company and are not part of the terms of the Notes or Note Hedges. Holders of the Notes and Note Hedges will not have any rights with respect to the Warrants.
3. Stockholders Equity
Stock Options Issued to Employees
The 1999 Stock Option Plan (the 1999 Plan) provides for the issuance of incentive and non-statutory options to employees and nonemployees of the Company. On April 30, 2009, the 1999 Plan expired. The expiration of the 1999 Plan did not affect awards outstanding, which continue to be governed by the terms and conditions of the 1999 Plan. In addition to the 1999 Plan, the Company maintains the 2004 Equity Incentive Plan, 2004 Employee Stock Purchase Plan and the 2004 Outside Directors Stock Plan. These plans, other than the 2004 Outside Directors Stock Plan, provide for annual automatic increases on February 1 to the shares reserved for issuance based on the lesser of (i) a specific percentage of the total number of shares outstanding at year end; (ii) a fixed number of shares; or (iii) a lesser number of shares set by the Companys Board of Directors, all as specified in the respective plans.
23
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
On February 1, 2010, 3.5 million additional shares were reserved under the 2004 Equity Incentive Plan pursuant to the automatic increase. The 2004 Employee Stock Purchase Plan will not be implemented unless and until the Companys Board of Directors authorizes the commencement of one or more offerings under the plan. No offering periods have been authorized to date.
In April 2006, the Companys Board of Directors approved the 2006 Inducement Equity Incentive Plan (the Inducement Plan) that allows for stock option and other equity incentive grants to employees in connection with merger or acquisition activity. In fiscal 2010, the Board of Directors amended the Inducement Plan to increase the share reserve by 300,000 shares to 700,000 shares total. As of October 31, 2010, there were 303,543 shares of common stock available for grant under the Inducement Plan.
Prior to February 1, 2006, options issued under the Companys stock option plans generally had a term of 10 years. After February 1, 2006, options issued to employees have a term of 5 years.
Stock activity for the nine months ended October 31, 2010 is as follows:
Shares Available for Grant |
Options Outstanding | |||||||||||||||
Outstanding Stock Options |
Weighted- Average Exercise Price |
Aggregate Intrinsic Value (in thousands) |
||||||||||||||
Balance as of January 31, 2010 |
4,607,929 | 14,036,371 | $ | 40.36 | ||||||||||||
Increase in options authorized: |
||||||||||||||||
2004 Equity Incentive Plan |
3,500,000 | | | |||||||||||||
Options granted under all plans |
(724,675 | ) | 724,675 | 83.53 | ||||||||||||
Restricted stock unit activity |
(93,190 | ) | | | ||||||||||||
Stock grants to board members for board services and advisory board members |
(37,650 | ) | | | ||||||||||||
Exercised |
| (3,631,390 | ) | 31.94 | ||||||||||||
1999 Plan shares expired |
(89,804 | ) | | | ||||||||||||
Cancelled |
687,605 | (687,605 | ) | 49.00 | ||||||||||||
Balance as of October 31, 2010 |
7,850,215 | 10,442,051 | $ | 45.71 | $ | 734,664 | ||||||||||
Vested or expected to vest |
10,117,020 | $ | 45.36 | $ | 715,411 | |||||||||||
Exercisable at October 31, 2010 |
4,122,901 | $ | 32.22 | $ | 345,720 | |||||||||||
The total intrinsic value of the options exercised during the nine months ended October 31, 2010 and 2009 were $222.9 million and $36.1 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 3.2 years.
As of October 31, 2010, options to purchase 4,122,901 shares were vested at a weighted average exercise price of $32.22 per share and a remaining weighted-average remaining contractual life of approximately 2.7 years. The total intrinsic value of these vested options as of October 31, 2010 was $345.7 million.
24
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
The following table summarizes information about stock options outstanding as of October 31, 2010:
Options Outstanding | Options Vested | |||||||||||||||||||
Range of Exercise Prices |
Number Outstanding |
Weighted-Average Remaining Contractual Life (Years) |
Weighted- Average Exercise Price |
Number of Shares |
Weighted- Average Exercise Price |
|||||||||||||||
$0.75 to $25.19 |
1,127,057 | 3.5 | $ | 10.37 | 1,127,057 | $ | 10.37 | |||||||||||||
$25.97 |
2,336,058 | 3.1 | $ | 25.97 | 800,597 | $ | 25.97 | |||||||||||||
$27.20 to $52.28 |
1,904,794 | 2.2 | $ | 41.08 | 1,384,466 | $ | 40.06 | |||||||||||||
$52.30 to $60.96 |
1,508,149 | 2.5 | $ | 53.49 | 679,972 | $ | 53.20 | |||||||||||||
$61.34 to $65.41 |
105,543 | 2.9 | $ | 63.34 | 36,952 | $ | 62.85 | |||||||||||||
$65.44 |
2,561,644 | 4.1 | $ | 65.44 | | | ||||||||||||||
$65.68 to $114.77 |
898,806 | 4.1 | $ | 79.83 | 93,857 | $ | 67.98 | |||||||||||||
10,442,051 | 3.2 | $ | 45.71 | 4,122,901 | $ | 32.22 | ||||||||||||||
Restricted stock unit activity for the nine months ended October 31, 2010 is as follows:
Restricted Stock Units Outstanding | ||||||||||||
Outstanding | Weighted- Average Exercise Price |
Aggregate Intrinsic Value (in thousands) |
||||||||||
Balance as of January 31, 2010 |
2,316,452 | $ | 0.001 | |||||||||
Granted |
294,324 | $ | 0.001 | |||||||||
Cancelled |
(201,134 | ) | $ | 0.001 | ||||||||
Vested and converted to shares |
(554,908 | ) | $ | 0.001 | ||||||||
Balance as of October 31, 2010 |
1,854,734 | $ | 0.001 | $ | 215,279 | |||||||
Expected to vest |
1,739,517 | $ | 201,906 | |||||||||
The restricted stock units, which upon vesting entitles the holder to one share of common stock for each restricted stock unit, have an exercise price of $0.001 per share, which is equal to the par value of the Companys common stock, and vest over 4 years.
The weighted-average fair value of the restricted stock issued for the nine months ended October 31, 2010 and 2009 was $87.37 and $38.59 per share, respectively.
The Company realized tax benefits of $73.9 million from the exercise, sale or vesting of stock awards during the nine months ended October 31, 2010.
25
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
Common Stock
The following shares of common stock are available for future issuance at October 31, 2010:
Options outstanding |
10,442,051 | |||
Restricted stock units outstanding |
1,854,734 | |||
Stock available for future grant: |
||||
2004 Equity Incentive Plan |
6,923,672 | |||
2006 Inducement Equity Incentive Plan |
303,543 | |||
2004 Employee Stock Purchase Plan |
1,000,000 | |||
2004 Outside Directors Stock Plan |
623,000 | |||
0.75% Convertible senior notes |
6,735,953 | |||
Warrants |
6,735,953 | |||
34,618,906 | ||||
4. Acquisitions
On May 7, 2010 the Company acquired for cash the stock of Jigsaw Data Corporation (Jigsaw), a provider of crowd-sourced data services in the cloud. The Company acquired Jigsaw to combine the Companys CRM applications and enterprise cloud platform with Jigsaws cloud-based model for the automation of acquiring, completing and cleansing business contact data. The Company has included the financial results of Jigsaw in the condensed consolidated financial statements from the date of acquisition. The total cash consideration for Jigsaw was approximately $148.5 million. In addition, the Company will potentially make additional payments (contingent consideration) totaling up to $14.4 million in cash, based on the achievement of certain billings targets related to Jigsaws services for the one-year period from May 8, 2010 through May 7, 2011. The estimated fair value of the contingent consideration at May 7, 2010 was $13.4 million and is included in the total purchase price. The Company has recorded and will record the fair value of the contingent consideration each reporting period based on Jigsaws achievement of meeting its billing targets as it relates to the contingent consideration. The Companys estimated fair value of the contingent consideration at October 31, 2010 was $13.9 million. The change in fair value of contingent consideration is recorded in general and administrative expenses.
The total preliminary purchase price and the fair value of the contingent consideration was allocated to the net tangible and intangible assets based upon their fair values as of May 7, 2010 as set forth below. The excess of the preliminary purchase price over the net tangible and intangible assets was recorded as goodwill. The following table summarizes the estimated fair values of the assets and liabilities assumed at the acquisition date. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to both current and non-current deferred tax liabilities which are subject to change, pending the finalization of certain tax returns.
(in thousands) |
||||
Net tangible assets |
$ | 4,347 | ||
Intangible assets |
28,140 | |||
Deferred tax liability |
(3,864 | ) | ||
Goodwill |
133,254 | |||
Total purchase price |
$ | 161,877 | ||
26
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
The following table sets forth the components of intangible assets acquired in connection with the Jigsaw acquisition:
(in thousands) |
Fair value | Useful Life | ||||||
Developed service technology and database |
$ | 23,560 | 3 years | |||||
Customer relationships |
2,440 | 5 years | ||||||
Trade name and trademark |
2,140 | 3 years | ||||||
Total intangible assets subject to amortization |
$ | 28,140 | ||||||
Customer relationships represent the fair values of the underlying relationships and agreements with Jigsaws customers. Developed service technology and database represents the fair values of the Jigsaw technology and database that contains the business contact data. Trade name and trademark represents the fair values of brand and name recognition associated with the marketing of Jigsaws services. The goodwill balance is not deductible for tax purposes. The acquisition costs related to Jigsaw were not material.
During the nine months ended October 31, 2010, the Company acquired two privately-held companies for approximately $13.8 million in cash to expand its products and services. These acquisitions were not significant. The Company has included the financial results of these companies in its condensed consolidated results from their acquisition dates. The preliminary purchase price allocations for these acquisitions were based upon the fair values as of the acquisition dates.
5. Joint Venture
During the three months ended October 31, 2010, the Company increased its ownership interest in Salesforce Japan from 73 percent to 96 percent through the purchase of shares held by SunBridge Corporation, a Japanese corporation (SunBridge) and certain other shareholders for cash payments totaling $151.0 million. Salesforce Japan was formed in 2000 as a joint venture between the Company and SunBridge. As a result of the purchase of the shares held by SunBridge, the joint venture agreement terminated according to its terms. The purchase transaction, including transaction-related fees totaling $1.1 million, were accounted for as a reduction to Additional paid-in capital and noncontrolling interest.
6. Commitments and Contingencies
Letters of Credit
As of October 31, 2010, the Company had a total of $11.7 million in letters of credit outstanding for office space in San Francisco, California, New York City, Singapore, Sweden, United Kingdom, Australia and Switzerland. These letters of credit renew annually and mature at various dates through September 2021.
27
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
Leases
The Company leases office space and equipment under noncancelable operating and capital leases with various expiration dates.
As of October 31, 2010, the future minimum lease payments under noncancelable operating and capital leases are as follows (in thousands):
Capital Leases |
Operating Leases |
|||||||
Fiscal Period: |
||||||||
Remaining three months in fiscal 2011 |
$ | 2,540 | $ | 27,340 | ||||
Fiscal 2012 |
12,311 | 98,722 | ||||||
Fiscal 2013 |
5,713 | 88,946 | ||||||
Fiscal 2014 |
2,222 | 64,679 | ||||||
Fiscal 2015 |
| 37,908 | ||||||
Thereafter |
| 147,343 | ||||||
Total minimum lease payments |
22,786 | $ | 464,938 | |||||
Less: amount representing interest |
(1,258 | ) | ||||||
Present value of capital lease obligations |
$ | 21,528 | ||||||
The Companys agreements for the facilities and certain services provide the Company with the option to renew. The Companys future contractual obligations would change if it were to exercise these options.
