Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☒	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2019



☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 001-35580

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)

2225 Lawson Lane

Santa Clara, California 95054

(Address of principal executive offices and zip code)

(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	The New York Stock Exchange

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 ☒ 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 ☒ 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	☒	Accelerated Filer	☐
Non-Accelerated Filer	☐	Smaller Reporting Company	☐
		Emerging Growth Company	☐

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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 ☒

As of June 30, 2019, there were approximately 187.5 million shares of the Registrant’s Common Stock outstanding.

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		Page
	PART I
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018	1
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2019 and 2018	2
	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018	3
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	45

	PART II
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3.	Defaults Upon Senior Securities	63
Item 4.	Mine Safety Disclosures	63
Item 5.	Other Information	63
Item 6.	Exhibits	64
	Signatures

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PART I

ITEM 1. FINANCIAL STATEMENTS

SERVICENOW, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)



	June 30, 2019			December 31, 2018

Assets
Current assets:
Cash and cash equivalents	$	583,581		$	566,204
Short-term investments	1,069,803			931,718
Accounts receivable, net	503,376			574,810
Current portion of deferred commissions	152,045			139,890
Prepaid expenses and other current assets	133,482			132,071
Total current assets	2,442,287			2,344,693
Deferred commissions, less current portion	287,432			282,490
Long-term investments	746,716			581,856
Property and equipment, net⁽¹⁾	364,007			347,216
Operating lease right-of-use assets⁽¹⁾	397,950			—
Intangible assets, net	121,599			100,582
Goodwill	152,472			148,845
Other assets	90,240			73,458
Total assets	$	4,602,703		$	3,879,140
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	65,711		$	30,733
Accrued expenses and other current liabilities⁽¹⁾	360,916			330,246
Current portion of deferred revenue	1,752,220			1,651,594
Current portion of operating lease liabilities⁽¹⁾	46,132			—
Total current liabilities	2,224,979			2,012,573
Deferred revenue, less current portion	37,159			38,597
Operating lease liabilities, less current portion⁽¹⁾	382,812			—
Convertible senior notes, net	678,145			661,707
Other long-term liabilities⁽¹⁾	18,662			55,064
Total liabilities	3,341,757			2,767,941
Stockholders’ equity:
Common stock	188			180
Additional paid-in capital	2,238,782			2,093,834
Accumulated other comprehensive income (loss)	13,542			(4,035		)
Accumulated deficit⁽¹⁾	(991,566		)	(978,780		)
Total stockholders’ equity	1,260,946			1,111,199
Total liabilities and stockholders’ equity	$	4,602,703		$	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

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SERVICENOW, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands, except share and per share data)

(unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Revenues:
Subscription	$	780,989		$	585,282		$	1,520,975		$	1,128,607
Professional services and other	52,915			45,774			101,855			91,671
Total revenues	833,904			631,056			1,622,830			1,220,278
Cost of revenues⁽¹⁾:
Subscription	135,479			101,699			262,068			197,097
Professional services and other	62,668			51,466			122,331			99,541
Total cost of revenues	198,147			153,165			384,399			296,638
Gross profit	635,757			477,891			1,238,431			923,640
Operating expenses⁽¹⁾:
Sales and marketing	393,895			310,869			755,304			594,570
Research and development	183,420			127,916			355,942			245,184
General and administrative	85,442			71,095			169,898			136,158
Total operating expenses	662,757			509,880			1,281,144			975,912
Loss from operations	(27,000		)	(31,989		)	(42,713		)	(52,272		)
Interest expense	(8,269		)	(15,498		)	(16,437		)	(32,562		)
Interest income and other income (expense), net	18,954			6,638			31,379			36,625
Loss before income taxes	(16,315		)	(40,849		)	(27,771		)	(48,209		)
Provision for (benefit from) income taxes	(5,236		)	11,897			(15,147		)	(6,085		)
Net loss	$	(11,079	)	$	(52,746	)	$	(12,624	)	$	(42,124	)
Net loss per share - basic and diluted	$	(0.06	)	$	(0.30	)	$	(0.07	)	$	(0.24	)
Weighted-average shares used to compute net loss per share - basic and diluted	186,677,622			177,343,176			184,418,903			176,418,984
Other comprehensive income (loss):
Foreign currency translation adjustments	$	(410	)	$	6,992		$	9,225		$	(1,443	)
Unrealized gain (loss) on investments, net of tax	3,629			1,983			8,352			(1,085		)
Other comprehensive income (loss), net of tax	3,219			8,975			17,577			(2,528		)
Comprehensive income (loss)	$	(7,860	)	$	(43,771	)	$	4,953		$	(44,652	)


