NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Our mission is to help our customers improve service levels and reduce costs while scaling and automating their businesses.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (U.S. GAAP), and include our accounts and the accounts of our wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.
Prior Period Reclassification
Certain reclassifications of prior period amounts have been made to conform to the current period presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. 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 not limited to, the best estimate of selling price of the deliverables included in multiple elements revenue arrangements, 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, future taxable income 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.
Foreign Currency Translation and Transactions
The functional currencies for our foreign subsidiaries are primarily their local currencies. Assets and liabilities of the wholly-owned foreign subsidiaries are translated into U.S. Dollars at exchange rates in effect at each period end. Amounts classified in stockholders’ equity are translated at historical exchange rates. Revenues and expenses are translated at the average exchange rates during the period. The resulting translation adjustments are recorded in accumulated other comprehensive loss as a component of stockholders’ equity. Foreign currency transaction gains and losses are included in interest income and other income (expense), net within the consolidated statements of comprehensive loss, and have not been material for all periods presented.
Allocation of Overhead Costs
Overhead costs associated with office facilities, IT and certain depreciation related to non-cloud-based infrastructure hardware equipment are allocated to cost of revenues and operating expenses based on headcount.
Revenue Recognition
We derive our revenues from two sources: (i) subscriptions and (ii) professional services and other. Subscription revenues are primarily comprised of subscription fees that give customers access to the ordered subscription service, related support and updates to the subscribed service during the subscription term. Our contracts typically do not give the customer the right to take possession of the software supporting the services. Professional services and other revenues consist of fees associated with the implementation and configuration of our services. Professional services and other revenues also include customer training and attendance and sponsorship fees for Knowledge, our annual user conference and other customer forums.
We commence revenue recognition when all of the following conditions are met:
•
There is persuasive evidence of an arrangement;
•
The service has been provided to the customer;
•
The collection of related fees is reasonably assured; and
•
The amount of fees to be paid by the customer is fixed or determinable.
Our arrangements are generally non-cancelable and do not contain refund-type provisions.
We recognize subscription revenues ratably over the contract term beginning on the commencement date of each contract, the date we make our services available to our customers. 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 contract commencement date, the accounts receivable and corresponding deferred revenue amounts are netted to zero on our consolidated balance sheets, unless such amounts have been paid as of the balance sheet date.
Professional services revenues on our time-and materials arrangements are recognized as the services are delivered. Professional services revenues associated with fixed fee arrangements are recognized using a proportional performance model. 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.
We have multiple element arrangements comprised of subscription fees and professional services. To qualify as a separate unit of accounting, the delivered item must have value to the customer on a standalone basis. We have concluded that our subscription service and professional services, including implementation and configuration services, have standalone value.
The total arrangement consideration for a multiple element arrangement is allocated to the identifiable separate units of accounting based on a relative selling price hierarchy. We determined the relative selling price for a deliverable based on its vendor-specific objective evidence (VSOE) of selling price or third-party evidence (TPE) of selling price if VSOE does not exist. If neither VSOE nor TPE of selling price exists for a deliverable, the selling price is determined using the best estimate of selling price (BESP). We determine the BESP for each deliverable primarily by considering the historical selling price of these deliverables in similar transactions as well as other factors, including, but not limited to, market competition, review of stand-alone sales and current pricing practices. In determining the appropriate pricing structure, we consider the extent of competitive pricing of similar products and marketing analysis.
In limited circumstances, we grant certain customers the right to deploy our subscription service on the customers’ own servers. These arrangements are subject to software revenue recognition guidance since the customer deploys our software. As we never sell the non-software elements separately from the software elements, we have determined that we do not have sufficient VSOE of fair value for all undelivered non-software elements. Consequently, we defer all revenue and related costs under the arrangement until the last element in the transaction has been delivered or starts to be delivered. Once the delivery of the last element has commenced, we recognize the entire fee and related costs from the arrangement ratably over the remaining period of the arrangement.
Deferred revenue consists primarily of payments received in advance of revenue recognition for our subscriptions and professional services and other revenues and is recognized as the revenue recognition criteria are met.
Deferred Commissions
Deferred commissions are the incremental selling costs that are directly associated with our customer contracts and consist of sales commissions paid to our direct sales force and referral fees paid to independent third-parties. The majority of commissions and referral fees are deferred and amortized on a straight-line basis over the terms of the related customer contracts. We include amortization of deferred commissions in sales and marketing expense in the consolidated statements of comprehensive loss.
Fair Value Measurements
We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized in the financial statements on a non-recurring basis or disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We use a fair value hierarchy that is based on three levels of inputs, of which the first two are considered observable and the last unobservable. The three levels of the fair value hierarchy are as follows:
Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access;
Level 2—Inputs other than Level 1 that are directly or indirectly observable, such as quoted prices for identical or similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities, such as interest rates, yield curves and foreign currency spot rates; and
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. Cash and cash equivalents are stated at cost, which approximates fair value.
Investments
Investments consist of commercial paper, corporate notes and bonds, certificates of deposit and U.S. government and agency securities. We classify investments as available-for-sale at the time of purchase and reevaluate such classification as of each balance sheet date. All investments are recorded at estimated fair value. Unrealized gains and losses for available-for-sale securities are included in accumulated other comprehensive loss, a component of stockholders’ equity. We evaluate our investments to assess whether those with unrealized loss positions are other than temporarily impaired. We consider impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely we will sell the securities before the recovery of their cost basis. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in interest income and other income (expense), net in the consolidated statements of comprehensive loss.
Strategic Investments
We report our investments in non-marketable debt and equity securities in privately-held companies, in which we do not have a controlling interest or significant influence, at cost or fair value when an event or circumstance indicates an other-than-temporary decline in value has occurred. We include these strategic investments in "Other assets" on the consolidated balance sheets.
Accounts Receivable
We record trade accounts receivable at the net invoice value and such receivables are non-interest bearing. We consider receivables past due based on the contractual payment terms. We review our exposure to accounts receivable and reserve for specific amounts if collectability is no longer reasonably assured.
Property and Equipment
Property and equipment, net, are stated at cost, subject to review of impairment, and depreciated using the straight-line method over the estimated useful lives of the assets as follows:
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Building
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39 years
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Computer equipment and software
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3—5 years
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Furniture and fixtures
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3—7 years
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Leasehold and other improvements
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|
shorter of the lease term or estimated useful life
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When assets are sold, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in cost of revenues or operating expenses depending on whether the asset sold is being used in our provision of services to our customers. Repairs and maintenance expenses are charged to our statements of comprehensive loss as incurred.
Capitalized Software Development Costs
Software development costs for software to be sold, leased, or otherwise marketed are expensed as incurred until the establishment of technological feasibility, at which time those costs are capitalized until the product is available for general release to customers and amortized over the estimated life of the product. Technological feasibility is established upon the completion of a working prototype that has been certified as having no critical bugs and is a release candidate. To date, costs and time incurred between the establishment of technological feasibility and product release have not been significant, and all software development costs have been charged to research and development expense in our consolidated statements of comprehensive loss.
Costs incurred to develop our internal administration, finance and accounting systems are capitalized during the application development stage and amortized over the software’s estimated useful life of
three
to
five years
.
Leases
Leases are reviewed and classified as capital or operating at their inception. Some of our lease agreements contain rent escalation, rent holidays, lease incentives and renewal options. Rent escalation and rent holidays are included in the determination of rent expenses to be recorded over the lease term. Lease incentives to pay for our costs or assets are recognized as a reduction of rent expense on a straight-line basis over the term of the lease. Renewals are not assumed in the determination of the lease term unless they are deemed to be reasonably assured at the inception of the lease. We begin recognizing rent expense on the date that we obtain the legal right to use and control the leased space. The difference between rent payments and straight-line rent expense is recorded as deferred rent in the consolidated balance sheets. Deferred rent that will be recognized during the ensuing
12
-month period is recorded as the current portion of deferred rent included in "Accrued expenses and other current liabilities" and the remainder is recorded as long term deferred rent included in "Other long-term liabilities".
Goodwill, Intangible Assets and Other Long Lived Assets
Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. We evaluate and test the recoverability of goodwill for impairment at least annually, during the fourth quarter, or more frequently if circumstances indicate that goodwill may not be recoverable. We perform the impairment testing by first assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of its reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we perform a two-step impairment test. The first step requires the identification of the reporting units and comparison of the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the second step of the impairment test is performed to compute the amount of the impairment. Under the second step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. For purposes of goodwill impairment testing, we have one reporting unit.
