ServiceNow
Annual Report 2016

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-KxAnnual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended December 31, 2016OR ¨Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934Commission File Number: 001-35580SERVICENOW, INC.(Exact name of registrant as specified in its charter) Delaware 20-2056195(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification Number)ServiceNow, Inc.2225 Lawson LaneSanta Clara, California 95054(408) 501-8550(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of each exchange on which registeredCommon stock, par value $0.001 per share New York Stock Exchange, Inc.Securities registered pursuant to Section 12(g) of the Act:Not applicable__________________________Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of Act. Yes ¨ No xIndicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post suchfiles). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to thebest of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No xBased on the closing price of the Registrant’s Common Stock on the last business day of the Registrant’s most recently completed second fiscal quarter, which was June 30, 2016, theaggregate market value of its shares (based on a closing price of $66.40 per share on June 30, 2016 as reported on the New York Stock Exchange) held by non-affiliates wasapproximately $7.6 billion.As of January 31, 2017, there were approximately 168.0 million shares of the Registrant’s Common Stock outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant’s definitive proxy statement for its 2017 Annual Meeting of Stockholders (Proxy Statement) to be filed within 120 days of the Registrant’s fiscal year endedDecember 31, 2016, are incorporated by reference in Part III of this Report on Form 10-K. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part of this Form 10-K.TABLE OF CONTENTS Page PART I Item 1Business1Item 1ARisk Factors7Item 1BUnresolved Staff Comments20Item 2Properties20Item 3Legal Proceedings20Item 4Mine Safety Disclosures20 PART II Item 5Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities21Item 6Selected Consolidated Financial Data23Item 7Management’s Discussion and Analysis of Financial Condition and Results of Operations25Item 7AQuantitative and Qualitative Disclosures About Market Risk52Item 8Consolidated Financial Statements and Supplementary Data54Item 9Changes in and Disagreements with Accountants on Accounting and Financial Disclosure87Item 9AControls and Procedures88Item 9BOther Information88 PART III Item 10Directors, Executive Officers and Corporate Governance88Item 11Executive Compensation89Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters89Item 13Certain Relationships and Related Party Transactions and Director Independence89Item 14Principal Accounting Fees and Services89 PART IV Item 15Exhibits and Financial Statement Schedules89Item 16Form 10-K Summary90Signatures 90Index to Exhibits 92 PART IFORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K, including the “Management's Discussion and Analysis of Financial Condition and Results of Operations,” containsforward-looking statements regarding future events and our future results that are based on our current expectations, estimates, forecasts and projectionsabout our business, our results of operations, the industry in which we operate and the beliefs and assumptions of our management. Words such as“believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “would,” “could,” “should,” “intend” and “expect,” variations of these words, and similarexpressions are intended to identify those forward-looking statements. These forward-looking statements are only predictions and are subject to risks,uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in anyforward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Report underthe section entitled “Risk Factors” in Item 1A of Part I and elsewhere herein, and in other reports we file with the Securities and Exchange Commission(SEC). While forward-looking statements are based on the reasonable expectations of our management at the time that they are made, you should not relyon them. We undertake no obligation to revise or update publicly any forward-looking statements for any reason, whether as a result of new information,future events or otherwise, except as may be required by law. ITEM 1. BUSINESSServiceNow is a leading provider of enterprise cloud computing solutions that define, structure, manage and automate services for global enterprises.Our mission is to help our customers improve service levels and reduce costs while scaling and automating their businesses.We offer a comprehensive set of cloud-based services that automate workflow within and between departments in an enterprise. Historically, our focuswas on solving challenges found in enterprise information technology (IT) departments, and we pioneered the use of the cloud to deliver IT servicemanagement applications. We now provide workflow solutions that go beyond the scope of the IT department and have extended our focus to servicemanagement for customer support, human resources, security operations and other enterprise departments where a patchwork of semi-automated and manualprocesses had been used in the past. Using our cloud services, users can easily request business services from these departments, service levels from thesedepartments improve and overall the business runs more efficiently.All of our cloud services are built on our proprietary platform which features one code base and one data model. The platform also enables customers toeasily create, by themselves or with our partners, their own service-oriented business applications across the enterprise. We deliver our software via theInternet as a service, through an easy-to-use, consumer product-like interface, which means it can be easily configured and rapidly deployed.We market our services to enterprises in a wide variety of industries, including financial services, consumer products, IT services, health care,government, education and technology. We sell our subscription services primarily through direct sales and, to a lesser extent, through indirect