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," "commitments," 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, industry prospects and the anticipated impact on our business of the ongoing COVID-19 pandemic and related public health measures. 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 impact of, and actions we may take in response to, the COVID-19 pandemic, related public health measures and resulting economic downturn and market volatility; our ability to maintain security levels and service performance meeting the expectations of our customers, and the resources and costs required to avoid unanticipated downtime and prevent, detect and remediate performance degradation and security breaches; the expenses associated with our data centers and third-party infrastructure providers; our ability to secure additional data center capacity; our reliance on third-party hardware, software and platform providers; 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; current and potential litigation involving us or our industry, including litigation involving acquired entities such asTableau Software, Inc. and Slack Technologies, Inc., and the resolution or settlement thereof; regulatory developments and regulatory investigations involving us or affecting our industry; our ability to successfully introduce new services and product features, including any efforts to expand our services; the success of our strategy of acquiring or making investments in complementary businesses, joint ventures, services, technologies and intellectual property rights; our ability to complete, on a timely basis or at all, announced transactions; our ability to realize the benefits from acquisitions, strategic partnerships, joint ventures and investments, including ourJuly 2021 acquisition of Slack Technologies, Inc., and successfully integrate acquired businesses and technologies; our ability to compete in the markets in which we participate; the success of our business strategy and our plan to build our business, including our strategy to be a leading provider of enterprise cloud computing applications and platforms; our ability to execute our business plans; our ability to continue to grow unearned revenue and remaining performance obligation; the pace of change and innovation in enterprise cloud computing services; the seasonal nature of our sales cycles; our ability to limit customer attrition and costs related to those efforts; the success of our international expansion strategy; the demands on our personnel and infrastructure resulting from significant growth in our customer base and operations, including as a result of acquisitions; our ability to preserve our workplace culture, including as a result of our decisions regarding our current and future office environments or work-from-home policies; our dependency on the development and maintenance of the infrastructure of the Internet; our real estate and office facilities strategy and related costs and uncertainties; fluctuations in, and our ability to predict, our operating results and cash flows; the variability in our results arising from the accounting for term license revenue products; the performance and fair value of our investments in complementary businesses through our strategic investment portfolio; the impact of future gains or losses from our strategic investment portfolio, including gains or losses from overall market conditions that may affect the publicly traded companies within our strategic investment portfolio; our ability to protect our intellectual property rights; our ability to develop our brands; the impact of foreign currency exchange rate and interest rate fluctuations on our results; the valuation of our deferred tax assets and the release of related valuation allowances; the potential availability of additional tax assets in the future; the impact of new accounting pronouncements and tax laws; uncertainties affecting our ability to estimate our tax rate; uncertainties regarding our tax obligations in connection with potential jurisdictional transfers of intellectual property, including the tax rate, the timing of the transfer and the value of such transferred intellectual property; uncertainties regarding the effect of general economic and market conditions; the impact of geopolitical events; uncertainties regarding the impact of expensing stock options and other equity awards; the sufficiency of our capital resources; our ability to comply with our debt covenants and lease obligations; and the impact of climate change, natural disasters and actual or threatened public health emergencies, including the ongoing COVID-19 pandemic. 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 global leader in customer relationship management ("CRM") technology that brings companies and customers together. With our Customer 360 platform we deliver a single source of truth, connecting customer data across systems, apps and devices to help companies sell, service, market and conduct commerce from anywhere. Since our founding in 1999, we have pioneered innovations in cloud, mobile, social, analytics and artificial intelligence ("AI"), enabling companies of every size and industry to transform their businesses in the all-digital, work-from-anywhere world. 33 -------------------------------------------------------------------------------- Table of Contents COVID-19 Impact InMarch 2020 , theWorld Health Organization declared the novel coronavirus and resulting disease ("COVID-19") a pandemic. This pandemic has created significant global economic uncertainty, adversely impacted the business of our customers and partners, impacted our business and results of operations and could further impact our results of operations and our cash flows in the future. As the administration of the vaccine program increases and cases decline and as our employees, customers and partners begin to work in person on a periodic basis, we continue to evaluate and refine our return to work strategy. Specifically, we continue to evaluate our office space needs, our investments in our go-to-market and product efforts and our plans for business travel for our employees. As we adjust and refine our strategy, there may be additional investments and redirection efforts in the future which may include position eliminations, incremental costs to improve employee's ability to work from home and impairments to assets associated with real estate leases in select locations we decide to exit. The ultimate extent of the impact of the COVID-19 pandemic on our operational and financial performance, including our long term revenue growth and profitability, depends on certain developments, including the duration of the pandemic and any resurgences (such as the recent delta variant surge throughout the world), the severity of the disease, responsive actions taken by public health officials or by us, the development, distribution and public acceptance of treatments and vaccines, the impacts on our customers and our sales cycles, our ability to generate new business leads, the impacts on our customers, employee and industry events, and the effects on our vendors, all of which are uncertain and currently cannot be predicted with any degree of