7. Legal Proceedings and Claims
The Company is involved in various legal proceedings arising from the normal course of business activities. In managements opinion, resolution of these matters is not expected to have a material adverse impact on the Companys consolidated results of operations, cash flows or its financial position. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect the Companys future results of operations, cash flows or financial position.
On May 18, 2010, Microsoft Corporation filed a complaint against the Company in the United States District Court for the Western District of Washington alleging infringement of nine patents which Microsoft claimed were related to certain aspects of the Companys products and services. The complaint sought, among other things, damages, attorneys fees and costs, and injunctive relief. On June 24, 2010, the Company filed a complaint against Microsoft in the United States District Court for the District of Delaware alleging infringement of five of the Companys patents related to certain aspects of Microsofts products and services. The complaint sought, among other things, damages, attorneys fees and costs, and injunctive relief. On August 2, 2010, the Company entered into a patent cross-license and settlement agreement with Microsoft and the companies subsequently dismissed their respective cases.
Many of the Companys subscription agreements require the Company to indemnify its customers for third-party intellectual property infringement claims, which could increase the cost to the Company of an adverse ruling on such a claim. Any adverse determination related to intellectual property claims or litigation could prevent the Company from offering its service to others, could be material to its net income or cash flows (or both) of a particular quarter or could otherwise adversely affect the Companys operating results.
28
salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements(Continued)
8. Related-Party Transactions
In January 1999, the salesforce.com/foundation, also referred to as the Foundation, a non-profit public charity, was chartered to build philanthropic programs that are focused on youth and technology. The Companys chairman is the chairman of the Foundation. The Companys chairman, one of the Companys employees and one of the Companys board members hold three of the Foundations seven board seats. The Company is not the primary beneficiary of the Foundations activities, and accordingly, the Company does not consolidate the Foundations statement of activities with its financial results.
Since the Foundations inception, the Company has provided at no charge certain resources to Foundation employees such as office space. The value of these items totals approximately $35,000 per quarter.
In addition to the resource sharing with the Foundation, the Company issued the Foundation warrants in August 2002 to purchase 500,000 shares of common stock which were all exercised in prior years. As of October 31, 2010, the Foundation held 124,500 shares of salesforce.com common stock. Additionally, the Company has donated subscriptions to the Companys service to other qualified non-profit organizations and permitted the Foundation to sell such subscriptions to qualified non-profit organizations. The fair value of these donated subscriptions were approximately $4.0 million per month during the three months ended October 31, 2010. The Company currently plans to continue providing free subscriptions to qualified non-profit organizations through its relationship with the Foundation.
29
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion in Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements consist of, among other things, trend analyses, statements regarding future events, future financial performance, our business strategy and our plan to build our business, our service performance and security, the expenses associated with our data center capacity, our operating results, our anticipated growth, trends in our business, new application service features, our strategy of acquiring or making investments in complementary companies, services and technologies, the effect of general economic and market conditions including sudden declines in the fair value of our investments in cash equivalents and marketable securities, our ability to protect our intellectual property rights, our ability to develop our brands, the effect of evolving government regulations, the effect of foreign currency exchange rate and interest rate fluctuations on our financial results, the potential availability of additional tax assets in the future and related matters, the impact of expensing stock options, the sufficiency of our capital resources, our plan to build our new global headquarters in San Francisco, and our strategy to be the leading provider of CRM application services and the leading platform on which customers and partners build enterprise cloud computing applications, of which are based on current expectations, estimates, and forecasts, and the beliefs and assumptions of our management. Words such as expects, anticipates, projects, intends, plans, believes, estimates, variations of such words, and similar expressions are also intended to identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified below, under Risk Factors and elsewhere in this report, for factors that may cause actual results to be different than those expressed in these forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Overview
We are a leading provider of enterprise cloud computing applications. We provide a comprehensive customer and collaboration relationship management, or CRM, service to businesses of all sizes and industries worldwide and we provide a technology platform for customers and developers to build and run business applications.
We were founded in February 1999 and began offering our enterprise CRM application service in February 2000.
Our objective is to be the leading provider of CRM application services and to be the leading platform on which our customers and partners build enterprise cloud computing applications. Key elements of our strategy include:
| Strengthening our existing CRM applications; |
| Extending into new functional areas within CRM; |
| Aggressively pursuing new customers and expanding our revenue outside the Americas; |
| Deepening relationships with our existing customer base; |
| Continuing to lead the industry transformation to cloud computing; and |
| Encouraging the development of third-party applications on our Force.com cloud computing platform. |
We believe the factors that will influence our ability to achieve our objectives include our prospective customers willingness to migrate to an enterprise cloud computing application service; the performance and security of our service; our ability to continue to release, and gain customer acceptance of, new and improved
30
features; successful customer adoption and utilization of our service; acceptance of our service in markets where we have few customers; the emergence of additional competitors in our market and improved product offerings by existing and new competitors; the location of new data centers; third-party developers willingness to develop applications on our platform; our ability to successfully integrate acquired businesses; and general economic conditions which could affect our customers ability and willingness to purchase our application service, delay the customers purchasing decision or affect renewal rates.
To address these factors, we will need to, among other things, continue to add substantial numbers of paying subscriptions, upgrade our customers to fully featured versions such as our Unlimited Edition, provide high quality technical support to our customers and encourage the development of third-party applications on our Force.com platform. We plan to invest for future growth by expanding our data center capacity. We also plan to hire additional personnel, particularly in direct sales, other customer-related areas and research and development. As part of our growth plans we will have continued focus in the area of retaining customers at the time of renewal. We also plan to: expand our domestic and international selling and marketing activities; add additional distribution channels; increase our research and development activities to upgrade and extend our service offerings; develop and support new services and technologies; and, add to our infrastructure to support our growth. We also regularly evaluate acquisitions or investment opportunities in complementary businesses, joint ventures, services and technologies in an effort to strengthen and extend our service CRM offerings. We expect to continue to make such investments and acquisitions in the future.
In May 2010, we acquired Jigsaw Data Corporation for a total purchase price consideration of $161.9 million. Jigsaw offers a cloud-based model for the automation of acquiring, completing and cleansing business contact data. We acquired Jigsaw for its developed technology and database in order to combine our CRM application with Jigsaws crowd-source, data service.
During the three months ended October 31, 2010, we increased our ownership interest in Salesforce Japan from 73 to 96 percent through the purchase of shares held by SunBridge and certain other stockholders for cash payments totaling $151.0 million. Salesforce Japan was formed as a joint venture between the Company and SunBridge. As a result of the purchase of the shares held by SunBridge, the joint venture agreement terminated according to its terms. We intend to acquire the remaining outstanding shares of Salesforce Japan.
We expect marketing and sales costs, which were 47 percent of our total revenues for the nine months ended October 31, 2010 and 46 percent for the same period a year ago, to continue to represent a substantial portion of total revenues in the future as we seek to add and manage more paying subscribers, and build brand awareness.
On November 1, 2010 we purchased approximately 14 acres of undeveloped land in San Francisco, California, including entitlements and improvements associated with the land and parking rights in an existing garage for approximately $278.0 million in cash. We have not set a date for construction yet, but we plan to use the land to build a facility that will become our new global headquarters.
Fiscal Year
Our fiscal year ends on January 31. References to fiscal 2011, for example, refer to the fiscal year ended
January 31, 2011.
Sources of Revenues
We derive our revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing our enterprise cloud computing application service, and from customers purchasing additional support beyond the standard support that is included in the basic subscription fee; and (2) related professional services and other revenues consisting primarily of training fees. Subscription and
31
support revenues accounted for approximately 94 percent of our total revenues during the nine months ended October 31, 2010. Subscription revenues are driven primarily by the number of paying subscribers of our service and the subscription price of our service. We define a customer as a separate and distinct buying entity (e.g., a company, a distinct business unit of a large corporation, a partnership, etc.) that has entered into a contract to access our enterprise cloud computing service. We define a subscription as a unique user account purchased by a customer for use by its employee or other customer-authorized user, and each such user is what we call a subscriber. The number of paying subscriptions at each of our customers ranges from one to tens of thousands. None of our customers accounted for more than 5 percent of our revenues during the three and nine months ended October 31, 2010 and 2009 respectively.
Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement dates of each contract. The typical subscription and support term is 12 to 24 months, although terms range from one to 60 months. Our subscription and support contracts are noncancelable, though customers typically have the right to terminate their contracts for cause if we materially fail to perform. We generally invoice our customers in advance, in annual or quarterly installments, and typical payment terms provide that our customers pay us within 30 days of invoice. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue, or in revenue depending on whether the revenue recognition criteria have been met. In general, we collect our billings in advance of the subscription service period.
Professional services and other revenues consist of fees associated with consulting and implementation services and training. Our consulting and implementation engagements are typically billed on a time and materials basis. We also offer a number of classes on implementing, using and administering our service that are billed on a per person, per class basis. Our typical payment terms provide that our customers pay us within 30 days of invoice.
We generally recognize revenue ratably over the contract term beginning on the commencement date of each contract. In determining whether professional services can be accounted for separately from subscription and support revenues, we consider a number of factors, which are described in Critical Accounting Policies and EstimatesRevenue Recognition below. As we introduce new service offerings, we may not be able to establish objective and reliable evidence of fair value for these elements of our sales arrangements. As a result, when the professional services are sold together with subscription services that do not have objective and reliable evidence of fair value, the professional services fees cannot be accounted for separately, and the entire arrangement is accounted for as a single unit of accounting. In such situations, we recognize the entire arrangement fee ratably over the term of the subscription contract. Approximately 8 percent and 6 percent of our total deferred revenue as of October 31, 2010 and January 31, 2010, respectively, related to deferred professional service revenues.
Seasonal Nature of Deferred Revenue and Accounts Receivable
Deferred revenue primarily consists of billings to customers for our subscription service. Over 90 percent of the value of our billings to customers is for our subscription and support service. We generally invoice our customers in either quarterly or annual cycles, with a disproportionate weighting towards annual billings in the fourth quarter, primarily as a result of large enterprise account buying patterns. Additionally, our fourth quarter has historically been our strongest quarter for new business. The year on year compounding effect of this seasonality in both billing patterns and overall new business is causing the value of invoices that we generate in the fourth quarter for both new and existing customers to increase as a proportion of our total annual billings.
Accordingly, the sequential quarterly changes in accounts receivable and the related deferred revenue during the first three quarters of our fiscal year are not necessarily indicative of the billing activity that occurs in the fourth quarter.
