Edgar Filing: SALESFORCE COM INC

CRM-2014.4.30-10Q

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 April 30, 2014



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

Commission File Number: 001-32224

salesforce.com, inc.

(Exact name of registrant as specified in its charter)



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

The Landmark @ One Market, Suite 300

San Francisco, California 94105

(Address of principal executive offices)

Telephone Number (415) 901-7000

(Registrant’s telephone number, including area code)

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

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

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



Large accelerated filer x	Accelerated filer ¨

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

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

As of April 30, 2014, there were approximately 614.0 million shares of the Registrant’s Common Stock outstanding.

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INDEX



		Page No.
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets as of April 30, 2014 and January 31, 2014	1

	Condensed Consolidated Statements of Operations for the three months ended April 30, 2014 and 2013	2

	Condensed Consolidated Statements of Comprehensive Loss for the three months ended April 30, 2014 and 2013	3

	Condensed Consolidated Statements of Cash Flows for the three months ended April 30, 2014 and 2013	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52

Item 4.	Controls and Procedures	54

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	55

Item 1A.	Risk Factors	56

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69

Item 3.	Defaults Upon Senior Securities	69

Item 4.	Mine Safety Disclosures	69

Item 5.	Other Information	69

Item 6.	Exhibits	70

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PART I.	FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

salesforce.com, inc.

Condensed Consolidated Balance Sheets

(in thousands)



	April 30, 2014			January 31, 2014
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	827,891		$	781,635
Short-term marketable securities	51,233			57,139
Accounts receivable, net	684,155			1,360,837
Deferred commissions	162,494			171,461
Prepaid expenses and other current assets	313,608			309,180
Total current assets	2,039,381			2,680,252
Marketable securities, noncurrent	650,764			482,243
Property and equipment, net	1,251,000			1,240,746
Deferred commissions, noncurrent	143,467			153,459
Capitalized software, net	455,819			481,917
Goodwill	3,500,823			3,500,823
Other assets, net	600,090			613,490
Total assets	$	8,641,344		$	9,152,930
Liabilities, temporary equity and stockholders’ equity
Current liabilities:
Accounts payable, accrued expenses and other liabilities	$	766,601		$	934,324
Deferred revenue	2,288,324			2,473,705
Convertible 0.75% senior notes, net	275,029			542,159
Term loan, current	30,000			30,000
Total current liabilities	3,359,954			3,980,188
Convertible 0.25% senior notes, net	1,052,815			1,046,930
Term loan, noncurrent	247,500			255,000
Deferred revenue, noncurrent	36,291			48,410
Other noncurrent liabilities	802,927			757,187
Total liabilities	5,499,487			6,087,715
Temporary equity	9,943			26,705
Stockholders’ equity:
Common stock	614			610
Additional paid-in capital	3,556,070			3,363,377
Accumulated other comprehensive income	15,298			17,680
Accumulated deficit	(440,068		)	(343,157		)
Total stockholders’ equity	3,131,914			3,038,510
Total liabilities, temporary equity and stockholders’ equity	$	8,641,344		$	9,152,930

See accompanying Notes.

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salesforce.com, inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)



	Three Months Ended April 30,
	2014			2013
Revenues:
Subscription and support	$	1,147,306		$	842,221
Professional services and other	79,466			50,412
Total revenues	1,226,772			892,633
Cost of revenues (1)(2):
Subscription and support	208,947			153,550
Professional services and other	83,358			55,444
Total cost of revenues	292,305			208,994
Gross profit	934,467			683,639
Operating expenses (1)(2):
Research and development	188,358			131,939
Marketing and sales	639,355			466,490
General and administrative	162,095			129,750
Total operating expenses	989,808			728,179
Loss from operations	(55,341		)	(44,540		)
Investment income	1,778			3,354
Interest expense	(20,359		)	(11,883		)
Other expense (3)	(10,847		)	(874		)
Loss before provision for income taxes	(84,769		)	(53,943		)
Provision for income taxes	(12,142		)	(13,778		)
Net loss	$	(96,911	)	$	(67,721	)
Basic net loss per share	$	(0.16	)	$	(0.12	)
Diluted net loss per share	$	(0.16	)	$	(0.12	)
Shares used in computing basic net loss per share	612,512			588,385
Shares used in computing diluted net loss per share	612,512			588,385

_______________

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



	Three Months Ended April 30,
	2014		2013
Cost of revenues	$	28,672	$	21,305
Marketing and sales	14,965		2,460

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



	Three Months Ended April 30,
	2014		2013
Cost of revenues	$	11,810	$	10,678
Research and development	27,284		24,429
Marketing and sales	67,133		59,802
General and administrative	24,865		19,820


(3)	Amount includes approximately $8.5 million loss on conversions of our convertible 0.75% senior notes due January 2015 recognized during the three months ended April 30, 2014.

See accompanying Notes.

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salesforce.com, inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)



	Three Months Ended April 30,
	2014			2013
Net loss	$	(96,911	)	$	(67,721	)
Other comprehensive loss, before tax and net of reclassification adjustments:
Foreign currency translation and other gains (losses)	3,115			(5,760		)
Unrealized gains (losses) on investments	(5,497		)	1,721
Other comprehensive loss, before tax	(2,382		)	(4,039		)
Tax effect	0			628
Other comprehensive loss, net of tax	(2,382		)	(3,411		)
Comprehensive loss	$	(99,293	)	$	(71,132	)

See accompanying Notes.

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salesforce.com, inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



	Three Months Ended April 30,
	2014			2013
Operating activities:
Net loss	$	(96,911	)	$	(67,721	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	110,808			62,297
Amortization of debt discount and transaction costs	11,791			9,670
Loss on conversions of convertible senior notes	8,529			0
Amortization of deferred commissions	59,855			45,667
Expenses related to employee stock plans	131,092			114,729
Excess tax benefits from employee stock plans	(9,041		)	(1,866		)
Changes in assets and liabilities, net of business combinations:
Accounts receivable, net	676,682			369,889
Deferred commissions	(40,896		)	(17,483		)
Prepaid expenses, current assets and other assets	4,277			(6,350		)
Accounts payable, accrued expenses and other liabilities	(185,599		)	(95,808		)
Deferred revenue	(197,500		)	(129,835		)
Net cash provided by operating activities	473,087			283,189
Investing activities:
Business combinations, net of cash acquired	0			(22,161		)
Nonrefundable deposit received for land	30,000			0
Strategic investments	(16,246		)	(5,116		)
Purchases of marketable securities	(250,536		)	(264,287		)
Sales of marketable securities	79,312			111,740
Maturities of marketable securities	7,198			14,558
Capital expenditures	(60,098		)	(54,010		)
Net cash used in investing activities	(210,370		)	(219,276		)
Financing activities:
Proceeds from borrowings on convertible senior notes, net	0			1,132,750
Proceeds from issuance of warrants	0			84,800
Purchase of convertible note hedge	0			(153,800		)
Proceeds from employee stock plans	73,795			66,524
Excess tax benefits from employee stock plans	9,041			1,866
Payments on convertible senior notes	(283,892		)	0
Principal payments on capital lease obligations	(10,594		)	(8,499		)
Principal payments on term loan	(7,500		)	0
Net cash provided by (used in) financing activities	(219,150		)	1,123,641
Effect of exchange rate changes	2,689			(6,809		)
Net increase in cash and cash equivalents	46,256			1,180,745
Cash and cash equivalents, beginning of period	781,635			747,245
Cash and cash equivalents, end of period	$	827,891		$	1,927,990
Supplemental cash flow disclosure:
Cash paid during the period for:
Interest	$	8,667		$	642
Income taxes, net of tax refunds	$	9,994		$	17,283
Non-cash financing and investing activities:
Fixed assets acquired under capital leases	$	5,886		$	6,557
Building in progress - leased facility acquired under financing obligation	$	12,760		$	0

See accompanying Notes.

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salesforce.com, inc.

Notes to Condensed Consolidated Financial Statements

1. Summary of Business and Significant Accounting Policies

Description of Business

Salesforce.com, inc. (the “Company”) is a provider of enterprise cloud computing services. The Company is dedicated to helping customers of all sizes and industries worldwide transform themselves into “customer companies” by empowering them to connect with their customers, partners, employees and products in entirely new ways. The Company provides customers with the solutions they need to build a next generation social front office with social and mobile cloud technologies.

Fiscal Year

The Company’s fiscal year ends on January 31. References to fiscal 2015, for example, refer to the fiscal year ending January 31, 2015.

Basis of Presentation

The accompanying condensed consolidated balance sheet as of April 30, 2014 and the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive loss and the condensed consolidated statements of cash flows for the three months ended April 30, 2014 and 2013, respectively, are unaudited. The condensed consolidated balance sheet data as of January 31, 2014 was derived from the audited consolidated financial statements which are included in the Company’s Form 10-K for the fiscal year ended January 31, 2014, which was filed with the Securities and Exchange Commission (the “SEC”) on March 5, 2014. The accompanying statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s fiscal 2014 Form 10-K.

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements in the Form 10-K, and include all adjustments necessary for the fair presentation of the Company’s balance sheet as of April 30, 2014, and its results of operations, including its comprehensive loss, and its cash flows for the three months ended April 30, 2014 and 2013. All adjustments are of a normal recurring nature. The results for the three months ended April 30, 2014 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending January 31, 2015.

Use of Estimates

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

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


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


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


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


•	the recognition and measurement of loss contingencies,


•	the fair value of the convertible notes,


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


•	the valuation of strategic investments and the determination of other-than-temporary impairments,


•	the estimate of real estate sublease rental rates and market conditions, and


•	the assessment of recoverability of long-lived assets (property and equipment, goodwill and identified intangibles).

Actual results could differ materially from those estimates.

