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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
☒ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2021
OR
| | | | | |
☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 001-35580
SERVICENOW, INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Delaware | | 20-2056195 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
ServiceNow, Inc.
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)
Not Applicable
(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 | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2021, there were approximately 198.1 million shares of the Registrant’s Common Stock outstanding.
TABLE OF CONTENTS
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PART I
ITEM 1. FINANCIAL STATEMENTS
SERVICENOW, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
(unaudited)
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 1,362 | | | $ | 1,677 | |
Short-term investments | 1,622 | | | 1,415 | |
Accounts receivable, net | 781 | | | 1,009 | |
Current portion of deferred commissions | 255 | | | 229 | |
Prepaid expenses and other current assets | 205 | | | 192 | |
Total current assets | 4,225 | | | 4,522 | |
Deferred commissions, less current portion | 494 | | | 444 | |
Long-term investments | 1,350 | | | 1,468 | |
Property and equipment, net | 732 | | | 660 | |
Operating lease right-of-use assets | 466 | | | 454 | |
Intangible assets, net | 310 | | | 153 | |
Goodwill | 793 | | | 241 | |
Deferred tax assets | 665 | | | 673 | |
Other assets | 152 | | | 100 | |
Total assets | $ | 9,187 | | | $ | 8,715 | |
Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 98 | | | $ | 34 | |
Accrued expenses and other current liabilities | 608 | | | 668 | |
Current portion of deferred revenue | 3,023 | | | 2,963 | |
Current portion of operating lease liabilities | 80 | | | 72 | |
Current debt, net | 99 | | | — | |
Total current liabilities | 3,908 | | | 3,737 | |
Deferred revenue, less current portion | 49 | | | 45 | |
Operating lease liabilities, less current portion | 427 | | | 423 | |
Long-term debt, net | 1,483 | | | 1,640 | |
Other long-term liabilities | 45 | | | 36 | |
Total liabilities | 5,912 | | | 5,881 | |
Commitments and contingencies | | | |
Stockholders’ equity: | | | |
Common stock | — | | | — | |
Additional paid-in capital | 3,298 | | | 2,974 | |
Accumulated other comprehensive income | 70 | | | 94 | |
Accumulated deficit | (93) | | | (234) | |
Total stockholders’ equity | 3,275 | | | 2,834 | |
Total liabilities and stockholders’ equity | $ | 9,187 | | | $ | 8,715 | |
See accompanying notes to condensed consolidated financial statements
SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions, except number of shares which are reflected in thousands and per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Revenues: | | | | | | | |
Subscription | $ | 1,330 | | | $ | 1,015 | | | $ | 2,623 | | | $ | 2,010 | |
Professional services and other | 79 | | | 56 | | | 146 | | | 107 | |
Total revenues | 1,409 | | | 1,071 | | | 2,769 | | | 2,117 | |
Cost of revenues(1): | | | | | | | |
Subscription | 248 | | | 172 | | | 476 | | | 332 | |
Professional services and other | 81 | | | 61 | | | 152 | | | 124 | |
Total cost of revenues | 329 | | | 233 | | | 628 | | | 456 | |
Gross profit | 1,080 | | | 838 | | | 2,141 | | | 1,661 | |
Operating expenses(1): | | | | | | | |
Sales and marketing | 557 | | | 426 | | | 1,081 | | | 867 | |
Research and development | 333 | | | 245 | | | 647 | | | 472 | |
General and administrative | 139 | | | 104 | | | 265 | | | 210 | |
| | | | | | | |
Total operating expenses | 1,029 | | | 775 | | | 1,993 | | | 1,549 | |
Income from operations | 51 | | | 63 | | | 148 | | | 112 | |
Interest expense | (7) | | | (8) | | | (14) | | | (17) | |
Other income, net | 6 | | | 7 | | | 15 | | | 15 | |
Income before income taxes | 50 | | | 62 | | | 149 | | | 110 | |
Provision for (benefit from) income taxes | (9) | | | 21 | | | 8 | | | 21 | |
Net income | $ | 59 | | | $ | 41 | | | $ | 141 | | | $ | 89 | |
| | | | | | | |
Net income per share - basic | $ | 0.30 | | | $ | 0.21 | | | $ | 0.71 | | | $ | 0.47 | |
Net income per share - diluted | $ | 0.29 | | | $ | 0.20 | | | $ | 0.70 | | | $ | 0.44 | |
| | | | | | | |
Weighted-average shares used to compute net income per share - basic | 197,815 | | | 191,319 | | | 197,216 | | | 190,731 | |
