CRM
$70.62
Salesforce.Com
($.18)
(.25%)
Earnings Details
3rd Quarter October 2016
Thursday, November 17, 2016 4:05:00 PM
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Summary

Salesforce.Com Misses

Salesforce.Com (CRM) reported 3rd Quarter October 2016 earnings of $0.21 per share on revenue of $2.1 billion. The consensus earnings estimate was $0.21 per share on revenue of $2.1 billion. The Earnings Whisper number was $0.22 per share. Revenue grew 25.3% on a year-over-year basis.

The company said it expects fourth quarter earnings of $0.24 to $0.25 per share on revenue of $2.267 billion to $2.277 billion. The current consensus earnings estimate is $0.25 per share on revenue of $2.24 billion for the quarter ending January 31, 2017.

Salesforce.com Inc provides enterprise cloud computing solutions, offering social and mobile cloud apps and platform services, as well as professional services to facilitate the adoption of its solutions.

Results
Reported Earnings
$0.21
Earnings Whisper
$0.22
Consensus Estimate
$0.21
Reported Revenue
$2.14 Bil
Revenue Estimate
$2.12 Bil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Salesforce Announces Fiscal 2017 Third Quarter Results

Salesforce (CRM), the Customer Success Platform and world’s #1 CRM company, today announced results for its third fiscal quarter ended October 31, 2016.

http://photos.prnewswire.com/prnvar/20130612/SF30598LOGO

"Salesforce delivered an exceptional quarter with year-over-year revenue growth of 25% in dollars and 27% in constant currency," said Marc Benioff, chairman and CEO, Salesforce. "I’m delighted to announce that we expect to deliver our first $10 billion year during our fiscal year 2018, which puts us well on the path to reach $20 billion faster than any other enterprise software company."

"We had outstanding execution in the third quarter, closing a record number of large transactions as more and more companies look to Salesforce as their trusted advisor to redefine their customer strategies," said Keith Block, vice chairman, president and COO, Salesforce. "No other enterprise software company is delivering customer success at this scale -- and certainly not at this pace."

"We delivered another strong quarter of booked business on and off the balance sheet, which is now more than $12 billion, up 27% year-over-year," said Mark Hawkins, CFO, Salesforce. "We are pleased to raise our fiscal full-year 2017 revenue guidance by $50 million to $8.375 billion at the high end of the range."

Salesforce delivered the following results for its third fiscal quarter 2017:

Revenue: Total revenue was $2.14 billion, an increase of 25% year-over-year, and 27% in constant currency. Subscription and support revenues were $1.98 billion, an increase of 24% year-over-year. Professional services and other revenues were $161 million, an increase of 39% year-over-year.

Earnings per Share: GAAP loss per share was ($0.05), and non-GAAP diluted earnings per share was $0.24.

Cash: Cash generated from operations was $154 million, a decrease of 5% year-over-year. Total cash, cash equivalents and marketable securities finished the quarter at $1.75 billion.

Deferred Revenue: Deferred revenue on the balance sheet as of October 31, 2016 was $3.50 billion, an increase of 23% year-over-year, and 25% in constant currency. Unbilled deferred revenue, representing business that is contracted but unbilled and off balance sheet, ended the third quarter at approximately $8.6 billion, up 28% year-over-year. This includes approximately $350 million related to unbilled deferred revenue from the Demandware acquisition.

As of November 17, 2016, the company is initiating revenue, earnings per share, and deferred revenue guidance for its fourth quarter of fiscal year 2017. In addition, the company is raising its full fiscal year 2017 revenue and non-GAAP earnings per share guidance, lowering its GAAP earnings per share guidance, and maintaining its operating cash flow guidance, previously provided on August 31, 2016. The company is also initiating revenue guidance for its fiscal year 2018. This guidance includes the impact of acquisitions that have closed to date or have signed and are expected to close in the company’s fourth quarter of fiscal 2017.

Q4 FY17 Guidance: Revenue is projected to be approximately $2.267 billion to $2.277 billion, an increase of 25% to 26% year-over-year.

GAAP loss per share is projected to be ($0.10) to ($0.09), while non-GAAP diluted earnings per share is projected to be $0.24 to $0.25.

On balance sheet deferred revenue growth is projected to be approximately 22% to 23% year-over-year.

Full Year FY17 Guidance: Revenue is projected to be approximately $8.365 billion to $8.375 billion, an increase of 25% to 26% year-over-year.

GAAP diluted earnings per share is projected to be $0.24 to $0.25, while non-GAAP diluted earnings per share is projected to be $0.97 to $0.98.

Operating cash flow growth is projected to be 20% to 21% year-over-year.

Full Year FY18 Guidance: Revenue for the company’s full fiscal year 2018 is projected to be approximately $10.1 billion to $10.15 billion, an increase of 21% year-over-year. The company plans on providing its expectations for FY18 GAAP EPS, non-GAAP EPS, and operating cash flow when it announces its fourth quarter and full fiscal year 2017 results in February 2017.

