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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 

FORM 10-Q
x
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2018
OR
 ¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-35580

snlogo18.jpg
SERVICENOW, INC.
(Exact name of registrant as specified in its charter) 
Delaware
 
20-2056195
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)


ServiceNow, Inc.
2225 Lawson Lane
Santa Clara, California 95054
(408) 501-8550
(Registrant’s telephone number, including area code) 


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
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 x
As of June 30, 2018, there were approximately 177.9 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)

 
June 30, 2018
 
December 31, 2017
 
 
*As Adjusted
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
704,846

 
$
726,495

Short-term investments
1,044,812

 
1,052,803

Accounts receivable, net
367,598

 
437,051

Current portion of deferred commissions
119,068

 
109,643

Prepaid expenses and other current assets
115,305

 
95,959

Total current assets
2,351,629

 
2,421,951

Deferred commissions, less current portion
239,523

 
224,252

Long-term investments
304,629

 
391,442

Property and equipment, net
286,953

 
245,124

Intangible assets, net
87,726

 
86,916

Goodwill
143,007

 
128,728

Other assets
59,417

 
51,832

Total assets
$
3,472,884

 
$
3,550,245

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
30,656

 
$
32,109

Accrued expenses and other current liabilities
273,994

 
253,257

Current portion of deferred revenue
1,320,928

 
1,210,695

Current portion of convertible senior notes, net
211,463

 
543,418

Total current liabilities
1,837,041

 
2,039,479

Deferred revenue, less current portion
44,389

 
36,120

Convertible senior notes, net
645,668

 
630,018

Other long-term liabilities
54,076

 
65,884

Total liabilities
2,581,174

 
2,771,501

Stockholders’ equity:
 
 
 
Common stock
178

 
174

Additional paid-in capital
1,889,727

 
1,731,367

Accumulated other comprehensive (loss) income
(3,995
)
 
5,767

Accumulated deficit
(994,200
)
 
(958,564
)
Total stockholders’ equity
891,710

 
778,744

Total liabilities and stockholders’ equity
$
3,472,884

 
$
3,550,245


*As adjusted to reflect the impact of the full retrospective adoption of Topic 606. See Note 2 for further details.

See accompanying notes to condensed consolidated financial statements

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Table of Contents

SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, except share and per share data)
(unaudited) 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
*As Adjusted
 
 
*As Adjusted
Revenues:
 
 
 
 
 
 
 
Subscription
$
585,282

 
$
402,672

 
$
1,128,607

 
$
790,256

Professional services and other
45,774

 
45,586

 
91,671

 
86,773

Total revenues
631,056

 
448,258

 
1,220,278

 
877,029

Cost of revenues(1):
 
 
 
 
 
 
 
Subscription
101,699

 
75,793

 
197,097

 
146,168

Professional services and other
51,466

 
46,335

 
99,541

 
92,044

Total cost of revenues
153,165

 
122,128

 
296,638

 
238,212

Gross profit
477,891

 
326,130

 
923,640

 
638,817

Operating expenses(1):
 
 
 
 
 
 
 
Sales and marketing
310,869

 
222,393

 
594,570

 
426,132

Research and development
127,916

 
90,005

 
245,184

 
174,494

General and administrative
71,095

 
51,526

 
136,158

 
97,777

Total operating expenses
509,880

 
363,924

 
975,912

 
698,403

Loss from operations
(31,989
)
 
(37,794
)
 
(52,272
)
 
(59,586
)
Interest expense
(15,498
)
 
(11,337
)
 
(32,562
)
 
(20,015
)
Interest income and other income (expense), net
6,638

 
(8,485
)
 
36,625

 
(756
)
Loss before income taxes
(40,849
)
 
(57,616
)
 
(48,209
)
 
(80,357
)
Provision for (benefit from) income taxes
11,897

 
(1,812
)
 
(6,085
)
 
(3,039
)
Net loss
$
(52,746
)
 
$
(55,804
)
 
$
(42,124
)
 
$
(77,318
)
Net loss per share - basic and diluted
$
(0.30
)
 
$
(0.33
)
 
$
(0.24
)
 
$
(0.46
)
Weighted-average shares used to compute net loss per share - basic and diluted
177,343,176

 
170,419,083

 
176,418,984

 
169,585,356

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
6,992

 
$
14,351

 
$
(1,443
)
 
$
17,146

Unrealized gain (loss) on investments, net of tax
1,983

 
524

 
(1,085
)
 
8,107

Other comprehensive income (loss), net of tax
8,975

 
14,875

 
(2,528
)
 
25,253

Comprehensive loss
$
(43,771
)
 
$
(40,929
)
 
$
(44,652
)
 
$
(52,065
)
 
(1)
Includes stock-based compensation as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
*As Adjusted
 
 
*As Adjusted
Cost of revenues:
 
 
 
 
 
 
 
Subscription
$
12,538

 
$
8,942

 
$
23,829

 
$
16,880

Professional services and other
8,342

 
7,617

 
15,903

 
14,492

Sales and marketing
57,069

 
42,287

 
109,151

 
80,688

Research and development
33,780

 
22,731

 
62,378

 
44,532

General and administrative
23,831

 
16,489

 
45,640

 
31,343



 *As adjusted to reflect the impact of the full retrospective adoption of Topic 606. See Note 2 for further details.
 
