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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 March 31, 2020
OR
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-35580

logojpg.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, including zip code, of registrant’s principal executive offices)

(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.


Table of Contents

Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer
Smaller Reporting Company
 
 
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No
As of March 31, 2020, there were approximately 190.7 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, 2020
 
December 31, 2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
808,725

 
$
775,778

Short-term investments
1,049,980

 
915,317

Accounts receivable, net
615,234

 
835,279

Current portion of deferred commissions
182,830

 
175,039

Prepaid expenses and other current assets
149,092

 
125,488

Total current assets
2,805,861

 
2,826,901

Deferred commissions, less current portion
339,727

 
333,448

Long-term investments
1,077,938

 
1,013,332

Property and equipment, net
470,969

 
468,085

Operating lease right-of-use assets
464,576

 
402,428

Intangible assets, net
171,049

 
143,850

Goodwill
207,605

 
156,756

Deferred tax assets
586,021

 
599,633

Other assets
73,670

 
77,997

Total assets
$
6,197,416

 
$
6,022,430

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
73,904

 
$
52,960

Accrued expenses and other current liabilities
370,997

 
461,403

Current portion of deferred revenue
2,215,265

 
2,185,754

Current portion of operating lease liabilities
60,895

 
52,668

Total current liabilities
2,721,061

 
2,752,785

Deferred revenue, less current portion
40,477

 
40,038

Operating lease liabilities, less current portion
440,938

 
383,221

Convertible senior notes, net
701,288

 
694,981

Other long-term liabilities
27,557

 
23,464

Total liabilities
3,931,321

 
3,894,489

Stockholders’ equity:
 
 
 
Common stock
190

 
189

Additional paid-in capital
2,584,298

 
2,454,741

Accumulated other comprehensive income (loss)
(14,380
)
 
25,255

Accumulated deficit
(304,013
)
 
(352,244
)
Total stockholders’ equity
2,266,095

 
2,127,941

Total liabilities and stockholders’ equity
$
6,197,416

 
$
6,022,430




See accompanying notes to condensed consolidated financial statements

1

Table of Contents

SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(unaudited) 
 
Three Months Ended March 31,
 
2020
 
2019
Revenues:
 
 
 
Subscription
$
994,702

 
$
739,986

Professional services and other
51,638

 
48,940

Total revenues
1,046,340

 
788,926

Cost of revenues(1):
 
 
 
Subscription
159,721

 
126,589

Professional services and other
63,645

 
59,663

Total cost of revenues
223,366

 
186,252

Gross profit
822,974

 
602,674

Operating expenses(1):
 
 
 
Sales and marketing
441,234

 
361,409

Research and development
226,657

 
172,522

General and administrative
105,748

 
84,456

Total operating expenses
773,639

 
618,387

Income (loss) from operations
49,335

 
(15,713
)
Interest expense
(8,570
)
 
(8,168
)
Interest income and other income, net
7,597

 
12,425

Income (loss) before income taxes
48,362

 
(11,456
)
Provision for (benefit from) income taxes
131

 
(9,911
)
Net income (loss)
$
48,231

 
$
(1,545
)
Net income (loss) per share - basic
$
0.25

 
$
(0.01
)
Net income (loss) per share - diluted
$
0.24

 
$
(0.01
)
Weighted-average shares used to compute net income (loss) per share - basic
190,163

 
182,062

Weighted-average shares used to compute net income (loss) per share - diluted
199,938

 
182,062

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
$
(20,393
)
 
$
9,635

Unrealized gain (loss) on investments, net of tax
(19,242
)
 
4,723

Other comprehensive income (loss), net of tax
(39,635
)
 
14,358

Comprehensive income
$
8,596

 
$
12,813


(1)
Includes stock-based compensation as follows:
 
Three Months Ended March 31,
 
2020
 
2019
Cost of revenues:
 
 
 