(1)	Includes stock-based compensation as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Cost of revenues:
Subscription	$	19,117	$	12,538	$	35,139	$	23,829
Professional services and other	10,951		8,342		20,882		15,903
Sales and marketing	69,229		57,069		131,359		109,151
Research and development	50,041		33,780		93,623		62,378
General and administrative	22,422		23,831		48,207		45,640

See accompanying notes to condensed consolidated financial statements

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SERVICENOW, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)



	Three Months Ended June 30, 2019														Three Months Ended June 30, 2018
	Common Stock			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity			Common Stock			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity			Shares	Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance at beginning of period	184,739,169	$	185	$	2,164,930		$	(980,487	)	$	10,323	$	1,194,951		176,562,963	$	177	$	1,819,410		$	(941,454	)	$	(12,970	)	$	865,163
Common stock issued under employee stock plans	1,120,439	1		10,206			—			—		10,207			1,382,983	1		8,758			—			—			8,759
Taxes paid related to net share settlement of equity awards	—	—		(108,150		)	—			—		(108,150		)	—	—		(68,956		)	—			—			(68,956		)
Stock-based compensation	—	—		171,798			—			—		171,798			—	—		135,812			—			—			135,812
Settlement of 2018 Notes conversion feature	—	—		—			—			—		—			—	—		(427,937		)	—			—			(427,937		)
Benefit from exercise of 2018 Note Hedges	—	—		—			—			—		—			—	—		422,640			—			—			422,640
Settlement of 2018 Warrants	1,602,201	2		(2		)	—			—		—			—	—		—			—			—			—
Other comprehensive income, net of tax	—	—		—			—			3,219		3,219			—	—		—			—			8,975			8,975
Net loss	—	—		—			(11,079		)	—		(11,079		)	—	—		—			(52,746		)	—			(52,746		)
Balance at end of period	187,461,809	$	188	$	2,238,782		$	(991,566	)	$	13,542	$	1,260,946		177,945,946	$	178	$	1,889,727		$	(994,200	)	$	(3,995	)	$	891,710



	Six Months Ended June 30, 2019															Six Months Ended June 30, 2018
	Common Stock			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity			Common Stock			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity			Shares	Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance at beginning of period	180,175,355	$	180	$	2,093,834		$	(978,780	)	$	(4,035	)	$	1,111,199		174,275,864	$	174	$	1,731,367		$	(958,564	)	$	5,767		$	778,744
Impact of the adoption of new accounting pronouncements	—	—		—			(162		)	—			(162		)	—	—		—			6,488			(7,234		)	(746		)
Common stock issued under employee stock plans	3,003,260	3		63,306			—			—			63,309			3,670,082	4		61,416			—			—			61,420
Taxes paid related to net share settlement of equity awards	—	—		(247,620		)	—			—			(247,620		)	—	—		(154,573		)	—			—			(154,573		)
Stock-based compensation	—	—		329,267			—			—			329,267			—	—		257,521			—			—			257,521
Settlement of 2018 Notes conversion feature	—	—		—			—			—			—			—	—		(473,154		)	—			—			(473,154		)
Benefit from exercise of 2018 Note Hedges	—	—		—			—			—			—			—	—		467,150			—			—			467,150
Settlement of 2018 Warrants	4,283,194	5		(5		)	—			—			—			—	—		—			—			—			—
Other comprehensive income (loss), net of tax	—	—		—			—			17,577			17,577			—	—		—			—			(2,528		)	(2,528		)
Net loss	—	—		—			(12,624		)	—			(12,624		)	—	—		—			(42,124		)	—			(42,124		)
Balance at end of period	187,461,809	$	188	$	2,238,782		$	(991,566	)	$	13,542		$	1,260,946		177,945,946	$	178	$	1,889,727		$	(994,200	)	$	(3,995	)	$	891,710

See accompanying notes to condensed consolidated financial statements

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SERVICENOW, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Six Months Ended June 30,
	2019			2018

