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now:day now:security now:trading_day now:company
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 

FORM 10-Q
x
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2018
OR
 ¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-35580

snlogo18.jpg
SERVICENOW, INC.
(Exact name of registrant as specified in its charter) 
Delaware
 
20-2056195
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)


ServiceNow, Inc.
2225 Lawson Lane
Santa Clara, California 95054
(408) 501-8550
(Registrant’s telephone number, including area code) 


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company  ¨
 
Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of March 31, 2018, there were approximately 176.6 million shares of the Registrant’s Common Stock outstanding.



TABLE OF CONTENTS

 
 
 
Page
 
 
Item 1.
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 
   
 
 

i

Table of Contents

PART I

ITEM 1.     FINANCIAL STATEMENTS

SERVICENOW, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

 
March 31, 2018
 
December 31, 2017
 
 
*As Adjusted
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
682,854

 
$
726,495

Short-term investments
1,203,105

 
1,052,803

Accounts receivable, net
371,008

 
437,051

Current portion of deferred commissions
115,867

 
109,643

Prepaid expenses and other current assets
117,092

 
95,959

Total current assets
2,489,926

 
2,421,951

Deferred commissions, less current portion
233,715

 
224,252

Long-term investments
451,209

 
391,442

Property and equipment, net
267,454

 
245,124

Intangible assets, net
82,553

 
86,916

Goodwill
128,685

 
128,728

Other assets
50,943

 
51,832

Total assets
$
3,704,485

 
$
3,550,245

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
37,715

 
$
32,109

Accrued expenses and other current liabilities
250,738

 
253,257

Current portion of deferred revenue
1,292,638

 
1,210,695

Current portion of convertible senior notes, net
516,925

 
543,418

Total current liabilities
2,098,016

 
2,039,479

Deferred revenue, less current portion
50,244

 
36,120

Convertible senior notes, net
637,795

 
630,018

Other long-term liabilities
53,267

 
65,884

Total liabilities
2,839,322

 
2,771,501

Stockholders’ equity:
 
 
 
Common stock
177

 
174

Additional paid-in capital
1,819,410

 
1,731,367

Accumulated other comprehensive (loss) income
(12,970
)
 
5,767

Accumulated deficit
(941,454
)
 
(958,564
)
Total stockholders’ equity
865,163

 
778,744

Total liabilities and stockholders’ equity
$
3,704,485

 
$
3,550,245


*As adjusted to reflect the impact of the full retrospective adoption of Topic 606. See Note 2 for further details.

See accompanying notes to condensed consolidated financial statements

1

Table of Contents

SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share data)
(unaudited) 
 
Three Months Ended March 31,
 
2018
 
2017
 
 
*As Adjusted
Revenues:
 
 
 
Subscription
$
543,325

 
$
387,584

Professional services and other
45,897

 
41,187

Total revenues
589,222

 
428,771

Cost of revenues(1):
 
 
 
Subscription
95,398

 
70,375

Professional services and other
48,075

 
45,709

Total cost of revenues
143,473

 
116,084

Gross profit
445,749

 
312,687

Operating expenses(1):
 
 
 
Sales and marketing
283,701

 
203,739

Research and development
117,268

 
84,489

General and administrative
65,063

 
46,251

Total operating expenses
466,032

 
334,479

Loss from operations
(20,283
)
 
(21,792
)
Interest expense
(17,064
)
 
(8,678
)
Interest income and other income (expense), net
29,987

 
7,729

Loss before income taxes
(7,360
)
 
(22,741
)
Benefit from income taxes
(17,982
)
 
(1,227
)
Net income (loss)
$
10,622

 
$
(21,514
)
Net income (loss) per share - basic and diluted
$
0.06

 
$
(0.13
)
Weighted-average shares used to compute net income (loss) per share - basic
175,482,833

 
168,742,366

Weighted-average shares used to compute net income (loss) per share - diluted
190,249,786

 
168,742,366

Other comprehensive loss:
 
 
 
Foreign currency translation adjustments
$
(8,435
)
 
$
2,795

Unrealized (loss) gain on investments, net of tax
(3,068
)
 
7,583

Other comprehensive (loss) income, net of tax
(11,503
)
 
10,378

Comprehensive loss
$
(881
)
 
$
(11,136
)
 
(1)
Includes stock-based compensation as follows:
 
Three Months Ended March 31,
 
2018
 
2017
 
 
*As Adjusted
Cost of revenues:
 
 
 
Subscription
$
11,291

 
$
7,938

Professional services and other
7,561

 
6,875

Sales and marketing
52,082

 
38,401

Research and development
28,598

 
21,801

General and administrative
21,809

 
14,854



 *As adjusted to reflect the impact of the full retrospective adoption of Topic 606. See Note 2 for further details.
 