The following is a per share reconciliation of GAAP diluted earnings per share to non-GAAP diluted earnings per share guidance for the next quarter and full fiscal year:

Fiscal 2017
Q4
FY2017
GAAP (loss) EPS range*
($0.10) - ($0.09)
$0.24 - $0.25
Plus
Amortization of purchased intangibles
$
0.09
$
0.31
Stock-based expense
$
0.34
$
1.17
Amortization of debt discount, net
$
0.01
$
0.04
Less
Gains on sales of strategic investments
$
- $
(0.02)
Income tax effects and adjustments**
$
(0.10)
$
(0.77)
Non-GAAP diluted EPS
$0.24 - $0.25
$0.97 - $0.98
Shares used in computing basic net income per share (millions)
702
688
Shares used in computing diluted net income per share (millions) 724
703
* For Q4 GAAP (loss) EPS, basic number of shares used for calculation and expected tax rate of (42%). For FY17 GAAP EPS, diluted number of shares used for calculation and expected tax rate of (1,550%). Note that full year expected tax rate is high as GAAP profitability is near break-even.
** The Company’s non-GAAP tax provision uses a long-term projected tax rate of 35%.

For additional information regarding non-GAAP financial measures see the reconciliation of results and related explanations below.

Quarterly Conference Call Salesforce will host a conference call at 2:00 p.m. (PT) / 5:00 p.m. (ET) today to discuss its financial results with the investment community. A live web broadcast of the event will be available on the Salesforce Investor Relations website at www.salesforce.com/investor. A live dial-in is available domestically at 866-901-SFDC or 866-901-7332 and internationally at 706-902-1764, passcode 6538283. A replay will be available at (800) 585-8367 or (855) 859-2056 until midnight (ET) Dec. 17, 2016.

About Salesforce Salesforce, the Customer Success Platform and world’s #1 CRM company, empowers companies to connect with their customers in a whole new way. Salesforce has headquarters in San Francisco, with offices in Europe and Asia, and trades on the New York Stock Exchange under the ticker symbol "CRM." For more information about Salesforce, visit: www.salesforce.com.

"Safe harbor" statement under the Private Securities Litigation Reform Act of 1995: This press release contains forward-looking statements about our financial results, which may include expected GAAP and non-GAAP financial and other operating and non-operating results, including revenue, net income (loss), diluted earnings per share, operating cash flow growth, operating margin improvement, deferred revenue growth, expected revenue run rate, expected tax rates, stock-based compensation expenses, amortization of purchased intangibles, amortization of debt discount and shares outstanding. The achievement or success of the matters covered by such forward-looking statements involves risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, the company’s results could differ materially from the results expressed or implied by the forward-looking statements we make.

The risks and uncertainties referred to above include -- but are not limited to -- risks associated with possible fluctuations in the company’s financial and operating results; the company’s rate of growth and anticipated revenue run rate, including the company’s ability to convert deferred revenue and unbilled deferred revenue into revenue and, cash flow, and ability to maintain continued growth of deferred revenue and unbilled deferred revenue; foreign currency exchange rates; errors, interruptions or delays in the company’s services or the company’s Web hosting; breaches of the company’s security measures; the financial and other impact of any previous and future acquisitions; the nature of the company’s business model; the company’s ability to continue to release, and gain customer acceptance of, new and improved versions of the company’s services; successful customer deployment and utilization of the company’s existing and future services; changes in the company’s sales cycle; competition; various financial aspects of the company’s subscription model; unexpected increases in attrition or decreases in new business; the company’s ability to realize benefits from strategic partnerships and strategic investments; the emerging markets in which the company operates; unique aspects of entering or expanding in international markets, the company’s ability to hire, retain and motivate employees and manage the company’s growth; changes in the company’s customer base; technological developments; regulatory developments; litigation related to intellectual property and other matters, and any related claims, negotiations and settlements; unanticipated changes in the company’s effective tax rate; factors affecting the company’s outstanding convertible notes and revolving credit facility; fluctuations in the number of company shares outstanding and the price of such shares; collection of receivables; interest rates; factors affecting the company’s deferred tax assets and ability to value and utilize them; the potential negative impact of indirect tax exposure; the risks and expenses associated with the company’s real estate and office facilities space; and general developments in the economy, financial markets, and credit markets.

Further information on these and other factors that could affect the company’s financial results is included in the reports on Forms 10-K, 10-Q and 8-K and in other filings we make with the Securities and Exchange Commission from time to time. These documents are available on the SEC Filings section of the Investor Information section of the company’s website at www.salesforce.com/investor.

Salesforce.com, inc. assumes no obligation and does not intend to update these forward-looking statements, except as required by law.

? 2016 salesforce.com, inc. All rights reserved. Salesforce and other marks are trademarks of salesforce.com, inc. Other brands featured herein may be trademarks of their respective owners.

