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Table of Contents

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 September 30, 2019
OR
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-35580

snlogo26.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)
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


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
As of September 30, 2019, there were approximately 188.6 million shares of the Registrant’s Common Stock outstanding.



TABLE OF CONTENTS

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

i

Table of Contents

PART I

ITEM 1.     FINANCIAL STATEMENTS

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

 
September 30, 2019
 
December 31, 2018
 
 
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
622,925

 
$
566,204

Short-term investments
848,148

 
931,718

Accounts receivable, net
539,416

 
574,810

Current portion of deferred commissions
158,241

 
139,890

Prepaid expenses and other current assets
128,483

 
132,071

Total current assets
2,297,213

 
2,344,693

Deferred commissions, less current portion
293,086

 
282,490

Long-term investments
1,001,513

 
581,856

Property and equipment, net(1)
400,858

 
347,216

Operating lease right-of-use assets(1)
405,424

 

Intangible assets, net
112,947

 
100,582

Goodwill
153,902

 
148,845

Other assets
91,865

 
73,458

Total assets
$
4,756,808

 
$
3,879,140

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
61,906

 
$
30,733

Accrued expenses and other current liabilities(1)
319,792

 
330,246

Current portion of deferred revenue
1,761,532

 
1,651,594

Current portion of operating lease liabilities(1)
49,331

 

Total current liabilities
2,192,561

 
2,012,573

Deferred revenue, less current portion
41,286

 
38,597

Operating lease liabilities, less current portion(1)
388,483

 

Convertible senior notes, net
686,516

 
661,707

Other long-term liabilities(1)
18,489

 
55,064

Total liabilities
3,327,335

 
2,767,941

Stockholders’ equity:
 
 
 
Common stock
189

 
180

Additional paid-in capital
2,360,621

 
2,093,834

Accumulated other comprehensive income (loss)
19,631

 
(4,035
)
Accumulated deficit(1)
(950,968
)
 
(978,780
)
Total stockholders’ equity
1,429,473

 
1,111,199

Total liabilities and stockholders’ equity
$
4,756,808

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Subscription
$
834,910

 
$
626,567

 
$
2,355,885

 
$
1,755,174

Professional services and other
50,923

 
46,530

 
152,778

 
138,201

Total revenues
885,833

 
673,097

 
2,508,663

 
1,893,375

Cost of revenues(1):
 
 
 
 
 
 
 
Subscription
139,330

 
106,821

 
401,398

 
303,918

Professional services and other
61,463

 
51,037

 
183,794

 
150,578

Total cost of revenues
200,793

 
157,858

 
585,192

 
454,496

Gross profit
685,040

 
515,239

 
1,923,471

 
1,438,879

Operating expenses(1):
 
 
 
 
 
 
 
Sales and marketing
362,975

 
289,323

 
1,118,279

 
883,893

Research and development
190,099

 
135,655

 
546,041

 
380,839

General and administrative
75,642

 
80,693

 
245,540

 
216,851

Total operating expenses
628,716

 
505,671

 
1,909,860

 
1,481,583

Income (loss) from operations
56,324

 
9,568

 
13,611

 
(42,704
)
Interest expense
(8,371
)
 
(11,233
)
 
(24,808
)
 
(43,795
)
Interest income and other income (expense), net
12,817

 
8,895

 
44,196

 
45,520

Income (loss) before income taxes
60,770

 
7,230

 
32,999

 
(40,979
)
Provision for (benefit from) income taxes
20,172

 
(1,175
)
 
5,025

 
(7,260
)
Net income (loss)
$
40,598

 
$
8,405

 
$
27,974

 
$
(33,719
)
Net income (loss) per share - basic
$
0.22

 
$
0.05

 
$
0.15

 
$
(0.19
)
Net income (loss) per share - diluted
$
0.21

 
$
0.04

 
$
0.14

 
$
(0.19
)
Weighted-average shares used to compute net income (loss) per share - basic
188,074,303

 
178,719,694

 
185,676,049

 
177,198,179

Weighted-average shares used to compute net income (loss) per share - diluted
197,878,215

 
192,190,899

 
196,738,774

 
177,198,179

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
5,507

 
$
1,655

 
$
14,732

 
$
212

Unrealized gain (loss) on investments, net of tax
582

 
922

 
8,934

 
(163
)
Other comprehensive income, net of tax
6,089

 
2,577

 
23,666

 
49

Comprehensive income (loss)
$
46,687

 
$
10,982

 
$
51,640

 
$
(33,670
)