See accompanying notes to condensed consolidated financial statements

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SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
 
 
*As Adjusted
Cash flows from operating activities:
 
 
 
Net income (loss)
$
10,622

 
$
(21,514
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
33,411

 
25,226

Amortization of deferred commissions
30,419

 
22,038

Amortization of debt discount and issuance costs
17,064

 
8,678

Stock-based compensation
121,341

 
89,869

Deferred income tax
(24,348
)
 
(3,291
)
Unrealized gain on marketable equity securities
(18,455
)
 

Repayments of convertible senior notes attributable to debt discount
(8,660
)
 

Other
(5,805
)
 
(1,273
)
Changes in operating assets and liabilities, net of effect of business combinations:
 
 
 
Accounts receivable
69,502

 
48,515

Deferred commissions
(42,475
)
 
(30,956
)
Prepaid expenses and other assets
(15,808
)
 
(16,468
)
Accounts payable
875

 
675

Deferred revenue
83,733

 
84,863

Accrued expenses and other liabilities
(1,336
)
 
(18,754
)
Net cash provided by operating activities
250,080

 
187,608

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(35,371
)
 
(33,186
)
Business combination, net of cash and restricted cash acquired

 
(15,035
)
Purchases of other intangibles
(7,850
)
 

Purchases of investments
(376,130
)
 
(223,596
)
Sales of investments

 
21,789

Maturities of investments
182,105

 
122,263

Net cash used in investing activities
(237,246
)
 
(127,765
)
Cash flows from financing activities:
 
 
 
Repayments of convertible senior notes attributable to principal
(28,606
)
 

Proceeds from employee stock plans
52,657

 
34,807

Taxes paid related to net share settlement of equity awards
(85,555
)
 
(53,023
)
Payments on financing obligations
(288
)
 
(1,415
)
Net cash used in financing activities
(61,792
)
 
(19,631
)
Foreign currency effect on cash, cash equivalents and restricted cash (1)
6,491

 
(843
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(42,467
)
 
39,369

Cash, cash equivalents and restricted cash at beginning of period (1)
727,829

 
401,932

Cash, cash equivalents and restricted cash at end of period (1)
$
685,362

 
$
441,301

Cash, cash equivalents and restricted cash at end of period:
 
 
 
Cash and cash equivalents
$
682,854

 
$
439,915

Current portion of restricted cash included in prepaid expenses and other current assets
2,508

 
1,386

Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows
$
685,362

 
$
441,301

Non-cash investing and financing activities:
 
 
 
Benefit from 2018 Note Hedges
$
44,510

 
$

Property and equipment included in accounts payable and accrued expenses
24,288

 
8,857

Financing obligation for property and equipment
5,033

 



*As adjusted to reflect the impact of the full retrospective adoption of Topic 606. See Note 2 for further details.
(1)
During the three months ended December 31, 2017, we adopted Accounting Standards Update 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires that amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Accordingly, we have recast our prior period condensed consolidated statement of cash flows to conform to the current presentation. The impact of the adoption for the three months ended March 31, 2017 is not material.

See accompanying notes to condensed consolidated financial statements

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SERVICENOW, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
Unless the context requires otherwise, references in this report to “ServiceNow,” the “Company”, “we,” “us,” and “our” refer to ServiceNow, Inc. and its consolidated subsidiaries.

(1)    Description of the Business

ServiceNow is a leading provider of enterprise cloud computing solutions that define, structure, manage and automate services for global enterprises. We help our customers improve service quality and reduce costs while scaling and automating their businesses. We typically deliver our software via the Internet as a service, through an easy-to-use, consumer product-like interface, which means it can be easily configured and rapidly deployed. In a minority of cases, we deploy our software on-premises at a customer data center to support a customer’s unique regulatory or security requirements.

(2)    Summary of Significant Accounting Policies

Basis of Presentation

Effective January 1, 2018, we adopted the Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” as discussed in Note 2. All amounts and disclosures set forth in this Form 10-Q have been updated to comply with the new standards, as indicated by the "as adjusted" reference in these condensed consolidated financial statements and related notes. Certain prior period amounts reported in our condensed consolidated financial statements and notes thereto have been reclassified to conform to the current period presentation.

The accompanying unaudited condensed consolidated financial statements and condensed footnotes have been prepared in accordance with the applicable rules and regulations of the Securities and Exchange Commission (the SEC) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary under GAAP for fair statement of results for the interim periods presented have been included. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for other interim periods or future years. The condensed consolidated balance sheet as of December 31, 2017 is derived from audited financial statements as adjusted to reflect the impact of the full retrospective adoption of Topic 606; however, it does not include all of the information and footnotes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the SEC on February 28, 2018.

Principles of Consolidation

The condensed consolidated financial statements have been prepared in conformity with GAAP, and include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.

Use of Estimates
 
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as reported amounts of revenues and expenses during the reporting period. Such management estimates and assumptions include, but are not limited to, the stand-alone selling price (SSP) for each distinct performance obligation included in customer contracts with multiple performance obligations, the period of benefit for deferred commissions, the fair value of assets acquired and liabilities assumed for business combinations, stock-based compensation expenses, the assessment of the useful life and recoverability of our property and equipment, goodwill and identifiable intangible assets, and legal contingencies. Actual results could differ from those estimates.


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New Accounting Pronouncements Adopted in 2018

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (FASB) issued Topic 606, which supersedes the prior revenue recognition standard (Topic 605). Under Topic 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. In addition, this standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer.

The Topic 606 guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). We adopted the requirements of Topic 606 as of January 1, 2018, utilizing a full retrospective method. The most significant impacts of the standard relate to the timing of revenue recognition related to our on-premises offerings, in which we grant customers the right to deploy our software on the customer’s own servers without significant penalty, the accounting for incremental costs to obtain a contract, and the classification of proceeds for Knowledge and other user forums as a reduction in sales and marketing expenses instead of as professional services and other revenues. The adoption of Topic 606 resulted in changes to our accounting policies for revenue recognition, unbilled receivables, deferred commissions, deferred revenue and customer deposits as detailed below.