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Principles of Consolidation

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

Segments

The Company operates as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who is the chief executive officer, in deciding how to allocate resources and assessing performance. Over the past few years, the Company has completed several acquisitions. These acquisitions have allowed the Company to expand its offerings, presence and reach in various market segments of the enterprise cloud computing market. While the Company has offerings in multiple enterprise cloud computing market segments, the Company’s business operates in one operating segment because the Company’s chief operating decision maker evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis. Since the Company operates in one operating segment, all required financial segment information can be found in the condensed consolidated financial statements.

Concentrations of Credit Risk and Significant Customers

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and trade accounts receivable. Although the Company deposits its cash with multiple financial institutions, its deposits, at times, may exceed federally insured limits. Collateral is not required for accounts receivable. The Company maintains an allowance for doubtful accounts receivable balances. 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 five percent of accounts receivable at April 30, 2014 and January 31, 2014, respectively. No single customer accounted for five percent or more of total revenue during the three months ended April 30, 2014 and 2013.

Geographic Locations

As of April 30, 2014 and January 31, 2014, assets located outside the Americas were 13 percent and 12 percent of total assets, respectively.

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



	Three Months Ended April 30,
	2014		2013
Americas	$	876,377	$	631,108
Europe	230,810		162,826
Asia Pacific	119,585		98,699
	$	1,226,772	$	892,633

Americas revenue attributed to the United States was approximately 94 percent and 95 percent for the three months ended April 30, 2014 and 2013, respectively.

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Revenue Recognition

The Company derives its revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing the Company’s enterprise cloud computing services and from customers paying for additional support beyond the standard support that is included in the basic subscription fees; and (2) related professional services such as process mapping, project management, implementation services and other revenue. “Other revenue” consists primarily of training fees.

The Company commences revenue recognition when all of the following conditions are satisfied:


•	there is persuasive evidence of an arrangement;


•	the service has been or is being provided to the customer;


•	the collection of the fees is reasonably assured; and


•	the amount of fees to be paid by the customer is fixed or determinable.

The Company’s subscription service arrangements are non-cancelable and do not contain refund-type provisions.

Subscription and Support Revenues

Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement date of each contract, which is the date the Company’s service is made available to customers.

Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.

Professional Services and Other Revenues

The majority of the Company’s professional services contracts are on a time and material basis. When these services are not combined with subscription revenues as a single unit of accounting, as discussed below, these revenues are recognized as the services are rendered for time and material contracts, and when the milestones are achieved and accepted by the customer for fixed price contracts. Training revenues are recognized as the services are performed.

Multiple Deliverable Arrangements

The Company enters into arrangements with multiple deliverables that generally include multiple subscriptions, premium support and professional services. If the deliverables have standalone value upon delivery, the Company accounts for each deliverable separately. Subscription services have standalone value as such services are often sold separately. In determining whether professional services have standalone value, the Company considers the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the subscription service start date and the contractual dependence of the subscription service on the customer’s satisfaction with the professional services work. To date, the Company has concluded that all of the professional services included in multiple deliverable arrangements executed have standalone value.

Multiple deliverables included in an arrangement are separated into different units of accounting and the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. The Company determines the relative selling price for a deliverable based on its vendor-specific objective evidence of selling price (“VSOE”), if available, or its best estimate of selling price (“BESP”), if VSOE is not available. The Company has determined that third-party evidence of selling price (“TPE”) is not a practical alternative due to differences in its service offerings compared to other parties and the availability of relevant third-party pricing information. The amount of revenue allocated to delivered items is limited by contingent revenue, if any.

For certain professional services, the Company has established VSOE as a consistent number of standalone sales of these deliverables have been priced within a reasonably narrow range. The Company has not established VSOE for its subscription services due to lack of pricing consistency, the introduction of new services and other factors. Accordingly, the Company uses its BESP to determine the relative selling price.

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The Company determined BESP by considering its overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the Company’s discounting practices, the size and volume of the Company’s transactions, the customer demographic, the geographic area where services are sold, price lists, its go-to-market strategy, historical standalone sales and contract prices. The determination of BESP is made through consultation with and approval by the Company’s management, taking into consideration the go-to-market strategy. As the Company’s go-to-market strategies evolve, the Company may modify its pricing practices in the future, which could result in changes in relative selling prices, including both VSOE and BESP.

Deferred Revenue

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

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.

Deferred Commissions

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

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

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at fair value.

Marketable Securities

Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such determination at each balance sheet date. Securities are classified as available for sale and are carried at fair value, with the change in unrealized gains and losses, net of tax, reported as a separate component on the condensed consolidated statements of comprehensive loss. Fair value is determined based on quoted market rates when observable or utilizing data points that are observable, such as quoted prices, interest rates and yield curves. Declines in fair value judged to be other-than-temporary on securities available for sale are included as a component of investment income. In order to determine whether a decline in value is other-than-temporary, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value and its intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. The cost of securities sold is based on the specific-identification method. Interest on securities classified as available for sale is also included as a component of investment income.

Fair Value Measurement

The Company measures its cash equivalents, marketable securities and foreign currency derivative contracts at fair value.

The additional disclosures regarding the Company’s fair value measurements are included in Note 2 “Investments”.

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Property and Equipment

Property and equipment are stated at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of those assets as follows:



Computer, equipment and software	3 to 9 years
Furniture and fixtures	5 years
Leasehold improvements	Shorter of the lease term or 10 years
Building improvements	Amortized over the estimated useful lives of the respective assets when they are ready for their intended use.

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

Capitalized Internal-Use Software Costs

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

Goodwill, Intangible Assets, Long-Lived Assets and Impairment Assessments

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

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

The Company evaluates the recoverability of its long-lived assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value.

Business Combinations

The Company uses its best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. The Company continues to collect information and reevaluates these estimates and assumptions quarterly and records any adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s condensed consolidated statements of operations.

Leases and Asset Retirement Obligations

The Company categorizes leases at their inception as either operating or capital leases. In certain lease agreements, the Company may receive rent holidays and other incentives. The Company recognizes lease costs on a straight-line basis once control of the space is achieved, without regard to deferred payment terms, such as rent holidays that defer the commencement date of required payments. Additionally, incentives received are treated as a reduction of costs over the term of the agreement.

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The Company establishes assets and liabilities for the present value of estimated future costs to retire long-lived assets at the termination or expiration of a lease. Such assets are depreciated over the lease period into operating expense, and the recorded liabilities are accreted to the future value of the estimated retirement costs.

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

Accounting for Stock-Based Compensation

The Company recognizes stock-based expenses related to stock options and restricted stock awards on a straight-line basis over the requisite service period of the awards, which is generally the vesting term of four years. The Company recognizes stock-based expenses related to shares issued pursuant to its 2004 Employee Stock Purchase Plan (“ESPP”) on a straight-line basis over the offering period, which is 12 months. Stock-based expenses are recognized net of estimated forfeiture activity. The estimated forfeiture rate applied is based on historical forfeiture rates. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option pricing model.

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



	Three Months Ended April 30,
Stock Options	2014			2013
Volatility	37		%	43		%
Estimated life	3.5 years			3.7 years
Risk-free interest rate	1.20-1.39		%	0.52-0.59		%
Weighted-average fair value per share of grants	$	16.93		$	13.47

There were no stock purchase rights granted under the ESPP in the three months ended April 30, 2014 or 2013 as these stock purchase rights are only granted in June and December.

The Company estimated its future stock price volatility considering both its observed option-implied volatilities and its historical volatility calculations. Management believes this is the best estimate of the expected volatility over the expected life of its stock options.

The estimated life for the stock options was based on an analysis of historical exercise activity. The risk-free interest rate is based on the rate for a U.S. government security with the same estimated life at the time of the option grant.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the consolidated statement of operations in the period that includes the enactment date.

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

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

Foreign Currency Translation

The functional currency of the Company’s major foreign subsidiaries is generally the local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as a separate component on the condensed consolidated statements of comprehensive loss. Foreign currency transaction gains and losses are included in net loss for the period. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average exchange rate during the period. Equity transactions are translated using historical exchange rates.

Warranties and Indemnification

The Company’s enterprise cloud computing services are typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable and materially in accordance with the Company’s online help documentation under normal use and circumstances.

The Company’s arrangements generally include certain provisions for indemnifying customers against liabilities if its products or services infringe a third-party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of such obligations and has not accrued any liabilities related to such obligations in the accompanying condensed consolidated financial statements.

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

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2. Investments

Marketable Securities

At April 30, 2014, marketable securities consisted of the following (in thousands):



Investments classified as Marketable Securities	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Corporate notes and obligations	$	417,693	$	1,510	$	(137	)	$	419,066
U.S. treasury securities	42,705		20		(3		)	42,722
Mortgage backed obligations	35,811		238		(96		)	35,953
Asset backed securities	70,401		74		(34		)	70,441
Municipal securities	2,999		1		(3		)	2,997
Foreign government obligations	24,495		205		0			24,700
U.S. agency obligations	23,717		11		(17		)	23,711
Covered bonds	81,573		836		(2		)	82,407
Total marketable securities	$	699,394	$	2,895	$	(292	)	$	701,997

At January 31, 2014, marketable securities consisted of the following (in thousands):



Investments classified as Marketable Securities	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Corporate notes and obligations	$	340,706	$	1,314	$	(170	)	$	341,850
U.S. treasury securities	16,016		28		0			16,044
Mortgage backed obligations	24,888		281		(93		)	25,076
Asset backed securities	38,213		39		(35		)	38,217
Municipal securities	2,000		1		(3		)	1,998
Foreign government obligations	24,305		171		(2		)	24,474
U.S. agency obligations	14,726		9		(10		)	14,725
Covered bonds	76,282		717		(1		)	76,998
Total marketable securities	$	537,136	$	2,560	$	(314	)	$	539,382

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



	As of
	April 30, 2014		January 31, 2014
Recorded as follows:
Short-term (due in one year or less)	$	51,233	$	57,139
Long-term (due after one year)	650,764		482,243
	$	701,997	$	539,382

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As of April 30, 2014, the following marketable securities were in an unrealized loss position (in thousands):



	Less than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate notes and obligations	$	93,208	$	(137	)	$	0	$	0		$	93,208	$	(137	)
U.S. treasury securities	32,147		(3		)	0		0			32,147		(3		)
Mortgage backed obligations	16,451		(80		)	1,861		(16		)	18,312		(96		)
Asset backed securities	16,170		(31		)	1,676		(3		)	17,846		(34		)
Municipal securities	1,997		(3		)	0		0			1,997		(3		)
U.S. agency obligations	14,713		(17		)	0		0			14,713		(17		)
Covered bonds	2,070		(2		)	0		0			2,070		(2		)
	$	176,756	$	(273	)	$	3,537	$	(19	)	$	180,293	$	(292	)

The unrealized loss for each of these fixed rate marketable securities ranged from less than $1,000 to $28,000. 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 April 30, 2014. The Company expects to receive the full principal and interest on all of these marketable securities.

