Salesforce.com 2005 Annual Report Download - page 39

Table of Contents
historically focused our research and development efforts on increasing the functionality and enhancing the ease of use of our on-demand application service.
Our proprietary, scalable and secure multi-tenant architecture enables us to provide all of our customers with a service based on a single version of our
application. As a result, we do not have to maintain multiple versions, which enables us to have relatively low research and development expenses as
compared to traditional enterprise software companies. We expect that in the future, research and development expenses will increase in absolute dollars as
we upgrade and extend our service offerings and develop new technologies.
We recently upgraded our new development and test data center. We expect the annual cost of this data center to be significant.
Marketing and Sales. Marketing and sales expenses are our largest cost and consist primarily of salaries and related expenses for our sales and
marketing staff, including commissions, payments to partners, marketing programs and allocated overhead. Marketing programs consist of advertising, events,
corporate communications and brand building and product marketing activities.
As our revenues increase, we plan to continue to invest heavily in marketing and sales by increasing the number of direct sales personnel in order to add
new customers and increase penetration within our existing customer base, expanding our domestic and international selling and marketing activities, building
brand awareness and sponsoring additional marketing events. We expect that in the future, marketing and sales expenses will increase in absolute dollars and
continue to be our largest cost.
General and Administrative. General and administrative expenses consist of salaries and related expenses for finance and accounting, human resources
and management information systems personnel, legal costs, professional fees, other corporate expenses and allocated overhead. We expect that in the future,
general and administrative expenses will increase in absolute dollars as we add personnel and incur additional professional fees and insurance costs related to
the growth of our business, international expansion and operations as a public company, including the cost of our compliance with Section 404 of the
Sarbanes-Oxley Act.
Stock-Based Expenses. Our cost of revenues and operating expenses include stock-based expenses related to options and warrants issued to non-
employees, option grants to employees in situations where the exercise price was less than the deemed fair value of our common stock at the date of grant and
stock awards to board members for board services. These charges have been significant and are reflected in our historical financial results. These amounts do
not include the incremental costs and operating expenses associated with the new accounting pronouncement to expense stock options, which we will adopt at
the start of fiscal 2007.
Joint Venture
In December 2000, we established a Japanese joint venture, Kabushiki Kaisha salesforce.com, with SunBridge, Inc., a Japanese corporation, to assist us
with our sales efforts in Japan. As of January 31, 2006, we owned a 63 percent interest in the joint venture. Because of this majority interest, we consolidate
the venture's financial results, which are reflected in each revenue, cost of revenues and expense category in our consolidated statement of operations. We
then record minority interest, which reflects the minority investors' interest in the venture's results, exclusive of intercompany charges. Through January 31,
2006, the operating performance and liquidity requirements of the Japanese joint venture had not been significant. While we plan to expand our selling and
marketing activities in Japan in order to add new customers, we believe the future operating performance and liquidity requirements of the Japanese joint
venture will not be significant.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of
these consolidated financial statements requires us to make
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