Under Topic 606, for our on-premises offerings, the requirement to have vendor specific objective evidence (VSOE) for undelivered elements was eliminated. As a result, for all periods presented, we have recognized as subscription revenues a portion of the sales price upon delivery of the software, compared to the prior practice under Topic 605 of recognizing the entire sales price ratably over an estimated subscription period due to the lack of VSOE. To the extent the amounts recognized as subscription revenues have not been billed, the revenues are primarily recorded as “unbilled receivables.”. In addition, refundable amounts associated with customer contracts are recorded as “customer deposits.”

In addition, under Topic 606, for all periods presented, we have deferred all incremental commission costs to obtain customer contracts, including indirect costs that are not tied to a specific contract, for both our on-premises offerings and our cloud-based subscription offerings. On initial contracts and contracts for increased purchases with existing customers (expansion contracts), these costs are primarily amortized over a period of benefit that we have determined to be five years. On renewal contracts, these costs are amortized over the renewal term. Additionally, for our on-premises offerings, consistent with the recognition of subscription revenue for on-premises offerings as described above, a portion of the commission cost is expensed upfront when the on-premises offering is made available. Our prior practice under Topic 605 was to defer only direct and incremental commission costs to obtain a contract and amortize those costs over the contract term, which is generally 12 to 36 months, for both our on-premises offerings and our cloud-based subscription offerings.

The direct effect on income taxes resulting from the full retrospective adoption of the above-mentioned changes to revenues and commission expenses resulted in a cumulative income tax expense of $23.3 million recorded in the prior periods. The indirect tax benefit of Topic 606 on income taxes associated with intercompany adjustments of $23.1 million, or $0.13 per basic share and $0.12 per diluted share, has been recorded in the first quarter of 2018.


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The table below provides specified line items from our condensed consolidated balance sheet (i) as previously reported and (ii) as adjusted to reflect the impact of the full retrospective adoption of Topic 606 (in thousands):
 
Year Ended December 31, 2017
 
As Previously Reported
 
As Adjusted
 
 
 
 
Assets
 
 
 
Accounts receivable, net
$
434,895

 
$
437,051

Current portion of deferred commissions
118,690

 
109,643

Prepaid expenses and other current assets
77,681

 
95,959

Deferred commissions, less current portion
85,530

 
224,252

Other assets
49,600

 
51,832

Liabilities
 
 
 
Accrued expenses and other current liabilities
244,605

 
253,257

Current portion of deferred revenue
1,280,499

 
1,210,695

Deferred revenue, less current portion
39,884

 
36,120

Other long-term liabilities
43,239

 
65,884

Stockholder’s equity
 
 
 
Accumulated other comprehensive (loss) income
(889
)
 
5,767

Accumulated deficit
(1,146,520
)
 
(958,564
)


The table below provides specified line items from our condensed consolidated statement of comprehensive income (loss) (i) as previously reported and (ii) as adjusted to reflect the impact of the full retrospective adoption of Topic 606 (in thousands, except per share data):
 
Three months ended March 31, 2017
 
As Previously Reported
 
As Adjusted
 
 
 
 
Revenues:
 
 
 
Subscription
$
376,135

 
$
387,584

Professional services and other
40,648

 
41,187

Total revenues
416,783

 
428,771

Cost of revenues:
 
 
 
Professional services and other
46,072

 
45,709

Total cost of revenues
116,447

 
116,084

Gross profit
300,336

 
312,687

Operating expenses:
 
 
 
Sales and marketing
212,086

 
203,739

Total operating expenses
342,826

 
334,479

Loss from operations
(42,490
)
 
(21,792
)
Interest income and other income (expense), net
7,716

 
7,729

Loss before income taxes
(43,452
)
 
(22,741
)
Provision for income taxes
(2,790
)
 
(1,227
)
Net loss
$
(40,662
)
 
$
(21,514
)
Net loss per share - basic and diluted
$
(0.24
)
 
$
(0.13
)
Weighted-average shares used to compute net loss per share - basic and diluted
168,742,366

 
168,742,366



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The table below provides specified line items from our condensed consolidated statement of cash flows (i) as previously reported and (ii) as adjusted to reflect the impact of the full retrospective adoption of Topic 606 (in thousands):
 
Three Months Ended March 31, 2017
 
As Previously Reported
 
As Adjusted
 
 
 
 
Cash flows from operating activities:
 
 
 
Net loss
$
(40,662
)
 
$
(21,514
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Amortization of deferred commissions
26,180

 
22,038

Changes in operating assets and liabilities, net of effect of business combinations:
 
 
 
Accounts receivable
47,021

 
48,515

Deferred commissions
(27,195
)
 
(30,956
)
Prepaid expenses and other assets
(22,772
)
 
(16,468
)
Deferred revenue
112,447

 
84,863

Accrued expenses and other liabilities
(27,553
)
 
(18,754
)
Net cash provided by operating activities
187,424

 
187,608

Foreign currency effect on cash, cash equivalents and restricted cash
(659
)
 
(843
)