See accompanying notes to condensed consolidated financial statements

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SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six Months Ended June 30,
 
2018
 
2017
 
 
*As Adjusted
Cash flows from operating activities:
 
 
 
Net loss
$
(42,124
)
 
$
(77,318
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
68,618

 
52,407

Amortization of deferred commissions
64,304

 
43,086

Amortization of debt discount and issuance costs
32,562

 
20,015

Stock-based compensation
256,901

 
187,935

Deferred income tax
(30,926
)
 
(4,751
)
Gain on marketable equity securities
(19,257
)
 
—

Repayments of convertible senior notes attributable to debt discount
(87,557
)
 
—

Other
(1,707
)
 
(2,014
)
Changes in operating assets and liabilities, net of effect of business combinations:
 
 
 
Accounts receivable
65,940

 
55,186

Deferred commissions
(92,995
)
 
(69,947
)
Prepaid expenses and other assets
2,040

 
(3,606
)
Accounts payable
(2,632
)
 
(7,860
)
Deferred revenue
131,089

 
133,416

Accrued expenses and other liabilities
31,720

 
(10,216
)
Net cash provided by operating activities
375,976

 
316,333

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(88,362
)
 
(69,103
)
Business combinations, net of cash and restricted cash acquired
(24,940
)
 
(21,537
)
Purchases of other intangibles
(10,850
)
 
(6,170
)
Purchases of investments
(379,913
)
 
(358,590
)
Sales of investments
39,975

 
77,968

Maturities of investments
453,156

 
221,949

Net cash used in investing activities(1)
(10,934
)
 
(155,483
)
Cash flows from financing activities:
 
 
 
Net proceeds from borrowings on convertible senior notes
—

 
772,127

Repayments of convertible senior notes attributable to principal
(271,185
)
 
—

Proceeds from issuance of warrants
—

 
54,071

Purchases of convertible note hedges
—

 
(128,017
)
Repurchases and retirement of common stock
—

 
(55,000
)
Proceeds from employee stock plans
61,419

 
40,892

Taxes paid related to net share settlement of equity awards
(154,531
)
 
(87,349
)
Payments on financing obligations
(576
)
 
(2,560
)
Net cash (used in) provided by financing activities
(364,873
)
 
594,164

Foreign currency effect on cash, cash equivalents and restricted cash(1)
(7,505
)
 
18,040

Net (decrease) increase in cash, cash equivalents and restricted cash(1)
(7,336
)
 
773,054

Cash, cash equivalents and restricted cash at beginning of period(1)
727,829

 
401,932

Cash, cash equivalents and restricted cash at end of period(1)
$
720,493

 
$
1,174,986

Cash, cash equivalents and restricted cash at end of period:
 
 
 
Cash and cash equivalents
$
704,846

 
$
1,173,457

Current portion of restricted cash included in prepaid expenses and other current assets
5,971

 
1,529

Non-current portion of restricted cash included in other assets
9,676

 
—

Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows
$
720,493

 
$
1,174,986

Non-cash investing and financing activities:
 
 
 
Benefit from 2018 Note Hedges
$
467,176

 
$
—

Property and equipment included in accounts payable and accrued expenses
25,027

 
16,030

Financing obligation for purchases of other intangibles
—

 
2,110



*As adjusted to reflect the impact of the full retrospective adoption of Topic 606. See Note 2 for further details.
(1)
During the three months ended December 31, 2017, we adopted Accounting Standards Update 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires that amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Accordingly, we have recast our prior period condensed consolidated statement of cash flows to conform to the current presentation. The impact of the adoption for the six months ended June 30, 2017 is not material.

See accompanying notes to condensed consolidated financial statements

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SERVICENOW, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
Unless the context requires otherwise, references in this report to “ServiceNow,” the “Company”, “we,” “us,” and “our” refer to ServiceNow, Inc. and its consolidated subsidiaries.