Subscription
$
21,524

 
$
16,022

Professional services and other
12,012

 
9,931

Sales and marketing
70,160

 
62,130

Research and development
58,903

 
43,582

General and administrative
25,686

 
25,785



See accompanying notes to condensed consolidated financial statements

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Table of Contents

SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive Income (Loss)
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance at December 31, 2019
189,461

 
$
189

 
$
2,454,741

 
$
(352,244
)
 
$
25,255

 
$
2,127,941

Common stock issued under employee stock plans
1,239

 
1

 
66,874

 

 

 
66,875

Taxes paid related to net share settlement of equity awards

 

 
(125,706
)
 

 

 
(125,706
)
Stock-based compensation

 

 
188,565

 

 

 
188,565

Settlement of 2022 Notes conversion feature

 

 
(3,728
)
 

 

 
(3,728
)
Benefit from exercise of 2022 Note Hedge

 

 
3,552

 

 

 
3,552

Other comprehensive loss, net of tax

 

 

 

 
(39,635
)
 
(39,635
)
Net income

 

 

 
48,231

 

 
48,231

Balance at March 31, 2020
190,700

 
$
190

 
$
2,584,298

 
$
(304,013
)
 
$
(14,380
)
 
$
2,266,095


 
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

 
$
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
1,883

 
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
2,681

 
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

 
$
185

 
$
2,164,930

 
$
(980,487
)
 
$
10,323

 
$
1,194,951



See accompanying notes to condensed consolidated financial statements

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SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income (loss)
$
48,231

 
$
(1,545
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
76,238

 
55,449

Amortization of deferred commissions
49,481

 
39,557

Amortization of debt discount and issuance costs
8,570

 
8,168

Stock-based compensation
188,285

 
157,450

Deferred income taxes
(1,527
)
 
(1,480
)
Repayments of convertible senior notes attributable to debt discount
(282
)
 

Other
2,271

 
724

Changes in operating assets and liabilities, net of effect of business combinations:
 
 
 
Accounts receivable
208,789

 
151,105

Deferred commissions
(70,797
)
 
(46,599
)
Prepaid expenses and other assets
(20,391
)
 
(33,659
)
Accounts payable
20,679

 
6,562

Deferred revenue
59,847

 
61,370

Accrued expenses and other liabilities
(77,826
)
 
(36,254
)
Net cash provided by operating activities
491,568

 
360,848

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(83,207
)
 
(47,124
)
Business combinations, net of cash acquired
(82,948
)
 

Purchases of investments
(527,819
)
 
(438,782
)
Sales and maturities of investments
312,560

 
262,885

Realized gains (losses) on derivatives not designated as hedging instruments, net
(3,620
)
 
22,148

Net cash used in investing activities
(385,034
)
 
(200,873
)
Cash flows from financing activities:
 
 
 
Repayments of convertible senior notes attributable to principal
(2,236
)
 

Proceeds from employee stock plans
66,908

 
53,093

Taxes paid related to net share settlement of equity awards
(125,700
)
 
(139,493
)
Net cash used in financing activities
(61,028
)
 
(86,400
)
Foreign currency effect on cash, cash equivalents and restricted cash
(10,649
)
 
1,079

Net increase in cash, cash equivalents and restricted cash
34,857

 
74,654

Cash, cash equivalents and restricted cash at beginning of period
777,991

 
568,538

Cash, cash equivalents and restricted cash at end of period
$
812,848

 
$
643,192

Cash, cash equivalents and restricted cash at end of period:
 
 
 
Cash and cash equivalents
$
808,725

 
$
639,722

Restricted cash included in prepaid expenses and other current assets
4,123

 
3,470

Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows
$
812,848

 
$
643,192

Supplemental disclosures of other cash flow information:
 
 
 
Income taxes paid, net of refunds
$
6,966

 
$
8,109

Non-cash investing and financing activities:
 
 
 
Settlement of 2022 Notes conversion feature
$
3,728

 
$

Benefit from exercise of 2022 Note Hedge
3,552

 