We periodically review the carrying amounts of long-lived assets, such as property and equipment, and purchased intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We measure the recoverability of these assets by comparing the carrying amount of each asset to the future undiscounted cash flows we expect the asset to generate. If we consider any of these assets to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair value. In addition, we periodically evaluate the estimated remaining useful lives of long-lived assets to determine whether events or changes in circumstances warrant a revision to the remaining period of depreciation or amortization. Our intangible assets are amortized over their useful lives ranging from
18 months
to
ten years
.
Advertising Costs
Advertising costs, excluding costs related to our annual Knowledge user conference and other customer forums, are expensed as incurred and are included in sales and marketing expense. These costs for the years ended
December 31, 2016
,
2015
and
2014
were
$42.1 million
,
$26.0 million
and
$17.2 million
, respectively.
Legal Contingencies
From time to time, we are a party to litigation and other legal proceedings in the ordinary course of business. We accrue for loss contingencies when we can reasonably estimate the amount of loss or range of loss and when, based on the advice of counsel, it is probable that we will incur the loss. Because of uncertainties related to these matters, we base our estimate on the information available at the time of our assessment. As additional information becomes available, we reassess our potential liability and may revise our estimate.
Stock-based Compensation
We recognize compensation expense related to stock options and restricted stock units (RSUs) on a straight-line basis over the requisite service period, which is generally the vesting term of four years. For RSUs granted with a performance condition, the expenses are recognized on a graded vesting basis over the vesting period, after assessing the probability of achieving requisite performance criteria. This has the impact of greater stock-based compensation expense during the initial years of the vesting period as stock-based compensation cost is recognized over the requisite service period for each separately vesting tranche of the award as though the award were, in substance, multiple awards. We recognize compensation expense related to shares issued pursuant to the employee stock purchase plan (ESPP) on a straight-line basis over the offering period. We estimate the fair value of options using the Black-Scholes options pricing model and fair value of RSUs using the fair value of our common stock on the date of grant. We recognize compensation expense net of estimated forfeiture activity, which is based on historical forfeiture rates. In some instances, shares are issued on the vesting dates net of the minimum statutory tax withholding requirements to be paid by us on behalf of our employees. In these instances, we record the liability for withholding amounts to be paid by us as a reduction to additional paid-in capital when paid, and include these payments as a reduction of cash flows from financing activities.
Net Loss Per Share
Basic net loss per share attributable to common stockholders is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, adjusted for the effects of dilutive common shares, which are comprised of outstanding common stock options, convertible preferred stock, RSUs, common stock subject to repurchase, ESPP obligations, convertible senior notes and warrants. The dilutive potential common shares are computed using the treasury stock method or the as-if converted method, as applicable. In periods where the effect of the conversion of preferred stock is dilutive, net loss attributable to common stockholders is adjusted by the associated preferred dividends and accretions. The effects of outstanding common stock options, convertible preferred stock, RSUs, common stock subject to repurchase, ESPP obligations, convertible senior notes and warrants are excluded from the computation of diluted net loss per common share in periods in which the effect would be antidilutive.
Concentration of Credit Risk and Significant Customers
Financial instruments potentially exposing us to credit risk consist primarily of cash, cash equivalents, 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. We are also exposed to credit risk under the convertible note hedge (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
December 31, 2016
and
2015
, there were
no
customers that represented more than
10%
of our accounts receivable balance. There were
no
customers that individually exceeded
10%
of our 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.
We review the composition of the accounts receivable balance, historical write-off experience and the potential risk of loss associated with delinquent accounts to determine if an allowance for doubtful accounts is necessary. Individual accounts receivable are written off when we become aware of a specific customer’s inability to meet its financial obligation, and all collection efforts are exhausted. The following table presents the changes in the allowance for doubtful accounts (in thousands):
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Balance at Beginning of Year
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Additions (Deductions): Charged to Operations
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Additions (Deductions): Charged to Deferred Revenue
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Less:
Write-offs
|
|
Balance at End of Year
|
Year ended December 31, 2016
|
|
|
|
|
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|
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|
Allowance for doubtful accounts
|
$
|
1,179
|
|
|
2,219
|
|
|
(391
|
)
|
|
684
|
|
|
$
|
2,323
|
|
Year ended December 31, 2015
|
|
|
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|
|
|
|
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Allowance for doubtful accounts
|
$
|
809
|
|
|
841
|
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|
(70
|
)
|
|
401
|
|
|
$
|
1,179
|
|
Year ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
$
|
1,143
|
|
|
395
|
|
|
(523
|
)
|
|
206
|
|
|
$
|
809
|
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Warranties and Indemnification
Our cloud computing solutions are typically warranted to perform in material conformance with their specifications.
We include service level commitments to our customers that permit those customers to receive credits in the event we fail to meet those service levels. We establish an accrual based on an evaluation of the known service disruptions. Service level credit accrual charges are recorded against revenue and were not material for all periods presented.
We have also agreed to indemnify our directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by us, arising out of that person’s services as a director or officer of our company or that person’s services provided to any other company or enterprise at our request. We maintain director and officer insurance coverage that may enable us to recover a portion of any future amounts paid. The fair values of these obligations are not material as of each balance sheet date.
Our agreements include provisions indemnifying customers against intellectual property and other third-party claims. We have not incurred any costs as a result of such indemnification obligations and have not recorded any liabilities related to such obligations in the consolidated financial statements.
Income Taxes
We use the asset and liability method of accounting for income taxes, in which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be reversed. We recognize the effect on deferred tax assets and liabilities of a change in tax rates as income and expense in the period that includes the enactment date. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. In determining the need for a valuation allowance, we consider future growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, historical earnings, taxable income in prior years, if carryback is permitted under the law, carryforward periods and prudent and feasible tax planning strategies.
Our tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. We recognize the tax benefit of an uncertain tax position only if it is more likely than not the position is sustainable upon examination by the taxing authority, based on the technical merits. We measure the tax benefit recognized as the largest amount of benefit which is more likely than not to be realized upon settlement with the taxing authority. We recognize interest accrued and penalties related to unrecognized tax benefits in our tax provision.
We calculate the current and deferred income tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years and record adjustments based on filed income tax returns when identified. The amount of income taxes paid is subject to examination by U.S. federal, state and foreign tax authorities. The estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts and circumstances existing at that time. To the extent the assessment of such tax position changes, we record the change in estimate in the period in which we make the determination.
New Accounting Pronouncements Adopted in 2016
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This standard is effective for our interim and annual reporting periods beginning January 1, 2017, and early adoption is permitted. We elected to early adopt this standard during the three months ended June 30, 2016. The impact of the early adoption was as follows:
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•
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The standard eliminates additional paid in capital (APIC) pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement as a discrete item when the awards vest or are settled. The adoption of this guidance on a prospective basis resulted in the recognition of excess tax benefits in our provision for income taxes of
$2.5 million
for the
year ended
December 31, 2016
.
|
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•
|
The standard requires excess tax benefits to be recognized regardless of whether the benefit reduces taxes payable. The adoption of this guidance on a modified retrospective basis resulted in the recognition of a cumulative-effect adjustment of
$11.4 million
that reduced our accumulated deficit and increased our foreign long-term deferred income tax as of January 1, 2016. The previously unrecognized U.S. excess tax effects were recorded as a deferred tax asset net of a valuation allowance.
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•
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We have elected to continue to estimate forfeitures expected to occur to determine the amount of stock-based compensation cost to be recognized in each period. As such, the guidance relating to forfeitures did not have an impact on our accumulated deficit as of January 1, 2016.
|
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•
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We elected to apply the statement of cash flows guidance that cash flows related to excess tax benefits be presented as an operating activity retrospectively, which resulted in a
$2.7 million
increase to net cash provided by operating activities and a corresponding decrease to net cash provided by financing activities in the accompanying consolidated statement of cash flows for the year ended December 31, 2015, and a
$2.0 million
increase to net cash provided by operating activities and a corresponding decrease to net cash provided by financing activities in the accompanying consolidated statement of cash flows for the year ended December 31, 2014, as compared to the amounts previously reported.
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•
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The statement of cash flows guidance that cash flows related to employee taxes paid for withheld shares be presented as a financing activity had no impact on our consolidated financial statements as we have historically presented such cash flows as a financing activity.
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In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments (Topic 805),” which eliminates the requirement to restate prior period financial statements for measurement period adjustments in business combinations. This new standard requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. We adopted this standard during the three months ended March 31, 2016 on a prospective basis and the adoption had no material impact on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement." ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes software. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. We adopted this standard during the three months ended March 31, 2016 on a prospective basis and the adoption had no material impact on our consolidated financial statements.