Income Taxes

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which provides entities the option to reclassify tax effects stranded in accumulated other comprehensive income as a result of the 2017 Tax Cuts and Jobs Act (the Tax Act) to retained earnings. This standard is effective for our fiscal year beginning January 1, 2019 and early adoption is permitted. We early adopted this new standard effective January 1, 2018, with an immaterial amount of cumulative effect adjustment recorded to our accumulated deficit as of January 1, 2018. As this standard was adopted on a prospective basis as of January 1, 2018, the adoption of this standard did not impact our previously reported financial statements for periods ended on or prior to December 31, 2017.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts for the 2017 Tax Cuts and Jobs Act (the Tax Act) during a measurement period not to extend beyond one year of the enactment date, with further clarifications made recently with the issuance of ASU2018-05. Through March 31,2018, we did not have any significant adjustments to our provisional amounts, including the accounting for deferred tax remeasurements, the impact of the transition of U.S. international taxation from a worldwide tax system to a territorial system and other provisions. In addition, we are still assessing whether to change our indefinite investment assertion in light of the Tax Act and consider that assessment to be incomplete as permitted under guidance issued by the SEC. We will continue our analysis of these provisional amounts, which are still subject to change during the measurement period, and we anticipate further guidance on accounting interpretations from the FASB and application of the law from the Department of Treasury. We expect to reach a final determination within the measurement period described above.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which includes a revision of the accounting for the income tax consequences of intra-entity transfers of assets other than inventory to reduce the complexity in accounting standards. We adopted this new standard as of January 1, 2018 with an immaterial amount of cumulative effect adjustment recorded to our accumulated deficit as of January 1, 2018. As this standard was adopted on a prospective basis as of January 1, 2018, the adoption of this standard did not impact our previously reported financial statements for periods ended on or prior to December 31, 2017.



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Financial Instruments

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments, with further clarifications made recently with the issuance of ASU 2018-03 and 2018-04. These new standards require equity securities to be measured at fair value with changes in fair value recognized through net income, which results in greater variability in our net income. We adopted these new standards as of January 1, 2018 with a cumulative-effect adjustment, net of tax of $7.2 million recorded to our accumulated deficit as of January 1, 2018. This adjustment relates to the unrealized gain on our marketable equity securities as of December 31, 2017, which was previously included in accumulated other comprehensive income (loss) on our condensed consolidated balance sheet. As part of the adoption, we elected to apply the measurement alternative for our non-marketable equity investments that do not have readily determinable fair values, measuring them at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The adoption of these standards did not result in an adjustment for our non-marketable equity investments as our measurement alternative election requires adjustments to be recorded only on a prospective basis. As these standards were adopted on a prospective basis as of January 1, 2018, the adoption of these standards did not impact our previously reported financial statements for periods ended on or prior to December 31, 2017.

Updated Significant Accounting Policies

Revenue Recognition

We report our revenues in two categories: (i) subscriptions and (ii) professional services and other.

Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

We determine revenue recognition through the following steps:

Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, we satisfy a performance obligation

Subscription revenues

Subscription revenues are primarily comprised of subscription fees that give customers access to the ordered subscription service, related support and updates, if any, to the subscribed service during the subscription term. We recognize subscription revenues ratably over the contract term beginning on the commencement date of each contract, which is the date we make our services available to our customers. Our contracts with customers typically include a fixed amount of consideration, and are generally non-cancelable and without any refund-type provisions. We typically invoice our customers annually in advance for our subscription services upon execution of the initial contract or subsequent renewal, and our invoices are typically due within 30 days from the invoice date.

Subscription revenues also include revenues from our on-premises offerings in which we grant customers the right to deploy our subscription service on the customers’ own servers without significant penalty. For these contracts, we account for the software element and the related support and updates separately as they are distinct performance obligations. Refer to the discussion below related to contracts with multiple performance obligations for further details. The transaction price is allocated to separate performance obligations on a relative SSP basis. Transaction price allocated to the software element is recognized upon delivery, which is when transfer of control of the software to the customer is complete. The transaction price allocated to the related support and updates are recognized ratably over the contract term.


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Professional services and other revenues

Our professional services arrangements are primarily on a time-and-materials basis, and revenues on these arrangements are recognized over time as the services are delivered. We typically invoice our customers monthly in arrears for these professional services based on actual hours and expenses incurred, and our invoices are typically due within 30 days from the invoice date. Professional services revenues associated with fixed fee arrangements are recognized on a proportional performance basis. In instances where certain milestones are required to be met before revenues are recognized, we defer professional services revenues and the associated costs until milestone criteria have been met. Other revenues consist of fees from customer training delivered on-site or through publicly available classes.

Contracts with multiple performance obligations

We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. For these contracts, the transaction price is allocated to the separate performance obligations on a relative SSP basis. We determine SSP by considering the historical selling price of these performance obligations in similar transactions as well as other factors, including, but not limited to, competitive pricing of similar products, other software vendor pricing, industry publications and current pricing practices.

Unbilled Receivables

Unbilled receivables, which is a contract asset, represent subscription revenues that are recognized upon delivery of the software prior to being invoiced. Unbilled receivables are primarily presented under prepaid expenses and other current assets on our condensed consolidated balance sheets.