certainty. As a result, the extent to which the COVID-19 pandemic will continue to impact our financial condition or results of operations is uncertain. Due to our primarily subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods. If the COVID-19 pandemic has a substantial impact on our employees', partners' or customers' productivity, our results of operations and overall financial performance may be harmed. In addition, the global macroeconomic effects of the COVID-19 pandemic and related impacts on our customers' business operations and their demand for our products and services may persist for an indefinite period, even after the COVID-19 pandemic has subsided. See Part II, Item 1A. "Risk Factors" for further discussion of the impact and possible future impacts of the COVID-19 pandemic on our business. Highlights from the Third Quarter of Fiscal Year 2022 •Revenue: For the nine months endedOctober 31, 2021 , revenue was$19.2 billion , an increase of 24 percent year-over-year. •Earnings per Share: For the nine months endedOctober 31, 2021 , diluted earnings per share was$1.53 as compared to earnings per share of$4.11 from a year ago. For the nine months endedOctober 31, 2020 , our results included a$2.0 billion one-time discrete tax benefit. •Cash: Cash provided by operations for the nine months endedOctober 31, 2021 was$4.0 billion , an increase of 53 percent year-over-year. Total cash, cash equivalents and marketable securities as ofOctober 31, 2021 was$9.4 billion . •Remaining Performance Obligation: Remaining performance obligation as ofOctober 31, 2021 was approximately$36.3 billion , which includes approximately$900 million of remaining performance obligation related to the Slack acquisition, an increase of 20 percent year-over-year. Current remaining performance obligation as ofOctober 31, 2021 was approximately$18.8 billion , an increase of 23 percent year-over-year. We continue to invest for future growth and are focused on several key growth levers, including driving multiple service offering adoption, increasing our penetration with enterprise and international customers and our industry-specific reach with more vertical software solutions. These growth drivers often require a more sophisticated go-to-market approach and, as a result, we may incur additional costs upfront to obtain new customers and expand our relationships with existing customers, including additional sales and marketing expenses specific to subscription and support revenue. As a result, we have seen that customers with many of these characteristics have lower attrition rates than our company average. We plan to continue to reinvest a significant portion of our income from operations in future periods to grow and innovate our business and service offerings and expand our leadership role in the cloud computing industry. We drive innovation organically and, to a lesser extent, through acquisitions. We regularly evaluate acquisitions and investment opportunities in complementary businesses, services, technologies and intellectual property rights in an effort to expand our service offerings and to nurture the overall ecosystem for our offerings. Past acquisitions have enabled us to deliver innovative solutions in new categories, including analytics, integration and messaging. We continue to evaluate investment opportunities and expect to continue to make investments and acquisitions in the future, such as ourJuly 2021 acquisition of Slack. Slack has an integrated value proposition across all of our service offerings and, upon successful product integration, we believe it will further enable companies to grow and succeed in an all-digital, work-from-anywhere era. 34 -------------------------------------------------------------------------------- Table of Contents As a result of our aggressive growth plans and integration of our previously acquired businesses, we have incurred significant expenses for equity awards and amortization of purchased intangibles, which have reduced our operating income. We periodically make changes to our sales organization to position us for long-term growth, which has in the past, and could again in the future result in temporary disruptions to our sales productivity. In addition, we have experienced, and may at times in the future experience, more variation from our forecasted expectations of new business activity due to longer and less predictable sales cycles and increasing complexity of our business, which includes an expanded mix of products and various revenue models resulting from acquisitions and increased enterprise solution selling activities. Slower growth in new business in a given period could negatively affect our revenues in future periods, as well as remaining performance obligation in current or future periods, particularly if experienced on a sustained basis. The expanding global scope of our business and the heightened volatility of global markets, including as a result of COVID-19, expose us to the risk of fluctuations in foreign currency markets. Foreign currency fluctuations benefited revenues by approximately one percent for the three months endedOctober 31, 2021 . Fluctuations inthe United States Dollar against international currencies did not have a material impact on our remaining performance obligation as ofOctober 31, 2021 compared to what we would have reported as ofOctober 31, 2020 using constant currency rates. Recently there have been negative fluctuations in certain foreign currency markets in which we operate. If these conditions continue or materially worsen, they could have an impact on our future results and our ability to accurately predict our future results and earnings. The impact of these fluctuations could also be compounded by the seasonality of our business in which our fourth quarter has historically been our strongest quarter for new business and renewals. Fiscal Year Our fiscal year ends onJanuary 31 . References to fiscal 2022, for example, refer to the fiscal year endingJanuary 31, 2022 . Operating Segments We operate as one segment. See Note 1 "Summary of Business and Significant Accounting Policies" to the condensed consolidated financial statements for a discussion about our segments. Sources of Revenues We derive our revenues from two sources: subscription and support revenues and professional services and other revenues. Subscription and support revenues accounted for approximately 93 percent of our total revenues for the nine months endedOctober 31, 2021 . Subscription and support revenues include subscription fees from customers accessing our enterprise cloud computing services (collectively, "Cloud Services"), software license revenues from the sales of term and perpetual licenses, and support revenues from the sale of support and updates beyond the basic subscription fees or related to the sales of software licenses. Our Cloud Services allow customers to use our multi-tenant software without taking possession of the software. Revenue is generally recognized ratably over the contract term. Subscription and support revenues also include revenues associated with term and perpetual software licenses that provide the customer with a right to use the software as it exists when made available. Revenues