(1)    Description of the Business

ServiceNow is a leading provider of enterprise cloud computing solutions that define, structure, manage and automate services for global enterprises. We help our customers improve service quality and reduce costs while scaling and automating their businesses. We typically deliver our software via the Internet as a service, through an easy-to-use, consumer product-like interface, which means it can be easily configured and rapidly deployed. In a minority of cases, we deploy our software on-premises at a customer data center to support a customer’s unique regulatory or security requirements.

(2)    Summary of Significant Accounting Policies

Basis of Presentation

Effective January 1, 2018, we adopted the Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” as discussed further below in this Note 2. All amounts and disclosures set forth in this Form 10-Q have been updated to comply with the new standards, including previously reported amounts, which are labeled "as adjusted" in these condensed consolidated financial statements and related notes. Certain prior period amounts reported in our condensed consolidated financial statements and notes thereto have been reclassified to conform to the current period 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. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary under GAAP for fair statement of results for the interim periods presented have been included. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for other interim periods or future years. The condensed consolidated balance sheet as of December 31, 2017 is derived from audited financial statements as adjusted to reflect the impact of the full retrospective adoption of Topic 606; 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, 2017, which was filed with the SEC on February 28, 2018.

Principles of Consolidation

The condensed consolidated financial statements have been prepared in conformity with GAAP, and include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.

Use of Estimates
 
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as reported amounts of revenues and expenses during the reporting period. Such management estimates and assumptions include, but are not limited to, the stand-alone selling price (SSP) for each distinct performance obligation included in customer contracts with multiple performance obligations, the period of benefit for deferred commissions, the fair value of assets acquired and liabilities assumed for business combinations, stock-based compensation expenses, the assessment of the useful life and recoverability of our property and equipment, goodwill and identifiable intangible assets, and legal contingencies. Actual results could differ from those estimates.


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Table of Contents

New Accounting Pronouncements Adopted in 2018

Stock-based Compensation

In June 2018, the Financial Accounting Standards Board (FASB) issued ASU No. 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting,” which is intended to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments. Currently, the accounting requirements for nonemployee and employee share-based payment transactions are significantly different. This standard expands the scope of Topic 718 to include share-based payments issued to nonemployees for goods or services, aligning the accounting for share-based payments to nonemployees and employees. This standard is effective for our fiscal year beginning January 1, 2019 and early adoption is permitted. We early adopted this new standard effective January 1, 2018, and the adoption of this standard did not have a material impact on our condensed consolidated financial statements. As this standard was adopted on a prospective basis as of January 1, 2018, the adoption of this standard did not impact our previously reported financial statements for periods ended on or prior to December 31, 2017. The adoption of this standard did not impact our previously reported financial statements for the three months ended March 31, 2018 and 2017.

Income Taxes

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which provides entities the option to reclassify tax effects stranded in accumulated other comprehensive income as a result of the 2017 Tax Cuts and Jobs Act (the Tax Act) to retained earnings. This standard is effective for our fiscal year beginning January 1, 2019 and early adoption is permitted. We early adopted this new standard effective January 1, 2018, with an immaterial amount of cumulative effect adjustment recorded to our accumulated deficit as of January 1, 2018. As this standard was adopted on a modified prospective basis as of January 1, 2018, the adoption of this standard did not impact our previously reported financial statements for periods ended on or prior to December 31, 2017.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts for the 2017 Tax Cuts and Jobs Act (the Tax Act) during a measurement period not to extend beyond one year of the enactment date, with further clarifications made recently with the issuance of ASU 2018-05. Through June 30, 2018, we did not have any significant adjustments to our provisional amounts. In light of the enactment of the Tax Act, we are assessing whether to change our indefinite reinvestment assertion, in which we consider earnings from our foreign operations to be indefinitely reinvested outside of the United States. Under guidance issued by the SEC, we are required to complete our assessment by the end of the measurement period described above. We will continue our analysis of these provisional amounts, which remain subject to change during the measurement period. We anticipate further guidance on accounting interpretations from the FASB and application of the law from the Department of Treasury. We expect to reach a final determination within the measurement period described above.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which includes a revision of the accounting for the income tax consequences of intra-entity transfers of assets other than inventory to reduce the complexity in accounting standards. We adopted this new standard as of January 1, 2018 with an immaterial amount of cumulative effect adjustment recorded to our accumulated deficit as of January 1, 2018. As this standard was adopted on a modified prospective basis as of January 1, 2018, the adoption of this standard did not impact our previously reported financial statements for periods ended on or prior to December 31, 2017.