Weighted-average shares used to compute net income per share - diluted | 202,273 | | | 201,453 | | | 202,348 | | | 200,843 | |
Other comprehensive income: | | | | | | | |
Foreign currency translation adjustments | $ | 14 | | | $ | 18 | | | $ | (17) | | | $ | (2) | |
Unrealized gain (loss) on investments, net of tax | — | | | 27 | | | (7) | | | 7 | |
Other comprehensive income (loss) | 14 | | | 45 | | | (24) | | | 5 | |
Comprehensive income | $ | 73 | | | $ | 86 | | | $ | 117 | | | $ | 94 | |
(1)Includes stock-based compensation as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Cost of revenues: | | | | | | | |
Subscription | $ | 33 | | | $ | 25 | | | $ | 62 | | | $ | 46 | |
Professional services and other | 15 | | | 13 | | | 28 | | | 25 | |
Operating expenses: | | | | | | | |
Sales and marketing | 99 | | | 79 | | | 192 | | | 149 | |
Research and development | 98 | | | 70 | | | 186 | | | 129 | |
General and administrative | 37 | | | 30 | | | 70 | | | 56 | |
See accompanying notes to condensed consolidated financial statements
SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions, except number of shares which are reflected in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 | | Three Months Ended June 30, 2020 |
| Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity |
| Shares | | Amount | | | Shares | | Amount | |
Balance at beginning of the period | 197,447 | | | $ | — | | | $ | 3,133 | | | $ | (152) | | | $ | 56 | | | $ | 3,037 | | | 190,700 | | | $ | — | | | $ | 2,585 | | | $ | (304) | | | $ | (15) | | | $ | 2,266 | |
Common stock issued under employee stock plans | 688 | | | — | | | 1 | | | — | | | — | | | 1 | | | 1,101 | | | — | | | 24 | | | — | | | — | | | 24 | |
Taxes paid related to net share settlement of equity awards | — | | | — | | | (124) | | | — | | | — | | | (124) | | | — | | | — | | | (113) | | | — | | | — | | | (113) | |
Stock-based compensation | — | | | — | | | 282 | | | — | | | — | | | 282 | | | — | | | — | | | 217 | | | — | | | — | | | 217 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Shares granted related to business combination | — | | | — | | | 6 | | | — | | | — | | | 6 | | | — | | | — | | | — | | | — | | | — | | | — | |
Settlement of 2022 Notes conversion feature | — | | | — | | | (89) | | | — | | | — | | | (89) | | | — | | | — | | | (19) | | | — | | | — | | | (19) | |
Benefit from exercise of 2022 Note Hedge | — | | | — | | | 89 | | | — | | | — | | | 89 | | | — | | | — | | | 18 | | | — | | | — | | | 18 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 14 | | | 14 | | | — | | | — | | | — | | | — | | | 45 | | | 45 | |
Net income | | | — | | | | | 59 | | | | | 59 | | | — | | | — | | | — | | | 41 | | | — | | | 41 | |
Balance at end of the period | 198,135 | | | $ | — | | | $ | 3,298 | | | $ | (93) | | | $ | 70 | | | $ | 3,275 | | | 191,801 | | | $ | — | | | $ | 2,712 | | | $ | (263) | | | $ | 30 | | | $ | 2,479 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 | | Six Months Ended June 30, 2020 |
| Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity |
| Shares | | Amount | | | Shares | | Amount | |
Balance at beginning of the period | 195,845 | | | $ | — | | | $ | 2,974 | | | $ | (234) | | | $ | 94 | | | $ | 2,834 | | | $ | 189,461 | | | $ | — | | | $ | 2,455 | | | $ | (352) | | | $ | 25 | | | $ | 2,128 | |
Common stock issued under employee stock plans | 1,754 | | | — | | | 95 | | | — | | | — | | | 95 | | | 2,340 | | | — | | | 91 | | | — | | | — | | | 91 | |
Taxes paid related to net share settlement of equity awards | — | | | — | | | (315) | | | — | | | — | | | (315) | | | — | | | — | | | (239) | | | — | | | — | | | (239) | |
Stock-based compensation | | | — | | | 538 | | | — | | | — | | | 538 | | | — | | | — | | | 406 | | | — | | | — | | | 406 | |
Shares granted related to business combination | — | | | — | | | 6 | | | — | | | — | | | 6 | | | — | | | — | | | — | | | — | | | — | | | — | |
Settlement of 2022 Warrants | 536 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Settlement of 2022 Notes conversion feature | — | | | — | | | (191) | | | — | | | — | | | (191) | | | — | | | — | | | (23) | | | — | | | — | | | (23) | |
Benefit from exercise of 2022 Note Hedge | — | | | — | | | 191 | | | — | | | — | | | 191 | | | — | | | — | | | 22 | | | — | | | — | | | 22 | |