Fair Value Measurement

All of the Company’s cash equivalents, marketable securities and foreign currency derivative contracts are classified within Level 1 or Level 2 because the Company’s cash equivalents, marketable securities and foreign currency derivative contracts are valued using quoted market prices or alternative pricing sources and models utilizing observable market inputs.

The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1. Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2. Other inputs that are directly or indirectly observable in the marketplace.

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

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The following table presents information about the Company’s assets and liabilities that are measured at fair value as of April 30, 2014 and indicates the fair value hierarchy of the valuation (in thousands):



Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balances as of April 30, 2014
Cash equivalents (1):
Time deposits	$	0	$	102,773	$	0	$	102,773
Money market mutual funds	237,395		0		0		237,395
Marketable securities:
Corporate notes and obligations	0		419,066		0		419,066
U.S. treasury securities	0		42,722		0		42,722
Mortgage backed obligations	0		35,953		0		35,953
Asset backed securities	0		70,441		0		70,441
Municipal securities	0		2,997		0		2,997
Foreign government obligations	0		24,700		0		24,700
U.S. agency obligations	0		23,711		0		23,711
Covered bonds	0		82,407		0		82,407
Foreign currency derivative contracts (2)	0		550		0		550
Total Assets	$	237,395	$	805,320	$	0	$	1,042,715
Liabilities
Foreign currency derivative contracts (3)	$	0	$	1,482	$	0	$	1,482
Total Liabilities	$	0	$	1,482	$	0	$	1,482

_____________

(1)Included in “cash and cash equivalents” in the accompanying condensed consolidated balance sheet as of April 30, 2014, in addition to $487.7 million of cash.

(2)Included in “prepaid expenses and other current assets” in the accompanying condensed consolidated balance sheet as of April 30, 2014.

(3)Included in “accounts payable, accrued expenses and other liabilities” in the condensed consolidated balance sheet as of April 30, 2014.

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The following table presents information about the Company’s assets and liabilities that are measured at fair value as of January 31, 2014 and indicates the fair value hierarchy of the valuation (in thousands):



Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balances as of January 31, 2014
Cash equivalents (1):
Time deposits	$	0	$	212,700	$	0	$	212,700
Money market mutual funds	87,898		0		0		87,898
Marketable securities:
Corporate notes and obligations	0		341,850		0		341,850
U.S. treasury securities	0		16,044		0		16,044
Mortgage backed obligations	0		25,076		0		25,076
Asset backed securities	0		38,217		0		38,217
Municipal securities	0		1,998		0		1,998
Foreign government obligations	0		24,474		0		24,474
U.S. agency obligations	0		14,725		0		14,725
Covered bonds	0		76,998		0		76,998
Foreign currency derivative contracts (2)	0		1,598		0		1,598
Total Assets	$	87,898	$	753,680	$	0	$	841,578
Liabilities
Foreign currency derivative contracts (3)	$	0	$	1,801	$	0	$	1,801
Total Liabilities	$	0	$	1,801	$	0	$	1,801

______________

(1)Included in “cash and cash equivalents” in the accompanying condensed consolidated balance sheet as of January 31, 2014, in addition to $481.0 million of cash.

(2)Included in “prepaid expenses and other current assets” in the accompanying condensed consolidated balance sheet as of January 31, 2014.

(3)Included in “accounts payable, accrued expenses and other liabilities” in the accompanying condensed consolidated balance sheet as of January 31, 2014.

Derivative Financial Instruments

The Company enters into foreign currency derivative contracts with financial institutions to reduce the risk that its cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. The Company uses forward currency derivative contracts to minimize the Company’s exposure to balances primarily denominated in Euros, Japanese yen, Canadian dollars and British pounds. The Company’s foreign currency derivative contracts which are not designated as hedging instruments are used to reduce the exchange rate risk associated primarily with intercompany receivables and payables. The Company’s program is not designated for trading or speculative purposes. As of April 30, 2014 and January 31, 2014, the foreign currency derivative contracts that were not settled are recorded at fair value on the condensed consolidated balance sheets.

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

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



	As of
	April 30, 2014			January 31, 2014
Notional amount of foreign currency derivative contracts	$	460,640		$	563,060
Fair value of foreign currency derivative contracts	$	(932	)	$	(203	)

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



		Fair Value of Derivative Instruments
		As of
	Balance Sheet Location	April 30, 2014		January 31, 2014
Derivative Assets
Derivatives not designated as hedging instruments:
Foreign currency derivative contracts	Prepaid expenses and other current assets	$	550	$	1,598
Derivative Liabilities
Derivatives not designated as hedging instruments:
Foreign currency derivative contracts	Accounts payable, accrued expenses and other liabilities	$	1,482	$	1,801

The effect of the derivative instruments not designated as hedging instruments on the condensed consolidated statements of operations during the three months ended April 30, 2014 and 2013, respectively, are summarized below (in thousands):



Derivatives Not Designated as Hedging Instruments	Gains (Losses) on Derivative Instruments Recognized in Income
		Three Months Ended April 30,
	Location	2014			2013
Foreign currency derivative contracts	Other expense	$	(12	)	$	2,075

Strategic Investments

The Company has three investments in marketable equity securities measured using quoted prices in their respective active markets and certain interests in non-marketable equity and debt securities that are collectively considered strategic investments. As of April 30, 2014, the fair value of the Company’s marketable equity securities of $9.6 million includes an unrealized gain of $7.4 million. As of January 31, 2014, the Company had three investments in marketable equity securities which had a fair value of $15.5 million, which included an unrealized gain of $13.3 million. These investments are recorded in other assets, net on the condensed consolidated balance sheets.

The Company’s interest in non-marketable equity and debt securities consists of noncontrolling equity and debt investments in privately-held companies. The Company’s investments in these privately-held companies are reported at cost or marked down to fair value when an event or circumstance indicates an other-than-temporary decline in value has occurred. These investments are valued using significant unobservable inputs or data in an inactive market and the valuation requires the Company’s judgment due to the absence of market price and inherent lack of liquidity.

As of April 30, 2014 and January 31, 2014, the carrying value of the Company’s investments in privately-held companies was $92.8 million and $77.0 million, respectively. These investments are recorded in other assets, net on the condensed consolidated balance sheets.

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Investment Income

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



	Three Months Ended April 30,
	2014			2013
Interest income	$	1,764		$	3,397
Realized gains	117			638
Realized losses	(103		)	(681		)
Total investment income	$	1,778		$	3,354

Reclassification adjustments out of accumulated other comprehensive loss into net loss were immaterial for the three months ended April 30, 2014 and 2013.

3. Property and Equipment

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



	As of
	April 30, 2014			January 31, 2014
Land	$	248,263		$	248,263
Building improvements	49,572			49,572
Computers, equipment and software	961,675			931,171
Furniture and fixtures	65,021			58,956
Leasehold improvements	313,535			296,390
Building in progress—leased facility	52,931			40,171
	1,690,997			1,624,523
Less accumulated depreciation and amortization	(439,997		)	(383,777		)
	$	1,251,000		$	1,240,746

Depreciation and amortization expense totaled $56.4 million and $30.8 million for the three months ended April 30, 2014 and 2013, respectively.

Computers, equipment and software at April 30, 2014 and January 31, 2014 included a total of $617.5 million and $612.0 million acquired under capital lease agreements, respectively. Accumulated amortization relating to computers, equipment and software under capital leases totaled $130.6 million and $109.1 million, respectively, at April 30, 2014 and January 31, 2014. Amortization of assets under capital leases is included in depreciation and amortization expense.

In November 2010, the Company purchased approximately 14 net acres of undeveloped real estate in San Francisco, California, including entitlements and improvements associated with the land. In addition to the amounts reflected in the table above, the Company recorded $23.3 million in purchased intangible assets related to perpetual parking rights associated with an existing parking garage situated on the land. The perpetual parking rights are classified as a purchased intangible asset as it represents an intangible right to use the existing garage. The Company has capitalized pre-construction activities related to the development of the land, including interest costs and property taxes since the November 2010 purchase. During the first quarter of fiscal 2013, the Company suspended pre-construction activity. The total carrying value of the land, building improvements and perpetual parking rights was $321.1 million as of April 30, 2014. During the quarter ended April 30, 2014, the Company entered into an agreement to sell 8.8 net acres of this undeveloped real estate, for which the Company received a nonrefundable deposit in the amount of $30.0 million. The Company does not expect this sale to close within twelve months. Separately, the Company entered into an agreement to sell 3.7 net acres of its undeveloped real estate. This portion of the Company's land and building improvements meets the criteria as held for sale. As of April 30, 2014, the carrying value of this portion of the Company's land and building improvements approximates fair value. Each land sale is subject to separate closing conditions. The Company continues to evaluate its future needs for facilities space and its options for the remaining undeveloped real estate of approximately 1.5 net acres.