Pending Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which eliminates Step 2 from the goodwill impairment test. The standard requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. In addition, this new standard eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. This standard is effective for our interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. We do not anticipate this standard will have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. This standard is effective for our interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force," 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. This standard is effective for our interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We do not anticipate this standard will have a material impact on our consolidated financial statements.
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. This standard is effective for our interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," which provides guidance on eight specific cash flow issues. Among these issues, this standard requires, at the settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowings, the portion of the cash payment attributable to the accreted interest related to the debt discount to be classified as cash flows for operating activities, and the portion of the cash payments attributable to the principal to be classified as cash outflows for financing activities. This standard is effective for our interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.
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 standard is effective for our interim and annual reporting periods beginning after December 15, 2019. We are currently evaluating the impact of this standard on our 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 is effective for our interim and annual periods beginning January 1, 2019 and early adoption is permitted. While we are currently evaluating the impact of this standard on our consolidated financial statements, we anticipate this standard will have a material impact on our consolidated balance sheets given that we had operating lease commitments of approximately
$300 million
as of
December 31, 2016
. However, we do not anticipate this standard will have a material impact on our consolidated statements of comprehensive loss since the expense recognition under this new standard will be similar to current practice.
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. This new standard is effective for our interim and annual periods beginning January 1, 2018. We are currently evaluating the impact of this standard on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." Under the new standard, 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 receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations. These new standards are effective for our interim and annual periods beginning January 1, 2018 and early adoption beginning January 1, 2017 is permitted. We are planning to adopt these new standards beginning January 1, 2018.
The guidance 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 guidance recognized at the date of initial application (modified retrospective method). We currently anticipate adopting the standard using the full retrospective method to restate each prior reporting period presented.
We expect the new standard to have a material impact on the timing of revenue and expense recognition for our contracts related to on-premises offerings, in which we grant customers the right to deploy our subscription service on the customer’s own servers. Under this new standard, the requirement to have vendor specific objective evidence (VSOE) for undelivered elements is eliminated. As such, we may be required to recognize as revenue a portion of the sales price upon delivery of the software, compared to the current practice of recognizing the entire sales price ratably over an estimated subscription period due to the lack of VSOE. Currently, revenues from our on-premises offerings, under the ratable recognition model, represent less than 10% of our total revenues. Costs associated with our on-premises offerings, including commissions paid on the software, will be expensed immediately under the new standard.
In addition, we expect the new standard to impact our deferred commissions asset and the related amortization expense as the types of incremental costs requiring capitalization as well as the expense amortization period could change from our current practice. We currently expect the deferred commissions asset to increase and the related amortization expense in each reporting period to decrease under the new standard due to an increase in the average term over which such commissions are amortized.
We are continuing to evaluate the impact of the adoption of this standard on our consolidated financial statements and our preliminary assessments are subject to change.
(3) Investments
Marketable Securities
The following is a summary of our available-for-sale investment securities, excluding those securities classified within cash and cash equivalents on the consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
Commercial paper
|
$
|
56,839
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
56,839
|
|
Corporate notes and bonds
|
628,054
|
|
|
91
|
|
|
(1,590
|
)
|
|
626,555
|
|
Certificates of deposit
|
35,355
|
|
|
—
|
|
|
—
|
|
|
35,355
|
|
U.S. government agency securities
|
42,088
|
|
|
7
|
|
|
(62
|
)
|
|
42,033
|
|
Total available-for-sale securities
|
$
|
762,336
|
|
|
$
|
98
|
|
|
$
|
(1,652
|
)
|
|
$
|
760,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
Commercial paper
|
$
|
32,430
|
|
|
$
|
2
|
|
|
$
|
(38
|
)
|
|
$
|
32,394
|
|
Corporate notes and bonds
|
617,054
|
|
|
7
|
|
|
(2,027
|
)
|
|
615,034
|
|
Certificates of deposit
|
29,610
|
|
|
2
|
|
|
(17
|
)
|
|
29,595
|
|
U.S. government agency securities
|
134,962
|
|
|
1
|
|
|
(374
|
)
|
|
134,589
|
|
Total available-for-sale securities
|
$
|
814,056
|
|
|
$
|
12
|
|
|
$
|
(2,456
|
)
|
|
$
|
811,612
|
|
As of
December 31, 2016
, the contractual maturities of our investment securities did not exceed
24 months
. The fair values of available-for-sale investment securities, by remaining contractual maturity, are as follows (in thousands):
|
|
|
|
|
|
December 31, 2016
|
Due in one year or less
|
$
|
498,124
|
|
Due in one year through two years
|
262,658
|
|
Total
|
$
|
760,782
|
|
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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
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
|
$
|
492,503
|
|
|
$
|
(1,530
|
)
|
|
$
|
47,940
|
|
|
$
|
(60
|
)
|
|
$
|
540,443
|
|
|
$
|
(1,590
|
)
|
U.S. government agency securities
|
30,033
|
|
|
(62
|
)
|
|
—
|
|
|
—
|
|
|
30,033
|
|
|
(62
|
)
|
Total
|
$
|
522,536
|
|
|
$
|
(1,592
|
)
|
|
$
|
47,940
|
|
|
$
|
(60
|
)
|
|
$
|
570,476
|
|
|
$
|
(1,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
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
|
$
|
24,913
|
|
|
$
|
(38
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,913
|
|
|
$
|
(38
|
)
|
Corporate notes and bonds
|
539,586
|
|
|
(1,897
|
)
|
|
60,099
|
|
|
(130
|
)
|
|
599,685
|
|
|
(2,027
|
)
|
Certificates of deposit
|
19,750
|
|
|
(17
|
)
|
|
—
|
|
|
—
|
|
|
19,750
|
|
|
(17
|
)
|
U.S. government agency securities
|
132,581
|
|
|
(374
|
)
|
|
—
|
|
|
—
|
|
|
132,581
|
|
|
(374
|
)
|
Total
|
$
|
716,830
|
|
|
$
|
(2,326
|
)
|
|
$
|
60,099
|
|
|
$
|
(130
|
)
|
|
$
|
776,929
|
|
|
$
|
(2,456
|
)
|
As of
December 31, 2016
, we had a total of
274
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.
Strategic Investments
We account for our investments in non-marketable equity securities of certain privately-held companies under the cost method, as we have less than a 20% ownership interest and we do not have the ability to exercise significant influence over the operations of these companies. We utilize Level 3 inputs as part of our impairment analysis, including pre- and post-money valuations of recent financing events and the impact of those on its fully diluted ownership percentages, as well as other available information such as the issuer's financial results and earnings trends to identify indicators of other-than-temporary impairment. We have not recorded any impairment charges for any of our investments in privately-held companies and the carrying value of these investments was
$11.0 million
and
$10.5 million
as of
December 31, 2016
and
2015
, respectively.
(4) Fair Value Measurements
The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis at
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
Cash equivalents:
|
|
|
|
|
|
Money market funds
|
$
|
165,627
|
|
|
$
|
—
|
|
|
$
|
165,627
|
|
Short-term investments:
|
|
|
|
|
|
Commercial paper
|
—
|
|
|
56,839
|
|
|
56,839
|
|
Corporate notes and bonds
|
|
|
|
388,429
|
|
|
388,429
|
|
Certificates of deposit
|
—
|
|
|
35,355
|
|
|
35,355
|
|
U.S. government agency securities
|
—
|
|
|
17,501
|
|
|
17,501
|
|
Long-term investments:
|
|
|
|
|
|
Corporate notes and bonds
|
—
|
|
|
238,125
|
|
|
238,125
|
|
U.S. government agency securities
|
—
|
|
|
24,533
|
|
|
24,533
|
|
Total
|
$
|
165,627
|
|
|
$
|
760,782
|
|
|
$
|
926,409
|
|
The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis at
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
Cash equivalents:
|
|
|
|
|
|
Money market funds
|
$
|
263,515
|
|
|
$
|
—
|
|
|
$
|
263,515
|
|
Commercial paper
|
—
|
|
|
2,000
|
|
|
2,000
|
|
Corporate notes and bonds
|
—
|
|
|
1,119
|
|
|
1,119
|
|
Short-term investments:
|
|
|
|
|
|
Commercial paper
|
—
|
|
|
32,394
|
|
|
32,394
|
|
Corporate notes and bonds
|
—
|
|
|
303,567
|
|
|
303,567
|
|
Certificates of deposit
|
—
|
|
|
23,736
|
|
|
23,736
|
|
U.S. government agency securities
|
—
|
|
|
29,248
|
|
|
29,248
|
|
Long-term investments:
|
|
|
|
|
|
Corporate notes and bonds
|
—
|
|
|
311,467
|
|
|
311,467
|
|
Certificates of deposit
|
—
|
|
|
5,859
|
|
|
5,859
|
|
U.S. government agency securities
|
—
|
|
|
105,341
|
|
|
105,341
|
|
Total
|
$
|
263,515
|
|
|
$
|
814,731
|
|
|
$
|
1,078,246
|
|
We determine the fair value of our security holdings based on pricing from our service provider 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 9 for the fair value measurement of our convertible senior notes.