Other comprehensive income (loss), net of tax | — | | | — | | | — | | | — | | | (24) | | | (24) | | | — | | | — | | | — | | | — | | | 5 | | | 5 | |
Net income | — | | | — | | | — | | | 141 | | | — | | | 141 | | | — | | | — | | | — | | | 89 | | | — | | | 89 | |
Balance at end of the period | 198,135 | | | $ | — | | | $ | 3,298 | | | $ | (93) | | | $ | 70 | | | $ | 3,275 | | | $ | 191,801 | | | $ | — | | | $ | 2,712 | | | $ | (263) | | | $ | 30 | | | $ | 2,479 | |
See accompanying notes to condensed consolidated financial statements
SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
Cash flows from operating activities: | | | |
Net income | $ | 141 | | | $ | 89 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 221 | | | 159 | |
| | | |
Amortization of deferred commissions | 136 | | | 101 | |
| | | |
Stock-based compensation | 537 | | | 405 | |
Deferred income taxes | (16) | | | (3) | |
| | | |
Repayments of convertible senior notes attributable to debt discount | (13) | | | (2) | |
| | | |
| | | |
Other | 22 | | | 16 | |
Changes in operating assets and liabilities, net of effect of business combinations: | | | |
Accounts receivable | 224 | | | 200 | |
Deferred commissions | (217) | | | (144) | |
Prepaid expenses and other assets | (57) | | | (32) | |
Accounts payable | 75 | | | 38 | |
Deferred revenue | 85 | | | 69 | |
Accrued expenses and other liabilities | (111) | | | (36) | |
Net cash provided by operating activities | 1,027 | | | 860 | |
Cash flows from investing activities: | | | |
Purchases of property and equipment | (198) | | | (194) | |
Business combinations, net of cash acquired | (738) | | | (83) | |
| | | |
Purchases of investments | (1,139) | | | (1,108) | |
| | | |
| | | |
| | | |
Sales and maturities of investments | 1,023 | | | 766 | |
| | | |
Other | 1 | | | (9) | |
Net cash used in investing activities | (1,051) | | | (628) | |
Cash flows from financing activities: | | | |
| | | |
| | | |
Repayments of convertible senior notes attributable to principal | (53) | | | (16) | |
| | | |
| | | |
| | | |
| | | |
| | | |
Proceeds from employee stock plans | 95 | | | 91 | |
Taxes paid related to net share settlement of equity awards | (315) | | | (239) | |
| | | |
Net cash used in financing activities | (273) | | | (164) | |
Foreign currency effect on cash, cash equivalents and restricted cash | (11) | | | (5) | |
Net change in cash, cash equivalents and restricted cash | (308) | | | 63 | |
Cash, cash equivalents and restricted cash at beginning of period | 1,679 | | | 778 | |
Cash, cash equivalents and restricted cash at end of period | $ | 1,371 | | | $ | 841 | |
Cash, cash equivalents and restricted cash at end of period: | | | |
Cash and cash equivalents | $ | 1,362 | | | $ | 837 | |
Restricted cash included in prepaid expenses and other current assets | 9 | | | 4 | |
| | | |
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows | $ | 1,371 | | | $ | 841 | |
Supplemental disclosures of other cash flow information: | | | |
Interest paid | $ | 15 | | | $ | — | |
Income taxes paid, net of refunds | 20 | | | 10 | |
Non-cash investing and financing activities: | | | |
Settlement of 2022 Notes conversion feature | $ | 191 | | | $ | 23 | |
| | | |
Benefit from exercise of 2022 Note Hedge | 191 | | | 22 | |
Property and equipment included in accounts payable and accrued expenses | 49 | | | 95 | |
| | | |
| | | |
| | | |
See accompanying notes to condensed consolidated financial statements
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 want the technology they use in their work to be more efficient and easier to use. We build applications to meet that demand by automating existing processes and creating efficient, digitized workflows with a consumer grade user experience. Our products and services enable the steps of a job to flow naturally across disparate departments, systems and processes of a business. ServiceNow delivers digital workflows on a single enterprise cloud platform called the Now Platform®. Our product portfolio is currently focused on providing Information Technology (“IT”), Employee and Customer workflows in standardized product offerings. We also enable our customers to design and build their own custom workflow applications using our Creator workflows, formerly called the Now Platform App Engine, and to integrate those applications with third party systems through our Integration Hub.