32
The following table sets forth our accounts receivable and deferred revenue balances as of the end of each fiscal quarter:
(in thousands) |
April 30, 2010 |
July 31, 2010 |
October 31, 2010 |
|||||||||||||
Fiscal 2011 |
||||||||||||||||
Accounts receivable, net |
$ | 183,612 | $ | 228,550 | $ | 258,764 | ||||||||||
Deferred revenue, current and noncurrent |
664,529 | 683,019 | 694,557 | |||||||||||||
April 30, 2009 |
July 31, 2009 |
October 31, 2009 |
January 31, 2010 |
|||||||||||||
Fiscal 2010 |
||||||||||||||||
Accounts receivable, net |
$ | 145,869 | $ | 168,842 | $ | 191,297 | $ | 320,956 | ||||||||
Deferred revenue, current and noncurrent |
549,373 | 549,010 | 545,435 | 704,348 | ||||||||||||
April 30, 2008 |
July 31, 2008 |
October 31, 2008 |
January 31, 2009 |
|||||||||||||
Fiscal 2009 |
||||||||||||||||
Accounts receivable, net |
$ | 143,909 | $ | 146,982 | $ | 157,680 | $ | 266,555 | ||||||||
Deferred revenue, current and noncurrent |
470,297 | 479,546 | 469,534 | 594,026 |
Cost of Revenues and Operating Expenses
Cost of Revenues. Cost of subscription and support revenues primarily consists of expenses related to hosting our service and providing support, the costs of data center capacity, depreciation or operating lease expense associated with computer equipment, costs associated with website development activities, allocated overhead and amortization expense associated with capitalized software related to our application service and acquired technology. We allocate overhead such as rent and occupancy charges based on headcount. Employee benefit costs and taxes are allocated based upon a percentage of total compensation expense. As such, general overhead expenses are reflected in each cost of revenue and operating expense category. Cost of professional services and other revenues consists primarily of employee-related costs associated with these services, including stock-based expenses, the cost of subcontractors and allocated overhead. The cost of providing professional services is significantly higher as a percentage of revenue than for our enterprise cloud computing subscription service due to the direct labor costs.
We intend to continue to invest additional resources in our enterprise cloud computing application service. For example, we plan to open additional data centers in the future. Additionally, as we acquire new businesses and technologies, the amortization expense associated with this activity will be included in cost of revenues. The timing of these additional expenses will affect our cost of revenues, both in terms of absolute dollars and as a percentage of revenues, in a particular quarterly period.
Research and Development. Research and development expenses consist primarily of salaries and related expenses, including stock-based expenses, the costs of our development and test data center and allocated overhead. We continue to focus our research and development efforts on adding new features and services, increasing the functionality and enhancing the ease of use of our enterprise cloud computing application service. Our proprietary, scalable and secure multi-tenant architecture enables us to provide all of our customers with a service based on a single version of our application. As a result, we do not have to maintain multiple versions, which enables us to have relatively lower research and development expenses as compared to traditional enterprise software companies. We expect that in the future, research and development expenses will increase in absolute dollars as we upgrade and extend our service offerings, develop new technologies and integrate acquired businesses and technologies.
Marketing and Sales. Marketing and sales expenses are our largest cost and consist primarily of salaries and related expenses, including stock-based expenses, for our sales and marketing staff, including commissions, payments to partners, marketing programs and allocated overhead. Marketing programs consist of advertising, events, corporate communications and brand building and product marketing activities.
33
We plan to continue to invest in marketing and sales by expanding our domestic and international selling and marketing activities, building brand awareness and sponsoring additional marketing events. We expect that in the future, marketing and sales expenses will increase in absolute dollars and continue to be our largest cost.
General and Administrative. General and administrative expenses consist of salaries and related expenses, including stock-based expenses, for finance and accounting, human resources and management information systems personnel, legal costs, professional fees, other corporate expenses and allocated overhead. We expect that in the future, general and administrative expenses will increase in absolute dollars as we invest in our infrastructure and we incur additional employee related costs, professional fees and insurance costs related to the growth of our business and international expansion. We expect general and administrative costs as a percentage of total revenues to remain flat for the next several quarters.
Stock-Based Expenses. Our cost of revenues and operating expenses include stock-based expenses related to option and stock awards to employees and non-employee directors. We recognize our share-based payments as an expense in the statement of operations based on their fair values and vesting periods. If our stock price increases in the future, stock-based expenses will rise. These charges have been significant in the past and we expect that they will increase as we hire more employees and seek to retain existing employees.
Joint Venture
In December 2000, we established a Japanese joint venture, Kabushiki Kaisha salesforce.com (Salesforce Japan), with SunBridge, Inc., a Japanese corporation, to assist us with our sales efforts in Japan. During the three months ended October 31, 2010, we acquired SunBridges and other shareholders interest and increased our ownership from 73 to 96 percent of Salesforce Japan. Because of this majority interest, we consolidate Salesforce Japans financial results, which are reflected in each revenue, cost of revenues and expense category in our consolidated statement of operations. We then record a noncontrolling interest, which reflects the noncontrolling investors interest in Salesforce Japans results. We intend to acquire the remaining outstanding shares of Salesforce Japan.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that of our significant accounting policies, which are described in note 1 to our condensed consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our condensed consolidated financial condition and results of operations.
Revenue Recognition. We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the collection of our fees is reasonably assured; and (4) the amount of fees to be paid by the customer is fixed or determinable. Our arrangements do not contain general rights of return.
We recognize subscription revenues ratably over the contract terms beginning on the commencement dates of each contract. Support revenues from customers who purchase our premium support offerings are recognized similarly over the term of the support contract. As part of their subscription agreements, customers generally benefit from new features and functionality with each release at no additional cost. In situations where we have contractually committed to an individual customer specific technology, we defer all of the revenue for that customer until the technology is delivered and accepted. Once delivery occurs, we then recognize the revenue over the remaining contract term.
34
Consulting services and training revenues are accounted for separately from subscription and support revenues when these services have value to the customer on a standalone basis and there is objective and reliable evidence of fair value of each deliverable. When accounted for separately, revenues are recognized as the services are rendered for time and material contracts, and when the milestones are achieved and accepted by the customer for fixed price contracts. The majority of our consulting service contracts are on a time and material basis. Training revenues are recognized after the services are performed. For revenue arrangements with multiple deliverables, such as an arrangement that includes subscription, premium support, consulting or training services, we allocate the total amount the customer will pay to the separate units of accounting based on their relative fair values, as determined by the price of the undelivered items when sold separately.
In determining whether the consulting services can be accounted for separately from subscription and support revenues, we consider the following factors for each consulting agreement: availability of the consulting services from other vendors, whether objective and reliable evidence for fair value exists for the undelivered elements, the nature of the consulting services, the timing of when the consulting contract was signed in comparison to the subscription service start date, and the contractual dependence of the subscription service on the customers satisfaction with the consulting work. If a consulting arrangement does not qualify for separate accounting, we recognize the consulting revenue ratably over the remaining term of the subscription contract. Additionally, in these situations we defer the direct costs of the consulting arrangement and amortize those costs over the same time period as the consulting revenue is recognized. The deferred cost on our condensed consolidated balance sheet totaled $27.8 million at October 31, 2010 and $19.1 million at January 31, 2010. Such amounts are included in prepaid expenses and other current assets and other assets, net.
Accounting for Deferred Commissions. We defer commission payments to our direct sales force. The commissions are deferred and amortized to sales expense over the non-cancelable terms of the related subscription contracts with our customers, which are typically 12 to 24 months. The commission payments, which are paid in full the month after the customers service commences, are a direct and incremental cost of the revenue arrangements. The deferred commission amounts are recoverable through the future revenue streams under the non-cancelable customer contracts. We believe this is the preferable method of accounting as the commission charges are so closely related to the revenue from the non-cancelable customer contracts that they should be recorded as an asset and charged to expense over the same period that the subscription revenue is recognized.
During the nine months ended October 31, 2010, we deferred $65.2 million of commission expenditures and we amortized $57.6 million to sales expense. During the same period a year ago, we deferred $43.0 million of commission expenditures and we amortized $46.0 million to sales expense. Deferred commissions on our condensed consolidated balance sheet totaled $83.2 million at October 31, 2010 and $75.5 million at January 31, 2010.
Accounting for Stock-Based Awards. We recognize the fair value of our stock awards on a straight-line basis over the requisite service period of the award, which is the vesting term of four years.
We recognized stock-based expense of $78.7 million, or 7 percent of revenue, during the nine months ended October 31, 2010. The requirement to expense stock-based awards will continue to materially reduce our reported results of operations. As of October 31, 2010, we had an aggregate of $237.7 million of stock compensation remaining to be amortized to expense over the remaining requisite service period of the underlying awards. We currently expect this stock compensation balance to be amortized as follows: $29.3 million during the remaining three months of fiscal 2011; $101.4 million during fiscal 2012; $64.7 million during fiscal 2013; $38.2 million during fiscal 2014; and $4.1 million during fiscal 2015. These amounts reflect only outstanding stock awards as of October 31, 2010 and assume no forfeiture activity. We expect to continue to issue share-based awards to our employees in future periods.
35
We recognize as an operating expense the payroll and social tax costs when stock options are exercised. The impact of stock-based expense in the future is dependent upon, among other things, the timing of when we hire additional employees, the effect of long-term incentive strategies involving stock awards in order to continue to attract and retain employees, the total number of stock awards granted, the fair value of the stock awards at the time of grant, changes in estimated forfeiture assumption rates and the tax benefit that we may or may not receive from stock-based expenses. Additionally, we are required to use an option-pricing model to determine the fair value of stock option awards. This determination of fair value is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards.
As of October 31, 2010, there were 1.9 million restricted stock units outstanding. We plan to continue awarding restricted stock units to our employees in the future. The restricted stock units, which upon vesting entitles the holder to one share of common stock for each restricted stock unit, have an exercise price of $0.001 per share, which is equal to the par value of our common stock, and vest over 4 years. The fair value of the restricted stock units is based on our closing stock price on the date of grant, and compensation expense, net of estimated forfeitures, is recognized on a straight-line basis over the vesting period.
Accounting for Income Taxes. We account for income taxes using the liability method, which requires the recognition of deferred tax assets or liabilities for the tax-effected temporary differences between the financial reporting and tax bases of our assets and liabilities and for net operating loss and tax credit carryforwards. The tax expense or benefit for unusual items, or certain adjustments to the valuation allowance are treated as discrete items in the interim period in which the events occur.
Our effective tax rate could be adversely affected by changes in the mix of earnings and losses in countries with differing statutory tax rates, certain non-deductible expenses as a result of acquisitions, the valuation of deferred tax assets and liabilities, and changes in tax laws and accounting principles.
36
Results of Operations
The following tables set forth selected data for each of the periods indicated and are in thousands. All data is unaudited.