(5) Business Combinations
2016 Business Combinations
BrightPoint Security
On June 3, 2016, we completed the acquisition of a privately-held company, BrightPoint Security, Inc. (BrightPoint), by acquiring all issued and outstanding common shares of BrightPoint for approximately
$19.6 million
in an all-cash transaction to expand our security operations solutions. The following table summarizes the allocation of the purchase price to the fair value of the tangible and intangible assets acquired and liabilities assumed as of the acquisition date:
|
|
|
|
|
|
|
|
Purchase Price Allocation
(in thousands)
|
|
Useful Life
(in years)
|
Intangible assets:
|
|
|
|
Developed technology
|
$
|
8,100
|
|
|
6
|
Customer contracts and related relationships
|
500
|
|
|
1.5
|
Goodwill
|
15,258
|
|
|
|
Net tangible liabilities acquired
|
(1,339
|
)
|
|
|
Net deferred tax liabilities
(1)
|
(2,890
|
)
|
|
|
Total purchase price
|
$
|
19,629
|
|
|
|
|
|
(1)
|
Deferred tax liabilities, net primarily relates to purchased identifiable intangible assets and is shown net of deferred tax assets.
|
ITapp
On April 8, 2016, we completed the acquisition of a privately-held company, ITapp Inc. (ITapp), by acquiring all issued and outstanding common shares of ITapp for approximately
$14.5 million
in an all-cash transaction to expand our IT Operations Management solutions. The following table summarizes the allocation of the purchase price to the fair value of the tangible and intangible assets acquired and liabilities assumed as of the acquisition date:
|
|
|
|
|
|
|
|
Purchase Price Allocation
(in thousands)
|
|
Useful Life
(in years)
|
Net tangible assets acquired
|
$
|
140
|
|
|
|
Intangible assets:
|
|
|
|
Developed technology
|
4,700
|
|
|
5
|
Customer contracts and related relationships
|
200
|
|
|
1.5
|
Goodwill
|
11,437
|
|
|
|
Net deferred tax liabilities
(1)
|
(2,015
|
)
|
|
|
Total purchase price
|
$
|
14,462
|
|
|
|
|
|
(1)
|
Deferred tax liabilities, net primarily relates to purchased identifiable intangible assets and is shown net of deferred tax assets.
|
For both business combinations, the excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. We believe the goodwill represents the synergies expected from expanded market opportunities when integrating the acquired technologies with our offerings. The goodwill balance for both business combinations is not deductible for income tax purposes. Acquisition-related costs of
$1.0 million
are included in general and administrative expenses in our consolidated statements of comprehensive loss.
The results of operations of both BrightPoint and ITapp have been included in our consolidated financial statements from their respective dates of purchase. The following unaudited pro forma consolidated financial information combines the results of operations from us, BrightPoint and ITapp for the years ended December 31, 2016 and 2015, as if the acquisitions of BrightPoint and ITapp had occurred on January 1, 2015 (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
(Unaudited)
|
Revenue
|
$
|
1,391,220
|
|
|
$
|
1,007,752
|
|
Net loss
|
$
|
(455,146
|
)
|
|
$
|
(207,748
|
)
|
Weighted-average shares used to compute net loss per share - basic and diluted
|
164,533,823
|
|
|
155,706,643
|
|
Net loss per share - basic and diluted
|
$
|
(2.77
|
)
|
|
$
|
(1.33
|
)
|
The pro forma results as presented above are based on estimates and assumptions, which we believe are reasonable. They are not necessarily indicative of our consolidated results of operations in future periods or the results that actually would have been realized had we been a combined company during the periods presented. The pro forma results include adjustments primarily related to amortization of acquired intangible assets and acquisition-related costs.
2014 Business Combination
Neebula Systems Ltd.
On July 11, 2014, we completed the acquisition of a privately-held company, Neebula Systems Ltd. (Neebula), by acquiring all issued and outstanding common shares of Neebula for approximately
$100 million
in an all-cash transaction to expand our IT Operations Management solutions. The following table summarizes the allocation of the purchase price to the fair value of the tangible and intangible assets acquired and liabilities assumed as of the acquisition date:
|
|
|
|
|
|
|
|
Purchase Price Allocation
(in thousands)
|
|
Useful Life
(in years)
|
Net tangible assets acquired
|
$
|
102
|
|
|
|
Intangible assets:
|
|
|
|
Developed technology
|
56,200
|
|
|
5.5
|
Order backlog
|
600
|
|
|
1.5
|
Trade names
|
300
|
|
|
1.5
|
Goodwill
|
53,788
|
|
|
|
Net deferred tax liabilities
(1)
|
(10,527
|
)
|
|
|
Total purchase price
|
$
|
100,463
|
|
|
|
|
|
(1)
|
Deferred tax liabilities, net primarily relates to purchased identifiable intangible assets and is shown net of deferred tax assets.
|
The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. We believe the goodwill represents the synergies expected from expanded market opportunities when integrating Neebula technologies with our offerings. The goodwill balance is not deductible for U.S. income tax purposes. Acquisition-related costs of $
1.2 million
are primarily included in general and administrative expenses on our consolidated statements of comprehensive loss.
The results of operations of Neebula have been included in our consolidated financial statements from the date of purchase. The following unaudited pro forma consolidated financial information combines the results of operations for us and Neebula for the year ended December 31, 2014, as if the acquisition of Neebula had occurred on January 1, 2014 (in thousands, except share and per share data):
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
(Unaudited)
|
Total revenues
|
$
|
683,426
|
|
Net loss
|
(189,457
|
)
|
Weighted-average shares used to compute net loss per share - basic and diluted
|
145,355,543
|
|
Net loss per share - basic and diluted
|
$
|
(1.30
|
)
|
The pro forma results as presented above are based on estimates and assumptions, which we believe are reasonable. They are not necessarily indicative of our consolidated results of operations in future periods or the results that actually would have been realized had we been a combined company during the periods presented. The pro forma results include adjustments primarily related to amortization of acquired intangible assets and acquisition-related costs.
(6) Goodwill and Intangible Assets
Goodwill balances are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
Balance as of December 31, 2014
|
|
$
|
55,016
|
|
Goodwill acquired
|
|
1,442
|
|
Foreign currency translation adjustments
|
|
(789
|
)
|
Balance as of December 31, 2015
|
|
55,669
|
|
Goodwill acquired
|
|
26,695
|
|
Foreign currency translation adjustments
|
|
170
|
|
Balance as of December 31, 2016
|
|
$
|
82,534
|
|
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Developed technology
|
$
|
79,206
|
|
|
$
|
(30,858
|
)
|
|
$
|
48,348
|
|
Patents
|
17,610
|
|
|
(867
|
)
|
|
16,743
|
|
Other
|
1,775
|
|
|
(1,012
|
)
|
|
763
|
|
Total intangible assets
|
$
|
98,591
|
|
|
$
|
(32,737
|
)
|
|
$
|
65,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Developed technology
|
$
|
58,144
|
|
|
$
|
(17,463
|
)
|
|
$
|
40,681
|
|
Patents
|
1,750
|
|
|
—
|
|
|
1,750
|
|
Other
|
1,945
|
|
|
(1,371
|
)
|
|
574
|
|
Total intangible assets
|
$
|
61,839
|
|
|
$
|
(18,834
|
)
|
|
$
|
43,005
|
|
Apart from the business combinations described in Note 5, we acquired
$25.0 million
and
$1.8 million
of intangible assets in patents and technology acquisitions during the years ended December 31, 2016 and December 31, 2015 respectively. Weighted average useful life for these patents and technology is approximately
9
years and
5
years, respectively.
