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8-K/A - FORM 8-K/A - SALESFORCE.COM, INC.d665195d8ka.htm
EX-23.1 - EX-23.1 - SALESFORCE.COM, INC.d665195dex231.htm
EX-99.1 - EX-99.1 - SALESFORCE.COM, INC.d665195dex991.htm
EX-99.2 - EX-99.2 - SALESFORCE.COM, INC.d665195dex992.htm

Exhibit 99.3

salesforce.com, inc.

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information are based on the historical financial statements of salesforce.com, inc. (the “Company”) and ExactTarget, Inc. (“ET”) after giving effect to the Company’s acquisition of ET on July 12, 2013 and the assumptions, reclassifications and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial information.

The unaudited pro forma condensed combined statements of operations for the six months ended July 31, 2013, and year ended January 31, 2013, are presented as if the acquisition of ET had occurred on February 1, 2012 and were carried forward through each of the aforementioned periods presented.

A pro forma condensed combined balance sheet as of July 31, 2013 is not required as the Company’s balance sheet as of July 31, 2013 included in the Form 10-Q as of and for the three and six months ended July 31, 2013 reflects the impact of the acquisition.

The preliminary allocation of the purchase price used in the unaudited pro forma condensed combined financial information is based upon preliminary estimates. These preliminary estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date) as the Company finalizes the valuations of the tangible and intangible assets acquired and liabilities assumed in connection with the acquisition of ET.

The unaudited pro forma condensed combined financial information is not intended to represent or be indicative of the Company’s consolidated results of operations or financial position that the Company would have reported had the ET acquisition been completed as of the dates presented, and should not be taken as a representation of the Company’s future consolidated results of operations or financial position.

The unaudited pro forma condensed combined financial information does not reflect any operating efficiencies and/or cost savings that the Company may achieve with respect to the combined companies.

The unaudited pro forma condensed combined financial information should be read in conjunction with the historical consolidated financial statements and accompanying notes of the Company included in the Annual Report on Form 10-K for the fiscal year ended January 31, 2013 and the Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2013 and of ET’s financial statements included in Form 8-K/A for the year ended December 31, 2012 and the six months ended June 30, 2013.


salesforce.com, inc.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the Six Months Ended July 31, 2013

 

     Historical              
     Six Months Ended              
     July 31, 2013     June 30, 2013     Pro Forma        
           ExactTarget     Adjustments     Pro Forma  

(in thousands)

   salesforce.com     (Note 1)     (Note 3)     Combined  

Revenues:

        

Subscription and support

   $ 1,745,065      $ 146,661      $ (22,403 )(A)(G)(I)    $ 1,869,323   

Professional services and other

     104,662        36,649        (4,177 )(A)(I)      137,134   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     1,849,727        183,310        (26,580     2,006,457   

Cost of revenues:

        

Subscription and support

     314,458        37,825        16,806  (B)(C)(I)      369,089   

Professional services and other

     112,253        28,222        (2,514 )(B)(I)      137,961   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     426,711        66,047        14,292        507,050   

Gross profit

     1,423,016        117,263        (40,872     1,499,407   

Operating expenses:

        

Research and development

     280,018        37,244        (3,415 )(B)(I)      313,847   

Marketing and sales

     947,111        77,524        15,752  (B)(C)(G)(I)      1,040,387   

General and administrative

     280,284        30,819        (22,648 )(B)(C)(D)(E)(H)(I)      288,455   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     1,507,413        145,587        (10,311     1,642,689   

Loss from operations

     (84,397     (28,324     (30,561     (143,282

Investment income

     7,741        0        0        7,741   

Interest expense

     (31,539     0        (2,681 )(F)      (34,220

Other expense

     (2,552     (109     0        (2,661
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before benefit from income taxes

     (110,747     (28,433     (33,242     (172,422

Benefit from income taxes

     119,629        0        (116,759 )(J)      2,870   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 8,882      $ (28,433   $ (150,001   $ (169,552
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share

   $ 0.02      $ (0.41     $ (0.29

Diluted net income (loss) per share

   $ 0.01      $ (0.41     $ (0.29

Shares used in computing basic net income (loss) per share (Note 5)

     591,210        69,317          591,210   

Shares used in computing diluted net income (loss) per share (Note 5)

