Edgar Filing: ServiceNow, Inc.

Document

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 March 31, 2019



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

Commission File Number: 001-35580

SERVICENOW, INC.

(Exact name of registrant as specified in its charter)



Delaware		20-2056195
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

ServiceNow, Inc.

2225 Lawson Lane

Santa Clara, California 95054

(408) 501-8550

(Registrant’s telephone number, including area code)

_____________________________________

(Former name, former address and formal fiscal year, if changed since last report.)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock, par value $0.001 per share	NOW	New York Stock Exchange, Inc.

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 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 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.



Large accelerated filer x	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company ¨
	Emerging growth company ¨

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

As of March 31, 2019, there were approximately 184.7 million shares of the Registrant’s Common Stock outstanding.

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		Page
	PART I
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	1
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2019 and 2018	2
	Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018	3
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38

	PART II
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3.	Defaults Upon Senior Securities	56
Item 4.	Mine Safety Disclosures	56
Item 5.	Other Information	56
Item 6.	Exhibits	57
	Signatures

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PART I

ITEM 1. FINANCIAL STATEMENTS

SERVICENOW, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)



	March 31, 2019			December 31, 2018

Assets
Current assets:
Cash and cash equivalents	$	639,722		$	566,204
Short-term investments	1,022,391			931,718
Accounts receivable, net	422,559			574,810
Current portion of deferred commissions	144,629			139,890
Prepaid expenses and other current assets	145,185			132,071
Total current assets	2,374,486			2,344,693
Deferred commissions, less current portion	283,124			282,490
Long-term investments	674,633			581,856
Property and equipment, net⁽¹⁾	350,651			347,216
Operating lease right-of-use assets⁽¹⁾	393,561			—
Intangible assets, net	93,252			100,582
Goodwill	151,184			148,845
Other assets	78,004			73,458
Total assets	$	4,398,895		$	3,879,140
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	38,668		$	30,733
Accrued expenses and other current liabilities⁽¹⁾	306,161			330,246
Current portion of deferred revenue	1,711,060			1,651,594
Current portion of operating lease liabilities⁽¹⁾	41,952			—
Total current liabilities	2,097,841			2,012,573
Deferred revenue, less current portion	36,722			38,597
Operating lease liabilities, less current portion⁽¹⁾	380,944			—
Convertible senior notes, net	669,875			661,707
Other long-term liabilities⁽¹⁾	18,562			55,064
Total liabilities	3,203,944			2,767,941
Stockholders’ equity:
Common stock	185			180
Additional paid-in capital	2,164,930			2,093,834
Accumulated other comprehensive income (loss)	10,323			(4,035		)
Accumulated deficit⁽¹⁾	(980,487		)	(978,780		)
Total stockholders’ equity	1,194,951			1,111,199
Total liabilities and stockholders’ equity	$	4,398,895		$	3,879,140


(1)	We adopted Topic 842 using the modified retrospective method as of January 1, 2019 and elected the transition option that allows us not to restate the comparative periods in our condensed consolidated financial statements in the year of adoption. See Note 2 for further details.

See accompanying notes to condensed consolidated financial statements

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SERVICENOW, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands, except share and per share data)

(unaudited)



	Three Months Ended March 31,
	2019			2018

Revenues:
Subscription	$	739,986		$	543,325
Professional services and other	48,940			45,897
Total revenues	788,926			589,222
Cost of revenues⁽¹⁾:
Subscription	126,589			95,398
Professional services and other	59,663			48,075
Total cost of revenues	186,252			143,473
Gross profit	602,674			445,749
Operating expenses⁽¹⁾:
Sales and marketing	361,409			283,701
Research and development	172,522			117,268
General and administrative	84,456			65,063
Total operating expenses	618,387			466,032
Loss from operations	(15,713		)	(20,283		)
Interest expense	(8,168		)	(17,064		)
Interest income and other income (expense), net	12,425			29,987
Loss before income taxes	(11,456		)	(7,360		)
Benefit from income taxes	(9,911		)	(17,982		)
Net income (loss)	$	(1,545	)	$	10,622
Net income (loss) per share - basic	$	(0.01	)	$	0.06
Net income (loss) per share - diluted	$	(0.01	)	$	0.06
Weighted-average shares used to compute net income (loss) per share - basic	182,061,579			175,482,833
Weighted-average shares used to compute net income (loss) per share - diluted	182,061,579			190,249,786
Other comprehensive income (loss):
Foreign currency translation adjustments	$	9,635		$	(8,435	)
Unrealized gain (loss) on investments, net of tax	4,723			(3,068		)
Other comprehensive income (loss), net of tax	14,358			(11,503		)
Comprehensive income (loss)	$	12,813		$	(881	)


