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’s purpose is to make the world of work, work better for people. We believe that people should work the way they want to, so we build applications that help automate existing processes and create efficient, digitized workflows. Our products and services enable the steps of a job to flow naturally across disparate departments, systems and processes of a business. When work flows naturally, great experiences follow. We make work flow utilizing our leading enterprise cloud computing services that manage and deliver digital workflows, simplifying the complexity of work across systems, functions and departments on a single enterprise cloud platform, called the Now Platform. Our product portfolio is currently focused on delivering better Information Technology (IT), Employee and Customer workflows in pre-packaged product offerings. We also enable our customers to use the Now Platform App Engine to design and build any workflow application which are purpose built for their own business.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (GAAP), and include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.
Prior Period Reclassifications
Certain reclassifications of prior period amounts pertaining to the reclassification of revenues from IT Operations Management (ITOM) products to digital workflow products have been made in Note 19 to conform to the current period presentation. These reclassifications did not result in a restatement of prior period financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as reported amounts of revenues and expenses during the reporting period. Such management estimates and assumptions include, but are not limited to, evaluating the terms and conditions included within our customer contracts as well as determining the standalone selling price (SSP) for each distinct performance obligation included in customer contracts with multiple performance obligations, the period of benefit for deferred commissions, purchase price allocation for business combinations, stock-based compensation expenses, the useful life of our property and equipment, goodwill and identifiable intangible assets, whether an arrangement is or contains a lease, the discount rate used for operating leases, fair value of convertible notes, and income taxes. Actual results could differ from those estimates.
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 income (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 income (loss), and have not been material for all periods presented.
Derivative Financial Instruments and Hedging Activities
We use derivative financial instruments to manage foreign currency risks. These derivative contracts consist of forward contracts entered into with various counterparties and are not designated as hedging instruments under applicable accounting guidance. As such, all changes in the fair value of these derivative contracts are recorded in interest income and other income (expense), net on the consolidated statements of comprehensive income (loss), and are intended to offset the foreign currency gains or losses associated with the underlying monetary assets and liabilities. Realized gains (losses) from settlement of the derivative assets and liabilities not designated as hedging instruments are classified as investing activities in the consolidated statements of cash flows.
Allocation of Overhead Costs
Overhead costs associated with office facilities, IT and certain depreciation related to infrastructure that is not dedicated for customer use or research and development use are allocated to cost of revenues and operating expenses based on headcount.
Revenue Recognition
Effective January 1, 2018, we adopted the Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606)” on a full retrospective basis.
We report our revenues in two categories: (i) subscriptions and (ii) professional services and other.
Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.
We determine revenue recognition through the following steps:
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•
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Identification of the contract, or contracts, with a customer
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Identification of the performance obligations in the contract
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Determination of the transaction price
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•
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Allocation of the transaction price to the performance obligations in the contract
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Recognition of revenue when, or as, we satisfy a performance obligation
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Subscription revenues
Subscription revenues are primarily comprised of subscription fees that give customers access to the ordered subscription service, related support and updates, if any, to the subscribed service during the subscription term. We recognize subscription revenues ratably over the contract term beginning on the commencement date of each contract, which is the date we make our services available to our customers. Our contracts with customers typically include a fixed amount of consideration and are generally non-cancelable and without any refund-type provisions. We typically invoice our customers annually in advance for our subscription services upon execution of the initial contract or subsequent renewal, and our invoices are typically due within 30 days from the invoice date.
Subscription revenues also include revenues from self-hosted offerings in which customers deploy, or we grant customers the option to deploy without significant penalty, our subscription service internally or contract with a third party to host the software. For these contracts, we account for the software element and the related support and updates separately as they are distinct performance obligations. Refer to the discussion below related to contracts with multiple performance obligations for further details. The transaction price is allocated to separate performance obligations on a relative SSP basis. The transaction price allocated to the software element is recognized when transfer of control of the software to the customer is complete. The transaction price allocated to the related support and updates are recognized ratably over the contract term.
Professional services and other revenues
Our professional services arrangements are primarily on a time-and-materials basis, and we generally invoice our customers monthly in arrears for these professional services based on actual hours and expenses incurred. Some of our professional services arrangements are on a fixed fee or subscription basis. Professional services revenues are recognized as services are delivered. Other revenues consist of fees from customer training delivered on-site or through publicly available classes. Typical payment terms require our customers to pay us within 30 days of invoice.
Contracts with multiple performance obligations
We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. We evaluate the terms and conditions included within our customer contracts to ensure appropriate revenue recognition, including whether products and services are considered distinct performance obligations that should be accounted for separately versus together. For contracts with multiple performance obligations, the transaction price is allocated to the separate performance obligations on a relative SSP basis. We determine SSP by considering the historical selling price of these performance obligations in similar transactions as well as other factors, including, but not limited to, competitive pricing of similar products, other software vendor pricing, industry publications and current pricing practices.
Unbilled Receivables
Unbilled receivables, which is a contract asset, represent subscription revenues that are recognized upon delivery of the software prior to being invoiced. Unbilled receivables are primarily presented under prepaid expenses and other current assets on our consolidated balance sheets.
Deferred revenue
Deferred revenue, which is a contract liability, consists primarily of payments received in advance of revenue recognition from our contracts with customers and is recognized as the revenue recognition criteria are met. Once our services are available to customers, we record amounts due in accounts receivable and in deferred revenue. To the extent we bill customers in advance of the billing period commencement date, the accounts receivable and corresponding deferred revenue amounts are netted to zero on our consolidated balance sheets, unless such amounts have been paid as of the balance sheet date.
Customer deposits
Customer deposits primarily relate to payments received from customers which could be refundable pursuant to the terms of the contract and are presented under accrued expenses and other current liabilities on our consolidated balance sheets.
Deferred Commissions
Deferred commissions are the incremental selling costs that are associated with acquiring customer contracts and consist primarily of sales commissions paid to our sales force and referral fees paid to independent third-parties. Deferred commissions also include the associated payroll taxes and fringe benefit costs associated with payments to our sales employees to the extent they are incremental. Commissions and referral fees earned upon the execution of initial and expansion contracts are primarily deferred and amortized over a period of benefit that we have determined to be five years. Commissions earned upon the renewal of customer contracts are deferred and amortized over the average renewal term. Additionally, for self-hosted offerings, consistent with the recognition of subscription revenue for self-hosted offerings, a portion of the commission cost is expensed upfront when the self-hosted offering is made available. We determine the period of benefit by taking into consideration our customer contracts, our technology life cycle and other factors. We include amortization of deferred commissions in sales and marketing expense in our consolidated statements of comprehensive income (loss). There was no impairment loss in relation to the incremental selling costs capitalized for all periods presented.
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 or remaining maturities of three months or less when purchased. Cash and cash equivalents are stated at 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 re-evaluate such classification as of each balance sheet date. All investments are recorded at estimated fair value. Unrealized gains and losses for available-for-sale securities are included in accumulated other comprehensive income (loss), 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 income (loss).
Strategic investments
Our strategic investments consist of debt and non-marketable equity investments in privately-held companies in which we do not have a controlling interest or significant influence. Debt investments in privately-held companies are classified as available-for-sale and are recorded at their estimated fair value with changes in fair value recorded through accumulated other comprehensive income (loss). We have elected to apply the measurement alternative for equity investments that do not have readily determinable fair values, measuring them at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. An impairment loss is recorded when event or circumstance indicates a decline in value has occurred. We include these strategic investments in other assets on our 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 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 consolidated statements of comprehensive income (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 material, and all software development costs have been charged to research and development expense in our consolidated statements of comprehensive income (loss).
Costs incurred to develop our internal administration, finance and accounting systems are capitalized during the application development stage and generally amortized over the software’s estimated useful life of three to five years. Costs related to preliminary project activities and post implementation activities are expensed as incurred.
Leases
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842),” which requires lessees to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets, and to recognize on the income statement the expenses in a manner similar to prior practice. We adopted Topic 842 using the modified retrospective method as of January 1, 2019 and elected the transition option that allows us not to restate the comparative periods in our financial statements in the year of adoption. We also elected the package of transition expedients available for expired or existing contracts, which allowed us to carryforward our historical assessment of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs.
