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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, 2019
OR
 ¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-35580

snlogo22.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) 

_____________________________________
(Former name, former address and formal fiscal year, if changed since last report.)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common stock, par value $0.001 per share
 
NOW
 
New York Stock Exchange, Inc.

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 every Interactive Data File required to be submitted 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 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.
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company  ¨
 
Emerging growth company  ¨


Table of Contents

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, 2019, there were approximately 184.7 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, 2019
 
December 31, 2018
 
 
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
639,722

 
$
566,204

Short-term investments
1,022,391

 
931,718

Accounts receivable, net
422,559

 
574,810

Current portion of deferred commissions
144,629

 
139,890

Prepaid expenses and other current assets
145,185

 
132,071

Total current assets
2,374,486

 
2,344,693

Deferred commissions, less current portion
283,124

 
282,490

Long-term investments
674,633

 
581,856

Property and equipment, net(1)
350,651

 
347,216

Operating lease right-of-use assets(1)
393,561

 

Intangible assets, net
93,252

 
100,582

Goodwill
151,184

 
148,845

Other assets
78,004

 
73,458

Total assets
$
4,398,895

 
$
3,879,140

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
38,668

 
$
30,733

Accrued expenses and other current liabilities(1)
306,161

 
330,246

Current portion of deferred revenue
1,711,060

 
1,651,594

Current portion of operating lease liabilities(1)
41,952

 

Total current liabilities
2,097,841

 
2,012,573

Deferred revenue, less current portion
36,722

 
38,597

Operating lease liabilities, less current portion(1)
380,944

 

Convertible senior notes, net
669,875

 
661,707

Other long-term liabilities(1)
18,562

 
55,064

Total liabilities
3,203,944

 
2,767,941

Stockholders’ equity:
 
 
 
Common stock
185

 
180

Additional paid-in capital
2,164,930

 
2,093,834

Accumulated other comprehensive income (loss)
10,323

 
(4,035
)
Accumulated deficit(1)
(980,487
)
 
(978,780
)
Total stockholders’ equity
1,194,951

 
1,111,199

Total liabilities and stockholders’ equity
$
4,398,895

 
$
3,879,140



(1)
We adopted Topic 842 using the modified retrospective method as of January 1, 2019 and elected the transition option that allows us not to restate the comparative periods in our condensed consolidated financial statements in the year of adoption. 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,
 
2019
 
2018
 
 
 
 
Revenues:
 
 
 
Subscription
$
739,986

 
$
543,325

Professional services and other
48,940

 
45,897

Total revenues
788,926

 
589,222

Cost of revenues(1):
 
 
 
Subscription
126,589

 
95,398

Professional services and other
59,663

 
48,075

Total cost of revenues
186,252

 
143,473

Gross profit
602,674

 
445,749

Operating expenses(1):
 
 
 
Sales and marketing
361,409

 
283,701

Research and development
172,522

 
117,268

General and administrative
84,456

 
65,063

Total operating expenses
618,387

 
466,032

Loss from operations
(15,713
)
 
(20,283
)
Interest expense
(8,168
)
 
(17,064
)
Interest income and other income (expense), net
12,425

 
29,987

Loss before income taxes
(11,456
)
 
(7,360
)
Benefit from income taxes
(9,911
)
 
(17,982
)
Net income (loss)
$
(1,545
)
 
$
10,622

Net income (loss) per share - basic
$
(0.01
)
 
$
0.06

Net income (loss) per share - diluted
$
(0.01
)
 
$
0.06

Weighted-average shares used to compute net income (loss) per share - basic
182,061,579

 
175,482,833

Weighted-average shares used to compute net income (loss) per share - diluted
182,061,579

 
190,249,786

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
$
9,635

 
$
(8,435
)
Unrealized gain (loss) on investments, net of tax
4,723

 
(3,068
)
Other comprehensive income (loss), net of tax
14,358

 
(11,503
)
Comprehensive income (loss)
$
12,813

 
$
(881
)

(1)
Includes stock-based compensation as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
 
 
 
Cost of revenues:
 
 
 
Subscription
$
16,022

 
$
11,291

Professional services and other
9,931

 
7,561

Sales and marketing
62,130

 
52,082

Research and development
43,582

 
28,598

General and administrative
25,785

 
21,809


 
See accompanying notes to condensed consolidated financial statements

2

Table of Contents

SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive Income (Loss)
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance at December 31, 2018
180,175,355