channel sales.We also provide a portfolio of comprehensive professional services to customers through our professional services experts and a network of partners. As ofDecember 31, 2016, we had approximately 3,600 enterprise customers, including more than 30% of the world’s 2,000 largest companies, as defined by anannual ranking by Forbes magazine.We were incorporated as Glidesoft, Inc. in California in June 2004 and changed our name to Service-now.com in February 2006. In May 2012, wereincorporated into Delaware as ServiceNow, Inc.Key Customer BenefitsKey customer benefits of our services include:Security, Scalability and Performance. Our cloud-based architecture, customer-dedicated software and network resources, and high-availabilityinfrastructure deliver security, scalability and performance to our customers' operations.Automation. Our platform enables the implementation of standardized, automated workflows that reduce inefficiencies and the costs incurred by ourcustomers in deploying enterprise-wide service management solutions.Cloud delivery. The ease of implementing, configuring and upgrading our cloud-based applications enable the rapid delivery of solutions to servicemanagement requirements across the enterprise.1Single system of record. Consolidating service management applications across the enterprise onto one platform improves the manageability of ITsystems, enhances compliance and reporting and reduces costs.User satisfaction. We deliver a consumer product-like experience that improves user satisfaction and increases adoption.Expertise. We offer customers an extensive network of experts, in addition to community-based and self-help support, so that customers have theresources to design, implement and manage enterprise-wide solutions.Our StrategyOur goal is to be the recognized leader of cloud-based services that automate service management requirements across the enterprise. We believe themarket for our solutions is significant and growing, and we intend to continue to make significant investments to expand our operational capacity and globalmarket adoption. Key elements of our growth strategy include:Drive service management transformation. We will continue to inspire and lead global enterprises to transform service management by standardizing,consolidating and automating services across their businesses on our applications and platform.Invest in technology leadership. We will continue to make significant investments in research and development to enhance our existing applicationsand deliver new applications, as well as develop new automation and machine intelligence technologies. We typically deliver ongoing innovation to ourcustomers in two upgrades per year. We will also look to acquire technology and talent through acquisitions and partnerships.Expand our customer base. We will continue to expand our customer base through additional investments in our direct sales force, strategic reseller andinfluencer partnerships, and our cloud infrastructure and data centers. We will make these investments in new and existing geographies in which we compete.Extend our relationships with existing customers. We will continue to expand adoption of our services within our existing customer base by marketing,selling and further enhancing our applications and platform capabilities that deliver business benefits to our customers.Develop our partner ecosystem. Our partners provide us and our customers with an important extension of product, solution and geographic reach. Weintend to further strengthen and expand our relationships with strategic resellers, system integrators, managed service providers, global service providers andindependent software vendors.Strengthen our customer community. Customer success is our most critical objective, and we will continue to invest in resources that our customersvalue. Our annual user conference Knowledge, vertical market and other user groups, online community sharing and educational programs are among theways we collaborate with and deliver ongoing value to our customers.Our Cloud Services ServiceNow PlatformThe ServiceNow platform is the foundation of our cloud-based services and all of our applications are built on this one cloud platform. It provides asingle data model, common services and delivers a single system of record with the ability to orchestrate actions to get work done across the enterprise.Common services provided by the platform include workflow, configuration management database, service catalog, service portal, knowledge management,reporting and analytics, data benchmarking, visual task boards, built-in and optional encryption capabilities and collaboration and developer tools. Theplatform also enables developers in IT and other departments across the enterprise to create, test and deploy their own applications within an integrateddevelopment environment while leveraging the single data model and common services of the platform.2Information Technology (IT)We have three product suites focused on meeting the challenges of enterprise IT management and operations. Our IT Service Management (ITSM)product suite defines, structures, consolidates, manages and automates IT services that are offered to an enterprise’s employees, customers and partners.Among its capabilities, our ITSM product suite records incidents, remediates problems and oversees the management of IT resources. Our second productsuite, IT Operations Management (ITOM), connects a customer's physical and cloud-based IT infrastructure with our applications and platform. It identifies acustomer's IT infrastructure components (e.g., servers) and associated business services (e.g., email) which are dependent upon that infrastructure. It alsomaintains a single data record for all IT configurable items, which allows our customers to exercise control over their on-premise or cloud-basedinfrastructures and orchestrate key processes and tasks. Finally, our IT Business Management (ITBM) product suite enables customers to manage their ITpriorities, including the scope and cost of IT projects, the development of software related to those projects and the overall management of the customer's