from software licenses are generally recognized at the point in time when the software is made available to the customer. Revenue from support and updates is recognized as such support and updates are provided, which is generally ratably over the contract term. Changes in contract duration for multi-year licenses can impact the amount of revenues recognized upfront. Revenues from software licenses represent less than ten percent of total subscription and support revenue for the nine months endedOctober 31, 2021 . The revenue growth rates of each of our service offerings, as described below in "Results of Operations," fluctuate from quarter to quarter and over time. Additionally, we manage the total balanced product portfolio to deliver solutions to our customers and, as a result, the revenue result for each offering is not necessarily indicative of the results to be expected for any subsequent quarter. In addition, some of our Cloud Service offerings have similar features and functions. For example, customers may use our Sales, Service or Platform service offering to record account and contact information, which are similar features across these service offerings. Depending on a customer's actual and projected business requirements, more than one service offering may satisfy the customer's current and future needs. We record revenue based on the individual products ordered by a customer, not according to the customer's business requirements and usage. Our growth in revenues is also impacted by attrition. Attrition represents the reduction or loss of the annualized value of our contracts with customers. We calculate our attrition rate at a point in time on a trailing twelve-month basis as of the end of each month. As ofOctober 31, 2021 , our attrition rate, excluding our Integration service offering, Salesforce.org, Tableau and Slack, was between 7.5 and 8.0 percent. Beginning in fiscal year 2021, our attrition rate includes our Commerce service offering. In general, we exclude service offerings from acquisitions from our attrition calculation until they are fully integrated 35 -------------------------------------------------------------------------------- Table of Contents into our customer success organization. While our attrition rate is difficult to predict, we expect it to remain consistent for the remainder of fiscal 2022 due to the diversity of size, industry and geography within the customer base. However, our attrition rate may increase over time, including, for example, as a result of COVID-19. We continue to invest in a variety of customer programs and initiatives, which, along with increasing enterprise adoption, have helped keep our attrition rate consistent as compared to the prior year. Consistent attrition rates play a role in our ability to maintain growth in our subscription and support revenues. [[Image Removed: crm-20211031_g1.jpg]] Seasonal Nature of Unearned Revenue, Accounts Receivable and Operating Cash Flow Unearned revenue primarily consists of billings to customers for our subscription service. Over 90 percent of the value of our billings to customers is for our subscription and support service. We generally invoice our customers in advance, in annual installments, and typical payment terms provide that our customers pay us within 30 days of invoice. Amounts that have been invoiced are recorded in accounts receivable and in unearned revenue or in revenue depending on whether transfer of control to customers has occurred. In general, we collect our billings in advance of the subscription service period. We typically issue renewal invoices in advance of the renewal service period, and depending on timing, the initial invoice for the subscription and services contract and the subsequent renewal invoice may occur in different quarters. There is a disproportionate weighting toward annual billings in the fourth quarter, primarily as a result of large enterprise account buying patterns. Our fourth quarter has historically been our strongest quarter for new business and renewals. The year-on-year compounding effect of this seasonality in both billing patterns and overall new and renewal business causes the value of invoices that we generate in the fourth quarter for both new business and renewals to increase as a proportion of our total annual billings. Accordingly, because of this billing activity, our first quarter is typically our largest collections and operating cash flow quarter. Conversely, our third quarter has historically been our smallest operating cash flow quarter. Unearned revenues, accounts receivable and operating cash flow may also be impacted by acquisitions. For example, operating cash flows may be adversely impacted by acquisitions due to transaction costs, financing costs such as interest expense and lower operating cash flows from the acquired entity. In response to COVID-19, we offered temporary financial flexibility to some customers in the first quarter of fiscal 2021 and changed billing frequencies for other customers throughout fiscal 2021, which delayed payments to periods later than expected. We also accelerated our investments in our go-to-market and product efforts throughout fiscal 2021, which resulted in increased expenses and a negative impact to operating cash flow. These efforts have affected and may continue to affect trends related to the seasonal nature of unearned revenue, accounts receivable and operating cash flow. The sequential quarterly changes in accounts receivable and the related unearned revenue and operating cash flow during the first quarter of our fiscal year are not necessarily indicative of the billing activity that occurs for the following quarters as displayed below (in millions). 36
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[[Image Removed: crm-20211031_g4.jpg]] Remaining Performance Obligation Our remaining performance obligation represents all future revenue under contract that has not yet been recognized as revenue and includes unearned revenue and unbilled amounts. Our current remaining performance obligation represents future revenue under contract that is expected to be recognized as revenue in the next 12 months. Remaining performance obligation is not necessarily indicative of future revenue growth and is influenced by several factors, including seasonality, the timing of renewals, average contract terms, foreign currency exchange rates and fluctuations in new business growth. Remaining performance obligation is also impacted by acquisitions. Unbilled portions of the remaining performance obligation denominated in foreign currencies are revalued each period based on the period end exchange rates. For multi-year subscription agreements billed annually, the associated unbilled balance and corresponding remaining performance obligation are typically high at the beginning of the contract period, zero just prior to renewal, and increase if the agreement is renewed. Low remaining performance obligation attributable to a particular subscription agreement is often associated with an impending renewal but may not be an indicator of the likelihood of renewal or future revenue from such customer. Changes in contract duration or the timing of delivery of professional services can impact remaining performance obligation as well as the allocation between current and non-current remaining performance obligation. 