(1)
Includes stock-based compensation as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Cost of revenues:
 
 
 
 
 
 
 
Subscription
$
18,880

 
$
12,775

 
$
54,019

 
$
36,604

Professional services and other
10,867

 
8,407

 
31,749

 
24,310

Sales and marketing
68,712

 
60,132

 
200,071

 
169,283

Research and development
50,636

 
35,527

 
144,259

 
97,905

General and administrative
13,839

 
27,567

 
62,046

 
73,207




2

Table of Contents

See accompanying notes to condensed consolidated financial statements

3

Table of Contents

SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)
 
Three Months Ended September 30, 2019
 
Three Months Ended September 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
 
 
Shares
 
Amount
 
Balance at beginning 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

Common stock issued under employee stock plans
1,097,392

 
1

 
41,926

 

 

 
41,927

 
1,359,393

 
1

 
39,021

 

 

 
39,022

Taxes paid related to net share settlement of equity awards

 

 
(83,172
)
 

 

 
(83,172
)
 

 

 
(66,694
)
 

 

 
(66,694
)
Stock-based compensation

 

 
163,085

 

 

 
163,085

 

 

 
145,631

 

 

 
145,631

Settlement of 2018 Notes conversion feature

 

 

 

 

 

 

 

 
(81,318
)
 

 

 
(81,318
)
Benefit from exercise of 2018 Note Hedges

 

 

 

 

 

 

 

 
80,851

 

 

 
80,851

Other comprehensive income, net of tax

 

 

 

 
6,089

 
6,089

 

 

 

 

 
2,577

 
2,577

Net income

 

 

 
40,598

 

 
40,598

 

 

 

 
8,405

 

 
8,405

Balance at end of period
188,559,201

 
$
189

 
$
2,360,621

 
$
(950,968
)
 
$
19,631

 
$
1,429,473

 
179,305,339

 
$
179

 
$
2,007,218

 
$
(985,795
)
 
$
(1,418
)
 
$
1,020,184

 
Nine Months Ended September 30, 2019
 
Nine Months Ended September 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
 
 
Shares
 
Amount
 
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
4,100,652

 
4

 
105,232

 

 

 
105,236

 
5,029,475

 
5

 
100,437

 

 

 
100,442

Taxes paid related to net share settlement of equity awards

 

 
(330,792
)
 

 

 
(330,792
)
 

 

 
(221,267
)
 

 

 
(221,267
)
Stock-based compensation

 

 
492,352

 

 

 
492,352

 

 

 
403,152

 

 

 
403,152

Settlement of 2018 Notes conversion feature

 

 

 

 

 

 

 

 
(554,472
)
 

 

 
(554,472
)
Benefit from exercise of 2018 Note Hedges

 

 

 

 

 

 

 

 
548,001

 

 

 
548,001

Settlement of 2018 Warrants
4,283,194

 
5

 
(5
)
 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

 

 

 
23,666

 
23,666

 

 

 

 

 
49

 
49

Net income (loss)

 

 

 
27,974

 

 
27,974

 

 

 

 
(33,719
)
 

 
(33,719
)
Balance at end of period
188,559,201

 
$
189

 
$
2,360,621

 
$
(950,968
)
 
$
19,631

 
$
1,429,473

 
179,305,339

 
$
179

 
$
2,007,218

 
$
(985,795
)
 
$
(1,418
)
 
$
1,020,184


See accompanying notes to condensed consolidated financial statements

4

Table of Contents

SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2019
 
2018
 
 
 
 
Cash flows from operating activities:
 
 
 
Net income (loss)
$
27,974

 
$
(33,719
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
179,783

 
106,492

Amortization of deferred commissions
122,226

 
107,367

Amortization of debt discount and issuance costs
24,808

 
43,795

Stock-based compensation
492,144

 
401,309

Deferred income taxes
(2,842
)
 
(32,297
)
Gain on marketable equity securities

 
(19,257
)
Repayments of convertible senior notes attributable to debt discount

 
(101,633
)
Other
(4,621
)
 
4,502

Changes in operating assets and liabilities, net of effect of business combinations:
 
 
 
Accounts receivable
28,331

 
7,454

Deferred commissions
(158,309
)
 
(152,521
)
Prepaid expenses and other assets
(25,569
)
 
1,519

Accounts payable
30,088

 
5,058

Deferred revenue
135,455

 
174,058

Accrued expenses and other liabilities
(34,707
)
 
9,350

Net cash provided by operating activities
814,761

 
521,477

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(185,889
)
 