     623,865        69,317          591,210   

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

  

Cost of revenues

     43,856        2,166        21,052        67,074   

Marketing and sales

     6,936        1,001        22,016        29,953   

General and administrative

     0        130        (130     0   

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

  

Cost of revenues

     20,659        880        658        22,197   

Research and development

     50,461        2,240        222        52,923   

Marketing and sales

     115,935        2,211        1,662        119,808   

General and administrative

     38,150        2,902        39        41,091   


salesforce.com, inc.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the Year Ended January 31, 2013

 

    Historical              
    Year Ended              
    January 31, 2013     December 31, 2012     Pro Forma        
          ExactTarget     Adjustments     Pro Forma  

(in thousands)

  salesforce.com     (Note 1)     (Note 3)     Combined  

Revenues:

       

Subscription and support

  $ 2,868,808      $ 234,222      $ (64,750 )(A)(G)    $ 3,038,280   

Professional services and other

    181,387        58,050        1,704  (A)      241,141   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    3,050,195        292,272        (63,046     3,279,421   

Cost of revenues:

       

Subscription and support

    494,187        56,770        50,958  (B)(C)      601,915   

Professional services and other

    189,392        46,830        2,025  (B)      238,247   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    683,579        103,600        52,983        840,162   

Gross profit

    2,366,616        188,672        (116,029     2,439,259   

Operating expenses:

       

Research and development

    429,479        54,022        6,898  (B)      490,399   

Marketing and sales

    1,614,026        115,312        58,442  (B)(C)(G)      1,787,780   

General and administrative

    433,821        39,725        10,261  (B)(C)(E)(H)      483,807   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    2,477,326        209,059        75,601        2,761,986   

Loss from operations

    (110,710     (20,387     (191,630     (322,727

Investment income

    19,562        0        0        19,562   

Interest expense

    (30,948     0        (6,254 )(F)      (37,202

Other expense

    (5,698     (571     0        (6,269
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before benefit from income taxes

    (127,794     (20,958     (197,884     (346,636

Benefit from income taxes

    (142,651     0        115,207  (J)      (27,444
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (270,445   $ (20,958   $ (82,677   $ (374,080
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share

  $ (0.48   $ (0.39     $ (0.66

Diluted net income (loss) per share

  $ (0.48   $ (0.39     $ (0.66

Shares used in computing basic net income (loss) per share (Note 5)

    564,896        53,856          564,896   

Shares used in computing diluted net income (loss) per share (Note 5)

    564,896        53,856          564,896   

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

  

Cost of revenues

    77,249        1,024        49,634        127,907   

Marketing and sales

    10,922        704        49,695        61,321   

General and administrative

    0        354        (354     0   

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

  

Cost of revenues

    33,757        1,378        3,349        38,484   

Research and development

    76,333        2,183        6,898        85,414   

Marketing and sales

    199,284        3,179        10,357        212,820   

General and administrative

    69,976        4,442        8,639        83,057   

 


salesforce.com, inc.

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

1. BASIS OF PRO FORMA PRESENTATION

The unaudited pro forma condensed combined statements of operations for the six months ended July 31, 2013, and for the year ended January 31, 2013, are based on the historical financial statements of salesforce.com, inc. (the “Company”) and ExactTarget, Inc. (“ET”) after giving effect to the Company’s acquisition of ET on July 12, 2013 and the assumptions, reclassifications and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial information.

The Company accounts for business combinations pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (ASC) 805, Business Combinations (“ASC 805”). In accordance with ASC 805, the Company uses its best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Goodwill as of the acquisition date is measured as the excess of purchase consideration over the fair value of tangible and identifiable intangible assets acquired and liabilities assumed.

The fair values assigned to ET’s tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The estimated fair values of these assets acquired and liabilities assumed are considered preliminary and are based on the information that was available as of the date of the acquisition. The preliminary estimated fair values of assets acquired and liabilities assumed, including current and noncurrent income taxes payable and deferred taxes, and identifiable intangible assets may be subject to change as additional information is received and certain tax returns finalized. Thus the provisional measurements of fair value are subject to change. The Company expects to finalize the valuation of the tangible and intangible assets acquired and liabilities assumed as soon as practicable, but not later than one-year from the acquisition date.