Deferred Commissions

Deferred commissions are the incremental selling costs that are associated with acquiring customer contracts and consist of sales commissions paid to our sales force and referral fees paid to independent third-parties. On initial and expansion contracts, commissions and referral fees are primarily deferred and amortized over a period of benefit that we have determined to be five years. On renewal contracts, commissions and referral fees are deferred and amortized over the renewal term. Additionally, for our on-premises offerings, consistent with the recognition of subscription revenue for on-premises offerings, a portion of the commission cost is expensed upfront when the on-premises offering is made available. We determine the period of benefit by taking into consideration our customer contracts, our technology and other factors. We include amortization of deferred commissions in sales and marketing expense in our condensed consolidated statements of comprehensive income (loss). There was no impairment loss in relation to the costs capitalized for all periods presented.

Deferred revenue

Deferred revenue, which is a contract liability, consists primarily of payments received in advance of revenue recognition from our contracts with customers and is recognized as the revenue recognition criteria are met. Once our services are available to customers, we record amounts due in accounts receivable and in deferred revenue. To the extent we bill customers in advance of the billing period commencement date, the accounts receivable and corresponding deferred revenue amounts are netted to zero on our condensed consolidated balance sheets, unless such amounts have been paid as of the balance sheet date.

Customer deposits

Customer deposits primarily relate to payments received from customers which could be refundable pursuant to the terms of the contract and are presented under “accrued expenses and other current liabilities” on our condensed consolidated balance sheets.

Strategic investments

Our strategic investments consist of debt and non-marketable equity investments in privately-held companies. Debt investments in privately-held companies are classified as available-for-sale and are recorded at their estimated fair value with changes in fair value recorded through accumulated other comprehensive income (loss). We have elected to apply the measurement alternative for equity investments that do not have readily determinable fair values, measuring them at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. An impairment loss is recorded when event or circumstance indicates a decline in value has occurred. We include these strategic investments in “Other assets” on the consolidated balance sheets.

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New Accounting Pronouncements Pending Adoption

In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (GILTI) provisions of the Tax Cuts and Jobs Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. We are currently evaluating the impact of the adoption of this standard on our condensed consolidated financial statements and have not yet made a provisional estimate, as we have not yet completed our assessment or elected an accounting policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to record GILTI as period costs if and when incurred.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. This new standard is effective for our interim and annual periods beginning January 1, 2020. We are currently evaluating the impact of the adoption of this standard on our condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires lessees to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets, and to recognize on the income statement the expenses in a manner similar to current practice. This new standard, including related amendments recently issued by the FASB, is effective for our interim and annual periods beginning January 1, 2019, and early adoption is permitted. We are in the process of evaluating the impact of this new standard on our existing systems and processes and do not plan to early adopt this new standard. We currently anticipate that the adoption of this standard will have a material impact on our condensed consolidated balance sheets given that we had operating lease commitments in excess of $300 million as of March 31, 2018. However, we do not anticipate that the adoption of this standard will have a material impact on our condensed consolidated statements of comprehensive income (loss) since the expense recognition under this new standard will be similar to current practice.

(3)    Investments
 
Marketable Securities

The following is a summary of our available-for-sale investment securities, excluding marketable equity securities and those securities classified within cash and cash equivalents on the condensed consolidated balance sheets (in thousands):
 
March 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
Commercial paper
$
320,564

 
$

 
$
(3
)
 
$
320,561

Corporate notes and bonds
1,151,991

 
19

 
(6,069
)
 
1,145,941

Certificates of deposit
36,241

 
2

 

 
36,243

U.S. government agency securities
113,127

 

 
(731
)
 
112,396

Total available-for-sale securities
$
1,621,923

 
$
21

 
$
(6,803
)
 
$
1,615,141



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December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
Commercial paper
$
258,348

 
$
1

 
$
(5
)
 
$
258,344

Corporate notes and bonds
1,006,302

 
26

 
(3,084
)
 
1,003,244

Certificates of deposit
33,084

 

 

 
33,084

U.S. government agency securities
129,494

 

 
(638
)
 
128,856

Total available-for-sale securities
$
1,427,228

 
$
27

 
$
(3,727
)
 
$
1,423,528



As of March 31, 2018, the contractual maturities of our available-for-sale investment securities, excluding marketable equity securities and those securities classified within cash and cash equivalents on the condensed consolidated balance sheets, did not exceed 36 months. The fair values of these securities, by remaining contractual maturity, are as follows (in thousands):
 
March 31, 2018
Due within 1 year
$
1,163,932

Due in 1 year through 5 years
451,209

Total
$
1,615,141


The following table shows the fair values and the gross unrealized losses of our available-for-sale investment securities, classified by the length of time that the securities have been in a continuous unrealized loss position, and aggregated by investment types, excluding those securities classified within cash and cash equivalents on the condensed consolidated balance sheets (in thousands): 
 
March 31, 2018
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Commercial paper
$
14,870

 
$
(3
)
 
$

 
$

 
$
14,870

 
$
(3
)
Corporate notes and bonds
$
1,010,573

 
$
(5,704
)
 
$
121,328

 
$
(365
)
 
$
1,131,901

 
$
(6,069
)
U.S. government agency securities
92,780

 
(653
)
 
19,616

 
(78
)
 
112,396

 
(731
)
Total
$
1,118,223

 
$
(6,360
)
 
$
140,944

 
$
(443
)
 
$
1,259,167

 
$
(6,803
)


 
December 31, 2017
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Commercial paper
$
14,809

 
$
(5
)
 
$

 
$

 
$
14,809

 
$
(5
)
Corporate notes and bonds
819,113

 
(2,703
)
 
141,874

 
(381
)
 
960,987

 
(3,084
)
U.S. government agency securities
106,301

 
(593
)
 
22,555

 
(45
)
 
128,856

 
(638
)
Total
$
940,223

 
$
(3,301
)
 
$
164,429

 
$
(426
)
 
$
1,104,652

 
$
(3,727
)

 As of March 31, 2018, we had a total of 446 available-for-sale securities, excluding those securities classified within cash and cash equivalents on the consolidated balance sheet in an unrealized loss position. There were no impairments considered “other-than-temporary” as it is more likely than not we will hold the securities until maturity or a recovery of the cost basis.