We determine if an arrangement is or contains a lease at inception by evaluating various factors, including whether a vendor’s right to substitute an identified asset is substantive. Lease classification is determined at the lease commencement date, on which the leased assets are made available for our use. Operating leases are included in “Operating lease right-of-use assets”, “Current portion of operating lease liabilities”, and “Operating lease liabilities, less current portion” in our consolidated balance sheets. We did not have any material financing leases in any of the periods presented.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The difference between the total right-of-use assets and total lease liabilities recorded as of January 1, 2019 is primarily due to the derecognition of deferred rent liabilities that were included in “Accrued expenses and other current liabilities” and “Other long-term liabilities”, respectively, in our consolidated balance sheet as of December 31, 2018. Lease payments consist primarily of the fixed payments under the arrangement, less any lease incentives such as rent holidays. We use an estimate of our incremental borrowing rate (IBR) based on the information available at the lease commencement date in determining the present value of lease payments, unless the implicit rate is readily determinable. In determining the appropriate IBR, we consider information including, but not limited to, our credit rating, the lease term, and the currency in which the arrangement is denominated. For leases which commenced prior to our adoption of Topic 842, we used the IBR on January 1, 2019. Our lease terms may include the sole option for us to either renew or terminate the lease when the option is reasonably certain to be exercised. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
For our office facility leases, we elected to account for lease and non-lease components as a single lease component. For other arrangements, lease and non-lease components are generally accounted for separately. Additionally, we do not record leases on the balance sheet that, at the lease commencement date, have a lease term of 12 months or less.
Business Combinations
We apply a screen test to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets to determine whether a transaction is accounted for as an asset acquisition or business combination. If the screen test is not met, the integrated set of activities and assets is considered a business based on whether there are inputs and substantive processes in place. The allocation of the purchase price in a business combination requires us to make significant estimates in determining the fair value of acquired assets and assumed liabilities, especially with respect to intangible assets. The excess of the purchase price in a business combination over the fair value of these tangible and intangible assets acquired and liabilities assumed is recorded as goodwill. These estimates are based upon a number of factors, including historical experience, market conditions and information obtained from the management of the acquired company. Critical estimates in valuing certain intangible assets included, but are not limited to, cash flows that an asset is expected to generate in the future, discount rates, the time and expense that would be necessary to recreate the assets and the profit margin a market participant would receive.
Goodwill, Intangible Assets and Other Long-Lived Assets
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 goodwill impairment test. To calculate any potential impairment, we compare the fair value of a reporting unit with its carrying amount, including goodwill. Any excess of the carrying amount of the reporting unit’s goodwill over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down. 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 four years to ten years.
Advertising Costs
Advertising costs, excluding costs related to our annual Knowledge user conference and other user forums, are expensed as incurred and are included in sales and marketing expense. These costs for the years ended December 31, 2019, 2018 and 2017 were $114.9 million, $65.2 million and $43.3 million, respectively. Costs, net of proceeds related to our annual Knowledge user conference and other user forums, are deferred and expensed when the respective events occur.
Convertible Senior Notes
In May and June 2017, we issued an aggregate of $782.5 million of 0% convertible senior notes (the 2022 Notes) and in November 2013, we issued $575.0 million of 0% convertible senior notes (the 2018 Notes, and together with the 2022 Notes, the Notes). 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 respective 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 respective terms of the Notes, and transaction costs attributable to the equity component were netted with the equity component of the Notes in stockholders’ equity. To the extent we receive note conversion requests prior to the maturity of the Notes, the difference between the fair value and the amortized book value of the Notes is recorded as a gain or loss on early note conversion. The fair value of the Notes is measured based on a similar liability that does not have an associated convertible feature, based on the remaining term of the Notes.
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, we believe 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) with only service conditions on a straight-line basis over the requisite service period, which is generally the vesting term of four years. For stock options and RSUs granted with both service conditions and performance or market conditions, the expenses are recognized on a graded vesting basis over the requisite service period and, for awards with performance conditions, when it is probable that the performance condition will be achieved. 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 six months offering period. We estimate the fair value of stock option grants with only service conditions and shares issued pursuant to the ESPP using the Black-Scholes options pricing model and fair value of RSU awards (including performance-based 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.
Concentration of Credit Risk and Significant Customers
Financial instruments potentially exposing us to credit risk consist primarily of cash, cash equivalents, derivative contracts, investments and accounts receivable. We hold cash at financial institutions that management believes are high credit, quality financial institutions and invest in securities with a minimum rating of BBB by Standard & Poor’s, Baa2 by Moody’s, or BBB by Fitch to minimize our credit risks. Our derivative contracts expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the arrangement. We mitigate this credit risk by transacting with major financial institutions with high credit ratings and entering into master netting arrangements, which permit net settlement of transactions with the same counterparty. While the contract or notional amount is often used to express the volume of foreign currency derivative contracts, the amounts potentially subject to credit risk are generally limited to the amounts, if any, by which the counterparties’ obligations under the agreements exceed the obligations of the Company to the counterparties. We are not required to pledge, and are not entitled to receive, cash collateral related to these derivative instruments. We are also exposed to credit risk under the convertible note hedge transactions that may result from counterparties’ non-performance.
Credit risk arising from accounts receivable is mitigated due to our large number of customers and their dispersion across various industries and geographies. As of December 31, 2019 and 2018, there were no customers that represented more than 10% of our accounts receivable balance. There were no customers that individually exceeded 10% of our total revenues in any of the periods presented. For purposes of assessing concentration of credit risk and significant customers, a group of customers under common control or customers that are affiliates of each other are regarded as a single customer.
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: Charged to Operations
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Additions: Charged to Deferred Revenue
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Less:
Write-offs
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Balance at End of Year
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Year ended December 31, 2019
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Allowance for doubtful accounts
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$
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4,649
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1,284
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1,306
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1,043
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$
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6,196
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Year ended December 31, 2018
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Allowance for doubtful accounts
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$
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3,115
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1,255
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1,177
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898
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$
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4,649
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Year ended December 31, 2017
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Allowance for doubtful accounts
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$
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2,323
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1,688
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194
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1,090
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$
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3,115
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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, executive officers and certain other 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 within the provision for income taxes 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.
Recently Adopted Accounting Pronouncement
Leases
As described in the “Leases” section above, we adopted Topic 842 using the modified retrospective method as of January 1, 2019 with an immaterial amount of cumulative effect adjustment recorded to our accumulated deficit as of January 1, 2019. As this standard was adopted on a modified prospective basis as of January 1, 2019, the adoption of this standard did not impact our previously reported consolidated financial statements for periods ended on or prior to December 31, 2018. Upon adoption, we recorded operating lease right-of-use assets of approximately $334.7 million and corresponding operating lease liabilities of $362.7 million on our consolidated balance sheets.
Recently Issued Accounting Pronouncements Pending Adoption
Income taxes
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which simplifies the accounting for incomes taxes by removing certain exceptions to the general principles in Topic 740 and amending existing guidance to improve consistent application. This new standard is effective for our interim and annual periods beginning January 1, 2021 and earlier adoption is permitted. Most amendments within this standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.
Cloud computing arrangements implementation costs
In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new standard requires capitalized costs to be amortized on a straight-line basis generally over the term of the arrangement, and the financial statement presentation for these capitalized costs would be the same as that of the fees related to the hosting arrangements. This new standard is effective for our interim and annual periods beginning January 1, 2020 and earlier adoption is permitted. This standard could be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We will adopt this standard on a prospective basis as of January 1, 2020. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.
Credit losses
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected, with further clarifications made more recently. For trade receivables, loans, and other financial assets, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. Credit losses relating to available-for-sale debt securities are required to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. This new standard is effective for our interim and annual periods beginning January 1, 2020 and requires a cumulative effect adjustment to the balance sheet as of January 1, 2020. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.