 
$
180

 
$
2,093,834

 
$
(978,780
)
 
$
(4,035
)
 
$
1,111,199

Cumulative effect adjustment for Topic 842 adoption

 

 

 
(162
)
 

 
(162
)
Common stock issued under employee stock plans
1,882,821

 
2

 
53,100

 

 

 
53,102

Taxes paid related to net share settlement of equity awards

 

 
(139,470
)
 

 

 
(139,470
)
Stock-based compensation

 

 
157,469

 

 

 
157,469

Partial settlement of 2018 Warrants
2,680,993

 
3

 
(3
)
 

 

 

Other comprehensive income, net of tax

 

 

 

 
14,358

 
14,358

Net loss

 

 

 
(1,545
)
 

 
(1,545
)
Balance at March 31, 2019
184,739,169

 
$
185

 
$
2,164,930

 
$
(980,487
)
 
$
10,323

 
$
1,194,951


 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive Income (Loss)
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance at December 31, 2017
174,275,864

 
$
174

 
$
1,731,367

 
$
(958,564
)
 
$
5,767

 
$
778,744

Cumulative effect adjustment for ASU 2016-01 adoption

 

 
 
 
7,234

 
(7,234
)
 

Cumulative effect adjustment for ASU 2016-16 adoption

 

 

 
(746
)
 

 
(746
)
Common stock issued under employee stock plans
2,287,099

 
3

 
52,658

 

 

 
52,661

Taxes paid related to net share settlement of equity awards

 

 
(85,617
)
 

 

 
(85,617
)
Stock-based compensation

 

 
121,709

 

 

 
121,709

Settlement of 2018 Notes conversion feature

 

 
(45,217
)
 

 

 
(45,217
)
Benefit from exercise of 2018 Note Hedges

 

 
44,510

 

 

 
44,510

Other comprehensive loss, net of tax

 

 

 

 
(11,503
)
 
(11,503
)
Net income

 

 

 
10,622

 

 
10,622

Balance at March 31, 2018
176,562,963

 
$
177

 
$
1,819,410

 
$
(941,454
)
 
$
(12,970
)
 
$
865,163


See accompanying notes to condensed consolidated financial statements

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Table of Contents

SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
 
 
 
 
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(1,545
)
 
$
10,622

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
55,449

 
33,411

Amortization of deferred commissions
39,557

 
30,419

Amortization of debt discount and issuance costs
8,168

 
17,064

Stock-based compensation
157,450

 
121,341

Deferred income taxes
(1,480
)
 
(24,348
)
Gain on marketable equity securities

 
(18,455
)
Repayments of convertible senior notes attributable to debt discount

 
(8,660
)
Other
724

 
(5,805
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
151,105

 
69,502

Deferred commissions
(46,599
)
 
(42,475
)
Prepaid expenses and other assets
(33,659
)
 
(15,808
)
Accounts payable
6,562

 
875

Deferred revenue
61,370

 
83,733

Accrued expenses and other liabilities
(36,254
)
 
(1,336
)
Net cash provided by operating activities
360,848

 
250,080

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(47,124
)
 
(35,371
)
Purchases of other intangibles

 
(7,850
)
Purchases of investments
(438,498
)
 
(376,130
)
Purchases of strategic investments
(284
)
 

Sales of investments
6,576

 

Maturities of investments
256,309

 
182,105

Realized gains on derivatives not designated as hedging instruments, net
22,148

 

Net cash used in investing activities
(200,873
)
 
(237,246
)
Cash flows from financing activities:
 
 
 
Repayments of convertible senior notes attributable to principal

 
(28,606
)
Proceeds from employee stock plans
53,093

 
52,657

Taxes paid related to net share settlement of equity awards
(139,493
)
 
(85,555
)
Payments on financing obligations

 
(288
)
Net cash used in financing activities
(86,400
)
 
(61,792
)
Foreign currency effect on cash, cash equivalents and restricted cash
1,079

 
6,491

Net increase (decrease) in cash, cash equivalents and restricted cash
74,654

 
(42,467
)
Cash, cash equivalents and restricted cash at beginning of period
568,538

 
727,829

Cash, cash equivalents and restricted cash at end of period
$
643,192

 
$
685,362

 
 
 
 
Cash, cash equivalents and restricted cash at end of period:
 
 
 
Cash and cash equivalents
$
639,722

 
$
682,854

Current portion of restricted cash included in prepaid expenses and other current assets
3,470