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In December 2012, the Company entered into a lease agreement for approximately 445,000 rentable square feet of office space in San Francisco, California. The space rented is for the total office space available in the building, which is in the process of being constructed. As a result of the Company’s involvement during the construction period, the Company is considered for accounting purposes to be the owner of the construction project. As of April 30, 2014, the Company capitalized $52.9 million of construction costs, based on the construction costs incurred to date by the landlord, and recorded a corresponding noncurrent financing obligation liability of $52.9 million. The total expected financing obligation associated with this lease upon completion of the construction of the building, inclusive of the amounts currently recorded, is $335.8 million (See Note 9 “Commitments” for future commitment details). The obligation will be settled through monthly lease payments to the landlord once the construction is complete and the office space is ready for occupancy.

There was no impairment of long-lived assets during the three months ended April 30, 2014 and 2013, respectively.

4. Convertible Senior Notes and Term Loan

Convertible Senior Notes



	Par Value		Equity Component Recorded at Issuance			Liability Component of Par Value as of
(In thousands)	Par Value		Equity Component Recorded at Issuance			April 30, 2014		January 31, 2014
0.75% Convertible Senior Notes due January 15, 2015	$	284,972	$	125,530	(1)	$	275,029	$	542,159
0.25% Convertible Senior Notes due April 1, 2018	1,150,000		122,421		(2)	1,052,815		1,046,930

___________

(1)This amount represents the equity component recorded at the initial issuance of the 0.75% convertible senior notes. As of April 30, 2014, $9.9 million was reclassified as temporary equity on the condensed consolidated balance sheet as these notes are convertible.

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

In January 2010, the Company issued at par value $575.0 million of 0.75% convertible senior notes (the “0.75% Senior Notes”) due January 15, 2015, unless earlier purchased by the Company or converted. Interest is payable semi-annually in arrears on January 15 and July 15 of each year. In March 2013, the Company issued at par value $1.15 billion of 0.25% convertible senior notes (the “0.25% Senior Notes”, and together with the 0.75% Senior Notes, the “Notes”) due April 1, 2018, unless earlier purchased by the Company or converted. Interest is payable semi-annually, in arrears on April 1 and October 1 of each year.

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

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



	Conversion Rate per $1,000 Par Value	Initial Conversion Price per Share		Convertible Date
0.75% Senior Notes	46.8588	$	21.34	October 15, 2014
0.25% Senior Notes	15.0512	$	66.44	January 1, 2018

Throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events, including 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, if, for at least 20 trading days during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sales price of the Company’s common stock for such trading day is greater than or equal to 130% of the applicable conversion price on such trading day share of common stock on such last trading day;

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


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


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

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% of the principal amount of the Notes plus accrued and unpaid interest. Following certain corporate transactions that constitute a change of control, the Company will increase the conversion rate for a holder who elects to convert the 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 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the transaction costs related to the Note issuance, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Transaction costs attributable to the liability component are being amortized to expense over the term of the Notes, and transaction costs attributable to the equity component were netted with the equity component in temporary stockholders’ equity and stockholders’ equity. Additionally, the Company recorded a deferred tax liability of $51.1 million in connection with the 0.75% Senior Notes.

The Notes consisted of the following (in thousands):



	As of
	April 30, 2014			January 31, 2014
Liability component :
Principal:
0.75% Senior Notes (1)	$	284,972		$	568,864
0.25% Senior Notes (1)	1,150,000			1,150,000
Less: debt discount, net
0.75% Senior Notes (2)	(9,943		)	(26,705		)
0.25% Senior Notes (3)	(97,185		)	(103,070		)
Net carrying amount	$	1,327,844		$	1,589,089

(1)The effective interest rates of the 0.75% Senior Notes and 0.25% Senior Notes are 5.86% and 2.53%, respectively. These interest rates were based on the interest rates of a similar liability at the time of issuance that did not have an associated convertible feature.

(2)Included in the condensed consolidated balance sheets within Convertible 0.75% Senior Notes (which is classified as a current liability, as these notes were convertible) and is amortized over the life of the 0.75% Senior Notes using the effective interest rate method.

(3)Included in the condensed consolidated balance sheets within Convertible 0.25% Senior Notes (which is classified as a noncurrent liability) and is amortized over the life of the 0.25% Senior Notes using the effective interest rate method.

The total estimated fair values of the Company’s 0.75% Senior Notes and 0.25% Senior Notes at April 30, 2014 were $688.8 million and $1.3 billion, respectively. The fair value was determined based on the closing trading price per $100 of the 0.75% Senior Notes and 0.25% Senior Notes as of the last day of trading for the first quarter of fiscal 2015.

Based on the closing price of the Company’s common stock of $51.65 on April 30, 2014, the if-converted value of the 0.75% Senior Notes exceeded their principal amount by approximately $404.7 million and the if-converted value of the 0.25% Senior Notes was less than their principal amount.

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During the three months ended April 30, 2014, a portion of the 0.75% Senior Notes outstanding was converted by noteholders. The Company repaid $283.9 million of principal balance of the 0.75% Senior Notes. The Company also distributed approximately 8.7 million shares of the Company’s common stock to noteholders which represents the conversion value in excess of the principal amount. The Company received approximately 8.7 million shares of the Company’s common stock from the convertible note hedges related to the 0.75% Senior Notes. The Company recorded a loss of $8.5 million during the three months ended April 30, 2014 related to the extinguishment of the 0.75% Senior Notes converted by noteholders. This amount represents the difference between the fair market value allocated to the liability component on settlement date and the net carrying amount of the liability component and unamortized debt issuance costs on settlement date.

As of April 30, 2014 the remaining principal balance of the 0.75% Senior Notes outstanding is approximately $285.0 million. The remaining principal balance of the 0.75% Senior Notes matures on January 15, 2015 unless earlier purchased by the Company or converted by noteholders. As of the date of the filing of this Form 10-Q, the Company has received conversion notices for an additional $13.7 million of the principal balance of the 0.75% Senior Notes.

Note Hedges

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



(in thousands, except for shares)	Date	Purchase		Shares
0.75% Note Hedges	January 2010	$	126,500	26,943,812
0.25% Note Hedges	March 2013	$	153,800	17,308,880

The Note Hedges cover shares of the Company’s common stock at a strike price that corresponds to the initial conversion price of the respective Notes, also subject to adjustment, and are exercisable upon conversion of the Notes. The Note Hedges will expire upon the maturity of the Notes. The Note Hedges are intended to reduce the potential economic dilution upon conversion of the Notes in the event that the market value per share of the Company’s common stock, as measured under the Notes, at the time of exercise is greater than the conversion price of the Notes. The Note Hedges are separate transactions and are not part of the terms of the Notes. Holders of the Notes will not have any rights with respect to the Note Hedges. The Company initially recorded a deferred tax asset of $51.4 million in connection with the 0.75% Note Hedges. The Note Hedges do not impact earnings per share.

As a result of the conversions of the 0.75% Senior Notes, the Company exercised its rights on the 0.75% Note Hedges and received approximately 8.7 million shares of the Company's common stock during the three months ended April 30, 2014.

Warrants



	Date	Proceeds (in thousands)		Shares	Strike Price
0.75% Warrants	January 2010	$	59,300	26,943,812	$	29.88
0.25% Warrants	March 2013	$	84,800	17,308,880	$	90.40

Separately, in January 2010 and March 2013, the Company also entered into warrant transactions (the “0.75% Warrants” and the “0.25% Warrants”, respectively) (collectively, the “Warrants”), whereby the Company sold warrants to acquire, subject to anti-dilution adjustments, shares of the Company’s common stock. As the average market value per share of the Company’s common stock for the reporting period, as measured under the 0.75% Warrants, exceeds the strike price of the 0.75% Warrants, the 0.75% Warrants would have a dilutive effect on the Company’s earnings/loss per share if the Company were to report net income for the three month period ended April 30, 2014. The Warrants were anti-dilutive for the periods presented. The Warrants are separate transactions, entered into by the Company and are not part of the terms of the Notes or Note Hedges. Holders of the Notes and Note Hedges will not have any rights with respect to the Warrants.

Term Loan

On July 11, 2013, the Company entered into a credit agreement (the “Credit Agreement”) with Bank of America, N.A. and certain other lenders. The Credit Agreement provides for a $300.0 million term loan (the “Term Loan”) maturing on July 11, 2016 (the “Maturity Date”) and bears interest at the Company’s option at either a base rate plus a spread of 0.50% to 1.00% or an adjusted LIBOR rate as defined in the Credit Agreement plus a spread of 1.50% to 2.00%.

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The Company entered into the Term Loan in conjunction with and for purposes of funding the acquisition of ExactTarget in fiscal 2014.

Interest is due and payable in arrears quarterly for the loan bearing interest at the base rate and at the end of an interest period in the case of the loan bearing interest at the adjusted LIBOR rate. The Term Loan is payable in quarterly installments equal to $7.5 million beginning on September 30, 2013, with the remaining outstanding principal amount of the term loan being due and payable on the Maturity Date. The Company may prepay the Term Loan, in whole or in part at any time during the term of the Term Loan. Amounts repaid or prepaid may not be reborrowed under the terms of the Credit Agreement. The Term Loan is secured by a pledge of 100 percent of the equity securities of the Company’s direct domestic subsidiaries and 65 percent of the equity securities of the Company’s foreign subsidiaries.

The Credit Agreement contains certain customary affirmative and negative covenants, including a consolidated leverage ratio covenant, a consolidated interest coverage ratio covenant, a limit on the Company’s ability to incur additional indebtedness, issue preferred stock or pay dividends, and certain other restrictions on the Company’s activities each defined specifically in the Credit Agreement. The Company was in compliance with the Credit Agreement’s covenants as of April 30, 2014.

The weighted average interest rate on the Term Loan was 2.0% for the three months ended April 30, 2014. The current portion outstanding under the Term Loan was $30.0 million and the noncurrent outstanding portion was $247.5 million. Future principal payments on the Term Loan are payable as follows: $22.5 million during the remaining nine months of fiscal 2015; $30.0 million during fiscal 2016; and $225.0 million during fiscal 2017.