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Marketable Equity Securities

As of March 31, 2018 and December 31, 2017, we had marketable equity securities of $39.2 million and $20.7 million, respectively. During the three months ended March 31, 2018, we adopted ASU 2016-01 and recognized $18.5 million of unrealized gains relating to the changes in the fair value of these securities during the three months ended March 31, 2018, through net income. Refer to Note 2 for further details. During the three months ended March 31, 2017, prior to the adoption of ASU 2016-01, we recognized $11.7 million of unrealized gains on our marketable equity securities offset by $4.3 million of tax effect through accumulated other comprehensive loss on our condensed consolidated balance sheet.

Strategic Investments

As of March 31, 2018 and December 31, 2017, the total amount of equity investments in privately-held companies included in other assets on our condensed consolidated balance sheets was $4.8 million. We have not recorded any adjustments resulting from observable price changes or impairment charges for any of our equity investments in privately-held companies.
 
The fair value of our debt investments in privately-held companies included within our strategic investments is $1.0 million as of March 31, 2018 and December 31, 2017. These investments are recorded at fair value using significant unobservable inputs or data in an inactive market and the valuation requires our judgment due to the absence of quoted prices in active markets and inherent lack of liquidity and are categorized accordingly as Level 3 in the fair value hierarchy.

(4)    Fair Value Measurements

The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis at March 31, 2018 (in thousands): 
 
Level 1
 
Level 2
 
Total
Cash equivalents:
 
 
 
 
 
Money market funds
$
131,149

 
$

 
$
131,149

Commercial paper

 
99,647

 
99,647

Corporate notes and bonds

 
7,923

 
7,923

Certificates of deposit

 
3,750

 
3,750

Short-term investments:
 
 
 
 
 
Commercial paper

 
320,561

 
320,561

Corporate notes and bonds

 
750,337

 
750,337

Certificates of deposit

 
30,448

 
30,448

U.S. government agency securities

 
62,586

 
62,586

Marketable equity securities
39,173

 

 
39,173

Long-term investments:
 
 
 
 
 
Corporate notes and bonds

 
395,604

 
395,604

Certificates of deposit

 
5,795

 
5,795

U.S. government agency securities

 
49,810

 
49,810

Total
$
170,322

 
$
1,726,461

 
$
1,896,783

 

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The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis at December 31, 2017 (in thousands): 
 
Level 1
 
Level 2
 
Total
Cash equivalents:
 
 
 
 
 
Money market funds
$
282,507

 
$

 
$
282,507

Commercial paper

 
100,456

 
100,456

Corporate notes and bonds

 
50,437

 
50,437

Short-term investments:
 
 
 
 
 
Commercial paper

 
258,344

 
258,344

Corporate notes and bonds

 
688,316

 
688,316

Certificates of deposit

 
17,950

 
17,950

U.S. government agency securities

 
67,476

 
67,476

Marketable equity securities
20,717

 

 
20,717

Long-term investments:
 
 
 
 
 
Corporate notes and bonds

 
314,928

 
314,928

Certificates of deposit

 
15,134

 
15,134

U.S. government agency securities

 
61,380

 
61,380

Total
$
303,224

 
$
1,574,421

 
$
1,877,645


We determine the fair value of our security holdings based on pricing from our service providers and market prices from industry-standard independent data providers. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs), such as yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures.

See Note 3 for the fair value measurement of our debt investments in privately-held companies, Note 8 for the fair value measurement of our derivative instruments and Note 11 for the fair value measurement of our convertible senior notes.

(5)    Business Combinations
 
On January 20, 2017, we completed the acquisition of a privately-held company, DxContinuum, Inc. (DxContinuum), for approximately $15.0 million in cash. The results of operations of DxContinuum have been included in our condensed consolidated financial statements from the date of purchase. In allocating the aggregate purchase price based on the estimated fair value, we recorded $11.2 million of goodwill, $6.4 million of developed technology intangible assets (to be amortized over estimated useful life of five years) and $2.6 million of deferred tax liabilities. The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill, representing synergies expected from expanded market opportunities when integrating DxContinuum technologies with our offerings. The goodwill balance is not deductible for income tax purposes.