37 -------------------------------------------------------------------------------- Table of Contents Remaining performance obligation consisted of the following (in billions): [[Image Removed: crm-20211031_g5.jpg]] (1) Includes approximately$900 million of remaining performance obligation related to the Slack acquisition inJuly 2021 . (2) Includes approximately$800 million of remaining performance obligation related to the Slack acquisition inJuly 2021 . Cost of Revenues and Operating Expenses Cost of Revenues Cost of subscription and support revenues primarily consists of expenses related to delivering our service and providing support, including the costs of data center capacity, certain fees paid to various third parties for the use of their technology, services and data and employee-related costs such as salaries and benefits. Our cost of subscription and support revenues also includes amortization of acquisition-related intangible assets, such as the amortization of the cost associated with an acquired company's research and development efforts. Also included in the cost of subscription and support revenues are expenses incurred supporting the free user base of Slack, including third-party hosting costs and employee-related costs specific to customer experience and technical operations. Cost of professional services and other revenues consists primarily of employee-related costs associated with these services, including stock-based expense, the cost of subcontractors and certain third-party fees. We expect the cost of professional services to be approximately in line with revenues from professional services in future fiscal periods. We believe that this investment in professional services facilitates the adoption of our service offerings, helps us to secure larger subscription revenue contracts and supports our customers' success. Research and Development Research and development expenses consist primarily of salaries and related expenses, including stock-based expense and allocated overhead. Marketing and Sales Marketing and sales expenses make up the majority of our operating expenses and consist primarily of salaries and related expenses, including stock-based expense and commissions, for our sales and marketing staff, as well as payments to partners, marketing programs and allocated overhead. Marketing programs consist of advertising, events, corporate communications, brand building and product marketing activities. We capitalize certain costs to obtain customer contracts, such as commissions, and amortize these costs on a straight-line basis. Payments of these commissions are not consistent with the period in which the expense is recognized. Our marketing and sales expenses include amortization of acquisition-related intangible assets, such as the amortization of the cost associated with an acquired company's trade names, customer lists and customer relationships. 38 -------------------------------------------------------------------------------- Table of Contents General and Administrative General and administrative expenses consist primarily of salaries and related expenses, including stock-based expense, for finance and accounting, legal, internal audit, human resources and management information systems personnel and professional services fees. We allocate overhead such as information technology infrastructure, rent and occupancy charges based on headcount. Employee benefit costs and taxes are allocated based upon a percentage of total compensation expense. As such, these types of expenses are reflected in each cost of revenue and operating expense category. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies, which are described in Note 1 "Summary of Business and Significant Accounting Policies" to our condensed consolidated financial statements, the following accounting policies and specific estimates involve a greater degree of judgment and complexity. Accordingly, these are the policies and estimates we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations: •the fair value of assets acquired and liabilities assumed for business combinations; •the standalone selling price ("SSP") of performance obligations for revenue contracts with multiple performance obligations; •the valuation of privately held strategic investments, including impairment considerations; •the recognition, measurement and valuation of current and deferred income taxes and uncertain tax positions; and •the average period of benefit associated with costs capitalized to obtain revenue contracts. These estimates may change, as new events occur and additional information is obtained, and such changes will be recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from these estimates and any such differences may be material to our financial statements. Recent Accounting Pronouncements See Note 1 "Summary of Business and Significant Accounting Policies" to the condensed consolidated financial statements for our discussion about new accounting pronouncements adopted. 39
-------------------------------------------------------------------------------- Table of Contents Results of Operations The following tables set forth selected data for each of the periods indicated (in millions): 3 Three Months Ended October 31, Nine Months Ended October 31, % of Total % of Total % of Total % of Total 2021 Revenues 2020 Revenues 2021 Revenues 2020 Revenues
Revenues:
Subscription and support$ 6,379 93 %$ 5,085 94 %$ 17,829 93 %$ 14,500 94 % Professional services and other 484 7 334 6 1,337 7 935 6 Total revenues 6,863 100 5,419 100 19,166 100 15,435 100 Cost of revenues (1)(2): Subscription and support 1,335 20 1,060 20 3,603 19 3,039 20 Professional services and other 509 7 334 6 1,409 7 920 6 Total cost of revenues 1,844 27 1,394 26 5,012 26 3,959 26 Gross profit 5,019 73 4,025 74 14,154 74 11,476 74 Operating expenses (1)(2): Research and development 1,203 18 902 17 3,174 17 2,659 17 Marketing and sales 3,111 45 2,377 44 8,391 44 7,042 45 General and administrative 667 9 522 9 1,865 9 1,513 10 Total operating expenses 4,981 72 3,801 70 13,430 70 11,214 72 Income from operations 38 1 224 4 724 4 262 2 Gains on strategic investments, net 363 5 1,036 19 1,177 6 1,910 12 Other expense (102) (2) (10) 0 (172) (1) (36) 0 Income before benefit from (provision for) income taxes 299 4 1,250 23 1,729 9 2,136 14 Benefit from (provision for) income taxes (3) 169 3 (169) (3) (257) (1) 1,669 11 Net income$ 468 7 %$ 1,081 20 %$ 1,472 8 %$ 3,805 25 %
(1) Amounts related to amortization of intangible assets acquired through business combinations, as follows (in millions):
Three Months Ended October 31, Nine Months Ended October 31, % of Total % of Total % of Total % of Total 2021 Revenues 2020 Revenues 2021 Revenues 2020 Revenues Cost of revenues $ 272 4 %$ 169 3 % $ 624 3 %$ 494 3 % Marketing and sales 236 3 114 2 491 3 344 2
(2) Amounts related to stock-based expense, as follows (in millions):
Three Months Ended October 31, Nine Months Ended October 31, % of Total % of Total % of Total % of Total 2021 Revenues 2020 Revenues 2021 Revenues 2020 Revenues