Interest Expense

The following table sets forth total interest expense recognized related to the Notes and the Term Loan prior to capitalization of interest (in thousands):



	Three Months Ended April 30,
	2014		2013
Contractual interest expense	$	2,903	$	1,415
Amortization of debt issuance costs	1,228		741
Amortization of debt discount	10,984		9,240
	$	15,115	$	11,396

5. Other Balance Sheet Accounts

Prepaid Expenses and Other Current Assets

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



	As of
	April 30, 2014		January 31, 2014
Deferred income taxes, net	$	48,556	$	49,279
Prepaid income taxes	22,838		23,571
Customer contract asset	54,360		77,368
Prepaid expenses and other current assets	187,854		158,962
	$	313,608	$	309,180

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

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Capitalized Software, net

Capitalized software consisted of the following (in thousands):



	As of
	April 30, 2014		January 31, 2014
Capitalized internal-use software development costs, net of accumulated amortization of $109,994 and $101,687, respectively	$	77,169	$	72,915
Acquired developed technology, net of accumulated amortization of $324,980 and $294,628, respectively	378,650		409,002
	$	455,819	$	481,917

Capitalized internal-use software amortization expense totaled $8.3 million and $6.7 million for the three months ended April 30, 2014 and 2013, respectively. Acquired developed technology amortization expense totaled $30.4 million and $22.0 million for the three months ended April 30, 2014 and 2013, respectively.

The Company capitalized $1.0 million and $0.9 million of stock-based expenses related to capitalized internal-use software development and deferred professional services during the three months ended April 30, 2014 and 2013, respectively.

Goodwill

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

Goodwill totaled $3.5 billion at April 30, 2014 and January 31, 2014

Other Assets, net

Other assets consisted of the following (in thousands):



	As of
	April 30, 2014		January 31, 2014
Deferred income taxes, noncurrent, net	$	9,738	$	9,691
Long-term deposits	18,027		17,970
Purchased intangible assets, net of accumulated amortization of $81,557 and $66,399, respectively	400,962		416,119
Acquired intellectual property, net of accumulated amortization of $12,479 and $11,304, respectively	11,967		11,957
Strategic investments	102,439		92,489
Customer contract asset	10,989		18,182
Other	45,968		47,082
	$	600,090	$	613,490

Customer contract asset reflects the noncurrent portion of future billings that are contractually committed by ExactTarget’s existing customers as of the acquisition date.

Purchased intangible assets amortization expense for the three months ended April 30, 2014 and 2013 was $15.2 million and $2.5 million, respectively. Acquired intellectual property amortization expense for the three months ended April 30, 2014 and 2013 was $1.2 million and $1.0 million, respectively.

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Accounts Payable, Accrued Expenses and Other Liabilities

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



	As of
	April 30, 2014		January 31, 2014
Accounts payable	$	36,723	$	64,988
Accrued compensation	259,517		397,002
Accrued other liabilities	274,792		235,543
Accrued income and other taxes payable	123,292		153,026
Accrued professional costs	19,309		15,864
Customer liability, current	38,077		53,957
Accrued rent	14,891		13,944
	$	766,601	$	934,324

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

Other Noncurrent Liabilities

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



	As of
	April 30, 2014		January 31, 2014
Deferred income taxes and income taxes payable	$	106,420	$	108,760
Customer liability, noncurrent	8,897		13,953
Financing obligation, building in progress-leased facility	52,931		40,171
Long-term lease liabilities and other	634,679		594,303
	$	802,927	$	757,187

Customer liability, noncurrent reflects the noncurrent fair value of the legal obligation to provide future services that are contractually committed by ExactTarget’s existing customers but unbilled as of the acquisition date.

6. Stockholders’ Equity

The Company maintains the following stock plans: the 2006 Inducement Equity Incentive Plan (the “Inducement Plan”), the ESPP and the 2013 Equity Incentive Plan. The expiration of the 1999 Stock Option Plan (“1999 Plan”) in fiscal 2010 did not affect awards outstanding, which continue to be governed by the terms and conditions of the 1999 Plan.

As of April 30, 2014, $59.0 million has been withheld on behalf of employees for future purchases under the ESPP and is recorded in accounts payable, accrued expenses and other liabilities.

Prior to February 1, 2006, options issued under the Company’s stock option plans generally had a term of 10 years. From February 1, 2006 through July 3, 2013, options issued had a term of 5 years. After July 3, 2013, options issued have a term of 7 years.

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Stock activity excluding the ESPP is as follows:



			Options Outstanding
	Shares Available for Grant		Outstanding Stock Options		Weighted- Average Exercise Price		Aggregate Intrinsic Value (in thousands)
Balance as of January 31, 2014	55,852,536		28,604,045		$	34.26
Increase in shares authorized:
2013 Equity Incentive Plan	1,186,551		0		0.00
Options granted under all plans	(536,057	)	536,057		58.31
Restricted stock activity	(880,568	)	0		0.00
Stock grants to board and advisory board members	(67,080	)	0		0.00
Exercised	0		(1,785,330	)	21.69
Plan shares expired	(775,831	)	0		0.00
Cancelled	328,647		(328,647	)	26.01
Balance as of April 30, 2014	55,108,198		27,026,125		35.67		$	440,360
Vested or expected to vest			25,550,631		$	35.21	$	427,122
Exercisable as of April 30, 2014			10,647,678		$	27.72	$	254,804

The total intrinsic value of the options exercised during the three months ended April 30, 2014 and 2013 was $68.8 million and $57.7 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 3.8 years.

As of April 30, 2014, options to purchase 10,647,678 shares were vested at a weighted average exercise price of $27.72 per share and had a remaining weighted-average contractual life of approximately 2.2 years. The total intrinsic value of these vested options as of April 30, 2014 was $254.8 million.

The following table summarizes information about stock options outstanding as of April 30, 2014:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted- Average Remaining Contractual Life (Years)	Weighted- Average Exercise Price		Number of Shares	Weighted- Average Exercise Price
$0.26 to $22.12	3,921,342	3.0	$	12.61	3,045,518	$	12.53
$22.98 to $27.06	3,861,549	3.2	26.79		1,851,121	26.85
$27.56 to $35.07	1,638,794	3.7	31.42		588,732	31.80
$35.63	4,190,536	1.6	35.63		3,297,395	35.63
$35.87 to $39.09	6,122,454	3.4	38.05		1,817,970	38.01
$40.19 to $52.14	879,377	5.5	42.94		46,942	42.30
$52.30 to $63.66	6,412,073	6.6	52.97		0	0.00
	27,026,125	3.9	$	35.67	10,647,678	$	27.72

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Restricted stock activity is as follows:



	Restricted Stock Outstanding
	Outstanding		Weighted- Average Exercise Price		Aggregate Intrinsic Value (in thousands)
Balance as of January 31, 2014	24,653,578		$	0.001
Granted	831,288		0.001
Cancelled	(701,260	)	0.001
Vested and converted to shares	(2,011,456	)	0.001
Balance as of April 30, 2014	22,772,150		$	0.001	$	1,176,182
Expected to vest	19,426,360				$	1,003,371

The restricted stock, which upon vesting entitles the holder to one share of common stock for each share of restricted stock, has an exercise price of $0.001 per share, which is equal to the par value of the Company’s common stock, and generally vest over 4 years.

The weighted-average grant date fair value of the restricted stock issued for the three months ended April 30, 2014 and 2013 was $63.71 and $42.47, respectively.

Common Stock

The following number of shares of common stock were reserved and available for future issuance at April 30, 2014:



Options outstanding	27,026,125
Restricted stock awards and units outstanding	22,772,150
Stock available for future grant:
2013 Equity Incentive Plan	54,825,805
2006 Inducement Equity Incentive Plan	282,393
2004 Employee Stock Purchase Plan	6,114,165
Convertible senior notes	30,662,326
Warrants	44,252,692
	185,935,656

7. Income Taxes

Effective Tax Rate

The Company computes its year-to-date provision for income taxes by applying the estimated annual effective tax rate to year to date pretax loss and adjusts the provision for discrete tax items recorded in the period. For the three months ended April 30, 2014, the Company reported a tax expense of $12.1 million on a pretax loss of $84.8 million, which resulted in a negative effective tax rate of 14 percent. The tax provision recorded was related to income taxes in profitable jurisdictions outside the U.S. and the current tax expense in the U.S. The Company had U.S. current tax expense as a result of forecasted taxable income before considering certain excess tax benefits from stock options and vesting of restricted stock. This U.S. current tax expense was partially offset by tax benefit attributable to losses in certain U.S. states with no valuation allowance.

For the three months ended April 30, 2013, the Company reported a tax expense of $13.8 million on a pretax loss of $53.9 million, which resulted in a negative effective tax rate of 26 percent. The Company recorded a tax provision on a pretax loss primarily due to income taxes accrued in profitable jurisdictions outside of the U.S. and the loss in the U.S. that was not benefited due to its valuation allowance.

Tax Benefits Related to Stock-Based Compensation

The total income tax benefit related to stock-based awards was $42.6 million and $34.3 million for three months ended April 30, 2014 and 2013, respectively, the majority of which was not recognized as a result of the valuation allowance.

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Unrecognized Tax Benefits and Other Considerations

The Company records liabilities related to its uncertain tax positions. Tax positions for the Company and its subsidiaries are subject to income tax audits by multiple tax jurisdictions throughout the world. Certain prior year tax returns are currently being examined by various taxing authorities in countries including the United States, Canada, Japan, Germany and the United Kingdom. To date, the Company has not received any material proposed adjustments.

The Company believes that it has provided adequate reserves for its income tax uncertainties in all open tax years. In the next 12 months, the Company does not expect the unrecognized tax benefits balance to materially change.

