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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended April 30, 2018
OR
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-32224
 
 
salesforce.com, inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
94-3320693
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
The Landmark @ One Market, Suite 300
San Francisco, California 94105
(Address of principal executive offices)
Telephone Number (415) 901-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes  x   No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x   No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer
¨
 
 
 
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨   No  x
As of April 30, 2018, there were approximately 733.9 million shares of the Registrant’s Common Stock outstanding.


Table of Contents


INDEX
 
 
 
Page No.
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.



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PART I. FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS
salesforce.com, inc.
Condensed Consolidated Balance Sheets
(in millions)
(unaudited) 
 
April 30,
2018
 
January 31, 2018 (as adjusted)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
5,922

 
$
2,543

Marketable securities
1,237

 
1,978

Accounts receivable
1,763

 
3,921

Costs capitalized to obtain revenue contracts, net
667

 
671

Prepaid expenses and other current assets
562

 
471

Total current assets
10,151

 
9,584

Property and equipment, net
1,950

 
1,947

Costs capitalized to obtain revenue contracts, noncurrent, net
1,038

 
1,105

Capitalized software, net
149

 
146

Strategic investments
1,024

 
677

Goodwill
7,444

 
7,314

Intangible assets acquired through business combinations, net
815

 
827

Other assets, net
392

 
384

Total assets
$
22,963

 
$
21,984

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable, accrued expenses and other liabilities
$
1,691

 
$
2,047

Unearned revenue
6,201

 
6,995

Current portion of debt
3

 
1,025

Total current liabilities
7,895

 
10,067

Noncurrent debt
3,172

 
695

Other noncurrent liabilities
836

 
846

Total liabilities
11,903

 
11,608

Stockholders’ equity:
 
 
 
Common stock
1

 
1

Additional paid-in capital
10,123

 
9,752

Accumulated other comprehensive loss
(33
)
 
(12
)
Retained earnings
969

 
635

Total stockholders’ equity
11,060

 
10,376

Total liabilities and stockholders’ equity
$
22,963

 
$
21,984












See accompanying Notes.

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salesforce.com, inc.
Condensed Consolidated Statements of Operations
(in millions, except per share data)
(unaudited)
 
Three Months Ended April 30,
 
2018
 
2017 (as adjusted)
Revenues:
 
 
 
Subscription and support
$
2,810

 
$
2,209

Professional services and other
196

 
188

Total revenues
3,006

 
2,397

Cost of revenues (1)(2):
 
 
 
Subscription and support
573

 
463

Professional services and other
194

 
188

Total cost of revenues
767

 
651

Gross profit
2,239

 
1,746

Operating expenses (1)(2):
 
 
 
Research and development
424

 
376

Marketing and sales
1,329

 
1,106

General and administrative
295

 
260

Total operating expenses
2,048

 
1,742

Income from operations
191

 
4

Investment income
16

 
5

Interest expense
(34
)
 
(22
)
Gains on strategic investments, net
211

 
3

Other income
1

 
0

Income (loss) before (provision for) benefit from income taxes
385

 
(10
)
(Provision for) benefit from income taxes
(41
)
 
11

Net income
$
344

 
$
1

Basic net income per share
$
0.47

 
$
0.00

Diluted net income per share
$
0.46

 
$
0.00

Shares used in computing basic net income per share
729

 
706

Shares used in computing diluted net income per share
754

 
722

_______________
(1)
Amounts include amortization of intangible assets acquired through business combinations, as follows:
 
Three Months Ended April 30,
 
2018
 
2017
Cost of revenues
$
39

 
$
44

Marketing and sales
30

 
31

(2) Amounts include stock-based expense, as follows:
 
Three Months Ended April 30,
 
2018
 
2017
Cost of revenues
$
34

 
$
32

Research and development
66

 
64

Marketing and sales
120

 
119

General and administrative
32

 
37





See accompanying Notes.

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salesforce.com, inc.
Condensed Consolidated Statements of Comprehensive Income
(in millions)
(unaudited) 
 
Three Months Ended April 30,
 
2018
 
2017 (as adjusted)
Net income
$
344

 
$
1

Other comprehensive income (loss), before tax and net of reclassification adjustments:
 
 
 
Foreign currency translation and other gains (losses)
(10
)
 
14

Unrealized gains (losses) on marketable securities and strategic investments
(4
)
 
71

Reclassification of unrealized gains upon adoption of ASU 2016-01* (Note 1)
(13
)
 
0

Other comprehensive income (loss), before tax
(27
)
 
85

Tax effect upon adoption of ASU 2016-01*
6

 
0

Other comprehensive income (loss), net of tax
(21
)
 
85

Comprehensive income
$
323

 
$
86

*
Accounting Standards Update 2016-01 “Financial Instruments” (ASU 2016-01)






























See accompanying Notes.

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salesforce.com, inc.
Condensed Consolidated Statements of Cash Flows
(in millions)
(unaudited)
 
Three Months Ended April 30,
 
2018
 
2017 (as adjusted)
Operating activities:
 
 
 
Net income
$
344

 
$
1

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
181

 
185

Amortization of debt discount and issuance costs
16

 
8

Amortization of costs capitalized to obtain revenue contracts, net
188

 
141

Expenses related to employee stock plans
252

 
252

Gains on strategic investments, net
(211
)
 
(3
)
Changes in assets and liabilities, net of business combinations:
 
 
 
Accounts receivable, net
2,162

 
1,759

Costs capitalized to obtain revenue contracts, net
(118
)
 
(133
)
Prepaid expenses and other current assets and other assets
(90
)
 
(185
)
Accounts payable, accrued expenses and other liabilities
(456
)
 
(297
)
Unearned revenue
(802
)
 
(498
)
Net cash provided by operating activities
1,466

 
1,230

Investing activities:
 
 
 
Business combination, net of cash acquired
(182
)
 
(20
)
Purchases of strategic investments
(147
)
 
(12
)
Sales of strategic investments
4

 
12

Purchases of marketable securities
(263
)
 
(699
)
Sales of marketable securities
938

 
104

Maturities of marketable securities
48

 
4

Capital expenditures
(122
)
 
(157
)
Net cash provided by (used in) investing activities
276

 
(768
)
Financing activities:
 
 
 
Proceeds from issuance of debt, net
2,470

 
0

Proceeds from employee stock plans
201

 
160

Principal payments on capital lease obligations
(19
)
 
(9
)
Repayments of debt
(1,027
)
 
(200
)
Net cash provided by (used in) financing activities
1,625

 
(49
)
Effect of exchange rate changes
12

 
5

Net increase in cash and cash equivalents
3,379

 
418

Cash and cash equivalents, beginning of period
2,543

 
1,607

Cash and cash equivalents, end of period
$
5,922

 
$
2,025












See accompanying Notes.

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salesforce.com, inc.
Condensed Consolidated Statements of Cash Flows
Supplemental Cash Flow Disclosure
(in millions)
 
Three Months Ended April 30,
 
2018
 
2017
Supplemental cash flow disclosure:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
7

 
$
7

Income taxes, net of tax refunds
19

 
17















































See accompanying Notes.

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salesforce.com, inc.
Notes to Condensed Consolidated Financial Statements
1. Summary of Business and Significant Accounting Policies
Description of Business
Salesforce.com, inc. (the "Company") is a leading provider of enterprise software, delivered through the cloud, with a focus on customer relationship management, or CRM. The Company introduced its first CRM solution in 2000, and has since expanded its service offerings into new areas and industries with new editions, features and platform capabilities.
The Company's core mission is to empower its customers to connect with their customers in entirely new ways through cloud, mobile, social, Internet of Things (“IoT”) and artificial intelligence technologies.
The Company's Customer Success Platform is a comprehensive portfolio of service offerings providing sales force automation, customer service and support, marketing automation, digital commerce, community management, industry-specific solutions, analytics, application development, IoT integration, collaborative productivity tools, an enterprise cloud marketplace which the Company refers to as the AppExchange, and its professional cloud services.
Fiscal Year
The Company’s fiscal year ends on January 31. References to fiscal 2019, for example, refer to the fiscal year ending January 31, 2019.
Basis of Presentation
The accompanying condensed consolidated balance sheets as of April 30, 2018 and January 31, 2018 and the condensed consolidated statements of operations, condensed consolidated statements of comprehensive income and condensed consolidated statements of cash flows for the three months ended April 30, 2018 and 2017, respectively, are unaudited.
These financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all adjustments necessary for the fair presentation of the Company’s balance sheets as of April 30, 2018 and January 31, 2018, and its results of operations, including its comprehensive income, and its cash flows for the three months ended April 30, 2018 and 2017. All adjustments are of a normal recurring nature. The results for the three months ended April 30, 2018 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending January 31, 2019.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2018, filed with the Securities and Exchange Commission (the “SEC”) on March 9, 2018.
The Company has adjusted its condensed consolidated financial statements from amounts previously reported due to the adoption of Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) as discussed below. In addition, the Company prospectively adopted Accounting Standards Update No. 2016-01, "Financial Instrument-Overall (Subtopic 825-10)" ("ASU 2016-01") and Accounting Standards Update No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory" ("ASU 2016-16"), as discussed below.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in the Company’s condensed consolidated financial statements and notes thereto.
Significant estimates and assumptions made by management include the determination of:
the standalone selling price (SSP) of performance obligations for contracts with multiple performance obligations;
the estimate of variable consideration as part of the adoption of ASU 2014-09;
the fair value of assets acquired and liabilities assumed for business combinations;
the recognition, measurement and valuation of current and deferred income taxes;
the average period of benefit associated with costs capitalized to obtain revenue contracts;
the fair value of certain stock awards issued;
the useful lives of intangible assets; and
the valuation of strategic investments.