(1)	Includes stock-based compensation as follows:



	Three Months Ended March 31,
	2019		2018

Cost of revenues:
Subscription	$	16,022	$	11,291
Professional services and other	9,931		7,561
Sales and marketing	62,130		52,082
Research and development	43,582		28,598
General and administrative	25,785		21,809

See accompanying notes to condensed consolidated financial statements

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SERVICENOW, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)



	Common Stock			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance at December 31, 2018	180,175,355	$	180	$	2,093,834		$	(978,780	)	$	(4,035	)	$	1,111,199
Cumulative effect adjustment for Topic 842 adoption	—	—		—			(162		)	—			(162		)
Common stock issued under employee stock plans	1,882,821	2		53,100			—			—			53,102
Taxes paid related to net share settlement of equity awards	—	—		(139,470		)	—			—			(139,470		)
Stock-based compensation	—	—		157,469			—			—			157,469
Partial settlement of 2018 Warrants	2,680,993	3		(3		)	—			—			—
Other comprehensive income, net of tax	—	—		—			—			14,358			14,358
Net loss	—	—		—			(1,545		)	—			(1,545		)
Balance at March 31, 2019	184,739,169	$	185	$	2,164,930		$	(980,487	)	$	10,323		$	1,194,951



	Common Stock			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance at December 31, 2017	174,275,864	$	174	$	1,731,367		$	(958,564	)	$	5,767		$	778,744
Cumulative effect adjustment for ASU 2016-01 adoption	—	—					7,234			(7,234		)	—
Cumulative effect adjustment for ASU 2016-16 adoption	—	—		—			(746		)	—			(746		)
Common stock issued under employee stock plans	2,287,099	3		52,658			—			—			52,661
Taxes paid related to net share settlement of equity awards	—	—		(85,617		)	—			—			(85,617		)
Stock-based compensation	—	—		121,709			—			—			121,709
Settlement of 2018 Notes conversion feature	—	—		(45,217		)	—			—			(45,217		)
Benefit from exercise of 2018 Note Hedges	—	—		44,510			—			—			44,510
Other comprehensive loss, net of tax	—	—		—			—			(11,503		)	(11,503		)
Net income	—	—		—			10,622			—			10,622
Balance at March 31, 2018	176,562,963	$	177	$	1,819,410		$	(941,454	)	$	(12,970	)	$	865,163

See accompanying notes to condensed consolidated financial statements

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SERVICENOW, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Three Months Ended March 31,
	2019			2018

Cash flows from operating activities:
Net income (loss)	$	(1,545	)	$	10,622
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	55,449			33,411
Amortization of deferred commissions	39,557			30,419
Amortization of debt discount and issuance costs	8,168			17,064
Stock-based compensation	157,450			121,341
Deferred income taxes	(1,480		)	(24,348		)
Gain on marketable equity securities	—			(18,455		)
Repayments of convertible senior notes attributable to debt discount	—			(8,660		)
Other	724			(5,805		)
Changes in operating assets and liabilities:
Accounts receivable	151,105			69,502
Deferred commissions	(46,599		)	(42,475		)
Prepaid expenses and other assets	(33,659		)	(15,808		)
Accounts payable	6,562			875
Deferred revenue	61,370			83,733
Accrued expenses and other liabilities	(36,254		)	(1,336		)
Net cash provided by operating activities	360,848			250,080
Cash flows from investing activities:
Purchases of property and equipment	(47,124		)	(35,371		)
Purchases of other intangibles	—			(7,850		)
Purchases of investments	(438,498		)	(376,130		)
Purchases of strategic investments	(284		)	—
Sales of investments	6,576			—
Maturities of investments	256,309			182,105
Realized gains on derivatives not designated as hedging instruments, net	22,148			—
Net cash used in investing activities	(200,873		)	(237,246		)
Cash flows from financing activities:
Repayments of convertible senior notes attributable to principal	—			(28,606		)
Proceeds from employee stock plans	53,093			52,657
Taxes paid related to net share settlement of equity awards	(139,493		)	(85,555		)
Payments on financing obligations	—			(288		)
Net cash used in financing activities	(86,400		)	(61,792		)
Foreign currency effect on cash, cash equivalents and restricted cash	1,079			6,491
Net increase (decrease) in cash, cash equivalents and restricted cash	74,654			(42,467		)
Cash, cash equivalents and restricted cash at beginning of period	568,538			727,829
Cash, cash equivalents and restricted cash at end of period	$	643,192		$	685,362

Cash, cash equivalents and restricted cash at end of period:
Cash and cash equivalents	$	639,722		$	682,854
Current portion of restricted cash included in prepaid expenses and other current assets	3,470			2,508
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows	$	643,192		$	685,362
Non-cash investing and financing activities:
Settlement of 2018 Notes conversion feature	$	—		$	45,217
Benefit from exercise of 2018 Note Hedges	—			44,510
Property and equipment included in accounts payable and accrued expenses	29,002			24,288

See accompanying notes to condensed consolidated financial statements

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SERVICENOW, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Unless the context requires otherwise, references in this report to “ServiceNow,” the “Company,” “we,” “us,” and “our” refer to ServiceNow, Inc. and its consolidated subsidiaries.