The unaudited pro forma condensed combined financial information is not intended to represent or be indicative of the Company’s consolidated results of operations or financial position that would have been reported had the ET acquisition been completed as of the dates presented, and should not be taken as a representation of the Company’s future consolidated results of operations or financial position. The unaudited pro forma condensed combined financial information does not reflect any operating efficiencies, cost savings that the Company may achieve and/or changes in significant accounting policies with respect to the combined companies.

The unaudited pro forma condensed combined financial information should be read in conjunction with the Company’s historical consolidated financial statements and accompanying notes included in its Annual Report on Form 10-K for the fiscal year ended January 31, 2013 and Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2013 and ET’s historical consolidated financial statements and accompanying notes included in the Form 8-K/A for the year ended December 31, 2012 and the six months ended June 30, 2013.

Accounting Periods Presented

ET’s historical fiscal year ended on December 31 and, for purposes of the unaudited pro forma condensed combined financial information, its historical results have been aligned to more closely conform to the Company’s January 31 fiscal year end as explained below.

The unaudited pro forma condensed combined statements of operations of the Company and ET for the six months ended July 31, 2013 and year ended January 31, 2013 are presented as if the ET acquisition had taken place on February 1, 2012. Due to different fiscal period ends, the pro forma statement of operations for the six months ended July 31, 2013 combines the historical results of the Company for the six months ended July 31, 2013 and the historical results of ET for the six months ended June 30, 2013. The pro forma statement of operations of the Company and ET for the year ended January 31, 2013, due to different fiscal period ends, combines the historical results of the Company for the year ended January 31, 2013 and the historical results of ET for the year ended December 31, 2012.

A pro forma condensed combined balance sheet as of July 31, 2013 is not required as the Company’s balance sheet as of July 31, 2013 included in the Form 10-Q as of and for the three and six months ended July 31, 2013 reflects the impact of the acquisition.

Reclassifications

No reclassifications were required to the presentation of ET’s historical financial statements in order to conform to the Company’s presentation.


2. ACQUISITION OF EXACTTARGET, INC.

On July 12, 2013, the Company acquired for cash the outstanding stock of ET, a leading global provider of cross-channel, digital marketing solutions that empower organizations of all sizes to communicate with their customers through the digital channels they use most. The Company acquired ET to, among other things, create a world-class marketing platform across the channels of email, social, mobile and the web. The Company has included the financial results of ET in the consolidated financial statements from the date of acquisition. The preliminary acquisition date fair value of the consideration transferred for ET was approximately $2.6 billion, including the proceeds from the term loan of $300.0 million, which consisted of the following (in thousands):

 

     Fair Value  

Cash

   $ 2,567,098   

Fair value of equity awards assumed

     40,067   
  

 

 

 

Total

   $ 2,607,165   
  

 

 

 

The preliminary estimated fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of 0.84 was applied to convert ET’s outstanding equity awards for ET’s common stock into equity awards for shares of the Company’s common stock.

The following table summarizes the preliminary estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):

 

     Fair Value  

Cash, cash equivalents and marketable securities

   $ 91,549   

Accounts receivable

     63,320   

Other current assets

     20,965   

Customer contract asset, current and noncurrent

     201,161   

Property and equipment

     64,782   

Other noncurrent assets

     4,379   

Intangible assets

     708,260   

Goodwill

     1,852,852   

Accounts payable, accrued expenses and other liabilities

     (66,346

Deferred revenue, current and noncurrent

     (46,525

Customer liability, current and noncurrent

     (141,783

Other liabilities, noncurrent

     (1,825

Deferred tax liability

     (143,624
  

 

 

 

Net assets acquired

   $ 2,607,165   
  

 

 

 

The excess of preliminary purchase consideration over the preliminary fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The preliminary fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets. The preliminary estimated fair values of assets acquired and liabilities assumed, including current and noncurrent income taxes payable and deferred taxes, and identifiable intangible assets may be subject to change as additional information is received and certain tax returns are finalized. Thus the provisional measurements of fair value set forth above are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one-year from the acquisition date.