salesforce.com, inc.
Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
Three Months Ended
Nine Months Ended
October 31,
October 31,
2016
2015
2016
2015
Revenues:
Subscription and support
$
1,983,981
$1,596,333
$
5,645,554
$
4,522,939
Professional services and other
160,794
115,634
452,442
334,879
Total revenues
2,144,775
1,711,967
6,097,996
4,857,818
Cost of revenues (1)(2):
Subscription and support
411,363
303,045
1,108,134
870,023
Professional services and other
174,159
120,638
499,948
340,846
Total cost of revenues
585,522
423,683
1,608,082
1,210,869
Gross profit
1,559,253
1,288,284
4,489,914
3,646,949
Operating expenses (1)(2):
Research and development
311,459
239,212
863,935
695,440
Marketing and sales
997,993
818,820
2,828,784
2,349,449
General and administrative
246,765
186,818
709,622
544,314
Operating lease termination resulting from purchase of 50 Fremont 0
0
0
(36,617)
Total operating expenses
1,556,217
1,244,850
4,402,341
3,552,586
Income from operations
3,036
43,434
87,573
94,363
Investment income
3,709
3,507
23,747
11,351
Interest expense
(21,946)
(18,249)
(64,665)
(53,020)
Other income (expense) (1)
1,782
(7,093)
(11,500)
(6,064)
Gain on sales of land and building improvements
0
21,792
0
21,792
Gains on sales of strategic investments
833
0
13,697
0
Income (loss) before benefit from (provision for) income taxes
(12,586)
43,391
48,852
68,422
Benefit from (provision for) income taxes (3)
(24,723)
(68,548)
182,220
(90,339)
Net income (loss)
$
(37,309)
$
(25,157)
$
231,072
$
(21,917)
Basic net income (loss) per share
$
(0.05)
$
(0.04)
$
0.34
$
(0.03)
Diluted net income (loss) per share
$
(0.05)
$
(0.04)
$
0.33
$
(0.03)
Shares used in computing basic net income (loss) per share
690,468
664,131
683,075
659,160
Shares used in computing diluted net income (loss) per
share
690,468
664,131
696,257
659,160
__________________
(1)
Amounts include amortization of purchased intangibles from business combinations, as follows:
Three Months Ended October 31,
Nine Months Ended October 31,
2016
2015
2016
2015
Cost of revenues
$ 36,703
$ 20,296
$ 84,462
$ 60,825
Marketing and sales
28,064
18,966
66,601
57,995
Other non-operating expense 579
761
1,927
2,877
(2)
Amounts include stock-based expense, as follows:
Three Months Ended October 31,
Nine Months Ended October 31,
2016
2015
2016
2015
Cost of revenues
$ 26,783
$ 17,516
$ 76,912
$ 49,237
Research and development
50,372
31,534
124,164
96,508
Marketing and sales
93,718
69,561
275,515
211,819
General and administrative
33,878
25,706
99,389
77,092
(3) Amounts include a $205.6 million tax benefit recorded during the nine months ended October 31, 2016 as a result of the release of a portion of the valuation allowance related to the Demandware, Inc. acquisition.
salesforce.com, inc.
Consolidated Statements of Operations
(As a percentage of total revenues)
(Unaudited)
Three Months Ended October 31,
Nine Months Ended October 31,
2016
2015
2016
2015
Revenues:
Subscription and support
93 %
93 %
93%
93 %
Professional services and other
7
7
7
7
Total revenues
100
100
100
100
Cost of revenues (1)(2):
Subscription and support
19
18
18
18
Professional services and other
8
7
8
7
Total cost of revenues
27
25
26
25
Gross profit
73
75
74
75
Operating expenses (1)(2):
Research and development
15
14
14
14
Marketing and sales
47
48
46
49
General and administrative
11
11
12
11
Operating lease termination resulting from purchase of 50 Fremont 0
0
0
(1)
Total operating expenses
73
73
72
73
Income from operations
0
2
2
2
Investment income
0
0
0
0
Interest expense
(1)
(1)
(1)
(1)
Other income (expense) (1)
0
0
0
0
Gain on sales of land and building improvements
0
2
0
1
Gains on sales of strategic investments
0
0
0
0
Income (loss) before benefit from (provision for) income taxes
(1)
3
1
2
Benefit from (provision for) income taxes
(1)
(4)
3
(2)
Net income (loss)
(2)%
(1)%
4%
0%
__________________
(1)
Amortization of purchased intangibles from business combinations as a percentage of total revenues, as follows:
Three Months Ended October 31,
Nine Months Ended October 31,
2016
2015
2016
2015
Cost of revenues
2%
1%
1%
1%
Marketing and sales
1
1
1
1
Other non-operating expense 0
0
0
0
(2) Stock-based expense as a percentage of total revenues, as follows:
Three Months Ended October 31,
Nine Months Ended October 31,
2016
2015
2016
2015
Cost of revenues
1%
1%
1%
1%
Research and development
2
2
2
2
Marketing and sales
4
4
5
4
General and administrative 2
1
2
2
salesforce.com, inc.
Consolidated Balance Sheets
(in thousands)
October 31,
January 31,
2016
2016
(unaudited)
Assets
Current assets:
Cash and cash equivalents
$
1,145,736
$
1,158,363
Short-term marketable securities
55,071
183,018
Accounts receivable, net
1,281,425
2,496,165
Deferred commissions
237,729
259,187
Prepaid expenses and other current assets
281,593
250,594
Total current assets
3,001,554
4,347,327
Marketable securities, noncurrent
550,323
1,383,996
Property and equipment, net
1,756,673
1,715,828
Deferred commissions, noncurrent
167,839
189,943
Capitalized software, net
637,877
384,258
Goodwill
6,616,999
3,849,937
Strategic investments
555,968
520,721
Other assets, net
1,100,436
370,910
Total assets
$
14,387,669
$
12,762,920
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable, accrued expenses and other liabilities $
1,496,841
$
1,349,338
Deferred revenue
3,478,693
4,267,667
Total current liabilities