Amortization expense for intangible assets was approximately
$15.1 million
,
$11.8 million
and
$6.8 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
The following table presents the estimated future amortization expense related to intangible assets held at
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
2017
|
|
$
|
16,910
|
|
2018
|
|
15,762
|
|
2019
|
|
15,682
|
|
2020
|
|
6,072
|
|
2021
|
|
4,170
|
|
Thereafter
|
|
7,258
|
|
Total future amortization expense
|
|
$
|
65,854
|
|
(7) Property and Equipment
Property and equipment, net consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Computer equipment and software
|
$
|
254,780
|
|
|
$
|
180,197
|
|
Leasehold improvements
|
37,095
|
|
|
31,659
|
|
Furniture and fixtures
|
31,574
|
|
|
26,017
|
|
Building
|
6,379
|
|
|
6,318
|
|
Construction in progress
|
2,535
|
|
|
1,886
|
|
|
332,363
|
|
|
246,077
|
|
Less: Accumulated depreciation
|
(150,743
|
)
|
|
(101,363
|
)
|
Total property and equipment, net
|
$
|
181,620
|
|
|
$
|
144,714
|
|
Construction in progress consists primarily of leasehold improvements and in-process software development costs. Depreciation expense was
$67.8 million
,
$48.5 million
and $
35.3 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
(8) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Taxes payable
|
$
|
19,472
|
|
|
$
|
9,080
|
|
Bonuses and commissions
|
67,259
|
|
|
33,124
|
|
Accrued compensation
|
30,816
|
|
|
17,089
|
|
Other employee expenses
|
28,812
|
|
|
21,529
|
|
Other
|
25,277
|
|
|
20,442
|
|
Total accrued expenses and other current liabilities
|
$
|
171,636
|
|
|
$
|
101,264
|
|
(9) Convertible Senior Notes
In November 2013, we issued
0%
convertible senior notes due
November 1, 2018
with an aggregate principal amount of
$575 million
(Notes). The Notes will not bear interest. The Notes mature on
November 1, 2018
unless converted or repurchased in accordance with their terms prior to such date. We cannot redeem the Notes prior to maturity.
The 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, 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. We intend to settle the principal amount of the Notes with cash.
The Notes are convertible into
7.8 million
shares of our common stock at an initial conversion rate of approximately
13.54
shares of common stock per
$1,000
principal amount, which is equal to an initial conversion price of approximately
$73.88
per share of common stock, subject to adjustment. Holders of the Notes may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding
July 1, 2018
, only under the following circumstances:
|
|
•
|
during any calendar quarter commencing after the calendar quarter ending on
March 31, 2014
(and only during such calendar quarter), if the last reported sale price of the common stock for at least
20
trading days (whether or not consecutive) during the period of
30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to
130%
of the conversion price on each applicable trading day;
|
|
|
•
|
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 conversion rate on each such trading day; or
|
|
|
•
|
upon the occurrence of specified corporate events.
|
On or after
July 1, 2018
, 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. Upon conversion, 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 will be subject to adjustment in some events. Holders of the Notes who convert their 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 Notes may require us to purchase with cash all or a portion of the Notes upon the occurrence of a fundamental change, at a purchase price equal to
100%
of the principal amount of the Notes plus any accrued and unpaid interest.
In accounting for the issuance of the Notes, we separated the Notes into liability and equity components. The carrying cost of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes. The difference between the principal amount of the Notes and the proceeds allocated to the liability component, or the debt discount, is amortized to interest expense using the effective interest method over the term of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the issuance of the Notes, we allocated the total amount incurred to the liability and equity components based on their relative fair values. Transaction costs attributable to the liability component are being amortized to interest expense over the term of the Notes, and transaction costs attributable to the equity component were netted with the equity component of the Notes in stockholders’ equity. The Notes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Liability:
|
|
|
|
Principal
|
$
|
575,000
|
|
|
$
|
575,000
|
|
Less: debt issuance cost and debt discount, net of amortization
|
(67,188
|
)
|
|
(100,466
|
)
|
Net carrying amount
|
$
|
507,812
|
|
|
$
|
474,534
|
|
We consider the fair value of the Notes at
December 31, 2016
and
2015
to be a Level 2 measurement. The estimated fair values of the Notes were
$681.4 million
and
$741.8 million
at
December 31, 2016
and
2015
respectively (based on the closing trading price per
$100
of the Notes on
December 31, 2016
and
2015
, respectively). The Notes were not convertible as of
December 31, 2016
and
2015
.
As of
December 31, 2016
, the remaining life of the Notes is
22
months. The following table sets forth total interest expense recognized related to the Notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Amortization of debt issuance cost
|
$
|
1,785
|
|
|
$
|
1,668
|
|
|
$
|
1,558
|
|
Amortization of debt discount
|
31,493
|
|
|
29,429
|
|
|
27,501
|
|
Total
|
$
|
33,278
|
|
|
$
|
31,097
|
|
|
$
|
29,059
|
|
Effective interest rate of the liability component
|
6.5%
|
Note Hedge
To minimize the impact of potential economic dilution upon conversion of the Notes, we entered into convertible note hedge transactions (Note Hedge), with respect to our common stock concurrent with the issuance of the Notes. The Note Hedge covers approximately
7.8 million
shares of our common stock at a strike price per share that corresponds to the initial conversion price of the Notes, subject to adjustment, and is exercisable upon conversion of the Notes. We paid an aggregate amount of
$135.8 million
for the Note Hedge. The Note Hedge will expire upon maturity of the Notes. The Note Hedge is intended to reduce the potential economic dilution upon conversion of the 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 Notes. The Note Hedge is a separate transaction and is not part of the terms of the Notes. The Note Hedge does not impact earnings per share, as it was entered into to offset any dilution from the Notes.
Warrants
Separately, we entered into warrant transactions (Warrants), whereby we sold warrants to acquire up to
7.8 million
shares of our common stock, at a strike price of
$107.46
per share, subject to adjustment. We received aggregate proceeds of
$84.5 million
from the sale of 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 Warrants, the Warrants will have a dilutive effect on our earnings per share. The Warrants are separate transactions and are not remeasured through earnings each reporting period. The Warrants are not part of the Notes or the Note Hedge, and have been accounted for as part of additional paid-in capital.
(10) Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Foreign currency translation adjustment
|
$
|
(19,277
|
)
|
|
$
|
(14,438
|
)
|
Net unrealized loss on investments, net of tax
|
(1,856
|
)
|
|
(2,444
|
)
|
Accumulated other comprehensive loss
|
$
|
(21,133
|
)
|
|
$
|
(16,882
|
)
|
Reclassification adjustments out of accumulated other comprehensive loss into net loss were immaterial for all periods presented.
(11) Stockholders' Equity
Common Stock
We are authorized to issue a total of
600,000,000
shares of common stock as of
December 31, 2016
. Holders of our common stock are not entitled to receive dividends unless declared by our board of directors. As of
December 31, 2016
, we had
167,430,773
shares of common stock outstanding and had reserved shares of common stock for future issuance as follows:
|
|
|
|
|
|
|
|
December 31, 2016
|
Stock option plans:
|
|
|
Options outstanding
|
|
5,818,435
|
|
RSUs
|
|
12,222,282
|
|
Stock awards available for future grants:
|
|
|
2012 Equity Incentive Plan
(1)
|
|
20,901,395
|
|
2012 Employee Stock Purchase Plan
(1)
|
|
8,566,803
|
|
Total reserved shares of common stock for future issuance
|
|
47,508,915
|
|
|
|
(1)
|
Refer to Note 12 for a description of these plans.
|
During the years ended
December 31, 2016
and
2015
, we issued a total of
6,645,009
shares and
11,276,672
shares, respectively, from stock option exercises, vesting of RSUs and ESPP.
Preferred Stock
Our board of directors has the authority, without further action by stockholders, to issue up to
10,000,000
shares of preferred stock in one or more series. Our board of directors may designate the rights, preferences, privileges and restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preference and number of shares constituting any series or the designation of any series. The issuance of preferred stock could have the effect of restricting dividends on our common stock, diluting the voting power of our common stock, impairing the liquidation rights of our common stock, or delaying or preventing a change in control. At
December 31, 2016
and
2015
,
no
shares of preferred stock were outstanding.
(12) Stock Awards
We have a 2005 Stock Option Plan (2005 Plan) which provides for grants of stock awards, including options to purchase shares of common stock, stock purchase rights and RSUs to certain employees, officers, directors and consultants. As of
December 31, 2016
, there were
52,968,233
total shares of common stock authorized for issuance under the 2005 Plan, which includes shares already issued under such plan and shares reserved for issuance pursuant to outstanding options and RSUs.
On April 27, 2012, the board of directors approved the 2012 Equity Incentive Plan (2012 Plan) and the 2012 Employee Stock Purchase Plan (2012 ESPP) which became effective on June 27, 2012 and June 28, 2012, respectively.