(3) Investments
Marketable Debt Securities
The following is a summary of our available-for-sale debt securities recorded within short-term and long-term investments on the consolidated balance sheets (in thousands):
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December 31, 2019
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
Commercial paper
|
$
|
101,416
|
|
|
$
|
83
|
|
|
$
|
(9
|
)
|
|
$
|
101,490
|
|
Corporate notes and bonds
|
1,654,166
|
|
|
7,360
|
|
|
(196
|
)
|
|
1,661,330
|
|
Certificates of deposit
|
38,007
|
|
|
38
|
|
|
—
|
|
|
38,045
|
|
U.S. government and agency securities
|
127,544
|
|
|
254
|
|
|
(14
|
)
|
|
127,784
|
|
Total available-for-sale securities
|
$
|
1,921,133
|
|
|
$
|
7,735
|
|
|
$
|
(219
|
)
|
|
$
|
1,928,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
Commercial paper
|
$
|
108,061
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
108,061
|
|
Corporate notes and bonds
|
1,233,589
|
|
|
343
|
|
|
(4,218
|
)
|
|
1,229,714
|
|
Certificates of deposit
|
73,584
|
|
|
1
|
|
|
—
|
|
|
73,585
|
|
U.S. government and agency securities
|
102,549
|
|
|
23
|
|
|
(358
|
)
|
|
102,214
|
|
Total available-for-sale securities
|
$
|
1,517,783
|
|
|
$
|
367
|
|
|
$
|
(4,576
|
)
|
|
$
|
1,513,574
|
|
As of December 31, 2019, the contractual maturities of our available-for-sale debt investment securities, excluding those securities classified within cash and cash equivalents on the consolidated balance sheet, did not exceed 36 months. The fair values of available-for-sale investment securities, by remaining contractual maturity, are as follows (in thousands):
|
|
|
|
|
|
December 31, 2019
|
Due within 1 year
|
$
|
915,317
|
|
Due in 1 year through 5 years
|
1,013,332
|
|
Total
|
$
|
1,928,649
|
|
The following table shows the fair values and the gross unrealized losses of these available-for-sale debt securities, classified by the length of time that the securities have been in a continuous unrealized loss position, and aggregated by investment types, excluding those securities classified within cash and cash equivalents on the consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
Commercial paper
|
$
|
20,752
|
|
|
$
|
(9
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,752
|
|
|
$
|
(9
|
)
|
Corporate notes and bonds
|
242,012
|
|
|
(181
|
)
|
|
16,264
|
|
|
(15
|
)
|
|
258,276
|
|
|
(196
|
)
|
U.S. government and agency securities
|
17,806
|
|
|
(14
|
)
|
|
—
|
|
|
—
|
|
|
17,806
|
|
|
(14
|
)
|
Total
|
$
|
280,570
|
|
|
$
|
(204
|
)
|
|
$
|
16,264
|
|
|
$
|
(15
|
)
|
|
$
|
296,834
|
|
|
$
|
(219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
Corporate notes and bonds
|
$
|
714,605
|
|
|
$
|
(2,603
|
)
|
|
$
|
294,956
|
|
|
$
|
(1,615
|
)
|
|
$
|
1,009,561
|
|
|
$
|
(4,218
|
)
|
Certificates of deposit
|
1,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,000
|
|
|
—
|
|
U.S. government and agency securities
|
11,756
|
|
|
(5
|
)
|
|
61,457
|
|
|
(353
|
)
|
|
73,213
|
|
|
(358
|
)
|
Total
|
$
|
727,361
|
|
|
$
|
(2,608
|
)
|
|
$
|
356,413
|
|
|
$
|
(1,968
|
)
|
|
$
|
1,083,774
|
|
|
$
|
(4,576
|
)
|
As of December 31, 2019, we had a total of 91 available-for-sale securities, excluding those securities classified within cash and cash equivalents on the consolidated balance sheet in an unrealized loss position. There were no impairments considered “other-than-temporary” as it is more likely than not we will hold the securities until maturity or a recovery of the cost basis.
Marketable Equity Securities
During the year ended December 31, 2018, we sold all of our marketable equity securities for total proceeds of $40.0 million and recognized net gains of $19.3 million. During the year ended December 31, 2017, prior to the adoption of ASU 2016-01, we recognized $10.7 million of unrealized gains on our marketable equity securities offset by $3.5 million of tax effect through accumulated other comprehensive income (loss) on our consolidated balance sheet. As of each of December 31, 2019 and 2018, we had no marketable equity securities on our consolidated balance sheets.
Strategic Investments
As of December 31, 2019 and 2018, the total amount of equity investments in privately-held companies included in other assets on our consolidated balance sheets was $22.4 million and $14.6 million, respectively. These non-marketable equity investments are recorded at fair value only if an impairment or observable price adjustment is recognized in the current period. We classify these assets as Level 3 within the fair value hierarchy only if an impairment or observable adjustment is recognized on these non-marketable equity securities during the period as they are based on observable transaction price at the transaction date and other unobservable inputs such as volatility.
(4) Fair Value Measurements
The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis as of December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
Cash equivalents:
|
|
|
|
|
|
Money market funds
|
$
|
486,982
|
|
|
$
|
—
|
|
|
$
|
486,982
|
|
Commercial paper
|
—
|
|
|
86,388
|
|
|
86,388
|
|
Marketable securities:
|
|
|
|
|
|
Commercial paper
|
—
|
|
|
101,490
|
|
|
101,490
|
|
Corporate notes and bonds
|
—
|
|
|
1,661,330
|
|
|
1,661,330
|
|
Certificates of deposit
|
—
|
|
|
38,045
|
|
|
38,045
|
|
U.S. government and agency securities
|
—
|
|
|
127,784
|
|
|
127,784
|
|
Total
|
$
|
486,982
|
|
|
$
|
2,015,037
|
|
|
$
|
2,502,019
|
|
The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis as of December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
Cash equivalents:
|
|
|
|
|
|
Money market funds
|
$
|
229,047
|
|
|
$
|
—
|
|
|
$
|
229,047
|
|
Commercial paper
|
—
|
|
|
16,961
|
|
|
16,961
|
|
Certificates of deposit
|
—
|
|
|
2,465
|
|
|
2,465
|
|
Marketable securities:
|
|
|
|
|
|
Commercial paper
|
—
|
|
|
108,061
|
|
|
108,061
|
|
Corporate notes and bonds
|
—
|
|
|
1,229,714
|
|
|
1,229,714
|
|
Certificates of deposit
|
—
|
|
|
73,585
|
|
|
73,585
|
|
U.S. government and agency securities
|
—
|
|
|
102,214
|
|
|
102,214
|
|
Total
|
$
|
229,047
|
|
|
$
|
1,533,000
|
|
|
$
|
1,762,047
|
|
We determine the fair value of our security holdings based on pricing from our service providers and market prices from industry-standard independent data providers. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs), such as yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures.
Our equity investments in privately-held companies are not included in the table above and are discussed in Note 3. See Note 8 for the fair value measurement of our derivative contracts and Note 11 for the fair value measurement of our convertible senior notes, which are also not included in the table above.
(5) Business Combinations
2019 Business Combination
During the year ended December 31, 2019, we completed a business combination for a purchase price of $7.5 million in cash. In allocating the purchase price based on the estimated fair values, we recorded a total of $3.0 million of developed technology intangible assets (to be amortized over estimated useful lives of five years), $2.5 million of backlog intangible assets (to be recognized over estimated life of two years), $1.4 million of deferred tax liabilities and $2.2 million of goodwill which is not deductible for income tax purposes.
2018 Business Combinations
During the year ended December 31, 2018, we completed four business combinations for an aggregate purchase price of $37.6 million in cash. In allocating the aggregate purchase price based on the estimated fair values, we recorded a total of $13.5 million of developed technology intangible assets (to be amortized over estimated useful lives of five years), $2.2 million of deferred tax liabilities and $26.1 million of goodwill, of which $8.0 million of the goodwill amount is deductible for income tax purposes.
2017 Business Combinations
SkyGiraffe
On October 31, 2017, we completed the acquisition of a privately-held company, SkyGiraffe Ltd. (SkyGiraffe), by acquiring all issued and outstanding common shares of SkyGiraffe for approximately $32.3 million in an all-cash transaction to enhance the consumer product-like mobile experience of our solutions. In allocating the aggregate purchase price based on the estimated fair values, we recorded $15.6 million of developed technology intangible assets (to be amortized over estimated useful lives of five years), $3.3 million of deferred tax liabilities and $19.4 million of goodwill which is not deductible for income tax purposes.
Other 2017 Business Combinations
We also completed three other business combinations for an aggregate purchase price of approximately $26.6 million in cash. In allocating the aggregate purchase price based on the estimated fair values, we recorded $9.9 million of developed technology intangible assets (to be amortized over estimated useful lives of five years), $3.6 million of deferred tax liabilities and a total of $20.3 million of goodwill, of which $4.1 million of the goodwill amount is deductible for income tax purposes.
For all of our 2019, 2018 and 2017 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. Aggregate acquisition-related costs associated with our business combinations are not material for each of the years presented and are included in general and administrative expenses in our consolidated statement of comprehensive income (loss). The results of operations of all of our business combinations have been included in our consolidated financial statements from their respective dates of purchase. These business combinations did not have a material impact on our consolidated financial statements, and therefore historical and pro forma disclosures have not been presented.
(6) Goodwill and Intangible Assets
Goodwill balances are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
Balance as of December 31, 2017
|
|
$
|
128,728
|
|
Goodwill acquired
|
|
26,063
|
|
Foreign currency translation adjustments
|
|
(5,946
|
)
|
Balance as of December 31, 2018
|
|
148,845
|
|
Goodwill acquired
|
|
2,246
|
|
Foreign currency translation adjustments
|
|
5,665
|
|
Balance as of December 31, 2019
|
|
$
|
156,756
|
|
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
2019
|
|
2018
|
Developed technology
|
$
|
177,746
|
|
|
$
|
114,395
|
|
Patents
|
67,730
|
|
|
57,180
|
|
Other
|
3,594
|
|
|
650
|
|
Total intangible assets
|
249,070
|
|
|
172,225
|
|
Less: accumulated amortization
|
(105,220
|
)
|
|
(71,643
|
)
|
Net carrying amount
|
$
|
143,850
|
|
|
$
|
100,582
|
|
Apart from the business combinations described in Note 5, during the year ended December 31, 2019, we acquired $72.7 million in intangible assets, comprising primarily $61.0 million of developed technology and $10.6 million in patents. The weighted-average useful lives for the developed technology and patents acquired during the year ended December 31, 2019 was approximately five years and eight years, respectively. During the year end of December 31, 2018, we acquired $26.2 million of intangible assets in patents. The weighted-average useful life for patents acquired during the year ended December 31, 2018 was approximately seven years.