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Actual results could differ materially from those estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the result of which forms the basis for making judgments about the carrying values of assets and liabilities.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Segments
The Company operates as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who is the chief executive officer, in deciding how to allocate resources and assessing performance. Over the past few years, the Company has completed a number of acquisitions. These acquisitions have allowed the Company to expand its offerings, presence and reach in various market segments of the enterprise cloud computing market. While the Company has offerings in multiple enterprise cloud computing market segments, including as a result of the Company's acquisitions, the Company’s business operates in one operating segment because the majority of the Company's offerings operate on a single platform and are deployed in an identical way, and the Company’s chief operating decision maker evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis. Since the Company operates in one operating segment, all required financial segment information can be found in the condensed consolidated financial statements.
Concentrations of Credit Risk and Significant Customers
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable. Collateral is not required for accounts receivable. The Company maintains an allowance for its doubtful accounts receivable. This allowance is based upon historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with delinquent accounts. Receivables are written-off and charged against the recorded allowance when the Company has exhausted collection efforts without success.
No single customer accounted for more than five percent of accounts receivable at April 30, 2018 and January 31, 2018. No single customer accounted for five percent or more of total revenue during the three months ended April 30, 2018 and 2017. As of April 30, 2018 and January 31, 2018, assets located outside the Americas were 12 percent and 17 percent of total assets, respectively. As of April 30, 2018 and January 31, 2018, assets located in the United States were 86 percent and 81 percent of total assets, respectively.
Revenue Recognition
Adoption of Topic 606
Effective at the start of fiscal 2019, the Company adopted the provisions and expanded disclosure requirements described in ASU 2014-09 also referred to as Topic 606. The Company adopted the standard using the full retrospective method. Accordingly, the results for the prior comparable period were adjusted to conform to the current period measurement and recognition of results.
The impact of Topic 606 on reported revenue results was not material. Topic 606, however, modified the Company’s revenue recognition policy in the following ways:
Removal of the limitation on contingent revenue, which can result in the subscription and support revenue for certain multi-year customer contracts being recognized earlier in the duration of the contract term;
More allocation of subscription and support revenues across the Company’s cloud service offerings and to professional services revenue; and
Inclusion of an estimate of variable consideration, such as overage fees, in the total transaction price, which results in the estimated fees being recognized ratably over the contract term, further resulting in the recognition of subscription and support revenues before the actual variable consideration occurs.
The Company used the following transitional practical expedients in the adoption of Topic 606:
the Company has not disclosed the remaining transaction price for reporting periods prior to the first quarter of fiscal 2019; and
contracts modified before fiscal 2017 were reflected using the retrospective method.
Additionally, as part of its business strategy, the Company periodically makes acquisitions of complementary businesses, services and technology. These acquired businesses may have customer arrangements that include the delivery of an on-premise software element combined with a software-as-a-service element. The Company has to apply significant judgment to

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determine the appropriate revenue recognition policy for such products and services since Topic 606 eliminated the provision that service revenue accounting was appropriate when the relative selling price of one or more deliverables in a multiple element solution arrangement could not be determined.
Revenue Recognition Policy
The Company derives its revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing the Company’s enterprise cloud computing services (collectively, "Cloud Services") and from customers paying for additional support beyond the standard support that is included in the basic subscription fees; and (2) related professional services such as process mapping, project management and implementation services. Other revenue consists primarily of training fees.
With the adoption of Topic 606, revenue is recognized upon transfer of control of promised products and services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. If the consideration promised in a contract includes a variable amount, for example, overage fees, contingent fees or service level penalties, the Company includes an estimate of the amount it expects to receive for the total transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur.
The Company determines the amount of revenue to be recognized through application of the following steps:
Identification of the contract, or contracts with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when or as the Company satisfies the performance obligations.
The Company’s subscription service arrangements are non-cancelable and do not contain refund-type provisions.
Subscription and Support Revenues
Subscription and support revenues are comprised of fees that provide customers with access to Cloud Services, related support and updates during the term of the arrangement. Cloud Services allow customers to use the Company's multi-tenant software without taking possession of the software. Revenue is generally recognized ratably over the contract term beginning on the commencement date of each contract, which is the date the Company’s Cloud Services are made available to customers.
The Company typically invoices its customers annually in advance upon execution of the contract or subsequent renewals. Amounts that have been invoiced are recorded in accounts receivable and in unearned revenue or revenue, depending on whether transfer of control to customers has occurred.
Professional Services and Other Revenues
The Company’s professional services contracts are either on a time and materials, fixed fee or subscription basis. These revenues are recognized as the services are rendered for time and materials contracts, when the milestones are achieved and accepted by the customer or on a proportional performance basis for fixed price contracts and ratably over the contract term or on a proportional performance basis for subscription professional services contracts. The milestone method for revenue recognition is used when there is substantive uncertainty at the date the contract is entered into whether the milestone will be achieved. Training revenues are recognized as the services are performed.
Significant Judgments - Contracts with Multiple Performance Obligations
The Company enters into contracts with its customers that often include promises to transfer multiple Cloud Services, premium support and professional services. A performance obligation is a promise in a contract with a customer to transfer products or services that are distinct. Determining whether products and services are distinct performance obligations that should be accounted for separately or combined as one unit of accounting may require significant judgment.
Cloud Services are distinct as such services are often sold separately. In determining whether professional services are distinct, the Company considers the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the Cloud Service start date and the contractual dependence of the Cloud service on the customer’s satisfaction with the professional services work. To date, the Company has concluded that all of the professional services included in contracts with multiple performance obligations are distinct.
The Company allocates the transaction price to each performance obligation on a relative standalone selling price ("SSP") basis. The SSP is the price at which the Company would sell a promised product or service separately to a customer. Judgment is required to determine the SSP for each distinct performance obligation.

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The Company determines SSP by considering its overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the Company’s discounting practices, the size and volume of the Company’s transactions, the customer demographic, the geographic area where services are sold, price lists, its go-to-market strategy, historical sales and contract prices. The determination of SSP is made through consultation with and approval by the Company’s management, taking into consideration the go-to-market strategy. As the Company’s go-to-market strategies evolve, the Company may modify its pricing practices in the future, which could result in changes to SSP.
In certain cases, the Company is able to establish SSP based on observable prices of products or services sold separately in comparable circumstances to similar customers. The Company uses a single amount to estimate SSP when it has observable prices.
If SSP is not directly observable, for example when pricing is highly variable, the Company uses a range of SSP. The Company determines the SSP range using information that may include market conditions or other observable inputs. The Company typically has more than one SSP for individual products and services due to the stratification of those products and services by customer size and geography.
Costs Capitalized to Obtain Revenue Contracts
As part of its adoption of ASU 2014-09, the Company capitalizes incremental costs of obtaining a non-cancelable subscription and support revenue contract. The provisions of ASU 2014-09 are significantly different than the Company's previous accounting for deferred commissions. The new guidance results in the capitalization of significantly more costs and longer amortization lives. Under the prior accounting guidance, the Company only capitalized sales commissions that had a direct relationship to a specific new revenue contract and amortized the capitalized amounts over the initial contract period, which was typically 12 to 36 months.
Under the new accounting, the capitalized amounts consist primarily of sales commissions paid to the Company’s direct sales force. Capitalized amounts also include (1) amounts paid to employees other than the direct sales force who earn incentive payouts under annual compensation plans that are tied to the value of contracts acquired, (2) commissions paid to employees upon renewals of subscription and support contracts, (3) the associated payroll taxes and fringe benefit costs associated with the payments to the Company’s employees, and to a lesser extent (4) success fees paid to partners in emerging markets where the Company has a limited presence.
Costs capitalized related to new revenue contracts are amortized on a straight-line basis over four years, which, although longer than the typical initial contract period, reflects the average period of benefit, including expected contract renewals. In arriving at this average period of benefit, the Company evaluated both qualitative and quantitative factors which included the estimated life cycles of its offerings and its customer attrition. Additionally, the Company amortizes capitalized costs for renewals and success fees paid to partners over two years.
The capitalized amounts are recoverable through future revenue streams under all non-cancelable customer contracts. The Company periodically evaluates whether there have been any changes in its business, the market conditions in which it operates or other events which would indicate that its amortization period should be changed or if there are there are potential indicators of impairment.
Amortization of capitalized costs to obtain revenue contracts is included in marketing and sales expense in the accompanying condensed consolidated statements of operations.
During the three months ended April 30, 2018, the Company capitalized $118 million of costs to obtain revenue contracts and amortized $188 million to marketing and sales expense. During the same period a year ago, the Company capitalized $133 million of costs to obtain revenue contracts and amortized $141 million to marketing and sales expense. Capitalized costs to obtain a revenue contract, net on the Company's condensed consolidated balance sheets totaled $1.7 billion at April 30, 2018 and $1.8 billion at January 31, 2018.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at fair value.
Marketable Securities
The Company considers all of its marketable debt securities as available for use in current operations, including those with maturity dates beyond one year, and therefore classifies these securities within current assets on the condensed consolidated balance sheets. Securities are classified as available for sale and are carried at fair value, with the change in unrealized gains and losses, net of tax, reported as a separate component on the condensed consolidated statements of comprehensive income until realized. Fair value is determined based on quoted market rates when observable or utilizing data points that are observable, such as quoted prices, interest rates and yield curves. Declines in fair value judged to be other-than-

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temporary on securities available for sale are included as a reduction to investment income. To determine whether a decline in value is other-than-temporary, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value and its intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. For the purposes of computing realized and unrealized gains and losses, the cost of securities sold is based on the specific-identification method. Interest on securities classified as available for sale is also included as a component of investment income.
Strategic Investments
The Company holds strategic investments in publicly held equity securities and privately held debt and equity securities in which the Company does not have a controlling interest or significant influence. Publicly held equity securities are measured using quoted prices in their respective active markets with changes recorded through net gains on strategic investments on the condensed consolidated statement of operations. Privately held equity securities without a readily determinable fair value are recorded at cost and adjusted for impairments and observable price changes with a same or similar security from the same issuer and are recorded through net gains on strategic investments on the condensed consolidated statement of operations. Privately held debt securities are recorded at fair value with changes in fair value recorded through accumulated other comprehensive income on the condensed consolidated balance sheet. If, based on the terms of these publicly traded and privately held securities, the Company determines that the Company exercises significant influence on the entity to which these securities relate, the Company will apply the equity method of accounting for such investments.
Privately held debt and equity securities are valued using significant unobservable inputs or data in an inactive market and the valuation requires the Company's judgment due to the absence of market prices and inherent lack of liquidity. The carrying value is not adjusted for the Company's privately held equity securities if there are no observable price changes in a same or similar security from the same issuer or if there are no identified events or changes in circumstances that may indicate impairment, as discussed below. In determining the estimated fair value of its strategic investments in privately held companies, the Company utilizes the most recent data available to the Company. Valuations of privately held companies are inherently complex due to the lack of readily available market data. In addition, the determination of whether an orderly transaction is for a similar investment requires significant management judgment including: the rights and obligations of the investments, the extent to which those differences would affect the fair values of those investments, and the impact of any differences based on the stage of operational development of the investee.
The Company assesses its strategic investments portfolio quarterly for impairment. The Company’s impairment analysis encompasses an assessment of the severity and duration of the impairment and qualitative and quantitative analysis of other key factors including: the investee’s financial metrics, the investee’s products and technologies meeting or exceeding predefined milestones, market acceptance of the product or technology, other competitive products or technology in the market, general market conditions, management and governance structure of the investee, the investee’s liquidity, debt ratios and the rate at which the investee is using its cash. If the investment is considered to be other-than-temporarily impaired, the Company will record the investment at fair value by recognizing an impairment through the condensed consolidated statement of operations and establishing a new carrying value for the investment.
Derivative Financial Instruments
The Company enters into foreign currency derivative contracts with financial institutions to reduce foreign exchange risk. The Company uses forward currency derivative contracts to minimize the Company’s exposure to balances primarily denominated in the Euro, British Pound Sterling, Japanese Yen, Canadian Dollar and Australian Dollar. The Company’s foreign currency derivative contracts, which are not designated as hedging instruments, are used to reduce the exchange rate risk associated primarily with intercompany receivables and payables. The Company’s derivative financial instruments program is not designated for trading or speculative purposes. As of April 30, 2018 and January 31, 2018, the outstanding foreign currency derivative contracts were recorded at fair value on the condensed consolidated balance sheets.
Foreign currency derivative contracts are marked-to-market at the end of each reporting period with gains and losses recognized as other expense to offset the gains or losses resulting from the settlement or remeasurement of the underlying foreign currency denominated receivables and payables. While the contract or notional amount is often used to express the volume of foreign currency derivative contracts, the amounts potentially subject to credit risk are generally limited to the amounts, if any, by which the counterparties’ obligations under the agreements exceed the obligations of the Company to the counterparties.
Fair Value Measurement
The Company measures its cash and cash equivalents, marketable securities and foreign currency derivative contracts at fair value. The additional disclosures regarding the Company’s fair value measurements are included in Note 5 “Fair Value Measurement.” In addition, the Company measures its publicly held equity securities at fair value. The additional disclosure regarding the Company's fair value measurements of its strategic investments are included in Note 3 "Investments."