(136,349
)
Business combinations, net of cash and restricted cash acquired

 
(24,940
)
Purchases of other intangibles
(37,360
)
 
(13,600
)
Purchases of investments
(1,255,691
)
 
(826,998
)
Sales of investments
31,046

 
39,975

Maturities of investments
900,407

 
861,629

Realized gains on derivatives not designated as hedging instruments, net
21,742

 

Net cash used in investing activities
(525,745
)
 
(100,283
)
Cash flows from financing activities:
 
 
 
Repayments of convertible senior notes attributable to principal

 
(311,520
)
Proceeds from employee stock plans
105,227

 
100,437

Taxes paid related to net share settlement of equity awards
(330,802
)
 
(221,268
)
Payments on financing obligations

 
(756
)
Net cash used in financing activities
(225,575
)
 
(433,107
)
Foreign currency effect on cash, cash equivalents and restricted cash
(6,439
)
 
(9,593
)
Net increase (decrease) in cash, cash equivalents and restricted cash
57,002

 
(21,506
)
Cash, cash equivalents and restricted cash at beginning of period
568,538

 
727,829

Cash, cash equivalents and restricted cash at end of period
$
625,540

 
$
706,323

Cash, cash equivalents and restricted cash at end of period:
 
 
 
Cash and cash equivalents
$
622,925

 
$
703,629

Restricted cash included in prepaid expenses and other current assets
2,615

 
2,694

Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows
$
625,540

 
$
706,323

Supplemental disclosures of other cash flow information:
 
 
 
Income taxes paid, net of refunds
$
15,856

 
$
14,936

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

 
$
554,472

Benefit from exercise of 2018 Note Hedges

 
548,001

Property and equipment included in accounts payable and accrued expenses
26,566

 
25,018



See accompanying notes to condensed consolidated financial statements

5

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 and nine months ended September 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.


6

Table of Contents

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 to a certain extent due to our large number of customers and their dispersion across various industries and geographies. As of September 30, 2019, we had one customer that represented approximately 17% 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 the impact of our adoption of this standard on our condensed consolidated financial statements will largely depend on the magnitude of implementation costs incurred in our cloud computing arrangements beginning January 1, 2020.


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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, which will largely depend on the composition and credit quality of our investment portfolio and trade receivables as well as the economic condition at the time of adoption.

(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):
 
September 30, 2019
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
Commercial paper
$
108,568

 
$
113

 
$
(22
)
 
$
108,659

Corporate notes and bonds
1,574,066

 
7,662

 
(276
)
 
1,581,452

Certificates of deposit
30,493

 
50

 

 
30,543

U.S. government and agency securities
128,867

 
189

 
(49
)
 
129,007

Total available-for-sale securities
$
1,841,994

 
$
8,014

 
$
(347
)
 
$
1,849,661



 
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 September 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):
 
September 30, 2019
Due within 1 year
$
848,148

Due in 1 year through 5 years
1,001,513

Total
$
1,849,661



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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): 
 
September 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
Commercial paper
$
17,826

 
$
(22
)
 
$

 
$

 
$
17,826

 
$
(22
)
Corporate notes and bonds
249,623

 
(230
)
 
55,236

 
(46
)
 
304,859

 
(276
)
U.S. government and agency securities
36,425

 
(48
)
 
2,999

 
(1
)
 
39,424

 
(49
)
Total
$
303,874

 
$
(300
)
 
$
58,235

 
$
(47
)
 
$
362,109

 
$
(347
)


 
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 September 30, 2019, we had a total of 111 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 nine months ended September 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 nine months ended September 30, 2018. As of each of September 30, 2019 and December 31, 2018, we had no marketable equity securities on our condensed consolidated balance sheet.

Strategic Investments

As of September 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 September 30, 2019 (in thousands): 
 
Level 1
 
Level 2
 
Total
Cash equivalents:
 
 
 
 
 
Money market funds
$
292,716

 
$

 
$
292,716

Commercial paper

 
104,698

 
104,698

Corporate notes and bonds

 
34,603

 
34,603

Marketable securities:
 
 
 
 
 
Commercial paper

 
108,659

 
108,659

Corporate notes and bonds

 
1,581,452

 
1,581,452

Certificates of deposit

 
30,543

 
30,543

U.S. government and agency securities

 
129,007

 
129,007

Total
$
292,716

 
$
1,988,962

 
$
2,281,678

 
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

During the nine months ended September 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.


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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
5,057

Balance as of September 30, 2019
$
153,902



Intangible assets consist of the following (in thousands):
 
September 30, 2019