UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended January 31, 2012
OR
¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 001-32224
salesforce.com, inc.
(Exact name of registrant as specified in its charter)
Delaware | 94-3320693 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
The Landmark @ One Market, Suite 300
San Francisco, California 94105
(Address of principal executive offices)
Telephone Number (415) 901-7000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.001 per share | New York Stock Exchange, Inc. |
Securities registered pursuant to section 12(g) of the Act:
Not applicable
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of Act. Yes ¨ No x
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
Based on the closing price of the Registrants Common Stock on the last business day of the Registrants most recently completed second fiscal quarter, which was July 31, 2011, the aggregate market value of its shares (based on a closing price of $144.71 per share) held by non-affiliates was approximately $19.3 billion. Shares of the Registrants Common Stock held by each executive officer and director and by each entity or person that owned 5 percent or more of the Registrants outstanding Common Stock were excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of January 31, 2012, there were approximately 137.0 million shares of the Registrants Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants definitive proxy statement for its 2012 Annual Meeting of Stockholders (the Proxy Statement), to be filed within 120 days of the Registrants fiscal year ended January 31, 2012, are incorporated by reference in Part III of this Report on Form 10-K. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part of this Form 10-K.
salesforce.com, inc.
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FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K, including the section titled Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) in Item 7, 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 social enterprise, 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 companies, services and technologies, and intellectual property rights, our ability to successfully integrate acquired businesses and technologies, and the continued growth and ability to maintain deferred revenue and unbilled deferred revenue, our ability to protect our intellectual property rights, our ability to develop our brands, the effect of evolving government regulations, the effect of foreign currency exchange rate and interest rate fluctuations on our financial results, the potential availability of additional tax assets in the future and related matters, the impact of expensing stock options, the sufficiency of our capital resources, 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, 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.
PART I
ITEM 1. | BUSINESS |
Overview
We are a leading provider of enterprise cloud computing and social enterprise solutions, and are dedicated to helping customers transform themselves into social enterprises. Social enterprises leverage social, mobile and open technologies to engage and collaborate with their customers and employees in new and powerful ways. Our technologies are targeted at businesses of all sizes and industries worldwide.
We were incorporated in Delaware in February 1999, and founded on the simple concept of delivering customer relationship management, or CRM, applications via the Internet or cloud. Cloud computing refers to the use of Internet-based computing, storage and connectivity technology to deliver a variety of different services. We introduced our first CRM service in February 2000. Since then, primarily through development and to a lesser extent acquisition, we have augmented our CRM service with new editions, services and enhanced features. In recent years, we have seen a broad shift in the information technology (IT) industry to social networking and the use of mobile devices. Industry analysts describe how social networking users have surpassed the total number of email users, how consumers are spending the majority of their time on the Internet using social websites, and how more people are browsing the Internet on mobile devices than on desktop computers. In fiscal 2012, to address this shift to social networking, we began to describe to companies of all sizes the benefits of becoming a social enterprise and how our service offerings could accelerate their transformation into becoming a social enterprise.
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We have designed, developed and acquired applications and platforms that are easy-to-use and intuitive, that can be deployed rapidly, customized easily and integrated with other enterprise applications or platforms. We deliver our service through all of the market-leading Internet browsers and mobile devices. Customers who use our social enterprise applications and platforms are able to avoid much of the expense and complexity of traditional enterprise software development and implementations. As a result, our customers face less risk and lower upfront implementation and ongoing costs, and benefit from increased productivity and efficiency.
We market our social enterprise applications and platforms to businesses on a subscription basis, primarily through our direct sales efforts and to a lesser extent indirectly through partners. Through our platforms and other developer tools, we also encourage third parties to develop additional functionality and new applications that run on our platforms, but which are sold separately from, or in conjunction with, our social enterprise solution.
Our principal executive offices are located in San Francisco, California and our principal website address is www.salesforce.com. Our office address is The Landmark @ One Market, Suite 300, San Francisco, California 94105.
Cloud Computing
Cloud computing changes the way enterprise business applications are developed and deployed. Application developers no longer need to create and manage their own infrastructure of servers, storage, network devices, operating system software and development tools in order to create a business application. Instead, the entire infrastructure is managed by third parties who specialize in infrastructure management, and developers simply use an Internet browser to access the development environment. Application users can gain access to a variety of business applications via an Internet browser or mobile device on an as-needed basis, and are able to take advantage of a robust, secure, scalable and highly available application, with few or no implementation services required and without the cost and complexity of managing the hardware or software infrastructure in-house.
Historically, only large businesses could afford to make investments in enterprise resource planning, and sales, marketing and service applications to gain an enterprise-wide view of business information and automate and improve basic processes. Today, cloud applications are available to businesses of all sizes and across all industries because third parties manage the infrastructure. Our vision of enterprise cloud computing is based on a multi-tenant technology architecture, which enables cloud vendors like us to leverage a common infrastructure and software code base across all of our customers who benefit from access to the most current release of an application, periodic upgrades, more rapid innovation and the economies of a shared infrastructure.
In recent years, we have seen a shift from traditional enterprise software to enterprise cloud computing. We believe this shift to cloud computing provides significant benefits even beyond those associated with multi-tenant infrastructure. Businesses are able to realize many of the benefits offered by traditional enterprise software vendors, such as a comprehensive set of features and functionality and the ability to customize and integrate with other applications, while at the same time reducing the risks and lowering the total costs associated with owning enterprise software. As a result, we believe the continued emergence of cloud applications is bringing about a fundamental transformation in the enterprise software industry as businesses are offered the choice of replacing their purchased software with subscriptions to a wide range of application services.
We believe that cloud applications and their related success in the market are the most widely understood segment of enterprise cloud computing. However, enterprise cloud computing also includes building new applications on a cloud-based application development platform, also referred to as cloud platforms.
Application developers use cloud platform technology to build both custom applications for individual businesses or vertical industries, and horizontal applications to address standard business processes that can be sold to a broad range of potential customers. Application developers include corporate IT departments that typically develop applications for a companys internal-use and independent software vendors (ISVs) that develop applications to sell to customers. Traditionally, these developers have needed to purchase, install, test
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and maintain complex software and hardware infrastructure to develop and deliver their applications. This requirement resulted in more time and resources being spent maintaining infrastructure and less time and resources being available to develop applications, with a resulting reduction in innovation and productivity levels.
Cloud platforms enable corporate IT developers and ISVs to leverage the benefits of a multi-tenant platform for developing new applications. Cloud platforms allow developers to build applications using only a browser and an Internet connection, just as cloud applications allow users to use applications through a browser. In addition, developers typically pay no upfront costs when building cloud applications, with costs only to be incurred at the point of application deployment.
The Social Enterprise
We believe that the next phase of cloud computing is again transforming enterprise software. Driven by the consumerization of IT, the next phase of cloud computing will have three key characteristics it will be social, mobile and open. With the popularity of social networking websites, new ways to communicate and collaborate based on feeds and status updates have emerged. In the enterprise market, that means enabling employees, customers and partners to easily find, share and collaborate around information and business processes. In addition, with the wide adoption of mobile phones and tablets, customers now expect cloud computing technologies to work on these devices, fully leveraging functionality such as touch-screens, regardless of the carrier or operating system. Customers are increasingly focused on open standards, which enable developers to easily integrate our solution with applications and technology from other vendors, and we offer a Web services application programming interface (API) for programmatic access and integration. We call this the social enterprise, and we help our customers embrace the opportunities and meet the challenges it poses to businesses. We believe that companies must change the way they collaborate, communicate and share information with customers, employees and partners to stay competitive.
Our solution helps companies transform themselves into social enterprises by:
| Creating customer social profiles: As users continue to adopt social technologies in their personal lives, they are coming to expect the same experience, communication features and benefits from business applications. Users want the business equivalents of liking on Facebook, tweeting on Twitter, and connecting on LinkedIn. In the social enterprise, a social customer profile captures all of this publicly available information, empowering every employee to support customers by knowing who they are and delivering a new and comprehensive level of service and experience. |
| Creating employee social networks: Many companies struggle to connect their employees with the best information and experts within their own company. Utilizing social features popularized by Facebook and Twitter such as profiles, status updates and real-time feeds employees can follow documents, people, business processes and application data. As a result, information is delivered directly to users, rather than making them search for it themselves. Companies can build private employee social networks that help employees rapidly collaborate across their company so they can engage, sell and service customers more effectively. |
| Creating customer social networks: Customer social networks allow companies to build stronger relationships with their customers on todays most popular social channels. Companies can listen to, engage with and analyze what people are saying about them and create applications through which customers can interact with their brand. These applications utilize social and mobile technology, can be location-aware, and can be accessed from any device. |
| Product and partner social networks: In addition to customer social networks, social enterprises can also bring their products and partners into these networks. For example, businesses can provide real-time information to their customers about products, such as service needs or updates. In addition, |
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partners are able to connect directly with customers through the same channels, thereby providing a consistent customer user experience. |
Our solution is comprised of cloud applications and cloud platforms, as well as professional services to facilitate the adoption of our solution.
Our Cloud Applications for the Social Enterprise
We are a leading provider of enterprise cloud computing services, and are dedicated to helping customers transform themselves into social enterprises with our applications. Our primary applications are within our Sales Cloud and Service Cloud brands, but the combination of all the applications below allows our customers to transform themselves by connecting, engaging, selling, servicing, and collaborating with customers as well as improving internal automation and collaboration. Our primary applications are as follows:
| Sales Cloud. The sales force automation features of our CRM application services are marketed under our Sales Cloud brand and focus on allowing our customers to better connect and sell to their customers. Through the Sales Cloud, users are able to be more productive through the automation of manual and repetitive tasks and access to better and more organized data about their current customers and prospects. Our customers are also able to establish a system and process for recording, tracking, and sharing information about sales opportunities, sales leads, sales forecasts, the sales process, and closed business, as well as managing sales territories. Customers are able to create social profiles of their customers, based on information from social networking services like Facebook, Twitter and LinkedIn. Our customers are also better able to manage unstructured information such as sales collateral, presentations, price lists, and video assets. In addition, the Sales Cloud encompasses partner relationship management functionality (including channel management and partner portals) and marketing automation (including campaigns, and return-on-investment tracking). |
| Service Cloud. Our customer service and support automation features are marketed under our Service Cloud brand and allow our customers to better service and engage with their customers. Through the Service Cloud, companies are able to maintain better relationships with their existing customers and more efficiently address a variety of service and support needs, such as advice about products and services, requests for repairs, complaints about faulty goods, and the need for additional goods and services. Using the Service Cloud, companies can access a comprehensive solution for their customer service interactions across every service channel: call centers with phone, email, and chat; Web portals for self-service and customer collaboration; and community interactions within social networks. In addition, built-in collaboration tools enable customer service agents to share information on how to better service customers. |
| Salesforce Chatter. Our Chatter application enables customers to create private employee social networks for companies of all sizes in order to improve employee collaboration. For current customers of our Sales and Service Cloud editions, Chatter is included free for all subscribers. In addition, we offer Chatter Plus edition, designed to provide access to Chatter for employees in customers organizations who are not current subscribers of a Sales or Service Cloud edition. We recently delivered new features, including Chatter Now for real-time collaboration, and Chatter Customer Groups enabling users to invite people outside their organizations, such as customers and partners, into their Chatter network to collaborate in a secure environment. Chatter is a core attribute of our Force.com platform and its social capabilities are an integral part of each of our application offerings and our Social Enterprise solution. |
| Salesforce Radian6. Our Radian6 application provides our customers a tool for social media monitoring and marketing. The application allows companies to listen, analyze, engage and measure their brands presence within social media. As a result, companies can better service their customers by listening to what their customers are saying about their brand online, and interacting and influencing conversations in real-time. For example, companies are able to measure the effectiveness of marketing |
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campaigns, respond quickly and effectively in times of crisis, or even generate new customer leads through integration with our sales and service cloud applications. |
| Salesforce Data.com. We provide companies with a database of high-quality business contacts, company profiles and social insights. Delivered as a service, data.com integrates with our applications to provide the business data that helps companies increase their pipeline of sales leads and to improve engagement with existing customers. |
Our Cloud Platforms for the Social Enterprise
Our cloud platforms provide application developers access to new capabilities that can be built into their business applications. These platforms include features popularized by social networking companies, such as profiles, status updates and feeds; and also the capability to extend applications for use on mobile devices. In addition, they run on our Database.com offering, an open enterprise database built for social and mobile computing.
Our cloud platforms allow both IT departments and ISV developers to use several programming languages to build their applications. Developers are able to use the most popular programming languages on our cloud platforms, such as Java and Ruby, to build their applications, and our cloud platforms support multiple other languages to provide developers openness and choice.
We have two platform offerings: Force.com and Heroku, and offer additional developer tools such as Database.com and the AppExchange. The details of these offerings are as follows:
| The Force.com Platform. The Force.com cloud computing platform provides a feature set and technology environment for building business applications, including data models and objects to manage data, a workflow engine for managing collaboration of data between users, a user interface model to handle forms and other interactions, and a Web services API for programmatic access and integration. The Force.com platform provides the tools and infrastructure required to: |
| deploy our applications; |
| customize and integrate existing enterprise software applications; |
| create and deploy new business applications that are pre-integrated with our service and leverage the same user interface or customize the user interface specific to customer requirements; and |
| sample and deploy applications built by third parties from the AppExchange. |
| Heroku Platform. Heroku is a leading cloud platform for application developers to build and deploy social and mobile applications. Built on open standards, Heroku supports multiple frameworks, databases, and languagesincluding Java and Ruby. Most application developers choose to build applications on Heroku because they can utilize their existing skillsets. And, because it is delivered as a service, application developers can be more efficient, dedicating their time to writing code, not managing servers and application deployment. |
| Database.com. In 2010, we opened the multi-tenant database that underlies the Sales Cloud and Service Cloud applications to application developers so that they can more easily architect and build new mobile and social applications in the cloud. The service is open so it can be accessed using any language, any platform and any device. Database.com provides the functionality of a modern database, which must accommodate mobile devices and data generated by social media tools. |
| The AppExchange. The AppExchange is an online directory that provides customers a way to browse, sample, share, and install applications developed on our Force.com platform. Partners and developers can offer their applications and services for a fee on the AppExchange directory. This directory gives our users a way to find and install applications to expand their use of the Force.com platform to areas that are complementary to our social enterprise solution. |
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Professional Services
We offer consulting, deployment and training services to our customers to facilitate the adoption of our social enterprise services. We expanded our ability to provide these services to our customers in our acquisition of Model Metrics in December 2011. Consulting services consist of services such as business process mapping, project management services and guidance on best practices in using our service. Deployment services include systems integration, technical architecture and development, configuration and data conversion as well as developing and delivering customized education programs for our customers. Most of our consulting and deployment engagements are billed on a time and materials basis. We offer a number of traditional classroom and online educational classes that address topics such as deploying, using, administering and developing on our service. We also offer classes for our partners who deploy our service on behalf of our customers. We bill the traditional classroom and some of the online educational classes on a per person, per class basis. There is a selection of online educational classes available at no charge to customers that subscribe to our service.
As the reach of our enterprise cloud computing services has grown, partners and other third-party consulting and professional service providers play an integral part in providing these services to our customers.
Business Benefits of Using Our Solution
The key advantages of our solution include:
| Secure, private, scalable and reliable delivery platform. The delivery platform for our service has been designed to provide our customers with privacy and high levels of performance, reliability, and security. We have built, and continue to invest in, a comprehensive security infrastructure, including firewalls, intrusion detection systems, and encryption for transmissions over the Internet, which we monitor and test on a regular basis. We built and maintain a multi-tenant application architecture that has been designed to enable our service to scale securely, reliably, and cost-effectively. Our multi-tenant application architecture maintains the integrity and separation of customer data while still permitting all customers to use the same application functionality simultaneously. |
| Rapid deployment. Our service can be deployed rapidly since our customers do not have to spend time procuring, installing or maintaining the servers, storage, networking equipment, security products, or other infrastructure hardware and software necessary to ensure a scalable and reliable service. |
| Ease of integration. Our platforms are designed to enable IT professionals to integrate our service with existing applications quickly and seamlessly. Our platforms provide a set of APIs that enable customers and independent software developers to both integrate our service with existing third-party, custom, and legacy applications and write their own application services that integrate with our service. For example, many of our customers use the Force.com API to move customer-related data from custom-developed and legacy applications into our service on a periodic basis to provide greater visibility into their activities. |
| High levels of user adoption. We have designed our service to be intuitive and easy to use. Since our service contains many tools and features recognizable to users of popular websites such as those of Amazon, Facebook, Google and Twitter, it has a more familiar user interface than typical enterprise applications. As a result, our users do not require substantial training on how to use and benefit from our service. |
| Rapid development of applications using the Force.com and Heroku platforms. Our customers and third-party developers can develop applications rapidly because of the ease of use and the benefits of a multi-tenant platform. We provide the capability for business users to easily customize our applications to suit their specific needs, and also a variety of programming language support so developers can code complex applications spanning multiple business processes and deliver them to multiple mobile devices. |
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| Increasing innovation. By providing infrastructure and development environments on demand, we provide developers the opportunity to create new and innovative applications without having to invest in hardware and distribution. A developer with an idea for a new application can log on to our platforms, develop, test and support their system on Force.com or Heroku and make the application accessible for a fee to our customers. |
| Lower total cost of ownership. We enable customers to achieve significant upfront savings relative to the traditional enterprise software model. Customers benefit from the predictability of their future costs since they pay for the service on a per subscriber basis for the term of the subscription contract. All upgrades are included in our service, so customers are not burdened or disrupted by the periodic need to perform system upgrades. Because we deploy all upgrades on our servers, new features and functionality automatically become part of our service on the release date and therefore benefit all of our customers immediately. |
Our Go-To-Market Strategy
Our objective is to help companies put customers and employees at the center of their businesses and transform themselves into social enterprises by the use of our applications and platforms. Not only do we want to be the leading provider of the social enterprise solution, we also want to offer additional social applications and have the leading cloud computing platforms upon which our customers and partners build applications.