 
2,508

Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows
$
643,192

 
$
685,362

Non-cash investing and financing activities:
 
 
 
Settlement of 2018 Notes conversion feature
$

 
$
45,217

Benefit from exercise of 2018 Note Hedges

 
44,510

Property and equipment included in accounts payable and accrued expenses
29,002

 
24,288



See accompanying notes to condensed consolidated financial statements

4

Table of Contents

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, the company that makes work, work better for people, is a leading provider of enterprise cloud computing services that define, structure, manage and automate digital workflows for global enterprises. We deliver digital workflows that help our customers create great experiences and unlock productivity. Our Now Platform enables enterprise-wide experiences and productivity by simplifying and streamlining processes across systems, functions and departments. Our product portfolio focuses on delivering better information technology (IT), employee and customer workflows, and enabling our customers to build any workflow application that makes sense for their business.

(2)    Summary of Significant Accounting Policies

Basis of 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 due to the permitted exclusion of certain disclosures for interim reporting. 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, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for other interim periods or future years. The condensed consolidated balance sheet as of December 31, 2018 is derived from audited financial statements; 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, 2018, which was filed with the SEC on February 27, 2019.

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, evaluating the terms and conditions included within our customer contracts as well as determining 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, purchase price allocation for business combinations, stock-based compensation expenses, the useful life and recoverability of our property and equipment, goodwill and identifiable intangible assets, whether an arrangement is or contains a lease, the discount rate used for operating leases, fair value of convertible notes, income taxes, and legal contingencies. Actual results could differ from those estimates.

Segments
 
We define the term “chief operating decision maker” to be our Chief Executive Officer. Our chief operating decision maker allocates resources and assesses financial performance based upon discrete financial information at the consolidated level. Accordingly, we have determined that we operate as a single operating and reportable segment. 


5

Table of Contents

Concentration of Credit Risk and Significant Customers
 
Financial instruments potentially exposing us to credit risk consist primarily of cash, cash equivalents, derivative contracts, investments and accounts receivable. We hold cash at financial institutions that management believes are high credit, quality financial institutions and invest in securities with a minimum rating of BBB by Standard & Poor’s, Baa2 by Moody’s, or BBB by Fitch to minimize our credit risks. Our 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 are also exposed to credit risk under the convertible note hedge transactions that may result from counterparties’ non-performance.
 
Credit risk arising from accounts receivable is mitigated due to our large number of customers and their dispersion across various industries and geographies. As of March 31, 2019, we had one customer that represented approximately 13% of our accounts receivable balance. As of December 31, 2018, there were no customers that represented more than 10% of our accounts receivable balance. There were no customers that individually exceeded 10% of our total revenues in any of the periods presented. For purposes of assessing concentration of credit risk and significant customers, a group of customers under common control or customers that are affiliates of each other are regarded as a single customer.

Updated Significant Accounting Policies

Leases

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 prior practice. We adopted Topic 842 using the modified retrospective method as of January 1, 2019 and elected the transition option that allows us not to restate the comparative periods in our financial statements in the year of adoption. We also elected the package of transition expedients available for expired or existing contracts, which allowed us to carryforward our historical assessment of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs.

We determine if an arrangement is or contains a lease at inception by evaluating various factors, including whether a vendor’s right to substitute an identified asset is substantive. Lease classification is determined at the lease commencement date, on which the leased assets are made available for our use. Operating leases are included in “Operating lease right-of-use assets”, “Current portion of operating lease liabilities”, and “Operating lease liabilities, less current portion” in our condensed consolidated balance sheets. We did not have any material financing leases in any of the periods presented.

Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The difference between the total right-of-use assets and total lease liabilities recorded as of January 1, 2019 is primarily due to the derecognition of deferred rent liabilities that were included in “Accrued expenses and other current liabilities” and “Other long-term liabilities”, respectively, in our condensed consolidated balance sheet as of December 31, 2018. Lease payments consist primarily of the fixed payments under the arrangement, less any lease incentives such as rent holidays. We use an estimate of our incremental borrowing rate (IBR) based on the information available at the lease commencement date in determining the present value of lease payments, unless the implicit rate is readily determinable. In determining the appropriate IBR, we consider information including, but not limited to, our credit rating, the lease term, and the currency in which the arrangement is denominated. For leases which commenced prior to our adoption of Topic 842, we used the IBR on January 1, 2019. Our lease terms may include the sole option for us to either renew or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

For our office facility leases, we elected to account for lease and non-lease components as a single lease component. For other arrangements, lease and non-lease components are generally accounted for separately. Additionally, we do not record leases on the balance sheet that, at the lease commencement date, have a lease term of 12 months or less.