(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. As a result of displaying amounts in millions, rounding differences may exist in the consolidated financial statements and footnote tables. The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021 or for other interim periods or future years. The condensed consolidated balance sheet as of December 31, 2020 is derived from audited consolidated 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, 2020, which was filed with the SEC on February 12, 2021.
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 condensed 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, standalone selling price for each distinct performance obligation included in customer contracts with multiple performance obligations, the period of benefit for deferred commissions, valuation of intangible assets, the useful life of property and equipment and identifiable intangible assets, stock-based compensation expense and income taxes. Actual results could differ from those estimates. We assessed the impact of COVID-19 on the estimates and assumptions and determined there was no material impact.
Significant Accounting Policies
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, 2020, which was filed with the SEC on February 12, 2021.
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 June 30, 2021, we had one customer, a channel partner, that represented 14% of our accounts receivable and no customers that individually exceeded 10% of our total revenues in any of the periods presented. As of December 31, 2020, there were no customers that represented more than 10% of our accounts receivable balance. 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.
Accounting Pronouncement Adopted in 2021
Income taxes
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2019-12, “Income Taxes (“Topic 740”): Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and amending existing guidance to improve consistent application. 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 adopted this standard on a prospective basis as of January 1, 2021. The adoption of this standard did not result in any material impact on our condensed consolidated financial statements upon adoption.
Recently Issued Accounting Pronouncement Pending Adoption
Debt with Conversion Options
In August 2020, the FASB issued new guidance to simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The standard eliminates beneficial conversion feature and cash conversion models resulting in more convertible instruments being accounted for as a single unit; and simplifies classification of debt on the balance sheet and earnings per share calculation. This new standard is effective for our interim and annual periods beginning January 1, 2022 and earlier adoption is permitted. Amendments within this standard are required to 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.
(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 millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Available-for-sale securities: | | | | | | | |
Commercial paper | $ | 430 | | | $ | — | | | $ | — | | | $ | 430 | |
Corporate notes and bonds | 2,324 | | | 5 | | | (1) | | | 2,328 | |
Certificates of deposit | 61 | | | — | | | — | | | 61 | |
U.S. government and agency securities | 107 | | | — | | | — | | | 107 | |
Mortgage and asset backed securities | 47 | | | — | | | (1) | | | 46 | |
| | | | | | | |
Total available-for-sale securities | $ | 2,969 | | | $ | 5 | | | $ | (2) | | | $ | 2,972 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Available-for-sale securities: | | | | | | | |
Commercial paper | $ | 406 | | | $ | — | | | $ | — | | | $ | 406 | |
Corporate notes and bonds | 2,298 | | | 10 | | | — | | | 2,308 | |
Certificates of deposit | 23 | | | — | | | — | | | 23 | |
U.S. government and agency securities | 145 | | | 1 | | | — | | | 146 | |
Total available-for-sale securities | $ | 2,872 | | | $ | 11 | | | $ | — | | | $ | 2,883 | |
As of June 30, 2021, 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 and mortgage and asset backed securities that do not have a single maturity, did not exceed 36 months. The fair values of available-for-sale securities, by remaining contractual maturity, are as follows (in millions):
| | | | | |
| June 30, 2021 |
Due within 1 year | $ | 1,622 | |
Due in 1 year through 5 years | 1,304 | |
Instruments not due in single maturity | 46 | |
Total | $ | 2,972 | |
As of June 30, 2021 and December 31, 2020, the gross unrealized losses that have been in a continuous unrealized loss position related to $875 million and $637 million available-for-sale debt securities, respectively, were not material.