Amortization expense for intangible assets was approximately $34.6 million, $25.2 million, $19.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The following table presents the estimated future amortization expense related to intangible assets held at December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
2020
|
|
$
|
35,641
|
|
2021
|
|
33,322
|
|
2022
|
|
28,343
|
|
2023
|
|
22,507
|
|
2024
|
|
15,809
|
|
Thereafter
|
|
8,228
|
|
Total future amortization expense
|
|
$
|
143,850
|
|
(7) Property and Equipment
Property and equipment, net consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Computer equipment
|
$
|
680,160
|
|
|
$
|
493,536
|
|
Computer software
|
59,511
|
|
|
58,303
|
|
Leasehold and other improvements
|
125,299
|
|
|
74,721
|
|
Furniture and fixtures
|
53,651
|
|
|
42,551
|
|
Building(1)
|
—
|
|
|
6,551
|
|
Construction in progress(1)
|
6,830
|
|
|
10,167
|
|
Property and equipment, gross
|
925,451
|
|
|
685,829
|
|
Less: Accumulated depreciation
|
(457,366
|
)
|
|
(338,613
|
)
|
Property and equipment, net
|
$
|
468,085
|
|
|
$
|
347,216
|
|
|
|
(1)
|
We adopted Topic 842 using the modified retrospective method as of January 1, 2019 and derecognized $10.6 million in building and construction in progress assets that we were previously deemed to own under the prior lease accounting standards. These assets are recognized under our operating lease right-of-use assets under Topic 842 as of December 31, 2019.
|
Construction in progress consists primarily of leasehold and other improvements and in-process software development costs. Depreciation expense was $167.9 million, $123.0 million and $93.2 million for the years ended December 31, 2019, 2018 and 2017, respectively.
(8) Derivative Contracts
We conduct business on a global basis in multiple foreign currencies, subjecting us to foreign currency risk. In order to manage certain exposures to currency fluctuations, we initiated a limited hedging program during the year ended December 31, 2018 by entering into foreign currency derivative contracts with maturities of 12 months or less to hedge a portion of our net outstanding monetary assets and liabilities.
As of December 31, 2019 and 2018, we had foreign currency forward contracts with total notional values of $358.0 million and $872.8 million, respectively, which are not designated as hedge instruments. Our foreign currency contracts are classified within Level 2 because the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets, such as currency spot and forward rates. The fair values of these outstanding derivative contracts were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet Location
|
|
December 31, 2019
|
December 31, 2018
|
Derivative Assets:
|
|
|
|
|
Foreign currency derivative contracts
|
Prepaid expenses and other current assets
|
|
$
|
2,237
|
|
$
|
22,831
|
|
Derivative Liabilities
|
|
|
|
|
Foreign currency derivative contracts
|
Accrued expenses and other current liabilities
|
|
$
|
1,362
|
|
$
|
2,441
|
|
(9) Deferred Revenue and Performance Obligations
Revenues recognized during the year ended December 31, 2019 from amounts included in deferred revenue as of December 31, 2018 are $1.6 billion. Revenues recognized during the year ended December 31, 2018 from amounts included in deferred revenue as of December 31, 2017 are $1.1 billion.
Remaining Performance Obligations
Transaction price allocated to remaining performance obligations (RPO) represents contracted revenue that has not yet been recognized, which includes deferred revenue and non-cancelable amounts that will be invoiced and recognized as revenue in future periods. RPO excludes contracts that are billed in arrears, such as certain time and materials contracts, as we apply the “right to invoice” practical expedient under relevant accounting guidance.
As of December 31, 2019, our RPO was approximately $6.6 billion, and we expect to recognize revenues on approximately 50% of these RPO over the following 12 months, with the balance to be recognized thereafter.
(10) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
|
|
|
|
Accrued payroll
|
$
|
230,682
|
|
|
$
|
158,006
|
|
Taxes payable
|
38,326
|
|
|
35,122
|
|
Other employee related liabilities
|
74,853
|
|
|
60,889
|
|
Other
|
117,542
|
|
|
76,229
|
|
Total accrued expenses and other current liabilities
|
$
|
461,403
|
|
|
$
|
330,246
|
|
(11) Convertible Senior Notes
In May and June 2017, we issued an aggregate of $782.5 million of 0% convertible senior notes (the 2022 Notes), which are due June 1, 2022 (Maturity Date) unless earlier converted or repurchased in accordance with their terms. The 2022 Notes do not bear interest, and we cannot redeem the 2022 Notes prior to maturity. In November 2013, we issued $575.0 million of 0% convertible senior notes (the 2018 Notes, and together with the 2022 Notes, the Notes), which were earlier converted prior to, or settled on November 1, 2018, in accordance with their terms.
The 2022 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries.
Upon conversion of the 2022 Notes, we may choose to pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock upon settlement. We settled the principal amount of our 2018 Notes with cash and currently intend to settle the principal amount of the 2022 Notes with cash.
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Date
|
|
Initial Conversion Price per Share
|
|
Initial Conversion Rate per $1,000 Par Value
|
|
Initial Number of Shares
|
|
|
|
|
|
|
|
(in thousands)
|
2022 Notes
|
February 1, 2022
|
|
$
|
134.75
|
|
|
7.42 shares
|
|
5,807
|
|
2018 Notes
|
July 1, 2018
|
|
$
|
73.88
|
|
|
13.54 shares
|
|
7,783
|
|
Conversion of the 2022 Notes prior to the Convertible Date. At any time prior to the close of business on the business day immediately preceding February 1, 2022 (Convertible Date), holders of the 2022 Notes may convert their Notes at their option, only if one of the following conditions are met:
|
|
•
|
during any calendar quarter (and only during such calendar quarter) if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day (in each case, the Conversion Condition); or
|
|
|
•
|
during the five-business day period after any five-consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of the Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or
|
|
|
•
|
upon the occurrence of specified corporate events.
|
Conversion of the 2022 Notes on or after the Convertible Date. On or after the Convertible Date, a holder may convert all or any portion of its Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the Maturity Date regardless of the foregoing conditions, and such conversions will settle upon the Maturity Date. Upon settlement, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.
The conversion price of the 2022 Notes will be subject to adjustment in some events. Holders of the 2022 Notes who convert their 2022 Notes in connection with certain corporate events that constitute a “make-whole fundamental change” are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a “fundamental change,” holders of the 2022 Notes may require us to purchase with cash all or a portion of the 2022 Notes upon the occurrence of a fundamental change, at a purchase price equal to 100% of the principal amount of the 2022 Notes plus any accrued and unpaid special interest, if any.
In accounting for the issuance of the 2022 Notes and the related transaction costs, we separated the 2022 Notes into liability and equity components. The 2022 Notes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Liability component:
|
|
|
|
Principal:
|
|
|
|
2022 Notes
|
$
|
782,491
|
|
|
$
|
782,500
|
|
Less: debt issuance cost and debt discount, net of amortization
|
|
|
|
2022 Notes
|
(87,510
|
)
|
|
(120,793
|
)
|
Net carrying amount
|
$
|
694,981
|
|
|
$
|
661,707
|
|
|
|
|
|
|
|
2022 Notes
|
Equity component recorded at issuance:
|
|
Note
|
$
|
162,039
|
|
Issuance cost
|
(2,148
|
)
|
Net amount recorded in equity
|
$
|
159,891
|
|
The Conversion Condition for the 2022 Notes was met for all quarters ended June 30, 2018 through December 31, 2019, except for the quarter ended December 31, 2018. Therefore, our 2022 Notes became convertible at the holders’ option beginning on July 1, 2018 and continue to be convertible through March 31, 2020, except for the quarter ended March 31, 2019 because the Conversion Condition for the 2022 Notes was not met for the quarter ended December 31, 2018. During the year ended December 31, 2019, we paid cash to settle an immaterial principal amount of the 2022 Notes. Based on additional conversion requests we have received through the filing date, we expect to settle in cash an aggregate of approximately $2.5 million and $5.2 million in principal amount of the 2022 Notes during the first and second quarter of 2020, respectively. We may receive additional conversion requests that require settlement in the second quarter of 2020.