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Table of Contents

Financial Instruments

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments, with further clarifications made more recently. This new standard requires equity securities to be measured at fair value with changes in fair value recognized through net income, which results in greater variability in our net income. We adopted these new standards as of January 1, 2018 with a cumulative-effect adjustment, net of tax of $7.2 million recorded to our accumulated deficit as of January 1, 2018. This adjustment relates to the unrealized gain on our marketable equity securities as of December 31, 2017, which was previously included in accumulated other comprehensive income (loss) on our condensed consolidated balance sheet. As part of the adoption, we elected to apply the measurement alternative for our non-marketable equity investments that do not have readily determinable fair values, measuring them at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The adoption of these standards did not result in an adjustment for our non-marketable equity investments as our measurement alternative election requires adjustments to be recorded only on a prospective basis. As these standards were adopted on a modified prospective basis as of January 1, 2018, the adoption of these standards did not impact our previously reported financial statements for periods ended on or prior to December 31, 2017.

Revenue from Contracts with Customers

In May 2014, the FASB issued Topic 606, which supersedes the prior revenue recognition standard (Topic 605). Under Topic 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. In addition, this standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer.

The Topic 606 standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application (modified retrospective method). We adopted the requirements of Topic 606 as of January 1, 2018, utilizing a full retrospective method. The most significant impact of the standard relates to the timing of revenue recognition related to our on-premises offerings, in which we grant customers the right to deploy our software on the customer’s own servers without significant penalty, the accounting for incremental costs to obtain a contract, and the classification of proceeds for Knowledge and other user forums as a reduction in sales and marketing expenses instead of as professional services and other revenues. The adoption of Topic 606 resulted in changes to our accounting policies for revenue recognition, unbilled receivables, deferred commissions, deferred revenue and customer deposits as detailed below.

Under Topic 606, for our on-premises offerings, the requirement to have vendor specific objective evidence (VSOE) for undelivered elements was eliminated. As a result, for all periods presented, we have recognized as subscription revenues a portion of the sales price upon delivery of the software, compared to the prior practice under Topic 605 of recognizing the entire sales price ratably over an estimated subscription period due to the lack of VSOE. To the extent the amounts recognized as subscription revenues have not been billed, the revenues are primarily recorded as “unbilled receivables.” In addition, refundable amounts associated with customer contracts are recorded as “customer deposits.”

In addition, under Topic 606, for all periods presented, we have deferred all incremental commission costs to obtain customer contracts, including indirect costs that are not tied to a specific contract, for both our on-premises offerings and our cloud-based subscription offerings. On initial contracts and contracts for increased purchases with existing customers (expansion contracts), these costs are primarily amortized over a period of benefit that we have determined to be five years. On renewal contracts, these costs are amortized over the renewal term. Additionally, for our on-premises offerings, consistent with the recognition of subscription revenue for on-premises offerings as described above, a portion of the commission cost is expensed upfront when the on-premises offering is made available. Our prior practice under Topic 605 was to defer only direct and incremental commission costs to obtain a contract and amortize those costs over the contract term, which is generally 12 to 36 months, for both our on-premises offerings and our cloud-based subscription offerings.

The direct effect on income taxes resulting from the full retrospective adoption of the above-mentioned changes to revenues and commission expenses resulted in a cumulative income tax expense of $23.3 million recorded in the prior periods through December 31, 2017. The indirect tax benefit of Topic 606 on income taxes associated with intercompany adjustments of $23.1 million, or $0.13 per basic and diluted share for the six months ended June 30, 2018, was recorded in the first quarter of adoption during the three months ended March 31, 2018.


6
Table of Contents

The table below provides specified line items from our condensed consolidated balance sheet (i) as previously reported and (ii) as adjusted to reflect the impact of the full retrospective adoption of Topic 606 (in thousands):
 
Year Ended December 31, 2017
 
As Previously Reported
 
As Adjusted
 
 
 
 
Assets
 
 
 
Accounts receivable, net
$
434,895

 
$
437,051

Current portion of deferred commissions
118,690

 
109,643

Prepaid expenses and other current assets
77,681

 
95,959

Deferred commissions, less current portion
85,530

 
224,252

Other assets
49,600

 
51,832

Liabilities
 
 
 
Accrued expenses and other current liabilities
244,605

 
253,257

Current portion of deferred revenue
1,280,499

 
1,210,695

Deferred revenue, less current portion
39,884

 
36,120

Other long-term liabilities
43,239

 
65,884

Stockholder’s equity
 
 
 
Accumulated other comprehensive (loss) income
(889
)
 
5,767

Accumulated deficit
(1,146,520
)
 
(958,564
)


The table below provides specified line items from our condensed consolidated statement of comprehensive loss (i) as previously reported and (ii) as adjusted to reflect the impact of the full retrospective adoption of Topic 606 (in thousands, except per share data):
 