(1) Description of the Business

ServiceNow, the company that makes work, work better for people, is a leading provider of enterprise cloud computing services that define, structure, manage and automate digital workflows for global enterprises. We deliver digital workflows that help our customers create great experiences and unlock productivity. Our Now Platform enables enterprise-wide experiences and productivity by simplifying and streamlining processes across systems, functions and departments. Our product portfolio focuses on delivering better information technology (IT), employee and customer workflows, and enabling our customers to build any workflow application that makes sense for their business.

(2) Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and condensed footnotes have been prepared in accordance with the applicable rules and regulations of the Securities and Exchange Commission (the SEC) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (GAAP) for complete financial statements due to the permitted exclusion of certain disclosures for interim reporting. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary under GAAP for fair statement of results for the interim periods presented have been included. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for other interim periods or future years. The condensed consolidated balance sheet as of December 31, 2018 is derived from audited financial statements; however, it does not include all of the information and footnotes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on February 27, 2019.

Principles of Consolidation

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

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as reported amounts of revenues and expenses during the reporting period. Such management estimates and assumptions include, but are not limited to, evaluating the terms and conditions included within our customer contracts as well as determining stand-alone selling price (SSP) for each distinct performance obligation included in customer contracts with multiple performance obligations, the period of benefit for deferred commissions, purchase price allocation for business combinations, stock-based compensation expenses, the useful life and recoverability of our property and equipment, goodwill and identifiable intangible assets, whether an arrangement is or contains a lease, the discount rate used for operating leases, fair value of convertible notes, income taxes, and legal contingencies. Actual results could differ from those estimates.

Segments

We define the term “chief operating decision maker” to be our Chief Executive Officer. Our chief operating decision maker allocates resources and assesses financial performance based upon discrete financial information at the consolidated level. Accordingly, we have determined that we operate as a single operating and reportable segment.

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Concentration of Credit Risk and Significant Customers

Financial instruments potentially exposing us to credit risk consist primarily of cash, cash equivalents, derivative contracts, investments and accounts receivable. We hold cash at financial institutions that management believes are high credit, quality financial institutions and invest in securities with a minimum rating of BBB by Standard & Poor’s, Baa2 by Moody’s, or BBB by Fitch to minimize our credit risks. Our derivative contracts expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the arrangement. We mitigate this credit risk by transacting with major financial institutions with high credit ratings and entering into master netting arrangements, which permit net settlement of transactions with the same counterparty. While the contract or notional amount is often used to express the volume of foreign currency derivative contracts, the amounts potentially subject to credit risk are generally limited to the amounts, if any, by which the counterparties’ obligations under the agreements exceed the obligations of the Company to the counterparties. We are not required to pledge, and are not entitled to receive, cash collateral related to these derivative instruments. We are also exposed to credit risk under the convertible note hedge transactions that may result from counterparties’ non-performance.

Credit risk arising from accounts receivable is mitigated due to our large number of customers and their dispersion across various industries and geographies. As of March 31, 2019, we had one customer that represented approximately 13% of our accounts receivable balance. As of December 31, 2018, there were no customers that represented more than 10% of our accounts receivable balance. There were no customers that individually exceeded 10% of our total revenues in any of the periods presented. For purposes of assessing concentration of credit risk and significant customers, a group of customers under common control or customers that are affiliates of each other are regarded as a single customer.

Updated Significant Accounting Policies

Leases

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842),” which requires lessees to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets, and to recognize on the income statement the expenses in a manner similar to prior practice. We adopted Topic 842 using the modified retrospective method as of January 1, 2019 and elected the transition option that allows us not to restate the comparative periods in our financial statements in the year of adoption. We also elected the package of transition expedients available for expired or existing contracts, which allowed us to carryforward our historical assessment of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs.

We determine if an arrangement is or contains a lease at inception by evaluating various factors, including whether a vendor’s right to substitute an identified asset is substantive. Lease classification is determined at the lease commencement date, on which the leased assets are made available for our use. Operating leases are included in “Operating lease right-of-use assets”, “Current portion of operating lease liabilities”, and “Operating lease liabilities, less current portion” in our condensed consolidated balance sheets. We did not have any material financing leases in any of the periods presented.

Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The difference between the total right-of-use assets and total lease liabilities recorded as of January 1, 2019 is primarily due to the derecognition of deferred rent liabilities that were included in “Accrued expenses and other current liabilities” and “Other long-term liabilities”, respectively, in our condensed consolidated balance sheet as of December 31, 2018. Lease payments consist primarily of the fixed payments under the arrangement, less any lease incentives such as rent holidays. We use an estimate of our incremental borrowing rate (IBR) based on the information available at the lease commencement date in determining the present value of lease payments, unless the implicit rate is readily determinable. In determining the appropriate IBR, we consider information including, but not limited to, our credit rating, the lease term, and the currency in which the arrangement is denominated. For leases which commenced prior to our adoption of Topic 842, we used the IBR on January 1, 2019. Our lease terms may include the sole option for us to either renew or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

For our office facility leases, we elected to account for lease and non-lease components as a single lease component. For other arrangements, lease and non-lease components are generally accounted for separately. Additionally, we do not record leases on the balance sheet that, at the lease commencement date, have a lease term of 12 months or less.

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Derivative financial instruments and hedging activities

We use derivative financial instruments to manage foreign currency risks. These derivative contracts consist of forward contracts entered into with various counterparties and are not designated as hedging instruments under applicable accounting guidance. As such, all changes in the fair value of these derivative contracts are recorded in “Interest income and other income (expense), net” on the condensed consolidated statements of comprehensive income (loss), and are intended to offset the foreign currency gains or losses associated with the underlying monetary assets and liabilities. Realized gains (losses) from settlement of the derivative assets and liabilities are classified as investing activities in the condensed consolidated statement of cash flows.

Accounting Pronouncement Adopted in 2019

Leases

As described in the “Leases” section above, we adopted Topic 842 using the modified retrospective method as of January 1, 2019 with an immaterial amount of cumulative effect adjustment recorded to our accumulated deficit as of January 1, 2019. As this standard was adopted on a modified prospective basis as of January 1, 2019, the adoption of this standard did not impact our previously reported financial statements for periods ended on or prior to December 31, 2018.

Accounting Pronouncements Adopted in 2018

For details on our adoption of ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” and other accounting standards adopted in 2018, refer to Note 2, Summary of Significant Accounting Policies, of the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on February 27, 2019.

New Accounting Pronouncements Pending Adoption

Cloud computing arrangements implementation costs

In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new standard requires capitalized costs to be amortized on a straight-line basis generally over the term of the arrangement, and the financial statement presentation for these capitalized costs would be the same as that of the fees related to the hosting arrangements. This new standard is effective for our interim and annual periods beginning January 1, 2020 and earlier adoption is permitted. This standard could be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We will adopt this standard on a prospective basis as of January 1, 2020 and are evaluating the impact of our pending adoption of this standard on our condensed consolidated financial statements.

Credit losses

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. For trade receivables, loans, and other financial instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. Credit losses relating to available-for-sale debt securities 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.

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(3) Investments

Marketable Debt 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):



	March 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-sale securities:
Commercial paper	$	137,523	$	101	$	(6	)	$	137,618
Corporate notes and bonds	1,405,920		2,955		(903		)	1,407,972
Certificates of deposit	60,337		43		—			60,380
U.S. government and agency securities	91,162		49		(157		)	91,054
Total available-for-sale securities	$	1,694,942	$	3,148	$	(1,066	)	$	1,697,024



	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-sale securities:
Commercial paper	$	108,061	$	—	$	—		$	108,061
Corporate notes and bonds	1,233,589		343		(4,218		)	1,229,714
Certificates of deposit	73,584		1		—			73,585
U.S. government and agency securities	102,549		23		(358		)	102,214
Total available-for-sale securities	$	1,517,783	$	367	$	(4,576	)	$	1,513,574

As of March 31, 2019, the contractual maturities of our 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 available-for-sale investment securities, by remaining contractual maturity, are as follows (in thousands):



	March 31, 2019
Due within 1 year	$	1,022,391
Due in 1 year through 5 years	674,633
Total	$	1,697,024

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The following table shows the fair values and the gross unrealized losses of these securities, classified by the length of time that the securities have been in a continuous unrealized loss position, and aggregated by investment types, excluding those securities classified within cash and cash equivalents on the condensed consolidated balance sheets (in thousands):



	March 31, 2019
	Less than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Commercial paper	$	35,844	$	(6	)	$	—	$	—		$	35,844	$	(6	)
Corporate notes and bonds	255,199		(243		)	296,220		(660		)	551,419		(903		)
Certificates of deposit	2,050		—			—		—			2,050		—
U.S. government and agency securities	3,389		—			50,156		(157		)	53,545		(157		)
Total	$	296,482	$	(249	)	$	346,376	$	(817	)	$	642,858	$	(1,066	)