Key elements of our strategy include:
| Strengthening our existing Sales Cloud and Service Cloud applications and extending into new functional areas within the social enterprise. We designed our service to easily accommodate new features and functions. We intend to continue to add features and functions to our core service that we will make available to customers at no additional charge. We offer advanced editions for an additional subscription fee to customers that require enhanced CRM capabilities. We have a growing portfolio of cloud applications that serve different customer segments and markets. We have acquired several companies in complementary businesses, entered joint ventures and added services and technologies in an effort to strengthen and extend our Sales Cloud and Service Cloud application offerings. We expect to continue to make such investments and acquisitions in the future. |
| Leading the industry transformation to the social enterprise. We believe that the market transformation to cloud applications and platforms continues to be a growing trend in the information technology industry and that the next generation of enterprise computing is what we call the social enterprise. We believe the world is experiencing a social revolution. The number of social networking users has surpassed e-mail users, and people access the Internet more from mobile devices than from desktops. A core component of our business strategy is to enable companies to transform themselves into social enterprises through the use of our services. |
| Pursuing new customers and new territories aggressively. We believe that our social enterprise solution, cloud applications and cloud platforms provide significant value for businesses of any size. As a result, we will continue to aggressively target businesses of all sizes, primarily through our direct sales force. We have steadily increased and plan to continue to increase the number of direct sales professionals we employ, and we intend to develop additional distribution channels for our service. We have created several editions of our service to address the distinct requirements of businesses of different sizes. We also believe that there is a substantial market opportunity for our service outside of North America. We plan to continue to aggressively market to customers outside of North America by recruiting local sales and support professionals and by building partnerships that help us add customers in these regions. |
| Deepening relationships with our existing customer base. We believe there is significant opportunity to deepen our relationships with existing customers. As our customers realize the benefits of our service, we aim to either upgrade the customer to higher priced editions or sell more subscriptions by targeting |
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additional functional areas and business units within the customer organization, and ultimately pursue enterprise-wide deployments. Our goal is to have our customers renew their subscriptions at the end of their contractual terms and we run customer success and other programs in an effort to secure renewals of existing customers. |
| Encouraging the development of third-party applications on our cloud computing platforms. Our Force.com and Heroku cloud computing platform enables existing customers, ISVs and third-party developers to develop and deliver cloud applications they have built in our multi-tenant environment. It is a platform on which applications can be created, tested, published, and run. In addition, these applications can be listed on the AppExchange, our online marketplace of cloud applications, or sold by ISVs. We believe the ecosystem of cloud developers and ISVs will address the business requirements of both current and potential customers. |
Technology, Development and Operations
We deliver our service as a highly scalable, multi-tenant application. We use commercially available hardware and a combination of proprietary and commercially available software to provide our service. We have optimized our services to run on specific databases and operating systems using the tools and platforms best suited to serve our customers rather than providing software that must be written to different hardware, operating system and database platforms, or that depends upon a customers unique systems environment. Performance, functional depth and the usability of our service drive our technology decisions and product direction.
Our service treats all customers as logically separate tenants in central applications, databases and other resources. As a result, we are able to spread the cost of delivering our service across our user base. In addition, because we do not have to manage thousands of distinct applications with their own business logic and database schemas, we believe that we can scale our business faster than traditional software vendors. Moreover, we can focus our resources on building new functionality to deliver to our customer base as a whole rather than on maintaining an infrastructure to support each of their distinct applications.
Because of our multi-tenant and logically separated architecture, we are able to provide all of our customers with a service based on a single version of our applications. We are able to upgrade all of our customers at the same time with each release. As a result, we do not have to maintain multiple versions of our applications.
Our research and development efforts are focused on improving and enhancing the features, functionality and security of our existing service offerings as well as developing new services. In addition, from time to time we supplement our internal research and development activities with outside development resources and acquired technology.
Our customers access our service over the Internet through supported Internet browsers and mobile devices.
We currently serve our customers from third-party data center hosting facilities located in the United States and other countries.
Customers
We sell to businesses of all sizes. 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 in fiscal 2012, 2011, or 2010.
Sources of Revenue
We derive our revenues primarily from subscription fees from our customers and support revenues from customers purchasing additional support beyond the standard support that is included in the basic subscription fee.
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We generally recognize revenue ratably over the contract term, beginning on the commencement date of each contract. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
Sales, Marketing and Customer Support
We organize our sales and marketing programs by geographic regions, including the Americas, Europe, and Asia Pacific which includes Japan. Over 30 percent of our revenue comes from customers outside of the Americas.
Direct Sales
We sell subscriptions to our service primarily through our direct sales force comprised of inside sales, which consists of personnel that sell to customers primarily by phone, and field sales personnel, that are primarily based in geographic territories comprising customers and prospects. Both our inside sales and field sales personnel are supported by telesales representatives who are primarily responsible for generating qualifying leads. Our small business, general business and enterprise account executives and account managers focus their efforts on small, medium-size and large enterprises, respectively.
Referral and Indirect Sales
We have a network of partners who refer customer prospects to us and assist us in selling to these prospects.
The network includes consulting firms, other technology vendors, systems integrators and partners in markets where we do not have a large direct sales presence. In return, we typically pay these partners a fee based on the first-year subscription revenue generated by the customers they refer. We expense these fees at the time the customer signs the subscription service contract.
We also continue to develop distribution channels for our subscription service.
Marketing
Our marketing strategy is to promote our brand and generate significant demand for our offerings. We use a variety of marketing programs to target our prospective and current customers, partners, and developers.
Our primary marketing activities include:
| press and industry analyst relations to garner third-party validation and generate positive coverage for our company and product strategy; |
| user conferences and launch events, as well as participation in trade shows and industry events, to create customer awareness and prospect enthusiasm; |
| use of social network solutions such as Facebook, Twitter, LinkedIn and YouTube; |
| search engine marketing and advertising to drive traffic to our Web properties; |
| Web site development to engage and educate prospects and generate interest through product information and demonstrations, free trials, case studies, white papers, and marketing collateral; |
| email, direct mail, and phone campaigns to capture leads that can be funneled into our sales organization; |
| use of customer testimonials; and |
| sales tools and field marketing events to enable our sales organization to more effectively convert pipeline into completed transactions. |
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Customer Service and Support
Our global customer support group responds to both business and technical inquires from our customers relating to how to use our products and is available to customers by the web, telephone and email.
Basic customer support during business hours is available at no charge to customers who purchase any of our paying editions. Premier customer support includes extended availability and additional services, such as an assigned support representative and/or administrator. Premier customer support is available for a separate fee, or is included in our Unlimited Edition. Additional support services include developer support and partner support.
Seasonality
Our fourth quarter has historically been our strongest quarter for new business. For a more detailed discussion, see the Seasonal Nature of Deferred Revenue and Accounts Receivable discussion in Managements Discussion and Analysis.
Competition
The market for our offerings is highly competitive, rapidly evolving and fragmented, and subject to changing technology, frequent introductions of new products and services, and as we have seen recently, consolidation. Many prospective customers have invested substantial personnel and financial resources to implement and integrate traditional enterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to an enterprise cloud computing application service. Additionally, third party developers may be reluctant to build application services on our platform since they have invested in other competing technology platforms.
We compete primarily with vendors of packaged business software and companies offering cloud computing CRM applications. We also compete with internally developed applications and face, or expect to face, competition from enterprise software vendors and online service providers who may develop toolsets and products that allow customers to build new applications that run on the customers current infrastructure or as hosted services. Our current principal competitors include:
| enterprise software application vendors; |
| cloud computing CRM application service providers; |
| traditional platform development environment companies; and |
| cloud computing development platform companies. |
We believe that as enterprise software application and platform vendors shift more of their focus to cloud computing, they will be a greater competitive threat.
Intellectual Property
We rely on a combination of trademark, copyright, trade secret and patent laws in the United States and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brand. We also enter into confidentiality and proprietary rights agreements with our employees, consultants and other third parties and control access to software, documentation and other proprietary information.
Employees
As of January 31, 2012, we had 7,785 employees. None of our employees are represented by a labor union.
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Available Information
You can obtain copies of our Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other filings with the SEC, and all amendments to these filings, free of charge from our Web site at http://www.salesforce.com/company/investor/sec-filings/ as soon as reasonably practicable following our filing of any of these reports with the SEC. You can also obtain copies free of charge by contacting our Investor Relations department at our office address listed above. The public may read and copy any materials filed by the Company with the SEC at the SECs Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the Companys references to the URLs for these websites are intended to be inactive textual references only.
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ITEM 1A. | RISK FACTORS |
The risks and uncertainties described below are not the only ones facing us. Other events that we do not currently anticipate or that we currently deem immaterial also may affect our results of operations, cash flows and financial condition.
Risks Related to Our Business and Industry
Defects or disruptions in our service could diminish demand for our service and subject us to substantial liability.
Because our service is complex and incorporates a variety of hardware and proprietary and third-party software, our service may have errors or defects that could result in unanticipated downtime for our subscribers and harm to our reputation and our business. Internet-based services frequently contain undetected errors when first introduced or when new versions or enhancements are released. We have from time to time found defects in our service and new errors in our service may be detected in the future. In addition, our customers may use our service in unanticipated ways that may cause a disruption in service for other customers attempting to access their data. As we acquire companies, we may encounter difficulty in incorporating the acquired technologies into our service and maintaining the quality standards that are consistent with our brand and reputation. Since our customers use our service for important aspects of their business, any errors, defects, disruptions in service or other performance problems could hurt our reputation and may damage our customers businesses. As a result, customers could elect to not renew, or delay or withhold payment to us, we could lose future sales or customers may make warranty or other claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or the expense and risk of litigation.
Interruptions or delays in service from our third-party data center hosting facilities could impair the delivery of our service and harm our business.
We currently serve our customers from third-party data center hosting facilities located in the United States and other countries. Any damage to, or failure of, our systems generally could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable.
As part of our current disaster recovery arrangements, our production environment and all of our customers data is currently replicated in near real-time in a facility located in the United States. Companies and products added through acquisition may be temporarily served through alternate facilities. We do not control the operation of any of these facilities, and they are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Despite precautions taken at these facilities, the occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in our service. Even with the disaster recovery arrangements, our service could be interrupted.
As we continue to add data centers and add capacity in our existing data centers, we may move or transfer our data and our customers data. Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of our service.
If our security measures are breached and unauthorized access is obtained to a customers data or our data or our IT systems, our service may be perceived as not being secure, customers may curtail or stop using our service and we may incur significant legal and financial exposure and liabilities.
Our service involves the storage and transmission of customers proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. These security
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measures may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise and result in someone obtaining unauthorized access to our customers data or our data, including our intellectual property and other confidential business information, or our IT systems. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers data or our data or IT systems. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, our customers may authorize third-party technology providers on our AppExchange directory to access their customer data. Because we do not control the transmissions between our customers and third-party AppExchange technology providers, or the processing of such data by third-party AppExchange technology providers, we cannot ensure the integrity or security of such transmissions or processing. Any security breach could result in a loss of confidence in the security of our service, damage our reputation, negatively impact our future sales, disrupt our business and lead to legal liability.
Because we recognize revenue from subscriptions for our service over the term of the subscription, downturns or upturns in new business may not be immediately reflected in our operating results.
We generally recognize revenue from customers ratably over the terms of their subscription agreements, which are typically 12 to 24 months. As a result, most of the revenue we report in each quarter is the result of subscription agreements entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any one quarter may not be reflected in our revenue results for that quarter. Any such decline, however, will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our service, and potential changes in our rate of renewals may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.
Our efforts to expand our service beyond the CRM market and to develop our existing service in order to keep pace with technological developments may not succeed and may reduce our revenue growth rate and/or harm our business.
We derive substantially all of our revenue from subscriptions to our CRM enterprise cloud computing application service, and we expect this will continue for the foreseeable future. The market for our Force.com cloud computing platform remains relatively new and it is uncertain whether our efforts will ever result in significant revenue for us. Further, the introduction of new services beyond the CRM market may not be successful, and early stage interest and adoption of such new services may not result in long term success or significant revenue for us. Our efforts to expand our service beyond the CRM market may not succeed and may reduce our revenue growth rate.
Additionally, if we are unable to develop enhancements to and new features for our existing service or new services that keep pace with rapid technological developments, our business will be harmed. The success of enhancements, new features and services depends on several factors, including the timely completion, introduction and market acceptance of the feature or edition. Failure in this regard may significantly impair our revenue growth. In addition, because our service is designed to operate on a variety of network hardware and software platforms using a standard browser, we will need to continuously modify and enhance our service to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies. We may not be successful in either developing these modifications and enhancements or in bringing them to market timely. Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies, could increase our research and development or service delivery expenses. Any failure of our service to operate effectively with future network platforms and technologies could reduce the demand for our service, result in customer dissatisfaction and harm our business.
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If we experience significant fluctuations in our rate of anticipated growth and fail to balance our expenses with our revenue forecasts, our results could be harmed.
Due to our evolving business model and the unpredictability of future general economic and financial market conditions, we may not be able to accurately forecast our rate of growth. We plan our expense levels and investment on estimates of future revenue and future anticipated rate of growth. We may not be able to adjust our spending quickly enough if the addition of new subscriptions or the renewal rate for existing subscriptions falls short of our expectations. A portion of our expenses may also be a fixed cost in nature for some minimum amount of time, such as with a datacenter contract or office lease, so it may not be possible to reduce costs in a timely manner or without the payment of fees to exit certain obligations early.
As a result, we expect that our revenues, operating results and cash flows may fluctuate significantly on a quarterly basis. Our recent revenue growth rates may not be sustainable and may decline in the future. We believe that period-to-period comparisons of our revenues, operating results and cash flows may not be meaningful and should not be relied upon as an indication of future performance.
We cannot accurately predict subscription renewal or upgrade rates and the impact these rates may have on our future revenue and operating results.
Our customers have no obligation to renew their subscriptions for our service after the expiration of their initial subscription period, which is typically 12 to 24 months, and in fact, some customers have elected not to renew. In addition, our customers may renew for fewer subscriptions, renew for shorter contract lengths, or renew for lower cost editions of our service. We cannot accurately predict renewal rates given our varied customer base of enterprise and small and medium size business customers and the number of multiyear subscription contracts. Our renewal rates may decline or fluctuate as a result of a number of factors, including customer dissatisfaction with our service, customers spending levels, decreases in the number of users at our customers, pricing changes and deteriorating general economic conditions. If our customers do not renew their subscriptions for our service or reduce the number of paying subscriptions at the time of renewal, our revenue will decline and our business will suffer.
Our future success also depends in part on our ability to sell additional features and services, more subscriptions or enhanced editions of our service to our current customers. This may also require increasingly sophisticated and costly sales efforts that are targeted at senior management. Similarly, the rate at which our customers purchase new or enhanced services depends on a number of factors, including general economic conditions and that our customers do not react negatively to any price changes related to these additional features and services. If our efforts to upsell to our customers are not successful and negative reaction occurs, our business may suffer.
We rely on third-party computer hardware and software that may be difficult to replace or which could cause errors or failures of our service.
We rely on computer hardware purchased or leased and software licensed from third parties in order to offer our service, including database software from Oracle Corporation. This hardware and software may not continue to be available at reasonable prices or on commercially reasonable terms, or at all. Any loss of the right to use any of this hardware or software could significantly increase our expenses and otherwise result in delays in the provisioning of our service until equivalent technology is either developed by us, or, if available, is identified, obtained through purchase or license and integrated. Any errors or defects in third-party hardware or software could result in errors or a failure of our service which could harm our business.
Weakened global economic conditions may adversely affect our industry, business and results of operations.
Our overall performance depends in part on worldwide economic conditions. The United States and other key international economies have experienced in the past a downturn in which economic activity was impacted
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by falling demand for a variety of goods and services, restricted credit, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies and overall uncertainty with respect to the economy. The European Union continues to face great economic uncertainty which could impact the overall world economy or various other regional economies. These conditions affect the rate of information technology spending and could adversely affect our customers ability or willingness to purchase our enterprise cloud computing services, delay prospective customers purchasing decisions, reduce the value or duration of their subscription contracts, or affect renewal rates, all of which could adversely affect our operating results.
Our quarterly results can fluctuate and our stock price and the value of your investment could decline substantially.
Our quarterly operating results are likely to fluctuate. For example, our fiscal fourth quarter has historically been our strongest quarter for new business and renewals. The year-over-year compounding effect of this seasonality in billing patterns and overall new business and renewal activity causes the value of invoices that we generate in the fourth quarter to continually increase in proportion to our billings in the other three quarters of our fiscal year.
Additionally, some of the important factors that may cause our revenues, operating results and cash flows to fluctuate from quarter to quarter include:
| our ability to retain and increase sales to existing customers, attract new customers and satisfy our customers requirements; |
| the renewal rates for our service; |
| the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business; |
| changes in deferred revenue balances and unbilled revenue balances, which are not reflected in the balance sheet, due to seasonality, the compounding effects of renewals, invoice duration, invoice timing and new business linearity; |
| the number of new employees; |
| changes in our pricing policies and terms of contracts, whether initiated by us or as a result of competition; |
| the cost, timing and management effort for the introduction of new features to our service; |
| the rate of expansion and productivity of our sales force; |
| the length of the sales cycle for our service; |
| new product and service introductions by our competitors; |
| our success in selling our service to large enterprises; |
| variations in the revenue mix of editions of our service; |
| technical difficulties or interruptions in our service; |
| expenses related to our real estate, our office leases and our data center capacity and expansion; |
| changes in foreign currency exchange rates; |
| changes in interest rates and our mix of investments, which would impact our return on our investments in cash and marketable securities; |
| conditions, particularly sudden changes, in the financial markets have and may continue to impact the value of and access to our investment portfolio; |
| changes in the effective tax rates due to changes in the mix of earnings and losses in countries with differing statutory tax rates, certain non-deductible expenses as a result of acquisitions, compensation, the valuation of deferred tax assets and liabilities and changes in federal, state or international tax laws and accounting principles; |
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| general economic conditions that may adversely affect either our customers ability or willingness to purchase additional subscriptions or upgrade their service, or delay a prospective customers purchasing decision, or reduce the value of new subscription contracts, or affect renewal rates; |
| timing of additional investments in our enterprise cloud computing application and platform services and in our consulting service; |
| regulatory compliance costs; |
| the timing of customer payments and payment defaults by customers; |
| costs associated with acquisitions and subsequent integration of companies and technologies; |
| extraordinary expenses such as litigation or other dispute-related settlement payments; |
| any adverse resolution to income tax audits in any tax jurisdictions throughout the world; |
| the impact of new accounting pronouncements; |
| equity issuances, including as consideration in acquisitions or due to the conversion of our outstanding convertible notes at the election of the note holders; and |
| the timing of stock awards to employees and the related adverse financial statement impact of having to expense those stock awards ratably over their vesting schedules. |
Many of these factors are outside of our control, and the occurrence of one or more of them might cause our operating results to vary widely. As such, we believe that quarter-to-quarter comparisons of our revenues, operating results and cash flows may not be meaningful and should not be relied upon as an indication of future performance.
Additionally, we may fail to meet or exceed the expectations of securities analysts and investors, and the market price of our common stock could decline. If one or more of the securities analysts who cover us adversely change their recommendation regarding our stock, the market price of our common stock could decline. Moreover, our stock price may be based on expectations, estimates or forecasts of our future performance that may be unrealistic or that may not be met. Further, our stock price may fluctuate based on reporting by the financial media, including television, radio and press reports and blogs.
The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.