The Conversion Condition for the 2018 Notes was met for all quarters ended June 30, 2017 through March 31, 2018. Therefore, our 2018 Notes became convertible at the holders’ option beginning on July 1, 2017 and continued to be convertible at the holders’ option through June 30, 2018. Conversion requests received subsequent to June 30, 2018 were settled on the maturity date. We settled $413.2 million principal amount of the 2018 Notes in early conversions and the remaining principal amount of $161.8 million was settled on November 1, 2018, the maturity date of our 2018 Notes.
The conversion value over the principal amount for the early 2018 Note conversions was settled in cash from the exercise of the 2018 Note Hedges (as defined below). The conversion value over the principal amount for the principal amount settled on November 1, 2018 was satisfied with approximately 1.3 million shares of our common stock, which was entirely offset by shares of our common stock delivered to us by the 2018 Note Hedge counterparties under the 2018 Note Hedge, and cash in lieu of fractional shares. The shares delivered to us by the 2018 Note Hedge counterparties were immediately retired. As a result of the early note conversions, we recorded a loss of $4.1 million for the year ended December 31, 2018. As a result of the settlement of the 2018 Notes and the 2018 Note Hedges, we recorded an aggregate $6.4 million net reduction to additional paid-in capital, reflecting $773.3 million of fair value adjustments to the conversion option settled, offset by a $766.9 million benefit from the exercise of the 2018 Note Hedges.
For statement of cash flow presentation, we bifurcated the principal amount of the 2018 Notes paid during the year ended December 31, 2018 into two components: the portion of the repayment attributable to debt discount is classified as cash outflows from operating activities, and the portion of the repayment attributable to the principal is classified as cash outflows from financing activities.
We consider the fair value of the 2022 Notes at December 31, 2019 to be a Level 2 measurement. The estimated fair value of the 2022 Notes at December 31, 2019 and 2018 based on the closing trading price per $100 of the Notes was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
2022 Notes
|
$
|
1,645,970
|
|
|
$
|
1,105,281
|
|
As of December 31, 2019, the remaining life of the 2022 Notes is 29 months, and the 2018 Notes were no longer outstanding. The following table sets forth total interest expense recognized related to the Notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Amortization of debt issuance cost
|
|
|
|
|
|
2022 Notes
|
$
|
1,606
|
|
|
$
|
1,531
|
|
|
$
|
860
|
|
2018 Notes
|
—
|
|
|
1,131
|
|
|
1,911
|
|
Amortization of debt discount
|
|
|
|
|
|
2022 Notes
|
31,677
|
|
|
30,159
|
|
|
16,921
|
|
2018 Notes
|
—
|
|
|
19,912
|
|
|
33,702
|
|
Total
|
$
|
33,283
|
|
|
$
|
52,733
|
|
|
$
|
53,394
|
|
Effective interest rate of the liability component
|
|
2022 Notes
|
4.75%
|
2018 Notes
|
6.50%
|
Note Hedges
To minimize the impact of potential economic dilution upon conversion of the Notes, we entered into convertible note hedge transactions (the 2022 Note Hedge and 2018 Note Hedge, respectively, and collectively, the Note Hedges) with certain investment banks, with respect to our common stock concurrently with the issuance of the 2022 Notes and 2018 Notes. The 2018 Note Hedge offset the dilution and cash payments in excess of the principal amount of the converted 2018 Notes and expired upon the maturity date of the 2018 Notes, which was November 1, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
Initial Shares
|
|
Shares as of
December 31, 2019
|
|
|
|
|
|
|
|
(in thousands)
|
2022 Note Hedge
|
$
|
128,017
|
|
|
5,807
|
|
|
5,807
|
|
2018 Note Hedge
|
$
|
135,815
|
|
|
7,783
|
|
|
—
|
|
The 2022 Note Hedge covers shares of our common stock at a strike price per share that corresponds to the initial conversion price of the 2022 Notes, subject to adjustment, and are exercisable upon conversion of the 2022 Notes. If exercised, we may elect to receive cash, shares of our common stock, or a combination of cash and shares. The 2022 Note Hedge will expire upon the maturity of the 2022 Notes. The 2022 Note Hedge is intended to reduce the potential economic dilution upon conversion of the 2022 Notes in the event that the fair value per share of our common stock at the time of exercise is greater than the conversion price of the 2022 Notes. The 2022 Note Hedge is a separate transaction and is not part of the terms of the 2022 Notes. Holders of the 2022 Notes will not have any rights with respect to the 2022 Note Hedge. The 2022 Note Hedge does not impact earnings per share, as it was entered into to offset any dilution from the 2022 Notes.
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
|
|
Shares
|
|
Strike Price
|
|
First Expiration Date
|
|
Shares as of
December 31, 2019
|
|
(in thousands)
|
|
(in thousands)
|
|
|
|
|
|
(in thousands)
|
2022 Warrants
|
$
|
54,071
|
|
|
5,807
|
|
|
$
|
203.40
|
|
|
September 1, 2022
|
|
5,807
|
|
2018 Warrants
|
$
|
84,525
|
|
|
7,783
|
|
|
$
|
107.46
|
|
|
February 1, 2019
|
|
—
|
|
Separately, we entered into warrant transactions with certain investment banks, whereby we sold warrants to acquire, subject to adjustment, the number of shares of our common stock shown in the table above (the 2022 Warrants and 2018 Warrants, respectively, and collectively, the Warrants). If the average market value per share of our common stock for the reporting period, as measured under the Warrants, exceeds the strike price of the respective Warrants, such Warrants would have a dilutive effect on our earnings per share to the extent we report net income. According to the terms of each of the Warrants, the 2018 Warrants were automatically exercised and the 2022 Warrants will be automatically exercised over a 60 trading day period beginning on the first expiration date of the respective Warrants as set forth above. The Warrants are separate transactions and are not remeasured through earnings each reporting period. The Warrants are not part of the Notes or Note Hedges.
As the 2022 Warrants will be net share settled, the total number of shares of our common stock we will issue depends on the daily volume-weighted average stock prices over a 60 trading day period beginning on the first expiration date of the 2022 Warrants, which will be September 1, 2022. During the year end December 31, 2019, we issued approximately 4.3 million shares of our common stock upon the automatic exercise of the 2018 Warrants. The 2018 Warrants were no longer outstanding as of the second quarter of 2019. We expect to issue additional shares of our common stock in the second half of 2022 upon the automatic exercise of the 2022 Warrants. The 2022 Warrants could have a dilutive effect to the extent that the daily volume-weighted average stock prices over a 60 trading day period beginning on September 1, 2022 exceeds the strike price of the 2022 Warrants. Based on the volume-weighted average stock price on December 31, 2019, the total number of shares of our common stock to be issued upon the automatic exercise of the 2022 Warrants would be approximately 1.6 million. The actual number of shares of our common stock issuable upon the automatic exercise of the 2022 Warrants, if any, is unknown at this time.
(12) Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss), net of tax, consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Foreign currency translation adjustment
|
$
|
20,884
|
|
|
$
|
344
|
|
Net unrealized gain (loss) on investments, net of tax
|
4,371
|
|
|
(4,379
|
)
|
Accumulated other comprehensive income (loss)
|
$
|
25,255
|
|
|
$
|
(4,035
|
)
|
Reclassification adjustments out of accumulated other comprehensive income (loss) into net income (loss) were immaterial for all periods presented.
(13) Stockholders' Equity
Common Stock
We are authorized to issue a total of 600.0 million shares of common stock as of December 31, 2019. Holders of our common stock are not entitled to receive dividends unless declared by our board of directors. As of December 31, 2019, we had 189.5 million shares of common stock outstanding and had reserved shares of common stock for future issuance as follows:
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
(in thousands)
|
Stock plans:
|
|
|
Options outstanding
|
|
1,154
|
|
RSUs (1)
|
|
8,733
|
|
Shares of common stock available for future grants:
|
|
|
2012 Equity Incentive Plan (2)
|
|
29,641
|
|
2012 Employee Stock Purchase Plan (2)
|
|
10,196
|
|
Total shares of common stock reserved for future issuance
|
|
49,724
|
|
|
|
(1)
|
Represents the number of shares issuable upon settlement of outstanding RSUs and performance-based RSUs, as discussed under the section entitled “RSUs” in Note 14.
|
|
|
(2)
|
Refer to Note 14 for a description of these plans.
|
During the years ended December 31, 2019 and 2018, we issued a total of 5.0 million shares and 5.9 million shares, respectively, from stock option exercises, vesting of RSUs, net of employee payroll taxes and purchases from ESPP. In addition, as described in Note 11, we issued approximately 4.3 million shares of our common stock upon the automatic exercise of the 2018 Warrants during the year end December 31, 2019, and received and retired 1.3 million shares of our common stock in conjunction with our exercise of the 2018 Note Hedge during the year end December 31, 2018.