4,975,534
5,617,005
Convertible 0.25% senior notes, net
1,109,236
1,088,097
Term loan
496,934
0
Loan assumed on 50 Fremont
198,201
197,998
Deferred revenue, noncurrent
16,440
23,886
Other noncurrent liabilities
785,287
833,065
Total liabilities
7,581,632
7,760,051
Stockholders’ equity:
Common stock
697
671
Additional paid-in capital
7,281,753
5,705,386
Accumulated other comprehensive loss
(62,943)
(49,917)
Accumulated deficit
(413,470)
(653,271)
Total stockholders’ equity
6,806,037
5,002,869
Total liabilities and stockholders’ equity
$
14,387,669
$
12,762,920
salesforce.com, inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Three Months Ended October 31,
Nine Months Ended October 31,
2016
2015
2016
2015
Operating activities:
Net income (loss)
$ (37,309)
$ (25,157)
$ 231,072
$ (21,917)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
169,346
134,236
451,479
393,838
Amortization of debt discount and transaction costs
7,281
7,138
21,334
20,290
Gain on sales of land and building improvements
0
(21,792)
0
(21,792)
Gains on sales of strategic investments
(833)
0
(13,697)
0
50 Fremont lease termination
0
0
0
(36,617)
Abandonment of leasehold improvement
0
7,086
0
7,086
Amortization of deferred commissions
93,230
78,934
270,527
232,768
Expenses related to employee stock plans
204,751
144,317
575,980
434,656
Changes in assets and liabilities, net of business
combinations:
Accounts receivable, net
42,653
15,262
1,276,798
853,014
Deferred commissions
(92,803)
(80,030)
(226,965)
(200,867)
Prepaid expenses and other current assets and other assets
40,676
33,841
(25,723)
4,495
Accounts payable, accrued expenses and other liabilities
57,836
57,577
(275,058)
12,276
Deferred revenue
(330,516)
(188,898)
(829,695)
(475,357)
Net cash provided by operating activities (1)
154,312
162,514
1,456,052
1,201,873
Investing activities:
Business combinations, net of cash acquired
(32,117)
(27,759)
(2,832,110)
(58,680)
Proceeds from land and building improvements held for sale
0
127,066
0
127,066
Purchase of 50 Fremont land and building
0
0
0
(425,376)
Deposit for purchase of 50 Fremont land and building
0
0
0
115,015
Non-refundable amounts received for sale of land available for sale
0
0
0
6,284
Strategic investments, net
(16,877)
(30,330)
(39,328)
(325,226)
Purchases of marketable securities
(111,731)
(200,001)
(986,862)
(543,422)
Sales of marketable securities
93,391
91,153
1,927,049
414,259
Maturities of marketable securities
14,203
7,166
64,741
23,445
Capital expenditures
(140,653)
(80,041)
(319,984)
(216,011)
Net cash used in investing activities
(193,784)
(112,746)
(2,186,494)
(882,646)
Financing activities:
Proceeds from term loan, net
0
0
495,550
0
Proceeds from employee stock plans
92,846
98,016
315,865
367,830
Principal payments on capital lease obligations
(10,997)
(10,945)
(73,760)
(68,844)
Payments on revolving credit facility
0
0
0
(300,000)
Net cash provided by (used in) financing activities (1)
81,849
87,071
737,655
(1,014)
Effect of exchange rate changes
(11,867)
(2,872)
(19,840)
(3,012)
Net increase (decrease) in cash and cash equivalents
30,510
133,967
(12,627)
315,201
Cash and cash equivalents, beginning of period
1,115,226
1,089,351
1,158,363
908,117
Cash and cash equivalents, end of period
$ 1,145,736
$ 1,223,318
$ 1,145,736
$ 1,223,318
(1) During the nine months ended October 31, 2016, the Company early adopted Accounting Standards Update No. 2016-09, "Improvements to Employee Share-Based Payment Accounting (Topic 718)" ("ASU 2016-09"), which addresses among other items, updates to the presentation and treatment of excess tax benefits related to stock based compensation. Excess tax benefits are no longer classified as a reduction of operating cash flows. The Company has adopted changes to the consolidated statements of cash flows on a retrospective basis. The impact for the three and nine months ended October 31, 2015 was an increase of $44,607 and $48,698 to net cash provided by operating activities with a correlating decrease of equal amounts to net cash provided by (used in) financing activities, respectively.
salesforce.com, inc.
Additional Metrics
(Unaudited)
Oct 31,
Jul 31,
Apr 30,
Jan 31,
Oct 31,
Jul 31,
2016
2016
2016
2016
2015
2015
Full Time Equivalent Headcount (1)
23,939
23,247
21,119
19,742
18,726
17,622
Financial data (in thousands):
Cash, cash equivalents and marketable securities
$1,751,130
$1,719,946
$3,715,452
$2,725,377
$2,301,306
$2,066,963
Strategic investments
$
555,968
$
548,258
$
520,750
$
520,721
$
496,809
$
477,886
Deferred revenue, current and noncurrent
$3,495,133
$3,823,561
$4,006,914
$4,291,553
$2,846,510
$3,034,991
Unbilled deferred revenue, a non-GAAP measure (2)
$8,600,000
$8,000,000
$7,600,000
$7,100,000
$6,700,000
$6,200,000
Principal due on our outstanding debt obligations (3) $1,850,000
$1,850,000
$1,350,000
$1,350,000
$1,350,000
$1,350,000
(1) Full time equivalent headcount includes 1,050 from the July 2016 acquisition of Demandware, Inc.
(2) Unbilled deferred revenue represents future billings under our non-cancelable subscription agreements that have not been invoiced and, accordingly, are not recorded in deferred revenue. As of October 31, 2016, $350.0 million of the balance presented relates to Demandware, Inc.
(3) In July 2016, the Company borrowed $500.0 million under a term loan facility to partially fund the acquisition of Demandware, Inc.