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Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of those assets as follows:
Computers, equipment and software
3 to 9 years
Furniture and fixtures
5 years
Leasehold improvements
Shorter of the estimated lease term or 10 years
Building and structural components
Average weighted useful life of 32 years
Building - leased facility
27 years
Building improvements
10 years
When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from their respective accounts and any loss on such retirement is reflected in operating expenses.
Capitalized Software Costs
The Company capitalizes costs related to its enterprise cloud computing services and certain projects for internal use incurred during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life, which is generally three to five years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Intangible Assets acquired through Business Combinations
Intangible assets are amortized over their estimated useful lives. Each period, the Company evaluates the estimated remaining useful life of its intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. Management tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Impairment Assessment
The Company evaluates intangible assets and long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This includes but is not limited to significant adverse changes in business climate, market conditions, or other events that indicate an asset's carrying amount may not be recoverable. Recoverability of these assets is measured by comparing the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. If the undiscounted cash flows used in the test for recoverability are less than the carrying amount of these assets, the carrying amount of such assets is reduced to fair value.
The Company evaluates and tests the recoverability of its goodwill for impairment at least annually during its fourth quarter of each fiscal year or more often if and when circumstances indicate that goodwill may not be recoverable.
There was no impairment of capitalized software, intangible assets, long-lived assets or goodwill during the three months ended April 30, 2018 and 2017.
Business Combinations
The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the acquisition date. The Company continues to collect information and reevaluates these estimates and assumptions quarterly and records any adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s condensed consolidated statement of operations.
In the event the Company acquires an entity with which the Company has a preexisting relationship, the Company will recognize a gain or loss to settle that relationship as of the acquisition date, which is recorded in other income (expense) within the condensed consolidated statements of operations. In the event that the Company acquires an entity in which the Company previously held a strategic investment, the difference between the fair value of the shares as of the date of the acquisition and the carrying value of the strategic investment is recorded as a gain or loss and recorded within net gains on strategic investments in the condensed consolidated statement of operations.

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Table of Contents

Leases and Asset Retirement Obligations
The Company categorizes leases at their inception as either operating or capital leases. In certain lease agreements, the Company may receive rent holidays and other incentives. The Company recognizes lease costs on a straight-line basis once control of the space is achieved, without regard to deferred payment terms such as rent holidays that defer the commencement date of required payments. Additionally, incentives received are treated as a reduction of costs over the term of the agreement.
The Company establishes assets and liabilities for the present value of estimated future costs to retire long-lived assets at the termination or expiration of a lease. Such assets are depreciated over the lease period to operating expense.
In the event the Company is the deemed owner for accounting purposes during construction, the Company records assets and liabilities for the estimated construction costs incurred under build-to-suit lease arrangements to the extent it is involved in the construction of structural improvements or takes construction risk prior to commencement of a lease.
The Company additionally has entered into subleases for unoccupied leased office space. To the extent there are losses associated with the sublease, they are recognized in the period the sublease is executed. Gains are recognized over the sublease life. Any sublease payments received in excess of the straight-line rent payments for the sublease are recorded in other income (expense).
Stock-Based Expense
The Company recognizes stock-based expenses related to stock options and restricted stock awards on a straight-line basis, net of estimated forfeitures, over the requisite service period of the awards, which is generally the vesting term of four years.
The Company recognizes stock-based expenses related to shares issued pursuant to its Amended and Restated 2004 Employee Stock Purchase Plan (“ESPP” or “2004 Employee Stock Purchase Plan”) on a straight-line basis over the offering period, which is 12 months. The ESPP allows employees to purchase shares of the Company's common stock at a 15 percent discount and also allows employees to reduce their percentage election once during a six month purchase period (December 15 and June 15 of each fiscal year), but not increase that election until the next one-year offering period. The ESPP also includes a re-set provision for the purchase price if the stock price on the purchase date is less than the stock price on the offering date.
Stock-based expenses related to performance share grants are measured based on grant date fair value and expensed on a straight-line basis, net of estimated forfeitures, over the service period of the awards, which is generally the vesting term of three years.
The Company, at times, grants unvested restricted shares to employee stockholders of certain acquired companies in lieu of cash consideration. These awards are generally subject to continued post-acquisition employment. Therefore, the Company accounts for them as post-acquisition stock-based expense. The Company recognizes stock-based expense equal to the grant date fair value of the restricted stock awards on a straight-line basis over the requisite service period of the awards, which is generally four years
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the condensed consolidated statements of operations in the period that includes the enactment date.
The Company’s tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, solely based on its technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than 50 percent likely to be realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax provision.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the applicable tax law. The Company regularly reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The Company’s judgments regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute its business plans and/or tax planning strategies. Should there be a change in the ability to recover deferred tax assets, the tax provision would increase or decrease in the period in which the assessment is changed.

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In December 2017, the Tax Cuts and Jobs Act ("Tax Act") was enacted into law, significantly changing income tax law that affects U.S corporations. Key changes included a corporate tax rate reduction from 35 percent to 21 percent effective January 1, 2018, expensing of certain qualified property, significant changes to the U.S international tax system such as a one-time transition tax on accumulated foreign earnings, and how foreign earnings are subject to U.S. tax. The Company was required to recognize the effects of the tax law changes in the period of enactment, including the determination of the transition tax and the re-measurement of deferred taxes as well as to re-assess the realizability of the deferred tax assets. Subsequent to the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which allows companies to record provisional amounts related to the effects of the Tax Act during a measurement period not to extend beyond one year from the enactment date. Due to the timing of the Tax Act and additional guidance and interpretations that may be issued by the U.S. Treasury Department, the Internal Revenue Service ("IRS") and other standard-setting bodies in the future, the Company has not completed its analysis of the income tax effects of the Tax Act. The provisional estimates will be adjusted during the measurement period defined under SAB 118, based upon the Company's ongoing analysis of its data and tax positions along with new guidance from regulators and interpretations of the law.
Foreign Currency Translation
The functional currency of the Company’s major foreign subsidiaries is generally the local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as a separate component on the condensed consolidated statement of comprehensive income. Foreign currency transaction gains and losses are included in Other income (expense) in the condensed consolidated statement of operations for the period. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average exchange rate during the period. Equity transactions are translated using historical exchange rates.
Warranties and Indemnification
The Company’s enterprise cloud computing services are typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable and materially in accordance with the Company’s online help documentation under normal use and circumstances.
The Company’s arrangements generally include certain provisions for indemnifying customers against liabilities if its products or services infringe a third party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of such obligations and has not accrued any material liabilities related to such obligations in the accompanying condensed consolidated financial statements.
The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as the Company’s director or officer or that person’s services provided to any other company or enterprise at the Company’s request. The Company maintains director and officer insurance coverage that would generally enable the Company to recover a portion of any future amounts paid. The Company may also be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.
New Accounting Pronouncements Adopted in Fiscal 2019
In May 2014, the FASB issued ASU 2014-09, which in addition to replacing the existing revenue recognition guidance, provides guidance on the recognition of costs related to obtaining customer contracts. The adoption was material to the Company’s reported operating results and balance sheet for fiscal 2018 and 2017, as it requires additional types of costs to be capitalized and amortized over a longer period. The Company also recorded the related income tax effects, which did not have a material impact due to the Company's valuation allowance. The adoption had no impact to the Company’s operating cash flow.

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Adoption of ASU 2014-09 impacted the Company's previously reported results for the three months ended April 30, 2017 as follows (in millions, except per share amounts):
 
As reported
 
Change
 
As adjusted
Total revenues
$
2,388

 
$
9

 
$
2,397

Marketing and sales
1,110

 
(4
)
 
1,106

Benefit from income taxes
14

 
(3
)
 
11

Net income
(9
)
 
10

 
1

Diluted net income per share
(0.01
)
 
0.01

 
0.00

Adoption of ASU 2014-09 impacted the Company's previously reported results as of January 31, 2018 as follows (in millions):
 
As reported
 
Change
 
As adjusted
Accounts receivable, net
$
3,918

 
$
3

 
$
3,921

Costs capitalized to obtain revenue contracts, net
461

 
210

 
671

Prepaid expenses and other current assets
390

 
81

 
471

Costs capitalized to obtain revenue contracts, noncurrent, net
413

 
692

 
1,105

Other assets, net
396

 
(12
)
 
384

Accounts payable, accrued expenses and other liabilities
2,010

 
37

 
2,047

Unearned revenue
7,095

 
(100
)
 