Three months ended October 31, |
Nine months
ended October 31, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Subscription and support |
$ | 402,948 | $ | 306,870 | $ | 1,122,611 | $ | 882,078 | ||||||||
Professional services and other |
26,139 | 23,679 | 77,661 | 69,456 | ||||||||||||
Total revenues |
429,087 | 330,549 | 1,200,272 | 951,534 | ||||||||||||
Cost of revenues: |
||||||||||||||||
Subscription and support |
54,089 | 40,745 | 147,127 | 116,744 | ||||||||||||
Professional services and other |
28,042 | 24,825 | 84,375 | 73,122 | ||||||||||||
Total cost of revenues |
82,131 | 65,570 | 231,502 | 189,866 | ||||||||||||
Gross profit |
346,956 | 264,979 | 968,770 | 761,668 | ||||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
47,305 | 32,763 | 130,357 | 95,450 | ||||||||||||
Marketing and sales |
200,544 | 152,166 | 558,812 | 436,647 | ||||||||||||
General and administrative |
63,951 | 49,909 | 181,713 | 139,818 | ||||||||||||
Total operating expenses |
311,800 | 234,838 | 870,882 | 671,915 | ||||||||||||
Income from operations |
35,156 | 30,141 | 97,888 | 89,753 | ||||||||||||
Investment income |
11,699 | 7,503 | 28,309 | 19,780 | ||||||||||||
Interest expense |
(7,374 | ) | (292 | ) | (21,619 | ) | (793 | ) | ||||||||
Other expense |
(921 | ) | (336 | ) | (4,659 | ) | (1,037 | ) | ||||||||
Income before provision for income taxes and noncontrolling interest |
38,560 | 37,016 | 99,919 | 107,703 | ||||||||||||
Provision for income taxes |
(16,192 | ) | (15,573 | ) | (41,092 | ) | (45,426 | ) | ||||||||
Consolidated net income |
22,368 | 21,443 | 58,827 | 62,277 | ||||||||||||
Less: net income attributable to noncontrolling interest |
(1,296 | ) | (752 | ) | (5,266 | ) | (1,952 | ) | ||||||||
Net income attributable to salesforce.com |
$ | 21,072 | $ | 20,691 | $ | 53,561 | $ | 60,325 | ||||||||
As of | ||||||||||||
October 31, 2010 |
January 31, 2010 (1) |
October 31, 2009 |
||||||||||
Balance sheet data: |
||||||||||||
Cash, cash equivalents and marketable securities |
$ | 1,802,440 | $ | 1,727,048 | $ | 1,070,092 | ||||||
Deferred revenue, current and noncurrent |
694,557 | 704,348 | 545,435 |
(1) | Cash, cash equivalents and marketable securities includes the net proceeds from our January 2010 convertible senior note offering totaling approximately $500.0 million as described in Note 2 in the condensed consolidated financial statements. |
37
Three months ended October 31, |
Nine months ended October 31, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues by geography: |
||||||||||||||||
Americas |
$ | 292,540 | $ | 232,802 | $ | 826,493 | $ | 679,460 | ||||||||
Europe |
76,464 | 60,761 | 208,851 | 168,355 | ||||||||||||
Asia Pacific |
60,083 | 36,986 | 164,928 | 103,719 | ||||||||||||
$ | 429,087 | $ | 330,549 | $ | 1,200,272 | $ | 951,534 | |||||||||
Cost of revenues and operating expenses include the following amounts related to stock-based awards.
Three months ended October 31, |
Nine months ended October 31, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Cost of revenues |
$ | 2,357 | $ | 2,995 | $ | 8,617 | $ | 9,322 | ||||||||
Research and development |
3,976 | 2,707 | 12,119 | 8,741 | ||||||||||||
Marketing and sales |
11,969 | 9,055 | 36,496 | 28,314 | ||||||||||||
General and administrative |
7,330 | 5,650 | 21,483 | 16,570 |
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The following tables set forth selected consolidated statements of operations data for each of the periods indicated as a percentage of total revenues.
Three months ended October 31, |
Nine months ended October 31, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Subscription and support |
94 | % | 93 | % | 94 | % | 93 | % | ||||||||
Professional services and other |
6 | 7 | 6 | 7 | ||||||||||||
Total revenues |
100 | 100 | 100 | 100 | ||||||||||||
Cost of revenues: |
||||||||||||||||
Subscription and support |
13 | 12 | 12 | 12 | ||||||||||||
Professional services and other |
6 | 8 | 7 | 8 | ||||||||||||
Total cost of revenues |
19 | 20 | 19 | 20 | ||||||||||||
Gross profit |
81 | 80 | 81 | 80 | ||||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
11 | 10 | 11 | 10 | ||||||||||||
Marketing and sales |
47 | 46 | 47 | 46 | ||||||||||||
General and administrative |
15 | 15 | 15 | 15 | ||||||||||||
Total operating expenses |
73 | 71 | 73 | 71 | ||||||||||||
Income from operations |
8 | 9 | 8 | 9 | ||||||||||||
Investment income |
3 | 2 | 2 | 2 | ||||||||||||
Interest expense |
(2 | ) | | (2 | ) | | ||||||||||
Other expense |
| | | | ||||||||||||
Income before provision for income taxes and noncontrolling interest |
9 | 11 | 8 | 11 | ||||||||||||
Provision for income taxes |
(4 | ) | (5 | ) | (3 | ) | (5 | ) | ||||||||
Consolidated net income |
5 | 6 | 5 | 6 | ||||||||||||
Less: net income attributable to noncontrolling interest |
| | (1 | ) | | |||||||||||
Net income attributable to salesforce.com |
5 | % | 6 | % | 4 | % | 6 | % | ||||||||
Three months ended October 31, |
Nine months ended October 31, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues by geography: |
||||||||||||||||
Americas |
68 | % | 70 | % | 69 | % | 71 | % | ||||||||
Europe |
18 | 18 | 17 | 18 | ||||||||||||
Asia Pacific |
14 | 12 | 14 | 11 | ||||||||||||
100 | % | 100 | % | 100 | % | 100 | % | |||||||||
Three months ended October 31, |
Nine months ended October 31, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Stock-based expenses: |
||||||||||||||||
Cost of revenues |
| % | 1 | % | 1 | % | 1 | % | ||||||||
Research and development |
1 | 1 | 1 | 1 | ||||||||||||
Marketing and sales |
3 | 3 | 3 | 3 | ||||||||||||
General and administrative |
2 | 1 | 2 | 2 |
39
Three Months Ended October 31, 2010 and 2009
Revenues.
Three Months Ended October 31, |
Variance | |||||||||||||||
(In thousands) |
2010 | 2009 | Dollars | Percent | ||||||||||||
Subscription and support |
$ | 402,948 | $ | 306,870 | $ | 96,078 | 31 | % | ||||||||
Professional services and other |
26,139 | 23,679 | 2,460 | 10 | % | |||||||||||
Total revenues |
$ | 429,087 | $ | 330,549 | $ | 98,538 | 30 | % | ||||||||
Total revenues were $429.1 million for the three months ended October 31, 2010, compared to $330.5 million during the same period a year ago, an increase of $98.5 million, or 30 percent. Subscription and support revenues were $403.0 million, or 94 percent of total revenues, for the three months ended October 31, 2010, compared to $306.9 million, or 93 percent of total revenues, during the same period a year ago. The increase in subscription and support revenues was due primarily to new customers, upgrades and additional subscriptions from existing customers and improvement in renewal rates over the past twelve months. Professional services and other revenues were $26.1 million, or 6 percent of total revenues, for the three months ended October 31, 2010, compared to $23.7 million, or 7 percent of total revenues, for the same period a year ago. The increase in professional services and other revenues was primarily due to the higher demand for services from an increased number of customers.
Revenues in Europe and Asia Pacific accounted for $136.5 million, or 32 percent of total revenues, for the three months ended October 31, 2010, compared to $97.7 million, or 30 percent of total revenues, during the same period a year ago, an increase of $38.8 million, or 40 percent. The increase in revenues outside of the Americas was the result of our efforts to expand internationally. Additionally, the value of the U.S. dollar relative to foreign currencies contributed to a slight decrease in revenues outside the Americas for the three months ended October 31, 2010 as compared to the same period a year ago. The foreign currency impact had the effect of reducing our aggregate revenues by $3.7 million compared to the same period a year ago. As part of our overall growth, we expect the percentage of our revenues generated in Europe and Asia Pacific to continue to increase as a percentage of our total revenues.
Cost of Revenues.
Three Months Ended October 31, |
Variance | |||||||||||
(In thousands) |
2010 | 2009 | Dollars | |||||||||
Subscription and support |
$ | 54,089 | $ | 40,745 | $ | 13,344 | ||||||
Professional services and other |
28,042 | 24,825 | 3,217 | |||||||||
Total cost of revenues |
$ | 82,131 | $ | 65,570 | $ | 16,561 | ||||||
Percent of total revenues |
19 | % | 20 | % |
Cost of revenues was $82.1 million, or 19 percent of total revenues, for three months ended October 31, 2010, compared to $65.6 million, or 20 percent of total revenues, for the same period a year ago, an increase of $16.6 million. The increase in absolute dollars was primarily due to an increase of $4.8 million in employee-related costs, an increase of $2.2 million in service delivery costs, primarily due to our efforts in increasing data center capacity, an increase of $5.0 million in depreciation and amortization expenses including amortization expense related to our acquisition of Jigsaw and other acquisition activity, an increase of $3.3 million in outside subcontractor and other service costs and an increase of $1.6 million in allocated overhead. These increases were offset by a decrease of $0.6 million in stock-based expenses. The cost of the additional professional services headcount resulted in the cost of professional services and other revenues to be in excess of the related revenue for the three months ended
40
October 31, 2010 by $1.9 million. This reduction was the result of reduced utilization of existing professional services staff caused by lowered customer demand. We expect the cost of professional services and other revenue to continue to be in excess of the related revenue during fiscal 2011. We plan to continue to make this investment since our professional services are primarily designed to accelerate the adoption and expanded use by our customers of our enterprise cloud computing application service.
Research and Development.
Three Months Ended October 31, |
Variance | |||||||||||
(In thousands) |
2010 | 2009 | Dollars | |||||||||
Research and development |
$ | 47,305 | $ | 32,763 | $ | 14,542 | ||||||
Percent of total revenues |
11 | % | 10 | % |
Research and development expenses were $47.3 million, or 11 percent of total revenues, during the three months ended October 31, 2010, compared to $32.8 million, or 10 percent of total revenues, during the same period a year ago, an increase of $14.5 million. The increase in absolute dollars was due to an increase of $10.8 million in employee-related costs, an increase of $1.3 million in stock-based expenses, and an increase of $2.1 million in allocated overhead. We increased our research and development headcount by 34 percent since October 31, 2009 in order to upgrade and extend our service offerings and develop new technologies.
Marketing and Sales.
Three Months Ended October 31, |
Variance | |||||||||||
(In thousands) |
2010 | 2009 | Dollars | |||||||||
Marketing and sales |
$ | 200,544 | $ | 152,166 | $ | 48,378 | ||||||
Percent of total revenues |
47 | % | 46 | % |
Marketing and sales expenses were $200.5 million, or 47 percent of total revenues, during the three months ended October 31, 2010, compared to $152.2 million, or 46 percent of total revenues, during the same period a year ago, an increase of $48.4 million. The increase in absolute dollars was primarily due to increases of $34.1 million in employee related costs, $2.9 million in stock-based expenses, $0.2 million of amortized purchased intangibles which includes amortization expense related to our acquisition of Jigsaw and other acquisition activity, an increase of $6.1 million in advertising costs and marketing and event costs, $0.3 million in outside subcontractor and other service costs and an increase of $4.8 million in allocated overhead. Our marketing and sales headcount increased by 26 percent since October 31, 2009 as we hired additional sales personnel to focus on adding new customers and increasing penetration within our existing customer base. Some of the increase in headcount was due to the acquisition of Jigsaw in May 2010.
General and Administrative.