Property and equipment included in accounts payable and accrued expenses
41,252

 
29,002



See accompanying notes to condensed consolidated financial statements

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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’s purpose is to make the world of work, work better for people. We believe that people should work the way they want to, so we build applications that help automate existing processes and create efficient, digitized workflows. Our products and services enable the steps of a job to flow naturally across disparate departments, systems and processes of a business. When work flows naturally, great experiences follow. We make work flow utilizing our leading enterprise cloud computing services that manage and deliver digital workflows, simplifying the complexity of work across systems, functions and departments on a single enterprise cloud platform, called the Now Platform. Our product portfolio is currently focused on delivering better Information Technology (IT), Employee and Customer workflows in pre-packaged product offerings. We also enable our customers to use the Now Platform App Engine to design and build any workflow application which are purpose built for their own 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, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for other interim periods or future years. The condensed consolidated balance sheet as of December 31, 2019 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, 2019, which was filed with the SEC on February 20, 2020.

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.


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Table of Contents

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 the standalone 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, the useful life 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 and income taxes. Actual results could differ from those estimates.

Significant Accounting Policies

Notwithstanding the addition of policies described below for investments and accounts receivable, there were no significant changes to our significant accounting policies disclosed in “Note 2 – Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on February 20, 2020.

Investments 

Investments consist of commercial paper, corporate notes and bonds, certificates of deposit and U.S. government and agency securities. We classify investments as available-for-sale at the time of purchase and re-evaluate such classification as of each balance sheet date. All investments are recorded at estimated fair value. Unrealized gains and losses for available-for-sale securities are included in accumulated other comprehensive income (loss), net of tax, a component of stockholders’ equity, except for credit-related impairment losses for available-for-sale debt securities.

We evaluate our investments with unrealized loss positions for other than temporary impairment by assessing if they are related to deterioration in credit risk and whether we expect to recover the entire amortized cost basis of the security, our intent to sell and whether it is more likely than not that we will be required to sell the securities before the recovery of their cost basis. Credit-related impairment losses, not to exceed the amount that fair value is less than the amortized cost basis, are recognized through an allowance for credit losses with changes in the allowance for credit losses recorded in interest income and other income , net in the condensed consolidated statements of comprehensive income (loss). For purposes of identifying and measuring impairment, the policy election was made to exclude the applicable accrued interest from both the fair value and amortized cost basis. Applicable accrued interest, net of the allowance for credit losses (if any) of $11.8 million and $10.7 million, is recorded in prepaid expenses and other current assets on the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019, respectively.

Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in interest income and other income (expense), net in the condensed consolidated statements of comprehensive income (loss).

Accounts Receivable 

We record trade accounts receivable at the net invoice value and such receivables are non-interest bearing. We consider receivables past due based on the contractual payment terms. We review our exposure to accounts receivable and reserve for specific amounts if collectability is no longer reasonably assured based on assessment of various factors including historical loss rates and expectations of forward-looking loss estimates.

Concentration of Credit Risk and Significant Customers
  
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 March 31, 2020, we had one customer that represented 13% of our accounts receivable balance and no customers that individually exceeded 10% of our total revenues. As of December 31, 2019, there were no customers that represented more than 10% of our accounts receivable balance or that individually exceeded 10% of our total revenues. 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.


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Accounting Pronouncements Adopted in 2020

Cloud computing arrangements implementation costs

In August 2018, the Financial Accounting Standards Board (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. We adopted this standard on a prospective basis as of January 1, 2020. The adoption of this standard did not have a material impact on our previously reported consolidated financial statements for periods ended on or prior to December 31, 2019.

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 regarding the treatment of accrued interest, transfers between classifications for loans and debt securities, recoveries and the option to irrevocably elect the fair value option (on an instrument-by-instrument basis) for eligible financial assets at amortized costs. For trade receivables, loans, and other financial assets, 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. We adopted Topic 326 on a modified retrospective basis as of January 1, 2020. The adoption of this standard did not result in any cumulative effect adjustment on our condensed consolidated financial statements upon adoption as of January 1, 2020.