Three months ended June 30, 2017
 
Six months ended June 30, 2017
 
As Previously Reported
 
As Adjusted
 
As Previously Reported
 
As Adjusted
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Subscription
$
411,007

 
$
402,672

 
$
787,142

 
$
790,256

Professional services and other
60,696

 
45,586

 
101,344

 
86,773

Total revenues
471,703

 
448,258

 
888,486

 
877,029

Cost of revenues:
 
 
 
 
 
 
 
Professional services and other
45,892

 
46,335

 
91,964

 
92,044

Total cost of revenues
121,685

 
122,128

 
238,132

 
238,212

Gross profit
350,018

 
326,130

 
650,354

 
638,817

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
247,224

 
222,393

 
459,310

 
426,132

Total operating expenses
388,755

 
363,924

 
731,581

 
698,403

Loss from operations
(38,737
)
 
(37,794
)
 
(81,227
)
 
(59,586
)
Interest income and other income (expense), net
(7,830
)
 
(8,485
)
 
(114
)
 
(756
)
Loss before income taxes
(57,904
)
 
(57,616
)
 
(101,356
)
 
(80,357
)
Provision for income taxes
(1,431
)
 
(1,812
)
 
(4,221
)
 
(3,039
)
Net loss
$
(56,473
)
 
$
(55,804
)
 
$
(97,135
)
 
$
(77,318
)
Net loss per share - basic and diluted
$
(0.33
)
 
$
(0.33
)
 
$
(0.57
)
 
$
(0.46
)
Weighted-average shares used to compute net loss per share - basic and diluted
170,419,083

 
170,419,083

 
169,585,356

 
169,585,356



7
Table of Contents


The table below provides specified line items from our condensed consolidated statement of cash flows (i) as previously reported and (ii) as adjusted to reflect the impact of the full retrospective adoption of Topic 606 (in thousands):
 
Six months ended June 30, 2017
 
As Previously Reported
 
As Adjusted
 
 
 
 
Cash flows from operating activities:
 
 
 
Net loss
$
(97,135
)
 
$
(77,318
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Amortization of deferred commissions
50,587

 
43,086

Changes in operating assets and liabilities, net of effect of business combinations:
 
 
 
Accounts receivable
51,039

 
55,186

Deferred commissions
(61,287
)
 
(69,947
)
Prepaid expenses and other assets
(11,945
)
 
(3,606
)
Deferred revenue
145,662

 
133,416

Accrued expenses and other liabilities
(6,578
)
 
(10,216
)
Net cash provided by operating activities
316,149

 
316,333

Foreign currency effect on cash, cash equivalents and restricted cash
18,224

 
18,040



Updated Significant Accounting Policies

Revenue Recognition

We report our revenues in two categories: (i) subscriptions and (ii) professional services and other.

Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

We determine revenue recognition through the following steps:

•
Identification of the contract, or contracts, with a customer
•
Identification of the performance obligations in the contract
•
Determination of the transaction price
•
Allocation of the transaction price to the performance obligations in the contract
•
Recognition of revenue when, or as, we satisfy a performance obligation

Subscription revenues

Subscription revenues are primarily comprised of subscription fees that give customers access to the ordered subscription service, related support and updates, if any, to the subscribed service during the subscription term. We recognize subscription revenues ratably over the contract term beginning on the commencement date of each contract, which is the date we make our services available to our customers. Our contracts with customers typically include a fixed amount of consideration, and are generally non-cancelable and without any refund-type provisions. We typically invoice our customers annually in advance for our subscription services upon execution of the initial contract or subsequent renewal, and our invoices are typically due within 30 days from the invoice date.

Subscription revenues also include revenues from our on-premises offerings in which we grant customers the right to deploy our subscription service on the customers’ own servers without significant penalty. For these contracts, we account for the software element and the related support and updates separately as they are distinct performance obligations. Refer to the discussion below related to contracts with multiple performance obligations for further details. The transaction price is allocated to separate performance obligations on a relative SSP basis. Transaction price allocated to the software element is recognized upon delivery, which is when transfer of control of the software to the customer is complete. The transaction price allocated to the related support and updates are recognized ratably over the contract term.


8
Table of Contents

Professional services and other revenues

Our professional services arrangements are primarily on a time-and-materials basis, and revenues on these arrangements are recognized as the services are delivered. We typically invoice our customers monthly in arrears for these professional services based on actual hours and expenses incurred, and our invoices are typically due within 30 days from the invoice date. Professional services revenues associated with fixed fee arrangements are recognized on a proportional performance basis. In instances where certain milestones are required to be met before revenues are recognized, we defer professional services revenues and the associated costs until milestone criteria have been met. Other revenues consist of fees from customer training delivered on-site or through publicly available classes.