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, or collectively, stock 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 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. The share reserve also automatically increases on January 1 of each year until January 1, 2022, by up to
5%
of the total number of shares of common stock outstanding on December 31 of the preceding year as determined by the board of directors. As of
December 31, 2016
, there were
45,063,064
total shares of common stock authorized for issuance under the 2012 Plan, excluding
8,371,539
shares of common stock automatically added to the 2012 Plan on January 1,
2017
pursuant to the provision described in the preceding sentence.
Our 2012 ESPP authorizes the issuance of shares of common stock pursuant to purchase rights granted to our employees. 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 the board of directors. The price at which common stock is purchased under the 2012 ESPP is equal to
85%
of the fair market value of the 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. As of
December 31, 2016
, we had
8,566,803
total shares of common stock reserved for issuance under the 2012 ESPP, excluding
1,674,308
shares of common stock automatically added to the 2012 Plan on January 1,
2017
.
Stock Options
The 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 IPO, 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
. Option holders under the 2005 Plan can exercise unvested options to acquire restricted stock. Upon termination of service, we have the right to repurchase at the original purchase price any unvested (but issued) shares of common stock.
A summary of the stock option activity 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, 2014
|
15,897,422
|
|
|
$
|
11.96
|
|
|
|
|
|
Granted
|
316,048
|
|
|
75.76
|
|
|
|
|
|
Exercised
|
(7,695,815
|
)
|
|
8.89
|
|
|
|
|
$
|
523,127
|
|
Canceled
|
(262,101
|
)
|
|
31.31
|
|
|
|
|
|
Outstanding at December 31, 2015
|
8,255,554
|
|
|
16.65
|
|
|
|
|
|
Granted
|
617,985
|
|
|
71.17
|
|
|
|
|
|
Exercised
|
(2,587,173
|
)
|
|
13.36
|
|
|
|
|
$
|
157,774
|
|
Canceled
|
(467,931
|
)
|
|
58.01
|
|
|
|
|
|
Outstanding at December 31, 2016
|
5,818,435
|
|
|
$
|
20.57
|
|
|
5.43
|
|
$
|
313,823
|
|
Vested and expected to vest as of December 31, 2016
|
5,721,902
|
|
|
$
|
19.72
|
|
|
5.36
|
|
$
|
313,398
|
|
Vested and exercisable as of December 31, 2016
|
4,968,001
|
|
|
$
|
12.53
|
|
|
4.85
|
|
$
|
307,276
|
|
Aggregate intrinsic value represents the difference between the estimated fair value of our common stock and the exercise price of outstanding, in-the-money options. The total intrinsic value of the options exercised was
$406.6 million
for the year ended
December 31, 2014
. The weighted-average grant date fair value per share of options granted was
$28.01
,
$32.64
and
$29.66
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. The total fair value of shares vested was
$17.0 million
,
$34.5 million
and
$39.1 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
As of
December 31, 2016
, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options was approximately
$18.9 million
. The weighted-average remaining vesting period of unvested stock options at
December 31, 2016
was
2.84 years
.
RSUs
A summary of RSU activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average Grant Date Fair Value
(Per Share)
|
|
Aggregate
Intrinsic Value
(in thousands)
|
Outstanding at December 31, 2014
|
9,941,074
|
|
|
$
|
51.19
|
|
|
|
Granted
|
6,941,008
|
|
|
73.98
|
|
|
|
Vested
|
(3,290,220
|
)
|
|
50.25
|
|
|
$
|
254,691
|
|
Forfeited
|
(1,174,057
|
)
|
|
59.67
|
|
|
|
Outstanding at December 31, 2015
|
12,417,805
|
|
|
63.38
|
|
|
|
Granted
|
6,870,285
|
|
|
61.22
|
|
|
|
Vested
|
(5,213,662
|
)
|
|
59.95
|
|
|
$
|
354,320
|
|
Forfeited
|
(1,852,146
|
)
|
|
63.18
|
|
|
|
Outstanding at December 31, 2016
|
12,222,282
|
|
|
$
|
63.66
|
|
|
$
|
908,604
|
|
Expected to vest as of December 31, 2016
|
10,221,726
|
|
|
|
|
$
|
759,883
|
|
RSUs granted under the 2005 Plan and the 2012 Plan to employees generally vest over a four-year period. The total intrinsic value of the RSUs vested was
$73.7 million
for the year ended
December 31, 2014
.
Included in the RSU activity table above are shares with both service and performance-based vesting criteria that were granted to certain executives. These performance RSUs are considered as eligible to vest when approved by the compensation committee in January of the year following the grant. The shares granted in each year will vest in four quarterly increments from August of the following year contingent on the continuous employment of each executive. We recognized
$36.1 million
,
$30.8 million
, and
$19.2 million
of stock-based compensation expense, net of actual and estimated forfeitures, associated with performance RSUs on a graded vesting basis during the year ended
December 31, 2016
,
2015
, and
2014
, respectively.
As of
December 31, 2016
, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs was approximately
$570.4 million
and the weighted-average remaining vesting period was
2.78 years
.
(13) Stock-Based Compensation
We use the Black-Scholes options pricing model to estimate the fair value of our stock option grants. This model incorporates various assumptions including expected volatility, expected term, risk-free interest rates and expected dividend yields. The following assumptions were used for each respective period to calculate our stock-based compensation for each stock option grant on the date of the grant:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
Stock Options:
|
|
|
|
|
|
Expected volatility
|
41% - 42%
|
|
|
41% - 46%
|
|
|
47% - 50%
|
|
Expected term (in years)
|
4.89 - 5.60
|
|
|
5.50 - 6.08
|
|
|
6.08
|
|
Risk-free interest rate
|
1.18% - 1.87%
|
|
|
1.48% - 1.94%
|
|
|
1.78% - 2.06%
|
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
The following assumptions were used to calculate our stock-based compensation for each stock purchase right granted under the 2012 ESPP:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
ESPP:
|
|
|
|
|
|
Expected volatility
|
31% - 49%
|
|
|
31% - 49%
|
|
|
33% - 49%
|
|
Expected term (in years)
|
0.50
|
|
|
0.50
|
|
|
0.50
|
|
Risk-free interest rate
|
0.17% - 0.47%
|
|
|
0.05% - 0.17%
|
|
|
0.05% - 0.08%
|
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Expected volatility
. Prior to the third quarter of 2015, we used the historic volatility of publicly traded peer companies as an estimate for expected volatility. In considering peer companies, characteristics such as industry, stage of development, size and financial leverage are considered. Beginning in the third quarter of 2015, we began to include our own historical volatility in addition to publicly traded peers to calculate our expected volatility for a period similar to our expected term. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available.
Expected term
. Prior to the third quarter of 2015, we used the simplified method for calculating the expected term of options as described in the SEC's Staff Accounting Bulletin No. 107, Share-Based Payment. The simplified method calculates the expected term as the mid-point between the vesting date and the contractual expiration date of the award. Beginning in the third quarter of 2015, we determined the expected term based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior, because we now believe there is sufficient historical information to derive a reasonable estimate. We estimate the expected term for ESPP using the purchase period.
Risk-free interest rate
. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the stock-based award.
Expected dividend yield
. Our expected dividend yield is zero, as we have not and do not currently intend to declare dividends in the foreseeable future.