Three Months Ended | ||||||||||||
October 31, | Variance | |||||||||||
(In thousands) |
2010 | 2009 | Dollars | |||||||||
General and administrative |
$ | 63,951 | $ | 49,909 | $ | 14,042 | ||||||
Percent of total revenues |
15 | % | 15 | % |
General and administrative expenses were $64.0 million, or 15 percent of total revenues, during the three months ended October 31, 2010, compared to $49.9 million, or 15 percent of total revenues, during the same period a year ago, an increase of $14.0 million. The increase was primarily due to $13.6 million increase in
41
employee-related costs. Our general and administrative headcount increased by 22 percent since October 31, 2009 as we added personnel to support our growth.
Income from Operations.
Three Months Ended | ||||||||||||
October 31, | Variance | |||||||||||
(In thousands) |
2010 | 2009 | Dollars | |||||||||
Income from operations |
$ | 35,156 | $ | 30,141 | $ | 5,015 | ||||||
Percent of total revenues |
8 | % | 9 | % |
Income from operations during the three months ended October 31, 2010 was $35.2 million and included $25.6 million of stock-based expenses and $5.9 million of amortization of purchased intangibles and acquired developed technology. During the same period a year ago, operating income was $30.1 million and included $20.4 million of stock-based expenses and $2.8 million of amortization of purchased intangibles and acquired developed technology.
Investment income.
Three Months Ended October 31, |
Variance | |||||||||||
(In thousands) |
2010 | 2009 | Dollars | |||||||||
Investment income |
$ | 11,699 | $ | 7,503 | $ | 4,196 | ||||||
Percent of total revenues |
3 | % | 2 | % |
Investment income consists of income on cash and marketable securities balances. Investment income was $11.7 million for the three months ended October 31, 2010 and was $7.5 million during the same period a year ago. The increase was primarily due to the increase in cash equivalents and marketable securities balances resulting from cash generated by operating activities, proceeds from our convertible senior note offering in January 2010 and the proceeds from stock option exercises.
Interest expense.
Three Months Ended October 31, |
Variance | |||||||||||
(In thousands) |
2010 | 2009 | Dollars | |||||||||
Interest expense |
$ | (7,374 | ) | $ | (292 | ) | $ | (7,082 | ) | |||
Percent of total revenues |
2 | % | 0 | % |
Interest expense consists primarily of interest on our convertible senior notes and capital leases. Interest expense was $7.4 million during the three months ended October 31, 2010 and was $0.3 million during the same period a year ago. The increase was primarily due to interest expense associated with the January 2010 issuance of $575.0 million of convertible senior notes and capital leases associated with equipment in expanding our data center capacity.
Other expense.
Three Months Ended October 31, |
Variance | |||||||||||
(In thousands) |
2010 | 2009 | Dollars | |||||||||
Other expense |
$ | (921 | ) | $ | (336 | ) | $ | (585 | ) |
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Other expense primarily consists of foreign currency transaction gains and losses. Other expense increased due to realized and unrealized losses on foreign currency transactions for the three months ended October 31, 2010 when compared to the same period a year ago.
Provision for Income Taxes.
Three Months Ended October 31, |
Variance | |||||||||||
(In thousands) |
2010 | 2009 | Dollars | |||||||||
Provision for income taxes |
$ | (16,192 | ) | $ | (15,573 | ) | $ | (619 | ) | |||
Effective tax rate |
42 | % | 42 | % |
Our effective tax rate of 42 percent for the three months ended October 31, 2010 was higher than the federal statutory rate of 35 percent primarily due to state income taxes, foreign tax rate differential, non-deductible expenses as a result of acquisitions and the unfavorable impact of a change in California tax law, which were partially offset by California tax credits. Similarly, our effective tax rate of 42 percent for the three months ended October 31, 2009 was higher than the federal statutory rate of 35 percent primarily due to state income taxes, foreign tax rate differential and the unfavorable impact of a change in California tax law, which were partially offset by federal and California tax credits.
Nine Months Ended October 31, 2010 and 2009
Revenues.
Nine Months
Ended October 31, |
Variance | |||||||||||||||
(In thousands) |
2010 | 2009 | Dollars | Percent | ||||||||||||
Subscription and support |
$ | 1,122,611 | $ | 882,078 | $ | 240,533 | 27 | % | ||||||||
Professional services and other |
77,661 | 69,456 | 8,205 | 12 | % | |||||||||||
Total revenues |
$ | 1,200,272 | $ | 951,534 | $ | 248,738 | 26 | % | ||||||||
Total revenues were $1,200.3 million for the nine months ended October 31, 2010, compared to $951.5 million during the same period a year ago, an increase of $248.7 million, or 26 percent. Subscription and support revenues were $1,122.6 million, or 94 percent of total revenues, for the nine months ended October 31, 2010, compared to $882.1 million, or 93 percent of total revenues, during the same period a year ago. The increase in subscription and support revenues was due primarily to new customers, upgrades and additional subscriptions from existing customers and improvement in renewal rates. Professional services and other revenues were $77.7 million, or 6 percent of total revenues, for the nine months ended October 31, 2010, compared to $69.5 million, or 7 percent of total revenues, for the same period a year ago. The increase in professional services and other revenues was due primarily to the higher demand for services from an increased number of customers.
Revenues in Europe and Asia Pacific accounted for $373.8 million, or 31 percent of total revenues, for the nine months ended October 31, 2010, compared to $272.1 million, or 29 percent of total revenues, during the same period a year ago, an increase of $101.7 million, or 37 percent. The increase in revenues outside of the Americas was the result of our efforts to expand internationally. Additionally, the value of the U.S. dollar relative to foreign currencies contributed to the slight decrease in revenues outside the Americas for the nine months ended October 31, 2010 as compared to the same period a year ago. The foreign currency impact had the effect of reducing our aggregate revenues by $4.0 million compared to the same period a year ago. As part of our overall growth, we expect the percentage of our revenues generated in Europe and Asia Pacific to continue to increase as a percentage of our total revenues.
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Cost of Revenues.
Nine Months Ended October 31, |
Variance | |||||||||||
(In thousands) |
2010 | 2009 | Dollars | |||||||||
Subscription and support |
$ | 147,127 | $ | 116,744 | $ | 30,383 | ||||||
Professional services and other |
84,375 | 73,122 | 11,253 | |||||||||
Total cost of revenues |
$ | 231,502 | $ | 189,866 | $ | 41,636 | ||||||
Percent of total revenues |
19 | % | 20 | % |
Cost of revenues was $231.5 million, or 19 percent of total revenues, for nine months ended October 31, 2010, compared to $189.9 million, or 20 percent of total revenues, for the same period a year ago, an increase of $41.6 million. The increase in absolute dollars was primarily due to an increase of $16.1 million in employee-related costs, an increase of $9.7 million in depreciation and amortization expenses, an increase of $8.2 million in outside subcontractor and other service costs, an increase of $4.9 million in service delivery costs and an increase of $2.1 million in allocated overhead. These increases were offset by a decrease of $0.7 million in stock based expenses. The cost of the additional professional services headcount resulted in the cost of professional services and other revenues to be in excess of the related revenue for the nine months ended October 31, 2010 by $6.7 million. We increased the professional services headcount in order to meet the current and anticipated demand for our consulting and training services as our subscriber base has expanded to include more large businesses and as we have expanded internationally.
Research and Development.
Nine Months Ended October 31, |
Variance | |||||||||||
(In thousands) |
2010 | 2009 | Dollars | |||||||||
Research and development |
$ | 130,357 | $ | 95,450 | $ | 34,907 | ||||||
Percent of total revenues |
11 | % | 10 | % |
Research and development expenses were $130.4 million, or 11 percent of total revenues, during the nine months ended October 31, 2010, compared to $95.5 million, or 10 percent of total revenues, during the same period a year ago, an increase of $34.9 million. The increase in absolute dollars was due to an increase of $26.9 million in employee-related costs, an increase of $3.4 million in stock-based expenses and an increase of $3.3 million in allocated overhead. We increased our research and development headcount by 34 percent since October 31, 2009 in order to upgrade and extend our service offerings and develop new technologies. Some of the increase in headcount was due to acquired businesses.
Marketing and Sales.
Nine Months
Ended October 31, |
Variance | |||||||||||
(In thousands) |
2010 | 2009 | Dollars | |||||||||
Marketing and sales |
$ | 558,812 | $ | 436,647 | $ | 122,165 | ||||||
Percent of total revenues |
47 | % | 46 | % |
Marketing and sales expenses were $558.8 million, or 47 percent of total revenues, during the nine months ended October 31, 2010, compared to $436.6 million, or 46 percent of total revenues, during the same period a year ago, an increase of $122.2 million. The increase in absolute dollars was primarily due to increases of $95.7 million in employee related costs, $8.2 million in stock-based expenses, an increase of $7.6 million in advertising costs and marketing and event costs and an increase of $8.7 in allocated overhead. Our marketing and sales
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headcount increased by 26 percent since October 31, 2009 as we hired additional sales personnel to focus on adding new customers and increasing penetration within our existing customer base. Some of the increase in headcount was due to acquired businesses.
General and Administrative.
Nine Months Ended October 31, |
Variance | |||||||||||
(In thousands) |
2010 | 2009 | Dollars | |||||||||
General and administrative |
$ | 181,713 | $ | 139,818 | $ | 41,895 | ||||||
Percent of total revenues |
15 | % | 15 | % |
General and administrative expenses were $181.7 million, or 15 percent of total revenues, during the nine months ended October 31, 2010, compared to $139.8 million, or 15 percent of total revenues, during the same period a year ago, an increase of $41.9 million. The increase was primarily due to an increase in $32.7 million employee-related costs, an increase of $4.9 million in stock-based expenses, and an increase of $2.6 in depreciation and amortization expenses. Our general and administrative headcount increased by 22 percent since October 31, 2009 as we added personnel to support our growth.
Income from Operations.
Nine Months
Ended October 31, |
Variance | |||||||||||
(In thousands) |
2010 | 2009 | Dollars | |||||||||
Income from operations |
$ | 97,888 | $ | 89,753 | $ | 8,135 | ||||||
Percent of total revenues |
8 | % | 9 | % |
Income from operations during the nine months ended October 31, 2010 was $97.9 million and included $78.7 million of stock-based expenses and $13.4 million of amortization of purchased intangibles and acquired developed technology. During the same period a year ago, operating income was $89.8 million and included $62.9 million of stock-based expenses and $8.1 million of amortization of purchased intangibles.
Investment income.
Nine Months Ended October 31, |
Variance | |||||||||||
(In thousands) |
2010 | 2009 | Dollars | |||||||||
Investment income |
$ | 28,309 | $ | 19,780 | $ | 8,529 | ||||||
Percent of total revenues |
2 | % | 2 | % |
Investment income consists of income on cash and marketable securities balances. Investment income was $28.3 million for the nine months ended October 31, 2010 and was $19.8 million during the same period a year ago. The increase was primarily due to increased realized gains and the increase in marketable securities balances resulting from cash generated by operating activities, proceeds from our senior note offering in January 2010 and the proceeds from stock option exercises.
Interest expense.