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 credit-related impairment losses were not deemed material as of June 30, 2021.
Strategic Investments
As of June 30, 2021 and December 31, 2020, the total amount of equity investments in privately-held companies included in other assets on our condensed consolidated balance sheets was $44 million and $28 million, respectively. We classify these assets as Level 3 within the fair value hierarchy as only an impairment or observable adjustment is recognized 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.
(4) Fair Value Measurements
The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis as of June 30, 2021 (in millions):
| | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | | | Total |
Cash equivalents: | | | | | | | |
Money market funds | $ | 561 | | | $ | — | | | | | $ | 561 | |
Commercial paper | — | | | 48 | | | | | 48 | |
| | | | | | | |
| | | | | | | |
Deposits | 140 | | | — | | | | | 140 | |
U.S. government and agency securities | — | | | 53 | | | | | 53 | |
Marketable securities: | | | | | | | |
Commercial paper | — | | | 430 | | | | | 430 | |
Corporate notes and bonds | — | | | 2,328 | | | | | 2,328 | |
Certificates of deposit | — | | | 61 | | | | | 61 | |
U.S. government and agency securities | — | | | 107 | | | | | 107 | |
Mortgage and asset backed securities | — | | | 46 | | | | | 46 | |
| | | | | | | |
Total | $ | 701 | | | $ | 3,073 | | | | | $ | 3,774 | |
The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis as of December 31, 2020 (in millions):
| | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Total |
Cash equivalents: | | | | | |
Money market funds | $ | 1,305 | | | $ | — | | | $ | 1,305 | |
| | | | | |
| | | | | |
| | | | | |
U.S. government and agency securities | — | | | 2 | | | 2 | |
Marketable securities: | | | | | |
Commercial paper | — | | | 406 | | | 406 | |
Corporate notes and bonds | — | | | 2,308 | | | 2,308 | |
Certificates of deposit | — | | | 23 | | | 23 | |
U.S. government and agency securities | — | | | 146 | | | 146 | |
| | | | | |
Total | $ | 1,305 | | | $ | 2,885 | | | $ | 4,190 | |
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 long-term debt, which are also not included in the table above.
(5) Business Combinations
On January 8, 2021, we acquired all outstanding stock of Element AI Inc., a leading enterprise artificial intelligence (“AI”) solution provider for $228 million in an all-cash transaction. The purchase price was preliminarily allocated based on the estimated fair value of developed technology intangible asset of $85 million (five-year estimated useful life), net tangible assets of $16 million and goodwill of $126 million, which is partially deductible for income tax purposes. We established an unrecognized tax benefit of $43 million on pre-acquisition net operating loss carryforwards and other tax attributes. Goodwill is primarily attributed to the assembled workforce and expanded market opportunities.
On June 15, 2021, we acquired LightStep Inc., a leading observability solution provider for $512 million in a cash transaction. The purchase price was preliminarily allocated based on the estimated fair value of developed technology intangible asset of $85 million (five-year estimated useful life), customer related and brand assets of $11 million, net tangible assets of $8 million, deferred tax liabilities of $6 million and goodwill of $413 million, which is not deductible for income tax purposes. Goodwill is primarily attributed to the assembled workforce and expanded market opportunities.
The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions and may be subject to change as additional information is received. The provisional measurements of fair value for income taxes payable and deferred taxes may be subject to change as additional information is received and certain tax returns are finalized. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
On April 16, 2021, we also acquired all outstanding stock of Uber Techlabs Private Limited, d/b/a Intellibot, a robotic process automation solution provider in an all-cash transaction. The purchase price was allocated based on the estimated fair value of developed technology intangible asset, net tangible assets and goodwill, which is not deductible for income tax purposes.
We have included the financial results of business combinations in the condensed consolidated financial statements from the respective dates of acquisition, which were not material. Pro forma revenue and earnings amounts on a combined basis have not been presented as it is impracticable due to the lack of availability of historical financial statements that comply with GAAP. Aggregate acquisition-related costs associated with business combinations are not material for the three and six months ended June 30, 2021 and 2020, respectively, and are included in general and administrative expenses in our condensed consolidated statements of comprehensive income as incurred.