(14) Net Loss Per Share
The following tables present the calculation of basic and diluted net loss per share attributable to common stockholders (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Numerator:
|
|
|
|
|
|
Net loss
|
$
|
(451,804
|
)
|
|
$
|
(198,426
|
)
|
|
$
|
(179,387
|
)
|
Denominator:
|
|
|
|
|
|
Weighted-average shares outstanding - basic and diluted
|
164,533,823
|
|
|
155,706,643
|
|
|
145,355,543
|
|
Net loss per share - basic and diluted
|
$
|
(2.75
|
)
|
|
$
|
(1.27
|
)
|
|
$
|
(1.23
|
)
|
Potentially dilutive securities that are not included in the calculation of diluted net loss per share because doing so would be antidilutive are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Common stock options
|
5,818,435
|
|
|
8,255,554
|
|
|
15,897,422
|
|
Restricted stock units
|
12,222,282
|
|
|
12,417,805
|
|
|
9,941,074
|
|
Common stock subject to repurchase
|
—
|
|
|
—
|
|
|
13,597
|
|
ESPP obligations
|
366,529
|
|
|
254,728
|
|
|
272,294
|
|
Convertible senior notes
|
7,783,023
|
|
|
7,783,023
|
|
|
7,783,023
|
|
Warrants related to the issuance of convertible senior notes
|
7,783,023
|
|
|
7,783,023
|
|
|
7,783,023
|
|
Total potentially dilutive securities
|
33,973,292
|
|
|
36,494,133
|
|
|
41,690,433
|
|
(15) Income Taxes
The provision for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Current provision:
|
|
|
|
|
|
Federal
|
$
|
(55
|
)
|
|
$
|
682
|
|
|
$
|
2
|
|
State
|
135
|
|
|
211
|
|
|
216
|
|
Foreign
|
5,097
|
|
|
6,125
|
|
|
5,046
|
|
|
5,177
|
|
|
7,018
|
|
|
5,264
|
|
Deferred provision:
|
|
|
|
|
|
Federal
|
(4,462
|
)
|
|
—
|
|
|
(232
|
)
|
State
|
(746
|
)
|
|
—
|
|
|
(24
|
)
|
Foreign
|
1,784
|
|
|
(1,604
|
)
|
|
(1,161
|
)
|
|
(3,424
|
)
|
|
(1,604
|
)
|
|
(1,417
|
)
|
Provision for income taxes
|
$
|
1,753
|
|
|
$
|
5,414
|
|
|
$
|
3,847
|
|
The components of loss before provision for income taxes by U.S. and foreign jurisdictions were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
United States
|
$
|
(432,631
|
)
|
|
$
|
(150,593
|
)
|
|
$
|
(109,087
|
)
|
Foreign
|
(17,420
|
)
|
|
(42,419
|
)
|
|
(66,453
|
)
|
Total
|
$
|
(450,051
|
)
|
|
$
|
(193,012
|
)
|
|
$
|
(175,540
|
)
|
The effective income tax rate differs from the federal statutory income tax rate applied to the loss before provision for income taxes due to the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Tax computed at U.S. federal statutory rate
|
$
|
(153,017
|
)
|
|
$
|
(65,624
|
)
|
|
$
|
(59,684
|
)
|
State taxes, net of federal benefit
|
37
|
|
|
53
|
|
|
95
|
|
Tax rate differential for international subsidiaries
|
10,910
|
|
|
18,681
|
|
|
26,169
|
|
Stock-based compensation
|
(27,133
|
)
|
|
13,597
|
|
|
9,049
|
|
Tax credits
|
(16,452
|
)
|
|
(11,961
|
)
|
|
(9,481
|
)
|
Other
|
2,642
|
|
|
2,865
|
|
|
2,231
|
|
Valuation allowance
|
184,766
|
|
|
47,803
|
|
|
35,468
|
|
Provision for income taxes
|
$
|
1,753
|
|
|
$
|
5,414
|
|
|
$
|
3,847
|
|
Significant components of our deferred tax assets are shown below (in thousands). A valuation allowance has been recognized to offset our deferred tax assets, as necessary, by the amount of any tax benefits that, based on evidence, are not expected to be realized.
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
Net operating loss carryforwards
|
$
|
640,312
|
|
|
$
|
27,570
|
|
Accrued expenses
|
10,424
|
|
|
6,030
|
|
Credit carryforwards
|
50,559
|
|
|
32,824
|
|
Stock-based compensation
|
46,530
|
|
|
53,249
|
|
Note Hedge
|
20,520
|
|
|
30,593
|
|
Other
|
13,733
|
|
|
12,025
|
|
Total deferred tax assets
|
782,078
|
|
|
162,291
|
|
Less valuation allowance
|
(728,870
|
)
|
|
(110,311
|
)
|
|
53,208
|
|
|
51,980
|
|
Deferred tax liabilities:
|
|
|
|
Depreciation and amortization
|
(18,914
|
)
|
|
(13,103
|
)
|
Convertible notes
|
(23,605
|
)
|
|
(35,054
|
)
|
Other
|
—
|
|
|
(4
|
)
|
Net deferred tax assets
|
$
|
10,689
|
|
|
$
|
3,819
|
|
As of
December 31, 2016
, we had U.S. federal net operating loss and federal tax credit carryforwards of approximately
$1.7 billion
and
$40.5 million
, respectively. The federal net operating loss carryforwards and federal tax credits will begin to expire in
2024
if not utilized. In addition, we had state net operating loss and state tax credit carryforwards of approximately
$941.7 million
and
$32.5 million
, respectively. The state net operating loss will begin to expire in
2017
if not utilized, and the tax effected amount due to expire in
2017
is immaterial. State tax credits can be carried forward indefinitely. Utilization of our net operating loss and credit carryforwards may be subject to annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carryforwards before utilization.
We maintain a full valuation allowance against our U.S. deferred tax assets as of
December 31, 2016
. We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. Due to cumulative losses over recent years and based on all available evidence, we have determined that it is more likely than not that net deferred tax assets in the United States will not be realized. We have determined that
$10.7 million
related to deferred tax assets in certain foreign jurisdictions are realizable since the foreign entities have cumulative income and expected future income. The valuation allowance increased
$618.6 million
during the year ended
December 31, 2016
. This change is primarily attributable to an increase in current year net operating loss carryforwards of
$186.5 million
and an increase of
$417.0 million
related to the early adoption of ASU 2016-09 "Improvements to Employee Share-Based Payment Accounting," upon which previously unrecognized U.S. excess tax effects have been recorded as additional net operating loss carryforwards within our deferred tax asset. We will continue to assess the likelihood of realization of the deferred tax assets in each of the applicable jurisdictions in future periods and will adjust the valuation allowance accordingly.
We have not recorded a provision for deferred U.S. tax expense that could result from the remittance of foreign undistributed earnings since we intend to reinvest the earnings of the foreign subsidiaries indefinitely.
Our share of the undistributed earnings of foreign corporations not included in our consolidated federal income tax returns that could be subject to additional U.S. income tax if remitted is immaterial. The determination of the amount of unrecognized U.S federal deferred income tax liability for undistributed earnings is not practicable.
A reconciliation of the beginning and ending balance of total unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Balance, beginning period
|
$
|
11,737
|
|
|
$
|
9,158
|
|
|
$
|
4,810
|
|
Tax positions taken in prior period:
|
|
|
|
|
|
Gross increases
|
1,122
|
|
|
2
|
|
|
45
|
|
Gross decreases
|
(50
|
)
|
|
(1,017
|
)
|
|
(313
|
)
|
Tax positions taken in current period:
|
|
|
|
|
|
Gross increases
|
5,673
|
|
|
3,768
|
|
|
4,704
|
|
Gross decreases
|
—
|
|
|
(73
|
)
|
|
—
|
|
Lapse of statute of limitations
|
(42
|
)
|
|
(101
|
)
|
|
(88
|
)
|
Balance, end of period
|
$
|
18,440
|
|
|
$
|
11,737
|
|
|
$
|
9,158
|
|
As of
December 31, 2016
, we had gross unrecognized tax benefits of approximately
$18.4 million
, of which
$4.0 million
would impact the effective tax rate, if recognized. We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense. Accrued interest and penalties included in our liability related to unrecognized tax benefits were
$0.4 million
and
$0.5 million
at
December 31, 2016
and
2015
, respectively. The amount of unrecognized tax benefits could be reduced upon expiration of the applicable statutes of limitations. The potential reduction in unrecognized tax benefits during the next 12 months is not expected to be material. Interest and penalties accrued on these uncertain tax positions will be released upon the expiration of the statutes of limitations and these amounts are also not material.
We are subject to taxation in the United States and foreign jurisdictions. As of
December 31, 2016
, our tax years 2004 to 2016 remain subject to examination in most jurisdictions.
There are differing interpretations of tax laws and regulations, and as a result, disputes may arise with tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. We periodically evaluate our exposures associated with our tax filing positions. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations, and we do not anticipate a significant impact to our gross unrecognized tax benefits within the next 12 months related to these years. Although the timing of the resolution, settlement, and closure of any audit is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years that remain subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.