	December 31, 2018
	Less than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Corporate notes and bonds	$	714,605	$	(2,603	)	$	294,956	$	(1,615	)	$	1,009,561	$	(4,218	)
Certificates of deposit	1,000		—			—		—			1,000		—
U.S. government and agency securities	11,756		(5		)	61,457		(353		)	73,213		(358		)
Total	$	727,361	$	(2,608	)	$	356,413	$	(1,968	)	$	1,083,774	$	(4,576	)

As of March 31, 2019, we had a total of 239 available-for-sale securities, excluding those securities classified within cash and cash equivalents on the condensed consolidated balance sheet in an unrealized loss position. There were no impairments considered “other-than-temporary” as it is more likely than not we will hold the securities until maturity or a recovery of the cost basis.

Marketable Equity Securities

During the three months ended March 31, 2018, we recognized $18.5 million of unrealized gains through net income that related to the changes in the fair value of these securities during the three months ended March 31, 2018. As of each of March 31, 2019 and December 31, 2018, we had no marketable equity securities on our condensed consolidated balance sheet.

Strategic Investments

As of March 31, 2019 and December 31, 2018, the total amount of equity investments in privately-held companies included in other assets on our condensed consolidated balance sheets was $14.9 million and $14.6 million, respectively.

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(4) Fair Value Measurements

The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis as of March 31, 2019 (in thousands):



	Level 1		Level 2		Total
Cash equivalents:
Money market funds	$	330,113	$	—	$	330,113
Commercial paper	—		67,733		67,733
Certificates of deposit	—		15,351		15,351
Marketable securities:
Commercial paper	—		137,618		137,618
Corporate notes and bonds	—		1,407,972		1,407,972
Certificates of deposit	—		60,380		60,380
U.S. government and agency securities	—		91,054		91,054
Total	$	330,113	$	1,780,108	$	2,110,221

The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis as of December 31, 2018 (in thousands):



	Level 1		Level 2		Total
Cash equivalents:
Money market funds	$	229,047	$	—	$	229,047
Commercial paper	—		16,961		16,961
Certificates of deposit	—		2,465		2,465
Marketable securities:
Commercial paper	—		108,061		108,061
Corporate notes and bonds	—		1,229,714		1,229,714
Certificates of deposit	—		73,585		73,585
U.S. government and agency securities	—		102,214		102,214
Total	$	229,047	$	1,533,000	$	1,762,047

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

See Note 7 for the fair value measurement of our derivative contracts and Note 10 for the fair value measurement of our convertible senior notes, which are not included in the table above.

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(5) Goodwill and Intangible Assets

Goodwill balances are presented below (in thousands):



	Carrying Amount
Balance as of December 31, 2018	$	148,845
Foreign currency translation adjustments	2,339
Balance as of March 31, 2019	$	151,184

Intangible assets consist of the following (in thousands):



	March 31,			December 31,
	2019			2018
Developed technology	$	113,759		$	114,395
Patents	57,180			57,180
Other	650			650
Total intangible assets	171,589			172,225
Less: accumulated amortization	(78,337		)	(71,643		)
Net carrying amount	$	93,252		$	100,582

Amortization expense for intangible assets for the three months ended March 31, 2019 and 2018 was approximately $7.0 million and $5.7 million, respectively.

The following table presents the estimated future amortization expense related to intangible assets held at March 31, 2019 (in thousands):



Years Ending December 31,
Remainder of 2019	$	21,861
2020	19,371
2021	17,336
2022	13,673
2023	7,764
Thereafter	13,247
Total future amortization expense	$	93,252

(6) Property and Equipment

Property and equipment, net consists of the following (in thousands):



	March 31,			December 31,
	2019			2018
Computer equipment	$	532,371		$	493,536
Computer software	61,270			58,303
Leasehold and other improvements	84,429			74,721
Furniture and fixtures	43,565			42,551
Building⁽¹⁾	—			6,551
Construction in progress⁽¹⁾	3,527			10,167
	725,162			685,829
Less: Accumulated depreciation	(374,511		)	(338,613		)
Total property and equipment, net	$	350,651		$	347,216

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(1)	We adopted Topic 842 using the modified retrospective method as of January 1, 2019 and derecognized $10.6 million in building and construction in progress assets that we were previously deemed to own under the prior lease accounting standards. These assets are recognized under our operating lease right-of-use assets under Topic 842 as of March 31, 2019.

Construction in progress consists primarily of leasehold and other improvements and in-process software development costs. Depreciation expense for the three months ended March 31, 2019 and 2018 was $37.1 million and $27.7 million, respectively.