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Table of Contents

(6) Goodwill and Intangible Assets

Goodwill balances are presented below (in thousands):
 
Carrying Amount
Balance as of December 31, 2017
$
128,728

Foreign currency translation adjustments
(43
)
Balance as of March 31, 2018
$
128,685



Intangible assets consist of the following (in thousands):
 
March 31, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Developed technology
$
75,271

 
$
(34,388
)
 
$
40,883

Patents
32,130

 
(4,092
)
 
28,038

Other
16,831

 
(3,199
)
 
13,632

Total intangible assets
$
124,232

 
$
(41,679
)
 
$
82,553


 
December 31, 2017
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Developed technology
$
102,349

 
$
(43,382
)
 
$
58,967

Patents
31,030

 
(3,239
)
 
27,791

Other
1,575

 
(1,417
)
 
158

Total intangible assets
$
134,954

 
$
(48,038
)
 
$
86,916


Amortization expense for intangible assets for the three months ended March 31, 2018 and 2017 was approximately $5.7 million and $4.7 million, respectively.

The following table presents the estimated future amortization expense related to intangible assets held at March 31, 2018 (in thousands):
Years Ending December 31,
2018
 
$
17,231

2019
 
22,920

2020
 
12,895

2021
 
10,959

2022
 
7,066

Thereafter
 
11,482

Total future amortization expense
 
$
82,553




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(7)    Property and Equipment
 
Property and equipment, net consists of the following (in thousands):
 
March 31,
 
December 31,
 
2018
 
2017
Computer equipment
$
360,506

 
$
326,378

Computer software
48,108

 
46,413

Leasehold improvements
63,082

 
56,232

Furniture and fixtures
39,844

 
38,789

Building
7,044

 
7,084

Construction in progress
11,083

 
5,341

 
529,667

 
480,237

Less: accumulated depreciation
(262,213
)
 
(235,113
)
Total property and equipment, net
$
267,454

 
$
245,124



Construction in progress consists primarily of building, leasehold improvements and in-process software development costs. Depreciation expense for the three months ended March 31, 2018 and 2017 was $27.7 million and $20.4 million, respectively.

(8) Derivative Contracts

We conduct business on a global basis in multiple foreign currencies, subjecting us to foreign currency risk. In order to manage certain exposures to currency fluctuations, we initiated a limited hedging program during the three months ended March 31, 2018 by entering into foreign currency derivative contracts with maturities of 12 months or less to hedge a portion of our net outstanding monetary assets and liabilities.

These derivative contracts include spot and forward contracts entered into with various counterparties, and are not designated as hedging instruments under applicable accounting guidance. As such, all changes in the fair value of these derivative contracts are recorded in other income (expense), net on the condensed consolidated statements of comprehensive income (loss). These derivative contracts are intended to offset the foreign currency gains or losses associated with the underlying monetary assets and liabilities, and changes in the related derivative assets and liabilities balances are classified as operating activities.

These derivative contracts expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the arrangement. We mitigate this credit risk by transacting with major financial institutions with high credit ratings and entering into master netting arrangements, which permit net settlement of transactions with the same counterparty. While the contract or notional amount is often used to express the volume of foreign currency derivative contracts, the amounts potentially subject to credit risk are generally limited to the amounts, if any, by which the counterparties’ obligations under the agreements exceed the obligations of the Company to the counterparties. We are not required to pledge, and are not entitled to receive, cash collateral related to these derivative instruments. We do not enter into derivative contracts for trading or speculative purposes.

As of March 31, 2018, we had derivative contracts with total notional values of $835.1 million, which are not designated as hedge instruments. Our foreign currency contracts are classified within Level 2 because the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets, such as currency spot and forward rates. The fair values of these outstanding derivative contracts as of March 31, 2018 were as follows (in thousands):
 
Condensed Consolidated Balance Sheets Location
 
March 31, 2018
Derivative Assets:
 
 
 
Foreign currency derivative contracts
Prepaid expenses and other current assets
 
$
1,457

Derivative Liabilities
 
 
 
Foreign currency derivative contracts
Accrued expenses and other current liabilities
 
$
3,283




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Table of Contents

(9) Deferred Revenue and Performance Obligations

Revenues recognized during the three months ended March 31, 2018 from amounts included in deferred revenue as of December 31, 2017 are $479.2 million. Revenues recognized during the three months ended March 31, 2018 from performance obligations satisfied or partially satisfied in previous periods are not material.

Transaction Price Allocated to the Remaining Performance Obligations

Transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and non-cancelable amounts that will be invoiced and recognized as revenues in future periods. We applied the practical expedient in accordance with Topic 606 to exclude the amounts related to professional services contracts that are on a time-and-material basis, which typically have a remaining duration of one year or less. In addition, we elected to apply the practical expedient to not disclose the transaction price allocated to remaining performance obligations for all periods presented before January 1, 2018, the date of our initial adoption of Topic 606.

As of March 31, 2018, total remaining non-cancelable performance obligations under our contracts with customers was approximately $3.80 billion, and we expect to recognize revenues on approximately 50% of these remaining performance obligations over the following 12 months, with the balance to be recognized thereafter.

(10)    Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):
 
March 31, 2018
 
December 31, 2017
 
 
*As Adjusted
Taxes payable
$
21,673

 
$
25,617

Bonuses and commissions
58,323

 
84,972

Accrued compensation
53,969

 
45,428

Other employee related liabilities
33,867

 
44,284

Other
82,906

 
52,956

Total accrued expenses and other current liabilities
$
250,738

 
$
253,257



*As adjusted to reflect the impact of the full retrospective adoption of Topic 606. See Note 2 for further details.