6

Table of Contents

Derivative financial instruments and hedging activities

We use derivative financial instruments to manage foreign currency risks. These derivative contracts consist of 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 “Interest income and other income (expense), net” on the condensed consolidated statements of comprehensive income (loss), and are intended to offset the foreign currency gains or losses associated with the underlying monetary assets and liabilities. Realized gains (losses) from settlement of the derivative assets and liabilities are classified as investing activities in the condensed consolidated statement of cash flows.

Accounting Pronouncement Adopted in 2019

Leases

As described in the “Leases” section above, we adopted Topic 842 using the modified retrospective method as of January 1, 2019 with an immaterial amount of cumulative effect adjustment recorded to our accumulated deficit as of January 1, 2019. As this standard was adopted on a modified prospective basis as of January 1, 2019, the adoption of this standard did not impact our previously reported financial statements for periods ended on or prior to December 31, 2018.

Accounting Pronouncements Adopted in 2018

For details on our adoption of ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” and other accounting standards adopted in 2018, refer to Note 2, Summary of Significant Accounting Policies, of the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on February 27, 2019.

New Accounting Pronouncements Pending Adoption

Cloud computing arrangements implementation costs

In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new standard requires capitalized costs to be amortized on a straight-line basis generally over the term of the arrangement, and the financial statement presentation for these capitalized costs would be the same as that of the fees related to the hosting arrangements. This new standard is effective for our interim and annual periods beginning January 1, 2020 and earlier adoption is permitted. This standard could be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We will adopt this standard on a prospective basis as of January 1, 2020 and are evaluating the impact of our pending adoption of this standard on our condensed consolidated financial statements.

Credit losses

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. For trade receivables, loans, and other financial instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. 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.


7

Table of Contents

(3)    Investments
 
Marketable Debt 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, 2019
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
Commercial paper
$
137,523

 
$
101

 
$
(6
)
 
$
137,618

Corporate notes and bonds
1,405,920

 
2,955

 
(903
)
 
1,407,972

Certificates of deposit
60,337

 
43

 

 
60,380

U.S. government and agency securities
91,162

 
49

 
(157
)
 
91,054

Total available-for-sale securities
$
1,694,942

 
$
3,148

 
$
(1,066
)
 
$
1,697,024



 
December 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
Commercial paper
$
108,061

 
$

 
$

 
$
108,061

Corporate notes and bonds
1,233,589

 
343

 
(4,218
)
 
1,229,714

Certificates of deposit
73,584

 
1

 

 
73,585

U.S. government and agency securities
102,549

 
23

 
(358
)
 
102,214

Total available-for-sale securities
$
1,517,783

 
$
367

 
$
(4,576
)
 
$
1,513,574



As of March 31, 2019, the contractual maturities of our investment securities, excluding securities classified within cash and cash equivalents on the condensed consolidated balance sheets, did not exceed 36 months. The fair values of available-for-sale investment securities, by remaining contractual maturity, are as follows (in thousands):
 
March 31, 2019
Due within 1 year
$
1,022,391

Due in 1 year through 5 years
674,633

Total
$
1,697,024



8

Table of Contents

The following table shows the fair values and the gross unrealized losses of these 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, 2019
 
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
$
35,844

 
$
(6
)
 
$

 
$

 
$
35,844

 
$
(6
)
Corporate notes and bonds
255,199

 
(243
)
 
296,220

 
(660
)
 
551,419

 
(903
)
Certificates of deposit
2,050

 

 

 

 
2,050

 

U.S. government and agency securities
3,389

 

 
50,156

 
(157
)
 
53,545

 
(157
)
Total
$
296,482

 
$
(249
)
 
$
346,376

 
$
(817
)
 
$
642,858

 
$
(1,066
)


 
December 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
Corporate notes and bonds
$
714,605

 
$
(2,603
)
 
$
294,956

 
$
(1,615
)
 
$
1,009,561

 
$
(4,218
)
Certificates of deposit
1,000

 

 

 

 
1,000

 

U.S. government and agency securities
11,756

 
(5
)
 
61,457

 
(353
)
 
73,213

 
(358
)
Total
$
727,361

 
$
(2,608
)
 
$
356,413

 
$
(1,968
)
 
$
1,083,774

 
$
(4,576
)

 As of March 31, 2019, we had a total of 239 available-for-sale securities, excluding those securities classified within cash and cash equivalents on the condensed 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.