Selected Balance Sheet Accounts (in thousands):
October 31,
July 31,
January 31,
2016
2016
2016
Prepaid Expenses and Other Current Assets
Prepaid income taxes
$
22,766
$
23,504
$
22,044
Customer contract asset (4)
0
225,004
1,423
Other taxes receivable
25,829
28,749
27,341
Prepaid expenses and other current assets
232,998
266,595
199,786
$
281,593
$
543,852
$
250,594
Property and Equipment, net
Land
$
183,888
$
183,888
$
183,888
Buildings and building improvements
619,419
619,071
614,081
Computers, equipment and software
1,390,751
1,374,949
1,281,766
Furniture and fixtures
101,558
95,995
82,242
Leasehold improvements
586,040
531,760
473,688
2,881,656
2,805,663
2,635,665
Less accumulated depreciation and amortization
(1,124,983)
(1,077,420)
(919,837)
$
1,756,673
$
1,728,243
$
1,715,828
Capitalized Software, net
Capitalized internal-use software development costs, net of accumulated amortization $
137,989
$
133,388
$
123,065
Acquired developed technology, net of accumulated amortization
499,888
492,826
261,193
$
637,877
$
626,214
$
384,258
(4) Customer contract asset reflects future billings of amounts contractually committed by SteelBrick and Demandware’s existing customers as of the respective acquisition dates to be billed over a period of 72 months. The Company previously accounted for acquired subscription and services contracts and the legal obligation to provide future services as a customer contract asset and a customer contract liability, respectively. In the current quarter, the Company concluded that the acquired subscription and services contracts should more appropriately be accounted for as a single unit of accounting and as such, the fair value of the contractual relationships with customers have been reclassified to be presented as a single noncurrent intangible asset. This intangible asset is disclosed as a noncurrent customer contract asset as of October 31, 2016.
October 31,
July 31,
January 31,
2016
2016
2016
Other Assets, net
Deferred income taxes, noncurrent, net
$ 22,095
$ 22,545
$ 15,986
Long-term deposits
25,346
27,426
19,469
Purchased intangible assets, net of accumulated
amortization
622,667
803,076
258,580
Acquired intellectual property, net of accumulated
amortization
11,122
9,839
10,565
Customer contract asset, noncurrent (4)
308,484
496,461
93
Other (5)
110,722
96,450
66,217
$ 1,100,436
$ 1,455,797
$ 370,910
Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable
$ 140,541
$ 101,404
$ 71,481
Accrued compensation
558,945
469,009
554,502
Non-cash equity liability
74,570
76,043
0
Accrued other liabilities
498,774
520,854
447,729
Accrued income and other taxes payable
149,133
205,737
205,781
Accrued professional costs
38,331
33,717
33,814
Customer contract liability (6)
0
124,775
6,558
Accrued rent
17,055
16,966
14,071
Financing obligation - leased facility, current (7)
19,492
19,391
15,402
$ 1,496,841
$ 1,567,896
$ 1,349,338
Other Noncurrent Liabilities
Deferred income taxes and income taxes payable
$ 93,454
$ 89,053
$ 85,996
Customer contract liability, noncurrent (6)
0
272,608
66
Financing obligation - leased facility (7)
201,283
201,779
196,711
Long-term lease liabilities and other
490,550
496,912
550,292
$ 785,287
$ 1,060,352
$ 833,065
(5) In April 2015, the FASB issued ASU 2015-03 which simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability rather than an asset. The Company retrospectively adopted this standard for the January 31, 2016 balance sheet presented, which resulted in an adjustment of $7.9 million to Other.
(6) Customer contract liability reflects the legal obligation to provide future services that are contractually committed to SteelBrick and Demandware’s existing customers but unbilled as of their respective acquisition dates. The Company previously accounted for acquired subscription and services contracts and the legal obligation to provide future services as a customer contract asset and a customer contract liability, respectively. In the current quarter, the Company concluded that the acquired subscription and services contracts should more appropriately be accounted for as a single unit of accounting and as such, the fair value of the contractual relationships with customers have been reclassified to be presented as a single noncurrent intangible asset. This intangible asset is disclosed as a noncurrent customer contract asset as of October 31, 2016.
(7) As of January 31, 2016, 350 Mission was in construction. In March 2016, construction was completed on the building.
Supplemental Revenue Analysis
Subscription and support revenue by cloud
Three Months Ended October 31,
Nine Months Ended October 31,
service offering (in millions):
2016
2015
2016
2015
Sales Cloud
$ 776.2
$ 688.7
$ 2,255.7
$ 1,990.1
Service Cloud
589.9
469.5
1,705.4
1,322.4
App Cloud and Other
370.7
269.1
1,050.0
740.4
Marketing Cloud
247.2
169.0
634.5
470.1
$ 1,984.0
$ 1,596.3
$ 5,645.6
$ 4,523.0
Three Months Ended October 31,
Nine Months Ended October 31,
2016
2015
2016
2015
Total revenues by geography (in thousands):
Americas
$ 1,598,344
$ 1,258,148
$ 4,506,774
$ 3,575,441
Europe
337,497
302,704
1,012,671
848,413
Asia Pacific
208,934
151,115
578,551
433,964
$ 2,144,775
$ 1,711,967
$ 6,097,996
$ 4,857,818
As a percentage of total revenues:
Total revenues by geography:
Americas
74%
73%
74%
74%
Europe
16
18
17
17
Asia Pacific
10
9
9
9
100%
100%
100%
100%