The following table sets forth the components of identifiable intangible assets acquired and their preliminary estimated useful lives as of the date of acquisition (in thousands):

 

     Fair Value      Useful Life  

Developed technology

   $ 307,200         4-7 years   

Customer relationships

     362,200         6-8 years   

Trade name and trademark

     29,400         10 years   

Other purchased intangible assets

     9,460         3-4 years   
  

 

 

    

Total intangible assets subject to amortization

   $ 708,260      
  

 

 

    

Developed technology represents the preliminary estimated fair value of ET’s digital marketing technology. Customer relationships represent the preliminary estimated fair values of the underlying relationships with ET customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating ET’s digital marketing technology with the Company’s other offerings. The goodwill balance is not deductible for U.S. income tax purposes.

The Company assumed unvested options and restricted stock with a preliminary estimated fair value of $101.6 million. Of the total consideration, a portion was preliminarily allocated to the purchase consideration and the remainder of the preliminary estimated fair value was preliminarily allocated to future services and will be expensed over the remaining service periods on a straight-line basis.

3. TERM LOAN

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

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

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

The Credit Agreement contains certain customary affirmative and negative covenants, including a consolidated leverage ratio covenant, a consolidated interest coverage ratio covenant, a limit on the Company’s ability to incur additional indebtedness, issue preferred stock or pay dividends, and certain other restrictions on the Company’s activities each defined specifically in the Credit Agreement. The Company was in compliance with the Credit Agreement’s covenants as of July 31, 2013.

The weighted average interest rate on the Term Loan was 2.3% as of July 31, 2013. Accrued interest on the Term Loan was $0.4 million as of July 31, 2013. As of July 31, 2013, the current portion outstanding under the Term Loan was $30.0 million and the noncurrent outstanding portion was $270.0 million.

4. PRO FORMA ADJUSTMENTS

The following pro forma adjustments are included in the Company’s unaudited pro forma condensed combined financial information:

(A) To record a reduction in revenues related to the estimated fair value of the acquired deferred revenue and the customer liability. The difference between the preliminary fair values of acquired deferred revenues, representing amounts equivalent to the estimated costs plus an appropriate profit margin to fulfill the obligations assumed, and the historical carrying amounts of ET’s deferred revenues results in a discount to the recorded deferred revenue and is therefore subsequently recognized as a reduction to revenues.

 

in thousands

   Six Months Ended
July 31, 2013
    Year Ended
January 31, 2013
 

Subscription and support

   $ 9,570      $ 63,140   

Professional services and other

     (154     (1,704
  

 

 

   

 

 

 

Total reduction to revenue

   $ 9,416      $ 61,436   
  

 

 

   

 

 

 

(B) To record the estimated stock-based compensation expense related to the unvested portion of ET stock options and restricted stock-based awards assumed in connection with the acquisition using the straight-line amortization method over the remaining vesting periods.

 

     Six Months Ended July 31, 2013  

(in thousands)

   ET Historical Stock-
Based Compensation
     Stock-Based
Compensation Expense
Based Upon
Preliminary Fair
Values
     Increase in
Stock-Based
Compensation
Expense
 

Cost of revenues - subscriptions

   $ 282       $ 567       $ 285   

Cost of revenues - services

     598         1,208         610   

Research and development

     2,240         3,132         892   

Marketing and sales

     2,211         4,622         2,411   

General and administrative

     2,902         3,275         373   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 8,233       $ 12,804       $ 4,571   
  

 

 

    

 

 

    

 

 

 

 

     Year Ended January 31, 2013  

(in thousands)

   ET Historical Stock-
Based Compensation
     Stock-Based
Compensation Expense
Based Upon
Preliminary Fair
Values
     Increase in
Stock-Based
Compensation
Expense
 

Cost of revenues - subscriptions

   $ 345       $ 1,669       $ 1,324   

Cost of revenues - services

     1,033         3,058         2,025   

Research and development

     2,183         9,081         6,898   

Marketing and sales

     3,179         13,536         10,357   

General and administrative

     4,442         13,081         8,639   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 11,182       $ 40,425       $ 29,243   
  

 

 

    

 

 

    

 

 

 

(C) To record the estimated amortization expense related to the intangible assets acquired in connection with the Company’s acquisition of ET.