Marketable Equity Securities

During the three months ended March 31, 2018, we recognized $18.5 million of unrealized gains through net income that related to the changes in the fair value of these securities during the three months ended March 31, 2018. As of each of March 31, 2019 and December 31, 2018, we had no marketable equity securities on our condensed consolidated balance sheet.

Strategic Investments

As of March 31, 2019 and December 31, 2018, the total amount of equity investments in privately-held companies included in other assets on our condensed consolidated balance sheets was $14.9 million and $14.6 million, respectively.


9

Table of Contents

(4)    Fair Value Measurements

The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis as of March 31, 2019 (in thousands): 
 
Level 1
 
Level 2
 
Total
Cash equivalents:
 
 
 
 
 
Money market funds
$
330,113

 
$

 
$
330,113

Commercial paper

 
67,733

 
67,733

Certificates of deposit

 
15,351

 
15,351

Marketable securities:
 
 
 
 
 
Commercial paper

 
137,618

 
137,618

Corporate notes and bonds

 
1,407,972

 
1,407,972

Certificates of deposit

 
60,380

 
60,380

U.S. government and agency securities

 
91,054

 
91,054

Total
$
330,113

 
$
1,780,108

 
$
2,110,221

 
The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis as of December 31, 2018 (in thousands): 
 
Level 1
 
Level 2
 
Total
Cash equivalents:
 
 
 
 
 
Money market funds
$
229,047

 
$

 
$
229,047

Commercial paper

 
16,961

 
16,961

Certificates of deposit

 
2,465

 
2,465

Marketable securities:
 
 
 
 
 
Commercial paper

 
108,061

 
108,061

Corporate notes and bonds

 
1,229,714

 
1,229,714

Certificates of deposit

 
73,585

 
73,585

U.S. government and agency securities

 
102,214

 
102,214

Total
$
229,047

 
$
1,533,000

 
$
1,762,047


 
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 7 for the fair value measurement of our derivative contracts and Note 10 for the fair value measurement of our convertible senior notes, which are not included in the table above.


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Table of Contents

(5) Goodwill and Intangible Assets

Goodwill balances are presented below (in thousands):
 
Carrying Amount
Balance as of December 31, 2018
$
148,845

Foreign currency translation adjustments
2,339

Balance as of March 31, 2019
$
151,184



Intangible assets consist of the following (in thousands):
 
March 31,
 
December 31,
 
2019
 
2018
Developed technology
$
113,759

 
$
114,395

Patents
57,180

 
57,180

Other
650

 
650

Total intangible assets
171,589

 
172,225

Less: accumulated amortization
(78,337
)
 
(71,643
)
Net carrying amount
$
93,252

 
$
100,582


Amortization expense for intangible assets for the three months ended March 31, 2019 and 2018 was approximately $7.0 million and $5.7 million, respectively.

The following table presents the estimated future amortization expense related to intangible assets held at March 31, 2019 (in thousands):
Years Ending December 31,
Remainder of 2019
 
$
21,861

2020
 
19,371

2021
 
17,336

2022
 
13,673

2023
 
7,764

Thereafter
 
13,247

Total future amortization expense
 
$
93,252



(6)    Property and Equipment
 
Property and equipment, net consists of the following (in thousands):
 
March 31,
 
December 31,
 
2019
 
2018
Computer equipment
$
532,371

 
$
493,536

Computer software
61,270

 
58,303

Leasehold and other improvements
84,429

 
74,721

Furniture and fixtures
43,565

 
42,551

Building(1)

 
6,551

Construction in progress(1)
3,527

 
10,167

 
725,162

 
685,829

Less: Accumulated depreciation
(374,511
)
 
(338,613
)
Total property and equipment, net
$
350,651

 
$
347,216




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Table of Contents

(1)
We adopted Topic 842 using the modified retrospective method as of January 1, 2019 and derecognized $10.6 million in building and construction in progress assets that we were previously deemed to own under the prior lease accounting standards. These assets are recognized under our operating lease right-of-use assets under Topic 842 as of March 31, 2019.

Construction in progress consists primarily of leasehold and other improvements and in-process software development costs. Depreciation expense for the three months ended March 31, 2019 and 2018 was $37.1 million and $27.7 million, respectively.