(11)   Convertible Senior Notes

In May and June 2017, we issued an aggregate of $782.5 million of 0% convertible senior notes (the 2022 Notes), which are due June 1, 2022 unless earlier converted or repurchased in accordance with their terms. In November 2013, we issued $575.0 million of 0% convertible senior notes (the 2018 Notes, and together with the 2022 Notes, the Notes), which are due November 1, 2018 unless earlier converted or repurchased in accordance with their terms. The Notes do not bear interest, and we cannot redeem the Notes prior to maturity.

The Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries.

Upon conversion of the Notes, we may choose to pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock. We currently intend to settle the principal amount of the 2018 Notes with cash.
 
Convertible Date
 
Initial Conversion Price per Share
 
Initial Conversion Rate per $1,000 Par Value
 
Initial Number of Shares
2022 Notes
February 1, 2022
 
$
134.75

 
7.42 shares
 
5,806,936

2018 Notes
July 1, 2018
 
$
73.88

 
13.54 shares
 
7,783,023




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Table of Contents

Holders of the Notes may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding February 1, 2022 and July 1, 2018, for the 2022 Notes and 2018 Notes, respectively (each, a Convertible Date), only under the following circumstances:

during any calendar quarter (and only during such calendar quarter) if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day (in each case, the Conversion Condition); or

during the five-business day period after any five-consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of the Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on each such trading day; or

upon the occurrence of specified corporate events.

On or after the applicable Convertible Date, a holder may convert all or any portion of its Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date regardless of the foregoing conditions. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. As noted above, we currently intend to settle the principal amount of the 2018 Notes with cash.

The conversion price will be subject to adjustment in some events. Holders of the Notes who convert their Notes in connection with certain corporate events that constitute a “make-whole fundamental change” are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a “fundamental change,” holders of the Notes may require us to purchase with cash all or a portion of the Notes upon the occurrence of a fundamental change, at a purchase price equal to 100% of the principal amount of the respective Notes plus any accrued and unpaid special interest, if any.

In accounting for the issuance of the Notes, we separated the Notes into liability and equity components. The carrying cost of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes. The difference between the principal amount of the Notes and the proceeds allocated to the liability component, or the debt discount, is amortized to interest expense using the effective interest method over the term of the respective Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the transaction costs related to the issuance of the Notes, we allocated the total amount incurred to the liability and equity components based on their relative fair values. Transaction costs attributable to the liability component are being amortized to interest expense over the respective terms of the Notes, and transaction costs attributable to the equity component were netted with the equity component of the Notes in stockholders’ equity. The Notes consisted of the following (in thousands):
 
March 31, 2018
 
December 31, 2017
Liability component:
 
 
 
Principal:
 
 
 
2022 Notes
$
782,500

 
$
782,500

2018 Notes
537,728

 
574,994

Less: debt issuance cost and debt discount, net of amortization
 
 
 
2022 Notes
(144,705
)
 
(152,482
)
2018 Notes
(20,803
)
 
(31,576
)
Net carrying amount
$
1,154,720

 
$
1,173,436


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Table of Contents

 
2022 Notes
 
2018 Notes
Equity component recorded at issuance:
 
 
 
Note
$
162,039

 
$
155,319

Issuance cost
(2,148
)
 
(3,257
)
Net amount recorded in equity
$
159,891

 
$
152,062



The Conversion Condition for the 2022 Notes was not met for the quarter ended March 31, 2018 or any prior quarter, and therefore, our 2022 Notes were not convertible at the holders’ option. The Conversion Condition for the 2018 Notes was met for the quarters ended June 30, 2017, September 30, 2017, December 31, 2017 and March 31, 2018, respectively. Therefore, the 2018 Notes became convertible at the holders’ option beginning on July 1, 2017 and continue to be convertible at the holders’ option through June 30, 2018. During the three months ended March 31, 2018, we paid cash to settle $37.3 million principal amount of the 2018 Notes and recorded a loss on early note conversions of $0.8 million. As a result of the settlements, we also recorded a $0.7 million net reduction to additional paid-in capital, reflecting $45.2 million fair value adjustments to the conversion option settled offset by a $44.5 million benefit from the 2018 Note Hedges (as defined below). For cash flow presentation, we bifurcate the $37.3 million paid during the three months ended March 31, 2018 into two components: the portion of the repayment attributable to debt discount is classified as cash outflows from operating activities, and the portion of the repayment attributable to the principal is classified as cash outflows from financing activities.

Based on additional conversion requests we have received through the filing date, we expect to settle in cash an aggregate of $319.5 million in principal amount of the 2018 Notes during the second quarter of 2018. We may receive additional conversion requests that require settlement in the second quarter of 2018.

We consider the fair value of the Notes at March 31, 2018 to be a Level 2 measurement. The estimated fair values of the Notes at March 31, 2018 and December 31, 2017 based on the closing trading price per $100 of the Notes were as follows (in thousands):
 
March 31, 2018
 
December 31, 2017
2022 Notes
$
1,035,130

 
$
897,778

2018 Notes
$
1,196,192

 
$
1,015,554



As of March 31, 2018, the remaining life of the 2022 Notes and 2018 Notes are 50 months and 7 months, respectively. The following table sets forth total interest expense recognized related to the Notes (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Amortization of debt issuance cost
 
 
 
2022 Notes
$
376

 
$

2018 Notes
498

 
465

Amortization of debt discount
 
 
 
2022 Notes
7,402

 

2018 Notes
8,788

 
8,213

Total
$
17,064