Preferred Stock
Our board of directors has the authority, without further action by stockholders, to issue up to 10.0 million 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, 2019 and 2018, no shares of preferred stock were outstanding.
(14) Equity Awards
We currently have two equity incentive plans, our 2005 Stock Option Plan (the 2005 Plan) and our 2012 Equity Incentive Plan (the 2012 Plan). Our 2005 Plan was terminated in connection with our initial public offering in 2012 but continues to govern the terms of outstanding stock options that were granted prior to the termination of the 2005 Plan. We no longer grant equity awards pursuant to our 2005 Plan.
Our 2012 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, RSUs, performance-based stock awards and other forms of equity compensation (collectively, equity awards). In addition, the 2012 Plan provides for the grant of performance cash awards. Incentive stock options may be granted only to employees. All other equity awards may be granted to employees, including officers, as well as directors and consultants. The share reserve may increase to the extent outstanding stock options under the 2005 Plan expire or terminate unexercised. Prior to January 2019, the share reserve also automatically increased on January 1 of each year until January 1, 2022, by up to 5% of the total number of shares of common stock outstanding on December 31 of the preceding year as determined by our board of directors. Our board of directors elected not to increase the number of shares of common stock reserved for issuance under the 2012 Plan pursuant to the provision described in the preceding sentence for the year ending December 31, 2019. In January 2019, our Board of Directors amended the 2012 Plan to remove the automatic increase provision. Therefore, for the remaining term of the 2012 Plan, the share reserve will not be increased without stockholder approval.
Our 2012 Employee Stock Purchase Plan (the 2012 ESPP) authorizes the issuance of shares of common stock pursuant to purchase rights granted to our employees. The price at which common stock is purchased under the 2012 ESPP is equal to 85% of the fair market value of our common stock on the first or last day of the offering period, whichever is lower. Offering periods are six months long and begin on February 1 and August 1 of each year. The number of shares of common stock reserved for issuance automatically increases on January 1 of each year until January 1, 2022, by up to 1% of the total number of shares of common stock outstanding on December 31 of the preceding year as determined by our board of directors. Our board of directors elected not to increase the number of shares of common stock reserved for issuance under the 2012 ESPP pursuant to the provision described in the preceding sentence for the years ending December 31, 2019 and December 31, 2020.
Stock Options
Stock options are exercisable at a price equal to the market value of the underlying shares of common stock on the date of the grant as determined by our board of directors or, for those stock options issued subsequent to our initial public offering, the closing price of our common stock as reported on the New York Stock Exchange on the date of grant. Stock options granted under our 2005 Plan and the 2012 Plan to new employees generally vest 25% one year from the date the requisite service period begins and continue to vest monthly for each month of continued employment over the remaining three years. Options granted generally are exercisable for a period of up to ten years contingent on each holder’s continuous status as a service provider.
A summary of stock option activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price Per Share
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic Value
|
|
(in thousands)
|
|
|
|
(in years)
|
|
(in thousands)
|
Outstanding at December 31, 2017
|
3,370
|
|
|
$
|
38.43
|
|
|
|
|
|
Exercised
|
(1,462
|
)
|
|
$
|
26.23
|
|
|
|
|
$
|
204,337
|
|
Canceled
|
(97
|
)
|
|
$
|
70.52
|
|
|
|
|
|
Outstanding at December 31, 2018
|
1,811
|
|
|
$
|
46.55
|
|
|
|
|
|
Granted
|
161
|
|
|
$
|
266.31
|
|
|
|
|
|
Exercised
|
(640
|
)
|
|
$
|
34.61
|
|
|
|
|
$
|
138,389
|
|
Canceled
|
(178
|
)
|
|
$
|
86.02
|
|
|
|
|
|
Outstanding at December 31, 2019
|
1,154
|
|
|
$
|
77.70
|
|
|
5.1
|
|
$
|
236,055
|
|
Vested and expected to vest as of December 31, 2019
|
1,119
|
|
|
$
|
72.37
|
|
|
5.0
|
|
$
|
234,889
|
|
Vested and exercisable as of December 31, 2019
|
907
|
|
|
$
|
43.75
|
|
|
4.1
|
|
$
|
216,458
|
|
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 $277.7 million for the year ended December 31, 2017. The weighted-average grant date fair value per share of options granted was $266.31 and $37.57 for the years ended December 31, 2019 and 2017, respectively. No stock options were granted during the year ended December 31, 2018. The total fair value of shares vested was $7.7 million, $12.3 million and $11.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.
All of the options granted during the year ended December 31, 2019 are options with both service and market-based vesting conditions. These options were granted to our Chief Executive Officer in connection with the commencement of his employment with us during the year. The fair values of the options granted and the corresponding derived service periods were calculated using a Monte Carlo simulation, which estimates the potential outcome of reaching the market condition based on simulated future stock prices. A Monte Carlo simulation requires the use of various assumptions, including the stock price volatility and risk-free interest rate as of the valuation date corresponding to the length of time remaining in the performance period and expected dividend yield. The stock-based compensation expense associated with these options is recorded on a graded vesting basis.
Included in the number of shares canceled during the year ended December 31, 2019 are 171,912 options with both service and market-based vesting conditions. These options were granted to our former Chief Executive Officer during the year ended December 31, 2017 in connection with the commencement of his employment with us, and were canceled in connection with the termination of his employment as our Chief Executive Officer during the year ended December 31, 2019. The fair value of the options granted and the corresponding derived service periods were calculated using a Monte Carlo simulation as described above.
As of December 31, 2019, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options was approximately $17.9 million. The weighted-average remaining vesting period of unvested stock options at December 31, 2019 was 3.3 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)
|
|
|
|
(in thousands)
|
Outstanding at December 31, 2017
|
11,403
|
|
|
$
|
81.50
|
|
|
|
Granted
|
5,303
|
|
|
$
|
160.08
|
|
|
|
Vested
|
(5,486
|
)
|
|
$
|
77.38
|
|
|
$
|
931,848
|
|
Forfeited
|
(1,018
|
)
|
|
$
|
100.55
|
|
|
|
Outstanding at December 31, 2018
|
10,202
|
|
|
$
|
121.84
|
|
|
|
Granted
|
5,338
|
|
|
$
|
240.32
|
|
|
|
Vested
|
(5,487
|
)
|
|
$
|
126.85
|
|
|
$
|
1,369,918
|
|
Forfeited
|
(1,320
|
)
|
|
$
|
145.34
|
|
|
|
Outstanding at December 31, 2019
|
8,733
|
|
|
$
|
185.39
|
|
|
$
|
2,465,387
|
|
Expected to vest as of December 31, 2019
|
7,506
|
|
|
|
|
$
|
2,119,197
|
|
RSUs outstanding as of December 31, 2019 were comprised of 8.1 million RSUs with only service conditions and 0.6 million RSUs with both service conditions and performance conditions.
RSUs granted with only service conditions under and the 2012 Plan to employees generally vest over a four-year period. The total intrinsic value of the RSUs vested was $573.9 million for the year ended December 31, 2017.
PRSUs with both service and performance conditions are considered as eligible to vest when approved by the compensation committee of our board of directors in January of the year following the grant. The ultimate number of shares eligible to vest for PRSUs range from 0% to 180% of the target number of shares depending on achievement relative to the performance metric over the applicable period. The PRSUs shares granted in the years ended December 31, 2019 and 2018 will vest 33% in February of the following year and continue to vest quarterly for the remaining two subsequent years, contingent on each holder’s continuous status as a service provider on the applicable vesting dates. The number of PRSUs granted shown in the table above reflects the shares that could be eligible to vest at 100% of target for PRSUs and includes adjustments for over or under achievement for PRSUs granted in the prior year. We recognized $67.6 million, $91.8 million, and $40.5 million of stock-based compensation expense, net of actual and estimated forfeitures, associated with PRSUs on a graded vesting basis during the year ended December 31, 2019, 2018, and 2017, respectively.
As of December 31, 2019, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs was approximately $1.2 billion and the weighted-average remaining vesting period was 2.8 years.
(15) Stock-based Compensation
We use the Black-Scholes options pricing model to estimate the fair value of our stock option grants with only service conditions and the fair value of our common stock under the 2012 ESPP. This model incorporates various assumptions including expected volatility, expected term, risk-free interest rates and expected dividend yields. The following assumptions were used to calculate our stock-based compensation for each stock option grant on the date of the grant:
|
|
|
|
|
|
|
Year Ended
|
|
|
December 31, 2017
|
Stock Options with only service conditions:
|
|
|
Expected volatility
|
|
39% - 42%
|
|
Expected term (in years)
|
|
4.89
|
|
Risk-free interest rate
|
|
1.78% - 2.47%
|
|
Dividend yield
|
|
—
|
%
|
Apart from the options granted to our Chief Executive Officer as described in Note 14, which have both service and market-based vesting conditions, no other stock options were granted during the years ended December 31, 2019 and 2018.