(7) Derivative Contracts

As of March 31, 2019 and December 31, 2018, we had derivative contracts with total notional values of $1.2 billion and $883.9 million, respectively, 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 were as follows (in thousands):
 
Condensed Consolidated Balance Sheet Location
 
March 31, 2019
 
December 31, 2018
Derivative Assets:
 
 
 
 
 
Foreign currency derivative contracts
Prepaid expenses and other current assets
 
$
4,216

 
$
22,831

Derivative Liabilities
 
 
 
 
 
Foreign currency derivative contracts
Accrued expenses and other current liabilities
 
$
3,279

 
$
2,441



(8) Deferred Revenue and Performance Obligations

Revenues recognized during the three months ended March 31, 2019 from amounts included in deferred revenue as of December 31, 2018 were $569.9 million. Revenues recognized during the three months ended March 31, 2018, from amounts included in deferred revenue as of December 31, 2017 were $479.2 million.

Transaction Price Allocated to the Remaining Performance Obligations

Transaction price allocated to 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 apply the practical expedient in accordance with Topic 606 to exclude amounts related to professional services contracts that are on a time-and-material basis. Our professional services contracts typically have a remaining duration of one year or less.

As of March 31, 2019, the total remaining non-cancelable performance obligations under our contracts with customers was approximately $5.1 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.

(9)    Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
 
 
 
 
Accrued payroll
143,431

 
158,006

Taxes payable
20,529

 
35,122

Other employee related liabilities
43,255

 
60,889

Other
98,946

 
76,229

Total accrued expenses and other current liabilities
$
306,161

 
$
330,246




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Table of Contents

(10) 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 (Maturity Date) unless earlier converted or repurchased in accordance with their terms. The 2022 Notes do not bear interest, and we cannot redeem the 2022 Notes prior to maturity. 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 were earlier converted prior to, or settled on November 1, 2018, in accordance with their terms.

The 2022 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 2022 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 upon settlement. We settled the principal amount of our 2018 Notes with cash and currently intend to settle the principal amount of the 2022 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



Conversion of the 2022 Notes prior to the Convertible Date. At any time prior to the close of business on the business day immediately preceding February 1, 2022 (Convertible Date), holders of the 2022 Notes may convert their Notes at their option, only if one of the following conditions are met:

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.

Conversion of the 2022 Notes on or after the Convertible Date. On or after the 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, and such conversions will settle upon the Maturity Date. Upon settlement, 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.

The conversion price of the 2022 Notes will be subject to adjustment in some events. Holders of the 2022 Notes who convert their 2022 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 2022 Notes may require us to purchase with cash all or a portion of the 2022 Notes upon the occurrence of a fundamental change, at a purchase price equal to 100% of the principal amount of the 2022 Notes plus any accrued and unpaid special interest, if any.


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Table of Contents

In accounting for the issuance of the 2022 Notes and the related transaction costs, we separated the 2022 Notes into liability and equity components. The 2022 Notes consisted of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Liability component:
 
 
 
Principal:
 
 
 
2022 Notes
$
782,500

 
$
782,500

Less: debt issuance cost and debt discount, net of amortization
 
 
 
2022 Notes
(112,625
)
 
(120,793
)
Net carrying amount
$
669,875

 
$
661,707

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

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


The Conversion Condition for the 2022 Notes was met for the quarters ended June 30, 2018, September 30, 2018 and March 31, 2019. Therefore, our 2022 Notes became convertible at the holders’ option beginning on July 1, 2018 and continued to be convertible through June 30, 2019, with the exception of the quarter ended March 31, 2019 because the Conversion Condition for the 2022 Notes was not met for the quarter ended December 31, 2018. We have not received any conversion requests for our 2022 Notes.

We consider the fair value of the 2022 Notes at March 31, 2019 to be a Level 2 measurement. The estimated fair value of the 2022 Notes at March 31, 2019 and December 31, 2018 based on the closing trading price per $100 of the Notes were as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
2022 Notes
$
1,444,847

 
$
1,105,281


As of March 31, 2019, the remaining life of the 2022 Notes is 38 months, and the 2018 Notes were no longer outstanding. The following table sets forth total interest expense recognized related to the Notes (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Amortization of debt issuance cost
 
 
 
2022 Notes
$
394

 
$
376

2018 Notes

 
498

Amortization of debt discount
 
 
 
2022 Notes
7,774

 
7,402

2018 Notes

 
8,788

Total
$
8,168

 
$
17,064

Effective interest rate of the liability component
 
2022 Notes
4.75%
2018 Notes
6.50%


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Table of Contents

Note Hedges

To minimize the impact of potential economic dilution upon conversion of the Notes, we entered into convertible note hedge transactions (the 2022 Note Hedge and 2018 Note Hedge, respectively, and collectively, the Note Hedges) with certain investment banks, with respect to our common stock concurrently with the issuance of the 2022 Notes and 2018 Notes. The 2018 Note Hedge offset the dilution and cash payments in excess of the principal amount of the converted 2018 Notes and expired upon the maturity date of the 2018 Notes, which was November 1, 2018.
 