(7) Derivative Contracts

As of March 31, 2019 and December 31, 2018, we had derivative contracts with total notional values of $1.2 billion and $883.9 million, respectively, which are not designated as hedge instruments. Our foreign currency contracts are classified within Level 2 because 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 values of these outstanding derivative contracts were as follows (in thousands):



	Condensed Consolidated Balance Sheet Location	March 31, 2019		December 31, 2018
Derivative Assets:
Foreign currency derivative contracts	Prepaid expenses and other current assets	$	4,216	$	22,831
Derivative Liabilities
Foreign currency derivative contracts	Accrued expenses and other current liabilities	$	3,279	$	2,441

(8) Deferred Revenue and Performance Obligations

Revenues recognized during the three months ended March 31, 2019 from amounts included in deferred revenue as of December 31, 2018 were $569.9 million. Revenues recognized during the three months ended March 31, 2018, from amounts included in deferred revenue as of December 31, 2017 were $479.2 million.

Transaction Price Allocated to the Remaining Performance Obligations

Transaction price allocated to remaining performance obligations 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. We apply the practical expedient in accordance with Topic 606 to exclude amounts related to professional services contracts that are on a time-and-material basis. Our professional services contracts typically have a remaining duration of one year or less.

As of March 31, 2019, the total remaining non-cancelable performance obligations under our contracts with customers was approximately $5.1 billion and we expect to recognize revenues on approximately 50% of these remaining performance obligations over the following 12 months, with the balance to be recognized thereafter.

(9) Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):



	March 31, 2019		December 31, 2018

Accrued payroll	143,431		158,006
Taxes payable	20,529		35,122
Other employee related liabilities	43,255		60,889
Other	98,946		76,229
Total accrued expenses and other current liabilities	$	306,161	$	330,246

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(10) Convertible Senior Notes

In May and June 2017, we issued an aggregate of $782.5 million of 0% convertible senior notes (the 2022 Notes), which are due June 1, 2022 (Maturity Date) unless earlier converted or repurchased in accordance with their terms. The 2022 Notes do not bear interest, and we cannot redeem the 2022 Notes prior to maturity. In November 2013, we issued $575.0 million of 0% convertible senior notes (the 2018 Notes, and together with the 2022 Notes, the Notes), which were earlier converted prior to, or settled on November 1, 2018, in accordance with their terms.

The 2022 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries.

Upon conversion of the 2022 Notes, we may choose to pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock upon settlement. We settled the principal amount of our 2018 Notes with cash and currently intend to settle the principal amount of the 2022 Notes with cash.



	Convertible Date	Initial Conversion Price per Share		Initial Conversion Rate per $1,000 Par Value	Initial Number of Shares
2022 Notes	February 1, 2022	$	134.75	7.42 shares	5,806,936
2018 Notes	July 1, 2018	$	73.88	13.54 shares	7,783,023

Conversion of the 2022 Notes prior to the Convertible Date. At any time prior to the close of business on the business day immediately preceding February 1, 2022 (Convertible Date), holders of the 2022 Notes may convert their Notes at their option, only if one of the following conditions are met:

•

during any calendar quarter (and only during such calendar quarter) if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the applicable 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 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 applicable conversion rate on each such trading day; or


•	upon the occurrence of specified corporate events.

Conversion of the 2022 Notes on or after the Convertible Date. On or after the Convertible Date, a holder may convert all or any portion of its Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the Maturity Date, regardless of the foregoing conditions, and such conversions will settle upon the Maturity Date. Upon settlement, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.

The conversion price of the 2022 Notes will be subject to adjustment in some events. Holders of the 2022 Notes who convert their 2022 Notes in connection with certain corporate events that constitute a “make-whole fundamental change” are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a “fundamental change,” holders of the 2022 Notes may require us to purchase with cash all or a portion of the 2022 Notes upon the occurrence of a fundamental change, at a purchase price equal to 100% of the principal amount of the 2022 Notes plus any accrued and unpaid special interest, if any.

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In accounting for the issuance of the 2022 Notes and the related transaction costs, we separated the 2022 Notes into liability and equity components. The 2022 Notes consisted of the following (in thousands):



	March 31, 2019			December 31, 2018
Liability component:
Principal:
2022 Notes	$	782,500		$	782,500
Less: debt issuance cost and debt discount, net of amortization
2022 Notes	(112,625		)	(120,793		)
Net carrying amount	$	669,875		$	661,707



	2022 Notes
Equity component recorded at issuance:
Note	$	162,039
Issuance cost	(2,148		)
Net amount recorded in equity	$	159,891

The Conversion Condition for the 2022 Notes was met for the quarters ended June 30, 2018, September 30, 2018 and March 31, 2019. Therefore, our 2022 Notes became convertible at the holders’ option beginning on July 1, 2018 and continued to be convertible through June 30, 2019, with the exception of the quarter ended March 31, 2019 because the Conversion Condition for the 2022 Notes was not met for the quarter ended December 31, 2018. We have not received any conversion requests for our 2022 Notes.