The amounts of revenue (in thousands) of Demandware included in the Company’s consolidated statement of operations from the acquisition date of July 11, 2016 through October 31, 2016 is $57,878.

Revenue constant currency growth rates Three Months Ended
Three Months Ended
Three Months Ended
(as compared to the comparable prior
October 31, 2016
July 31, 2016
October 31, 2015
periods)
compared to Three Months
compared to Three Months
compared to Three Months
Ended October 31, 2015
Ended July 31, 2015
Ended October 31, 2014
Americas
27%
24%
27%
Europe
27%
32%
28%
Asia Pacific
29%
29%
25%
Total growth
27%
26%
27%

We present constant currency information to provide a framework for assessing how our underlying business performed excluding the effect of foreign currency rate fluctuations. To present this information, current and comparative prior period results for entities reporting in currencies other than United States dollars are converted into United States dollars at the weighted average exchange rate for the quarter being compared to for growth rate calculations presented, rather than the actual exchange rates in effect during that period.

October 31, 2016
July 31, 2016
October 31, 2015
compared to
compared to
compared to
October 31, 2015
July 31, 2015
October 31, 2014
Deferred revenue, current and noncurrent constant currency
growth rates (as compared to the comparable prior periods)
Total growth
25%
27%
30%

We present constant currency information for deferred revenue, current and noncurrent to provide a framework for assessing how our underlying business performed excluding the effects of foreign currency rate fluctuations. To present the information above, we convert the deferred revenue balances in local currencies in previous comparable periods using the United States dollar currency exchange rate as on the most recent balance sheet date.

Supplemental Non-GAAP Diluted Share Count Information
(share data in thousands)
Three Months Ended October 31,
Nine Months Ended October 31,
2016
2015
2016
2015
Weighted-average shares outstanding for basic earnings per share
690,468
664,131
683,075
659,160
Effect of dilutive securities:
Convertible senior notes (1)
2,059
1,437
1,994
964
Employee stock awards
12,177
12,162
11,188
12,212
Adjusted weighted-average shares outstanding and assumed conversions for Non-GAAP diluted earnings per share 704,704
677,730
696,257
672,336
(1) The 0.25% senior notes were not convertible, however there was a dilutive effect for shares outstanding for all periods presented.
Supplemental Cash Flow Information
Free cash flow analysis, a non-GAAP measure
(in thousands)
Three Months Ended October 31,
Nine Months Ended October 31,
2016
2015
2016
2015
Operating cash flow
GAAP net cash provided by operating activities $ 154,312
$ 162,514
$ 1,456,052
$ 1,201,873
Less:
Capital expenditures
(140,653)
(80,041)
(319,984)
(216,011)
Free cash flow
$ 13,659
$ 82,473
$ 1,136,068
$985,862

Our free cash flow analysis includes GAAP net cash provided by operating activities less capital expenditures. The capital expenditures balance does not include our strategic investments, nor does it include any costs or activities related to our purchase of 50 Fremont land and building, and construction costs related to building - leased facilities.