Purchase
 
Initial Shares
 
Shares as of
March 31, 2019
 
(in thousands)
 
 
 
 
2022 Note Hedge
$
128,017

 
5,806,936

 
5,806,936

2018 Note Hedge
$
135,815

 
7,783,023

 


The 2022 Note Hedge covers shares of our common stock at a strike price per share that corresponds to the initial conversion price of the 2022 Notes, subject to adjustment, and are exercisable upon conversion of the 2022 Notes. If exercised, we may elect to receive cash, shares of our common stock, or a combination of cash and shares. The 2022 Note Hedge will expire upon the maturity of the 2022 Notes. The 2022 Note Hedge is intended to reduce the potential economic dilution upon conversion of the 2022 Notes in the event that the fair value per share of our common stock at the time of exercise is greater than the conversion price of the 2022 Notes. The 2022 Note Hedge is a separate transaction and is not part of the terms of the 2022 Notes. Holders of the 2022 Notes will not have any rights with respect to the 2022 Note Hedge. The 2022 Note Hedge does not impact earnings per share, as it was entered into to offset any dilution from the 2022 Notes.

Warrants
 
Proceeds
 
Initial Shares
 
Strike Price
 
First Expiration Date
 
Shares as of March 31, 2019
 
(in thousands)
 
 
 
 
 
 
 
 
2022 Warrants
$
54,071

 
5,806,936

 
$
203.40

 
September 1, 2022
 
5,806,936

2018 Warrants
$
84,525

 
7,783,023

 
$
107.46

 
February 1, 2019
 
2,853,811


Separately, we entered into warrant transactions with certain investment banks, whereby we sold warrants to acquire, subject to adjustment, the number of shares of our common stock shown in the table above (the 2022 Warrants and 2018 Warrants, respectively, and collectively, the Warrants). If the average market value per share of our common stock for the reporting period, as measured under the Warrants, exceeds the strike price of the respective Warrants, such Warrants would have a dilutive effect on our earnings per share to the extent we report net income. According to the terms of each of the Warrants, the Warrants will be automatically exercised over a 60 trading day period beginning on the first expiration date of the respective Warrants as set forth above. The Warrants are separate transactions and are not remeasured through earnings each reporting period. The Warrants are not part of the Notes or Note Hedges.

As the remaining 2018 Warrants and the 2022 Warrants will be net share settled, the total number of shares of our common stock we will issue depends on the daily volume-weighted average stock prices over a 60 trading day period beginning on the first expiration date of the 2018 Warrants, which was February 1, 2019, and the first expiration date of the 2022 Warrants, which will be September 1, 2022. We issued approximately 2.7 million shares of our common stock upon the automatic exercise of a portion of the 2018 Warrants during the three months ended March 31, 2019 and approximately 1.6 million shares of our common stock upon the automatic exercise of the remaining 2018 Warrants during the quarter ending June 30, 2019. As of the date of the issuance of these condensed consolidated financial statements, the 2018 Warrants are no longer outstanding. We expect to issue additional shares of our common stock in the second half of 2022 upon the automatic exercise of the 2022 Warrants. The 2022 Warrants could have a dilutive effect to the extent that the daily volume-weighted average stock prices over a 60 trading day period beginning on September 1, 2022 exceeds the strike price of the 2022 Warrants. Based on the volume-weighted average stock price on March 31, 2019, the total number of shares of our common stock to be issued upon the automatic exercise of the 2022 Warrants would be approximately 1.0 million. The actual number of shares of our common stock issuable upon the automatic exercise of the 2022 Warrants, if any, is unknown at this time.


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Table of Contents

(11)   Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive (loss) income, net of tax, consist of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
 
 
 
 
Foreign currency translation adjustment
$
9,979

 
$
344

Net unrealized gain (loss) on investments, net of tax
344

 
(4,379
)
        Accumulated other comprehensive income (loss)
$
10,323

 
$
(4,035
)


Reclassification adjustments out of accumulated other comprehensive (loss) income into net income (loss) were immaterial for all periods presented.