The following assumptions were used in the Black-Scholes options pricing model to calculate our stock-based compensation for each stock purchase right granted under the 2012 ESPP:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
ESPP:
|
|
|
|
|
|
Expected volatility
|
30% - 49%
|
|
|
26% - 31%
|
|
|
28% - 49%
|
|
Expected term (in years)
|
0.50
|
|
|
0.50
|
|
|
0.50
|
|
Risk-free interest rate
|
2.04% - 2.46%
|
|
|
1.15% - 2.22%
|
|
|
0.40% - 1.15%
|
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Expected volatility. The expected volatility is based on the historical volatility of our common stock for a period similar to our expected term.
Expected term. We determine the expected term for stock options 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. 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.
(16) Net Income (Loss) Per Share
Basic net income (loss) per share attributable to common stockholders is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, adjusted for the effects of dilutive shares of common stock, which are comprised of outstanding stock options, RSUs, ESPP obligations, the Notes and the Warrants. Stock awards with performance conditions are included in dilutive shares to the extent the performance condition is met. The dilutive potential shares of common stock are computed using the treasury stock method or the as-if converted method, as applicable. The effects of outstanding stock options, RSUs, ESPP obligations, Notes and Warrants are excluded from the computation of diluted net income (loss) per share in periods in which the effect would be antidilutive.
The following tables present the calculation of basic and diluted net income (loss) per share attributable to common stockholders (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
|
|
Net income (loss)
|
$
|
626,698
|
|
|
$
|
(26,704
|
)
|
|
$
|
(116,846
|
)
|
Denominator:
|
|
|
|
|
|
Weighted-average shares outstanding - basic
|
186,466
|
|
|
177,846
|
|
|
171,176
|
|
Weighted-average effect of potentially dilutive securities:
|
|
|
|
|
|
Common stock options
|
1,109
|
|
|
—
|
|
|
—
|
|
RSUs
|
4,897
|
|
|
—
|
|
|
—
|
|
2018 Warrants
|
842
|
|
|
—
|
|
|
—
|
|
In-the-money portion of 2022 Notes
|
2,737
|
|
|
—
|
|
|
—
|
|
2022 Warrants
|
1,172
|
|
|
—
|
|
|
—
|
|
Weighted-average shares outstanding - diluted
|
197,223
|
|
|
177,846
|
|
|
171,176
|
|
Net income (loss) per share - basic
|
$
|
3.36
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.68
|
)
|
Net income (loss) per share - diluted
|
$
|
3.18
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.68
|
)
|
Potentially dilutive securities that are not included in the calculation of diluted net income (loss) per share because doing so would be antidilutive are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Common stock options
|
161
|
|
|
1,811
|
|
|
3,370
|
|
Restricted stock units
|
413
|
|
|
10,202
|
|
|
11,403
|
|
ESPP obligations
|
273
|
|
|
318
|
|
|
362
|
|
2018 Notes
|
—
|
|
|
—
|
|
|
7,783
|
|
2018 Warrants
|
—
|
|
|
7,783
|
|
|
7,783
|
|
2022 Notes
|
—
|
|
|
5,807
|
|
|
5,807
|
|
2022 Warrants
|
—
|
|
|
5,807
|
|
|
5,807
|
|
Total potentially dilutive securities
|
847
|
|
|
31,728
|
|
|
42,315
|
|
(17) Income Taxes
The provision for (benefit from) income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Current provision:
|
|
|
|
|
|
Federal
|
$
|
391
|
|
|
$
|
(336
|
)
|
|
$
|
(445
|
)
|
State
|
204
|
|
|
163
|
|
|
137
|
|
Foreign
|
15,657
|
|
|
22,204
|
|
|
9,512
|
|
|
16,252
|
|
|
22,031
|
|
|
9,204
|
|
Deferred provision:
|
|
|
|
|
|
Federal
|
(3,481
|
)
|
|
(2,026
|
)
|
|
(5,934
|
)
|
State
|
(882
|
)
|
|
(377
|
)
|
|
(886
|
)
|
Foreign
|
(571,402
|
)
|
|
(31,948
|
)
|
|
1,056
|
|
|
(575,765
|
)
|
|
(34,351
|
)
|
|
(5,764
|
)
|
(Benefit from) provision for income taxes
|
$
|
(559,513
|
)
|
|
$
|
(12,320
|
)
|
|
$
|
3,440
|
|
The components of income (loss) before income taxes by U.S. and foreign jurisdictions were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
(48,558
|
)
|
|
$
|
(153,290
|
)
|
|
$
|
(61,259
|
)
|
Foreign
|
115,743
|
|
|
114,266
|
|
|
(52,147
|
)
|
Total
|
$
|
67,185
|
|
|
$
|
(39,024
|
)
|
|
$
|
(113,406
|
)
|
The effective income tax rate differs from the federal statutory income tax rate applied to the income (loss) before income taxes due to the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Tax computed at U.S. federal statutory rate
|
$
|
14,109
|
|
|
$
|
(8,195
|
)
|
|
$
|
(38,558
|
)
|
State taxes, net of federal benefit
|
122
|
|
|
98
|
|
|
64
|
|
Tax rate differential for international subsidiaries
|
(5,005
|
)
|
|
(41,429
|
)
|
|
23,532
|
|
Stock-based compensation
|
(108,023
|
)
|
|
(93,073
|
)
|
|
(116,953
|
)
|
Tax credits
|
(51,237
|
)
|
|
(44,695
|
)
|
|
(21,038
|
)
|
Foreign restructuring and amortization
|
—
|
|
|
(625,292
|
)
|
|
2,794
|
|
Non-deductible expenses
|
21,953
|
|
|
9,657
|
|
|
2,833
|
|
Tax effects associated with Topic 606
|
—
|
|
|
(23,073
|
)
|
|
3,314
|
|
Other
|
448
|
|
|
408
|
|
|
607
|
|
Valuation allowance
|
(431,880
|
)
|
|
813,274
|
|
|
146,845
|
|
(Benefit from) provision for income taxes
|
$
|
(559,513
|
)
|
|
$
|
(12,320
|
)
|
|
$
|
3,440
|
|
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,
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
Net operating loss carryforwards
|
$
|
734,755
|
|
|
$
|
610,314
|
|
Credit carryforwards
|
171,856
|
|
|
120,594
|
|
Lease liability
|
108,224
|
|
|
—
|
|
Depreciation and amortization
|
577,599
|
|
|
594,496
|
|
Other
|
96,535
|
|
|
103,917
|
|
Total deferred tax assets
|
1,688,969
|
|
|
1,429,321
|
|
Less valuation allowance
|
(918,596
|
)
|
|
(1,342,981
|
)
|
|
770,373
|
|
|
86,340
|
|
Deferred tax liabilities:
|
|
|
|
Right of use asset
|
(101,091
|
)
|
|
—
|
|
Other
|
(73,818
|
)
|
|
(67,686
|
)
|
Net deferred tax assets
|
$
|
595,464
|
|
|
$
|
18,654
|
|
The unremitted earnings of our foreign subsidiaries are not considered indefinitely reinvested, except in certain designated jurisdictions in which the resident entity is a service provider that is not expected to generate substantial amounts of cash in excess of what may be reinvested by the local entity. We have not provided for state income or withholding taxes on the undistributed earnings of foreign subsidiaries which are considered indefinitely invested outside of the U.S. The amount of unrecognized deferred tax liability on these undistributed earnings is not material as of December 31, 2019.
As of December 31, 2019, we had U.S. federal net operating loss and federal tax credit carryforwards of approximately $2.9 billion and $125.7 million, respectively. The federal tax credits and a portion of the federal net operating loss carryforwards will begin to expire in 2024 if not utilized. In addition, we had state net operating loss and state tax credit carryforwards of approximately $1.7 billion and $91.7 million, respectively. The state net operating loss will begin to expire in 2020 if not utilized, however the tax effected amount due to expire in 2020 is immaterial. State tax credits and a portion of the federal net operating loss carryforwards 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, 2019. 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 our U.S. deferred tax assets will not be realized as of December 31, 2019. We recognized an income tax benefit of $574.2 million due to the release of the valuation allowance on the Irish deferred tax assets for the year ended December 31, 2019. These Irish deferred tax assets were created primarily as a result of the difference between the tax basis in our Irish subsidiary and the cost reported in our consolidated financial statements resulting from the transfer of intangible assets to the Irish subsidiary as part of our foreign restructuring in 2018. Management applied significant judgment in assessing the positive and negative evidence available in the determination of the amount of deferred tax assets that were more-likely-than-not to be realized in the future. The $424.4 million decrease in the 2019 valuation allowance was primarily attributable to the release of the valuation allowance on the Irish deferred tax assets. The $759.7 million increase in the 2018 valuation allowance was primarily attributable to an increase of approximately $590 million in deferred tax assets that are not realizable related to our foreign restructuring completed during 2018 giving rise to foreign amortizable assets. The $106.9 million decrease in the 2017 valuation allowance was primarily attributable to remeasuring the U.S. net deferred tax assets at the applicable tax rate of 21% in accordance with the Tax Act, offset by increases in deferred tax assets primarily related to net operating losses. To the extent sufficient positive evidence becomes available, we may release a portion, or all, of our valuation allowance in one or more future periods. A release of the valuation allowance, if any, would result in the recognition of certain deferred tax assets and a material income tax benefit for the period in which such release is recorded.