6,995

Other noncurrent liabilities
796

 
50

 
846

Stockholders’ equity
9,389

 
987

 
10,376

In January 2016, the FASB issued ASU 2016-01, which requires entities to measure equity instruments at fair value and recognize any changes in fair value within the statement of operations. The Company adopted ASU 2016-01 in the first quarter of fiscal 2019 on a prospective basis for privately held equity securities and a modified retrospective basis for publicly held equity investments. Upon adoption of ASU 2016-01, the Company reclassified approximately $13 million of unrealized gains related to its publicly traded equity investments and approximately $6 million reflecting the tax impact, from accumulated other comprehensive loss on the balance sheet to retained earnings. The adoption of the standard resulted in a net unrealized gain of $224 million, which was recorded in the condensed consolidated statement of operations for the three months ended April 30, 2018, and the Company anticipates additional volatility to the Company's statements of operations in future periods, due to changes in market prices of the Company's investments in publicly held equity investments and the valuation and timing of observable price changes and impairments of its investments in privately held securities.
In October 2016, the FASB issued ASU 2016-16, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company adopted the standard in the first quarter of fiscal 2019 using the modified retrospective transition method and reclassified a cumulative-effect adjustment to retained earnings as of the effective date of approximately $18 million.
Accounting Pronouncements Pending Adoption
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which requires lessees to record most leases on their balance sheets but recognize the expenses on their statements of operations in a manner similar to current accounting rules. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The new standard is effective for interim and annual periods beginning after December 15, 2018 on a modified retrospective basis. The Company is in the process of implementing changes to its systems, processes and controls, in conjunction with its review of existing lease agreements, in order to adopt the new standard in its first quarter of fiscal 2020. The Company expects its leases designated as operating leases in Note 14, “Commitments,” will be reported on the consolidated balance sheets upon adoption. The Company is currently evaluating the impact to its consolidated financial statements as it relates to other aspects of the business.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU

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2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.
Reclassifications
Certain reclassifications to fiscal 2018 balances were made to conform to the current period presentation in the condensed consolidated balance sheets and condensed consolidated statement of operations. These reclassifications include other noncurrent liabilities, temporary equity, other income (expense) and gains on strategic investments, net.
2. Revenues
Disaggregation of Revenue
Subscription and Support Revenue by the Company's core service offerings
Subscription and support revenues consisted of the following (in millions):
 
Three Months Ended April 30,
 
2018
 
2017
Sales Cloud
$
965

 
$
830

Service Cloud
848

 
656

Salesforce Platform and Other
575

 
424

Marketing and Commerce Cloud
422

 
299

 
$
2,810

 
$
2,209

Total Revenue by Geographic Locations
Revenues by geographical region consisted of the following (in millions):
 
Three Months Ended April 30,
 
2018
 
2017
Americas
$
2,101

 
$
1,765

Europe
606

 
409

Asia Pacific
299

 
223

 
$
3,006

 
$
2,397

Revenues by geography are determined based on the region of the Company's contracting entity, which may be different than the region of the customer. Americas revenue attributed to the United States was approximately 96 percent and 96 percent during the three months ended April 30, 2018 and 2017, respectively. No other country represented more than ten percent of total revenue during the three months ended April 30, 2018 and 2017.
Contract Balances
As described in Note 1, subscription and support revenue is generally recognized ratably over the contract term beginning on the commencement date of each contract. Under Topic 606 the timing and amount of revenue recognition may differ in certain situations from the revenue recognized under previous accounting guidance, which included a contingent revenue rule that limited subscription and support revenue to the customer invoice amount for the period of service (collectively billings). Under Topic 606, the Company records a contract asset when revenue recognized on a contract exceeds the billings. Contract assets were $75 million at April 30, 2018 and $81 million at January 31, 2018.
Unearned Revenue
Topic 606 introduced the concept of unearned revenue, which is substantially similar to deferred revenue under previous accounting guidance, except for the removal of the limitation on contingent revenue. The unearned revenue balance does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. Unearned revenue primarily consists of billings or payments received in advance of revenue recognition from subscription services described above and is recognized as revenue when transfer of control to customers has occurred. The Company generally invoices customers in annual installments. The unearned revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, dollar size and new business linearity within the quarter.

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Table of Contents

The changes in unearned revenue were as follows (in millions):
 
Three Months Ended April 30, 2018
Unearned revenue, beginning of period
$
6,995

Billings and other
2,212

Revenue recognized
(3,006
)
Unearned revenue, end of period
$
6,201

Remaining Transaction Price
Topic 606 also introduced the concept of remaining transaction price, which is different than unbilled deferred revenue under previous accounting guidance. Transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized, which includes unearned revenue and unbilled amounts that will be recognized as revenue in future periods. Transaction price allocated to the remaining performance obligation is influenced by several factors, including seasonality, the timing of renewals, average contract terms and foreign currency exchange rates. Unbilled portions of the remaining transaction price denominated in foreign currencies are revalued each period based on the period end exchange rates.
The Company applied the practical expedient in accordance with Topic 606 to exclude amounts related to performance obligations that are billed and recognized as they are delivered. This primarily consists of professional services contracts that are on a time-and-material basis.
Remaining transaction price consisted of the following (in billions):
 
Current
 
Noncurrent
 
Total
As of April 30, 2018
$
9.6

 
$
10.8

 
$
20.4

3. Investments
Marketable Securities
At April 30, 2018, marketable securities consisted of the following (in millions):
Investments classified as Marketable Securities
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Corporate notes and obligations
$
758

 
$
0

 
$
(9
)
 
$
749

U.S. treasury securities
90

 
0

 
(2
)
 
88

Mortgage backed obligations
88

 
0

 
(2
)
 
86

Asset backed securities
186

 
0

 
(2
)
 
184

Municipal securities
40

 
0

 
(1
)
 
39

Foreign government obligations
59

 
0

 
(1
)
 
58

U.S. agency obligations
4

 
0

 
0

 
4

Commercial paper
11

 
0

 
0

 
11

Covered bonds
18

 
0

 
0

 
18

Total marketable securities
$
1,254


$
0


$
(17
)

$
1,237


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At January 31, 2018, marketable securities consisted of the following (in millions):
Investments classified as Marketable Securities
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Corporate notes and obligations
$
1,223

 
$
1

 
$
(7
)
 
$
1,217

U.S. treasury securities
196

 
0

 
(2
)
 
194

Mortgage backed obligations
100

 
0

 
(1
)
 
99

Asset backed securities
251

 
0

 
(1
)
 
250

Municipal securities
53

 
0

 
(1
)
 
52

Foreign government obligations
87

 
0

 
(1
)
 
86

U.S. agency obligations
19

 
0

 
0

 
19

Commercial paper
11

 
0

 
0

 
11

Covered bonds
51

 
0

 
(1
)
 
50

Total marketable securities
$
1,991


$
1


$
(14
)

$
1,978

The contractual maturities of the investments classified as marketable securities are as follows (in millions):
 
As of
 
April 30,
2018
 
January 31,
2018
Due within 1 year
$
202

 
$
395

Due in 1 year through 5 years
1,031

 
1,579

Due in 5 years through 10 years
4

 
4

 
$
1,237

 
$
1,978

As of April 30, 2018, the following marketable securities were in an unrealized loss position (in millions):
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Corporate notes and obligations
$
607

 
$
(8
)
 
$
29

 
$
(1
)
 
$
636

 
$
(9
)
U.S. treasury securities
82

 
(2
)
 
6

 
0

 
88

 
(2
)
Mortgage backed obligations
68

 
(2
)
 
16

 
0

 
84

 
(2
)
Asset backed securities
170

 
(2
)
 
9

 
0

 
179

 
(2
)
Municipal securities
31

 
(1
)
 
7

 
0

 
38

 
(1
)
Foreign government obligations
58

 
(1
)
 
0

 
0

 
58

 
(1
)
 
$
1,016

 
$
(16
)
 
$
67

 
$
(1
)
 
$
1,083

 
$
(17
)
The unrealized losses for each of the fixed rate marketable securities were less than $1 million. The Company does not believe any of the unrealized losses represent an other-than-temporary impairment based on its evaluation of available evidence as of April 30, 2018, such as the Company's intent to hold and whether it is more likely than not that the Company will be required to sell the investment before recovery of the investment's amortized basis. The Company expects to receive the full principal and interest on all of these marketable securities.
Investment Income
Investment income consists of interest income, realized gains and realized losses on the Company’s cash, cash equivalents and marketable securities. The components of investment income are presented below (in millions):
 
Three Months Ended April 30,
 
2018
 
2017
Interest income
$
20

 
$
6

Realized gains
1

 
0

Realized losses
(5
)
 
(1
)
Total investment income
$
16

 
$
5


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Table of Contents

Reclassification adjustments out of accumulated other comprehensive income into investment income were immaterial for the three months ended April 30, 2018 and 2017.
Strategic Investments
Strategic investments by form and measurement category as of April 30, 2018 were as follows (in millions):
 
Measurement Category
 
Fair Value
 
Measurement Alternative
 
Other (1)
 
Total
Equity securities
$
363

 
$
554

 
$
40

 
$
957

Debt securities
53

 
0

 
14

 
67

Balance as of April 30, 2018
$
416

 
$
554

 
$
54

 
$
1,024


(1) Other includes the Company's investments accounted for under the equity method of accounting or amortized cost.
Measurement Alternative Adjustments
Privately held equity investments accounted for under the measurement alternative as of April 30, 2018 were as follows (in millions):
 
Three Months Ended April 30, 2018
Carrying amount, beginning of period
$
548

Adjustments related to privately held equity investments:


Net additions
11

Unrealized gains, losses and impairments on strategic investments
(5
)
Carrying amount, end of period
$
554

Gains on strategic investments, net
Gains and losses recognized in the three months ended April 30, 2018 and 2017 were as follows (in millions):
 
Three Months Ended April 30,
 
2018
 
2017
Net unrealized gains recognized on publicly traded equity securities
$
211

 
$
0

Net unrealized losses recognized on privately held equity securities
(9
)
 
0

Net realized gains recognized on strategic investments
9

 
3

Gains on strategic investments, net
$
211

 
$
3

Net gains recognized in the three months ended April 30, 2018 for investments still held as of April 30, 2018 were $202 million.
4. Derivatives
Details on outstanding foreign currency derivative contracts are presented below (in millions):
 
As of
 
April 30, 2018
 
January 31, 2018
Notional amount of foreign currency derivative contracts
$
2,449

 
$
1,871

Fair value of foreign currency derivative contracts
$
(11
)
 
$
12


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The fair value of the Company’s outstanding derivative instruments not designated as hedging instruments are summarized below (in millions):
 
 
As of
  
Balance Sheet Location
April 30, 2018
 
January 31, 2018
Foreign currency derivative contracts
Prepaid expenses and other current assets
$
6

 
$
18

Foreign currency derivative liabilities were not material as of April 30, 2018 or January 31, 2018.
Gains/losses on derivative instruments not designated as hedging instruments recorded in Other income (expense) in the condensed consolidated statements of operations during the three months ended April 30, 2018 and 2017, respectively, are summarized below (in millions):
 
Three Months Ended
April 30,
 
2018
 
2017
Foreign currency derivative contracts
$
20

 
$
15

5. Fair Value Measurement
The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1.    Quoted prices (unadjusted) in active markets for identical assets or liabilities.