Cash flows from operating activities:
Net loss	$	(12,624	)	$	(42,124	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	115,777			68,618
Amortization of deferred commissions	79,531			64,304
Amortization of debt discount and issuance costs	16,437			32,562
Stock-based compensation	329,210			256,901
Deferred income taxes	(3,073		)	(30,926		)
Gain on marketable equity securities	—			(19,257		)
Repayments of convertible senior notes attributable to debt discount	—			(87,557		)
Other	(3,323		)	(1,707		)
Changes in operating assets and liabilities, net of effect of business combinations:
Accounts receivable	71,354			65,940
Deferred commissions	(97,194		)	(92,995		)
Prepaid expenses and other assets	(28,483		)	2,040
Accounts payable	25,093			(2,632		)
Deferred revenue	100,190			131,089
Accrued expenses and other liabilities	11,688			31,720
Net cash provided by operating activities	604,583			375,976
Cash flows from investing activities:
Purchases of property and equipment	(97,020		)	(88,362		)
Business combinations, net of cash and restricted cash acquired	—			(24,940		)
Purchases of other intangibles	(36,160		)	(10,850		)
Purchases of investments	(800,641		)	(379,913		)
Sales of investments	8,169			39,975
Maturities of investments	500,149			453,156
Realized gains on derivatives not designated as hedging instruments, net	22,113			—
Net cash used in investing activities	(403,390		)	(10,934		)
Cash flows from financing activities:
Repayments of convertible senior notes attributable to principal	—			(271,185		)
Proceeds from employee stock plans	63,300			61,419
Taxes paid related to net share settlement of equity awards	(247,619		)	(154,531		)
Payments on financing obligations	—			(576		)
Net cash used in financing activities	(184,319		)	(364,873		)
Foreign currency effect on cash, cash equivalents and restricted cash	1,286			(7,505		)
Net increase (decrease) in cash, cash equivalents and restricted cash	18,160			(7,336		)
Cash, cash equivalents and restricted cash at beginning of period	568,538			727,829
Cash, cash equivalents and restricted cash at end of period	$	586,698		$	720,493
Cash, cash equivalents and restricted cash at end of period:
Cash and cash equivalents	$	583,581		$	704,846
Current portion of restricted cash included in prepaid expenses and other current assets	3,117			5,971
Non-current portion of restricted cash included in other assets	—			9,676
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows	$	586,698		$	720,493
Non-cash investing and financing activities:
Settlement of 2018 Notes conversion feature	$	—		$	473,154
Benefit from exercise of 2018 Note Hedges	—			467,150
Property and equipment included in accounts payable and accrued expenses	31,940			25,027

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, 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 and six months ended June 30, 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.

Prior Period Reclassification

Certain reclassifications of prior period amounts pertaining to the reclassification of revenues from IT Operations Management (ITOM) products to digital workflow products have been made in Note 18 to conform to the current period presentation. These reclassifications did not result in a restatement of prior period financial statements.

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.

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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.

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 June 30, 2019, we had one customer that represented approximately 10% 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.

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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.

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 not designated as hedging instruments 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. Upon adoption, we recorded operating lease right-of-use assets of approximately $334.7 million and corresponding operating lease liabilities of $362.7 million on our condensed consolidated balance sheets.

Accounting Pronouncements Adopted in 2018

For details on our adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” 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.

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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, with further clarifications made more recently. 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 are required to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. 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.

(3) Investments

Marketable Debt Securities

The following is a summary of our available-for-sale investment securities recorded within short-term and long-term investments and those securities classified within cash and cash equivalents on the condensed consolidated balance sheets (in thousands):



	June 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-sale securities:
Commercial paper	$	129,395	$	179	$	—		$	129,574
Corporate notes and bonds	1,535,635		6,820		(290		)	1,542,165
Certificates of deposit	66,642		77		—			66,719
U.S. government and agency securities	77,931		171		(41		)	78,061
Total available-for-sale securities	$	1,809,603	$	7,247	$	(331	)	$	1,816,519



	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 June 30, 2019, the contractual maturities of our investment securities, excluding securities classified within cash and cash equivalents on the condensed consolidated balance sheet, did not exceed 36 months. The fair values of available-for-sale investment securities, by remaining contractual maturity, are as follows (in thousands):