Cost of revenues$ 103 1 %$ 65 1 % $ 280 2 %$ 180 1 % Research and development 276 4 181 3 646 3 531 4 Marketing and sales 316 5 242 5 817 4 718 5 General and administrative 117 2 78 1 273 2 219 1 (3) During the second quarter of fiscal 2021, the Company recorded approximately$2.0 billion of a one-time benefit from a discrete tax item related to the recognition of deferred tax assets resulting from an intra-entity transfer of intangible property. 40 -------------------------------------------------------------------------------- Table of Contents The following table sets forth selected balance sheet data and other metrics for each of the periods indicated (in millions, except remaining performance obligation, which is presented in billions): As of October 31, 2021 January 31, 2021 Cash, cash equivalents and marketable securities $ 9,391 $ 11,966 Unearned revenue 10,116 12,607 Remaining performance obligation 36.3 36.1 Principal due on our outstanding debt obligations (1) 10,698 2,690 (1) Amounts do not include operating or financing lease obligations. Remaining performance obligation 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. Impact of Acquisitions The comparability of our operating results in the three and nine months endedOctober 31, 2021 compared to the same periods in fiscal 2021 was impacted by our recent acquisitions, including the acquisition of Slack inJuly 2021 , our largest acquisition to date. In our discussion of changes in our results of operations for the three and nine months endedOctober 31, 2021 , compared to the same periods in fiscal 2021, we may quantitatively disclose the impact of our acquired products and services for the one-year period subsequent to the acquisition date to the growth in certain of our revenues where such discussions would be meaningful. Expense contributions from our recent acquisitions for each of the respective period comparisons generally were not separately identifiable due to the integration of these businesses into our existing operations or were insignificant to our results of operations during the periods presented. Revenues Three Months Ended October 31, Variance (in millions) 2021 2020 Dollars Percent Subscription and support $ 6,379$ 5,085 $ 1,294 25 % Professional services and other 484 334 150 45 Total revenues $ 6,863$ 5,419 $ 1,444 27 % Nine Months Ended October 31, Variance (in millions) 2021 2020 Dollars Percent Subscription and support$ 17,829 $ 14,500 $ 3,329 23 % Professional services and other 1,337 935 402 43 Total revenues$ 19,166 $ 15,435 $ 3,731 24 % The increase in subscription and support revenues for the three and nine months endedOctober 31, 2021 was primarily caused by volume-driven increases from new business, which includes new customers, upgrades, additional subscriptions from existing customers and acquisition activity. Pricing was not a significant driver of the increase in revenues for either period. Revenues from term and perpetual software licenses, which are recognized at a point in time, represent approximately six percent of total subscription and support revenues for the three and nine months endedOctober 31, 2021 . Subscription and support revenues accounted for approximately 93 and 94 percent of our total revenues for the three months endedOctober 31, 2021 and 2020, respectively. The acquisition of Slack inJuly 2021 contributed approximately$276 million to subscription and support revenues during the nine months endedOctober 31, 2021 . As a result of our business combination activity, we recorded unearned revenue related to acquired contracts from acquired entities at fair value on the date of acquisition. As a result, we did not recognize certain revenues related to these acquired contracts that the acquired entities would have otherwise recorded as an independent entity. The increase in professional services and other revenues was due primarily to the higher demand for services from an increased number of customers as well as revenues resulting from theAcumen Solutions, Inc. ("Acumen") acquisition inFebruary 2021 . 41
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Table of Contents Subscription and Support Revenue by Service Offering Subscription and support revenues consisted of the following (in millions):
Three Months Ended October 31, 2021 2020 Variance Percent Sales $ 1,538$ 1,311 17% Service 1,658 1,376 20% Platform and Other 1,277 844 51% Marketing and Commerce 1,006 804 25% Data 900 750 20% Total $ 6,379$ 5,085 Nine Months Ended October 31, 2021 2020 Variance Percent Sales $ 4,403$ 3,835 15% Service 4,764 3,931 21% Platform and Other 3,159 2,439 30% Marketing and Commerce 2,856 2,264 26% Data 2,647 2,031 30% Total$ 17,829 $ 14,500 Our Industry Offerings revenue is included in one of the above service offerings depending on the primary service purchased; Slack revenues are included in Platform and Other. Data is comprised of revenue from Analytics and Integration service offerings, which were reclassified from Platform and Other beginning in the third quarter of fiscal 2022. Reclassifications to prior period Platform and Other revenues were made to conform to the current period presentation. Data subscription and support revenues include revenues from term and perpetual software licenses which are recognized at the point in time when the software is made available to the customer. Therefore we expect Data to experience more volatility quarter to quarter. For example, we recently made changes that impacted ourMulesoft sales organization which we expect to have long-term benefits, but created greater short-term disruption than anticipated. This disruption impacted Data revenues during the three months endedOctober 31, 2021 , due to the timing of revenue recognition associated with the sale ofMulesoft term and perpetual software licenses. Revenues by Geography
Three Months Ended
As a % of Total As a % of Total (in millions) 2021 Revenues 2020 Revenues Growth rate Americas$ 4,638 68 %$ 3,758 69 % 23 % Europe 1,581 23 1,149 21 38 Asia Pacific 644 9 512 10 26$ 6,863 100 %$ 5,419 100 % 27 %
Nine Months Ended
As a % of Total As a % of Total (in millions) 2021 Revenues 2020 Revenues Growth rate Americas$ 13,044 68 %$ 10,724 69 % 22 % Europe 4,299 22 3,253 21 32 Asia Pacific 1,823 10 1,458 10 25$ 19,166 100 %$ 15,435 100 % 24 % Revenues by geography are determined based on the region of the Salesforce contracting entity, which may be different than the region of the customer. The increase inAmericas revenues was the result of the increasing acceptance of our services and the investment of additional sales resources. The increase in revenues outside of theAmericas was the result of the increasing acceptance of our services, our focus on marketing our services internationally and investment in additional 42 -------------------------------------------------------------------------------- Table of Contents international resources. Foreign currency fluctuations did not have a material impact on revenues outside of theAmericas for the three and nine months endedOctober 31, 2021 and 2020. 43 --------------------------------------------------------------------------------