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

Level 3.    Significant unobservable inputs which are supported by little or no market activity.
All of the Company’s cash equivalents, marketable securities and foreign currency derivative contracts are classified within Level 1 or Level 2 because the Company’s cash equivalents, marketable securities and foreign currency derivative contracts are valued using quoted market prices or alternative pricing sources and models utilizing observable market inputs.
The following table presents information about the Company’s assets that are measured at fair value as of April 30, 2018 and indicates the fair value hierarchy of the valuation (in millions):
Description
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balances as of April 30, 2018
Cash equivalents (1):
 
 
 
 
 
 
 
Time deposits
$
0

 
$
36

 
$
0

 
$
36

Money market mutual funds
4,372

 
0

 
0

 
4,372

Marketable securities:
 
 
 
 
 
 
 
Corporate notes and obligations
0

 
749

 
0

 
749

U.S. treasury securities
0

 
88

 
0

 
88

Mortgage backed obligations
0

 
86

 
0

 
86

Asset backed securities
0

 
184

 
0

 
184

Municipal securities
0

 
39

 
0

 
39

Foreign government obligations
0

 
58

 
0

 
58

U.S. agency obligations
0

 
4

 
0

 
4

Commercial Paper
0

 
11

 
0

 
11

Covered bonds
0

 
18

 
0

 
18

Foreign currency derivative contracts (2)
0

 
6

 
0

 
6

Total assets
$
4,372

 
$
1,279

 
$
0

 
$
5,651

___________ 
(1)Included in “cash and cash equivalents” in the accompanying condensed consolidated balance sheet as of April 30, 2018, in addition to $1,514 million of cash.

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(2)Included in “prepaid expenses and other current assets” in the accompanying condensed consolidated balance sheet as of April 30, 2018.
The following table presents information about the Company’s assets that are measured at fair value as of January 31, 2018 and indicates the fair value hierarchy of the valuation (in millions):
Description
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balances as of
January 31, 2018
Cash equivalents (1):
 
 
 
 
 
 
 
Time deposits
$
0

 
$
543

 
$
0

 
$
543

Money market mutual funds
1,389

 
0

 
0

 
1,389

Marketable securities:
 
 
 
 
 
 
 
Corporate notes and obligations
0

 
1,217

 
0

 
1,217

U.S. treasury securities
0

 
194

 
0

 
194

Mortgage backed obligations
0

 
99

 
0

 
99

Asset backed securities
0

 
250

 
0

 
250

Municipal securities
0

 
52

 
0

 
52

Foreign government obligations
0

 
86

 
0

 
86

U.S. agency obligations
0

 
19

 
0

 
19

Commercial Paper
0

 
11

 
0

 
11

Covered bonds
0

 
50

 
0

 
50

Foreign currency derivative contracts (2)
0

 
18

 
0

 
18

Total assets
$
1,389

 
$
2,539

 
$
0

 
$
3,928

______________ 
(1)Included in “cash and cash equivalents” in the accompanying condensed consolidated balance sheet as of January 31, 2018, in addition to $611 million of cash.
(2)Included in “prepaid expenses and other current assets” in the accompanying condensed consolidated balance sheet as of January 31, 2018.
6. Property and Equipment
Property and Equipment
Property and equipment, net consisted of the following (in millions):
 
As of
 
April 30, 2018
 
January 31, 2018
Land
$
184

 
$
184

Buildings and building improvements
631

 
626

Computers, equipment and software
1,667

 
1,629

Furniture and fixtures
147

 
139

Leasehold improvements
862

 
825

 
3,491

 
3,403

Less accumulated depreciation and amortization
(1,541
)
 
(1,456
)

$
1,950

 
$
1,947

Depreciation and amortization expense totaled $89 million and $88 million during the three months ended April 30, 2018 and 2017, respectively.
Computers, equipment and software at April 30, 2018 and January 31, 2018 included a total of $709 million and $709 million acquired under capital lease agreements, respectively. Accumulated amortization relating to computers, equipment and software acquired under capital leases totaled $467 million and $450 million, respectively, at April 30, 2018 and January 31, 2018. Amortization of assets acquired under capital leases is included in depreciation and amortization expense.

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7. Business Combination
CloudCraze
In April 2018, the Company acquired all outstanding stock of CloudCraze LLC (“CloudCraze”), for consideration consisting of cash and equity awards assumed. CloudCraze is a commerce platform that allows businesses to generate online revenue and scale for growth. CloudCraze delivers interactions across commerce, sales, marketing and service. The Company has included the financial results of CloudCraze in the consolidated financial statements from the date of acquisition, which have not been material to date. The transaction costs associated with the acquisition were not material.
The preliminary acquisition date fair value consideration transferred for CloudCraze was approximately $190 million, which consisted of cash and the fair value of stock options and restricted stock awards assumed. The Company recorded approximately $58 million for developed technology and customer relationships with estimated useful lives of one to seven years. The Company recorded approximately $134 million of goodwill which is primarily attributed to the assembled workforce and expanded market opportunities from integrating CloudCraze's technology with the Company's other offerings. The goodwill balance is deductible for U.S. income tax purposes.
8. Intangible Assets Acquired Through Business Combinations and Goodwill
Intangible assets acquired through business combinations
Intangible assets acquired through business combinations are as follows (in millions):
 
Intangible Assets, Gross
 
Accumulated Amortization
 
Intangible Assets, Net
 
Weighted
Average
Remaining Useful Life
 
Jan 31, 2018
 
Additions and retirements, net
 
Apr. 30, 2018
 
Jan 31, 2018
 
Expense and retirements, net
 
Apr. 30, 2018
 
Jan 31, 2018
 
Apr. 30, 2018
 
Acquired developed technology
$
1,027

 
$
17

 
$
1,044

 
$
(677
)
 
$
(39
)
 
$
(716
)
 
$
350

 
$
328

 
2.7
Customer relationships
831

 
40

 
871

 
(359
)
 
(30
)
 
(389
)
 
472

 
482

 
4.4
Other (1)
53

 
1

 
54

 
(48
)
 
(1
)
 
(49
)
 
5

 
5

 
3.9
Total
$
1,911

 
$
58

 
$
1,969

 
$
(1,084
)
 
$
(70
)
 
$
(1,154
)
 
$
827

 
$
815

 
3.8
(1)Included in other are trade names, trademarks and territory rights.
Amortization of intangible assets resulting from business combinations for the three months ended April 30, 2018 and 2017 was $69 million and $75 million, respectively.
The expected future amortization expense for intangible assets as of April 30, 2018 is as follows (in millions):
Fiscal Period:
 
Remaining nine months of Fiscal 2019
$
207

Fiscal 2020
236

Fiscal 2021
181

Fiscal 2022
118

Fiscal 2023
41

Thereafter
32

Total amortization expense
$
815

Goodwill
The changes in the carrying amounts of goodwill, which is generally not deductible for tax purposes, were as follows (in millions):
Balance as of January 31, 2018
 
$
7,314

Acquisitions
 
134

Adjustments of acquisition date fair values, including the effect of foreign currency translation
 
(4
)
Balance as of April 30, 2018
 
$
7,444


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9. Debt
The carrying values of the Company's borrowings were as follows (in millions):
Instrument
 
Date of issuance
 
Maturity date
 
Effective interest rate for the three months ended April 30, 2018
 
April 30, 2018
 
January 31, 2018
2023 Senior Notes
 
April 2018
 
April 2023
 
3.25%
 
$
991

 
$
0

2028 Senior Notes
 
April 2018
 
April 2028
 
3.70%
 
1,487

 
0

2019 Term Loan
 
July 2016
 
July 2019
 
2.71%
 
498

 
498

Loan assumed on 50 Fremont
 
February 2015
 
June 2023
 
3.75%
 
199

 
199

0.25% Convertible Senior Notes
 
March 2013
 
April 2018
 
2.53%
 
0

 
1,023

Total carrying value of debt
 
 
 
 
 
 
 
3,175

 
1,720

Less current portion of debt
 
 
 
 
 
 
 
(3
)
 
(1,025
)
Total noncurrent debt
 
 
 
 
 
 
 
$
3,172

 
$
695

Each of the Company's debt agreements requires it to maintain compliance with certain debt covenants, all of which the Company was in compliance with as of April 30, 2018.
The expected future principal payments for all borrowings as of April 30, 2018 is as follows (in millions):
Fiscal period:
 
Remaining nine months of Fiscal 2019
$
2

Fiscal 2020
504

Fiscal 2021
4

Fiscal 2022
4

Fiscal 2023
4

Thereafter
2,682

Total principal outstanding
$
3,200

Bridge Facility
In March 2018, the Company entered into a commitment letter, pursuant to which certain lenders agreed to provide a senior unsecured 364-day bridge loan facility of up to $3.0 billion (the "Bridge Facility”) for the purpose of providing the financing to support the Company's acquisition of MuleSoft, Inc., which is discussed in Note 17 "Subsequent Events."
Under the terms of the commitment letter, the Bridge Facility was terminated upon execution of the 2023 Senior Notes, 2028 Senior Notes and 2021 Term Loan (as defined below) in April 2018. For the three months ended April 30, 2018, the Company incurred costs in connection with the Bridge Facility of $11 million that were recorded to interest expense.
2023 Senior Notes
In April 2018, the Company issued an aggregate principal amount of $1.0 billion in senior notes that will mature in April 2023 and bear interest at a fixed rate of 3.25 percent per annum ("2023 Senior Notes"). The interest is payable semi-annually in April and October of each year, commencing in October 2018. The Company incurred issuance costs of $8 million in connection with the 2023 Senior Notes that, along with the debt discount upon issuance, are being amortized to interest expense over the term of the senior notes. The 2023 Senior Notes are unsecured and rank equally in right of payment with all of our other senior unsecured indebtedness.
2028 Senior Notes
In April 2018, the Company issued an aggregate principal amount of $1.5 billion in senior notes that will mature in April 2028 and bear interest at a fixed rate of 3.70 percent per annum ("2028 Senior Notes"). The interest is payable semi-annually in April and October of each year, commencing in October 2018. The Company incurred issuance costs of $13 million in connection with the 2028 Senior Notes that, along with the debt discount upon issuance, are being amortized to interest expense over the term of the senior notes. The 2028 Senior Notes are unsecured and rank equally in right of payment with all of our other senior unsecured indebtedness.