(12)  Stockholders’ Equity

Common Stock

We are authorized to issue 600,000,000 shares of common stock as of March 31, 2019. Holders of our common stock are not entitled to receive dividends unless declared by our board of directors. As of March 31, 2019, we had 184,739,169 shares of common stock outstanding and had reserved shares of common stock for future issuance as follows: 
 
March 31, 2019
Stock plans:
 
Options outstanding
1,579,022

RSUs(1)
12,161,981

Shares of common stock available for future grants:
 
2012 Equity Incentive Plan(2)
28,705,526

2012 Employee Stock Purchase Plan(2)
10,396,547

Total shares of common stock reserved for future issuance
52,843,076


(1)
Represents the number of shares issuable upon settlement of outstanding RSUs and performance RSUs, assuming 100% of the target number of shares for performance RSUs, as discussed under the section entitled “RSUs” in Note 13.

(2)
Refer to Note 13 for a description of these plans.

During the three months ended March 31, 2019 and 2018, we issued a total of 1,882,821 shares and 2,287,099 shares, respectively, from stock option exercises, vesting of restricted stock units (RSUs), net of employee payroll taxes, and purchases from the employee stock purchase plan (ESPP). As described in Note 10, we issued approximately 2.7 million shares of our common stock upon the automatic exercise of a portion of the 2018 Warrants during the three months ended March 31, 2019.

(13) Equity Awards

We currently have two equity incentive plans, our 2005 Stock Option Plan (the 2005 Plan) and our 2012 Equity Incentive Plan (the 2012 Plan). Our 2005 Plan was terminated in connection with our initial public offering in 2012 but continues to govern the terms of outstanding stock options that were granted prior to the termination of the 2005 Plan. We no longer grant equity awards pursuant to our 2005 Plan.
 
Our 2012 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, RSUs, performance-based stock awards and other forms of equity compensation (collectively, equity awards). In addition, the 2012 Plan provides for the grant of performance cash awards. Incentive stock options may be granted only to employees. All other equity awards may be granted to employees, including officers, as well as directors and consultants. The share reserve may increase to the extent outstanding stock options under the 2005 Plan expire or terminate unexercised. Prior to January 2019, the share reserve also automatically increased on January 1 of each year, by up to 5% of the total number of shares of common stock outstanding on December 31 of the preceding year as determined by our board of directors. Our board of directors elected not to increase the number of shares of common stock reserved for issuance under the 2012 Plan pursuant to the provision described in the preceding sentence for the year ending December 31, 2019. In January 2019, our Board of Directors amended the 2012 Plan to remove the automatic increase provision. Therefore, for the remaining term of the 2012 Plan, the share reserve will not be increased without stockholder approval.

16



Our 2012 Employee Stock Purchase Plan (the 2012 ESPP) authorizes the issuance of shares of common stock pursuant to purchase rights granted to our employees. The price at which common stock is purchased under the 2012 ESPP is equal to 85% of the fair market value of our common stock on the first or last day of the offering period, whichever is lower. Offering periods are six months long and begin on February 1 and August 1 of each year. The number of shares of common stock reserved for issuance automatically increases on January 1 of each year until January 1, 2022, by up to 1% of the total number of shares of common stock outstanding on December 31 of the preceding year as determined by our board of directors. Our board of directors elected not to increase the number of shares of common stock reserved for issuance under the 2012 ESPP pursuant to the provision described in the preceding sentence for the year ending December 31, 2019.

Stock Options

Stock options are exercisable at a price equal to the market value of the underlying shares of common stock on the date of the grant as determined by our board of directors or, for those stock options issued subsequent to our initial public offering, the closing price of our common stock as reported on the New York Stock Exchange on the date of grant. Stock options granted under our 2005 Plan and the 2012 Plan to new employees generally vest 25% one year from the date the requisite service period begins and continue to vest monthly for each month of continued employment over the remaining three years. Options granted generally are exercisable for a period of up to ten years contingent on each holder’s continuous status as a service provider.

A summary of stock option activity for the three months ended March 31, 2019 was as follows:
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic Value
(in thousands)
Outstanding at December 31, 2018
1,810,580

 
$
46.55

 
 
 
 
Exercised
(231,558
)
 
21.69

 
 
 
$
46,348