Table of Contents Cost of Revenues Three Months Ended October 31, Variance (in millions) 2021 2020 Dollars Subscription and support$ 1,335 $ 1,060 $ 275 Professional services and other 509 334 175 Total cost of revenues$ 1,844 $ 1,394 $ 450 Percent of total revenues 27 % 26 % Nine Months Ended October 31, Variance (in millions) 2021 2020 Dollars Subscription and support$ 3,603 $ 3,039 $ 564 Professional services and other 1,409 920 489 Total cost of revenues$ 5,012 $ 3,959 $ 1,053 Percent of total revenues 26 % 26 % For the three months endedOctober 31, 2021 , the increase in cost of revenues was primarily due to an increase of$147 million in employee-related costs, an increase of$38 million in stock-based expense, an increase of$73 million in service delivery costs, primarily due to our efforts to increase data center capacity, and an increase of amortization of purchased intangible assets of$103 million . For the nine months endedOctober 31, 2021 , the increase in cost of revenues was primarily due to an increase of$431 million in employee-related costs, an increase of$100 million in stock-based expense, an increase of$183 million in service delivery costs, primarily due to our efforts to increase data center capacity, and an increase of amortization of purchased intangible assets of$130 million . We have increased our headcount by 37 percent sinceOctober 31, 2020 to meet the higher demand for services from our customers, and our recent acquisition of Slack also contributed to this increase. We intend to continue to invest additional resources in our enterprise cloud computing services and data center capacity to allow us to scale with our customers and continuously evolve our security measures. We also plan to add employees in our professional services group to facilitate the adoption of our services. The timing of these expenses will affect our cost of revenues, both in terms of absolute dollars and as a percentage of revenues, in future periods. Our professional services and other gross margin was negative$25 million and negative$72 million during the three and nine months endedOctober 31, 2021 , respectively, primarily due to increasing our capacity to support our enterprise customer base. Our professional services and other gross margin was break-even and$15 million during the three and nine months endedOctober 31, 2020 , respectively. We expect the cost of professional services to be approximately in line with revenues from professional services in future fiscal quarters. We believe that this investment in professional services facilitates the adoption of our service offerings, helps us to secure larger subscription revenue contracts and supports our customers' success. Operating Expenses Three Months Ended October 31, Variance (in millions) 2021 2020 Dollars Research and development$ 1,203 $ 902 $ 301 Marketing and sales 3,111 2,377 734 General and administrative 667 522 145 Total operating expenses$ 4,981 $ 3,801 $ 1,180 Percent of total revenues 72 % 70 % Nine Months Ended October 31, Variance (in millions) 2021 2020 Dollars Research and development$ 3,174 $ 2,659 $ 515 Marketing and sales 8,391 7,042 1,349 General and administrative 1,865 1,513 352 Total operating expenses$ 13,430 $ 11,214 $ 2,216 Percent of total revenues 70 % 72 %
For the three months ended
44 -------------------------------------------------------------------------------- Table of Contents increases in our development and test data center costs. Our research and development headcount increased by 23 percent since the three months endedOctober 31, 2020 in order to improve and extend our service offerings, develop new technologies and integrate acquired companies. In addition, our recent acquisition of Slack also contributed to this increase in headcount. For the nine months endedOctober 31, 2021 , the increase in research and development expenses was primarily due to an increase of approximately$277 million in employee-related costs, an increase in stock-based expense of$115 million and increases in our development and test data center costs. We expect that research and development expenses will increase in absolute dollars and may increase as a percentage of revenues in future periods as we continue to invest in additional employees and technology to support the development of new, and improve existing, technologies and to support the integration of acquired technologies. For the three months endedOctober 31, 2021 , the increase in marketing and sales expenses was primarily due to an increase of$324 million in employee-related costs, which includes the amortization of deferred commissions, an increase in stock-based expense of$74 million , an increase in advertising and event expense of$112 million , and an increase in amortization of purchased intangibles of$122 million . Our marketing and sales headcount increased by 26 percent since the three months endedOctober 31, 2020 , primarily due to hiring additional sales personnel to focus on adding new customers and increasing penetration within our existing customer base. In addition, our recent acquisition of Slack also contributed to this increase in headcount. For the nine months endedOctober 31, 2021 , the increase in marketing and sales expenses was primarily due to an increase of$844 million in employee-related costs, which includes the amortization of deferred commissions, an increase of$99 million in stock-based expense, an increase in advertising and event expense of$163 million , and an increase in amortization of purchased intangibles of$147 million . We expect that marketing and sales expenses will increase in absolute dollars and will increase as a percentage of revenues in future periods as we continue to hire additional sales personnel. We also expect an increase in marketing and sales expenses due to the gradual increase of travel and related expenses in the fourth quarter of fiscal 2022. For the three and nine months endedOctober 31, 2021 , the increase in general and administrative expenses was primarily due to an increase in employee-related costs. Our general and administrative headcount increased by 27 percent since the three months endedOctober 31, 2020 as we added personnel to support our growth, and our recent acquisition of Slack also contributed to this increase. During the nine months endedOctober 31, 2021 , the increase in general and administrative expenses was primarily due to an increase in employee-related costs and incurred transaction costs associated with our acquisition of Slack of approximately$54 million . We expect that general and administrative expenses will increase in absolute dollars but will generally remain consistent as a percentage of revenue. Other Income and Expense Three Months Ended October 31, Variance (in millions) 2021 2020 Dollars Gains on strategic investments, net $ 363$ 1,036 $ (673) Other expense (102) (10) (92) Nine Months Ended October 31, Variance (in millions) 2021 2020 Dollars Gains on strategic investments, net $ 1,177$ 1,910 $ (733) Other expense (172) (36) (136) Gains on strategic investments, net consists primarily of mark-to-market adjustments related to our publicly held equity securities, observable price adjustments related to our privately held equity securities and other adjustments. Net gains during the three months endedOctober 31, 2021 