	June 30, 2019
Due within 1 year	$	1,069,803
Due in 1 year through 5 years	746,716
Total	$	1,816,519

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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):



	June 30, 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
Corporate notes and bonds	$	190,304	$	(171	)	$	139,264	$	(119	)	$	329,568	$	(290	)
U.S. government and agency securities	—		—			29,959		(41		)	29,959		(41		)
Total	$	190,304	$	(171	)	$	169,223	$	(160	)	$	359,527	$	(331	)



	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 June 30, 2019, we had a total of 143 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 six months ended June 30, 2018, we recognized $19.3 million of unrealized gains through net income that related to the changes in the fair value of these securities during the six months ended June 30, 2018. As of each of June 30, 2019 and December 31, 2018, we had no marketable equity securities on our condensed consolidated balance sheet.

Strategic Investments

As of June 30, 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 $21.4 million and $14.6 million, respectively. These non-marketable equity investments are recorded at fair value only if an impairment or observable price adjustment is recognized in the current period. We classify these assets as Level 3 within the fair value hierarchy only if an impairment or observable price adjustment is recognized on these non-marketable equity securities during the period as they are based on observable transaction price at the transaction date and other unobservable inputs such as volatility.

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(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 June 30, 2019 (in thousands):



	Level 1		Level 2		Total
Cash equivalents:
Money market funds	$	301,614	$	—	$	301,614
Commercial paper	—		37,405		37,405
Corporate notes and bonds	—		1,430		1,430
Certificates of deposit	—		3,700		3,700
U.S. government and agency securities	—		9,986		9,986
Marketable securities:
Commercial paper	—		129,574		129,574
Corporate notes and bonds	—		1,542,165		1,542,165
Certificates of deposit	—		66,719		66,719
U.S. government and agency securities	—		78,061		78,061
Total	$	301,614	$	1,869,040	$	2,170,654

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.

Our equity investments in privately-held companies are not included in the table above and are discussed in Note 3. See Note 8 for the fair value measurement of our derivative contracts and Note 11 for the fair value measurement of our convertible senior notes, which are also not included in the table above.

(5) Business Combinations

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During the six months ended June 30, 2018, we completed acquisitions of two privately-held companies, Parlo, Inc. and VendorHawk, Inc., for an aggregate of approximately $25.1 million in cash. In allocating the aggregate purchase price based on the estimated fair values, we recorded a total of $18.1 million of goodwill, $9.0 million of developed technology intangible assets (to be amortized over estimated useful lives of five years) and $2.2 million of deferred tax liabilities. The excess of purchase consideration over the fair value of net tangible and identifiable assets acquired was recorded as goodwill. We believe the goodwill balance associated with these business combinations represents the synergies expected from expanded market opportunities when integrating the acquired developed technologies with our offerings. Goodwill arising from these business combinations is not deductible for income tax purposes.

The results of operations of these business combinations have been included in our condensed consolidated financial statements from their respective dates of purchase. These business combinations did not have a material impact on our condensed consolidated financial statements, and therefore historical and pro forma disclosures have not been presented.

(6) 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	3,627
Balance as of June 30, 2019	$	152,472

Intangible assets consist of the following (in thousands):



	June 30,			December 31,
	2019			2018
Developed technology	$	140,800		$	114,395
Patents	66,530			57,180
Other	276			650
Intangible assets, gross	207,606			172,225
Less: accumulated amortization	(86,007		)	(71,643		)
Intangible assets, net	$	121,599		$	100,582

During the six months ended June 30, 2019, we acquired $36.2 million of intangible assets, comprising primarily $26.5 million of developed technology and $9.4 million in patents. The weighted-average useful lives for the developed technology and patents acquired during the six months ended June 30, 2019 was approximately 5.0 and 6.1 years, respectively.

During the six months ended June 30, 2018, apart from the business combinations described in Note 5, we also acquired $4.1 million of intangible assets in patents. The weighted-average useful life for the patents acquired during the six months ended June 30, 2018 was approximately 10.0 years.

Amortization expense for intangible assets for the three months ended June 30, 2019 and 2018 was approximately $8.0 million and $6.1 million, respectively, and for the six months ended June 30, 2019 and 2018 was approximately $15.1 million and $11.8 million, respectively.

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