Comprehensive Income (Loss)
(in thousands)
(Unaudited)
Three Months Ended October 31,
Nine Months Ended October 31,
2016
2015
2016
2015
Net income (loss)
$ (37,309)
$ (25,157)
$ 231,072
$ (21,917)
Other comprehensive loss, before tax and net of reclassification adjustments:
Foreign currency translation and other losses
(28,372)
(1,173)
(28,523)
(8,419)
Unrealized gains (losses) on investments
(16,019)
(2,873)
20,961
337
Other comprehensive loss, before tax
(44,391)
(4,046)
(7,562)
(8,082)
Tax effect
(7,337)
(1,135)
(5,464)
(1,135)
Other comprehensive loss, net of tax
(51,728)
(5,181)
(13,026)
(9,217)
Comprehensive income (loss)
$ (89,037)
$ (30,338)
$ 218,046
$ (31,134)
salesforce.com, inc.
GAAP RESULTS RECONCILED TO NON-GAAP RESULTS
The following table reflects selected GAAP results reconciled to non-GAAP results.
(in thousands, except per share data)
(Unaudited)
Three Months Ended October 31,
Nine Months Ended October 31,
2016
2015
2016
2015
Non-GAAP gross profit
GAAP gross profit
$ 1,559,253
$ 1,288,284
$ 4,489,914
$ 3,646,949
Plus:
Amortization of purchased intangibles (a)
36,703
20,296
84,462
60,825
Stock-based expense (b)
26,783
17,516
76,912
49,237
Non-GAAP gross profit
$ 1,622,739
$ 1,326,096
$ 4,651,288
$ 3,757,011
Non-GAAP operating expenses
GAAP operating expenses
$ 1,556,217
$ 1,244,850
$ 4,402,341
$ 3,552,586
Less:
Amortization of purchased intangibles (a)
(28,064)
(18,966)
(66,601)
(57,995)
Stock-based expense (b)
(177,968)
(126,801)
(499,068)
(385,419)
Plus:
Operating lease termination resulting from purchase of
50 Fremont
0
0
0
36,617
Non-GAAP operating expenses
$ 1,350,185
$ 1,099,083
$ 3,836,672
$ 3,145,789
Non-GAAP income from operations
GAAP income from operations
$ 3,036
$ 43,434
$ 87,573
$ 94,363
Plus:
Amortization of purchased intangibles (a)
64,767
39,262
151,063
118,820
Stock-based expense (b)
204,751
144,317
575,980
434,656
Less:
Operating lease termination resulting from purchase of
50 Fremont
0
0
0
(36,617)
Non-GAAP income from operations
$ 272,554
$ 227,013
$ 814,616
$ 611,222
Non-GAAP non-operating loss (c)
GAAP non-operating loss
$ (15,622)
$ (43)
$ (38,721)
$ (25,941)
Plus:
Amortization of debt discount, net
6,304
6,148
18,794
18,317
Amortization of acquired lease intangible
579
761
1,927
2,877
Less:
Gain on sales of land and building improvements
0
(21,792)
0
(21,792)
Gains on sales of strategic investments
(833)
0
(13,697)
0
Non-GAAP non-operating loss
$ (9,572)
$ (14,926)
$ (31,697)
$ (26,539)
Non-GAAP net income
GAAP net income (loss)
$ (37,309)
$ (25,157)
$ 231,072
$ (21,917)
Plus:
Amortization of purchased intangibles (a)
64,767
39,262
151,063
118,820
Amortization of acquired lease intangible
579
761
1,927
2,877
Stock-based expense (b)
204,751
144,317
575,980
434,656
Amortization of debt discount, net
6,304
6,148
18,794
18,317
Less:
Operating lease termination resulting from purchase of
50 Fremont
0
0
0
(36,617)
Gain on sales of land and building improvements
0
(21,792)
0
(21,792)
Gains on sales of strategic investments
(833)
0
(13,697)
0
Income tax effects and adjustments
(67,320)
(3,016)
(456,241)
(117,223)
Non-GAAP net income
$ 170,939
$ 140,523
$ 508,898
$ 377,121
Three Months Ended October 31,
Nine Months Ended October 31,
2016
2015
2016
2015
Non-GAAP diluted earnings per share
GAAP diluted net income (loss) per share
$ (0.05)
$ (0.04)
$ 0.33
$ (0.03)
Plus:
Amortization of purchased intangibles
0.09
0.06
0.22
0.18
Amortization of acquired lease intangible
0.00
0.00
0.00
0.00
Stock-based expense
0.29
0.21
0.83
0.65
Amortization of debt discount, net
0.01
0.01
0.03
0.03
Less:
Operating lease termination resulting from purchase of
0.00
0.00
0.00
(0.05)
50 Fremont
Gain on sales of land and building improvements
0.00
(0.03)
0.00
(0.03)
Gains on sales of strategic investments
0.00
0.00
(0.02)
0.00
Income tax effects and adjustments
(0.10)
0.00
(0.66)
(0.19)
Non-GAAP diluted earnings per share
$ 0.24
$ 0.21
$ 0.73
$ 0.56
Shares used in computing Non-GAAP diluted net income per share 704,704
677,730
696,257
672,336
a) Amortization of purchased intangibles were as follows:
Three Months Ended October 31,
Nine Months Ended October 31,
2016
2015
2016
2015
Cost of revenues
$ 36,703
$ 20,296
$ 84,462
$ 60,825
Marketing and sales 28,064
18,966
66,601
57,995
$ 64,767
$ 39,262
$ 151,063
$ 118,820
b) Stock-based expense was as follows:
Three Months Ended October 31,
Nine Months Ended October 31,
2016
2015
2016
2015
Cost of revenues
$ 26,783
$ 17,516
$ 76,912
$ 49,237
Research and development
50,372
31,534
124,164
96,508
Marketing and sales
93,718
69,561
275,515
211,819
General and administrative 33,878
25,706
99,389
77,092
$ 204,751
$ 144,317
$ 575,980
$ 434,656
c) GAAP non-operating loss consists of investment income, interest expense, other expense and gains on sales of strategic investments.
salesforce.com, inc.
COMPUTATION OF BASIC AND DILUTED GAAP AND NON-GAAP NET INCOME (LOSS) PER SHARE
(in thousands, except per share data)
(Unaudited)
Three Months Ended October 31,
Nine Months Ended October 31,
2016
2015
2016
2015
GAAP Basic Net Income (Loss) Per Share
Net income (loss)
$ (37,309)
$ (25,157)
$ 231,072
$ (21,917)
Basic net income (loss) per share
$ (0.05)
$ (0.04)
$ 0.34
$ (0.03)
Shares used in computing basic net income (loss) per share
690,468
664,131
683,075
659,160
Three Months Ended October 31,
Nine Months Ended October 31,
2016
2015
2016
2015
Non-GAAP Basic Net Income Per Share
Non-GAAP net income
$ 170,939
$ 140,523
$ 508,898
$ 377,121
Basic Non-GAAP net income per share
$ 0.25
$ 0.21
$ 0.75
$ 0.57
Shares used in computing basic Non-GAAP net income per share
690,468
664,131
683,075
659,160
Three Months Ended October 31,
Nine Months Ended October 31,
2016
2015
2016
2015
GAAP Diluted Net Income (Loss) Per Share
Net income (loss)
$ (37,309)
$ (25,157)
$ 231,072
$ (21,917)
Diluted net income (loss) per share
$ (0.05)
$ (0.04)
$ 0.33
$ (0.03)
Shares used in computing diluted net income (loss) per share
690,468
664,131
696,257
659,160
Three Months Ended October 31,
Nine Months Ended October 31,
2016
2015
2016
2015
Non-GAAP Diluted Net Income Per Share
Non-GAAP net income
$ 170,939
$ 140,523
$ 508,898
$ 377,121
Diluted Non-GAAP net income per share
$ 0.24
$ 0.21
$ 0.73
$ 0.56
Shares used in computing diluted Non-GAAP net income per share 704,704
677,730
696,257
672,336