We consider the fair value of the 2022 Notes at March 31, 2019 to be a Level 2 measurement. The estimated fair value of the 2022 Notes at March 31, 2019 and December 31, 2018 based on the closing trading price per $100 of the Notes were as follows (in thousands):



	March 31, 2019		December 31, 2018
2022 Notes	$	1,444,847	$	1,105,281

As of March 31, 2019, the remaining life of the 2022 Notes is 38 months, and the 2018 Notes were no longer outstanding. The following table sets forth total interest expense recognized related to the Notes (in thousands):



	Three Months Ended March 31,
	2019		2018
Amortization of debt issuance cost
2022 Notes	$	394	$	376
2018 Notes	—		498
Amortization of debt discount
2022 Notes	7,774		7,402
2018 Notes	—		8,788
Total	$	8,168	$	17,064
Effective interest rate of the liability component
2022 Notes	4.75%
2018 Notes	6.50%

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Note Hedges

To minimize the impact of potential economic dilution upon conversion of the Notes, we entered into convertible note hedge transactions (the 2022 Note Hedge and 2018 Note Hedge, respectively, and collectively, the Note Hedges) with certain investment banks, with respect to our common stock concurrently with the issuance of the 2022 Notes and 2018 Notes. The 2018 Note Hedge offset the dilution and cash payments in excess of the principal amount of the converted 2018 Notes and expired upon the maturity date of the 2018 Notes, which was November 1, 2018.



	Purchase		Initial Shares	Shares as of March 31, 2019
	(in thousands)
2022 Note Hedge	$	128,017	5,806,936	5,806,936
2018 Note Hedge	$	135,815	7,783,023	—

The 2022 Note Hedge covers shares of our common stock at a strike price per share that corresponds to the initial conversion price of the 2022 Notes, subject to adjustment, and are exercisable upon conversion of the 2022 Notes. If exercised, we may elect to receive cash, shares of our common stock, or a combination of cash and shares. The 2022 Note Hedge will expire upon the maturity of the 2022 Notes. The 2022 Note Hedge is intended to reduce the potential economic dilution upon conversion of the 2022 Notes in the event that the fair value per share of our common stock at the time of exercise is greater than the conversion price of the 2022 Notes. The 2022 Note Hedge is a separate transaction and is not part of the terms of the 2022 Notes. Holders of the 2022 Notes will not have any rights with respect to the 2022 Note Hedge. The 2022 Note Hedge does not impact earnings per share, as it was entered into to offset any dilution from the 2022 Notes.

Warrants



	Proceeds		Initial Shares	Strike Price		First Expiration Date	Shares as of March 31, 2019
	(in thousands)
2022 Warrants	$	54,071	5,806,936	$	203.40	September 1, 2022	5,806,936
2018 Warrants	$	84,525	7,783,023	$	107.46	February 1, 2019	2,853,811

Separately, we entered into warrant transactions with certain investment banks, whereby we sold warrants to acquire, subject to adjustment, the number of shares of our common stock shown in the table above (the 2022 Warrants and 2018 Warrants, respectively, and collectively, the Warrants). If the average market value per share of our common stock for the reporting period, as measured under the Warrants, exceeds the strike price of the respective Warrants, such Warrants would have a dilutive effect on our earnings per share to the extent we report net income. According to the terms of each of the Warrants, the Warrants will be automatically exercised over a 60 trading day period beginning on the first expiration date of the respective Warrants as set forth above. The Warrants are separate transactions and are not remeasured through earnings each reporting period. The Warrants are not part of the Notes or Note Hedges.

As the remaining 2018 Warrants and the 2022 Warrants will be net share settled, the total number of shares of our common stock we will issue depends on the daily volume-weighted average stock prices over a 60 trading day period beginning on the first expiration date of the 2018 Warrants, which was February 1, 2019, and the first expiration date of the 2022 Warrants, which will be September 1, 2022. We issued approximately 2.7 million shares of our common stock upon the automatic exercise of a portion of the 2018 Warrants during the three months ended March 31, 2019 and approximately 1.6 million shares of our common stock upon the automatic exercise of the remaining 2018 Warrants during the quarter ending June 30, 2019. As of the date of the issuance of these condensed consolidated financial statements, the 2018 Warrants are no longer outstanding. We expect to issue additional shares of our common stock in the second half of 2022 upon the automatic exercise of the 2022 Warrants. The 2022 Warrants could have a dilutive effect to the extent that the daily volume-weighted average stock prices over a 60 trading day period beginning on September 1, 2022 exceeds the strike price of the 2022 Warrants. Based on the volume-weighted average stock price on March 31, 2019, the total number of shares of our common stock to be issued upon the automatic exercise of the 2022 Warrants would be approximately 1.0 million. The actual number of shares of our common stock issuable upon the automatic exercise of the 2022 Warrants, if any, is unknown at this time.