The market for enterprise cloud computing applications and platform services is highly competitive, rapidly evolving and fragmented, and subject to changing technology, shifting customer needs and frequent introductions of new products and services. We compete primarily with vendors of packaged CRM software and companies offering on-demand CRM applications. We also compete with internally developed applications and face, or expect to face, competition from enterprise software vendors and online service providers who may develop toolsets and products that allow customers to build new applications that run on the customers current infrastructure or as hosted services. Our current competitors include:
| enterprise software application vendors; |
| on-demand CRM application service providers; |
| traditional platform development environment companies; and |
| cloud computing development platform companies. |
Many of our current and potential competitors enjoy substantial competitive advantages, such as greater name recognition, longer operating histories and larger marketing budgets, as well as substantially greater financial, technical and other resources. In addition, many of our current and potential competitors have
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established marketing relationships and access to larger customer bases, and have major distribution agreements with consultants, system integrators and resellers.
As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Furthermore, because of these advantages, even if our service is more effective than the products that our competitors offer, potential customers might accept competitive products and services in lieu of purchasing our service. For all of these reasons, we may not be able to compete successfully against our current and future competitors.
As we acquire companies or technologies, they could prove difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our operating results and the value of your investment.
As part of our business strategy, we periodically make investments in, or acquisitions of, complementary businesses, joint ventures, services and technologies and intellectual property rights, and we expect that we will continue to make such investments and acquisitions in the future. Acquisitions and investments involve numerous risks, including:
| the potential failure to achieve the expected benefits of the combination or acquisition; |
| difficulties in and the cost of integrating operations, technologies, services and personnel; |
| diversion of financial and managerial resources from existing operations; |
| risk of entering new markets in which we have little or no experience or where competitors may have stronger market positions; |
| potential write-offs of acquired assets or investments, and potential financial and credit risks associated with acquired customers; |
| potential loss of key employees; |
| inability to generate sufficient revenue to offset acquisition or investment costs; |
| the inability to maintain relationships with customers and partners of the acquired business; |
| the difficulty of incorporating acquired technology and rights into our products and services and of maintaining the security standards consistent with our other services; |
| potential unknown liabilities associated with the acquired businesses; |
| unanticipated expenses related to acquired technology and its integration into existing technology; |
| negative impact to our results of operations because of the depreciation and amortization of amounts related to acquired intangible assets, fixed assets and deferred compensation, and the loss of acquired deferred revenue; |
| delays in customer purchases due to uncertainty related to any acquisition; |
| the need to implement controls, procedures and policies appropriate for a public company at private companies that we acquire; |
| challenges caused by distance, language and cultural differences; and |
| the tax effects of any such acquisitions. |
In addition, if we finance acquisitions by issuing equity or convertible or other debt securities, our existing stockholders may be diluted or we could face constraints related to the terms of and repayment obligation related to the incurrence of indebtedness which could affect the market price of our common stock. Further, if we fail to properly evaluate and execute acquisitions or investments, our business and prospects may be seriously harmed and the value of your investment may decline.
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If the market for our technology delivery model and enterprise cloud computing services develops more slowly than we expect, our business could be harmed.
Our success also depends on the willingness of third-party developers to build applications that are complementary to our service. Without the development of these applications, both current and potential customers may not find our service sufficiently attractive. In addition, for those customers who authorize a third-party technology partner access to their data, we do not provide any warranty related to the functionality, security and integrity of the data transmission or processing. Despite contract provisions to protect us, customers may look to us to support and provide warranties for the third-party applications, which may expose us to potential claims, liabilities and obligations for applications we did not develop or sell.
Supporting our existing and growing customer base could strain our personnel resources and infrastructure, and if we are unable to scale our operations and increase productivity, we may not be able to successfully implement our business plan.
We continue to experience significant growth in our customer base, which has placed a strain on our management, administrative, operational and financial infrastructure. We anticipate that additional investments in our infrastructure, research and development, and real estate spending will be required to scale our operations and increase productivity, to address the needs of our customers, to further develop and enhance our service, to expand into new geographic areas, and to scale with the overall growth of our Company.
Our success will depend in part upon the ability of our senior management to manage our projected growth effectively. To do so, we must continue to increase the productivity of our existing employees and to hire, train and manage new employees as needed. To manage the expected domestic and international growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls, our reporting systems and procedures, and our utilization of real estate. The additional investments we are making will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in the short term. If we fail to successfully scale our operations and increase productivity, we will be unable to execute our business plan.
As more of our sales efforts are targeted at larger enterprise customers, our sales cycle may become more time-consuming and expensive, we may encounter pricing pressure and implementation and customization challenges, and we may have to delay revenue recognition for some complex transactions, all of which could harm our business and operating results.
As we target more of our sales efforts at larger enterprise customers, we will face greater costs, longer sales cycles and less predictability in completing some of our sales. In this market segment, the customers decision to use our service may be an enterprise-wide decision and, if so, these types of sales would require us to provide greater levels of education regarding the use and benefits of our service, as well as education regarding privacy and data protection laws and regulations to prospective customers with international operations. In addition, larger customers may demand more customization, integration services and features. As a result of these factors, these sales opportunities may require us to devote greater sales support and professional services resources to individual customers, driving up costs and time required to complete sales and diverting our own sales and professional services resources to a smaller number of larger transactions, while potentially requiring us to delay revenue recognition on some of these transactions until the technical or implementation requirements have been met.
Professional services may also be performed by a third party or a combination of our own staff and a third party. Our strategy is to work with third parties to increase the breadth of capability and depth of capacity for delivery of these services to our customers. If a customer is not satisfied with the quality of work performed by us or a third party or with the type of services or solutions delivered, then we could incur additional costs to address the situation, the profitability of that work might be impaired, and the customers dissatisfaction with our
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services could damage our ability to obtain additional work from that customer. In addition, negative publicity related to our customer relationships, regardless of its accuracy, may further damage our business by affecting our ability to compete for new business with current and prospective customers.
Periodic changes to our sales organization can be disruptive and may reduce our rate of growth.
We periodically change and make adjustments to our sales organization in response to market opportunities, competitive threats, management changes, product introductions or enhancements, acquisitions, sales performance, increases in sales headcount, cost levels and other internal and external considerations. In the past, these changes sometimes resulted in a temporary lack of focus and reduced productivity; these effects could recur in connection with any future sales changes we might undertake and our rate of revenue growth could be negatively affected. In addition, any significant change to the way we structure our compensation of our sales organization may be disruptive and may affect our revenue growth.
Sales to customers outside the United States expose us to risks inherent in international sales.
We sell our service throughout the world and are subject to risks and challenges associated with international business. For example, sales in Europe and Asia Pacific together represented approximately 32 percent of our total revenues for the year ended January 31, 2012, and we intend to continue to expand our international sales efforts. The risks and challenges associated with sales to customers outside the United States include:
| localization of our service, including translation into foreign languages and associated expenses; |
| laws and business practices favoring local competitors; |
| compliance with multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection laws and regulations; |
| pressure on the creditworthiness of sovereign nations, particularly in Europe, where we have customers and a small balance of our cash, cash equivalents, and marketable securities. Liquidity issues or political actions by sovereign nations could result in decreased values for our cash, cash equivalents and marketable securities balances; |
| regional data privacy laws that apply to the transmission of our customers data across international borders; |
| treatment of revenue from international sources and changes to tax codes, including being subject to foreign tax laws and being liable for paying withholding income or other taxes in foreign jurisdictions; |
| foreign currency fluctuations and controls; |
| different pricing environments; |
| difficulties in staffing and managing foreign operations; |
| different or lesser protection of our intellectual property; |
| longer accounts receivable payment cycles and other collection difficulties; |
| natural disasters, acts of war, terrorism, pandemics or security breaches; and |
| regional economic and political conditions. |
Any of these factors could negatively impact our business and results of operations.
Additionally, our international subscription fees are paid either in U.S. dollars or local currency. As a result, fluctuations in the value of the U.S. dollar and foreign currencies may make our service more expensive for international customers, which could harm our business.
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We have been and may in the future be sued by third parties for various claims including alleged infringement of proprietary rights.
We are involved in various legal matters arising from the normal course of business activities. These may include claims, suits, government investigations and other proceedings involving alleged infringement of third-party patents and other intellectual property rights, and commercial, labor and employment, wage and hour, and other matters.
The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. We have received in the past and may receive in the future communications from third parties claiming that we have infringed the intellectual property rights of others. In addition we have been, and may in the future be, sued by third parties for alleged infringement of their claimed proprietary rights. Our technologies may be subject to injunction if they are found to infringe the rights of a third party or we may be required to pay damages, or both. Many of our subscription agreements require us to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us of an adverse ruling on such a claim.
The outcome of any litigation, regardless of its merits, is inherently uncertain. Any claims and lawsuits, and the disposition of such claims and lawsuits, could be time-consuming and expensive to resolve, divert management attention from executing our business plan, lead to attempts on the part of other parties to pursue similar claims and, in the case of intellectual property claims, require us to change our technology, change our business practices and/or pay monetary damages or enter into short- or long-term royalty or licensing agreements.
Any adverse determination related to intellectual property claims or other litigation could prevent us from offering our service to others, could be material to our financial condition or cash flows, or both, or could otherwise adversely affect our operating results. In addition, depending on the nature and timing of any such dispute, a resolution of a legal matter could materially affect our future results of operation or cash flows or both.
In addition, our exposure to risks associated with various claims, including the use of intellectual property, may be increased as a result of acquisitions of other companies. For example, we may have a lower level of visibility into the development process with respect to intellectual property or the care taken to safeguard against infringement risks with respect to the acquired company or technology. In addition, third parties may make infringement and similar or related claims after we have acquired technology that had not been asserted prior to our acquisition.
Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.
If we fail to protect our intellectual property rights adequately, our competitors may gain access to our technology, and our business may be harmed. In addition, defending our intellectual property rights may entail significant expense. Any of our patents, trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. While we have some U.S. patents and many U.S. and international patent applications pending, we may be unable to obtain patent protection for the technology covered in our patent applications. In addition, our existing patents and any patents issued in the future may not provide us with competitive advantages, or may be successfully challenged by third parties. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our service is available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the U.S., and mechanisms for enforcement of intellectual property rights may be inadequate. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property.
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We may be required to spend significant resources to monitor and protect our intellectual property rights. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel.
Privacy concerns and laws, evolving regulation of the Internet, cross-border data transfers and other domestic or foreign regulations may limit the use and adoption of our solution and adversely affect our business.
As Internet commerce continues to evolve, increasing regulation by federal, state or foreign governments and agencies becomes more likely. For example, we believe increased regulation is occurring in the area of data privacy, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information could affect our customers ability to use and share data, potentially reducing demand for our solutions and restricting our ability to store, process and share data with our customers.
Our customers can use our service to store contact and other personal or identifying information regarding their customers and contacts. Federal, state and foreign governments and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information obtained from consumers and individuals in addition to laws and regulations that impact the cross-border transfer of personal information. The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to the businesses of our customers may limit the use and adoption of our service and reduce overall demand for it, or lead to significant fines, penalties or liabilities for any noncompliance with such privacy laws. Furthermore, privacy concerns may cause our customers customers to resist providing the personal data necessary to allow our customers to use our service effectively. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our service in certain industries.
In addition to government activity, privacy advocacy groups and the technology and other industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us. If the gathering of personal information were to be curtailed in this manner, CRM solutions would be less effective, which may reduce demand for our service and harm our business.
If we fail to develop and maintain our brands, our business may suffer.
We believe that developing and maintaining awareness of the salesforce.com brand and our other brands is critical to achieving widespread acceptance of our existing and future services and is an important element in attracting new customers. We have incurred and expect to continue to incur significant expense to build our brands. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brands. If we fail to successfully promote and maintain our brands, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brands, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business could suffer.
We may lose key members of our management team or development and operations personnel, and may be unable to attract and retain employees we need to support our operations and growth.
Our success depends substantially upon the continued services of our executive officers and other key members of management, particularly our Chief Executive Officer. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives. Such changes in our executive management team may be disruptive to our business. We are also substantially dependent on the continued service of our existing development and operations personnel because of the complexity of our service and technologies. We do not have employment agreements with any of our executive officers, key management, development or operations personnel and they could terminate their employment with us at any time. The loss of one or more of our key employees or groups could seriously harm our business.
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In the technology industry, there is substantial and continuous competition for engineers with high levels of experience in designing, developing and managing software and Internet-related services, as well as competition for sales executives and operations personnel. We may not be successful in attracting and retaining qualified personnel. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.
We may not realize any benefits in connection with our purchase of undeveloped land in San Francisco. If we do not realize any benefits, our financial performance may be negatively impacted.
In November 2010, we purchased approximately 14 acres of undeveloped real estate in San Francisco, California, including entitlements and improvements associated with the land. We may not realize any benefits with respect to the purchase of such real estate. We have devoted significant capital resources to the purchase, and if we develop the real estate will be required to devote substantial additional resources in the future, which may impact our liquidity and financial flexibility. Finally, real estate assets are not as liquid as certain other types of assets. In the event that we cease development of the real estate in the future or have a future need to sell this property, we may not be able to do so on favorable terms, or at all, and our financial results may be negatively impacted.
Natural disasters and other events beyond our control could materially adversely affect us.
Natural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce and the global economy, and thus could have a strong negative effect on us. Our business operations are subject to interruption by natural disasters, fire, power shortages, pandemics and other events beyond our control. Although we maintain crisis management and disaster response plans, such events could make it difficult or impossible for us to deliver our services to our customers, and could decrease demand for our services. The majority of our research and development activities, corporate headquarters, information technology systems, and other critical business operations, are located near major seismic faults in the San Francisco Bay Area. Because we do not carry earthquake insurance for direct quake-related losses, and significant recovery time could be required to resume operations, our financial condition and operating results could be materially adversely affected in the event of a major earthquake or catastrophic event.
Risks Relating to Capitalization Matters
The market price of our common stock is likely to be volatile and could subject us to litigation.
The trading prices of the securities of technology companies have been highly volatile. Accordingly, the market price of our common stock has been and is likely to continue to be subject to wide fluctuations. Factors affecting the market price of our common stock include:
| variations in our operating results, earnings per share, cash flows from operating activities, deferred revenue and other financial metrics and non-financial metrics, and how those results compare to analyst expectations; |
| forward looking guidance to industry and financial analysts related to future revenue and earnings per share; |
| the net increases in the number of customers, either independently or as compared with published expectations of industry, financial or other analysts that cover our company; |
| changes in the estimates of our operating results or changes in recommendations by securities analysts that elect to follow our common stock; |
| announcements of technological innovations, new services or service enhancements, strategic alliances or significant agreements by us or by our competitors; |
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| announcements by us or by our competitors of mergers or other strategic acquisitions, or rumors of such transactions involving us or our competitors; |
| announcements of customer additions and customer cancellations or delays in customer purchases; |
| recruitment or departure of key personnel; |
| disruptions in our service due to computer hardware, software, network or data center problems; |
| the economy as a whole, market conditions in our industry and the industries of our customers; |
| trading activity by a limited number of stockholders who together beneficially own a majority of our outstanding common stock; |
| the issuance of shares of common stock by us, whether in connection with an acquisition, a capital raising transaction or upon conversion of some or all of our outstanding convertible senior notes; and |
| any other factors discussed herein. |
In addition, if the market for technology stocks or the stock market in general experiences uneven investor confidence, the market price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The market price of our common stock might also decline in reaction to events that affect other companies within, or outside, our industry even if these events do not directly affect us. Some companies that have experienced volatility in the trading price of their stock have been the subject of securities class action litigation. If we are the subject of such litigation, it could result in substantial costs and a diversion of managements attention and resources.
Provisions in our amended and restated certificate of incorporation and bylaws, Delaware law and our outstanding convertible notes might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the market price of our common stock.
Our amended and restated certificate of incorporation and bylaws contain provisions that could depress the market price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions among other things:
| establish a classified board of directors so that not all members of our board are elected at one time; |
| permit the board of directors to establish the number of directors; |
| provide that directors may only be removed for cause and only with the approval of 66 2/3 percent of our stockholders; |
| require super-majority voting to amend some provisions in our amended and restated certificate of incorporation and bylaws; |
| authorize the issuance of blank check preferred stock that our board could use to implement a stockholder rights plan (also known as a poison pill); |
| eliminate the ability of our stockholders to call special meetings of stockholders; |
| prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; |
| provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and |
| establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at annual stockholder meetings. |
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In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company. Section 203 imposes certain restrictions on merger, business combinations and other transactions between us and holders of 15 percent or more of our common stock.
In addition, the fundamental change purchase rights applicable to our convertible notes, which will allow note holders to require us to purchase all or a portion of their notes upon the occurrence of a fundamental change, and the provisions requiring an increase to the conversion rate for conversions in connection with a make-whole fundamental change may in certain circumstances delay or prevent a takeover of us and the removal of incumbent management that might otherwise be beneficial to investors.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2. | PROPERTIES |
As of January 31, 2012, our executive offices and principal office for domestic marketing, sales, professional services and development occupy over 650,000 square feet in the San Francisco Bay Area under leases that expire at various times through April 2021. We also lease space in various locations throughout the United States for local sales and professional services personnel. Our foreign subsidiaries lease office space for their operations including local sales and professional services personnel.
We believe that our existing facilities and offices are adequate to meet our current requirements. See Note 7, Commitments, in the Notes to the Consolidated Financial Statements for more information about our lease commitments. If we require additional space, we believe that we will be able to obtain such space on acceptable, commercially reasonable terms.
ITEM 3. | LEGAL PROCEEDINGS |
In the ordinary course of business, we are involved in various legal proceedings and claims related to alleged infringement of third-party patents and other intellectual property rights, commercial, employment, wage and hour, and other claims.
We have 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. We evaluate these claims and lawsuits with respect to their potential merits, our potential defenses and counter claims, and the expected effect on us. Our technologies may be subject to injunction if they are found to infringe the rights of a third party. In addition, many of our subscription agreements require us to indemnify our customers for third-party intellectual property infringement claims, which could increase the cost to us of an adverse ruling on such a claim.
The outcome of any litigation, regardless of its merits, is inherently uncertain. Any intellectual property claims and other lawsuits, and the disposition of such claims and lawsuits, could be time-consuming and expensive to resolve, divert our attention from executing our business plan, lead to attempts on the part of other parties to seek similar claims and, in the case of intellectual property claims, require us to change our technology, change our business practices and/or pay monetary damages or enter into short- or long-term royalty or licensing agreements.
In general, the resolution of a legal matter could prevent us from offering our service to others, could be material to our financial condition or cash flows, or both, or could otherwise adversely affect our operating results.
We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly
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and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. In our opinion, resolution of all current matters is not expected to have a material adverse impact on our consolidated results of operations, cash flows or financial position. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect our future results of operations or cash flows, or both, of a particular quarter.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
ITEM 4A. | EXECUTIVE OFFICERS OF THE REGISTRANT |
The following sets forth certain information regarding our current executive officers (in alphabetical order):
Name |
Age |
Position | ||||
Marc Benioff |
47 | Chairman of the Board of Directors and Chief Executive Officer | ||||
Parker Harris |
45 | Executive Vice President, Technology | ||||
George Hu |
37 | Chief Operating Officer | ||||
Hilarie Koplow-McAdams |
48 | President, Commercial and SMB Unit | ||||
Burke Norton |
45 | Executive Vice President and Chief Legal Officer | ||||
Graham Smith |
52 | Executive Vice President and Chief Financial Officer | ||||
Frank van Veenendaal |
52 | Vice Chairman |
Marc Benioff co-founded salesforce.com in February 1999 and has served as Chairman of the Board of Directors since inception. He has served as Chief Executive Officer since November 2001. From 1986 to 1999, Mr. Benioff was employed at Oracle Corporation, where he held a number of positions in sales, marketing and product development, lastly as a Senior Vice President. Mr. Benioff also serves as Chairman of the Board of Directors of the salesforce.com/foundation. Mr. Benioff received a Bachelor of Science in Business Administration (B. S. B. A.) from the University of Southern California, where he is also on the Board of Trustees.