Accounting Pronouncement Adopted in 2019

Leases

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires lessees to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets, and to recognize on the income statement the expenses in a manner similar to 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. 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 consolidated 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.

Recently Issued Accounting Pronouncement Pending Adoption

Income taxes

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which simplifies the accounting for incomes taxes by removing certain exceptions to the general principles in Topic 740 and amending existing guidance to improve consistent application. This new standard is effective for our interim and annual periods beginning January 1, 2021 and earlier adoption is permitted. Most amendments within this standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are currently evaluating the impact of the adoption of this standard on our condensed consolidated financial statements.


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(3) Investments
 
Marketable Debt Securities

The following is a summary of our available-for-sale debt securities recorded within short-term and long-term investments on the condensed consolidated balance sheets (in thousands):
 
March 31, 2020
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
Commercial paper
$
188,406

 
$
242

 
$
(18
)
 
$
188,630

Corporate notes and bonds
1,726,312

 
3,398

 
(17,367
)
 
1,712,343

Certificates of deposit
27,407

 
8

 
(75
)
 
27,340

U.S. government and agency securities
197,523

 
2,082

 

 
199,605

Total available-for-sale securities
$
2,139,648

 
$
5,730

 
$
(17,460
)
 
$
2,127,918


 
December 31, 2019
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
Commercial paper
$
101,416

 
$
83

 
$
(9
)
 
$
101,490

Corporate notes and bonds
1,654,166

 
7,360

 
(196
)
 
1,661,330

Certificates of deposit
38,007

 
38

 

 
38,045

U.S. government and agency securities
127,544

 
254

 
(14
)
 
127,784

Total available-for-sale securities
$
1,921,133

 
$
7,735

 
$
(219
)
 
$
1,928,649



As of March 31, 2020, the contractual maturities of our available-for-sale debt securities, excluding those 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 securities, by remaining contractual maturity, are as follows (in thousands):
 
March 31, 2020
Due within 1 year
$
1,049,980

Due in 1 year through 5 years
1,077,938

Total
$
2,127,918



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The following table shows the fair values and the gross unrealized losses of these available-for-sale debt 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, 2020
 
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
$
16,731

 
$
(18
)
 
$

 
$

 
$
16,731

 
$
(18
)
Corporate notes and bonds
1,140,793

 
(17,367
)
 

 

 
1,140,793

 
(17,367
)
Certificates of deposit
16,402

 
(75
)
 

 

 
16,402

 
(75
)
Total
$
1,173,926

 
$
(17,460
)
 
$

 
$

 
$
1,173,926

 
$
(17,460
)

 
December 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
$
20,752

 
$
(9
)
 
$

 
$

 
$
20,752

 
$
(9
)
Corporate notes and bonds
242,012

 
(181
)
 
16,264

 
(15
)
 
258,276

 
(196
)
U.S. government and agency securities
17,806

 
(14
)
 

 

 
17,806

 
(14
)
Total
$
280,570

 
$
(204
)
 
$
16,264

 
$
(15
)
 
$
296,834

 
$
(219
)


As of March 31, 2020, the decline in fair value below amortized cost basis was not 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 and minimal credit losses were identified. The available-for-sale debt securities with unrealized losses as of March 31, 2020 consist of investment-grade securities, of which $95.1 million was BBB+ or BBB per Standard & Poor's rating agency or Baa1 or Baa2 per Moody’s rating agency with $1.5 million gross unrealized losses and on average, less than one year to maturity. Credit-related impairment losses was not deemed material and the gross unrealized losses as of March 31, 2020 were primarily caused by global market disruptions resulting from the growing of a novel strain of Coronavirus disease (COVID-19) pandemic in March 2020 rather than credit risks associated with the respective issuers of the debt securities.