Nine Months Ended October 31, |
Variance | |||||||||||
(In thousands) |
2010 | 2009 | Dollars | |||||||||
Interest expense |
$ | (21,619 | ) | $ | (793 | ) | $ | (20,826 | ) | |||
Percent of total revenues |
2 | % | 0 | % |
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Interest expense consists primarily of interest on our convertible senior notes and capital leases. Interest expense was $21.6 million during the nine months ended October 31, 2010 and was $0.8 million during the same period a year ago. The increase was primarily due to interest expense associated with the January 2010 issuance of $575.0 million of convertible senior notes and capital leases associated with equipment in expanding our data center capacity.
Other expense.
Nine Months Ended October 31, |
Variance | |||||||||||
(In thousands) |
2010 | 2009 | Dollars | |||||||||
Other expense |
$ | (4,659 | ) | $ | (1,037 | ) | $ | (3,622 | ) |
Other expense primarily consists of foreign currency translation adjustments. Other expense increased due to realized and unrealized losses on foreign currency translations for the nine months ended October 31, 2010 when compared to the same period a year ago.
Provision for Income Taxes.
Nine Months Ended October 31, |
Variance | |||||||||||
(In thousands) |
2010 | 2009 | Dollars | |||||||||
Provision for income taxes |
$ | (41,092 | ) | $ | (45,426 | ) | $ | 4,334 | ||||
Effective tax rate |
41 | % | 42 | % |
Our effective tax rate of 41 percent for the nine months ended October 31, 2010 was higher than the federal statutory rate of 35 percent primarily due to state income taxes, foreign tax rate differential, non-deductible expenses as a result of acquisitions, and the unfavorable impact of a change in California tax law, which were partially offset by California tax credits. Similarly, our effective tax rate of 42 percent for the nine months ended October 31, 2009 was higher than the federal statutory rate of 35 percent primarily due to state income taxes, foreign tax rate differential, and the unfavorable impact of a change in California tax law, which were partially offset by Federal and California tax credits.
In February 2009, the State of California enacted several income tax law changes which include an election to apply a single-sales factor apportionment formula and adoption of a market sourcing approach for service income that will impact us beginning in fiscal 2012. As a result, we re-valued the anticipated future tax effects of California temporary differences including stock-based compensation and purchased intangibles, starting in the first quarter ended April 30 2009. Accordingly, we recorded a tax expense of $2.5 million during the first nine months ended October 31, 2009.
New Accounting Pronouncement
In September 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangementsa consensus of the FASB Emerging Issues Task Force (ASU 2009-13). It updates the existing multiple-element revenue arrangements guidance currently included under ASC 605-25, which originated primarily from the guidance in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21). The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. ASU 2009-13 will be effective for the first annual reporting period beginning on or after June 15, 2010. We believe the future impact of this new accounting pronouncement will not be material to consolidated net income.
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Liquidity and Capital Resources
At October 31, 2010, our principal sources of liquidity were cash, cash equivalents and marketable securities totaling $1.8 billion and accounts receivable of $258.8 million.
Net cash provided by operating activities was $293.3 million during the nine months ended October 31, 2010 and $179.4 million during the same period a year ago. The improvement in cash flow was due primarily to the growth in our customer base and improving renewal rates and the associated increase in billings and collections. Cash provided by operating activities has historically been affected by: the amount of net income; sales of subscriptions, support and professional services; changes in working capital accounts, particularly increases and seasonality in accounts receivable and deferred revenue as described above, and the timing of commission and bonus payments, collections from large enterprise customers; add-backs of non-cash expense items such as depreciation and amortization, amortization of debt discount and the expense associated with stock-based awards.
Net cash used in investing activities was $679.8 million during the nine months ended October 31, 2010 and $473.6 million during the same period a year ago. The net cash used in investing activities during the nine months ended October 31, 2010 primarily related to the purchase of Jigsaw in May 2010, investment of cash balances and capital expenditures, the deposit on undeveloped land in San Francisco, and investments in privately-held companies.
Net cash provided by financing activities was $3.4 million during the nine months ended October 31, 2010 and $59.5 million during the same period a year ago. Net cash provided by financing activities during the nine months ended October 31, 2010 consisted of $116.0 million of proceeds from the exercise of employee stock options and $46.8 million of excess tax benefits from employee stock plans, both of which were offset by the $152.2 million in purchases of shares held by others in Salesforce Japan and $7.2 million of principal payments on capital leases.
In January 2010, we issued $575.0 million of 0.75% convertible senior notes due January 15, 2015 (the Notes) and concurrently entered into convertible notes hedges (the Note Hedges) and separate warrant transactions (the Warrants). The Notes will mature on January 15, 2015, unless earlier converted. As of October 31, 2010, the Notes have not been repurchased or converted. We also have not received any shares under the Note Hedges or delivered cash or shares under the Warrants. For further information, see Note 2 to the condensed consolidated financial statements.
On November 1, 2010, we purchased approximately 14 acres of undeveloped land in San Francisco, California, including entitlements and improvements associated with the land and parking rights in an existing garage for approximately $278.0 million in cash. No date for construction is set, but we plan to use the land to build our new global headquarters. We plan to devote additional financial resources in the future to build our new headquarters.
Our cash, cash equivalents and marketable securities are comprised of corporate notes and obligations, U.S. agency obligations, U.S. treasury securities, mortgage backed securities, collateralized mortgage obligations, time deposits, money market mutual funds, government obligations and municipal securities.
As of October 31, 2010 we have a total of $11.7 million in letters of credit outstanding in favor of our landlords for office space in San Francisco, California, New York City, Singapore, Sweden, United Kingdom, Australia and Switzerland. To date, no amounts have been drawn against the letters of credit, which renew annually and mature at various dates through September 2021.
We do not have any special purpose entities, and other than operating leases for office space and computer equipment, we do not engage in off-balance sheet financing arrangements. Additionally, we currently do not have a bank line of credit.
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Our principal commitments consist of obligations under leases for office space and co-location facilities for data center capacity and the development and test data center, and computer equipment and furniture and fixtures. At October 31, 2010, the future non-cancelable minimum payments under these commitments were as follows (in thousands):
Capital Leases |
Operating Leases |
|||||||
Fiscal Period: |
||||||||
Remaining three months in fiscal 2011 |
$ | 2,540 | $ | 27,340 | ||||
Fiscal 2012 |
12,311 | 98,722 | ||||||
Fiscal 2013 |
5,713 | 88,946 | ||||||
Fiscal 2014 |
2,222 | 64,679 | ||||||
Fiscal 2015 |
| 37,908 | ||||||
Thereafter |
| 147,343 | ||||||
Total minimum lease payments |
22,786 | $ | 464,938 | |||||
Less: amount representing interest |
(1,258 | ) | ||||||
Present value of capital lease obligations |
$ | 21,528 | ||||||
Our lease agreements provide us with the option to renew. Our future operating lease obligations would change if we exercised these options and if we entered into additional operating lease agreements as we expand our operations.
We believe our existing cash, cash equivalents and short-term marketable securities and cash provided by operating activities will be sufficient to acquire the remaining outstanding shares of our subsidiary, Salesforce Japan, meet our working capital and other capital expenditure needs over the next 12 months.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Foreign currency exchange risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, British Pound Sterling, Canadian dollar, Swiss francs, Singapore dollars, Japanese Yen and Australian dollar. We seek to minimize the impact of certain foreign currency fluctuations by hedging certain balance sheet exposures with foreign currency forward contracts. Any gain or loss from settling these contracts is offset by the loss or gain derived from the underlying balance sheet exposures. The hedging contracts by policy have maturities of less than three months. Additionally, by policy, we do not enter into any hedging contracts for trading or speculative purposes.
Interest rate sensitivity
We had cash, cash equivalents and marketable securities totaling $1.8 billion at October 31, 2010. These amounts were invested primarily in money market funds, time deposits, corporate notes and bonds, government securities and other debt securities with credit ratings of at least single A or better. The cash, cash equivalents and short-term marketable securities are held for working capital purposes and were held for the purchase of undeveloped land in San Francisco, California on November 1, 2010. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes.
Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed rate interest securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in the market value due to changes in interest rates. However because we classify our debt securities as available for sale, no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary. Our fixed-income portfolio is subject to interest rate risk.
An immediate increase or decrease in interest rates of 100-basis points at October 31, 2010 could result in a $27.7 million market value reduction or increase of the same amount. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur. Fluctuations in the value of our investment securities caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive income, and are realized only if we sell the underlying securities.
At January 31, 2010, we had cash, cash equivalents and marketable securities totaling $1.7 billion. The fixed-income portfolio was also subject to interest rate risk. Changes in interest rates of 100-basis points would have resulted in market value changes of $13.1 million.
Market Risk and Market Interest Risk
In January 2010, we issued at par value $575.0 million of 0.75% convertible senior notes due 2015 (the Notes). Holders may convert their Notes prior to maturity upon the occurrence of certain circumstances. Upon conversion, we would pay the holder an amount of cash equal to the principal amount of the Notes. Amounts in excess of the principal amount, if any, may be paid in cash or stock at our option. Concurrent with the issuance of the Notes, we entered into separate note hedges transactions and the sale of warrants. These separate transactions were completed to reduce the potential economic dilution from the conversion of the Notes.
Our Notes have fixed annual interest rates at 0.75% and therefore, we do not have economic interest rate exposure on our Notes. However, the value of the Notes are exposed to interest rate risk. Generally, the fair market value of our fixed interest rate Notes will increase as interest rates fall and decrease as interest rates rise. In addition, the fair value of our Notes is affected by our stock price. The carrying value of our Notes was $466.8 million as of October 31, 2010. This represents the liability component of the $575.0 million principal balance as
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of October 31, 2010. The total estimated fair value of our Notes at October 31, 2010 was $860.8 million and the fair value was determined based on the closing trading price per $100 of our Notes as of the last day of trading for the third quarter of fiscal 2011, which was $149.70.
We have an investment portfolio that includes minority equity investments in several privately-held companies, many of which are in the development stage. When our ownership interests are less than 20 percent and we do not have the ability to exert significant influence on the investees, we account for the minority equity investments using the cost method of accounting. Otherwise, we account for the investments using the equity method of accounting. At October 31, 2010, the net book value of these investments was $10.7 million.
ITEM 4. | CONTROLS AND PROCEDURES |
(a) Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this report (the Evaluation Date).
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on managements evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.
(b) Changes in internal control over financial reporting
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that evaluation, our principal executive officer and principal financial officer concluded that there has not been any material change in our internal control over financial reporting during the quarter covered by this report that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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ITEM 1. | LEGAL PROCEEDINGS and CLAIMS |
We are involved in various legal proceedings arising from the normal course of business activities. In managements opinion, resolution of these matters is not expected to have a material adverse impact on our consolidated results of operations, cash flows or financial position. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect our future results of operations, cash flows or financial position.
On May 18, 2010, Microsoft Corporation filed a complaint against us in the United States District Court for the Western District of Washington alleging infringement of nine patents which Microsoft claimed were related to certain aspects of our products and services. The complaint sought, among other things, damages, attorneys fees and costs, and injunctive relief. On June 24, 2010, we filed a complaint against Microsoft in the United States District Court for the District of Delaware alleging infringement of five of our patents related to certain aspects of Microsofts products and services. The complaint sought, among other things, damages, attorneys fees and costs, and injunctive relief. On August 2, 2010, we entered into a patent cross-license and settlement agreement with Microsoft and the companies subsequently dismissed their respective cases.