Parker Harris co-founded salesforce.com in February 1999 and served in senior technical positions since inception. Since December 2004, Mr. Harris has served as our Executive Vice President, Technology. From October 1996 to February 1999, Mr. Harris was a Vice President at Left Coast Software, a Java consulting firm he co-founded. Mr. Harris received a B.A. from Middlebury College.
George Hu has served as our Chief Operating Officer since November 2011. Previously, Mr. Hu served as our Executive Vice President, Platform and Marketing from August 2010 to November 2011, our Executive Vice President, Marketing and Alliances from February 2009 to August 2010, our Executive Vice President, Marketing, Applications and Education from December 2007 to February 2009, our Chief Marketing Officer from October 2006 through December 2007, our Senior Vice President and General Manager, Applications from January to October 2006 and our Vice President, Product Marketing from October 2004 to January 2006. Mr. Hu has also served in various management positions in marketing since joining salesforce.com in March 2002. Mr. Hu received an A.B. from Harvard College and an M.B.A. from Stanford University.
Hilarie Koplow-McAdams has served as our President, Commercial and SMB Unit since February 2012. Prior to that Ms. Koplow-McAdams served as our Executive Vice President, Worldwide Sales from July 2008 to February 2012. Prior to salesforce.com, Ms. Koplow-McAdams was at Intuit, Inc., a provider of business and financial management software, and served as its Vice President of Direct Sales from 2006 to 2008. In addition to Intuit, Inc., she served at Oracle Corporation, in various senior sales roles. Ms. Koplow-McAdams holds a Masters degree in public policy from the University of Chicago and a B.A. from Mills College.
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Burke Norton has served as our Executive Vice President and Chief Legal Officer since October 2011. From October 2006 to October 2011, Mr. Norton was Executive Vice President, General Counsel and Secretary and a member of the office of the chairman at Expedia, Inc. Previously, Mr. Norton was a partner at the law firm of Wilson Sonsini Goodrich & Rosati P.C., where he practiced corporate and securities law for 11 years, representing clients in the enterprise software, telecommunications, semiconductor, life sciences, entertainment and ecommerce industries. Mr. Norton holds a J.D. from the University of California, Berkeley School of Law.
Graham Smith has served as our Executive Vice President and Chief Financial Officer since March 2008. Prior to that, Mr. Smith served as our Executive Vice President and Chief Financial Officer Designate from December 2007 to March 2008. Prior to salesforce.com, Mr. Smith was at Advent Software, Inc., a provider of portfolio management software, and served as its Chief Financial Officer from January 2003 to December 2007. In addition to Advent Software, he served as Chief Financial Officer of Vitria Technology and Nuance Communications, and also served at Oracle Corporation, in various senior finance roles, lastly as Vice President of Finance for worldwide operations. Mr. Smith holds a B.Sc. from Bristol University in England and qualified as a member of the Institute of Chartered Accountants in England and Wales.
Frank van Veenendaal has served as Vice Chairman since February 2012. Prior to that Mr. van Veenendaal served as our President, Worldwide Sales and Services from October 2009 to February 2012. Prior to this position, he was our Chief Sales Officer and President, Worldwide Sales from September 2008 to October 2009, our President, Global Corporate Sales and North American Operations from December 2007 to September 2008 and our President, Worldwide Corporate Sales and Services from February 2007 to December 2007. Since joining us in 2001, Mr. van Veenendaal has also served in various sales management positions, including Senior Vice President, North America Sales. From 1995 to 2001, Mr. van Veenendaal was Senior Vice President of Sales of Actuate Corporation, a software company. Mr. van Veenendaal received a B.S. from Rensselaer Polytechnic Institute.
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PART II
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information for Common Stock
Our common stock has been quoted on the New York Stock Exchange under the symbol CRM.
The following table sets forth for the indicated periods the high and low closing sales prices of our common stock as reported by the New York Stock Exchange.
High | Low | |||||||
Fiscal year ending January 31, 2012 |
||||||||
First quarter |
$ | 143.08 | $ | 120.01 | ||||
Second quarter |
$ | 159.32 | $ | 128.96 | ||||
Third quarter |
$ | 145.66 | $ | 110.86 | ||||
Fourth quarter |
$ | 136.60 | $ | 97.48 | ||||
Fiscal year ending January 31, 2011 |
||||||||
First quarter |
$ | 88.70 | $ | 62.08 | ||||
Second quarter |
$ | 100.07 | $ | 77.52 | ||||
Third quarter |
$ | 123.14 | $ | 96.41 | ||||
Fourth quarter |
$ | 150.58 | $ | 110.15 |
Dividend Policy
We have never paid any cash dividends on our common stock. Our board of directors currently intends to retain any future earnings to support operations and to finance the growth and development of our business and does not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board.
Stockholders
As of January 31, 2012 there were 125 registered stockholders of record of our common stock, including The Depository Trust Company, which holds shares of salesforce.com common stock on behalf of an indeterminate number of beneficial owners.
Securities Authorized for Issuance under Equity Compensation Plans
The information concerning our equity compensation plans is incorporated by reference herein to the section of the Proxy Statement entitled Equity Compensation Plan Information.
Issued Warrants
During fiscal 2010 we issued 6.7 million warrants to purchase our common stock, as described in Note 2 Balance Sheet Accounts of the consolidated financial statements.
Stock Performance Graph
The following shall not be deemed incorporated by reference into any of our other filings under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, except to the extent we specifically incorporate it by reference into such filing.
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The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the Standard & Poors 500 Index and the Nasdaq Computer & Data Processing Index for the period beginning on June 23, 2004 (the date our common stock commenced trading on the New York Stock Exchange) through January 31, 2012, assuming an initial investment of $100. Data for the Standard & Poors 500 Index and the Nasdaq Computer & Data Processing Index assume reinvestment of dividends.
The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.
Comparison of Cumulative Total Return of salesforce.com, inc.
6/23/2004 | 1/31/2005 | 1/31/2006 | 1/31/2007 | 1/31/2008 | 1/31/2009 | 1/31/2010 | 1/31/2011 | 1/31/2012 | ||||||||||||||||||||||||||||
salesforce.com |
100.00 | 124.55 | 373.18 | 398.45 | 471.91 | 241.91 | 577.73 | 1,174.00 | 1,061.82 | |||||||||||||||||||||||||||
S&P 500 Index |
100.00 | 103.25 | 111.89 | 125.71 | 120.50 | 72.19 | 93.86 | 112.42 | 114.72 | |||||||||||||||||||||||||||
Nasdaq Computer & Data Processing Index |
100.00 | 100.45 | 111.93 | 116.62 | 117.84 | 71.02 | 116.00 | 153.34 | 162.74 |
Recent Sales of Unregistered Securities
None
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ITEM 6. | SELECTED FINANCIAL DATA |
The following selected consolidated financial data should be read in conjunction with our audited consolidated financial statements and related notes thereto and with Managements Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere in this Form 10-K. The consolidated statement of operations data for fiscal 2012, 2011, and 2010, and the selected consolidated balance sheet data as of January 31, 2012 and 2011 are derived from, and are qualified by reference to, the audited consolidated financial statements and are included in this Form 10-K. The consolidated statement of operations data for fiscal 2009 and 2008 and the consolidated balance sheet data as of January 31, 2010, 2009 and 2008 are derived from audited consolidated financial statements which are not included in this Form 10-K.
(in thousands, except per share data) | Fiscal Year Ended January 31, | |||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
Consolidated Statement of Operations: |
||||||||||||||||||||
Revenues: |
||||||||||||||||||||
Subscription and support |
$ | 2,126,234 | $ | 1,551,145 | $ | 1,209,472 | $ | 984,574 | $ | 680,581 | ||||||||||
Professional services and other |
140,305 | 105,994 | 96,111 | 92,195 | 68,119 | |||||||||||||||
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|
|
|
|
|
|
|
|
|||||||||||
Total revenues |
2,266,539 | 1,657,139 | 1,305,583 | 1,076,769 | 748,700 | |||||||||||||||
Cost of revenues (1): |
||||||||||||||||||||
Subscription and support |
360,758 | 208,243 | 159,172 | 127,082 | 91,268 | |||||||||||||||
Professional services and other |
128,128 | 115,570 | 98,753 | 93,389 | 80,323 | |||||||||||||||
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|
|
|
|
|
|
|
|
|||||||||||
Total cost of revenues |
488,886 | 323,813 | 257,925 | 220,471 | 171,591 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
1,777,653 | 1,333,326 | 1,047,658 | 856,298 | 577,109 | |||||||||||||||
Operating expenses (1): |
||||||||||||||||||||
Research and development |
295,347 | 187,887 | 131,897 | 99,530 | 63,812 | |||||||||||||||
Marketing and sales |
1,169,610 | 792,029 | 605,199 | 534,413 | 376,480 | |||||||||||||||
General and administrative |
347,781 | 255,913 | 195,290 | 158,613 | 116,508 | |||||||||||||||
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|
|
|
|
|
|
|
|
|||||||||||
Total operating expenses |
1,812,738 | 1,235,829 | 932,386 | 792,556 | 556,800 | |||||||||||||||
Income (loss) from operations |
(35,085 | ) | 97,497 | 115,272 | 63,742 | 20,309 | ||||||||||||||
Investment income |
23,268 | 37,735 | 30,408 | 22,774 | 24,539 | |||||||||||||||
Interest expense |
(17,045 | ) | (24,909 | ) | (2,000 | ) | (107 | ) | (46 | ) | ||||||||||
Gain on sale of investment |
0 | 0 | 0 | 0 | 1,272 | |||||||||||||||
Other income (expense) |
(4,455 | ) | (6,025 | ) | (1,299 | ) | (817 | ) | 139 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before benefit (provision) for income taxes and noncontrolling interest |
(33,317 | ) | 104,298 | 142,381 | 85,592 | 46,213 | ||||||||||||||
Benefit (provision) for income taxes |
21,745 | (34,601 | ) | (57,689 | ) | (37,557 | ) | (23,385 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Consolidated net income (loss) |
(11,572 | ) | 69,697 | 84,692 | 48,035 | 22,828 | ||||||||||||||
Less: net income attributable to noncontrolling interest |
0 | (5,223 | ) | (3,973 | ) | (4,607 | ) | (4,472 | ) | |||||||||||
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|
|
|
|
|
|
|
|
|
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Net income (loss) attributable to salesforce.com |
$ | (11,572 | ) | $ | 64,474 | $ | 80,719 | $ | 43,428 | $ | 18,356 | |||||||||
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|
|
|
|
|
|
|||||||||||
Net earnings per sharebasic and diluted: |
||||||||||||||||||||
Basic net income (loss) per share attributable to salesforce.com common shareholders |
$ | (0.09 | ) | $ | 0.50 | $ | 0.65 | $ | 0.36 | $ | 0.16 | |||||||||
Diluted net income (loss) per share attributable to salesforce.com common shareholders |
$ | (0.09 | ) | $ | 0.47 | $ | 0.63 | $ | 0.35 | $ | 0.15 | |||||||||
Shares used in computing basic net income (loss) per share |
135,302 | 130,222 | 124,462 | 121,183 | 116,840 | |||||||||||||||
Shares used in computing diluted net income (loss) per share |
135,302 | 136,598 | 128,114 | 125,228 | 122,422 |
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(1) | Cost of revenues and operating expenses include stock-based expenses, consisting of: |
Fiscal Year Ended January 31, | ||||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||||
Cost of revenues |
$ | 17,451 | $ | 12,158 | $ | 12,570 | $ | 11,051 | $ | 7,926 | ||||||||||||
Research and development |
45,894 | 18,897 | 13,129 | 9,852 | 6,336 | |||||||||||||||||
Marketing and sales |
115,730 | 56,451 | 39,722 | 36,028 | 25,423 | |||||||||||||||||
General and administrative |
50,183 | 32,923 | 23,471 | 20,435 | 15,522 |
As of January 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
Consolidated Balance Sheet Data: |
||||||||||||||||||||
Cash, cash equivalents and marketable securities |
$ | 1,447,174 | $ | 1,407,557 | $ | 1,727,048 | $ | 882,565 | $ | 669,800 | ||||||||||
(Negative) working capital |
(651,249 | ) | (201,542 | ) | 798,029 | 301,591 | 134,894 | |||||||||||||
Total assets |
4,164,154 | 3,091,165 | 2,460,201 | 1,479,822 | 1,089,593 | |||||||||||||||
Long-term obligations excluding deferred revenue and noncontrolling interest (2) |
85,909 | 516,506 | 481,234 | 20,106 | 10,601 | |||||||||||||||
Retained earnings (deficit) |
159,463 | 171,035 | 106,561 | 25,842 | (17,586 | ) | ||||||||||||||
Total stockholders equity controlling interest |
1,587,360 | 1,276,491 | 1,043,802 | 671,784 | 452,059 |
(2) | Long-term obligations excluding deferred revenue and noncontrolling interest includes the 0.75% convertible senior notes issued in January 2010. |
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ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion contains forward-looking statements, including, without limitation, our expectations and statements regarding our outlook and future revenues, expenses, results of operations, liquidity, plans, strategies and objectives of management and any assumptions underlying any of the foregoing. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future actual results to differ materially from our recent results or those projected in the forward-looking statements include, but are not limited to, those discussed in the section titled of this Annual Report on Form 10-K Risk Factors. Except as required by law, we assume no obligation to update the forward-looking statements or our risk factors for any reason.
Overview
We are a leading provider of enterprise cloud computing and social enterprise solutions, and are dedicated to helping customers transform themselves into social enterprises. Social enterprises leverage social, mobile and open technologies to place their customers and employees at the center of their business and to engage and collaborate with them in new and powerful ways. Our technologies are targeted at businesses of all sizes and industries worldwide.
We were founded in February 1999 and began offering our enterprise customer relationship management (CRM) application service in February 2000. Since then, we have augmented our CRM service with new editions, services and enhanced features. Over the last few years, we have both developed and acquired several mobile, social and open technologies to help our customers become social enterprises. We introduced our Force.com platform to customers and developers so they can build complementary applications to extend beyond CRM. We launched our AppExchange directory of enterprise cloud computing applications and services that are integrated with our flagship CRM product and in most cases have been developed on our Force.com platform by third parties. We introduced Chatter, a collaboration application for the enterprise to connect and share information securely and in real-time. Recently we enabled companies to invite their customers to collaborate with Chatter in private groups on this corporate social network. Our Salesforce Data.com (Data.com) offering, which provides some contacts from Jigsaw Data Corporation (Jigsaw), provides the most complete source of accurate business data and seamlessly integrates with our CRM products. We also expanded our platform offering via the acquisition of Heroku, Inc. (Heroku) an application development platform and the launch of Database.com, the worlds first enterprise cloud database. We acquired Radian6 Technologies, Inc. (Radian6) to help companies monitor and engage with their customers via social media.
Our objective is to help companies put customers at the center of their businesses and transform themselves into social enterprises by leveraging our applications and platforms. Key elements of our strategy include:
| Strengthening our existing sales and service cloud applications and extending into new functional areas within the social enterprise; |
| Leading the industry transformation to the social enterprise; |
| Pursuing new customers and new territories aggressively; |
| Deepening relationships with our existing customer base; |
| Encouraging the development of third-party applications on our cloud computing platforms. |
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 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
33
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; and general economic conditions which could affect our customers ability and willingness to purchase our services, delay the customers purchasing decision or affect renewal rates.
To address these factors, we will need to, among other things, continue to add substantial numbers of paying subscriptions, upgrade our customers to fully featured versions such as our Unlimited Edition or arrangements such as a social enterprise license agreement, provide high quality technical support to our customers and encourage the development of third-party applications on our platforms. Our plans to invest for future growth include the continuation of the expansion of our data center capacity. We also plan to continue to hire additional personnel, particularly in direct sales, other customer-related areas and research and development. As part of our growth plans, we intend to continue to focus on retaining customers at the time of renewal.
Additionally, we plan to: expand our domestic and international selling and marketing activities; continue to develop our brands; add additional distribution channels; increase our research and development activities to upgrade and extend our service offerings; develop new services and technologies and integrate acquired technologies; and add 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. As such, we plan to reinvest a significant portion of our incremental revenue in fiscal 2013 to grow our business and continue our leadership role in the cloud computing industry.
During fiscal 2012, we acquired several businesses and technologies to strengthen and extend our service offerings. In May 2011, we acquired Radian6 for a total purchase consideration of approximately $336.6 million, net of cash acquired. Radian6 is a cloud application vendor that provides customers with social media monitoring, measurement and engagement solutions. We acquired Radian6 for its developed technology, assembled workforce, expected synergies and expanded market opportunities when integrating Radian6s social solution technology with our current product offerings. In September 2011, we acquired Assistly for a total purchase consideration of approximately $58.7 million. Assistly is a cloud-based provider of customer service solutions. We acquired Assistly for its developed help desk application technology in order to expand our customer service market opportunities in the small and emerging business market. In order to expand our mobile and social consulting services, in December 2011, we acquired Model Metrics, a cloud computing professional services company, for a total purchase consideration of approximately $66.7 million.
We expect marketing and sales costs, which were 52 percent of our total revenues for fiscal 2012 and 48 percent for the same period a year ago, to continue to represent a substantial portion of total revenues in the future as we seek to add and manage more paying subscribers, and build greater brand awareness.
Fiscal Year
Our fiscal year ends on January 31. References to fiscal 2012, for example, refer to the fiscal year ended January 31, 2012.
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Sources of Revenues
We derive our revenues from: (1) subscription fees from customers accessing our enterprise cloud computing services; (2) support revenues from customers purchasing additional support beyond the standard support that is included in the basic subscription fees; (3) professional services, which include consulting services such as process mapping and project management, and implementation services including systems integration, technical architecture and development, and data conversion; and (4) other revenue, which consists primarily of training fees. Subscription and support revenues accounted for approximately 94 percent of our total revenues during fiscal 2012. Subscription revenues are driven primarily by the number of paying subscribers, varying service types, the price of our service and service renewal rates. 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 fiscal 2012, 2011, or 2010.
Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement dates of each contract. The typical subscription and support term is 12 to 24 months, although terms range from one to 60 months. Our subscription and support contracts are 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 Policies and Estimates Revenue Recognition below. Prior to February 1, 2011, the deliverables in multiple-deliverable arrangements were accounted for separately if the delivered items had standalone value and there was objective and reliable evidence of fair value for the undelivered items. If the deliverables in a multiple-deliverable arrangement could not be accounted for separately, the total arrangement fee was recognized ratably as a single unit of accounting over the contracted term of the subscription agreement. A significant portion of our multiple-deliverable arrangements were accounted for as a single unit of accounting because we did not have objective and reliable evidence of fair value for certain of our deliverables. Additionally, in these situations, we deferred the direct costs of a related professional service arrangement and amortized those costs over the same period as the professional services revenue was recognized.
In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605), Multiple-Deliverable Revenue Arrangementsa consensus of the FASB Emerging Issues Task Force (ASU 2009-13) which amended the previous multiple-deliverable arrangements accounting guidance. Pursuant to the new guidance, objective and reliable evidence of fair value of the deliverables to be delivered is no longer required in order to account for deliverables in a multiple-deliverable arrangement separately. Instead, arrangement consideration is allocated to deliverables based on their relative selling price. In the first quarter of fiscal 2012, we adopted this new accounting guidance on a prospective basis. We applied the new accounting guidance to those multiple-deliverable arrangements entered into or materially modified on or after February 1, 2011 which is the beginning of our fiscal year.
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Seasonal Nature of Deferred Revenue and Accounts Receivable
Deferred revenue primarily consists of billings to customers for our subscription service. Over 90 percent of the value of our billings to customers is for our subscription and support service. We generally invoice our customers in either quarterly or annual cycles. There is a disproportionate weighting towards annual billings in the fourth quarter, primarily as a result of large enterprise account buying patterns. Currently, there is greater operational discipline around annual invoicing, for both new business and renewals. Occasionally, we bill customers for their multi-year contract on a single invoice which results in an increase in noncurrent deferred revenue. Our fourth quarter has historically been our strongest quarter for new business and renewals. The year on year compounding effect of this seasonality in both billing patterns and overall new and renewal business causes the value of invoices that we generate in the fourth quarter for both new business and renewals to increase as a proportion of our total annual billings.
Accordingly, 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, 2011 |
July 31, 2011 |
October 31, 2011 |
January 31, 2012 |
||||||||||||
Fiscal 2012 |
||||||||||||||||
Accounts receivable, net |
$ | 270,816 | $ | 342,397 | $ | 312,331 | $ | 683,745 | ||||||||
Deferred revenue, current and noncurrent |
915,133 | 935,266 | 917,821 | 1,380,295 | ||||||||||||
(in thousands) |
April 30, 2010 |
July 31, 2010 |
October 31, 2010 |
January 31, 2011 |
||||||||||||
Fiscal 2011 |
||||||||||||||||
Accounts receivable, net |
$ | 183,612 | $ | 228,550 | $ | 258,764 | $ | 426,943 | ||||||||
Deferred revenue, current and noncurrent |
664,529 | 683,019 | 694,557 | 934,941 | ||||||||||||
(in thousands) |
April 30, 2009 |
July 31, 2009 |
October 31, 2009 |
January 31, 2010 |
||||||||||||
Fiscal 2010 |
||||||||||||||||
Accounts receivable, net |
$ | 145,869 | $ | 168,842 | $ | 191,297 | $ | 320,956 | ||||||||
Deferred revenue, current and noncurrent |
549,373 | 549,010 | 545,435 | 704,348 |
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 was over $2.2 billion as of January 31, 2012 and over $1.5 billion as of January 31, 2011. Unbilled deferred revenue represents future billings under our subscription agreements that have not been invoiced and, accordingly, are not recorded in deferred revenue. 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.
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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 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 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 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 as we improve and extend our service offerings, develop new technologies and integrate acquired businesses and technologies.
Marketing and Sales. Marketing and sales expenses are our largest cost and consist primarily of salaries and related expenses, including stock-based expenses, for our sales and marketing staff, including commissions, payments to partners, marketing programs and allocated overhead. Marketing programs consist of advertising, events, corporate communications, 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. We expect that in the future, marketing and sales expenses will increase in absolute dollars and continue to be our largest cost.
General and Administrative. General and administrative expenses consist of salaries and related expenses, including stock-based expenses, for finance and accounting, legal, internal audit, human resources and management information systems personnel, legal costs, professional fees, other corporate expenses and allocated overhead. We expect that in the future, general and administrative expenses will increase in absolute dollars as we invest in our infrastructure and we incur additional employee related costs, professional fees and insurance costs related to the growth of our business and international expansion. We expect general and administrative costs as a percentage of total revenues to remain flat 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 hire more employees and seek to retain existing employees.
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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 companys research and development efforts, trade names, customer lists and customer relationships. We expect this expense to increase as we acquire more companies.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that of our significant accounting policies, which are described in note 1 to our 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 consolidated financial condition and results of operations.
Revenue Recognition. We derive our revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing our enterprise cloud computing services and from customers purchasing additional support beyond the standard support that is included in the basic subscription fee; and (2) related professional services such as process mapping, project management, implementation services and other revenue. Other revenue consists primarily of training fees.
We commence revenue recognition when all of the following conditions are satisfied:
| There is persuasive evidence of an arrangement; |
| The service has been or is being provided to the customer; |
| The collection of the fees is reasonably assured; and |
| The amount of fees to be paid by the customer is fixed or determinable. |
Our subscription service arrangements are non-cancelable and do not contain refund-type provisions.
Subscription and Support Revenues
Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement date of each contract, which is the date our service is made available to customers. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
Professional Services and Other Revenues
The majority of our professional services contracts are on a time and material basis. When these services are not combined with subscription revenues as a single unit of accounting, as discussed below, these revenues are recognized as the services are rendered for time and material contracts, and when the milestones are achieved and accepted by the customer for fixed price contracts. Training revenues are recognized after the services are performed.
Multiple-Deliverable Arrangements
We enter into arrangements with multiple-deliverables that generally include subscription, premium support, and professional services.
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Prior to February 1, 2011, the deliverables in multiple-deliverable arrangements were accounted for separately if the delivered items had standalone value and there was objective and reliable evidence of fair value for the undelivered items. If the deliverables in a multiple-deliverable arrangement could not be accounted for separately, the total arrangement fee was recognized ratably as a single unit of accounting over the contracted term of the subscription agreement. A significant portion of our multiple-deliverable arrangements were accounted for as a single unit of accounting because we did not have objective and reliable evidence of fair value for certain of our deliverables. Additionally, in these situations, we deferred the direct costs of a professional services arrangement and amortized those costs over the same period as the professional services revenue is recognized.
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605), Multiple-Deliverable Revenue Arrangementsa consensus of the FASB Emerging Issues Task Force (ASU 2009-13) which amended the previous multiple-deliverable arrangements accounting guidance. Pursuant to the updated guidance, objective and reliable evidence of fair value of the deliverables to be delivered is no longer required in order to account for deliverables in a multiple-deliverable arrangement separately. Instead, arrangement consideration is allocated to deliverables based on their relative selling price.
In the first quarter of fiscal 2012, we adopted this updated accounting guidance on a prospective basis. We have applied the new accounting guidance to those multiple-deliverable arrangements entered into or materially modified on or after February 1, 2011 which is the beginning of our fiscal year.
The adoption of this updated accounting guidance did not have a material impact on our financial condition, results of operations or cash flows. As of January 31, 2012, the deferred professional services revenue and deferred costs under the previous accounting guidance are $30.5 million and $14.3 million, respectively, which will continue to be recognized over the related remaining subscription period.
Under the updated accounting guidance, in order to treat deliverables in a multiple-deliverable arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. 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 customers 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.
Under the updated accounting guidance, when multiple-deliverables included in an arrangement are separated into different units of accounting, 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
39
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.
As a result of the updated accounting guidance previously described, billings against professional services arrangements entered into prior to February 1, 2011 were generally added to deferred revenue and recognized over the remaining related subscription contract term.
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 24 months. The commission payments, which are paid in full the month after the customers service commences, are a direct and incremental cost of the revenue arrangements. The deferred commission amounts are recoverable through the future revenue streams under the non-cancelable customer contracts. We believe this is the preferable method of accounting as the commission charges are so closely related to the revenue from the non-cancelable customer contracts that they should be recorded as an asset and charged to expense over the same period that the subscription revenue is recognized.
During fiscal 2012, we deferred $167.2 million of commission expenditures and we amortized $107.2 million to sales expense. During the same period a year ago, we deferred $121.2 million of commission expenditures and we amortized $80.2 million to sales expense. Deferred commissions on our consolidated balance sheets totaled $176.6 million at January 31, 2012 and $116.6 million at January 31, 2011.
Business Combinations. We recognize separately from goodwill the fair value of assets acquired and liabilities assumed. Goodwill as of the acquisition date represents the excess of the purchase consideration of an acquired business over the fair value of the underlying net tangible and intangible assets acquired and liabilities assumed. 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. Our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill. 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 our consolidated statements of operations.
In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. We continue to collect information in order to determine their estimated fair values as of the date of acquisition. We reevaluate these items quarterly and record any adjustments to the preliminary estimates to goodwill provided that we are within the measurement period. Subsequent to the measurement period, changes to these uncertain tax positions and tax related valuation allowances will affect our provision for income taxes in the consolidated statements of operations.
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Stock-Based Awards. We recognize the fair value of our stock awards on a straight-line basis over the requisite service period of the award which is the vesting term of generally four years or one year for the Employee Stock Purchase Plan (ESPP). The fair value of each award is estimated on the date of grant using the Black-Scholes option pricing model. The estimated life for the stock options is based on an actual analysis of expected life. The estimated life for the ESPP is based on the two purchase periods within the offering period. The risk free interest rate is based on the rate for a U.S. government security with the same estimated life at the time of the option grant and the stock purchase rights.
We estimate the future stock price volatility 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.
We recognized stock-based expense of $229.3 million during fiscal 2012. The requirement to expense stock-based awards will continue to materially reduce our reported results of operations. As of January 31, 2012, we had an aggregate of $820.6 million of stock compensation remaining to be amortized to expense over the remaining requisite service period of the underlying awards. We currently expect this stock compensation balance to be amortized as follows: $296.5 million during fiscal 2013; $256.4 million during fiscal 2014; $196.1 million during fiscal 2015 and $71.6 million during fiscal 2016. These amounts reflect only outstanding stock awards as of January 31, 2012 and assume no forfeiture activity. We expect to continue to issue stock-based awards to our employees in future periods, which will increase the stock compensation amortization in such future periods.
We recognize as an operating expense the payroll and social tax costs, as applicable by jurisdiction, when stock options are exercised. The impact of stock-based expense in the future is dependent upon, among other things, the timing of when we hire additional employees, the effect of long-term incentive strategies involving stock awards in order to continue to attract and retain employees, the total number of stock awards granted, the fair value of the stock awards at the time of grant, changes in estimated forfeiture assumption rates. Additionally, we are required to use an option-pricing model to determine the fair value of stock-based awards. This determination of fair value is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards.
As of January 31, 2012, there were 5.0 million restricted stock awards and units outstanding. We plan to continue awarding restricted stock to our employees in the future. The restricted stock, which upon vesting entitles the holder to one share of common stock for each restricted stock, has an exercise price of $0.001 per share, which is equal to the par value of our common stock, and vests over four years. The fair value of the restricted stock is based on our closing stock price on the date of grant, and compensation expense, net of estimated forfeitures, is recognized on a straight-line basis over the vesting period.
Income Taxes. We account for income taxes using the liability method, which requires the recognition of deferred tax assets or liabilities for the tax-effected temporary differences between the financial reporting and tax bases of our assets and liabilities and for net operating loss and tax credit carryforwards. The tax expense or benefit for unusual items, or certain adjustments to the valuation allowance are treated as discrete items in the interim period in which the events occur.
Our effective tax rate could be adversely affected by changes in the mix of earnings and losses in countries with differing statutory tax rates, certain non-deductible expenses as a result of acquisitions, compensation, the valuation of deferred tax assets and liabilities and changes in tax laws and accounting principles.
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
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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 tax provision.
Strategic Investments. We report our investments in marketable equity securities at fair market value using the quoted prices in their respective active markets. 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).
Fiscal Year Ended January 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Revenues: |
||||||||||||
Subscription and support |
$ | 2,126,234 | $ | 1,551,145 | $ | 1,209,472 | ||||||
Professional services and other |
140,305 | 105,994 | 96,111 | |||||||||
|
|
|
|
|
|
|||||||
Total revenues |
2,266,539 | 1,657,139 | 1,305,583 | |||||||||
Cost of revenues: |
||||||||||||
Subscription and support |
360,758 | 208,243 | 159,172 | |||||||||
Professional services and other |
128,128 | 115,570 | 98,753 | |||||||||
|
|
|
|
|
|
|||||||
Total cost of revenues |
488,886 | 323,813 | 257,925 | |||||||||
|
|
|
|
|
|
|||||||
Gross profit |
1,777,653 | 1,333,326 | 1,047,658 | |||||||||
Operating expenses: |
||||||||||||
Research and development |
295,347 | 187,887 | 131,897 | |||||||||
Marketing and sales |
1,169,610 | 792,029 | 605,199 | |||||||||
General and administrative |
347,781 | 255,913 | 195,290 | |||||||||
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|
|
|
|
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Total operating expenses |
1,812,738 | 1,235,829 | 932,386 | |||||||||
Income (loss) from operations |
(35,085 | ) | 97,497 | 115,272 | ||||||||
Investment income |
23,268 | 37,735 | 30,408 | |||||||||
Interest expense |
(17,045 | ) | (24,909 | ) | (2,000 | ) | ||||||
Other expense |
(4,455 | ) | (6,025 | ) | (1,299 | ) | ||||||
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|
|
|
|
|
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Income (loss) before benefit (provision) for income taxes and noncontrolling interest |
(33,317 | ) | 104,298 | 142,381 | ||||||||
Benefit (provision) for income taxes |
21,745 | (34,601 | ) | (57,689 | ) | |||||||
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|
|
|
|
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Consolidated net income (loss) |
(11,572 | ) | 69,697 | 84,692 | ||||||||
Less: Net income attributable to noncontrolling interest |
0 | (5,223 | ) | (3,973 | ) | |||||||
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|
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|
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Net income (loss) attributable to salesforce.com |
$ | (11,572 | ) | $ | 64,474 | $ | 80,719 | |||||
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|
As of January 31, | ||||||||
2012 | 2011 | |||||||
Balance Sheet Data: |
||||||||
Cash, cash equivalents and marketable securities |
$ | 1,447,174 | $ | 1,407,557 | ||||
Deferred revenue, current and noncurrent |
1,380,295 | 934,941 |
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Revenues by geography were as follows:
Fiscal Year Ended January 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Americas |
$ | 1,540,289 | $ | 1,135,019 | $ | 923,823 | ||||||
Europe |
408,456 | 291,784 | 232,367 | |||||||||
Asia Pacific |
317,794 | 230,336 | 149,393 | |||||||||
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$ | 2,266,539 | $ | 1,657,139 | $ | 1,305,583 | |||||||
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Cost of revenues and marketing and sales expenses include the following amounts related to amortization of purchased intangibles from business combinations:
Fiscal Year Ended January 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Cost of revenues |
$ | 60,069 | $ | 15,459 | $ | 8,010 | ||||||
Marketing and sales |
7,250 | 4,209 | 3,241 |
Cost of revenues and operating expenses include the following amounts related to stock-based awards:
Fiscal Year Ended January 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Cost of revenues |
$ | 17,451 | $ | 12,158 | $ | 12,570 | ||||||
Research and development |
45,894 | 18,897 | 13,129 | |||||||||
Marketing and sales |
115,730 | 56,451 | 39,722 | |||||||||
General and administrative |
50,183 | 32,923 | 23,471 |
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The following tables set forth selected consolidated statements of operations data for each of the periods indicated as a percentage of total revenues:
Fiscal Year Ended January 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Revenues: |
||||||||||||
Subscription and support |
94 | % | 94 | % | 93 | % | ||||||
Professional services and other |
6 | 6 | 7 | |||||||||
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|
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|
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Total revenues |
100 | 100 | 100 | |||||||||
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|
|
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Cost of revenues: |
||||||||||||
Subscription and support |
16 | 13 | 12 | |||||||||
Professional services and other |
6 | 7 | 8 | |||||||||
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Total cost of revenues |
22 | 20 | 20 | |||||||||
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Gross profit |
78 | 80 | 80 | |||||||||
Operating expenses: |
||||||||||||
Research and development |
13 | 11 | 10 | |||||||||
Marketing and sales |
52 | 48 | 46 | |||||||||
General and administrative |
15 | 15 | 15 | |||||||||
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Total operating expenses |
80 | 74 | 71 | |||||||||
Income (loss) from operations |
(2 | ) | 6 | 9 | ||||||||
Investment income |
1 | 2 | 2 | |||||||||
Interest expense |
(1 | ) | (2 | ) | 0 | |||||||
Other expense |
0 | 0 | 0 | |||||||||
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Income (loss) before benefit (provision) for income taxes and noncontrolling interest |
(2 | ) | 6 | 11 | ||||||||
Benefit (provision) for income taxes |
1 | (2 | ) | (5 | ) | |||||||
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|
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Consolidated net income (loss) |
(1 | ) | 4 | 6 | ||||||||
Less: Net income attributable to noncontrolling interest |
0 | 0 | 0 | |||||||||
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|
|||||||
Net income (loss) attributable to salesforce.com |
(1 | )% | 4 | % | 6 | % | ||||||
|
|
|
|
|
|
Fiscal Year Ended January 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Revenues by geography: |
||||||||||||
Americas |
68 | % | 68 | % | 71 | % | ||||||
Europe |
18 | 18 | 18 | |||||||||
Asia Pacific |
14 | 14 | 11 | |||||||||
|
|
|
|
|
|
|||||||
100 | % | 100 | % | 100 | % | |||||||
|
|
|
|
|
|
|||||||
Fiscal Year Ended January 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Amortization of purchased intangibles from business combinations: |
||||||||||||
Cost of revenues |
3 | % | 1 | % | 1 | % | ||||||
Marketing and sales |
0 | 0 | 0 | |||||||||
Fiscal Year Ended January 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Stock-based awards: |
||||||||||||
Cost of revenues |
1 | % | 1 | % | 1 | % | ||||||
Research and development |
2 | 1 | 1 | |||||||||
Marketing and sales |
5 | 3 | 3 | |||||||||
General and administrative |
2 | 2 | 2 |
44
Fiscal Years Ended January 31, 2012 and 2011
Revenues.