(6) Goodwill and Intangible Assets
Goodwill balances are presented below (in millions):
| | | | | |
| Carrying Amount |
Balance as of December 31, 2020 | $ | 241 | |
Goodwill acquired | 551 | |
Foreign currency translation adjustments | 1 | |
Balance as of June 30, 2021 | $ | 793 | |
Intangible assets consist of the following (in millions):
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Developed technology | $ | 403 | | | $ | 226 | |
Patents | 62 | | | 65 | |
Other | 15 | | | 3 | |
Intangible assets, gross | 480 | | | 294 | |
Less: accumulated amortization | (170) | | | (141) | |
Intangible assets, net | $ | 310 | | | $ | 153 | |
The weighted-average useful life for the developed technology acquired during the six months ended June 30, 2021 and June 30, 2020 was approximately five years, respectively.
Amortization expense for intangible assets for the three months ended June 30, 2021 and 2020 was $16 million and $15 million, respectively, and for the six months ended June 30, 2021 and 2020 was $33 million and $25 million, respectively.
The following table presents the estimated future amortization expense related to intangible assets held at June 30, 2021 (in millions):
| | | | | | | | | | | | | | | | | |
Years Ending December 31, |
Remainder of 2021 | | $ | 40 | |
2022 | | 78 | |
2023 | | 71 | |
2024 | | 64 | |
2025 | | 42 | |
Thereafter | | 15 | |
Total future amortization expense | | $ | 310 | |
(7) Property and Equipment
Property and equipment, net consists of the following (in millions):
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Computer equipment | $ | 1,104 | | | $ | 974 | |
Computer software | 77 | | | 72 | |
Leasehold and other improvements | 183 | | | 168 | |
Furniture and fixtures | 70 | | | 69 | |
| | | |
Construction in progress | 12 | | | 9 | |
Property and equipment, gross | 1,446 | | | 1,292 | |
Less: Accumulated depreciation | (714) | | | (632) | |
Property and equipment, net | $ | 732 | | | $ | 660 | |
Construction in progress consists primarily of leasehold and other improvements and in-process software development costs. Depreciation expense for the three months ended June 30, 2021 and 2020 was $78 million and $51 million, respectively, and for the six months ended June 30, 2021 and 2020 was $149 million and $102 million, respectively.
(8) Derivative Contracts
As of June 30, 2021 and December 31, 2020, we had foreign currency forward contracts with total notional values of $555 million and $583 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 millions):
| | | | | | | | | | | | | | | | | |
| Condensed Consolidated Balance Sheet Location | | June 30, 2021 | | December 31, 2020 |
Derivative Assets: | | | | | |
Foreign currency derivative contracts | Prepaid expenses and other current assets | | $ | 8 | | | $ | 8 | |
Derivative Liabilities: | | | | | |
Foreign currency derivative contracts | Accrued expenses and other current liabilities | | $ | 3 | | | $ | 10 | |
(9) Deferred Revenue and Performance Obligations
Revenues recognized during the three months ended June 30, 2021 from amounts included in deferred revenue as of March 31, 2021 were $1.2 billion. Revenues recognized during the three months ended June 30, 2020 from amounts included in deferred revenue as of March 31, 2020 were $0.9 billion.
Revenues recognized during the six months ended June 30, 2021 from amounts included in deferred revenue as of December 31, 2020 were $2.0 billion. Revenues recognized during the six months ended June 30, 2020 from amounts included in deferred revenue as of December 31, 2019 were $1.5 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 June 30, 2021, the total non-cancelable RPO under our contracts with customers was $9.5 billion and we expect to recognize revenues on approximately 50% of these RPO over the following 12 months, with the balance to be recognized thereafter.