A reconciliation of the beginning and ending balance of total unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Balance, beginning period
|
$
|
27,591
|
|
|
$
|
27,648
|
|
|
$
|
18,440
|
|
Tax positions taken in prior period:
|
|
|
|
|
|
Gross increases
|
1,516
|
|
|
3,721
|
|
|
398
|
|
Gross decreases
|
—
|
|
|
(2,896
|
)
|
|
—
|
|
Tax positions taken in current period:
|
|
|
|
|
|
Gross increases
|
7,682
|
|
|
5,796
|
|
|
8,810
|
|
Lapse of statute of limitations
|
—
|
|
|
(1,078
|
)
|
|
—
|
|
Settlements
|
—
|
|
|
(5,600
|
)
|
|
—
|
|
Balance, end of period
|
$
|
36,789
|
|
|
$
|
27,591
|
|
|
$
|
27,648
|
|
As of December 31, 2019, we had gross unrecognized tax benefits of approximately $36.8 million, of which $6.1 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 $0.8 million and $0.3 million at December 31, 2019 and 2018, 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 are recognized as income tax expense and will be released upon the expiration of the statutes of limitations. These amounts are also not material for any periods presented.
We are subject to taxation in the United States and foreign jurisdictions. As of December 31, 2019, our tax years 2004 to 2018 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.
(18) Commitments and Contingencies
Operating Leases
For some of our offices and data centers, we have entered into non-cancelable operating lease agreements with various expiration dates through 2035. Certain lease agreements include options to renew or terminate the lease, which are not reasonably certain to be exercised and therefore are not factored into our determination of lease payments.
Total operating lease costs was $64.2 million, excluding short-term lease costs, variable lease costs and sublease income each of which were immaterial, for the year ended December 31, 2019. Total lease expenses recognized prior to our adoption of Topic 842 were $46.8 million and $42.8 million for the years ended December 31, 2018 and 2017, respectively.
For the year ended December 31, 2019, cash paid for amounts included in the measurement of operating lease liabilities was $44.1 million and operating lease liabilities arising from obtaining operating right-of-use assets totaled $115.0 million.
As of December 31, 2019, the weighted-average remaining lease term is 9.7 years, and the weighted-average discount rate is 3.7%.
Maturities of operating lease liabilities as of December 31, 2019 are presented in the table below (in thousands):
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
2020
|
|
$
|
67,629
|
|
2021
|
|
65,934
|
|
2022
|
|
62,754
|
|
2023
|
|
57,957
|
|
2024
|
|
45,820
|
|
Thereafter
|
|
230,605
|
|
Total operating lease payments
|
|
530,699
|
|
Less: imputed interest
|
|
(94,810
|
)
|
Present value of operating lease liabilities
|
|
$
|
435,889
|
|
In addition to the amounts above, as of December 31, 2019, we have operating leases, primarily for offices, that have not yet commenced with undiscounted cash flows of $445.7 million. These operating leases will commence between 2020 and 2022 with lease terms of 3 to 15 years.
Future minimum commitments under our non-cancelable operating leases as of December 31, 2018 are presented in the table below (in thousands):
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
2019
|
|
$
|
55,435
|
|
2020
|
|
60,996
|
|
2021
|
|
63,348
|
|
2022
|
|
67,707
|
|
2023
|
|
72,491
|
|
Thereafter
|
|
578,874
|
|
Total
|
|
$
|
898,851
|
|
Other Contractual Commitments
Other contractual commitments consist of data center and IT operations and sales and marketing activities related to our daily business operations. Future minimum payments under our non-cancelable purchase commitments as of December 31, 2019 are presented in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Purchase Obligations (1)
|
Years Ending December 31,
|
|
|
2020
|
|
$
|
70,819
|
|
2021
|
|
62,450
|
|
2022
|
|
32,572
|
|
2023
|
|
9,069
|
|
2024
|
|
2,699
|
|
Thereafter
|
|
2,630
|
|
Total
|
|
$
|
180,239
|
|
|
|
(1)
|
Not included in the table above are certain purchase commitments related to our future annual Knowledge user conferences and other customer or sales conferences to be held in 2021 and future years. If we had canceled these contractual commitments as of December 31, 2019 we would have been obligated to pay cancellation penalties of approximately $16.3 million in aggregate.
|
In addition to the amounts above, the repayment of our 2022 Notes with an aggregate principal amount of $782.5 million is due on June 1, 2022. Refer to Note 11 for further information regarding our Notes.
Also, approximately $6.1 million of unrecognized tax benefits have been recorded as liabilities as of December 31, 2019.
Letters of Credit
As of December 31, 2019, we had letters of credit in the aggregate amount of $22.9 million, primarily in connection with our customer contracts and operating leases.
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 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.
(19) 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,
|
|
2019
|
|
2018
|
|
2017
|
Revenues by geography
|
|
|
|
|
|
North America (1)
|
$
|
2,276,549
|
|
|
$
|
1,725,255
|
|
|
$
|
1,290,043
|
|
EMEA (2)
|
865,661
|
|
|
654,677
|
|
|
475,411
|
|
Asia Pacific and other
|
318,227
|
|
|
228,884
|
|
|
153,040
|
|
Total revenues
|
$
|
3,460,437
|
|
|
$
|
2,608,816
|
|
|
$
|
1,918,494
|
|
Property and equipment, net by geographic area were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Property and equipment, net:
|
|
|
|
North America (3)
|
$
|
269,754
|
|
|
$
|
227,471
|
|
EMEA (2)
|
118,399
|
|
|
82,526
|
|
Asia Pacific and other
|
79,932
|
|
|
37,219
|
|
Total property and equipment, net
|
$
|
468,085
|
|
|
$
|
347,216
|
|
|
|
(1)
|
Revenues attributed to the United States were approximately 94% of North America revenues for each of the years ended December 31, 2019, 2018 and 2017.
|
|
|
(2)
|
Europe, the Middle East and Africa (EMEA)
|
|
|
(3)
|
Property and equipment, net attributed to the United States were approximately 73% and 76% of property and equipment, net attributable to North America as of December 31, 2019 and 2018, respectively.
|
Subscription revenues consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Digital workflow products(1)
|
$
|
2,810,887
|
|
|
$
|
2,111,702
|
|
|
$
|
1,534,591
|
|
ITOM products(1)
|
444,192
|
|
|
309,611
|
|
|
204,909
|
|
Total subscription revenues
|
$
|
3,255,079
|
|
|
$
|
2,421,313
|
|
|
$
|
1,739,500
|
|
|
|
(1)
|
As we have expanded the scope of IntegrationHub (formerly included within our ITOM offering) beyond ITOM to align more closely with our broader platform offering, revenues associated with IntegrationHub have been reclassified from ITOM products to platform, which is part of our digital workflow products. Revenues reclassified from ITOM product revenues to digital workflow products revenues were $60.9 million and $44.4 million for the years ended December 31, 2018 and 2017, respectively.
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Our digital workflow products include the Now Platform, Now IT Service Management, Now IT Business Management, Now DevOps, Now IT Asset Management, Now Security Operations, Now Integrated Risk Management, Now HR Service Delivery, Now Finance Operations Management, Now Customer Service Management, and Now Field Service Management, and are generally priced on a per user basis. Our ITOM products are generally priced on a per node (physical or virtual server) basis. In previously issued consolidated financial statements, we referred to digital workflow products as “service management products.”
(20) Subsequent Events
On February 6, 2020, we completed the acquisition of a privately-held company, Loom Systems Ltd. (Loom), by acquiring all issued and outstanding shares of Loom for approximately $58.4 million in an all-cash transaction to extend our AIOps capabilities. Our accounting and analysis of this transaction is pending completion.
On February 7, 2020, we completed the acquisition of another privately-held company, Rupert Labs, Inc. d/b/a Passage AI (Passage AI), by acquiring all issued and outstanding shares of Passage AI for approximately $33.2 million in an all-cash transaction to advance our deep learning of AI capabilities. Our accounting and analysis of this transaction is pending completion.