Many of our subscription agreements require us to indemnify our customers for third-party intellectual property infringement claims, which could increase the cost to us of an adverse ruling on such a claim. Any adverse determination related to intellectual property claims or litigation could prevent us from offering our service to others, could be material to our net income or cash flows (or both) of a particular quarter or could otherwise adversely affect our operating results.
ITEM 1A. | RISK FACTORS |
The risks and uncertainties described below are not the only ones facing us. Other events that we do not currently anticipate or that we currently deem immaterial also may affect our results of operations and financial condition.
Risks Related to Our Business and Industry
Defects or disruptions in our service could diminish demand for our service and subject us to substantial liability.
Because our service is complex and we have incorporated a variety of new computer hardware and software, both developed in-house and acquired from third party vendors, our service may have errors or defects that users identify after they begin using it that could result in unanticipated downtime for our subscribers and harm our reputation and our business. Internet-based services frequently contain undetected errors when first introduced or when new versions or enhancements are released. We have from time to time found defects in our service and new errors in our existing service may be detected in the future. In addition, our customers may use our service in unanticipated ways that may cause a disruption in service for other customers attempting to access their data. Since our customers use our service for important aspects of their business, any errors, defects, disruptions in service or other performance problems with our service could hurt our reputation and may damage our customers businesses. If that occurs, customers could elect not to renew, or delay or withhold payment to us, we could lose future sales or customers may make warranty or other claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or the expense and risk of litigation.
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Interruptions or delays in service from our third-party data center hosting facilities could impair the delivery of our service and harm our business.
We currently serve our customers from third-party data center hosting facilities located in the United States and Singapore. Any damage to, or failure of, our systems generally could result in interruptions in our service. As we continue to add data centers and add capacity in our existing data centers, we may move or transfer our data and our customers data. Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of our service. Further, any damage to, or failure of, our systems generally could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable.
As part of our current disaster recovery arrangements, our production environment and all of our customers data is currently replicated in near real-time in a facility located on the east coast of the United States. Features added through acquisition are temporarily served through alternate facilities. We do not control the operation of any of these facilities, and they are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Despite precautions taken at these facilities, the occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in our service. Even with the disaster recovery arrangements, our service could be interrupted.
If our security measures are breached and unauthorized access is obtained to a customers data or our data or our information technology systems, our service may be perceived as not being secure, customers may curtail or stop using our service and we may incur significant legal and financial exposure and liabilities.
Our service involves the storage and transmission of customers proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. These security measures may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise, during transfer of data to additional data centers or at any time, and result in someone obtaining unauthorized access to our customers data or our data, including our intellectual property and other confidential business information, or our information technology systems. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers data or our data, including our intellectual property and other confidential business information, or our information technology systems. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, our customers may authorize third party technology providers, whose applications are available through our AppExchange directory, to access their customer data. Because we do not control the transmissions between our customers and third-party AppExchange technology providers, or the processing of such data by third-party AppExchange technology providers, we cannot ensure the complete integrity or security of such transmissions or processing. Any security breach could result in a loss of confidence in the security of our service, damage our reputation, disrupt our business, lead to legal liability and negatively impact our future sales.
Because we recognize revenue from subscriptions for our service over the term of the subscription, downturns or upturns in sales may not be immediately reflected in our operating results.
We generally recognize revenue from customers ratably over the terms of their subscription agreements, which are typically 12 to 24 months, although terms can range from one to 60 months. As a result, most of the revenue we report in each quarter is derived from the recognition of deferred revenue relating to subscription agreements entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in
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any one quarter may not be immediately reflected in our revenue results for that quarter. Such a decline, however, will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our service, and potential changes in our rate of renewals may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term. In addition, we may be unable to adjust our cost structure to reflect the changes in revenues.
We cannot accurately predict subscription renewal or upgrade rates and the impact these rates may have on our future revenue and operating results.
Our customers have no obligation to renew their subscriptions for our service after the expiration of their initial subscription period, which is typically 12 to 24 months, and in fact, some customers have elected not to renew. In addition, our customers may renew for fewer subscriptions, renew for shorter contract lengths, or renew for lower cost editions of our service. We cannot accurately predict renewal rates, particularly for our enterprise customers who purchase a large number of subscriptions under multiyear contracts and for our small and medium size business customers. Our renewal rates may decline or fluctuate as a result of a number of factors, including customer dissatisfaction with our service, customers ability to continue their operations and spending levels, decreases in the number of users at our customers and deteriorating general economic conditions. If our customers do not renew their subscriptions for our service or reduce the number of paying subscriptions at the time of renewal, our revenue will decline and our business will suffer.
Our future success also depends in part on our ability to sell additional features and services, more subscriptions or enhanced editions of our service to our current customers. This may also require increasingly sophisticated and costly sales efforts that are targeted at senior management. Similarly, the rate at which our customers purchase new or enhanced services depends on a number of factors, including general economic conditions. If our efforts to upsell to our customers are not successful, our business may suffer.
If we experience significant fluctuations in our rate of anticipated growth and fail to balance our expenses with our revenue forecasts, our results could be harmed.
Due to our evolving business model, the unpredictability of new markets that we enter and the unpredictability of future general economic and financial market conditions, we may not be able to accurately forecast our rate of growth. We plan our expense levels and investment on estimates of future revenue and future anticipated rate of growth. We may not be able to adjust our spending quickly enough if the addition of new subscriptions or the renewal rate for existing subscriptions falls short of our expectations.
As a result, we expect that our revenues, operating results and cash flows may fluctuate significantly on a quarterly basis. Our recent revenue growth rates may not be sustainable and may decline in the future. We believe that period-to-period comparisons of our revenues, operating results and cash flows may not be meaningful and should not be relied upon as an indication of future performance.
We have been and may in the future be sued by third parties for alleged infringement of their proprietary rights.
The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. We have received in the past, and may receive in the future, communications from third parties claiming that we have infringed the intellectual property rights of others. In addition, we have been, and may in the future be, sued by third parties for alleged infringement of their proprietary rights, including patent infringement lawsuits. Our technologies may be subject to injunction if they are held to infringe the rights of a third party and may not be able to withstand any third-party claims against their use.
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The outcome of any litigation, regardless of its merits, is inherently uncertain. Any intellectual property claims and lawsuits could be time-consuming and expensive to resolve, divert management attention from executing our business plan and require us to change our technology, change our business practices and/or pay monetary damages or enter into short- or long-term royalty or licensing agreements. In addition, in certain circumstances, such as those in which the opposing parties are large and well-funded companies, we may face a more expensive and protracted path to resolution of such claims or lawsuits.
Many of our subscription agreements require us to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us of an adverse ruling on such a claim. Any adverse determination related to intellectual property claims or litigation could prevent us from offering our service to others, could be material to our net income or cash flows (or both) of a particular quarter or could otherwise adversely affect our operating results.
Our exposure to risks associated with the use of intellectual property may be increased as a result of acquisitions, as we have a lower level of visibility into the development process with respect to such technology or the care taken to safeguard against infringement risks. In addition, third parties may make infringement and similar or related claims after we have acquired technology that had not been asserted prior to our acquisition.
Our quarterly results can fluctuate and our stock price and the value of your investment could decline substantially.
Our quarterly operating results are likely to fluctuate. For example, our fourth quarter has historically been our strongest quarter for new business and renewals. The year-over-year compounding effect of this seasonality in billing patterns and overall new business and renewal activity causes the value of invoices that we generate in the fourth quarter to continually increase in proportion to our billings in the other three quarters of our fiscal year.
Additionally, some of the important factors that may cause our revenues, operating results and cash flows to fluctuate from quarter to quarter include:
| our ability to retain and increase sales to existing customers, attract new customers and satisfy our customers requirements; |
| the renewal rates for our service; |
| the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business; |
| the number of new employees added; |
| changes in our pricing policies whether initiated by us or as a result of intense competition; |
| the cost, timing and management effort for the introduction of new features to our service; |
| the rate of expansion and productivity of our sales force; |
| the length of the sales cycle for our service; |
| new product and service introductions by our competitors; |
| our success in selling our service to large enterprises; |
| variations in the revenue mix of editions of our service; |
| technical difficulties or interruptions in our service; |
| expenses related to developing our new global headquarters and increasing our data center capacity and expanding our data centers domestically and internationally; |
| changes in foreign currency exchange rates; |
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| changes in interest rates and our mix of investments, which would impact our return on our investments in cash and marketable securities; |
| conditions, particularly sudden changes, in the financial markets have and may continue to impact the value of and access to our investment portfolio; |
| changes in the effective tax rates; |
| general economic conditions that may adversely affect either our customers ability or willingness to purchase additional subscriptions or upgrade their service, or delay a prospective customers purchasing decision, or reduce the value of new subscription contracts, or affect renewal rates; |
| timing of additional investments in our enterprise cloud computing application service and in our consulting service; |
| changes in deferred revenue balances due to the seasonal nature of our customer invoicing, changes in the average duration of our invoices, rate of renewals and the rate of new business growth; |
| regulatory compliance costs; |
| the timing of customer payments and payment defaults by customers; |
| costs associated with acquisitions of companies and technologies; |
| extraordinary expenses such as litigation or other dispute-related settlement payments; |
| the impact of new accounting pronouncements; and |
| the timing of stock awards to employees and the related adverse financial statement impact of having to expense those stock awards ratably over their vesting schedules. |
Many of these factors are not within our control, and the occurrence of one or more of them might cause our operating results to vary widely. As such, we believe that quarter-to-quarter comparisons of our revenues, operating results and cash flows may not be meaningful and should not be relied upon as an indication of future performance.
Additionally, we may also fail to meet or exceed the expectations of securities analysts or investors, and the market price of our common stock. Moreover, our stock price may be based on expectations of our future performance that may be unrealistic or that may not be met.
Weakened global economic conditions may adversely affect our industry, business and results of operations.
Our overall performance depends in part on worldwide economic conditions. The United States and other key international economies have been impacted by falling demand for a variety of goods and services, restricted credit, going concern threats to major multinational companies and medium and small businesses, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies and overall uncertainty with respect to the economy. These conditions affect the rate of information technology spending and could adversely affect our customers ability or willingness to purchase our enterprise cloud computing application service, delay prospective customers purchasing decisions, reduce the value or duration of their subscription contracts, or affect renewal rates, all of which could adversely affect our operating results.
As we acquire companies or technologies in the future, they could prove difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our operating results and the value of your investment.
As part of our business strategy, we regularly evaluate investments in, or acquisitions of, complementary businesses, joint ventures, services and technologies, and we expect that periodically we will continue to make such investments and acquisitions in the future. Acquisitions and investments involve numerous risks, including:
| the potential failure to achieve the expected benefits of the combination or acquisition; |
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| difficulties in and the cost of integrating operations, technologies, services and personnel; |
| diversion of financial and managerial resources from existing operations; |
| risk of entering new markets in which we have little or no experience or where competitors may have stronger market positions; |
| potential write-offs of acquired assets or investments; |
| potential loss of key employees; |
| inability to generate sufficient revenue to offset acquisition or investment costs; |
| the inability to maintain relationships with customers and partners of the acquired business; |
| the difficulty of incorporating acquired technology and rights into our products and services and of maintaining quality standards consistent with our brand; |
| potential unknown liabilities associated with the acquired businesses; |
| unanticipated expenses related to acquired technology and its integration into existing technology; |
| negative impact to our results of operations because of the depreciation and amortization of amounts related to acquired intangible assets, fixed assets and deferred compensation, and the loss of acquired deferred revenue; |
| delays in customer purchases due to uncertainty related to any acquisition; |
| the need to implement controls, procedures and policies appropriate for a public company at companies that prior to the acquisition lacked such controls, procedures and policies; and |
| challenges caused by distance, language and cultural differences. |
In addition, if we finance acquisitions by issuing equity or convertible debt securities, our existing stockholders may be diluted which could affect the market price of our common stock. Further, if we fail to properly evaluate and execute acquisitions or investments, our business and prospects may be seriously harmed and the value of your investment may decline.