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Table of Contents

2019 Term Loan
In July 2016, the Company entered into a credit agreement (“Term Loan Credit Agreement”) with Bank of America, N.A. and certain other institutional lenders for a $500 million term loan facility (“2019 Term Loan”) that matures in July 2019. In April 2018, the Company modified the Term Loan Credit Agreement with substantially the same terms, including the principal amount and maturity date. The Company accounted for the new 2019 Term Loan as a modification. No incremental fees were paid related to the modification of the 2019 Term Loan.
Interest on the 2019 Term Loan is due and payable in arrears quarterly for loans bearing interest at a rate based on the base rate and at the end of an interest period in the case of loans bearing interest at the adjusted LIBOR rate.
The weighted average interest rate on the 2019 Term Loan was 2.71% for the three months ended April 30, 2018. Accrued interest on the 2019 Term Loan was immaterial as of April 30, 2018. As of April 30, 2018, the noncurrent outstanding principal portion was $500 million.
Loan Assumed on 50 Fremont
The Company assumed a $200 million loan with the acquisition of 50 Fremont in San Francisco, California (“Loan”). The Loan bears an interest rate of 3.75% per annum and is due in June 2023. Beginning in fiscal 2019, principal and interest payments are required, with the remaining principal due at maturity. For the three months ended April 30, 2018 and 2017, total interest expense recognized was $2 million and $2 million, respectively. The Loan can be prepaid at any time subject to a yield maintenance fee. The agreement governing the Loan contains certain customary affirmative and negative covenants that the Company was in compliance with as of April 30, 2018.
Convertible Senior Notes
In March 2013, the Company issued at par value $1.15 billion of 0.25% convertible senior notes (the “0.25% Senior Notes”, or “Notes”) due in April 2018. During the three months ended April 30, 2018, the outstanding balance of the 0.25% Senior Notes matured and the Company repaid $1.0 billion in cash of principal balance of the 0.25% Senior Notes. The Company also distributed approximately 7 million shares of the Company's common stock to noteholders during the three months ended April 30, 2018, which represents the conversion value in excess of the principal amount.
To minimize the impact of potential economic dilution upon conversion of the Notes, also in March 2013, the Company entered into convertible note hedge transactions with respect to its common stock. The Company received approximately 7 million shares of the Company's common stock from the exercise of the notes hedges related to the 0.25% Senior Notes during this same period.
Warrants
In March 2013, the Company entered into a warrants transaction (“0.25% Warrants”), whereby the Company sold warrants to acquire, subject to anti-dilution adjustments, shares of the Company’s common stock. If the 0.25% Warrants are not exercised or early terminated by the Company by their exercise dates, which will occur in July through September 2018, they will expire. For periods in which the market value per share of the Company's common stock exceeds the applicable exercise price of $90.40 and the Company is profitable, the 0.25% Warrants have a dilutive effect on the Company's earnings per share. The 0.25% Warrants are separate transactions entered into by the Company and are not part of the terms of the 0.25% Senior Notes or the related note hedges.
2021 Term Loan
In April 2018, the Company entered into a new three-year unsecured term loan with Bank of America, N.A. and certain other institutional lenders for $500 million (“2021 Term Loan”) that matures in May 2021. No amounts were outstanding as of April 30, 2018. All net proceeds of the 2021 Term Loan were for the purpose of partially funding the acquisition of MuleSoft, Inc. and were received in May 2018.
Revolving Credit Facility
In April 2018, the Company entered into a Second Amended and Restated Credit Agreement ("Revolving Loan Credit Agreement") with Wells Fargo Bank, National Association, and certain other institutional lenders that provides for $1.0 billion unsecured revolving credit facility (“Credit Facility”) that matures in July 2023. The Revolving Loan Credit Agreement amended and restated the Company’s existing revolving credit facility dated July 2016. The Company may use the proceeds of future borrowings under the Credit Facility for refinancing other indebtedness, working capital, capital expenditures and other general corporate purposes, including permitted acquisitions.
In fiscal 2018, the Company paid down the remaining $200 million of outstanding borrowings under the original Credit Facility. There were no outstanding borrowings under the Credit Facility as of April 30, 2018. The Company continues to pay a commitment fee on the available amount of the Credit Facility.

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Table of Contents

Interest Expense on Debt
The following table sets forth total interest expense recognized related to debt (in millions):
 
Three Months Ended April 30,
 
2018
 
2017
Contractual interest expense
$
11

 
$
5

Amortization of debt issuance costs
12

 
1

Amortization of debt discount
4

 
7

 
$
27

 
$
13

10. Other Balance Sheet Accounts
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in millions):
 
As of
 
April 30,
2018
 
January 31,
2018
Prepaid income taxes
$
18

 
$
33

Other taxes receivable
34

 
33

Prepaid expenses and other current assets
510

 
405

 
$
562

 
$
471

Capitalized Software, net
Capitalized software, net at April 30, 2018 and January 31, 2018 was $149 million and $146 million, respectively. Accumulated amortization relating to capitalized software, net totaled $344 million and $326 million, respectively, at April 30, 2018 and January 31, 2018.
Capitalized internal-use software amortization expense totaled $19 million and $18 million for the three months ended April 30, 2018 and 2017, respectively.
Other Assets, net
Other assets, net consisted of the following (in millions):
 
As of
 
April 30,
2018
 
January 31,
2018
Deferred income taxes, noncurrent, net
$
39

 
$
36

Long-term deposits
23

 
24

Domain names and patents, net
21

 
23

Customer contract assets resulting from business combinations (1)
138

 
159

Other
171

 
142

 
$
392

 
$
384

(1) Customer contract assets resulting from business combinations reflects the fair value of future billings of amounts that are contractually committed by acquired companies' existing customers as of the acquisition date.

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Table of Contents

Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable, accrued expenses and other liabilities consisted of the following (in millions):
 
As of
 
April 30,
2018
 
January 31,
2018
Accounts payable
$
134

 
$
76

Accrued compensation
596

 
1,001

Accrued income and other taxes payable
213

 
306

Capital lease obligation, current
100

 
103

Other current liabilities
648

 
561

 
$
1,691

 
$
2,047

Other Noncurrent Liabilities
Other noncurrent liabilities consisted of the following (in millions):
 
As of
 
April 30,
2018
 
January 31,
2018
Deferred income taxes and income taxes payable
$
123

 
$
121

Financing obligation - leased facility
197

 
198

Long-term lease liabilities and other
516

 
527

 
$
836

 
$
846

11. Stockholders’ Equity
The Company maintains the following stock plans: the ESPP, the 2013 Equity Incentive Plan and the 2014 Inducement Equity Incentive Plan (“2014 Inducement Plan”).
As of April 30, 2018 and January 31, 2018, $150 million and $63 million, respectively, was withheld on behalf of employees for future purchases under the ESPP and is recorded in accounts payable, accrued expenses and other liabilities.
Prior to February 2006, options issued under the Company’s stock option plans generally had a term of 10 years. From February 1, 2006 through July 2013, options issued had a term of five years. After July 2013, options issued have a term of seven years.
The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions and fair value per share:
 
Three Months Ended
April 30,
Stock Options
2018
 
2017
Volatility
27.8 - 28

%
 
31.4

%
Estimated life
3.5 years

 
 
3.5 years

 
Risk-free interest rate
2.5 - 2.7

%
 
1.4 - 1.5

%
Weighted-average fair value per share of grants
$
28.39

 
 
$
20.63

 
The Company estimated its future stock price volatility considering both its observed option-implied volatilities and its historical volatility calculations. Management believes this is the best estimate of the expected volatility over the expected life of its stock options and stock purchase rights.
The estimated life for the stock options was based on an analysis of historical exercise activity. The risk-free interest rate is based on the rate for a U.S. government security with the same estimated life at the time of the option grant and the stock purchase rights.
ESPP assumptions and the related fair value per share table are disclosed in the three month period in which there is ESPP activity, such as an ESPP purchase. The Company's ESPP allows for two purchases during the year, one during the second quarter and one during the fourth quarter. The estimated life of the ESPP will be based on the two purchase periods within each offering period.

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Table of Contents

The estimated forfeiture rate applied is based on historical forfeiture rates. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option pricing model.
During fiscal 2016, the Company granted a performance-based restricted stock unit award to the Chairman of the Board and Chief Executive Officer and during fiscal 2017, the Company granted performance-based restricted stock unit awards to certain executive officers, including the Chairman of the Board and Chief Executive Officer. In the first quarter of fiscal 2019, the Company granted additional performance-based restricted stock unit awards to certain employees, including the Chairman of the Board and Chief Executive Officer and other senior executives. The performance-based restricted stock unit awards are subject to vesting based on a performance-based condition and a service-based condition. At the end of the three-year service period, based on the Company's share price performance, these performance-based restricted stock units will vest in a percentage of the target number of shares between 0 and 200%, depending on the extent the performance condition is achieved.
Stock activity excluding the ESPP is as follows:
 
 
 
Options Outstanding
 
Shares
Available for
Grant
(in thousands)
 
Outstanding
Stock
Options
(in thousands)
 
Weighted-
Average
Exercise Price
 
Aggregate
Intrinsic Value (in millions)
Balance as of January 31, 2018
50,313

 
21,735

 
$
65.96

 
 
Increase in shares authorized:
 
 
 
 
 
 
 
Assumed equity plans
18

 
0

 
24.23

 

Options granted under all plans
(6,230
)
 
6,230

 
118.02

 
 
Restricted stock activity
(16,558
)
 
0

 
0.00

 
 
Performance-based restricted stock units
(1,878
)
 
0

 
0.00

 

Stock grants to board and advisory board members
(43
)
 
0

 
0.00

 
 
Exercised
0

 
(1,928
)
 
58.82

 
 
Plan shares expired
(5
)
 
0

 
0.00

 
 
Canceled
337

 
(337
)
 
84.18

 
 
Balance as of April 30, 2018
25,954

 
25,700

 
$
78.81

 
$
1,084

Vested or expected to vest
 
 
23,548

 
$
76.90

 
$
1,038

Exercisable as of April 30, 2018
 
 
10,842

 
$
61.29

 
$
647

The total intrinsic value of the options exercised during the three months ended April 30, 2018 and 2017 was $121 million and $125 million, respectively. The intrinsic value is the difference between the current market value of the stock and the exercise price of the stock option.
The weighted-average remaining contractual life of vested and expected to vest options is approximately 5 years.
As of April 30, 2018, options to purchase 10.8 million shares were vested at a weighted average exercise price of $61.29 per share and had a remaining weighted-average contractual life of approximately 4 years. The total intrinsic value of these vested options as of April 30, 2018 was $647 million.
During the three months ended April 30, 2018, the Company recognized stock-based expense related to its equity plans for employees and non-employee directors of $252 million. As of April 30, 2018, the aggregate stock compensation remaining to be amortized to costs and expenses was approximately $2.7 billion. The Company will amortize this stock compensation balance as follows: $847 million during the remaining nine months of fiscal 2019; $870 million during fiscal 2020; $612 million during fiscal 2021; $343 million during fiscal 2022; $54 million during fiscal 2023 and $8 million thereafter. The expected amortization reflects only outstanding stock awards as of April 30, 2018 and assumes no forfeiture activity.
The aggregate stock compensation remaining to be amortized to costs and expenses will be recognized over a weighted average period of 2 years.