(10) Debt
The following table summarizes the carrying value of our outstanding debt (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
| 2030 Notes | | 2022 Notes | | 2030 Notes | | 2022 Notes |
Current, net of unamortized debt discount and issuance costs of $5 million | — | | | 99 | | — | | | — | |
Long-term, net of unamortized debt discount and issuance costs of $17 million and $29 million, respectively | 1,483 | | | — | | | 1,482 | | | 158 | |
Total debt | $ | 1,483 | | | $ | 99 | | | $ | 1,482 | | | $ | 158 | |
Effective interest rate of the liability component - 2022 Notes | 4.75% |
Effective interest rate - 2030 Notes | 1.53% |
The effective interest rates for the 2030 Notes and 2022 Notes include interest payable, amortization of debt issuance cost and amortization of debt discount, as applicable.
We consider the fair value of the 2030 Notes and 2022 Notes at June 30, 2021 to be a Level 2 measurement. The estimated fair value of the 2030 Notes and 2022 Notes at June 30, 2021 and December 31, 2020 is based on the closing trading price per $100 of the 2030 Notes and 2022 Notes were as follows (in millions):
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
2022 Notes | $ | 425 | | | $ | 687 | |
2030 Notes | $ | 1,405 | | | $ | 1,463 | |
| | | |
2030 Notes
In August 2020, we issued 1.40% fixed rate ten-year notes with an aggregate principal amount of $1.5 billion due on September 1, 2030 (the “2030 Notes”). The 2030 Notes were issued at 99.63% of principal and we incurred approximately $13 million for debt issuance costs. Interest is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2021, and the entire outstanding principal amount is due at maturity on September 1, 2030. The 2030 Notes are unsecured obligations and the indentures governing the 2030 Notes contain customary events of default and covenants that, among others and subject to exceptions, restrict the Company’s ability to incur or guarantee debt secured by liens on specified assets or enter into sale and lease-back transactions with respect to specified properties.
2022 Notes
In May and June 2017, we issued an aggregate of $782.5 million of 0% convertible senior notes (the “2022 Notes”), which are due June 1, 2022 unless earlier converted or repurchased in accordance with their terms. 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. In accounting for the issuance of the 2022 Notes and the related transaction costs, we valued and bifurcated the conversion option from the host debt instrument, referred to as debt discount, and recorded the conversion option of $160 million in equity at issuance. The resulting debt discount and transactions costs allocated to the liability component are amortized to interest expense using the effective interest method over the term of the 2022 Notes.
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 (in millions) |
2022 Notes | February 1, 2022 | | $ | 134.75 | | | 7.42 shares | | 6 | |
| | | | | | | |
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 2022 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.
For conversion requests received prior to maturity, the difference between the fair value and the amortized book value is recorded as a gain or loss on early note conversion.
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 2022 Notes at any time prior to the close of business on the second scheduled trading day immediately preceding maturity, regardless of the foregoing conditions, and such conversions will settle upon maturity. 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.
The Conversion Condition for the 2022 Notes was met for all the quarters ended June 30, 2018 through June 30, 2021, 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 September 30, 2021, 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 six months ended June 30, 2021, we paid cash to settle $65 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 $89 million fair value adjustments to the settled conversion option partially offset by a $89 million benefit from the 2022 Note Hedge (as defined below).
Based on conversion requests received through the filing date, we expect to settle in cash an aggregate of approximately $8 million in principal amount of the 2022 Notes during the third quarter of 2021. We may receive additional conversion requests that require settlement in the third quarter of 2021 and future periods.
Repurchase of 2022 Notes
On August 11, 2020, we repurchased $497 million in aggregate principal amount of the 2022 Notes (the “2022 Notes Repurchase”) funded in part by the $1.1 billion proceeds received from the partial unwind of the 2022 Note Hedge (as defined below). The 2022 Notes Repurchase was accounted for as a debt extinguishment in which $493 million and $1.1 billion were allocated to the liability and equity components of the 2022 Notes, respectively. The cash consideration allocated to the liability component was based on the estimated fair value of the liability component utilizing a discount rate assuming a similar liability per the Company’s credit rating with the same maturity, but without the conversion option, as of the repurchase date. The cash consideration allocated to the equity component was based on the aggregate cash consideration less the estimated fair value of the liability component. The loss on extinguishment of $39 million recorded as other income, net, represents the difference between the allocated cash consideration and the carrying value of the liability component, which includes the proportionate amounts of unamortized debt discount and unamortized debt issuance costs in the amount of $43 million.
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 June 30, 2021 |
| | | | | |
| (in millions) |
2022 Note Hedge | $ | 128 | | | 6 | | | 1 | |
| |