Contracts with multiple performance obligations

We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. For these contracts, the transaction price is allocated to the separate performance obligations on a relative SSP basis. We determine SSP by considering the historical selling price of these performance obligations in similar transactions as well as other factors, including, but not limited to, competitive pricing of similar products, other software vendor pricing, industry publications and current pricing practices.

Unbilled Receivables

Unbilled receivables, which is a contract asset, represent subscription revenues that are recognized upon delivery of the software prior to being invoiced. Unbilled receivables are primarily presented under prepaid expenses and other current assets on our condensed consolidated balance sheets.

Deferred Commissions

Deferred commissions are the incremental selling costs that are associated with acquiring customer contracts and consist of sales commissions paid to our sales force and referral fees paid to independent third-parties. On initial and expansion contracts, commissions and referral fees are primarily deferred and amortized over a period of benefit that we have determined to be five years. On renewal contracts, commissions are deferred and amortized over the renewal term. Additionally, for our on-premises offerings, consistent with the recognition of subscription revenue for on-premises offerings, a portion of the commission cost is expensed upfront when the on-premises offering is made available. We determine the period of benefit by taking into consideration our customer contracts, our technology life cycle and other factors. We include amortization of deferred commissions in sales and marketing expense in our condensed consolidated statements of comprehensive income (loss). There was no impairment loss in relation to the costs capitalized for all periods presented.

Deferred revenue

Deferred revenue, which is a contract liability, consists primarily of payments received in advance of revenue recognition from our contracts with customers and is recognized as the revenue recognition criteria are met. Once our services are available to customers, we record amounts due in accounts receivable and in deferred revenue. To the extent we bill customers in advance of the billing period commencement date, the accounts receivable and corresponding deferred revenue amounts are netted to zero on our condensed consolidated balance sheets, unless such amounts have been paid as of the balance sheet date.

Customer deposits

Customer deposits primarily relate to payments received from customers which could be refundable pursuant to the terms of the contract and are presented under “accrued expenses and other current liabilities” on our condensed consolidated balance sheets.


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Strategic investments

Our strategic investments consist of debt and non-marketable equity investments in privately-held companies in which we do not have a controlling interest or significant influence. Debt investments in privately-held companies are classified as available-for-sale and are recorded at their estimated fair value with changes in fair value recorded through accumulated other comprehensive income (loss). We have elected to apply the measurement alternative for equity investments that do not have readily determinable fair values, measuring them at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. An impairment loss is recorded when event or circumstance indicates a decline in value has occurred. We include these strategic investments in “Other assets” on the consolidated balance sheets.

New Accounting Pronouncements Pending Adoption

In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (GILTI) provisions of the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of subsidiary foreign corporations. We are currently evaluating the impact of the Tax Act and this guidance on our condensed consolidated financial statements and have not yet elected an accounting policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to record GILTI as period costs if and when incurred.

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. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. This new standard is effective for our interim and annual periods beginning January 1, 2020. We are currently evaluating the impact of the adoption of this standard on our condensed consolidated financial statements.

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 current practice. This new standard, including related amendments subsequently issued by the FASB, is effective for our interim and annual periods beginning January 1, 2019, and early adoption is permitted. We are in the process of implementing changes to our existing systems and processes in conjunction with a review of existing vendor agreements and do not plan to early adopt this new standard. We currently anticipate that the adoption of this standard will have a material impact on our condensed consolidated balance sheets given that we had operating lease commitments in excess of $700 million as of June 30, 2018. The present value of these lease commitments will be recognized as right-of-use assets and lease liabilities at the later to occur of (i) the adoption date of January 1, 2019 or (ii) the time we take possession of the leased asset. However, we do not anticipate that the adoption of this standard will have a material impact on our condensed consolidated statements of comprehensive income (loss) since the expense recognition under this new standard will be similar to current practice.


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(3)    Investments
 
Marketable Securities

The following is a summary of our available-for-sale investment securities, excluding marketable equity securities and those securities classified within cash and cash equivalents on the condensed consolidated balance sheets (in thousands):
 
June 30, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
Commercial paper
$
253,519

 
$
—

 
$
(1
)
 
$
253,518

Corporate notes and bonds
954,783

 
42

 
(4,146
)
 
950,679

Certificates of deposit
32,742

 
2

 
—

 
32,744

U.S. government agency securities
113,166

 
—

 
(666
)
 
112,500

Total available-for-sale securities
$
1,354,210

 
$
44

 
$
(4,813
)
 
$
1,349,441


 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
Commercial paper
$
258,348

 
$
1

 
$
(5
)
 
$
258,344

Corporate notes and bonds
1,006,302

 
26

 
(3,084
)
 