Strategic Investments

As of March 31, 2020 and December 31, 2019, the total amount of equity investments in privately-held companies included in other assets on our condensed consolidated balance sheets was $23.4 million and $22.4 million, respectively. We classify these assets as Level 3 within the fair value hierarchy only if an impairment or observable adjustment is recognized on these non-marketable equity securities during the period as they are based on observable transaction price at the transaction date of identical or similar investment of the same issuer and other unobservable inputs such as volatility.


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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, 2020 (in thousands): 
 
Level 1
 
Level 2
 
Total
Cash equivalents:
 
 
 
 
 
Money market funds
$
451,298

 
$

 
$
451,298

Commercial paper

 
76,832

 
76,832

Corporate notes and bonds

 
3,500

 
3,500

Marketable securities:
 
 
 
 
 
Commercial paper

 
188,630

 
188,630

Corporate notes and bonds

 
1,712,343

 
1,712,343

Certificates of deposit

 
27,340

 
27,340

U.S. government and agency securities

 
199,605

 
199,605

Total
$
451,298

 
$
2,208,250

 
$
2,659,548

 
The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis as of December 31, 2019 (in thousands): 
 
Level 1
 
Level 2
 
Total
Cash equivalents:
 
 
 
 
 
Money market funds
$
486,982

 
$

 
$
486,982

Commercial paper

 
86,388

 
86,388

Marketable securities:
 
 
 
 
 
Commercial paper

 
101,490

 
101,490

Corporate notes and bonds

 
1,661,330

 
1,661,330

Certificates of deposit

 
38,045

 
38,045

U.S. government and agency securities

 
127,784

 
127,784

Total
$
486,982

 
$
2,015,037

 
$
2,502,019


 
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 10 for the fair value measurement of our convertible senior notes, which are also not included in the table above.

(5) Business Combinations

On February 6, 2020, we completed an acquisition of a privately-held company, Loom Systems Ltd. (Loom) by acquiring all issued and outstanding shares of Loom for approximately $58.4 million in an all-cash transaction in order to extend our artificial intelligence of IT operations capabilities, providing customers with analytics solution capable of preventing IT incidents before customers are impacted. In allocating the aggregate purchase price based on the estimated fair values, we recorded $17.0 million of developed technology intangible assets (to be amortized over estimated useful lives of five years), $3.9 million of deferred tax liabilities and $39.9 million of goodwill.


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Table of Contents

On February 7, 2020, we completed an acquisition of another privately-held company, Rupert Labs, Inc. d/b/a Passage AI (Passage AI) by acquiring all issued and outstanding shares of Passage AI for approximately $33.2 million in an all-cash transaction in order to advance our deep learning of conversational AI capabilities. This acquisition will enhance the Now Platform and products, including ServiceNow Virtual Agent, Service Portal, and Workspaces by enabling support in multiple languages. In allocating the aggregate purchase price based on the estimated fair values, we recorded $21.5 million of developed technology intangible assets (to be amortized over estimated useful lives of five years), $5.5 million of deferred tax liabilities and $14.8 million of goodwill.

For both business combinations, 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.

Aggregate acquisition-related costs associated with our business combinations are not material for the three months ended March 31, 2020 and are included in general and administrative expenses in our condensed consolidated statement of comprehensive income (loss). 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, 2019
$
156,756

Goodwill acquired
54,635

Foreign currency translation adjustments
(3,786
)
Balance as of March 31, 2020
$
207,605



Intangible assets consist of the following (in thousands):
 
March 31, 2020
 
December 31, 2019
Developed technology
$
214,322

 
$
177,746

Patents
67,730

 
67,730

Other
3,585

 
3,594

Intangible assets, gross
285,637

 
249,070

Less: accumulated amortization
(114,588
)
 
(105,220
)
Intangible assets, net
$
171,049

 
$
143,850


Amortization expense for intangible assets for the three months ended March 31, 2020 and 2019 was approximately $10.3 million and $7.0 million, respectively.