      Six Months Ended July 31, 2013  

(in thousands)

   ET  Historical
Amortization
Expense
     Amortization Expense
Based Upon
Preliminary Fair
Values
     Increase in
Amortization
Expense
 

Cost of revenues – subscription and support

   $ 2,166       $ 25,329       $ 23,163   

Marketing and sales

     1,001         25,199         24,198   

General and administrative

     130         0         (130
  

 

 

    

 

 

    

 

 

 

Amortization expense

   $ 3,297       $ 50,528       $ 47,231   
  

 

 

    

 

 

    

 

 

 
     Year Ended January 31, 2013  

(in thousands)

   ET  Historical
Amortization
Expense
     Amortization Expense
Based Upon
Preliminary Fair
Values
     Increase in
Amortization
Expense
 

Cost of revenues – subscription and support

   $ 1,024       $ 50,658       $ 49,634   

Marketing and sales

     704         50,399         49,695   

General and administrative

     354         0         (354
  

 

 

    

 

 

    

 

 

 

Amortization expense

   $ 2,082       $ 101,057       $ 98,975   
  

 

 

    

 

 

    

 

 

 

(D) To eliminate acquisition related transaction costs of $5.5 million and $16.0 million that were incurred by ET and the Company in the six months ended June 30, 2013 and July 31, 2013, respectively.

(E) To record the increase in depreciation expense as a result of the increase in fair value of ET’s property, plant and equipment, net. For presentation purposes, this amount is reflected in General and administrative and not allocated.

 

(in thousands)

   Total increase in
Depreciation Expense
     Six Months Ended
July 31, 2013
     Year Ended
January 31, 2013
 

Increase in depreciation expense

   $ 2,405       $ 328       $ 655   

(F) To record interest expense associated with the issuance of a Term Loan to finance a portion of the cash consideration exchanged using the effective interest rate at the time of acquisition. The expense reflects the quarterly interest and principal payments.

 

(in thousands)

   Par Value      Effective
Annual Interest Rate
    Increase in Interest
Expense for Six
Months Ended July 31,
2013
     Increase in Interest
Expense for Year
Ended January 31,
2013
 

Three-year term loan

   $ 300,000         3.25   $ 2,681       $ 6,254   

(G) To eliminate revenues, and corresponding expenses between the Company and ET for the periods presented. The pro forma effects related to other expenses for the periods presented were not significant.

(H) To record the amortization of the favorable lease contract asset established upon purchase accounting. The asset represents the difference between the fair value and minimum lease obligations under outstanding leases acquired from ET.

 

(in thousands)

   Six Months Ended
July 31, 2013
     Year Ended
January 31, 2013
 

Amortization of favorable lease contract

   $ 652       $ 1,321   

(I) To eliminate ETs results included in the Company’s results for the period from the acquisition of July 12, 2013 to July 31, 2013.


(J) The following table presents pro forma income tax adjustments to the periods presented. An adjustment was recorded to exclude the partial release of the Company’s valuation allowance recorded in the Company’s second quarter ended July 31, 2013 from the pro forma statement of operations for the six months ended July 31, 2013, as this was a material nonrecurring credit that resulted directly from the acquisition of ExactTarget. An adjustment was recorded to eliminate the portion of the valuation allowance included in the statement of operations for the year ended January 31, 2013 that would have been directly impacted had the acquisition occurred on February 1, 2012. Other income tax adjustments were made to reflect the tax impact associated with the pro forma condensed combined statement of operations.

 

(Dollars in thousands)

   Six Months
Ended

July 31,
2013
    Year
Ended
January 31,
2013
 

Tax benefit related to valuation allowance change

   $ (117,992   $ 117,992   

Other proforma income tax adjustments

     1,233        (2,785
  

 

 

   

 

 

 

Pro forma adjustment to (increase)/decrease (provision)/benefit from income taxes

   $ (116,759   $ 115,207   
  

 

 

   

 

 

 

5. PRO FORMA EARNINGS PER SHARE

The pro forma basic and diluted earnings per share amounts presented in the unaudited pro forma condensed combined statements of operations are based upon the weighted average number of the Company’s common shares outstanding. Our acquisition of ET had substantially no impact to our basic weighted average common shares outstanding calculations for the unaudited pro forma condensed combined statements of operations periods presented.