Fiscal Year Ended January 31, | Variance | |||||||||||||||
(In thousands) |
2012 | 2011 | Dollars | Percent | ||||||||||||
Subscription and support |
$ | 2,126,234 | $ | 1,551,145 | $ | 575,089 | 37 | % | ||||||||
Professional services and other |
140,305 | 105,994 | 34,311 | 32 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
$ | 2,266,539 | $ | 1,657,139 | $ | 609,400 | 37 | % | ||||||||
|
|
|
|
|
|
|
|
Total revenues were $2.3 billion for fiscal 2012, compared to $1.7 billion during the same period a year ago, an increase of $609.4 million, or 37 percent. Subscription and support revenues were $2.1 billion, or 94 percent of total revenues, for fiscal 2012, compared to $1.6 billion, or 94 percent of total revenues, during the same period a year ago. The increase in subscription and support revenues was due primarily to new customers, upgrades and additional subscriptions from existing customers and improved renewal rates as compared to a year ago. The price per user per month for our three primary offerings, Professional Edition, Enterprise Edition and Unlimited Edition, in fiscal 2012 has generally remained consistent relative to fiscal 2011. Professional services and other revenues were $140.3 million, or six percent of total revenues, for fiscal 2012, compared to $106.0 million, or six percent of total revenues, for the same period a year ago. The increase in professional services and other revenues was due primarily to the improved utilization of existing headcount and a benefit from the prospective adoption of the new revenue accounting guidance for multiple-deliverable arrangements.
Revenues in Europe and Asia Pacific accounted for $726.3 million, or 32 percent of total revenues, for fiscal 2012, compared to $522.1 million, or 32 percent of total revenues, during the same period a year ago, an increase of $204.1 million, or 39 percent. The increase in revenues outside of the Americas was the result of the increasing acceptance of our service, our focus on marketing our services internationally and improved renewal rates. Additionally, the value of the U.S. dollar relative to foreign currencies contributed to a slight increase in U.S. dollar revenues outside of the Americas for fiscal 2012 as compared to the same period a year ago. The foreign currency impact had the effect of increasing our aggregate revenues by $36.9 million compared to the same period a year ago. As part of our overall growth, we expect the percentage of our revenue generated outside of the Americas to increase as a percentage of our total revenues worldwide.
Cost of Revenues.
Fiscal Year Ended January 31, | Variance Dollars |
|||||||||||
(In thousands) |
2012 | 2011 | ||||||||||
Subscription and support |
$ | 360,758 | $ | 208,243 | $ | 152,515 | ||||||
Professional services and other |
128,128 | 115,570 | 12,558 | |||||||||
|
|
|
|
|
|
|||||||
Total cost of revenues |
$ | 488,886 | $ | 323,813 | $ | 165,073 | ||||||
|
|
|
|
|
|
|||||||
Percent of total revenues |
22 | % | 20 | % |
Cost of revenues was $488.9 million, or 22 percent of total revenues, during fiscal 2012, compared to $323.8 million, or 20 percent of total revenues, during the same period a year ago, an increase of $165.1 million. The increase in absolute dollars was primarily due to an increase of $20.4 million in employee-related costs, an increase of $5.3 million in stock based expenses, an increase of $39.8 million in service delivery costs, primarily due to our efforts to increase data center capacity, an increase of $68.3 million in depreciation and amortization expenses, $44.6 million of which related to the amortization of purchased intangible assets, an increase of $24.2 million in outside subcontractor and other service costs, and an increase of $5.5 million in allocated overhead. Gross profit margins for professional services and other revenues improved over the same period a year ago primarily due to the improved utilization of existing headcount and a benefit from the prospective adoption of the new revenue accounting guidance for multiple-deliverable arrangements.
45
We intend to continue to invest additional resources in our enterprise cloud computing services and data center capacity. Additionally, the amortization of purchased intangible assets will increase as we acquire additional businesses and technologies. We also plan to add additional employees in our professional services group to facilitate the adoption of our services. The timing of these expenses will affect our cost of revenues, both in terms of absolute dollars and as a percentage of revenues in future periods.
Research and Development.
Fiscal Year Ended January 31, | Variance Dollars |
|||||||||||
(In thousands) |
2012 | 2011 | ||||||||||
Research and development |
$ | 295,347 | $ | 187,887 | $ | 107,460 | ||||||
Percent of total revenues |
13 | % | 11 | % |
Research and development expenses were $295.3 million, or 13 percent of total revenues, during fiscal 2012, compared to $187.9 million, or 11 percent of total revenues, during the same period a year ago, an increase of $107.5 million. The increase in absolute dollars was primarily due to an increase of $66.7 million in employee-related costs, an increase of $27.0 million in stock-based expenses, an increase of $2.2 million in our development and test data center, an increase of $1.4 million in depreciation and amortization expenses and an increase of $8.6 million in allocated overhead. We increased our research and development headcount by 52 percent since January 31, 2011 in order to improve and extend our service offerings and develop new technologies. Some of the increase in headcount was due to acquired businesses.
Marketing and Sales.
Fiscal Year Ended January 31, | Variance Dollars |
|||||||||||
(In thousands) |
2012 | 2011 | ||||||||||
Marketing and sales |
$ | 1,169,610 | $ | 792,029 | $ | 377,581 | ||||||
Percent of total revenues |
52 | % | 48 | % |
Marketing and sales expenses were $1,169.6 million, or 52 percent of total revenues, during fiscal 2012, compared to $792.0 million, or 48 percent of total revenues, during the same period a year ago, an increase of $377.6 million. The increase in absolute dollars was primarily due to increases of $255.6 million in employee-related costs, $59.3 million in stock-based expenses, $22.5 million in advertising, marketing and event costs, $21.8 million in allocated overhead, $8.2 million in outside subcontractor and other service costs, $3.1 million in depreciation and amortization and the preliminary settlement of the California wage and hour case discussed in Note 8. Our marketing and sales headcount increased by 44 percent since January 31, 2011 as we hired additional sales personnel to focus on adding new customers and increasing penetration within our existing customer base. Some of the increase in headcount was due to acquired businesses.
General and Administrative.
Fiscal Year Ended January 31, | Variance Dollars |
|||||||||||
(In thousands) |
2012 | 2011 | ||||||||||
General and administrative |
$ | 347,781 | $ | 255,913 | $ | 91,868 | ||||||
Percent of total revenues |
15 | % | 15 | % |
General and administrative expenses were $347.8 million, or 15 percent of total revenues, during fiscal 2012, compared to $255.9 million, or 15 percent of total revenues, during the same period a year ago, an increase of $91.9 million. The increase was primarily due to increases of $57.5 million in employee-related costs, $17.3 million in stock-based expenses and $14.3 million in professional and outside service costs. Our general and administrative headcount increased by 46 percent since January 31, 2011 as we added personnel to support our growth.
46
Income (loss) from operations.
Fiscal Year Ended January 31, | Variance Dollars |
|||||||||||
(In thousands) |
2012 | 2011 | ||||||||||
Income (loss) from operations |
$ | (35,085 | ) | $ | 97,497 | $ | (132,582 | ) | ||||
Percent of total revenues |
(2 | )% | 6 | % |
Loss from operations during fiscal 2012 was $35.1 million and included $229.3 million of stock-based expenses and $67.3 million of amortization of purchased intangibles. During the same period a year ago, operating income was $97.5 million and included $120.4 million of stock-based expenses and $19.7 million of amortization of purchased intangibles.
Investment income.
Fiscal Year Ended January 31, | Variance Dollars |
|||||||||||
(In thousands) |
2012 | 2011 | ||||||||||
Investment income |
$ | 23,268 | $ | 37,735 | $ | (14,467 | ) | |||||
Percent of total revenues |
1 | % | 2 | % |
Investment income consists of income on cash and marketable securities balances. Investment income was $23.3 million during fiscal 2012 and was $37.7 million during the same period a year ago. The decrease was primarily due to a reduction in realized gains from sales of marketable securities, the decrease in marketable securities balances and lower interest rates.
Interest expense.
Fiscal Year Ended January 31, | Variance Dollars |
|||||||||||
(In thousands) |
2012 | 2011 | ||||||||||
Interest expense |
$ | (17,045 | ) | $ | (24,909 | ) | $ | 7,864 | ||||
Percent of total revenues |
(1 | )% | (2 | )% |
Interest expense consists of interest on our convertible senior notes and capital leases. Interest expense was $17.0 million, net of interest costs capitalized, during fiscal 2012 and was $24.9 million during the same period a year ago. During fiscal 2012, we capitalized $14.6 million of interest costs related to capital projects, specifically costs related to our real estate holdings, which began during the fourth quarter of fiscal 2011, and our capitalized internal-use software development costs. Capitalized interest during the same period a year ago was $4.0 million.
Other expense.
Fiscal Year Ended January 31, | Variance Dollars |
|||||||||||
(In thousands) |
2012 | 2011 | ||||||||||
Other expense |
$ | (4,455 | ) | $ | (6,025 | ) | $ | 1,570 |
Other expense primarily consists of realized gains and losses resulting from strategic investment activity and foreign currency transaction gains and losses. Other expense decreased primarily due to the net gain of $2.9 million from activity within our portfolio of noncontrolling equity and debt investments in privately-held companies offset by realized and unrealized losses on foreign currency transactions for fiscal 2012 compared to the same period a year ago.
47
Benefit (provision) for income taxes.
Fiscal Year Ended January 31, | Variance Dollars |
|||||||||||
(In thousands) |
2012 | 2011 | ||||||||||
Benefit (provision) for income taxes |
$ | 21,745 | $ | (34,601 | ) | $ | 56,346 | |||||
Effective tax rate |
65 | % | 33 | % |
The benefit for income taxes was $21.7 million during fiscal 2012, compared to an income tax provision of $34.6 million during the same period a year ago.
Our effective tax rate was 65 percent for fiscal 2012 compared to 33 percent for the same period a year ago. The higher tax rate was primarily attributable to an increase in federal and California tax credits and a tax benefit related to the May 2011 acquisition of Radian6. The combined effect of these tax benefits was partially offset by an increase in foreign tax rate differential. Foreign tax expense relative to our fiscal 2012 pre-tax loss was higher as compared to foreign tax expense relative to our fiscal 2011 pre-tax income. The combined effect of these items on a small net loss before income taxes resulted in a comparatively higher fiscal 2012 effective tax rate.
The lower fiscal 2012 state tax rate was primarily attributable to two items. First, California enacted several income tax law changes, which generally benefited California-based companies. The result of this tax law change substantially reduced our state effective tax rate. Second, the company was subject to minimum state taxes, which reduced the state tax benefit. The combined effect of these tax items was an overall small fiscal 2012 state tax benefit. Note that we separately recorded an income tax expense of $2.2 million in fiscal 2011 to re-value the anticipated future tax effects of our California temporary differences related to this tax law change.
We also receive certain tax incentives in Switzerland and Singapore in the form of reduced tax rates. These temporary tax reduction programs will expire in 2016 and 2014 respectively. The Singapore program is eligible for renewal.
The total income tax benefit recognized in the accompanying consolidated statements of operations related to stock-based compensation was $76.0 million for fiscal 2012. See Note 6 Income Taxes to the Notes to the Consolidated Financial Statements for our reconciliation of income taxes at the statutory federal rate to the provision for income taxes.
Fiscal Years Ended January 31, 2011 and 2010
Revenues.
(In thousands) |
Fiscal Year Ended January 31, | Variance | ||||||||||||||
2011 | 2010 | Dollars | Percent | |||||||||||||
Subscription and support |
$ | 1,551,145 | $ | 1,209,472 | $ | 341,673 | 28 | % | ||||||||
Professional services and other |
105,994 | 96,111 | 9,883 | 10 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
$ | 1,657,139 | $ | 1,305,583 | $ | 351,556 | 27 | % | ||||||||
|
|
|
|
|
|
|
|
Total revenues were $1.7 billion for fiscal 2011, compared to $1.3 billion during fiscal 2010, an increase of $351.6 million, or 27 percent. Subscription and support revenues were $1.6 billion, or 94 percent of total revenues, for fiscal 2011, compared to $1.2 billion, or 93 percent of total revenues, during fiscal 2010. The increase in subscription and support revenues was due primarily to new customers, upgrades and additional subscriptions from existing customers and improved renewal rates as compared to fiscal 2010. The price per user per month for our three primary offerings, Professional Edition, Enterprise Edition and Unlimited Edition, in fiscal 2011 has generally remained consistent relative to fiscal 2010. Professional services and other revenues were $106.0 million, or 6 percent of total revenues, for fiscal 2011, compared to $96.1 million, or 7 percent of total revenues, for fiscal 2010. The increase in professional services and other revenues was due primarily to the higher demand for services from an increased number of customers.
48
Revenues in Europe and Asia Pacific accounted for $522.1 million, or 32 percent of total revenues, for fiscal 2011, compared to $381.8 million, or 29 percent of total revenues, during fiscal 2010, an increase of $140.3 million, or 37 percent. The increase in revenues outside of the Americas was the result of the increasing acceptance of our service, and our focus on marketing our service internationally. Additionally, the value of the U.S. dollar relative to foreign currencies contributed to a slight decrease in U.S. dollar revenues outside of the Americas for fiscal 2011 as compared to fiscal 2010. The foreign currency impact had the effect of reducing our aggregate revenues by $7.6 million compared to fiscal 2010.
Cost of Revenues.
Fiscal Year Ended January 31, | Variance Dollars |
|||||||||||
(In thousands) |
2011 | 2010 | ||||||||||
Subscription and support |
$ | 208,243 | $ | 159,172 | $ | 49,071 | ||||||
Professional services and other |
115,570 | 98,753 | 16,817 | |||||||||
|
|
|
|
|
|
|||||||
Total cost of revenues |
$ | 323,813 | $ | 257,925 | $ | 65,888 | ||||||
|
|
|
|
|
|
|||||||
Percent of total revenues |
20 | % | 20 | % |
Cost of revenues was $323.8 million, or 20 percent of total revenues, during fiscal 2011, compared to $257.9 million, or 20 percent of total revenues, during fiscal 2010, an increase of $65.9 million. The increase in absolute dollars was primarily due to an increase of $22.6 million in employee-related costs, an increase of $9.2 million in service delivery costs, primarily due to our efforts in increasing data center capacity, an increase of $16.6 million in depreciation and amortization expenses, an increase of $13.2 million in outside subcontractor and other service costs, and an increase of $3.6 million in allocated overhead, offset by a decrease of $0.4 million in stock based expenses. The cost of professional services and other revenues exceeded the related revenue during fiscal 2011 by $9.6 million as compared to $2.6 million during fiscal 2010, primarily due to an increase in the cost related to professional services headcount.
Research and Development.
Fiscal Year Ended January 31, | Variance Dollars |
|||||||||||
(In thousands) |
2011 | 2010 | ||||||||||
Research and development |
$ | 187,887 | $ | 131,897 | $ | 55,990 | ||||||
Percent of total revenues |
11 | % | 10 | % |
Research and development expenses were $187.9 million, or 11 percent of total revenues, during fiscal 2011, compared to $131.9 million, or 10 percent of total revenues, during fiscal 2010, an increase of $56.0 million. The increase in absolute dollars was due to an increase of $42.0 million in employee-related costs, an increase of $5.8 million in stock-based expenses, and an increase of $5.6 million in allocated overhead. We increased our research and development headcount by 47 percent since January 31, 2010 in order to upgrade and extend our service offerings and develop new technologies. Some of the increase in headcount was due to acquired businesses.
Marketing and Sales.
Fiscal Year Ended January 31, | Variance Dollars |
|||||||||||
(In thousands) |
2011 | 2010 | ||||||||||
Marketing and sales |
$ | 792,029 | $ | 605,199 | $ | 186,830 | ||||||
Percent of total revenues |
48 | % | 46 | % |
49
Marketing and sales expenses were $792.0 million, or 48 percent of total revenues, during fiscal 2011, compared to $605.2 million, or 46 percent of total revenues, during fiscal 2010, an increase of $186.8 million. The increase in absolute dollars was primarily due to increases of $143.1 million in employee-related costs, $16.7 million in stock-based expenses, $12.1 million in advertising costs and marketing and event costs, $1.0 million in depreciation and amortization, and $12.6 million in allocated overhead. Our marketing and sales headcount increased by 34 percent since January 31, 2010 as we hired additional sales personnel to focus on adding new customers and increasing penetration within our existing customer base. Some of the increase in headcount was due to acquired businesses.
General and Administrative.
Fiscal Year Ended January 31, | Variance Dollars |
|||||||||||
(In thousands) |
2011 | 2010 | ||||||||||
General and administrative |
$ | 255,913 | $ | 195,290 | $ | 60,623 | ||||||
Percent of total revenues |
15 | % | 15 | % |
General and administrative expenses were $255.9 million, or 15 percent of total revenues, during fiscal 2011, compared to $195.3 million, or 15 percent of total revenues, during fiscal 2010, an increase of $60.6 million. The increase was primarily due to increases of $46.8 million in employee-related costs, $9.5 million in stock-based expenses, and increases in depreciation and amortization, service delivery costs, and professional and outside service costs. Our general and administrative headcount increased by 30 percent since January 31, 2010 as we added personnel to support our growth.
Income from operations.
Fiscal Year Ended January 31, | Variance Dollars |
|||||||||||
(In thousands) |
2011 | 2010 | ||||||||||
Income from operations |
$ | 97,497 | $ | 115,272 | $ | (17,775 | ) | |||||
Percent of total revenues |
6 | % | 9 | % |
Income from operations during fiscal 2011 was $97.5 million and included $120.4 million of stock-based expenses and $19.7 million of amortization of purchased intangibles. During fiscal 2010, operating income was $115.3 million and included $88.9 million of stock-based expenses and $11.3 million of amortization of purchased intangibles.
Investment income.
Fiscal Year Ended January 31, | Variance Dollars |
|||||||||||
(In thousands) |
2011 | 2010 | ||||||||||
Investment income |
$ | 37,735 | $ | 30,408 | $ | 7,327 | ||||||
Percent of total revenues |
2 | % | 2 | % |
Investment income consists of income on cash and marketable securities balances. Investment income was $37.7 million during fiscal 2011 and was $30.4 million during fiscal 2010. The increase was primarily due to the increase in marketable securities balances resulting from cash generated by operating activities and the proceeds from stock option exercises and the convertible senior notes.
Interest expense.
Fiscal Year Ended January 31, | Variance Dollars |
|||||||||||
(In thousands) |
2011 | 2010 | ||||||||||
Interest expense |
$ | (24,909 | ) | $ | (2,000 | ) | $ | (22,909 | ) | |||
Percent of total revenues |
2 | % | 0 | % |
50
Interest expense consists of interest on our convertible senior notes and capital leases. Interest expense was $24.9 million, net of interest costs capitalized, during fiscal 2011 and was $2.0 million during fiscal 2010. The increase was primarily due to interest expense associated with the January 2010 issuance of $575.0 million of convertible senior notes and capital leases associated with equipment acquired to expand our data center capacity. During fiscal 2011, we capitalized $4.0 million of interest costs related to major capital projects, specifically our campus project and our capitalized internal-use software development costs.
Other expense.
Fiscal Year Ended January 31, | Variance Dollars |
|||||||||||
(In thousands) |
2011 | 2010 | ||||||||||
Other expense |
$ | (6,025 | ) | $ | (1,299 | ) | $ | (4,726 | ) |
Other expense primarily consists of foreign currency transaction gains and losses. Other expense increased due to realized and unrealized gains on foreign currency transactions for fiscal 2011 compared to fiscal 2010.