The following table presents the estimated future amortization expense related to intangible assets held at March 31, 2020 (in thousands):
Years Ending December 31,
Remainder of 2020
 
$
32,167

2021
 
40,903

2022
 
35,778

2023
 
33,570

2024
 
20,481

Thereafter
 
8,150

Total future amortization expense
 
$
171,049




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Table of Contents

(7) Property and Equipment
 
Property and equipment, net consists of the following (in thousands):
 
March 31, 2020
 
December 31, 2019
Computer equipment
$
705,922

 
$
680,160

Computer software
60,138

 
59,511

Leasehold and other improvements
125,521

 
125,299

Furniture and fixtures
52,708

 
53,651

Construction in progress
11,871

 
6,830

Property and equipment, gross
956,160

 
925,451

Less: Accumulated depreciation
(485,191
)
 
(457,366
)
Property and equipment, net
$
470,969

 
$
468,085



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, 2020 and 2019 was $50.5 million and $37.1 million, respectively.

(8) Derivative Contracts

As of March 31, 2020 and December 31, 2019, we had foreign currency forward contracts with total notional values of $263.6 million and $358.0 million, respectively, which are not designated as hedging instruments. Our foreign currency contracts are classified within Level 2 as 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 value of these outstanding derivative contracts was as follows (in thousands):
 
Condensed Consolidated Balance Sheet Location
 
March 31, 2020
 
December 31, 2019
Derivative Assets:
 
 
 
 
 
Foreign currency derivative contracts
Prepaid expenses and other current assets
 
$
2,222

 
$
2,237

Derivative Liabilities:
 
 
 
 
 
Foreign currency derivative contracts
Accrued expenses and other current liabilities
 
$
915

 
$
1,362



(9) Deferred Revenue and Performance Obligations

Revenues recognized during the three months ended March 31, 2020 from amounts included in deferred revenue as of December 31, 2019 were $0.8 billion. Revenues recognized during the three months ended March 31, 2019 from amounts included in deferred revenue as of December 31, 2018 were $0.6 billion.

Remaining Performance Obligations

Transaction price allocated to remaining performance obligations (RPO) 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. RPO excludes contracts that are billed in arrears, such as certain time and materials contracts, as we apply the “right to invoice” practical expedient under relevant accounting guidance.

As of March 31, 2020, the total non-cancelable RPO under our contracts with customers was approximately $6.6 billion and we expect to recognize revenues on approximately 51% of these RPO over the following 12 months, with the balance to be recognized thereafter.


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(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.

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 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
 
5,807



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 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 2022 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 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.

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, 2020
 
December 31, 2019
Liability component:
 
 
 
Principal
$
779,962

 
$
782,491

Less: debt issuance cost and debt discount, net of amortization
(78,674
)
 
(87,510
)
Net carrying amount
$
701,288

 
$
694,981


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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 all the quarters ended June 30, 2018 through March 31, 2020, except for the quarter ended December 31, 2018. Therefore, our 2022 Notes became convertible at the holders’ option beginning on July 1, 2018 and continue to be convertible through June 30, 2020, except for the quarter ended March 31, 2019 because the Conversion Condition for the 2022 Notes was not met for the quarter ended December 31, 2018.

During the three months ended March 31, 2020, we paid cash to settle approximately $2.5 million in principal of the 2022 Notes and the loss on the early note conversions was not material. As a result of the settlements, we also recorded a net reduction to additional paid-in capital, reflecting $3.7 million fair value adjustments to the settled conversion option partially offset by a $3.5 million benefit from the 2022 Note Hedge (as defined below).

Based on conversion requests we have received through the filing date, we expect to settle in cash an aggregate of approximately $15.2 million in principal amount of the 2022 Notes during the second quarter of 2020. We may receive additional conversion requests that require settlement in the second quarter of 2020.