8. Earnings/Loss Per Share

Basic earnings/loss per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the fiscal period. Diluted earnings/loss per share is computed giving effect to all potential weighted average dilutive common stock, including options, restricted stock units, warrants and the convertible senior notes. The dilutive effect of outstanding awards and convertible securities is reflected in diluted earnings per share by application of the treasury stock method. Diluted loss per share for the three months ended April 30, 2014 and 2013 are the same as basic loss per share as there is a net loss in these periods and inclusion of potentially issuable shares would be anti-dilutive.

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



	Three Months Ended April 30,
	2014			2013
Numerator:
Net loss	$	(96,911	)	$	(67,721	)
Denominator:
Weighted-average shares outstanding for basic loss per share	612,512			588,385
Effect of dilutive securities:
Convertible senior notes	0			0
Employee stock awards	0			0
Warrants	0			0
Adjusted weighted-average shares outstanding and assumed conversions for diluted loss per share	612,512			588,385

The weighted-average number of shares outstanding used in the computation of basic and diluted earnings/loss per share does not include the effect of the following potential outstanding common stock. The effects of these potentially outstanding shares were not included in the calculation of diluted earnings/loss per share because the effect would have been anti-dilutive (in thousands):



	Three Months Ended April 30,
	2014	2013
Stock awards	20,472	20,279
Convertible senior notes	30,662	44,248
Warrants	44,253	44,253

9. Commitments

Letters of Credit

As of April 30, 2014, the Company had a total of $61.8 million in letters of credit outstanding substantially in favor of certain landlords for office space. These letters of credit renew annually and expire at various dates through December 2030.

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Leases

The Company leases facilities space and certain fixed assets under non-cancelable operating and capital leases with various expiration dates.

As of April 30, 2014, the future minimum lease payments under non-cancelable operating and capital leases are as follows (in thousands):



	Capital Leases			Operating Leases		Financing Obligation, Building in Progress-Leased Facility(1)
Fiscal Period:
Remaining nine months of fiscal 2015	$	62,622		$	162,059	$	0
Fiscal 2016	74,140			207,371		1,777
Fiscal 2017	75,803			175,335		16,877
Fiscal 2018	83,843			142,830		21,107
Fiscal 2019	99,908			150,971		21,551
Thereafter	200,067			1,125,631		274,512
Total minimum lease payments	596,383			$	1,964,197	$	335,824
Less: amount representing interest	(82,847		)
Present value of capital lease obligations	$	513,536

______________

(1) Total Financing Obligation, Building in Progress-Leased Facility noted above represents the total obligation on the lease agreement noted in Note 3 “Property and Equipment” and includes $52.9 million that was recorded to Financing obligation, building in progress-leased facility, which is included in Other noncurrent liabilities on the balance sheet.

The Company’s agreements for the facilities and certain services provide the Company with the option to renew. The Company’s future contractual obligations would change if the Company exercised these options.

On April 10, 2014, the Company entered into an office lease agreement to lease approximately 714,000 rentable square feet of an office building to be located in San Francisco, California. The lease payments associated with the lease will be approximately $560.0 million over the 15.5 year term of the lease, beginning in the Company's first quarter of fiscal year 2018, which is reflected above under Operating Leases.

10. Legal Proceedings and Claims

In the ordinary course of business, the Company is or may be involved in various legal proceedings and claims related to alleged infringement of third-party patents and other intellectual property rights, commercial, corporate and securities, labor and employment, wage and hour, and other claims. The Company has been, and may in the future be, put on notice and/or sued by third parties for alleged infringement of their proprietary rights, including patent infringement.

In general, the resolution of a legal matter could prevent the Company from offering its service to others, could be material to the Company’s financial condition or cash flows, or both, or could otherwise adversely affect the Company’s operating results.

The Company makes a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. In management’s opinion, resolution of all current matters is not expected to have a material adverse impact on the Company’s condensed consolidated results of operations, cash flows or financial position. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect the Company’s future results of operations or cash flows, or both, of a particular quarter.

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11. Related-Party Transactions

In January 1999, The Salesforce.com Foundation, a non-profit public charity, also referred to as the Foundation, was chartered to build philanthropic programs that are focused on youth and technology. The Company’s chairman is the chairman of the Foundation. The Company’s chairman, two of the Company’s employees and one of the Company’s board members hold four of the Foundation’s ten board seats. The Company does not control the Foundation’s activities, and accordingly, the Company does not consolidate the Foundation’s statement of activities with its financial results.

Since the Foundation’s inception, the Company has provided at no charge certain resources to Foundation employees such as office space. The value of these items was approximately $345,000 for the three months ended April 30, 2014.

Additionally, the Company has donated subscriptions to the Company’s service to other qualified non-profit organizations. The Company also allows an affiliate of the Foundation to resell the Company’s service to non-profit organizations. The Company does not charge the affiliate for these subscriptions, so any revenue from subscriptions provided to non-profit organizations is retained by the Foundation to fund its charitable work. The value of the subscriptions was approximately $7.0 million for the three months ended April 30, 2014. The Company plans to continue these programs.

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

The following discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements consist of, among other things, trend analyses, statements regarding future events, future financial performance, our anticipated growth, the effect of general economic and market conditions, our business strategy and our plan to build our business, including our strategy to be the leading provider of enterprise cloud computing applications and platforms and to lead the industry shift to the “customer company,” our service performance and security, the expenses associated with new data centers, additional data center capacity, real estate and office facilities space, our operating results, new features and services, our strategy of acquiring or making investments in complementary businesses, joint ventures, services and technologies, and intellectual property rights, our ability to successfully integrate acquired businesses and technologies, our ability to continue the growth and to maintain deferred revenue and unbilled deferred revenue, our ability to protect our intellectual property rights, our ability to develop our brands, our ability to realize the benefits from strategic partnerships, the effect of evolving government regulations, the effect of foreign currency exchange rate and interest rate fluctuations on our financial results, the valuation of deferred tax assets, the potential availability of additional tax assets in the future and related matters, the impact of expensing stock options, the sufficiency of our capital resources, factors related to our outstanding convertible notes, term loan, compliance with our related debt covenants, and capital lease obligations, and current and potential litigation involving us, all of which are based on current expectations, estimates, and forecasts, and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “aims,” “projects,” “intends,” “plans,” “believes,” “estimates,” “seeks,” “assumes,” “may,” “should,” 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 solutions. We were founded on the concept of delivering customer relationship management, or CRM, applications via the Internet, or “cloud.” We introduced our first CRM solution in February 2000 and we have expanded our offerings with new editions, solutions and enhanced features, through internal development and acquisitions. We sell to businesses of all sizes and in almost every industry worldwide on a subscription basis.

Our mission is to help our customers transform themselves into “customer companies” by empowering them to connect with their customers, partners, employees and products in entirely new ways. Our objective is to deliver solutions to help companies transform the way they sell, service, market and innovate. With our four core services—Sales Cloud, Service Cloud, ExactTarget Marketing Cloud and the Salesforce1 Platform—customers have the tools they need to build a next generation social front office with our social and mobile cloud technologies. Key elements of our strategy include:


•	strengthening our market-leading solutions;


•	extending distribution into high-growth markets;


•	expanding relationships with our existing customer base;


•	pursuing new customers;


•	reducing our attrition rates;


•	building our business in top markets globally, which includes building partnerships that help add customers; and


•	encouraging the development of third-party applications on our cloud computing platforms.

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We believe the factors that will influence our ability to achieve our objectives include: our prospective customers’ willingness to migrate to enterprise cloud computing services; the availability, performance and security of our service; our ability to continue to release, and gain customer acceptance of, new and improved features; our ability to successfully integrate acquired businesses and technologies; successful customer adoption and utilization of our service; acceptance of our service in markets where we have few customers; the emergence of additional competitors in our market and improved product offerings by existing and new competitors; the location of new data centers; third-party developers’ willingness to develop applications on our platforms; our ability to attract new personnel and retain and motivate current personnel; and general economic conditions which could affect our customers’ ability and willingness to purchase our services, delay the customers’ purchasing decision or affect attrition rates.

To address these factors, we will need to, among other things, continue to add substantial numbers of paying subscriptions, upgrade our customers to fully featured versions such as our Unlimited Edition or arrangements such as a Social Enterprise License Agreement, provide high quality technical support to our customers, encourage the development of third-party applications on our platforms and continue to focus on retaining customers at the time of renewal. Our plans to invest for future growth include the continuation of the expansion of our data center capacity, the hiring of additional personnel, particularly in direct sales, other customer-related areas and research and development, the expansion of domestic and international selling and marketing activities, continuing to develop our brands, the addition of distribution channels, the upgrade of our service offerings, the development of new services, the integration of acquired technologies, the expansion of our ExactTarget Marketing Cloud and Salesforce1 Platform service offerings and the additions to our global infrastructure to support our growth.

We also regularly evaluate acquisitions or investment opportunities in complementary businesses, joint ventures, services and technologies and intellectual property rights in an effort to expand our service offerings. We expect to continue to make such investments and acquisitions in the future and we plan to reinvest a significant portion of our incremental revenue in future periods to grow our business and continue our leadership role in the cloud computing industry. As a result of our aggressive growth plans, specifically our hiring plan and acquisition activities, we have incurred significant expenses from equity awards and amortization of purchased intangibles which have resulted in net losses on a GAAP basis. As we continue with our growth plan, we may continue to have net losses on a GAAP basis.

Our typical subscription contract term is 12 to 36 months, although terms range from one to 60 months, so during any fiscal reporting period only a subset of active subscription contracts are available for renewal. We calculate our attrition rates as of the end of each reporting period. We do not calculate the attrition rate for ExactTarget, Inc. (“ExactTarget”). Our attrition rate was in the high-single digit percentage range as of April 30, 2014, declining slightly from the attrition rate percentage as of January 31, 2014. We expect our attrition rates to continue to decline slowly over time, as we continue to expand our enterprise business and invest in customer success and other related programs.