(16) Commitments and Contingencies
Operating Leases and Other Contractual Commitments
For some of our offices and data centers, we have entered into non-cancelable operating lease agreements with various expiration dates. Rent expense associated with office space leases was
$34.2 million
,
$22.0 million
and
$15.0 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
Payments for data center square footage as well as data center capacity for certain data centers, are primarily included in cost of revenues. These costs were
$17.3 million
,
$13.7 million
and
$13.1 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
Future minimum payments under our non-cancelable operating leases and other contractual commitments as of
December 31, 2016
are presented in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases, net of Sublease Income
|
|
Purchase Obligations
(1)
|
|
Other
|
|
Total
|
Years Ending December 31,
|
|
|
|
|
|
|
|
2017
|
$
|
33,855
|
|
|
$
|
17,933
|
|
|
$
|
517
|
|
|
$
|
52,305
|
|
2018
|
35,887
|
|
|
13,401
|
|
|
517
|
|
|
49,805
|
|
2019
|
36,042
|
|
|
6,529
|
|
|
517
|
|
|
43,088
|
|
2020
|
35,197
|
|
|
3,950
|
|
|
517
|
|
|
39,664
|
|
2021
|
34,847
|
|
|
2,127
|
|
|
517
|
|
|
37,491
|
|
Thereafter
|
122,643
|
|
|
—
|
|
|
1,465
|
|
|
124,108
|
|
Total
|
$
|
298,471
|
|
|
$
|
43,940
|
|
|
$
|
4,050
|
|
|
$
|
346,461
|
|
|
|
(1)
|
Consists of future minimum payments under non-cancelable purchase commitments primarily related to data center and IT operations. Not included in the table above are certain purchase commitments related to our future Knowledge user conferences. If we were to cancel these agreements as of
December 31, 2016
, we would have been obligated to pay cancellation penalties of approximately
$18.1 million
in aggregate.
|
In November 2012, we entered into a lease agreement for
148,704
square feet of office space located in Santa Clara, California. The lease commenced in April 2013 and has a term of approximately
11 years
. Rent is paid on a monthly basis and will increase incrementally over the term of the lease for total minimum lease payments of approximately
$48.8 million
.
In December 2014, we entered into a lease agreement for
328,867
square feet of space, located in Santa Clara, California. The lease commenced in August 2015 for an initial term of
12 years
, with two options to renew the lease for additional terms of
five years
each. Rent is paid on a monthly basis and will increase incrementally over the term of the lease for total minimum lease payments of approximately
$151.1 million
.
Subsequent to the year ended December 31, 2016, we entered into certain lease agreements for additional office space. Total future minimum lease payments under these operating leases of approximately
$52.1 million
in aggregate are not included in the table above.
$29.6 million
of the
$52.1 million
relates to an expansion and lease term extension of our existing San Diego office facility.
In addition to the amounts above, the repayment of our 0% convertible senior notes with an aggregate principal amount of
$575 million
is due on November 1, 2018. Refer to Note 9 for further information regarding our convertible senior notes.
Legal Proceedings
From time to time, we are party to litigation and other legal proceedings in the ordinary course of business. While the results of any litigation or other legal proceedings are uncertain, management does not believe the ultimate resolution of any pending legal matters is likely to have a material adverse effect on our financial position, results of operations or cash flows, except as discussed below and for those matters for which we have recorded a loss contingency. We accrue for loss contingencies when it is both probable that we will incur the loss and when we can reasonably estimate the amount of the loss or range of loss.
Generally, our subscription agreements require us to defend our customers for third-party intellectual property infringement and other claims. Any adverse determination related to intellectual property claims or other litigation could prevent us from offering our services and adversely affect our financial condition and results of operations.
On February 6, 2014, Hewlett-Packard Company (Hewlett-Packard) filed a lawsuit against us in the U.S. District Court for the Northern District of California. The lawsuit alleged patent infringement and sought damages and an injunction. On or about November 1, 2015, Hewlett Packard Enterprise Company (HPE) separated from Hewlett-Packard as an independent company, and Hewlett-Packard assigned to HPE all right, title, and interest in the eight Hewlett-Packard patents in the lawsuit and HPE was substituted as plaintiff in the litigation. On March 4, 2016, we entered into a confidential settlement agreement resolving the lawsuit with HPE (HPE Settlement). As a result, on March 9, 2016, the lawsuit was dismissed.
BMC Software, Inc. (BMC) filed lawsuits against us in the U.S. District Court for the Eastern District of Texas on September 23, 2014 and February 12, 2016, and in the Dusseldorf (Germany) Regional Court, Patent Division, on March 2, 2016. Each of the lawsuits alleged patent infringement and sought damages and an injunction. On April 8, 2016, we entered into a confidential settlement agreement resolving all the lawsuits with BMC (BMC Settlement). As a result, the second Texas lawsuit was dismissed on April 14, 2016, and each of the initial Texas lawsuit and the German lawsuit was dismissed on April 25, 2016.
These settlements are considered multiple element arrangements for accounting purposes. We evaluated the accounting treatment of these settlements by identifying each element of the arrangements, which included amongst other elements, a release of past infringement claims and a covenant not to sue for a specified term of years. The primary benefit we received from the arrangements was the settlement and termination of all existing litigation, the avoidance of future litigation expenses and the avoidance of future management and customer disruptions. We determined that none of the elements of the settlement agreements have identifiable future benefits that would be capitalized as an asset. Accordingly, we recorded charges for aggregate legal settlements of
$270.0 million
in our consolidated statement of comprehensive loss for the year ended December 31, 2016. The charge covers the fulfillment by us of all financial obligations under both the BMC Settlement and HPE Settlement with no remaining financial obligations under either settlement.
(17) Information about Geographic Areas and Products
Revenues by geographic area, based on the location of our users, were as follows for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Revenues by geography
|
|
|
|
|
|
North America
(1)
|
$
|
946,956
|
|
|
$
|
702,985
|
|
|
$
|
465,332
|
|
EMEA
(2)
|
339,341
|
|
|
233,378
|
|
|
173,635
|
|
Asia Pacific and other
|
104,216
|
|
|
69,117
|
|
|
43,596
|
|
Total revenues
|
$
|
1,390,513
|
|
|
$
|
1,005,480
|
|
|
$
|
682,563
|
|
Property and equipment, net by geographic area were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Property and equipment, net:
|
|
|
|
North America
(3)
|
$
|
132,671
|
|
|
$
|
104,085
|
|
EMEA
(2)
|
37,449
|
|
|
32,027
|
|
Asia Pacific and other
|
11,500
|
|
|
8,602
|
|
Total property and equipment, net
|
$
|
181,620
|
|
|
$
|
144,714
|
|
|
|
(1)
|
Revenues attributed to the United States were approximately
95%
of North America revenues for the years ended
December 31, 2016
and
2015
, and
94%
for the year ended
December 31, 2014
.
|
|
|
(2)
|
Europe, the Middle East and Africa (EMEA)
|
|
|
(3)
|
Property and equipment, net attributed to the United States were approximately
92%
and
98%
of property and equipment, net attributable to North America for the years ended
December 31, 2016
and
2015
, respectively.
|
Subscription revenues consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Service Management solutions
|
$
|
1,108,846
|
|
|
$
|
783,603
|
|
|
$
|
532,045
|
|
IT Operations Management solutions
|
112,793
|
|
|
64,675
|
|
|
35,172
|
|
Total subscription revenues
|
$
|
1,221,639
|
|
|
$
|
848,278
|
|
|
$
|
567,217
|
|
Our Service Management solutions include ServiceNow Platform, IT Service Management, IT Business Management, Customer Service, Human Resources and Security Operations, which have similar features and functions, and are generally priced on a per user basis. Our IT Operations Management solutions, which improve visibility, availability and agility of enterprise services, are generally priced on a per node basis.
(18) Related Party Transactions
We have entered into indemnification agreements with each of our directors, executive officers and certain other officers. These agreements require us to indemnify such individuals, to the fullest extent permitted by Delaware law, for certain liabilities to which they may become subject as a result of their affiliation with us.
All contracts with related parties are executed in ordinary course of business. There were no material related party transactions in
2016
,
2015
or
2014
. As of
December 31, 2016
and
2015
, there were no material amounts payable to or amounts receivable from related parties.
(19) Subsequent Events
Events subsequent to December 31, 2016 have been evaluated through the date these consolidated financial statements were issued to determine whether they should be disclosed to keep the consolidated financial statements from being misleading. Our management noted the following subsequent events that should be disclosed:
On January 20, 2017, we acquired all issued and outstanding common shares of DxContinuum, Inc. for approximately
$15.0 million
in an all-cash transaction to enhance the predictive capabilities of our solutions. Our accounting and analysis of this transaction is pending completion.
On February 27, 2017, we announced Frank Slootman will resign from his position as President and Chief Executive Officer, effective April 3, 2017. Mr. Slootman will continue to serve as Chairman of our board of directors. We also announced on February 27, 2017 that our board of directors approved and appointed John J. Donahoe as President and Chief Executive Officer and expects to appoint Mr. Donahoe as a member of our board of directors each effective as of April 3, 2017.