We consider the fair value of the 2022 Notes at March 31, 2020 to be a Level 2 measurement. The estimated fair value of the 2022 Notes at March 31, 2020 and December 31, 2019 based on the closing trading price per $100 of the 2022 Notes was as follows (in thousands):
 
March 31, 2020
 
December 31, 2019
2022 Notes
$
1,709,677

 
$
1,645,970


As of March 31, 2020, the remaining life of the 2022 Notes is 26 months. The following table sets forth total interest expense recognized related to the 2022 Notes (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Amortization of debt issuance cost
$
414

 
$
394

Amortization of debt discount
8,156

 
7,774

Total
$
8,570

 
$
8,168

Effective interest rate of the liability component
4.75%

Note Hedge

To minimize the impact of potential economic dilution upon conversion of the 2022 Notes, we entered into convertible note hedge transactions (the 2022 Note Hedge) with certain investment banks, with respect to our common stock concurrently with the issuance of the 2022 Notes.
 
Purchase
 
Initial Shares
 
Shares as of
March 31, 2020
 
 
 
 
 
 
 
(in thousands)
2022 Note Hedge
$
128,017

 
5,807

 
5,788




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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, 2020
 
(in thousands)
 
(in thousands)
 
 
 
 
 
(in thousands)
2022 Warrants
$
54,071

 
5,807

 
$
203.40

 
September 1, 2022
 
5,807



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). If the average market value per share of our common stock for the reporting period, as measured under the 2022 Warrants, exceeds the strike price of the respective 2022 Warrants, such 2022 Warrants would have a dilutive effect on our earnings per share to the extent we report net income. The 2022 Warrants are separate transactions and are not remeasured through earnings each reporting period. The 2022 Warrants are not part of the 2022 Notes or 2022 Note Hedge.

According to the terms, the 2022 Warrants will be net share settled and automatically exercised over a 60 trading day period beginning on the first expiration date as set forth above based on the daily volume-weighted average stock prices over the same 60 trading day period . 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, 2020, the total number of shares of our common stock to be issued upon the automatic exercise of the 2022 Warrants would be approximately 1.7 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.

In November 2013, we issued $575.0 million of 0% convertible senior notes, which were earlier converted prior to and cash settled on November 1, 2018, in accordance with their terms. The related warrant transactions with certain investment banks (the 2018 Warrants) were net share settled based on the daily volume-weighted average stock prices over a 60 trading day period beginning on the first expiration date, February 1, 2019. According to the terms of the 2018 Warrants, 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 additional shares of our common stock upon the automatic exercise of the remaining 2018 Warrants during the second quarter of 2019. The 2018 Warrants were no longer outstanding as of the second quarter of 2019. 

(11) Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), net of tax, consist of the following (in thousands):
 
March 31, 2020
 
December 31, 2019
 
 
 
 
Foreign currency translation adjustment
$
491

 
$
20,884

Net unrealized gain (loss) on investments, net of tax
(14,871
)
 
4,371

        Accumulated other comprehensive income (loss)
$
(14,380
)
 
$
25,255



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


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Table of Contents

(12) Stockholders' Equity

Common Stock

We are authorized to issue 600.0 million shares of common stock as of March 31, 2020. Holders of our common stock are not entitled to receive dividends unless declared by our board of directors. As of March 31, 2020, we had 190.7 million shares of common stock outstanding and had reserved shares of common stock for future issuance as follows (in thousands): 
 
March 31, 2020
Stock plans:
 
Options outstanding
994

RSUs(1)
10,082

Shares of common stock available for future grants:
 
2012 Equity Incentive Plan(2)
27,480

2012 Employee Stock Purchase Plan(2)
9,927

Total shares of common stock reserved for future issuance
48,483


(1)
Represents the number of shares issuable upon settlement of outstanding restricted stock units (RSUs) and performance-based RSUs, assuming 100% of the target number of shares for performance-based 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, 2020 and 2019, we issued a total of 1.2 million shares and 1.9 million shares, respectively, from stock option exercises, vesting of RSUs, net of employee payroll taxes, and purchases from the employee stock purchase plan (ESPP). In addition, 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 until January 1, 2022, 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 years ending December 31, 2020 and 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, 2020 was as follows:
 
Number of
Shares
 
Weighted-
Average
Exercise
Price Per Share
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic Value
 
(in thousands)
 
 
 
(in years)
 