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(11) Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive (loss) income, net of tax, consist of the following (in thousands):



	March 31, 2019		December 31, 2018

Foreign currency translation adjustment	$	9,979	$	344
Net unrealized gain (loss) on investments, net of tax	344		(4,379		)
Accumulated other comprehensive income (loss)	$	10,323	$	(4,035	)

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

(12) Stockholders’ Equity

Common Stock

We are authorized to issue 600,000,000 shares of common stock as of March 31, 2019. Holders of our common stock are not entitled to receive dividends unless declared by our board of directors. As of March 31, 2019, we had 184,739,169 shares of common stock outstanding and had reserved shares of common stock for future issuance as follows:



	March 31, 2019
Stock plans:
Options outstanding	1,579,022
RSUs⁽¹⁾	12,161,981
Shares of common stock available for future grants:
2012 Equity Incentive Plan⁽²⁾	28,705,526
2012 Employee Stock Purchase Plan⁽²⁾	10,396,547
Total shares of common stock reserved for future issuance	52,843,076


(1)	Represents the number of shares issuable upon settlement of outstanding RSUs and performance RSUs, assuming 100% of the target number of shares for performance RSUs, as discussed under the section entitled “RSUs” in Note 13.


(2)	Refer to Note 13 for a description of these plans.

During the three months ended March 31, 2019 and 2018, we issued a total of 1,882,821 shares and 2,287,099 shares, respectively, from stock option exercises, vesting of restricted stock units (RSUs), net of employee payroll taxes, and purchases from the employee stock purchase plan (ESPP). As described in Note 10, we issued approximately 2.7 million shares of our common stock upon the automatic exercise of a portion of the 2018 Warrants during the three months ended March 31, 2019.

(13) Equity Awards

We currently have two equity incentive plans, our 2005 Stock Option Plan (the 2005 Plan) and our 2012 Equity Incentive Plan (the 2012 Plan). Our 2005 Plan was terminated in connection with our initial public offering in 2012 but continues to govern the terms of outstanding stock options that were granted prior to the termination of the 2005 Plan. We no longer grant equity awards pursuant to our 2005 Plan.

Our 2012 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, RSUs, performance-based stock awards and other forms of equity compensation (collectively, equity awards). In addition, the 2012 Plan provides for the grant of performance cash awards. Incentive stock options may be granted only to employees. All other equity awards may be granted to employees, including officers, as well as directors and consultants. The share reserve may increase to the extent outstanding stock options under the 2005 Plan expire or terminate unexercised. Prior to January 2019, the share reserve also automatically increased on January 1 of each year, by up to 5% of the total number of shares of common stock outstanding on December 31 of the preceding year as determined by our board of directors. Our board of directors elected not to increase the number of shares of common stock reserved for issuance under the 2012 Plan pursuant to the provision described in the preceding sentence for the year ending December 31, 2019. In January 2019, our Board of Directors amended the 2012 Plan to remove the automatic increase provision. Therefore, for the remaining term of the 2012 Plan, the share reserve will not be increased without stockholder approval.

Our 2012 Employee Stock Purchase Plan (the 2012 ESPP) authorizes the issuance of shares of common stock pursuant to purchase rights granted to our employees. The price at which common stock is purchased under the 2012 ESPP is equal to 85% of the fair market value of our common stock on the first or last day of the offering period, whichever is lower. Offering periods are six months long and begin on February 1 and August 1 of each year. The number of shares of common stock reserved for issuance automatically increases on January 1 of each year until January 1, 2022, by up to 1% of the total number of shares of common stock outstanding on December 31 of the preceding year as determined by our board of directors. Our board of directors elected not to increase the number of shares of common stock reserved for issuance under the 2012 ESPP pursuant to the provision described in the preceding sentence for the year ending December 31, 2019.

Stock Options

Stock options are exercisable at a price equal to the market value of the underlying shares of common stock on the date of the grant as determined by our board of directors or, for those stock options issued subsequent to our initial public offering, the closing price of our common stock as reported on the New York Stock Exchange on the date of grant. Stock options granted under our 2005 Plan and the 2012 Plan to new employees generally vest 25% one year from the date the requisite service period begins and continue to vest monthly for each month of continued employment over the remaining three years. Options granted generally are exercisable for a period of up to ten years contingent on each holder’s continuous status as a service provider.

A summary of stock option activity for the three months ended March 31, 2019 was as follows:



	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2018	1,810,580		$	46.55
Exercised	(231,558	)