We expect marketing and sales costs, which were 52 percent of our total revenues for the three months ended April 30, 2014 and 52 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 customers, and build greater brand awareness.

Fiscal Year

Our fiscal year ends on January 31. References to fiscal 2015, for example, refer to the fiscal year ending January 31, 2015.

Operating Segments

We operate as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who in our case is the chief executive officer, in deciding how to allocate resources and assess performance. Over the past few years, we have completed several acquisitions. These acquisitions have allowed us to expand our offerings, presence and reach in various market segments of the enterprise cloud computing market. While we have offerings in multiple enterprise cloud computing market segments, our business operates in one operating segment because our chief operating decision maker evaluates our financial information and resources and assesses the performance of these resources on a consolidated basis. Since we operate as one operating segment, all required financial segment information can be found in the condensed consolidated financial statements.

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Sources of Revenues

We derive our revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing our enterprise cloud computing services and from customers paying for additional support beyond the standard support that is included in the basic subscription fees; and (2) related professional services such as process mapping, project management, implementation services and other revenue. “Other revenue” consists primarily of training fees. Subscription and support revenues accounted for approximately 94 percent of our total revenues for the three months ended April 30, 2014. Subscription revenues are driven primarily by the number of paying subscribers, varying service types, the price of our service and renewals. We define a “customer” as a separate and distinct buying entity (e.g., a company, a distinct business unit of a large corporation, a partnership, etc.) that has entered into a contract to access our enterprise cloud computing services. We define a “subscription” as a unique user account purchased by a customer for use by its employees or other customer-authorized users, and we refer to each such user as a “subscriber.” The number of paying subscriptions at each of our customers ranges from one to hundreds of thousands. None of our customers accounted for more than five percent of our revenues during the three months ended April 30, 2014 and 2013.

Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement dates of each contract. The typical subscription and support term is 12 to 36 months, although terms range from one to 60 months. Our subscription and support contracts are non-cancelable, though customers typically have the right to terminate their contracts for cause if we materially fail to perform. We generally invoice our customers in advance, in annual 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 training classes on implementing, using and administering our service that are billed on a per person, per class basis. Our typical professional services payment terms provide that our customers pay us within 30 days of invoice.

In determining whether professional services can be accounted for separately from subscription and support revenues, we consider a number of factors, which are described in “Critical Accounting Estimates—Revenue Recognition” below.

Revenue by Cloud Service Offering

We are providing the information below on a supplemental basis to give additional insight into the revenue performance of our individual core service offerings.

Subscription and support revenues during the three months ended April 30, 2014 consisted of the following by core service offering (in millions):



Sales Cloud	$	576.6
Service Cloud	294.8
ExactTarget Marketing Cloud	111.0
Salesforce1 Platform and Other	164.9
Total	$	1,147.3

In situations where a customer purchases multiple cloud offerings, such as through a Social Enterprise License Agreement, we allocate the contract value to each core service offering based on the customer’s estimated product demand plan and the service that was provided at the inception of the contract. We do not update these allocations based on actual product usage during the term of the contract. We have allocated approximately 10 percent of our total subscription and support revenues for the three months ended April 30, 2014, based on customers’ estimated product demand plans and these allocated amounts are included in the table above.

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Additionally, some of our core service offerings have similar features and functions. For example, customers may use the Sales Cloud, the Service Cloud or our Platform to record account and contact information, which are similar features across these core service offerings. Depending on a customer’s actual and projected business requirements, more than one core service offering may satisfy the customer’s current and future needs. We record revenue based on the individual products ordered by a customer, and not according to the customer’s business requirements and usage. In addition, as we introduce new features and functions within each offering, and refine our allocation methodology for changes in our business, we do not expect it to be practical to adjust historical revenue results by core service offering for comparability. Accordingly, comparisons of revenue performance by core service offering over time may not be meaningful.

We estimate that for the remainder of fiscal 2015, approximately 50 percent of total subscription and support revenue will continue to be derived from subscriptions to our Sales Cloud offering.

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 annual or quarterly cycles. Occasionally, we bill customers for their multi-year contract on a single invoice which results in an increase in noncurrent deferred revenue. We typically issue renewal invoices in advance of the renewal service period, and depending on timing, the initial invoice for the subscription and services contract and the subsequent renewal invoice may occur in different quarters. This may result in an increase in deferred revenue and accounts receivable. There is a disproportionate weighting towards annual billings in the fourth quarter, primarily as a result of large enterprise account buying patterns. Our fourth quarter has historically been our strongest quarter for new business and renewals. The year on year compounding effect of this seasonality in both billing patterns and overall new and renewal business causes the value of invoices that we generate in the fourth quarter for both new business and renewals to increase as a proportion of our total annual billings. Approximately 68 percent of all subscription and support invoices issued during the three months ended April 30, 2014 had annual terms.

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 as displayed below:



(in thousands)	April 30, 2014
Fiscal 2015
Accounts receivable, net	$	684,155
Deferred revenue, current and noncurrent	2,324,615



(in thousands)	April 30, 2013		July 31, 2013		October 31, 2013		January 31, 2014
Fiscal 2014
Accounts receivable, net	$	502,609	$	599,543	$	604,045	$	1,360,837
Deferred revenue, current and noncurrent	1,733,160		1,789,648		1,734,619		2,522,115



(in thousands)	April 30, 2012		July 31, 2012		October 31, 2012		January 31, 2013
Fiscal 2013
Accounts receivable, net	$	371,395	$	446,917	$	418,590	$	872,634
Deferred revenue, current and noncurrent	1,334,716		1,337,184		1,291,703		1,862,995

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Unbilled Deferred Revenue

The deferred revenue balance on our consolidated balance sheet does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. Unbilled deferred revenue represents future billings under our subscription agreements that have not been invoiced and, accordingly, are not recorded in deferred revenue. Unbilled deferred revenue was approximately $4.8 billion as of April 30, 2014 and approximately $4.5 billion as of January 31, 2014. Also as a result, our typical contract length has grown and is now between 12 and 36 months. We expect that the amount of unbilled deferred revenue will change from quarter to quarter for several reasons, including the specific timing and duration of large customer subscription agreements, varying billing cycles of subscription agreements, the specific timing of customer renewals, foreign currency fluctuations, the timing of when unbilled deferred revenue is to be recognized as revenue, and changes in customer financial circumstances. For multi-year subscription agreements billed annually, the associated unbilled deferred revenue is typically high at the beginning of the contract period, zero just prior to renewal, and increases if the agreement is renewed. Low unbilled deferred revenue attributable to a particular subscription agreement is often associated with an impending renewal and may not be an indicator of the likelihood of renewal or future revenue from such customer. Accordingly, we expect that the amount of aggregate unbilled deferred revenue will change from year-to-year depending in part upon the number and dollar amount of subscription agreements at particular stages in their renewal cycle. Such fluctuations are not a reliable indicator of future revenues. Unbilled deferred revenue does not include minimum revenue commitments from indirect sales channels, as we recognize revenue, deferred revenue, and any unbilled deferred revenue upon sell-through to an end user customer.

Cost of Revenues and Operating Expenses

Cost of Revenues. Cost of subscription and support revenues primarily consists of expenses related to hosting our service and providing support, the costs of data center capacity, depreciation or operating lease expense associated with computer equipment and software, allocated overhead and amortization expense associated with capitalized software related to our services and acquired developed technologies. We allocate overhead such as information technology infrastructure, rent and occupancy charges based on headcount. Employee benefit costs and taxes are allocated based upon a percentage of total compensation expense. As such, general overhead expenses are reflected in each cost of revenue and operating expense category. Cost of professional services and other revenues consists primarily of employee-related costs associated with these services, including stock-based expenses, the cost of subcontractors and allocated overhead. The cost of providing professional services is significantly higher as a percentage of the related revenue than for our enterprise cloud computing subscription service due to the direct labor costs and costs of subcontractors.

We intend to continue to invest additional resources in our enterprise cloud computing services. For example, we have invested in additional database software and we plan to open additional data centers and expand our current data 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 the affected periods.

Research and Development. Research and development expenses consist primarily of salaries and related expenses, including stock-based expenses, the costs of our development and test data center and allocated overhead. We continue to focus our research and development efforts on adding new features and services, integrating acquired technologies, increasing the functionality and security and enhancing the ease of use of our enterprise cloud computing services. Our proprietary, scalable and secure multi-tenant architecture enables us to provide all of our customers with a service based on a single version of our application. As a result, we do not have to maintain multiple versions, which enables us to have relatively lower research and development expenses as compared to traditional enterprise software companies.

We expect that in the future, research and development expenses will increase in absolute dollars and may increase as a percentage of total revenues as we invest in building the necessary employee and system infrastructure required to support the development of new, and improve existing, technologies and the integration of acquired businesses and technologies.

Marketing and Sales. Marketing and sales expenses are our largest cost and consist primarily of salaries and related expenses, including stock-based expenses, for our sales and marketing staff, including commissions, payments to partners, marketing programs and allocated overhead. Marketing programs consist of advertising, events, corporate communications, brand building and product marketing activities.

We plan to continue to invest in marketing and sales by expanding our domestic and international selling and marketing activities, building brand awareness, attracting new customers and sponsoring additional marketing events. The timing of these marketing events, such as our annual and largest event, Dreamforce, will affect our marketing costs in a particular quarter. We expect that in the future, marketing and sales expenses will increase in absolute dollars and continue to be our largest cost.

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General and Administrative. General and administrative expenses consist of salaries and related expenses, including stock-based expenses, for finance and accounting, legal, internal audit, human resources and management information systems personnel, legal costs, professional fees, other corporate expenses and allocated overhead. We expect that in the future, general and administrative expenses will increase in absolute dollars as we invest in our infrastructure and we incur additional employee related costs, professional fees and insurance costs related to the growth of our business and international expansion. We expect general and administrative costs as a percentage of total revenues to either remain flat or decrease for the next several quarters.