were primarily driven by unrealized gains on privately held investments of$162 million and a realized gain on the sale of one of our publicly held investments of$112 million . Net gains recognized during the nine months endedOctober 31, 2021 were primarily driven by an unrealized gain on one of our privately held equity investments of$369 million , a realized gain on the acquisition of one of our privately held equity investments in a stock and cash transaction by a publicly traded company of$155 million , and a realized gain on the sale of one of our publicly held investments of$112 million . Other expense primarily consists of interest expense on our debt as well as our finance leases offset by investment income. Interest expense was$72 million and$29 million for the three months endedOctober 31, 2021 and 2020, respectively and$147 million and$87 million for the nine months endedOctober 31, 2021 and 2020, respectively. The increase in interest expense was primarily driven by our issuance of$8.0 billion of Senior Notes inJuly 2021 . Investment income decreased by$10 million during the three months endedOctober 31, 2021 compared to the same period a year ago and decreased by$22 million in the nine months endedOctober 31, 2021 compared to the same period a year ago. The decrease in investment income was primarily due to lower interest rates across our portfolio as well as lower cash balances. Other expense for the three and nine months endedOctober 31, 2021 also includes$24 million in losses related to the Slack Convertible Notes, which were paid in excess of the notes' acquisition date fair values. 45
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Benefit From (Provision For) Income Taxes
Three Months Ended October 31, Variance (in millions) 2021 2020 Dollars Benefit from (provision for) income taxes $ 169$ (169) $ 338 Effective tax rate (57) % 14 % Nine Months Ended October 31, Variance (in millions) 2021 2020 Dollars Benefit from (provision for) income taxes$ (257) $ 1,669 $ (1,926) Effective tax rate 15 % (78) % We recorded a tax benefit of$169 million , primarily related to excess tax benefits from stock-based compensation, on pretax income of$299 million for the three months endedOctober 31, 2021 , and a tax provision of$257 million on pretax income of$1.7 billion for the nine months endedOctober 31, 2021 . Our year-to-date tax provision was related to excess tax benefits from stock-based compensation partially offset by profitable jurisdictions outsidethe United States subject to tax rates greater than 21 percent. Our effective tax rate may fluctuate due to changes in our domestic and foreign earnings or material discrete tax items or a combination of these factors resulting from transactions or events, for example, acquisitions, changes to our operating structure, or COVID-19. We recognized a tax provision of$169 million on a pretax income of$1.3 billion for the three months endedOctober 31, 2020 and a tax benefit of$1.7 billion on a pretax income of$2.1 billion for the nine months endedOctober 31, 2020 . We changed our international corporate structure, which included the consolidation of certain intangible property inIreland , resulting in a net tax benefit of$2.0 billion related to foreign deferred tax assets. We believe that it is more likely than not the deferred tax assets will be realized inIreland . Liquidity and Capital Resources AtOctober 31, 2021 , our principal sources of liquidity were cash, cash equivalents and marketable securities totaling$9.4 billion and accounts receivable of$4.0 billion . Our cash equivalents and marketable securities are comprised primarily of corporate notes and obligations,U.S. treasury securities,U.S. agency obligations, asset-backed securities, foreign government obligations, mortgage-backed obligations, covered bonds, time deposits, money market mutual funds and municipal securities. Our credit agreement (the "Revolving Loan Credit Agreement"), which as ofOctober 31, 2021 provides the ability to borrow up to$3.0 billion in unsecured financing (the "Credit Facility"), also serves as a source of liquidity. As ofOctober 31, 2021 , our remaining performance obligation was$36.3 billion . Our remaining performance obligation represents contracted revenue that has not yet been recognized and includes unearned revenue, which has been invoiced and is recorded on the balance sheet, and unbilled amounts that are not recorded on the balance sheet, that will be recognized as revenue in future periods. Cash from operations could continue to be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and other risks detailed in Part II, Item 1A titled "Risk Factors." We believe our existing cash, cash equivalents, marketable securities, cash provided by operating activities, unbilled amounts related to contracted non-cancelable subscription agreements, which is not reflected on the balance sheet, and, if necessary, our borrowing capacity under our Credit Facility will be sufficient to meet our working capital, capital expenditure and debt repayment needs over the next 12 months. In the future, we may enter into arrangements to acquire or invest in complementary businesses, services and technologies and intellectual property rights. To facilitate these acquisitions or investments, we may seek additional equity or debt financing, which may not be available on terms favorable to us or at all, impacting our ability to complete subsequent acquisitions or investments. 46 -------------------------------------------------------------------------------- Table of Contents Cash Flows For the three and nine months endedOctober 31, 2021 and 2020, our cash flows were as follows (in millions): 3 Three Months Ended October 31, Nine Months Ended October 31, 2021 2020 2021 2020 Net cash provided by operating activities $ 404 $
339 $ 4,018
(976) (1,035) (13,077) (4,065) Net cash provided by (used in) financing activities (970) 368 7,635 1,018 Operating Activities The net cash provided by operating activities during the nine months endedOctober 31, 2021 was primarily related to net income of$1.5 billion , adjusted for non-cash items including$2.4 billion of depreciation and amortization and$2.0 billion of expenses related to stock-based expense offset by$1.2 billion related to gains on strategic investments. Cash provided by operating activities during the nine months endedOctober 31, 2021 was further benefited by the change in accounts receivable, net of$3.9 billion , partially offset by a change in unearned revenue of$2.9 billion . The net cash provided by operating activities during the nine months endedOctober 31, 2020 was primarily related to net income of$3.8 billion , adjusted for non-cash items such as$2.0 billion related to depreciation and amortization and$1.6 billion of expenses related to stock-based expense offset by$2.0 billion from a one-time discrete tax item from the recognition of deferred tax assets related to an intra-entity transfer of certain intangible property and$1.9 billion related to gains on strategic investments, net. Cash provided by operating activities during the nine months endedOctober 31, 2020 further benefited by the change in accounts receivable, net of$2.9 billion , offset by change in unearned revenue