(in thousands)
Outstanding at December 31, 2019
1,154

 
$
77.70

 
 
 
 
Exercised
(149
)
 
$
28.47

 
 
 
$
44,465

Canceled
(11
)
 
$
75.77

 
 
 
 
Outstanding at March 31, 2020
994

 
$
85.08

 
5.2
 
$
200,386

Vested and expected to vest as of March 31, 2020
964

 
$
79.67

 
5.1
 
$
199,465

Vested and exercisable as of March 31, 2020
783

 
$
47.79

 
4.2
 
$
187,073

 
Aggregate intrinsic value represents the difference between the estimated fair value of our common stock and the exercise price of outstanding, in-the-money options. The total fair value of stock options vested during the three months ended March 31, 2020 was $0.8 million.

As of March 31, 2020, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options was approximately $15.3 million. The weighted-average remaining vesting period of unvested stock options at March 31, 2020 was 4.4 years.


17


RSUs

A summary of RSU activity for the three months ended March 31, 2020 was as follows:
 
Number of
Shares
 
Weighted-Average Grant-Date Fair Value
Per Share
 
Aggregate
Intrinsic Value
 
(in thousands)
 
 
 
(in thousands)
Outstanding at December 31, 2019
8,733

 
$
185.39

 
 
Granted
2,810

 
$
352.87

 
 
Vested
(1,183
)
 
$
151.19

 
$
411,813

Forfeited
(278
)
 
$
199.48

 
 
Outstanding at March 31, 2020
10,082

 
$
235.99

 
$
2,889,333



RSUs outstanding as of March 31, 2020 were comprised of 9.4 million RSUs with only service conditions and 0.7 million RSUs with both service conditions and performance conditions. RSUs granted with only service vesting criteria under the 2012 Plan to employees generally vest over a four-year period.

Performance-based RSUs (PRSUs) with both service and performance-based vesting criteria are considered as eligible to vest when approved by the compensation committee of our board of directors in January of the year following the grant. The ultimate number of shares eligible to vest for PRSUs range from 0% to 180% of the target number of shares depending on achievement relative to the performance metric over the applicable period. The eligible shares subject to PRSUs granted during the three months ended March 31, 2020 will vest 33% in February 2021 and continue to vest quarterly for the remaining two subsequent years, contingent on each holder’s continuous status as a service provider on the applicable vesting dates. The number of PRSUs granted shown in the table above reflects the shares that could be eligible to vest at 100% of target for PRSUs and includes adjustments for over or under achievement for PRSUs granted in the prior year. We recognized $13.7 million and $22.6 million of stock-based compensation, net of actual and estimated forfeitures, associated with PRSUs on a graded vesting basis during the three months ended March 31, 2020 and 2019, respectively.

As of March 31, 2020, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs was approximately $1.8 billion and the weighted-average remaining vesting period was 3.2 years.


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Table of Contents

(14)  Net Income (Loss) Per Share
 
Basic net income (loss) per share attributable to common stockholders is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, adjusted for the effects of dilutive shares of common stock, which are comprised of outstanding stock options, RSUs, ESPP obligations, the 2022 Notes, the 2022 Warrants and the 2018 Warrants. Stock awards with performance conditions are included in dilutive shares to the extent the performance condition is met. The dilutive potential shares of common stock are computed using the treasury stock method or the as-if converted method, as applicable. The effects of outstanding stock options, RSUs, ESPP obligations, Notes and Warrants are excluded from the computation of diluted net income (loss) per share in periods in which the effect would be antidilutive.

The following tables present the calculation of basic and diluted net income (loss) per share attributable to common stockholders (in thousands, except per share data):
 
Three Months Ended March 31,
 
2020
 
2019
Numerator:
 
 
 
Net income (loss)
$
48,231

 
$
(1,545
)
Denominator:
 
 
 
Weighted-average shares outstanding - basic
190,163

 
182,062

Weighted-average effect of potentially dilutive securities:
 
 
 
Common stock options
756