Stock-Based Expenses. Our cost of revenues and operating expenses include stock-based expenses related to equity plans for employees and non-employee directors. We recognize our stock-based compensation as an expense in the statement of operations based on their fair values and vesting periods. These charges have been significant in the past and we expect that they will increase as our stock price increases, as we acquire more companies, as we hire more employees and seek to retain existing employees.

During the three months ended April 30, 2014, we recognized stock-based expense of $131.1 million. As of April 30, 2014, the aggregate stock compensation remaining to be amortized to costs and expenses over a weighted-average period of 2.1 years was $1.1 billion. We expect this stock compensation balance to be amortized as follows: $370.6 million during the remaining nine months of fiscal 2015; $371.6 million during fiscal 2016; $239.7 million during fiscal 2017; $110.1 million during fiscal 2018 and $1.3 million during fiscal 2019. The expected amortization reflects only outstanding stock awards as of April 30, 2014 and assumes no forfeiture activity. We expect to continue to issue stock-based awards to our employees in future periods.

Amortization of Purchased Intangibles from Business Combinations. Our cost of revenues and operating expenses include amortization of acquisition-related intangible assets, such as the amortization of the cost associated with an acquired company’s research and development efforts, trade names, customer lists and customer relationships. We expect this expense to increase as we acquire more companies.

Critical Accounting Estimates

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

We believe that of our significant accounting policies, which are described in Note 1 “Summary of Business and Significant Accounting Policies” 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 derive our revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing our enterprise cloud computing services and from customers purchasing additional support beyond the standard support that is included in the basic subscription fee; and (2) related professional services such as process mapping, project management, implementation services and other revenue. “Other revenue” consists primarily of training fees.

We commence revenue recognition when all of the following conditions are satisfied:


•	there is persuasive evidence of an arrangement;


•	the service has been or is being provided to the customer;


•	the collection of the fees is reasonably assured; and


•	the amount of fees to be paid by the customer is fixed or determinable.

Our subscription service arrangements are non-cancelable and do not contain refund-type provisions.

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Subscription and Support Revenues

Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement date of each contract, which is the date our service is made available to customers. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.

Professional Services and Other Revenues

The majority of our professional services contracts are on a time and material basis. When these services are not combined with subscription revenues as a single unit of accounting, as discussed below, these revenues are recognized as the services are rendered for time and material contracts, and when the milestones are achieved and accepted by the customer for fixed price contracts. Training revenues are recognized after the services are performed.

Multiple Deliverable Arrangements

We enter into arrangements with multiple deliverables that generally include multiple subscriptions, premium support, and professional services. If the deliverables have standalone value upon delivery, we account for each deliverable separately. Subscription services have standalone value as such services are often sold separately. In determining whether professional services have standalone value, we consider the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the subscription service start date, and the contractual dependence of the subscription service on the customer’s satisfaction with the professional services work. To date, we have concluded that all of the professional services included in multiple deliverable arrangements executed have standalone value.

Multiple deliverables included in an arrangement are separated into different units of accounting and the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. We determine the relative selling price for a deliverable based on its vendor-specific objective evidence of selling price (“VSOE”), if available, or our best estimate of selling price (“BESP”), if VSOE is not available. We have determined that third-party evidence (“TPE”) is not a practical alternative due to differences in our service offerings compared to other parties and the availability of relevant third-party pricing information. The amount of revenue allocated to delivered items is limited by contingent revenue, if any.

For certain professional services, we have established VSOE as a consistent number of standalone sales of this deliverable have been priced within a reasonably narrow range. We have not established VSOE for our subscription services due to lack of pricing consistency, the introduction of new services and other factors. Accordingly, we use our BESP to determine the relative selling price.

We determined BESP by considering our overall pricing objectives and market conditions. Significant pricing practices taken into consideration include our discounting practices, the size and volume of our transactions, the customer demographic, the geographic area where our services are sold, our price lists, our go-to-market strategy, historical standalone sales and contract prices. The determination of BESP is made through consultation with and approval by management, taking into consideration the go-to-market strategy. As our go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes in relative selling prices, including both VSOE and BESP.

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

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

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

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During the three months ended April 30, 2014, we deferred $40.9 million of commission expenditures and we amortized $59.9 million to sales expense. During the same period a year ago, we deferred $17.5 million of commission expenditures and we amortized $45.7 million to sales expense. Deferred commissions on our condensed consolidated balance sheets totaled $306.0 million at April 30, 2014 and $324.9 million at January 31, 2014.

Capitalized Internal-Use Software Costs. We are required to follow the guidance of Accounting Standards Codification 350 (“ASC 350”), Intangibles- Goodwill and Other in accounting for the cost of computer software developed for internal-use and the accounting for web-based product development costs. ASC 350 requires companies to capitalize qualifying computer software costs, which are incurred during the application development stage, and amortize these costs on a straight-line basis over the estimated useful life of the respective asset. We deliver our enterprise cloud computing solutions as a service via all the major Internet browsers and on leading major mobile device operating systems. As a result of this software as a service delivery model, we believe we have larger capitalized costs as compared to traditional enterprise software companies as they are required to use a different accounting standard.

Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life. We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

Goodwill and Long-Lived Assets. We make estimates, assumptions, and judgments when valuing goodwill and other intangible assets in connection with the initial purchase price allocation of an acquired entity, as well as when evaluating the recoverability of our goodwill and other intangible assets on an ongoing basis. These estimates are based upon a number of factors, including historical experience, market conditions, and information obtained from the management of acquired companies. Critical estimates in valuing certain intangible assets include, but are not limited to, historical and projected attrition rates, anticipated growth in revenue from the acquired customers and acquired technology, and the expected use of the acquired assets. These factors are also considered in determining the useful life of acquired intangible assets. The amounts and useful lives assigned to identified intangible assets impacts the amount and timing of future amortization expense.

The value of our goodwill and intangible assets could be impacted by future adverse changes such as, but not limited to: a substantial decline in our market capitalization; an adverse action or assessment by a regulator; and unanticipated competition.

We evaluate and test the recoverability of our goodwill for impairment at least annually during the fourth quarter or more often if and when circumstances indicate that goodwill may not be recoverable. Each period we evaluate the estimated remaining useful life of our intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. We evaluate long-lived assets, such as property and equipment, and purchased intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such events or changes in circumstances include, but are not limited to, a significant decrease in the fair value of the underlying asset, a significant decrease in the benefits realized from the acquired assets, difficulty and delays in integrating the business or a significant change in the operations of the acquired assets or use of an asset. A long-lived asset is considered impaired if its carrying amount exceeds the estimated future undiscounted cash flows the asset is expected to generate. If a long-lived asset is considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the asset exceeds the fair value of the asset or asset group.

Business Combinations. Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired and liabilities assumed and pre-acquisition contingencies. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date.

Examples of critical estimates in valuing certain of the intangible assets and goodwill we have acquired include but are not limited to:


•	future expected cash flows from subscription and support contracts, professional services contracts, other customer contracts and acquired developed technologies and patents;


•	the acquired company’s trade name, trademark and existing customer relationship, as well as assumptions about the period of time the acquired trade name and trademark will continue to be used in our offerings;


•	uncertain tax positions and tax related valuation allowances assumed; and


•	discount rates.

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Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

Stock-Based Options and Awards. We recognize the fair value of our stock options and awards on a straight-line basis over the requisite service period of the option or award which is the vesting term of generally four years for stock options and restricted stock awards and one year for shares issued pursuant to our Employee Stock Purchase Plan (“ESPP”). The fair value of each option or ESPP share or stock purchase right is estimated on the date of grant using the Black-Scholes option pricing model. The estimated forfeiture rate applied is based on historical forfeiture rates. We evaluate the forfeiture rates at least annually, or when events or circumstances indicate a change may be needed. This may cause a fluctuation in our stock-based compensation in the period of change. Inputs into the Black-Scholes option pricing model include:


•	The estimated life for the stock options which is estimated based on an actual analysis of expected life. The estimated life for shares issued pursuant to our ESPP is based on the two purchase periods within the 12 month offering period;


•	The risk free interest rate which is based on the rate for a U.S. government security with the same estimated life at the time of the option grant and the stock purchase rights;


•	The future stock price volatility which is estimated considering both our observed option-implied volatilities and our historical volatility calculations. We believe this is the best estimate of the expected volatility over the expected life of our stock options and stock purchase rights; and


•	The probability of performance conditions, if any, that affect the vesting of certain awards being achieved. Expense is only recognized for those shares expected to vest.

Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the condensed consolidated statements of operations in the period that includes the enactment date. At each of the interim financial reporting periods, we compute our tax provision by applying an estimated annual effective tax rate to year to date ordinary income and adjust the provision for discrete tax items recorded in the same period. The estimated annual effective tax rate at each interim period represents the best estimate based on evaluations of possible future transactions and may be subject to subsequent refinement or revision.

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

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

Our tax provision could be adversely affected by changes in the mix of earnings and losses in countries with differing statutory tax rates, certain non-deductible expenses, changes in the valuation of deferred tax assets and liabilities and our ability to utilize them, changes in tax laws, including fundamental changes to tax laws applicable to corporate multinationals that may be considered by the United States and many countries in the European Union, changes in accounting principles, adverse results of tax examinations as well as changes in excess tax benefits related to exercises and vesting of stock-based compensation that are allocated directly to stockholders’ equity.

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Strategic Investments. We report our investments in non-marketable equity and debt securities, which consist of minority equity and debt investments in privately-held companies, at cost or fair value when an event or circumstance indicates an other-than-temporary decline in value has occurred. Management evaluates financial results, earnings trends, technology milestones and subsequent financing of these companies, as well as the general market conditions to identify indicators of other-than-temporary impairment.

Results of Operations

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



	Three Months Ended April 30,
	2014