Non-GAAP Financial Measures: This press release includes information about non-GAAP diluted earnings per share, non-GAAP tax rates, non-GAAP free cash flow, and constant currency revenue and deferred revenue growth rates (collectively the "non-GAAP financial measures"). These non-GAAP financial measures are measurements of financial performance that are not prepared in accordance with U.S. generally accepted accounting principles and computational methods may differ from those used by other companies. Non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with the company’s consolidated financial statements prepared in accordance with GAAP. Management uses both GAAP and non-GAAP measures when planning, monitoring, and evaluating the company’s performance.

The primary purpose of using non-GAAP measures is to provide supplemental information that may prove useful to investors who wish to consider the impact of certain non-cash or non-recurring items on the company’s operating performance and to enable investors to evaluate the company’s results in the same way management does. These non-cash or non-recurring items generally consist of one-time items resulting from strategic decisions that affect multiple periods or periods unrelated to when the actual items were incurred. Management believes that supplementing GAAP disclosure with non-GAAP disclosure that excludes items that are not directly related to performance in any particular period provides investors with a more complete view of the company’s operational performance and allows for meaningful period-to-period comparisons and analysis of trends in the company’s business. Further, to the extent that other companies use similar methods in calculating non-GAAP measures, the provision of supplemental non-GAAP information can allow for a comparison of the company’s relative performance against other companies that also report non-GAAP operating results.

Non-GAAP diluted earnings per share excludes the impact of the following items: stock-based compensation, amortization of acquisition-related intangibles, amortization of acquired leases, the net amortization of debt discount on the company’s convertible senior notes, gains/losses on sales of land and building improvements, gains on sales of strategic investments, and termination of office leases, as well as income tax adjustments. These items are excluded because the decisions which gave rise to these items were not made to increase revenue in a particular period, but were made for the company’s long-term benefit over multiple periods.

Specifically, management is excluding the following items from its non-GAAP earnings per share for Q3 and its non-GAAP estimates for Q4 and FY17:

Stock-Based Expenses: The company’s compensation strategy includes the use of stock-based compensation to attract and retain employees and executives. It is principally aimed at aligning their interests with those of our stockholders and at long-term employee retention, rather than to motivate or reward operational performance for any particular period. Thus, stock-based compensation expense varies for reasons that are generally unrelated to operational decisions and performance in any particular period.

Amortization of Purchased Intangibles and Acquired Leases: The company views amortization of acquisition- and building-related intangible assets, such as the amortization of the cost associated with an acquired company’s research and development efforts, trade names, customer lists and customer relationships, and acquired lease intangibles, as items arising from pre-acquisition activities determined at the time of an acquisition. While these intangible assets are continually evaluated for impairment, amortization of the cost of purchased intangibles is a static expense, one that is not typically affected by operations during any particular period.

Amortization of Debt Discount: Under GAAP, certain convertible debt instruments that may be settled in cash (or other assets) on conversion are required to be separately accounted for as liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, for GAAP purposes we are required to recognize imputed interest expense on the company’s $1.15 billion of convertible senior notes due 2018 that were issued in a private placement in March 2013. The imputed interest rate was approximately 2.5% for the convertible notes due 2018, while the actual coupon interest rate of the notes is 0.25%. The difference between the imputed interest expense and the coupon interest expense, net of the interest amount capitalized, is excluded from management’s assessment of the company’s operating performance because management believes that this non-cash expense is not indicative of ongoing operating performance.

Gains and Losses on Sales of Strategic Investments: The company views gains on sales of its strategic investments resulting from acquisitions initiated by the company in which an equity interest was previously held as discrete events and not indicative of operational performance during any particular period.

Income Tax Effects and Adjustments: The Company utilizes a fixed long-term projected non-GAAP tax rate in order to provide better consistency across the interim reporting periods by eliminating the effects of non-recurring and period-specific items such as changes in the tax valuation allowance and tax effects of acquisitions-related costs, since each of these can vary in size and frequency. When projecting this long-term rate, the Company evaluated a three-year financial projection that excludes the direct impact of the following non-cash items: stock-based expenses, amortization of purchased intangibles, amortization of acquired leases, amortization of debt discount, gains/losses on the sales of land and building improvements, gains on sales of strategic investments, and termination of office leases. The projected rate also assumes no new acquisitions in the three-year period, and considers other factors including the Company’s tax structure, its tax positions in various jurisdictions and key legislation in major jurisdictions where the company operates. This long-term rate could be subject to change for a variety of reasons, such as significant changes in the geographic earnings mix including acquisition activity, or fundamental tax law changes in major jurisdictions where the company operates. The Company re-evaluates this long-term rate on an annual basis or if any significant events that may materially affect this long-term rate occur. The non-GAAP tax rate for fiscal 2017 is 35.0 percent.

The company defines the non-GAAP measure free cash flow as GAAP net cash provided by operating activities, less capital expenditures. For this purpose, capital expenditures does not include our strategic investments, nor does it include any costs or activities related to our purchase of 50 Fremont land and building, and building - leased facilities.

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SOURCE Salesforce

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