Provision for income taxes.
Fiscal Year Ended January 31, | Variance Dollars |
|||||||||||
(In thousands) |
2011 | 2010 | ||||||||||
Provision for income taxes |
$ | (34,601 | ) | $ | (57,689 | ) | $ | 23,088 | ||||
Effective tax rate |
33 | % | 41 | % |
The provision for income taxes was $34.6 million during fiscal 2011, compared to $57.7 million during fiscal 2010.
Our effective tax rate decreased to 33 percent for fiscal 2011 compared to 41 percent for fiscal 2010. The decrease was due to a higher proportion of income being generated in countries with lower income tax rates than the U.S statutory tax rate, as well as increased tax credits. The extension of the federal research credit provision was enacted in the Tax Relief Act of 2010. The total income tax benefit recognized in the accompanying consolidated statements of operations related to stock-based compensation was $44.1 million for fiscal 2011. See Note 6 Income Taxes to the Notes to the Consolidated Financial Statements for our reconciliation of income taxes at the statutory federal rate to the provision for income taxes.
In addition, in February 2009, the State of California enacted several income tax law changes which included an election to apply a single sales factor apportionment formula and adoption of a market sourcing approach for service income impacted us beginning in fiscal 2012. As a result, we re-valued the anticipated future tax effects of our California temporary differences including stock-based compensation and purchased intangibles. Accordingly, we recorded an income tax expense of $2.2 million and $2.7 million related to this tax law change during fiscal 2011 and 2010 respectively.
New Accounting Pronouncements
In December 2010, the FASB issued Accounting Standards Update No. 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations (Topic 805)Business Combinations (ASU 2010-29), to improve consistency in how the pro forma disclosures are calculated. Additionally, ASU 2010-29 enhances the disclosure requirements and requires description of the nature and amount of any material, nonrecurring pro forma adjustments directly attributable to a business combination. ASU 2010-29 is effective for us in fiscal 2013 and should be applied prospectively to business combinations for which the acquisition date is after the effective date. We do not believe the impact of the pending adoption of ASU 2010-29 will have a significant effect on our consolidated financial statements.
51
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220)Presentation of Comprehensive Income (ASU 2011-05), to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. ASU 2011-05 is effective for us in fiscal 2013 and should be applied retrospectively. We do not believe the impact of the pending adoption of ASU 2011-05 will have a significant effect on the consolidated financial statements.
Liquidity and Capital Resources
At January 31, 2012, our principal sources of liquidity were cash, cash equivalents and marketable securities totaling $1.4 billion and accounts receivable of $683.7 million.
Net cash provided by operating activities was $591.5 million during fiscal 2012 and $459.1 million during the same period a year ago. Cash provided by operating activities has historically been affected by: the amount of net income (loss); sales of subscriptions, support and professional services; changes in working capital accounts, particularly increases and seasonality in accounts receivable and deferred revenue as described above, the timing of commission and bonus payments, and the timing of collections from large enterprise customers; add-backs of non-cash expense items such as depreciation and amortization, amortization of debt discount and the expense associated with stock-based awards.
Net cash used in investing activities was $489.7 million during fiscal 2012 and $1.1 billion during the same period a year ago. The net cash used in investing activities during fiscal 2012 primarily related to the purchase of Model Metrics in December 2011, the purchase of Assistly in September 2011, the purchase of Radian6 in May 2011, the purchase of Manymoon in February 2011, investment of cash balances, capital expenditures and strategic investments offset by proceeds from sales and maturities of marketable securities.
Net cash provided by financing activities was $75.9 million during fiscal 2012 and $14.1 million during the same period a year ago. Net cash provided by financing activities during fiscal 2012 consisted primarily of $116.6 million of proceeds from equity plans and $6.0 million of excess tax benefits from employee stock plans, offset by $30.5 million of principal payments on capital leases and $16.2 million of contingent consideration payments.
In January 2010, we issued $575.0 million of 0.75% convertible senior notes due January 15, 2015 (the Notes) and concurrently entered into convertible notes hedges (the Note Hedges) and separate warrant transactions (the Warrants). The Notes will mature on January 15, 2015, unless earlier converted.
For 20 trading days during the 30 consecutive trading days ended October 31, 2011, our common stock traded at a price exceeding 130% of the conversion price of $85.36 per share applicable to the Notes. Accordingly, the Notes were convertible at the holders option for the quarter ending January 31, 2012. The Notes are classified as a current liability on our consolidated balance sheet so long as the Notes are convertible. Upon conversion of any Notes, we will deliver cash up to the principal amount of the Notes and, with respect to any excess conversion value greater than the principal amount of the Notes, shares of our common stock, cash, or a combination of both. For 20 trading days during the 30 consecutive trading days ended January 31, 2012, our common stock did not exceed 130% of the conversion price of $85.36 per share applicable to the Notes. Accordingly, the Notes will not be convertible at the holders option for the quarter ending April 30, 2012 and will be reclassified as a noncurrent liability on our consolidated balance sheet so long as the Notes are not convertible.
Our cash, cash equivalents and marketable securities are comprised primarily of corporate notes and obligations, U.S. agency obligations, U.S. treasury securities, mortgage backed securities, collateralized mortgage obligations, time deposits, money market mutual funds, government obligations and municipal securities.
52
As of January 31, 2012, we have a total of $17.5 million in letters of credit outstanding in favor of certain landlords for office space. To date, no amounts have been drawn against the letters of credit, which renew annually and mature at various dates through April 2030.
We do not have any special purpose entities, and other than operating leases for office space and computer equipment, we do not engage in off-balance sheet financing arrangements. Additionally, we currently do not have a bank line of credit.
Our principal commitments consist of obligations under leases for office space and co-location facilities for data center capacity and our development and test data center, and computer equipment and furniture and fixtures. At January 31, 2012, the future non-cancelable minimum payments under these commitments were as follows:
(In thousands) Contractual Obligations |
Payments Due by Period | |||||||||||||||||||
Total | Less than 1 Year |
1-3 Years | 3-5 Years | More than 5 Years |
||||||||||||||||
Capital lease obligations |
$ | 60,997 | $ | 27,585 | $ | 30,125 | $ | 3,287 | $ | 0 | ||||||||||
Operating lease obligations: |
||||||||||||||||||||
Facilities space |
607,738 | 91,625 | 148,080 | 117,718 | 250,315 | |||||||||||||||
Computer equipment and furniture and fixtures |
60,082 | 32,622 | 27,460 | 0 | 0 | |||||||||||||||
Convertible Senior Notes, including interest |
587,938 | 4,313 | 583,625 | 0 | 0 | |||||||||||||||
Contractual commitments |
200 | 100 | 100 | 0 | 0 |
Our lease agreements provide us with the option to renew. Our future operating lease obligations would change if we exercised these options and if we entered into additional operating lease agreements as we expand our operations.
Purchase orders are not included in the table above. Our purchase orders represent authorizations to purchase rather than binding agreements. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum services to be used; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.
In January 2012, we entered into an office lease agreement to lease approximately 400,000 rentable square feet at 50 Fremont Street, San Francisco, CA. The cost of the lease is approximately $209.0 million over the 18-year term of the lease. We will take possession of the premises in phases beginning April 1, 2012. Our commitment is included in the table above.
On June 7, 2011, we entered into a preliminary settlement agreement with respect to a California state wage and hour lawsuit that had been filed against us early in 2011 in the Superior Court of California, County of San Francisco. The settlement agreement is subject to approval of the court, which is expected to rule by mid 2012. Our current estimate of the expense charge for the settlement is approximately $0.04 per diluted share. This charge is reflected in our financial results for fiscal 2012.
We anticipate making a tax payment of approximately $40.0 million during the first quarter of fiscal 2013 as a result of the Radian6 transaction. Besides the aforementioned Radian6 tax payment, the timing of tax settlements are not included in the table above. We are unable to make a reasonable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax settlements. For further information, see Note 6 to the notes to consolidated financial statements.
We believe our existing cash, cash equivalents and short-term marketable securities and cash provided by operating activities will be sufficient to meet our working capital and capital expenditure needs over the next 12 months.
53
During fiscal 2013, we may enter into arrangements to acquire or invest in complementary businesses or joint ventures, services and technologies, and intellectual property rights. We may be required to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.
Non-GAAP Financial Measures
Regulation S-K Item 10(e), Use of Non-GAAP Financial Measures in Commission Filings, defines and prescribes the conditions for use of non-GAAP financial information. Our measures of non-GAAP gross profit, non-GAAP operating profit, non-GAAP net income and non-GAAP earnings per share each meet the definition of a non-GAAP financial measure.
Non-GAAP gross profit, Non-GAAP operating profit and Non-GAAP net income
We use the non-GAAP measures of non-GAAP gross profit, non-GAAP operating profit and non-GAAP net income to provide an additional view of operational performance by excluding non-cash expenses that are not directly related to performance in any particular period. We use these non-GAAP measures when planning, monitoring, and evaluating our performance. We believe that these non-GAAP measures reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business, as they exclude certain expenses. These certain expenses are excluded because the decisions which gave rise to these expenses are not made to increase revenue in a particular period, but are made for our long-term benefit over multiple periods and we are not able to change or affect these items in any particular period.
We define non-GAAP net income as our total net income excluding the following components, which we believe are not reflective of our ongoing operational expenses. In each case, for the reasons set forth below, we believe that excluding the component provides useful information to investors and others in understanding and evaluating the impact of certain non-cash items to our operating results and future prospects in the same manner as us, in comparing financial results across accounting periods and to those of peer companies and to better understand the impact of these non-cash items on our gross margin and operating performance.
| Stock-Based Expenses. The companys compensation strategy includes the use of stock-based compensation to attract and retain employees and executives. It is principally aimed at aligning their interests with those of our stockholders and at long-term employee retention, rather than to motivate or reward operational performance for any particular period. Thus, stock-based compensation expense varies for reasons that are generally unrelated to operational decisions and performance in any particular period. |
| Amortization of Purchased Intangibles. The company views amortization of acquisition-related intangible assets, such as the amortization of the cost associated with an acquired companys research and development efforts, trade names, customer lists and customer relationships, as items arising from pre-acquisition activities determined at the time of an acquisition. While it is continually viewed for impairment, amortization of the cost of purchased intangibles is a static expense, one that is not typically affected by operations during any particular period. |
| Amortization of Debt Discount. Under GAAP, certain convertible debt instruments that may be settled in cash (or other assets) on conversion are required to be separately accounted for as liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuers non-convertible debt borrowing rate. Accordingly, for GAAP purposes we are required to recognize imputed interest expense on the companys $575 million of convertible subordinated notes that were issued in a private placement in January 2010. The imputed interest rate is approximately 5.9%, while the coupon interest rate is 0.75%. The difference between the imputed interest expense and the coupon interest expense, net of the interest amount capitalized, is excluded from managements assessment of the companys operating performance because management believes that this non-cash expense is not indicative of ongoing operating performance. Management believes that the exclusion of the non-cash interest expense provides investors an enhanced view of the companys operational performance. |
54
| Income Tax Effects. The companys non-GAAP effective tax rate excludes the tax effect of the expense items described above. |
We define non-GAAP gross profit as our total revenues less cost of revenues, as reported on our consolidated statement of operations, excluding the portions of stock-based expenses and amortization of purchased intangibles, as described above, that are included in cost of revenues.
We define non-GAAP operating profit as our gross profit less operating expenses, as reported on our consolidated statement of operations, excluding the portions of stock-based expenses and amortization of purchased intangibles, as described above, that are included in operating expenses.
Non-GAAP earnings per share
Management uses the non-GAAP earnings per share to provide an additional view of performance by excluding expenses that are not directly related to performance in any particular period in the earnings per share calculation.
We define non-GAAP earnings per share as our non-GAAP net income, which excludes the above components, which we believe are not reflective of our ongoing operational expenses, divided by basic or diluted shares outstanding.
Limitations on the use of Non-GAAP financial measures
A limitation of our non-GAAP financial measures of non-GAAP gross profit, non-GAAP operating profit, non-GAAP net income and non-GAAP earnings per share is that they do not have uniform definitions. Our definitions will likely differ from the definitions used by other companies, including peer companies, and therefore comparability may be limited. Thus, our non-GAAP measures of non-GAAP gross profit, non-GAAP operating profit, non-GAAP net income and non-GAAP earnings per share should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP. Additionally, in the case of stock-based expense, if we did not pay a portion of compensation in the form of stock-based expense, the cash salary expense included in costs of revenues and operating expenses would be higher which would affect our cash position.
We compensate for these limitations by reconciling non-GAAP gross profit, non-GAAP operating profit, non-GAAP net income and non-GAAP earnings per share to the most comparable GAAP financial measure. Management encourages investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view our non-GAAP financial measures in conjunction with the most comparable GAAP financial measures.
Our reconciliation of the non-GAAP financial measure of gross profit, non-GAAP operating profit, net income and earnings per share to the most comparable GAAP measure, gross profit, income (loss) from operations, net income (loss) attributable to salesforce.com and Diluted earnings (loss) per share for the years ended January 31, 2012, 2011 and 2010 is as follows (in thousands):
For the Year Ended January 31, | ||||||||||||
Non-GAAP gross profit |
2012 | 2011 | 2010 | |||||||||
GAAP gross profit |
$ | 1,777,653 | $ | 1,333,326 | $ | 1,047,658 | ||||||
Plus: |
||||||||||||
Amortization of purchased intangibles |
60,069 | 15,459 | 8,010 | |||||||||
Stock-based expenses |
17,451 | 12,158 | 12,570 | |||||||||
|
|
|
|
|
|
|||||||
Non-GAAP gross profit |
$ | 1,855,173 | $ | 1,360,943 | $ | 1,068,238 | ||||||
|
|
|
|
|
|
55
For the Year Ended January 31, | ||||||||||||
Non-GAAP operating profit |
2012 | 2011 | 2010 | |||||||||
GAAP income (loss) from operations |
$ | (35,085 | ) | $ | 97,497 | $ | 115,272 | |||||
Plus: |
||||||||||||
Amortization of purchased intangibles |
67,319 | 19,668 | 11,251 | |||||||||
Stock-based expenses |
229,258 | 120,429 | 88,892 | |||||||||
|
|
|
|
|
|
|||||||
Non-GAAP operating profit |
$ | 261,492 | $ | 237,594 | $ | 215,415 | ||||||
|
|
|
|
|
|
For the Year Ended January 31, | ||||||||||||
Non-GAAP net income attributable to salesforce.com |
2012 | 2011 | 2010 | |||||||||
GAAP net income (loss) attributable to salesforce.com |
$ | (11,572 | ) | $ | 64,474 | $ | 80,719 | |||||
Plus: |
||||||||||||
Amortization of purchased intangibles |
67,319 | 19,668 | $ | 11,251 | ||||||||
Stock-based expenses |
229,258 | 120,429 | 88,892 | |||||||||
Amortization of debt discount, net |
12,335 | 19,079 | 728 | |||||||||
Less: |
||||||||||||
Income tax effect of non-GAAP items |
(103,730 | ) | (57,544 | ) | (34,582 | ) | ||||||
|
|
|
|
|
|
|||||||
Non-GAAP net income attributable to salesforce.com |
$ | 193,610 | $ | 166,106 | $ | 147,008 | ||||||
|
|
|
|
|
|
For the Year Ended January 31, | ||||||||||||
Non-GAAP diluted earnings per share |
2012(a) | 2011 | 2010 | |||||||||
GAAP diluted earnings (loss) per share |
$ | (0.09 | ) | $ | 0.47 | $ | 0.63 | |||||
Plus: |
||||||||||||
Amortization of purchased intangibles |
0.47 | 0.14 | 0.09 | |||||||||
Stock-based expenses |
1.62 | 0.88 | 0.69 | |||||||||
Amortization of debt discount, net |
0.09 | 0.14 | 0.00 | |||||||||
Less: |
||||||||||||
Income tax effect of non-GAAP items |
(0.73 | ) | (0.41 | ) | (0.26 | ) | ||||||
|
|
|
|
|
|
|||||||
Non-GAAP diluted earnings per share attributable to salesforce.com |
$ | 1.36 | $ | 1.22 | $ | 1.15 | ||||||
|
|
|
|
|
|
|||||||
Shares used in computing diluted net income per share |
142,295 | 136,598 | 128,114 |
(a) | Reported GAAP loss per share was calculated using the basic share count. Non-GAAP diluted earnings per share was calculated using the diluted share count. |
The effects of dilutive securities were not included in the GAAP calculation of diluted earnings/loss per share for the year ended January 31, 2012 because we had a net loss for the period and the effect would have been anti-dilutive. The following table reflects the effect of the dilutive securities on the basic sharecount used in the GAAP earnings/loss per share calculation to derive the sharecount used for the non-GAAP diluted earnings per share:
Fiscal Year Ended January 31, | ||||||||||||
Supplemental Diluted Sharecount Information (in thousands): |
2012 | 2011 | 2010 | |||||||||
Weighted-average shares outstanding for GAAP basic earnings per share |
135,302 | 130,222 | 124,462 | |||||||||
Effect of dilutive securities: |
||||||||||||
Convertible senior notes |
2,263 | 1,561 | 0 | |||||||||
Warrants associated with the convertible senior note hedges |
553 | 0 | 0 | |||||||||
Employee stock awards |
4,177 | 4,815 | 3,652 | |||||||||
|
|
|
|
|
|
|||||||
Adjusted weighted-average shares outstanding and assumed conversions for Non-GAAP diluted earnings per share |
142,295 | 136,598 | 128,114 | |||||||||
|
|
|
|
|
|
56
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Foreign currency exchange risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, British Pound Sterling and Japanese Yen. We seek to minimize the impact of certain foreign currency fluctuations by hedging certain balance sheet exposures with foreign currency forward contracts. Any gain or loss from settling these contracts is offset by the loss or gain derived from the underlying balance sheet exposures. In accordance with our policy, the hedging contracts we enter into have maturities of less than three months. Additionally, by policy, we do not enter into any hedging contracts for trading or speculative purposes.
Interest rate sensitivity
We had cash, cash equivalents and marketable securities totaling $1.4 billion at January 31, 2012. This amount was invested primarily in money market funds, time deposits, corporate notes and bonds, government securities and other debt securities with credit ratings of at least single A or better. The cash, cash equivalents and short-term marketable securities are held for working capital purposes. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes.
Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However because we classify our debt securities as available for sale, no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary. Our fixed-income portfolio is subject to interest rate risk.
An immediate increase or decrease in interest rates of 100-basis points at January 31, 2012 could result in a $12.1 million market value reduction or increase of the same amount. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur. Fluctuations in the value of our investment securities caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive income, and are realized only if we sell the underlying securities.
At January 31, 2011, we had cash, cash equivalents and marketable securities totaling $1.4 billion. The fixed-income portfolio was also subject to interest rate risk. Changes in interest rates of 100-basis points would have resulted in market value changes of $27.7 million.