We rely on third-party computer hardware and software that may be difficult to replace or which could cause errors or failures of our service.
We rely on computer hardware purchased or leased and software licensed from third parties in order to offer our service, including database software from Oracle Corporation. This hardware and software may not continue to be available at reasonable prices or on commercially reasonable terms, or at all. Any loss of the right to use any of this hardware or software could significantly increase our expenses and otherwise result in delays in the provisioning of our service until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. Any errors or defects in third-party hardware or software could result in errors or a failure of our service which could harm our business.
If the market for our technology delivery model and an enterprise cloud computing application service develops more slowly than we expect, our business could be harmed.
The market for enterprise cloud computing application services is not as mature as the market for packaged enterprise software, and it is uncertain whether these services will achieve and sustain high levels of demand and market acceptance. Our success will depend to a substantial extent on the willingness of enterprises, large and small, to increase their use of enterprise cloud computing application services in general, and for CRM in particular. Many enterprises have invested substantial personnel and financial resources to integrate traditional enterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to an enterprise cloud computing application service. Furthermore, some enterprises may be reluctant or unwilling to use
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enterprise cloud computing application services because they have concerns regarding the risks associated with security capabilities, among other things, of the technology delivery model associated with these services. If enterprises do not perceive the benefits of enterprise cloud computing application services, then the market for these services may not develop at all, or it may develop more slowly than we expect, either of which would significantly adversely affect our operating results. In addition, we may make errors in predicting and reacting to relevant business trends, which could harm our business. Our success also depends on the willingness of third-party developers to build applications that are complementary to our service. Without the development of these applications, both current and potential customers may not find our service sufficiently attractive. In addition, for those customers who authorize third-party technology partners access to their data, we do not warrant the functionality, security and integrity of the data transmission or processing. Despite contract provisions to protect us, customers may look to us to support and warrant the third-party applications, which may expose us to potential claims, liabilities and obligations for applications we did not develop or sell.
The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.
The market for enterprise CRM business applications and development platforms is highly competitive, rapidly evolving and fragmented, and subject to changing technology, shifting customer needs and frequent introductions of new products and services. We compete primarily with vendors of packaged CRM software, whose software is installed by the customer directly, and companies offering on-demand CRM applications. We also compete with internally developed applications and face, or expect to face, competition from enterprise software vendors and online service providers who may develop toolsets and products that allow customers to build new applications that run on the customers current infrastructure or as hosted services. Our current competitors include:
| enterprise software application vendors; |
| on-demand CRM application service providers; |
| enterprise application service providers; |
| traditional platform development environment companies; and |
| cloud computing development platform companies. |
Many of our current and potential competitors enjoy substantial competitive advantages, such as greater name recognition, longer operating histories and larger marketing budgets, as well as substantially greater financial, technical and other resources. In addition, many of our current and potential competitors have established marketing relationships and access to larger customer bases, and have major distribution agreements with consultants, system integrators and resellers.
As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Furthermore, because of these advantages, even if our service is more effective than the products that our competitors offer, potential customers might accept competitive products and services in lieu of purchasing our service. For all of these reasons, we may not be able to compete successfully against our current and future competitors.
Our efforts to expand our service beyond the CRM market may not succeed and may reduce our revenue growth rate.
We derive substantially all of our revenue from subscriptions to our CRM enterprise cloud computing application service, and we expect this will continue for the foreseeable future. The market for our Force.com cloud computing platform is new and it is uncertain whether our efforts will ever result in significant revenue for us. Further, the introduction of new services beyond the CRM market may not be successful, and early stage interest and adoption of such new services may not result in long term success or significant revenue for us. Our efforts to expand our service beyond the CRM market may not succeed and may reduce our revenue growth rate.
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Supporting our existing and growing customer base could strain our personnel resources and infrastructure, and if we are unable to scale our operations and increase productivity, we may not be able to successfully implement our business plan.
We continue to experience significant growth in our customer base, which has placed a strain on our management, administrative, operational and financial infrastructure. We anticipate that additional investments in our infrastructure and research and development spending will be required to scale our operations and increase productivity, to address the needs of our customers, to further develop and enhance our service, and to expand into new geographic areas.
Our success will depend in part upon the ability of our senior management to manage our projected growth effectively. To do so, we must continue to increase the productivity of our existing employees and to hire, train and manage new employees as needed. To manage the expected domestic and international growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. The additional investments we are making will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in the short term. If we fail to successfully scale our operations and increase productivity, we will be unable to execute our business plan.
As more of our sales efforts are targeted at larger enterprise customers, our sales cycle may become more time-consuming and expensive, we may encounter pricing pressure and implementation challenges, and we may have to delay revenue recognition for some complex transactions, all of which could harm our business and operating results.
As we target more of our sales efforts at larger enterprise customers, we will face greater costs, longer sales cycles and less predictability in completing some of our sales. In this market segment, the customers decision to use our service may be an enterprise-wide decision and, if so, these types of sales would require us to provide greater levels of education regarding the use and benefits of our service, as well as education regarding privacy and data protection laws and regulations to prospective customers with international operations. In addition, larger customers may demand more customization, integration services and features. As a result of these factors, these sales opportunities may require us to devote greater sales support and professional services resources to individual customers, driving up costs and time required to complete sales and diverting sales and professional services resources to a smaller number of larger transactions, while potentially requiring us to delay revenue recognition on some of these transactions until the technical or implementation requirements have been met.
Periodic restructurings of our sales organization can be disruptive and may negatively impact our revenues.
We periodically restructure or make other adjustments to our sales organization in response to market opportunities, competitive threats, management changes, product introductions or enhancements, sales performance, increases in sales headcount, cost levels, and other internal and external considerations. In the past, these restructurings sometimes resulted in a temporary lack of focus and reduced productivity; these effects could recur in connection with any future sales restructurings we might undertake and our rate of revenue growth could be negatively affected.
If we are not able to develop enhancements and new features to our existing service or acceptable new services that keep pace with technological developments, our business will be harmed.
If we are unable to develop enhancements to and new features for our existing service or acceptable new services that keep pace with rapid technological developments, our business will be harmed. The success of enhancements, new features and services depends on several factors, including the timely completion, introduction and market acceptance of the feature or edition. Failure in this regard may significantly impair our
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revenue growth. In addition, because our service is designed to operate on a variety of network hardware and software platforms using a standard browser, we will need to continuously modify and enhance our service to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies. We may not be successful in either developing these modifications and enhancements or in timely bringing them to market. Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies, could increase our research and development expenses. Any failure of our service to operate effectively with future network platforms and technologies could reduce the demand for our service, result in customer dissatisfaction and harm our business.
Our business could be adversely affected if our customers are not satisfied with implementation and customization services provided by us or our partners.
Our business depends on our ability to satisfy our customers, both with respect to our CRM service and platform and the professional services that customize our CRM service and platform to meet our customers business needs. Professional services may be performed by our own staff, or by a third party or a combination of the two. Our strategy is to work with third parties to increase the breadth of capability and depth of capacity for delivery of these services to our customers. If a customer is not satisfied with the quality of work performed by us or a third party or with the type of services or solutions delivered, then we could incur additional costs to address the situation, the profitability of that work might be impaired, and the customers dissatisfaction with our services could damage our ability to obtain additional work from that customer. In addition, negative publicity related to our customer relationships, regardless of its accuracy, may further damage our business by affecting our ability to compete for new business with current and prospective customers.
Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.
If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology, and our business might be harmed. In addition, defending our intellectual property rights might entail significant expense. Any of our trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. While we have a few U.S. patents and many U.S. and international patent applications pending, we may be unable to obtain patent protection for the technology covered in our patent applications. In addition, our existing patents and any patents issued in the future may not provide us with competitive advantages, or may be successfully challenged by third parties. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our service is available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the U.S., and mechanisms for enforcement of intellectual property rights may be inadequate. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property.
We might be required to spend significant resources to monitor and protect our intellectual property rights. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel.
If we fail to develop our brands, our business may suffer.
We believe that developing and maintaining awareness of the salesforce.com brand and our other brands is critical to achieving widespread acceptance of our existing and future services and is an important element in attracting new customers. In the past, our efforts to build our brands have involved significant expense. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brands. If we fail to successfully promote and maintain our brands, or
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incur substantial expenses in an unsuccessful attempt to promote and maintain our brands, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business could suffer.
We may not realize the anticipated benefits in connection with our purchase of undeveloped land in San Francisco where we plan to develop our global headquarters. If we do not realize these benefits, our financial performance will be negatively impacted.
In November 2010, we paid $278.0 million in cash for approximately 14 acres of undeveloped real estate in San Francisco, California which we plan to develop into our global headquarters. We may not realize the anticipated benefits with respect to the purchase and future development of such real estate. We have devoted significant capital resources to the purchase, and we will be required to devote additional resources in the future to building our global headquarters on such land, which may impact our liquidity and financial flexibility. We may not be able to obtain financing for development projects on favorable terms, or at all, or complete construction on schedule or within budget. Any delay or lack of available financing could result in increased constructions costs and debt costs to fund such construction and development. In addition, our development efforts will otherwise be subject to various operational risks. We may not be able to obtain, or may experience delays in obtaining, all necessary zoning, land-use, building, occupancy and other governmental permits and authorizations. The construction costs and total investment amounts may exceed any estimates that we formulate, and projects may not be completed, or delivered as planned. Finally, real estate assets are not as liquid as certain other types of assets. In the event that we have a future need to sell this property, we may not be able to do so on favorable terms or at all.
Sales to customers outside the United States expose us to risks inherent in international sales.
Because we sell our service throughout the world, we are subject to risks and challenges that we would otherwise not face if we conducted our business only in the United States. For example, sales in Europe and Asia Pacific together represented approximately 30 percent of our total revenues for the year ended January 31, 2010, and we intend to continue to expand our international sales efforts. The risks and challenges associated with sales to customers outside the United States include:
| localization of our service, including translation into foreign languages and associated expenses; |
| laws and business practices favoring local competitors; |
| compliance with multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection laws and regulations; |
| treatment of revenue from international sources and changes to tax codes, including being subject to foreign tax laws and being liable for paying withholding income or other taxes in foreign jurisdictions; |
| regional data privacy laws that apply to the transmission of our customers data across international borders; |
| foreign currency fluctuations and controls; |
| different pricing environments; |
| difficulties in staffing and managing foreign operations; |
| different or lesser protection of our intellectual property; |
| longer accounts receivable payment cycles and other collection difficulties; |
| regional economic conditions; and |
|