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Table of Contents

The following table summarizes information about stock options outstanding as of April 30, 2018:
 
 
Options Outstanding
 
Options Exercisable
Range of Exercise
Prices
 
Number
Outstanding
(in thousands)
 
Weighted-
Average
Remaining
Contractual Life
(Years)
 
Weighted-
Average
Exercise
Price
 
Number of
Shares
(in thousands)
 
Weighted-
Average
Exercise
Price
$0.86 to $52.30
 
3,715

 
3.8
 
$
37.88

 
3,215

 
$
42.64

$53.60 to $58.86
 
401

 
3.3
 
55.97

 
332

 
56.08

$59.34
 
3,953

 
3.6
 
59.34

 
3,172

 
59.34

$59.37 to $75.01
 
1,224

 
4.9
 
70.07

 
525

 
70.17

$75.57
 
4,741

 
5.5
 
75.57

 
1,335

 
75.57

$76.48 to $80.62
 
558

 
5.1
 
78.59

 
232

 
78.68

$80.99 to $122.82
 
11,108

 
6.0
 
102.62

 
2,031

 
81.05

 
 
25,700

 
5.1
 
$
78.81

 
10,842

 
$
61.29

Restricted stock activity is as follows:
 
Restricted Stock Outstanding
 
Outstanding
(in thousands)
 
Weighted Average Grant Date Fair Value
 
Aggregate
Intrinsic
Value (in millions)
Balance as of January 31, 2018
19,018

 
$
77.85

 
 
Granted - restricted stock units and awards
8,210

 
117.93

 
 
Granted - performance-based stock units
437

 
118.16

 
 
Canceled
(480
)
 
77.72

 
 
Vested and converted to shares
(2,136
)
 
73.86

 
 
Balance as of April 30, 2018
25,049

 
$
91.95

 
$
3,031

Expected to vest
21,233

 
 
 
$
2,569

The restricted stock, which upon vesting entitles the holder to one share of common stock for each share of restricted stock, has an exercise price of $0.001 per share, which is equal to the par value of the Company’s common stock, and generally vests over four years. The total fair value of shares vested during the three months ended April 30, 2018 and 2017 was $246 million and $166 million, respectively.
Common Stock
The following number of shares of common stock were reserved and available for future issuance at April 30, 2018 (in thousands):
Options outstanding
25,700

Restricted stock awards and units and performance-based stock units outstanding
25,049

Stock available for future grant:
 
2013 Equity Incentive Plan
25,336

2014 Inducement Plan
511

Amended and Restated 2004 Employee Stock Purchase Plan
7,518

Acquired equity plans
107

Warrants
17,309

 
101,530

12. Income Taxes
Effective Tax Rate
The Company computes its year-to-date provision for income taxes by applying the estimated annual effective tax rate to year to date pretax income or loss and adjusts the provision for discrete tax items recorded in the period. For the three months

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Table of Contents

ended April 30, 2018, the Company reported a tax provision of $41 million on a pretax income of $385 million, which resulted in an effective tax rate of 11 percent. The Company recorded year-to-date tax provision primarily from profitable jurisdictions outside of the United States.
In December 2017, the Tax Act was enacted into law, significantly changing income tax law that affects U.S.
corporations. Key changes included a corporate tax rate reduction from 35 percent to 21 percent effective January 1, 2018,
expensing of certain qualified property, significant changes to the U.S international tax system such as such as a one-time transition tax on accumulated foreign earnings, and how foreign earnings are subject to U.S. tax. Due to the timing of the Tax Act and additional guidance and interpretations that may be issued in the future, the Company has not completed its analysis of the effects of the Tax Act and recorded provisional estimates in the period ended January 31, 2018. The provisional estimates will be adjusted during the measurement period defined under SAB 118, based upon the Company's ongoing analysis of its data and tax positions along with new guidance from regulators and interpretations of the law. During the three months ended April 30, 2018, the Company did not adjust its provisional estimates.
The Company regularly assesses the realizability of the deferred tax assets and establishes a valuation allowance if it is more-likely-than-not that some or all of the Company's deferred tax assets will not be realized. The Company evaluates and weighs all available positive and negative evidence such as historic results, future reversals of existing deferred tax liabilities, projected future taxable income, as well as prudent and feasible tax-planning strategies. The Company will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions going forward. The Company may release all or a portion of its valuation allowance if there is sufficient positive evidence that outweighs the negative evidence, for example, if
the trend in profitability continues.
For the three months ended April 30, 2017, the Company reported a tax benefit of $11 million on a pretax loss of $10 million, which resulted in an effective tax rate of 110 percent. In computing the estimated annual effective tax rate, the Company expected pretax income for the full year and projected tax expense primarily related to profitable jurisdictions outside the United States. In addition, the tax benefit included a discrete benefit relating to the realization of certain U.S. state deferred taxes.
Tax Benefits Related to Stock-Based Compensation
The income tax benefit related to stock-based compensation was $48 million and $68 million for the three months ended April 30, 2018 and 2017, respectively, the majority of which was not recognized as a result of the valuation allowance.
Unrecognized Tax Benefits and Other Considerations
The Company records liabilities related to its uncertain tax positions. Tax positions for the Company and its subsidiaries are subject to income tax audits by multiple tax jurisdictions throughout the world. Certain prior year tax returns are currently being examined or reviewed by various taxing authorities in countries including the United States, Australia, France, United Kingdom and Germany. In March 2017, the Company received the final notice of proposed adjustments primarily related to transfer pricing issues from the Internal Revenue Service and is currently appealing the proposed adjustments. The Company believes that it has provided adequate reserves for its income tax uncertainties in all open tax years. As the outcome of the tax audits cannot be predicted with certainty, if any issues addressed in the Company's tax audits are resolved in a manner inconsistent with management's expectations, the Company could adjust its provision for income taxes in the future. Generally, any adjustments resulting from the U.S. audits should not have a significant impact to the Company's tax provision due to its valuation allowance. In addition, the Company anticipates it is reasonably possible that a decrease of unrecognized tax benefits up to approximately $19 million may occur in the next 12 months, as the applicable statutes of limitations lapse, ongoing examinations are completed, or tax positions meet the conditions of being effectively settled.
13. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding for the fiscal period. Diluted earnings per share is computed by giving effect to all potential weighted average dilutive common stock, including options, restricted stock units, warrants and the convertible senior notes. The dilutive effect of outstanding awards and convertible securities is reflected in diluted earnings per share by application of the treasury stock method.

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Table of Contents

A reconciliation of the denominator used in the calculation of basic and diluted earnings per share is as follows (in millions):
 
Three Months Ended April 30,
 
2018
 
2017
Numerator:
 
 
 
Net income
$
344

 
$
1

Denominator:
 
 
 
Weighted-average shares outstanding for basic earnings per share
729

 
706

Effect of dilutive securities:
 
 
 
Convertible senior notes
4

 
4

Employee stock awards
17

 
12

Warrants
4

 
0

Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share
754

 
722

The weighted-average number of shares outstanding used in the computation of diluted earnings per share does not include the effect of the following potential outstanding common stock. The effects of these potentially outstanding shares were not included in the calculation of diluted earnings per share because the effect would have been anti-dilutive (in millions):
 
Three Months Ended April 30,
 
2018
 
2017
Employee stock awards
3

 
14

Convertible senior notes
0

 
0

Warrants
0

 
17

14. Commitments
Letters of Credit
As of April 30, 2018, the Company had a total of $100 million in letters of credit outstanding substantially in favor of certain landlords for office space. These letters of credit renew annually and expire at various dates through December 2030.
Leases
The Company leases facilities space and certain fixed assets under non-cancelable operating and capital leases with various expiration dates.

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Table of Contents

As of April 30, 2018, the future minimum lease payments under non-cancelable operating and capital leases are as follows (in millions):
 
Capital
Leases
 
Operating
Leases
 
Financing Obligation -Leased Facility (1)
Fiscal Period:
 
 
 
 
 
Remaining nine months of Fiscal 2019
$
113

 
$
509

 
$
16

Fiscal 2020
201

 
626

 
22

Fiscal 2021
0

 
487

 
23

Fiscal 2022
0

 
340

 
23

Fiscal 2023
0

 
310

 
24

Thereafter
0

 
1,264

 
187

Total minimum lease payments
314

 
$
3,536

 
$
295

Less: amount representing interest
(22
)
 

 

Present value of capital lease obligations
$
292

 

 

(1) Total Financing Obligation - Leased Facility noted above represents the total obligation on the lease agreement including amounts allocated to interest and the implied lease for the land. As of April 30, 2018, $217 million of the total $295 million above was recorded to Financing obligation leased facility, of which the current portion is included in "Accounts payable, accrued expenses and other liabilities" and the noncurrent portion is included in “Other noncurrent liabilities” on the condensed consolidated balance sheet.
The Company’s agreements for the facilities and certain services provide the Company with the option to renew. The Company’s future contractual obligations would change if the Company exercised these options.
The terms of the lease agreements provide for rental payments on a graduated basis. The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not paid. Of the total operating lease commitment balance of $3.5 billion, approximately $2.9 billion is related to facilities space. The remaining commitment amount is related to computer equipment and furniture and fixtures.
The Company has entered into various contractual commitments with infrastructure service providers for a total commitment of $2.0 billion. As of April 30, 2018 the total remaining commitment is approximately $1.9 billion and $94 million is remaining to be paid this fiscal year.
15. Legal Proceedings and Claims
In the ordinary course of business, the Company is or may be involved in various legal or regulatory proceedings, claims or purported class actions related to alleged infringement of third-party patents and other intellectual property rights, commercial, corporate and securities, labor and employment, wage and hour, and other claims. The Company has been, and may in the future be put on notice and/or sued by third-parties for alleged infringement of their proprietary rights, including patent infringement.
In general, the resolution of a legal matter could prevent the Company from offering its service to others, could be material to the Company’s financial condition or cash flows, or both, or could otherwise adversely affect the Company’s operating results.
The Company makes a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. The outcomes of legal proceedings and other contingencies are, however, inherently unpredictable and subject to significant uncertainties. As a result, the Company is not able to reasonably estimate the amount or range of possible losses in excess of any amounts accrued, including losses that could arise as a result of application of non-monetary remedies, with respect to the contingencies it faces, and the Company’s estimates may not prove to be accurate. In management’s opinion, resolution of all current matters is not expected to have a material adverse impact on the Company’s condensed consolidated results of operations, cash flows or financial position. However, depending on the nature and timing of any such dispute or other contingency, an unfavorable resolution of a matter could materially affect the Company’s current or future results of operations or cash flows, or both, in a particular quarter.
In September 2013, one of the Company’s subsidiaries, ExactTarget, Inc. (“ExactTarget”), was added as a defendant in a purported class-action lawsuit that alleged that ExactTarget and one of its customers, Simply Fashion Stores, Ltd. (“Simply Fashion”), violated the Telephone Consumer Protection Act (“TCPA”) as a result of Simply Fashion’s text messaging