of$2.8 billion . Cash provided by operating activities during the nine months endedOctober 31, 2020 was negatively impacted by providing temporary financial flexibility to customers most affected by COVID-19, in addition to changes in billing frequency for new business. In addition, our operating cash flows were negatively impacted by a one-time partial minimum commission guarantee as these cash outflows were not offset by corresponding cash inflows from customer receipts. Investing Activities The net cash used in investing activities during the nine months endedOctober 31, 2021 was primarily related to cash consideration for the acquisitions of Slack andAcumen , as well as other acquisitions, net of cash acquired, of approximately$14.8 billion . Net cash used in investing activities was impacted by net inflows of$1.1 billion from marketable securities activity and$1.2 billion from strategic investment activity. The net cash used in investing activities during the nine months endedOctober 31, 2020 was primarily related to cash consideration for the acquisition ofVlocity , net of cash acquired, of approximately$1.3 billion and by net outflows from marketable securities activity of$2.0 billion . In addition, we paid approximately$150 million of cash consideration related to the purchase of450 Mission St. inSan Francisco , which is reflected in capital expenditures. Financing Activities Net cash provided by financing activities during the nine months endedOctober 31, 2021 consisted primarily of$7.9 billion of net proceeds from ourJuly 2021 issuance of Senior Notes and$1.0 billion from proceeds from equity plans, partially offset by payments related to the Slack Convertible Notes net of capped call proceeds of$1.2 billion . Net cash provided by financing activities during the nine months endedOctober 31, 2020 consisted primarily of$1.1 billion from proceeds from equity plans. Debt As ofOctober 31, 2021 , the carrying value of our outstanding Senior Notes, which mature starting in 2023 through 2061, was$10.4 billion . In addition, we had senior secured notes outstanding related to our loan on our purchase of an office building located at50 Fremont Street inSan Francisco ("50Fremont "), due in 2023, with a total carrying value of$187 million . We were in compliance with all debt covenants as ofOctober 31, 2021 . InDecember 2020 , we entered into a credit agreement (the "Revolving Loan Credit Agreement"), which provides for a$3.0 billion unsecured revolving credit facility (the "Credit Facility") that matures inDecember 2025 . There were no outstanding borrowings under the Credit Facility as ofOctober 31, 2021 . We may use the proceeds of future borrowings under the Credit Facility for general corporate purposes, which may include, without limitation, financing the consideration for, fees, costs and expenses related to any acquisition. We do not have any special purpose entities and we do not engage in off-balance sheet financing arrangements. 47 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations Our principal commitments consist of obligations under leases for office space, co-location data center facilities and our development and test data center, as well as leases for computer equipment, software, furniture and fixtures. As ofOctober 31, 2021 , the future non-cancelable minimum payments under these commitments were approximately$4.0 billion . As ofOctober 31, 2021 , we have additional operating leases that have not yet commenced totaling$1.4 billion . Additionally, we have significant contractual commitments with infrastructure service providers. During fiscal 2022 and in future fiscal years, we have made, and expect to continue to make, additional investments in our infrastructure to scale our operations, increase productivity and enhance our security measures. We plan to upgrade or replace various internal systems to scale with our overall growth. While we continue to make investments in our infrastructure including offices, information technology and data centers, as well as investments with infrastructure service providers, to provide capacity for the growth of our business, our strategy may continue to change related to these investments and we may slow the pace of our investments, including in response to the known and potential impacts of COVID-19 on our business. Other Future Obligations InOctober 2019 , we acquired ClickSoftware for approximately$1.4 billion . In the event that we fully integrate the operations and assets of ClickSoftware, as well as other acquired Israeli based entities into our operations, we may be subject to a potential one-time income tax charge based on an assumed Israeli statutory tax rate of 23 percent applied to the value of any transferred intangibles. The timing and amount of the cash payment, if any, is uncertain and would be based upon a number of factors, including our integration plans, valuations related to intercompany transactions, the tax rate in effect at the time, potential negotiations with the taxing authorities and potential litigation. 48 -------------------------------------------------------------------------------- Table of Contents Environmental, Social, Governance We believe the business of business is to make the world a better place for all of our stakeholders, including our stockholders, customers, employees, partners, the planet and our communities. We believe that values drive value, and that effectively managing our priority Environmental, Social and Governance ("ESG") topics will help create long-term value for our investors. We also believe that transparently disclosing the goals and relevant metrics related to our ESG programs will allow our stakeholders to be informed about our progress. To identify ESG topics for disclosure, we performed an internal ESG materiality assessment in fiscal 2020, which assessed both the impact on our business and the importance to our stakeholders. We also identify relevant topics for disclosure by considering the recommendations of third-party ESG reporting foundations and frameworks, such as theValue Reporting Foundation and theTask Force on Climate-Related Financial Disclosures ("TCFD"). More information on our key ESG programs, goals and commitments, and key metrics can be found on our website, in our Form 10-K filed with theSEC onMarch 17, 2021 or on our annual Stakeholder Impact Report website, https://stakeholderimpactreport.salesforce.com. Website references throughout this document are provided for convenience only, and the content on the referenced websites is not incorporated by reference into this report. InJuly 2021 , we released our inaugural Sustainability Bond Framework (the "Framework") which can be found at https://investor.salesforce.com/sustainablebondframework. InJuly 2021 , we issued$1.0 billion of 2028 Senior Sustainability Notes, which will be allocated based on certain criteria described in the Framework. We intend to report on our allocations on an annual basis. While we believe that our ESG goals align with our long-term growth strategy and financial and operational priorities, they are aspirational and may change, and there is no guarantee or promise that they will be met. 49
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