Market Risk and Market Interest Risk
In January 2010, we issued at par value $575.0 million of 0.75% convertible senior notes due 2015 (the Notes). Holders may convert their Notes prior to maturity upon the occurrence of certain circumstances. Upon conversion, we would pay the holder an amount of cash equal to the principal amount of the Notes. Amounts in excess of the principal amount, if any, may be paid in cash or stock at our option. Concurrent with the issuance of the Notes, we entered into separate note hedging transactions and the sale of warrants. These separate transactions were completed to reduce the potential economic dilution from the conversion of the Notes.
For the three months ended January 31, 2012 the Notes were convertible at the option of the noteholder. For 20 trading days during the 30 consecutive trading days ended January 31, 2012, our common stock traded did not exceed 130% of the conversion price of $85.36 per share applicable to the Notes. Accordingly, the Notes will not be convertible at the holders option for the quarter ending April 30, 2012 and will be reclassified as a noncurrent liability on our consolidated balance sheet so long as the Notes are not convertible.
57
The Notes have a fixed annual interest rate of 0.75% and therefore, we do not have economic interest rate exposure on the Notes. However, the value of the Notes are exposed to interest rate risk. Generally, the fair market value of our fixed interest rate Notes will increase as interest rates fall and decrease as interest rates rise. In addition, the fair value of our Notes is affected by our stock price. The carrying value of our Notes was $496.1 million as of January 31, 2012. This represents the liability component of the $575.0 million principal balance as of January 31, 2012. The total estimated fair value of our Notes at January 31, 2012 was $869.5 million and the fair value was determined based on the closing trading price per $100 of the Notes as of the last day of trading for the fourth quarter of fiscal 2012, which was $151.25.
We have an investment portfolio that includes strategic investments in public and privately-held companies, many of which are in the development stage. When our ownership interests are less than 20 percent and we do not have the ability to exert significant influence, we account for investments in non-marketable equity and debt securities of the privately-held companies using the cost method of accounting. Otherwise, we account for the investments using the equity method of accounting. As of January 31, 2012 and 2011 the fair value of these investments was $48.3 million and $21.1 million, respectively.
58
ITEM 8. | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements are filed as part of this Annual Report on Form 10-K:
Page No. | ||||
60 | ||||
62 | ||||
63 | ||||
64 | ||||
65 | ||||
66 |
59
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of salesforce.com, inc.
We have audited the accompanying consolidated balance sheets of salesforce.com, inc. as of January 31, 2012 and 2011, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended January 31, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15(c). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of salesforce.com, inc. at January 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), salesforce.com, incs internal control over financial reporting as of January 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2012 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
San Jose, California
March 9, 2012
60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of salesforce.com, inc.
We have audited salesforce.com, inc.s internal control over financial reporting as of January 31, 2012, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Salesforce.com, inc.s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, salesforce.com, inc. maintained, in all material respects, effective internal control over financial reporting as of January 31, 2012, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of salesforce.com, inc as of January 31, 2012 and 2011, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended January 31, 2012 of salesforce.com, inc. and our report dated March 9, 2012 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
San Jose, California
March 9, 2012
61
Consolidated Balance Sheets
(in thousands, except share and per share data)
January 31, 2012 |
January 31, 2011 |
|||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 607,284 | $ | 424,292 | ||||
Short-term marketable securities |
170,582 | 72,678 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $1,273 and $1,711 at January 31, 2012 and 2011, respectively |
683,745 | 426,943 | ||||||
Deferred commissions |
98,471 | 67,774 | ||||||
Deferred income taxes |
31,821 | 27,516 | ||||||
Prepaid expenses and other current assets |
80,319 | 55,721 | ||||||
|
|
|
|
|||||
Total current assets |
1,672,222 | 1,074,924 | ||||||
Marketable securities, noncurrent |
669,308 | 910,587 | ||||||
Property and equipment, net |
527,946 | 387,174 | ||||||
Deferred commissions, noncurrent |
78,149 | 48,842 | ||||||
Deferred income taxes, noncurrent |
87,587 | 41,199 | ||||||
Capitalized software, net |
188,412 | 127,987 | ||||||
Goodwill |
785,381 | 396,081 | ||||||
Other assets, net |
155,149 | 104,371 | ||||||
|
|
|
|
|||||
Total assets |
$ | 4,164,154 | $ | 3,091,165 | ||||
|
|
|
|
|||||
Liabilities, temporary equity and stockholders equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 33,258 | $ | 18,106 | ||||
Accrued expenses and other current liabilities |
502,442 | 345,121 | ||||||
Deferred revenue |
1,291,622 | 913,239 | ||||||
Convertible senior notes, net |
496,149 | 0 | ||||||
|
|
|
|
|||||
Total current liabilities |
2,323,471 | 1,276,466 | ||||||
Convertible senior notes, net |
0 | 472,538 | ||||||
Income taxes payable, noncurrent |
37,258 | 18,481 | ||||||
Long-term lease liabilities and other |
48,651 | 25,487 | ||||||
Deferred revenue, noncurrent |
88,673 | 21,702 | ||||||
|
|
|
|
|||||
Total liabilities |
2,498,053 | 1,814,674 | ||||||
|
|
|
|
|||||
Temporary equity |
78,741 | 0 | ||||||
|
|
|
|
|||||
Commitments and contingencies (Notes 7 and 8) |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.001 par value; 5,000,000 shares authorized and none issued and outstanding |
0 | 0 | ||||||
Common stock, $0.001 par value; 400,000,000 shares authorized, 137,036,541 and 132,921,147 issued and outstanding at January 31, 2012 and 2011, respectively |
137 | 133 | ||||||
Additional paid-in capital |
1,415,077 | 1,098,604 | ||||||
Accumulated other comprehensive income |
12,683 | 6,719 | ||||||
Retained earnings |
159,463 | 171,035 | ||||||
|
|
|
|
|||||
Total stockholders equity |
1,587,360 | 1,276,491 | ||||||
|
|
|
|
|||||
Total liabilities, temporary equity and stockholders equity |
$ | 4,164,154 | $ | 3,091,165 | ||||
|
|
|
|
See accompanying Notes.
62
Consolidated Statements of Operations
(in thousands, except per share data)
Fiscal Year Ended January 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Revenues: |
||||||||||||
Subscription and support |
$ | 2,126,234 | $ | 1,551,145 | $ | 1,209,472 | ||||||
Professional services and other |
140,305 | 105,994 | 96,111 | |||||||||
|
|
|
|
|
|
|||||||
Total revenues |
2,266,539 | 1,657,139 | 1,305,583 | |||||||||
Cost of revenues (1)(2): |
||||||||||||
Subscription and support |
360,758 | 208,243 | 159,172 | |||||||||
Professional services and other |
128,128 | 115,570 | 98,753 | |||||||||
|
|
|
|
|
|
|||||||
Total cost of revenues |
488,886 | 323,813 | 257,925 | |||||||||
Gross profit |
1,777,653 | 1,333,326 | 1,047,658 | |||||||||
Operating expenses (1)(2): |
||||||||||||
Research and development |
295,347 | 187,887 | 131,897 | |||||||||
Marketing and sales |
1,169,610 | 792,029 | 605,199 | |||||||||
General and administrative |
347,781 | 255,913 | 195,290 | |||||||||
|
|
|
|
|
|
|||||||
Total operating expenses |
1,812,738 | 1,235,829 | 932,386 | |||||||||
Income (loss) from operations |
(35,085 | ) | 97,497 | 115,272 | ||||||||
Investment income |
23,268 | 37,735 | 30,408 | |||||||||
Interest expense |
(17,045 | ) | (24,909 | ) | (2,000 | ) | ||||||
Other expense |
(4,455 | ) | (6,025 | ) | (1,299 | ) | ||||||
|
|
|
|
|
|
|||||||
Income (loss) before benefit (provision) for income taxes and noncontrolling interest |
(33,317 | ) | 104,298 | 142,381 | ||||||||
Benefit (provision) for income taxes |
21,745 | (34,601 | ) | (57,689 | ) | |||||||
|
|
|
|
|
|
|||||||
Consolidated net income (loss) |
(11,572 | ) | 69,697 | 84,692 | ||||||||
Less: Net income attributable to noncontrolling interest |
0 | (5,223 | ) | (3,973 | ) | |||||||
|
|
|
|
|
|
|||||||
Net income (loss) attributable to salesforce.com |
$ | (11,572 | ) | $ | 64,474 | $ | 80,719 | |||||
|
|
|
|
|
|
|||||||
Earnings per sharebasic and diluted: |
||||||||||||
Basic net income (loss) per share attributable to salesforce.com common shareholders |
$ | (0.09 | ) | $ | 0.50 | $ | 0.65 | |||||
Diluted net income (loss) per share attributable to salesforce.com common shareholders |
(0.09 | ) | 0.47 | 0.63 | ||||||||
Shares used in computing basic net income (loss) per share |
135,302 | 130,222 | 124,462 | |||||||||
Shares used in computing diluted net income (loss) per share |
135,302 | 136,598 | 128,114 |
(1) | Amounts include amortization of purchased intangibles from business combinations, as follows: |
Fiscal Year Ended January 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Cost of revenues |
$ | 60,069 | $ | 15,459 | $ | 8,010 | ||||||
Marketing and sales |
7,250 | 4,209 | 3,241 |
(2) | Amounts include stock-based expenses, as follows: |
Fiscal Year Ended January 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Cost of revenues |
$ | 17,451 | $ | 12,158 | $ | 12,570 | ||||||
Research and development |
45,894 | 18,897 | 13,129 | |||||||||
Marketing and sales |
115,730 | 56,451 | 39,722 | |||||||||
General and administrative |
50,183 | 32,923 | 23,471 |
See accompanying Notes.
63
Consolidated Statements of Stockholders Equity
(in thousands, except share data)
Common Stock |
Additional Paid-in Capital |
Accumulated Other Comprehensive Income/(Loss) |
Retained Earnings |
Total Stockholders Equity Controlling Interest |
Total Stockholders Equity Noncontrolling Interest |
Total Stockholders Equity |
||||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||||
Balances at January 31, 2009 |
122,850,062 | $ | 123 | $ | 648,724 | $ | (2,905 | ) | $ | 25,842 | $ | 671,784 | $ | 10,703 | $ | 682,487 | ||||||||||||||||
Exercise of stock options and stock grants to board members for board services |
3,472,826 | 4 | 96,153 | 0 | 0 | 96,157 | 0 | 96,157 | ||||||||||||||||||||||||
Vested restricted stock units converted to shares |
829,561 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Tax benefits from employee stock plans |
0 | 0 | 49,478 | 0 | 0 | 49,478 | 0 | 49,478 | ||||||||||||||||||||||||
Stock-based expenses |
0 | 0 | 86,570 | 0 | 0 | 86,570 | 0 | 86,570 | ||||||||||||||||||||||||
Equity component of the convertible notes issuance, net. |
0 | 0 | 124,836 | 0 | 0 | 124,836 | 0 | 124,836 | ||||||||||||||||||||||||
Purchase of convertible note hedges |
0 | 0 | (126,500 | ) | 0 | 0 | (126,500 | ) | 0 | (126,500 | ) | |||||||||||||||||||||
Sale of warrants |
0 | 0 | 59,283 | 0 | 0 | 59,283 | 0 | 59,283 | ||||||||||||||||||||||||
Noncontrolling interest |
0 | 0 | 0 | 0 | 0 | 0 | 2,161 | 2,161 | ||||||||||||||||||||||||
Components of comprehensive income, net of tax: |
||||||||||||||||||||||||||||||||
Foreign currency translation adjustment and other |
0 | 0 | 0 | (2,820 | ) | 0 | (2,820 | ) | 0 | (2,820 | ) | |||||||||||||||||||||
Unrealized gain on marketable securities and cash equivalents |
0 | 0 | 0 | 4,295 | 0 | 4,295 | 0 | 4,295 | ||||||||||||||||||||||||
Net income attributable to salesforce.com |
0 | 0 | 0 | 0 | 80,719 | 80,719 | 0 | 80,719 | ||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||
Total comprehensive income, year ended January 31, 2010 |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 82,194 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balances at January 31, 2010 |
127,152,449 | $ | 127 | $ | 938,544 | $ | (1,430 | ) | $ | 106,561 | $ | 1,043,802 | $ | 12,864 | $ | 1,056,666 | ||||||||||||||||
Exercise of stock options and stock grants to board members for board services |
4,697,518 | 5 | 165,494 | 0 | 0 | 165,499 | 0 | 165,499 | ||||||||||||||||||||||||
Vested restricted stock units converted to shares |
1,071,180 | 1 | 0 | 0 | 0 | 1 | 0 | 1 | ||||||||||||||||||||||||
Tax benefits from employee stock plans |
0 | 0 | 36,069 | 0 | 0 | 36,069 | 0 | 36,069 | ||||||||||||||||||||||||
Stock-based expenses |
0 | 0 | 115,139 | 0 | 0 | 115,139 | 0 | 115,139 | ||||||||||||||||||||||||
Purchase of subsidiary stock, net |
0 | 0 | (156,187 | ) | 0 | 0 | (156,187 | ) | 0 | (156,187 | ) | |||||||||||||||||||||
Other |
0 | 0 | (455 | ) | 0 | 0 | (455 | ) | 0 | (455 | ) | |||||||||||||||||||||
Noncontrolling interest |
0 | 0 | 0 | 0 | 0 | 0 | (12,864 | ) | (12,864 | ) | ||||||||||||||||||||||
Components of comprehensive income, net of tax: |
||||||||||||||||||||||||||||||||
Foreign currency translation adjustment and other |
0 | 0 | 0 | 5,709 | 0 | 5,709 | 0 | 5,709 | ||||||||||||||||||||||||
Unrealized gain on marketable securities and cash equivalents and publicly traded strategic investments |
0 | 0 | 0 | 2,440 | 0 | 2,440 | 0 | 2,440 | ||||||||||||||||||||||||
Net income attributable to salesforce.com |
0 | 0 | 0 | 0 | 64,474 | 64,474 | 0 | 64,474 | ||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||
Total comprehensive income, year ended January 31, 2011 |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 72,623 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balances at January 31, 2011 |
132,921,147 | $ | 133 | $ | 1,098,604 | $ | 6,719 | $ | 171,035 | $ | 1,276,491 | $ | 0 | $ | 1,276,491 | |||||||||||||||||
Exercise of stock options and stock grants to board members for board services |
2,517,431 | 3 | 111,779 | 0 | 0 | 111,782 | 0 | 111,782 | ||||||||||||||||||||||||
Vested restricted stock units converted to shares |
1,075,001 | 1 | 0 | 0 | 0 | 1 | 0 | 1 | ||||||||||||||||||||||||
Shares issued related to business combinations |
522,962 | 0 | 56,612 | 56,612 | 56,612 | |||||||||||||||||||||||||||
Tax benefits from employee stock plans |
0 | 0 | 1,611 | 0 | 0 | 1,611 | 0 | 1,611 | ||||||||||||||||||||||||
Stock-based expenses |
0 | 0 | 225,212 | 0 | 0 | 225,212 | 0 | 225,212 | ||||||||||||||||||||||||
Temporary equity reclassification |
0 | 0 | (78,741 | ) | 0 | 0 | (78,741 | ) | 0 | (78,741 | ) | |||||||||||||||||||||
Components of comprehensive loss, net of tax: |
||||||||||||||||||||||||||||||||
Foreign currency translation adjustment and other |
0 | 0 | 0 | 9,512 | 0 | 9,512 | 0 | 9,512 | ||||||||||||||||||||||||
Unrealized loss on marketable securities and cash equivalents and publicly traded strategic investments |
0 | 0 | 0 | (3,548 | ) | 0 | (3,548 | ) | 0 | (3,548 | ) | |||||||||||||||||||||
Net loss |
0 | 0 | 0 | 0 | (11,572 | ) | (11,572 | ) | 0 | (11,572 | ) | |||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||
Total comprehensive loss, year ended January 31, 2012 |
0 | 0 | 0 | 0 | 0 | 0 | 0 | (5,608 | ) | |||||||||||||||||||||||
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|
|||||||||||||||||
Balances at January 31, 2012 |
137,036,541 | $ | 137 | $ | 1,415,077 | $ | 12,683 | $ | 159,463 | $ | 1,587,360 | $ | 0 | $ | 1,587,360 | |||||||||||||||||
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|
|
|
|
See accompanying Notes.
64
Consolidated Statements of Cash Flows
(in thousands)
Fiscal Year Ended January 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Operating activities: |
||||||||||||
Consolidated net income (loss) |
$ | (11,572 | ) | $ | 69,697 | $ | 84,692 | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
157,286 | 75,746 | 53,177 | |||||||||
Amortization of debt discount and transaction costs |
10,347 | 19,621 | 728 | |||||||||
Amortization of deferred commissions |
107,195 | 80,159 | 63,891 | |||||||||
Expenses related to stock-based awards |
229,258 | 120,429 | 88,892 | |||||||||
Excess tax benefits from employee stock plans |
(6,018 | ) | (35,991 | ) | (51,539 | ) | ||||||
Changes in assets and liabilities: |
||||||||||||
Accounts receivable, net |
(244,947 | ) | (102,507 | ) | (54,522 | ) | ||||||
Deferred commissions |
(167,199 | ) | (121,247 | ) | (82,336 | ) | ||||||
Prepaid expenses and other current assets |
(10,736 | ) | 2,001 | (3,899 | ) | |||||||
Other assets |
2,883 | (9,770 | ) | (1,405 | ) | |||||||
Accounts payable |
12,644 | 1,246 | (1,588 | ) | ||||||||
Accrued expenses and other current liabilities |
67,692 | 132,004 | 64,498 | |||||||||
Deferred revenue |
444,674 | 227,693 | 110,322 | |||||||||
|
|
|
|
|
|
|||||||
Net cash provided by operating activities |
591,507 | 459,081 | 270,911 | |||||||||
|
|
|
|
|
|
|||||||
Investing activities: |
||||||||||||
Business combinations, net of cash acquired |
(422,699 | ) | (403,331 | ) | (11,999 | ) | ||||||
Land activity and building improvements |
(19,655 | ) | (277,944 | ) | 0 | |||||||
Strategic investments |
(37,370 | ) | (20,105 | ) | (4,400 | ) | ||||||
Purchases of marketable securities |
(623,231 | ) | (1,682,549 | ) | (1,317,952 | ) | ||||||
Sales of marketable securities |
724,564 | 1,197,492 | 874,573 | |||||||||
Maturities of marketable securities |
40,346 | 214,770 | 130,663 | |||||||||
Capital expenditures |
(151,645 | ) | (90,887 | ) | (49,501 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash used in investing activities |
(489,690 | ) | (1,062,554 | ) | (378,616 | ) | ||||||
|
|
|
|
|
|
|||||||
Financing activities: |
||||||||||||
Proceeds from borrowings on convertible debt |
0 | 0 | 567,094 | |||||||||
Proceeds from issuance of warrants |
0 | 0 | 59,283 | |||||||||