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campaigns and alleged failure to opt-out certain Simply Fashion customers from receiving messages. The complaint was subsequently amended to remove Simply Fashion as a defendant and the lawsuit is currently before the United States District Court for the Southern District of Indiana. The complaint seeks statutory damages and injunctive relief. While disputing the allegations of wrongdoing, the Company reached a settlement of the lawsuit for approximately $6 million in fiscal 2018. The parties submitted the settlement agreement to the Court for approval and the Court entered the preliminary approval order.  The Court set the final approval hearing for July 20, 2018.
16. Related-Party Transactions
In January 1999, the Salesforce.com Foundation, also referred to as the Foundation, was chartered on an idea of leveraging the Company’s people, technology, and resources to help improve communities around the world. The Company calls this integrated philanthropic approach the 1-1-1 model. Beginning in 2008, Salesforce.org, which is a non-profit public benefit corporation, was established to resell the Company's services to nonprofit organizations and certain higher education organizations.
The Company’s Chairman is the chairman of both the Foundation and Salesforce.org. The Company’s Chairman holds one of the three Foundation board seats. The Company’s Chairman, one of the Company’s employees and one of the Company’s board members hold three of Salesforce.org’s nine board seats. The Company does not control the Foundation’s or Salesforce.org's activities, and accordingly, the Company does not consolidate either of the related entities' statement of activities with its financial results.
Since the Foundation’s and Salesforce.org’s inception, the Company has provided at no charge certain resources to those entities' employees such as office space, furniture, equipment, facilities, services, and other resources. The value of these items was approximately $4 million and $2 million for the three months ended April 30, 2018 and 2017, respectively.
Additionally, the Company allows Salesforce.org to donate subscriptions of the Company’s services to other qualified non-profit organizations. The Company also allows Salesforce.org to resell the Company’s service to non-profit organizations and certain education entities. The Company does not charge Salesforce.org for these subscriptions, therefore income from subscriptions sold to non-profit organizations is donated back to the community through charitable grants made by the Foundation and Salesforce.org. The value of the subscriptions sold by Salesforce.org pursuant to the reseller agreement, as amended, was approximately $56 million and $40 million for the three months ended April 30, 2018 and 2017, respectively.
17. Subsequent Events
In May 2018, the Company acquired all outstanding stock of MuleSoft, Inc. ("MuleSoft”), which provides a platform for building application networks that connect enterprise apps, data and devices, across any cloud and on-premise.  The preliminary acquisition date fair value of the consideration transferred for MuleSoft is estimated to be approximately $6.5 billion comprised of $4.9 billion in cash, including proceeds from the three year term loan of $500 million (see Note 9), $1.2 billion in common stock issued, and $0.4 billion related to the fair value of stock options and restricted stock awards assumed.
Approximately $5 million of transaction costs, such as legal, accounting and banker fees associated with the acquisition, were recorded in general and administrative expense for the three months ended April 30, 2018. Total impact to the Company's statement of operations for the three months ended April 30, 2018 was approximately $25 million which includes, in addition to transaction costs, financing costs associated with the acquisition such as debt issuance costs associated with the Bridge Facility of $11 million and additional interest expense incurred related to the issuance of the 2023 Senior Notes and 2028 Senior Notes of $5 million.




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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Words such as “expects,” “anticipates,” “aims,” “projects,” “intends,” “plans,” “believes,” “estimates,” “seeks,” “assumes,” “may,” “should,” “could,” “would,” “foresees,” “forecasts,” “predicts,” “targets,” variations of such words and similar expressions are intended to identify such forward-looking statements, which may consist of, among other things, trend analyses and statements regarding future events, future financial performance, anticipated growth and industry prospects. These forward-looking statements are based on current expectations, estimates and forecasts, as well as the beliefs and assumptions of our management, and are subject to risks and uncertainties that are difficult to predict, including: the effect of general economic and market conditions; the impact of foreign currency exchange rate and interest rate fluctuations on our results; our business strategy and our plan to build our business, including our strategy to be the leading provider of enterprise cloud computing applications and platforms; the pace of change and innovation in enterprise cloud computing services; the competitive nature of the market in which we participate; our international expansion strategy; our service performance and security, including the resources and costs required to prevent, detect and remediate potential security breaches; the expenses associated with new data centers and third-party infrastructure providers; additional data center capacity; real estate and office facilities space; our operating results and cash flows; new services and product features; our strategy of acquiring or making investments in complementary businesses, joint ventures, services, technologies and intellectual property rights; the performance and fair value of our investments in complementary businesses through our strategic investment portfolio; our ability to realize the benefits from strategic partnerships and investments; our ability to successfully integrate acquired businesses and technologies; our ability to continue to grow and maintain unearned revenue and remaining transaction price; our ability to protect our intellectual property rights; our ability to develop our brands; our reliance on third-party hardware, software and platform providers; our dependency on the development and maintenance of the infrastructure of the Internet; the effect of evolving domestic and foreign government regulations, including those related to the provision of services on the Internet, those related to accessing the Internet, and those addressing data privacy, cross-border data transfers and import and export controls; the valuation of our deferred tax assets; the potential availability of additional tax assets in the future; the impact of new accounting pronouncements and tax laws, including the U.S. Tax Cuts and Jobs Act, and interpretations thereof; uncertainties affecting our ability to estimate our tax rate; the impact of expensing stock options and other equity awards; the sufficiency of our capital resources; factors related to our 2023 and 2028 senior notes, revolving credit facility, 2019 term loan and loan associated with 50 Fremont; compliance with our debt covenants and capital lease obligations; current and potential litigation involving us; and the impact of climate change. These and other risks and uncertainties may cause our actual results to differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified below under “Risk Factors” and elsewhere in this report for additional detail regarding factors that may cause actual results to be different than those expressed in our forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Overview
We are a leading provider of enterprise cloud computing solutions, with a focus on customer relationship management, or CRM. We introduced our first CRM solution in 2000, and we have since expanded our service offerings with new editions, features and platform capabilities. Our core mission is to empower our customers to connect with their customers in entirely new ways through cloud, mobile, social, Internet of Things (“IoT”) and artificial intelligence technologies.
Our Customer Success Platform - including sales force automation, customer service and support, marketing automation, digital commerce, community management, industry-specific solutions, analytics, integration solutions, application development, IoT integration, collaborative productivity tools, our AppExchange, which is our enterprise cloud marketplace, and our professional cloud services - provides the tools customers need to succeed in a digital world. Key elements of our strategy include:
cross sell and upsell;
extend existing service offerings;
reduce customer attrition;
expand and strengthen the partner ecosystem;
expand internationally;
target vertical industries;
expand into new horizontal markets;
extend go-to-market capabilities;
ensure strong customer adoption; and

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encourage the development of third-party applications on our cloud computing platform.
We are also committed to a sustainable, low-carbon future, advancing equality and diversity, and fostering employee success. We try to integrate social good into everything we do. All of these goals align with our long-term growth strategy and financial and operational priorities.
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; our ability to maintain a balanced portfolio of products and customers; the availability, performance and security of our service; our ability to continue to release, and gain customer acceptance of new and improved features; our ability to successfully integrate acquired businesses and technologies; successful customer adoption and utilization of our service; our ability to continue to meet new and evolving privacy laws and regulations, acceptance of our service in markets where we have few customers; the emergence of additional competitors in our market and improved product offerings by existing and new competitors; the location of new data centers that we operate as well as the new locations of services provided by third-party cloud computing platform providers; third-party developers’ willingness to develop applications on our platforms; our ability to attract new personnel and retain and motivate current personnel; and general economic conditions which could affect our customers’ ability and willingness to purchase our services, delay the customers’ purchasing decision or affect attrition rates.
To address these factors, we will need to, among other things, continue to add substantial numbers of paying subscriptions, upgrade our customers to fully featured versions or arrangements such as an Enterprise License Agreement, provide high quality technical support to our customers, encourage the development of third-party applications on our platforms, realize the benefits from our strategic partnerships and continue to focus on retaining customers at the time of renewal. Our plans to invest for future growth include the continuation of the expansion of our data center capacity, whether internally or through the use of third parties, the hiring of additional personnel, particularly in direct sales, other customer-related areas and research and development, the expansion of domestic and international selling and marketing activities, specifically in our top markets, the continued development of our brands, the addition of distribution channels, the upgrade of our service offerings, the continued development of services including Community Cloud, Industry Clouds, Success Cloud and Integration Cloud, the integration of new and acquired technologies such as Commerce Cloud, artificial intelligence technologies and Salesforce Quip, the expansion of our Marketing Cloud and Salesforce Platform core service offerings, and the additions to our global infrastructure to support our growth.
We also regularly evaluate acquisitions or investment opportunities in complementary businesses, joint ventures, services and technologies and intellectual property rights in an effort to expand our service offerings. We expect to continue to make such investments and acquisitions in the future and we plan to reinvest a significant portion of our incremental revenue in future periods to grow our business and continue our leadership role in the cloud computing industry. As part of our growth strategy, we are delivering innovative solutions in new categories, including analytics, e-commerce, artificial intelligence, IoT and collaborative productivity tools. We drive innovation organically and to a lesser extent through acquisitions, such as our May 2018 acquisition of MuleSoft, Inc. We have a disciplined and thoughtful acquisition process where we routinely survey the industry landscape across a wide range of companies. As a result of our aggressive growth plans and integration of our previously acquired businesses, we have incurred significant expenses from equity awards and amortization of purchased intangibles, which have reduced our operating income. We remain focused on improving operating margins in fiscal 2019 and beyond.
Our typical subscription contract term is 12 to 36 months, although terms range from one to 60 months, so during any fiscal reporting period only a subset of active subscription contracts is eligible for renewal. We calculate our attrition rate as of the end of each month. Our attrition rate, including the Marketing Cloud service offering but excluding our Commerce Cloud serving offering, was less than ten percent as of Apr