Salesforce.com 2016 Annual Report Download - page 50

aggregate unbilled deferred revenue will change from year-to-year depending in part upon the number and dollar
amount of subscription agreements at particular stages in their renewal cycle. Such fluctuations are not a reliable
indicator of future revenues. Unbilled deferred revenue does not include minimum revenue commitments from
indirect sales channels, as we recognize revenue, deferred revenue, and any unbilled deferred revenue upon sell-
through to an end user customer.
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, the costs of data center capacity, depreciation or operating lease expense associated
with computer equipment and software, allocated overhead, amortization expense associated with capitalized software
related to our services and acquired developed technologies and certain fees paid to various third parties for the use of
their technology, services and data. 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, 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, including stock-based expenses, the cost of subcontractors and allocated overhead. The
cost of providing professional services is significantly higher as a percentage of the related revenue than for our
enterprise cloud computing subscription service due to the direct labor costs and costs of subcontractors.
We intend to continue to invest additional resources in our enterprise cloud computing services. For
example, we have invested in additional database software and we plan to increase the capacity that we are able
to offer globally through data centers and third party infrastructure providers. As we acquire new businesses and
technologies, the amortization expense associated with this activity will be included in cost of revenues.
Additionally, as we enter into new contracts with third parties for the use of their technology, services or data, or
as our sales volume grows, the fees paid to use such technology or services may increase. 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 the affected periods.
Research and Development. Research and development expenses consist primarily of salaries and related
expenses, including stock-based expenses, the costs of our development and test data center and allocated
overhead. We continue to focus our research and development efforts on adding new features and services,
integrating acquired technologies, increasing the functionality and security and enhancing the ease of use of our
enterprise cloud computing services. 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 lower 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 and may
increase as a percentage of total revenues as we invest in building the necessary employee and system
infrastructure required to support the development of new, and improve existing, technologies and the integration
of acquired businesses and technologies.
Marketing and Sales. Marketing and sales expenses are our largest cost and consist primarily of salaries and
related expenses, including stock-based 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, brand building and product marketing activities.
We plan to continue to invest in marketing and sales by expanding our domestic and international selling
and marketing activities, building brand awareness, attracting new customers and sponsoring additional
marketing events. The timing of these marketing events, such as our annual and largest event, Dreamforce, will
affect our marketing costs in a particular quarter. We expect that in the future, marketing and sales expenses will
increase in absolute dollars and continue to be our largest cost.
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