1,003,244

Certificates of deposit
33,084

 
—

 
—

 
33,084

U.S. government agency securities
129,494

 
—

 
(638
)
 
128,856

Total available-for-sale securities
$
1,427,228

 
$
27

 
$
(3,727
)
 
$
1,423,528



As of June 30, 2018, the contractual maturities of our available-for-sale investment securities, excluding securities classified within cash and cash equivalents on the condensed consolidated balance sheets, did not exceed 36 months. The fair values of these securities, by remaining contractual maturity, are as follows (in thousands):
 
June 30, 2018
Due within 1 year
$
1,044,812

Due in 1 year through 5 years
304,629

Total
$
1,349,441



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The following table shows the fair values and the gross unrealized losses of our available-for-sale investment 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 as cash and cash equivalents on the condensed consolidated balance sheets (in thousands): 
 
June 30, 2018
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Commercial paper
$
14,931

 
$
(1
)
 
$
—

 
$
—

 
$
14,931

 
$
(1
)
Corporate notes and bonds
850,411

 
(3,990
)
 
74,722

 
(156
)
 
925,133

 
(4,146
)
U.S. government agency securities
79,733

 
(537
)
 
32,767

 
(129
)
 
112,500

 
(666
)
Total
$
945,075

 
$
(4,528
)
 
$
107,489

 
$
(285
)
 
$
1,052,564

 
$
(4,813
)


 
December 31, 2017
 
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
$
14,809

 
$
(5
)
 
$
—

 
$
—

 
$
14,809

 
$
(5
)
Corporate notes and bonds
819,113

 
(2,703
)
 
141,874

 
(381
)
 
960,987

 
(3,084
)
U.S. government agency securities
106,301

 
(593
)
 
22,555

 
(45
)
 
128,856

 
(638
)
Total
$
940,223

 
$
(3,301
)
 
$
164,429

 
$
(426
)
 
$
1,104,652

 
$
(3,727
)

 As of June 30, 2018, we had a total of 366 available-for-sale securities, excluding those securities classified within cash and cash equivalents on the consolidated balance sheet in an unrealized loss position. There were no impairments considered “other-than-temporary” as it is more likely than not we will hold the securities until maturity or a recovery of the cost basis.

Marketable Equity Securities

As of December 31, 2017, we had marketable equity securities of $20.7 million. During the six months ended June 30, 2018, we sold these securities for total proceeds of $40.0 million, and we recognized net gains of $0.8 million and $19.3 million for the three and six months ended June 30, 2018, respectively. These gains resulted from our adoption of ASU 2016-01 as we began to record changes in stock price fluctuations of our marketable equity securities through net income, even prior to the sale of these securities. Upon our sale of these securities during the three months ended June 30, 2018, the previously unrealized gain became realized. During the six months ended June 30, 2017, prior to the adoption of ASU 2016-01, we recognized $12.2 million of unrealized gains on our marketable equity securities offset by $4.5 million of tax effect through accumulated other comprehensive loss on our condensed consolidated balance sheet. Refer to Note 2 for further details on ASU 2016-01.

Strategic Investments

As of June 30, 2018 and December 31, 2017, the total amount of equity investments in privately-held companies included in other assets on our condensed consolidated balance sheets was $4.8 million. We have not recorded any adjustments resulting from observable price changes or impairment charges for any of our equity investments in privately-held companies.
 
The fair value of our debt investments in privately-held companies included within our strategic investments is $1.0 million as of June 30, 2018 and December 31, 2017. These investments are recorded at fair value using significant unobservable inputs or data in an inactive market and the valuation requires our judgment due to the absence of quoted prices in active markets and inherent lack of liquidity and are categorized accordingly as Level 3 in the fair value hierarchy.


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(4)    Fair Value Measurements

The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis at June 30, 2018 (in thousands): 
 
Level 1
 
Level 2
 
Total
Cash equivalents:
 
 
 
 
 
Money market funds
$
176,304

 
$
—

 
$
176,304

Commercial paper
—

 
173,604

 
173,604

Corporate notes and bonds
—

 
6,598

 
6,598

Short-term investments:
 
 
 
 
 
Commercial paper
—

 
253,518

 
253,518

Corporate notes and bonds
—

 
678,619

 
678,619

Certificates of deposit
—

 
29,844

 
29,844

U.S. government agency securities
—

 
82,831

 
82,831

Long-term investments:
 
 
 
 
 
Corporate notes and bonds
—

 
272,060

 
272,060

Certificates of deposit
—

 
2,900

 
2,900

U.S. government agency securities
—

 
29,669

 
29,669

Total
$
176,304

 
$
1,529,643

 
$
1,705,947

 
The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis at December 31, 2017 (in thousands): 
 
