Salesforce.com 2004 Annual Report Download - page 24

Table of Contents
Sources of Revenues
We derive our revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing our on-
demand application service, and from customers purchasing additional support beyond the standard support that is included in the basic subscription fee; and
(2) related professional services and other revenues. Other revenues consist primarily of training fees. Subscription and support revenues accounted for 90
percent of our total revenues during fiscal 2005 and 89 percent during fiscal 2004. Subscription revenues are driven primarily by the number of paying
subscribers of our service and the subscription price of our service. None of our customers accounted for more than 5 percent of our revenues in fiscal 2005,
2004 and 2003.
Subscription and support revenues are recognized ratably over the contract terms beginning on the commencement dates of each contract. The typical
subscription and support term is 12 to 24 months, although terms range from one to 60 months. Our subscription and support contracts are noncancelable,
though customers typically have the right to terminate their contracts for cause if we materially fail to perform. We generally invoice our customers in
advance, in annual or quarterly 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 deferred revenue, or in revenue depending on whether the revenue recognition criteria have been met. In
general, we collect our billings in advance of the subscription service period.
Professional services and other revenues consist of fees associated with consulting and implementation services and training. Our consulting and
implementation engagements are typically billed on a time and materials basis. We also offer a number of classes on implementing, using and administering
our service that are billed on a per person, per class basis. Our typical payment terms provide that our customers pay us within 30 days of invoice.
Cost of Revenues and Operating Expenses
Cost of Revenues. Cost of subscription and support revenues primarily consists of expenses related to hosting our service and providing support,
depreciation or operating lease expense associated with computer equipment, costs associated with website development activities, allocated overhead and
amortization expense associated with capitalized software. To date, the expense associated with capitalized software has not been material to our cost of
revenues. We allocate overhead such as rent and occupancy charges, employee benefit costs and taxes to all departments based on headcount. As such,
general overhead expenses are reflected in each cost of revenue and operating expense category. Cost of professional services and other revenues consists
primarily of employee-related costs associated with these services, the cost of subcontractors and allocated overhead. The cost associated with providing
professional services is significantly higher as a percentage of revenue than for our on-demand subscription service due to the labor costs associated with
providing consulting services.
To the extent that our customer base grows, we intend to continue to invest additional resources in our on-demand application service and in our
consulting services. The timing of these additional expenses will affect our cost of revenues, both in terms of absolute dollars and as a percentage of revenues,
in a particular quarterly period. For example, we plan to increase the number of employees who are fully dedicated to consulting services. Additionally, we
are currently in the process of obtaining additional business continuity services and additional data center capacity. We currently expect these resources to be
in place at various dates during fiscal 2006. We currently expect the annual cost of these services to be approximately $7.0 million.
Research and Development. Research and development expenses consist primarily of salaries and related expenses and allocated overhead. We have
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
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