Level 1
 
Level 2
 
Total
Cash equivalents:
 
 
 
 
 
Money market funds
$
282,507

 
$
—

 
$
282,507

Commercial paper
—

 
100,456

 
100,456

Corporate notes and bonds
—

 
50,437

 
50,437

Short-term investments:
 
 
 
 
 
Commercial paper
—

 
258,344

 
258,344

Corporate notes and bonds
—

 
688,316

 
688,316

Certificates of deposit
—

 
17,950

 
17,950

U.S. government agency securities
—

 
67,476

 
67,476

Marketable equity securities
20,717

 
—

 
20,717

Long-term investments:
 
 
 
 
 
Corporate notes and bonds
—

 
314,928

 
314,928

Certificates of deposit
—

 
15,134

 
15,134

U.S. government agency securities
—

 
61,380

 
61,380

Total
$
303,224

 
$
1,574,421

 
$
1,877,645


We determine the fair value of our security holdings based on pricing from our service providers and market prices from industry-standard independent data providers. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs), such as yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures.

See Note 3 for the fair value measurement of our debt investments in privately-held companies, Note 8 for the fair value measurement of our derivative contracts and Note 11 for the fair value measurement of our convertible senior notes.


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(5)    Business Combinations
 
During the six months ended June 30, 2018, we completed acquisitions of two privately-held companies, Parlo, Inc. and VendorHawk, Inc., for an aggregate of approximately $25.1 million in cash. In allocating the aggregate purchase price based on the estimated fair values, we recorded a total of $18.1 million of goodwill, $9.0 million of developed technology intangible assets (to be amortized over estimated useful lives of five years) and $2.2 million of deferred tax liabilities.

During the six months ended June 30, 2017, we completed acquisitions of two privately-held companies, Qlue, Inc. and DxContinuum, Inc., for an aggregate of approximately $21.6 million in cash. In allocating the aggregate purchase price based on the estimated fair values, we recorded a total of $16.2 million of goodwill, $9.0 million of developed technology intangible assets (to be amortized over estimated useful lives of five years) and $3.6 million of deferred tax liabilities.

The excess of purchase consideration over the fair value of net tangible and identifiable assets acquired was recorded as goodwill. We believe the goodwill balance associated with these business combinations represents the synergies expected from expanded market opportunities when integrating the acquired developed technologies with our offerings. Goodwill arising from these business combinations is not deductible for income tax purposes.

The results of operations of these business combinations have been included in our condensed consolidated financial statements from their respective dates of purchase. These business combinations did not have a material impact on our condensed consolidated financial statements, and therefore historical and pro forma disclosures have not been presented. Aggregate acquisition-related costs of $0.7 million and $1.4 million for the six months ended June 30, 2018 and 2017, respectively, are included in general and administrative expenses in our condensed consolidated statements of comprehensive loss.

(6) Goodwill and Intangible Assets

Goodwill balances are presented below (in thousands):
 
Carrying Amount
Balance as of December 31, 2017
$
128,728

Goodwill acquired
18,063

Foreign currency translation adjustments
(3,784
)
Balance as of June 30, 2018
$
143,007



Intangible assets consist of the following (in thousands):
 
June 30,
 
December 31,
 
2018
 
2017
Developed technology
$
110,473

 
$
102,349

Patents
35,130

 
31,030

Other
650

 
1,575

Total intangible assets
146,253

 
134,954

Less: accumulated amortization
(58,527
)
 
(48,038
)
Net carrying amount
$
87,726

 
$
86,916


Apart from the business combinations described in Note 5, we acquired $4.1 million and $6.2 million of intangible assets in patents during the six months ended June 30, 2018 and 2017, respectively. The weighted-average useful life for the patents acquired was approximately 10 years.

Amortization expense for intangible assets for the three months ended June 30, 2018 and 2017 was approximately $6.1 million and $4.8 million, respectively, and for the six months ended June 30, 2018 and 2017 was approximately $11.8 million and $9.5 million, respectively.


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The following table presents the estimated future amortization expense related to intangible assets held at June 30, 2018 (in thousands):
Years Ending December 31,
2018
 
$
12,791

2019
 
24,686

2020
 
14,952

2021
 
12,558

2022
 
9,101

Thereafter
 
13,638

Total future amortization expense
 
$
87,726



(7)    Property and Equipment
 
Property and equipment, net, consists of the following (in thousands):
 
June 30,
 
December 31,
 
2018
 
2017
Computer equipment
$
391,524

 
$
326,378

Computer software
53,894

 
46,413

Leasehold and other improvements
63,561

 
56,232

Furniture and fixtures
39,814

 
38,789

Building
6,744