ITproject portfolio.Customer ServiceOur customer service management product defines, structures, consolidates, manages and automates customer service cases and requests. It allowscommon customer requests such as password resets to be automated with out-of-the-box self-service, and for other cases it routes work from the customerservice agent to field service, engineering, operations, finance, or legal personnel to resolve the underlying issues. Our field service management applicationallows field service agents to be effectively assigned, deployed and managed on the same underlying customer service management platform that created andmanaged the customer incident.Human Resources (HR)Our HR service management product defines, structures, consolidates, manages and automates human resources services related to employee requests.HR service management capabilities include HR case management, employee self-service, knowledge management and management of employee lifecycleevents such as onboarding, transfers and off-boarding.Security OperationsOur security operations management product defines, structures, consolidates, manages and automates security operations management requirements ofthird-party and other sources of security alerts from a customer's infrastructure. Security operations management capabilities include security incidentmanagement, threat enrichment intelligence, vulnerability response management and security incident intelligence sharing. Our governance, risk andcompliance management product defines, structures, consolidates, manages and automates cross-functional governance, risk and compliance workflows suchas compliance controls and risk mitigation.Comprehensive Professional Services We offer a portfolio of comprehensive services that help ensure customer success.Professional Services. Through ServiceNow professional services and partner professional services, we provide implementation and configurationservices to drive value realization of the ServiceNow solutions.Education Services. We offer training services and certification programs for different levels of ServiceNow expertise. Our training portfolio iscustomized for various skill levels and individual schedules.Customer Support. As part of their subscription, customers receive support 24 hours a day, seven days a week around the globe, from technicalresources located in Orlando, San Diego and Santa Clara in the United States, as well as internationally in Amsterdam, London, and Sydney. We also offerself-service technical support through our support portal, which provides access to documentation, knowledge base, online support forums and onlineincident filing. 3 Our Technology and OperationsWe designed our cloud computing service to support global enterprises. We operate a multi-instance architecture that provides each customer with itsown dedicated application and database. This architecture is designed to deliver high-availability, scalability, performance, security and ease of upgrading.Our data centers process billions of record-producing transactions per month and manage multiple petabytes of data across our customer base. We have astandardized Java-based development environment, with the majority of our software written in industry standard software programming languages. Ourinfrastructure primarily consists of industry standard servers and network components. Our operating system and database are Linux and MySQL,respectively.Our data centers operate in a paired configuration to enable replication for high-availability and redundancy. We operate data centers in Australia,Brazil, Canada, Hong Kong, the Netherlands, Singapore, Switzerland, the United Kingdom and the United States.We employ technologies, policies and procedures designed to protect customer data. Our services have received SSAE 16 (SOC 1 Type 1 and Type 2),SOC 2, ISO 27001 and ISO 27018 third-party attestations. Our U.S. federal services have also received a FedRAMP Provisional Authority to Operate that canbe used by our U.S. federal customer base in addition to a Department of Defense Provisional Authority to Operate at Impact Level 2. Additionally, our datacenter providers have received an ISO 27001 or SSAE 16 attestation or equivalent.We offer customers the option to be deployed on dedicated hardware in our data centers. Our architecture also gives us the added flexibility to deployour service on-premises at a customer data center in order to support regulatory or security requirements, and a minority of our customers have elected to doso. We generally provide remote installation services and customer support to customers who have installed our services on-premises at their data centersimilar to the way we support customer instances deployed in our own managed data centers.Sales and Marketing We sell our services primarily through our global direct sales organization. We also sell our services indirectly through third-party channels bypartnering with systems integrators, managed services providers and resale partners, particularly in less developed markets.Our marketing efforts and lead generation activities consist primarily of customer referrals, Internet advertising, trade shows, industry events and pressreleases. We also host our annual Knowledge global user conference, webinars and other customer forums where customers and partners both participate inand present on a variety of programs designed to help accelerate marketing success with our services and platform.We are investing in new geographies, including investment in direct and indirect sales channels, professional services capabilities, customer supportresources and implementation partners. In addition to adding new geographies, we also plan to increase our investment in our existing locations in order toachieve scale efficiencies in our sales and marketing efforts.Customers We primarily sell our services to large enterprise customers. We host and support large enterprise-wide deployments for our customers. As of December31, 2016, we had approximately 3,600 enterprise customers, including more than 30% of the Global 2000, an annual ranking of the top 2,000 publiccompanies in the world by Forbes magazine. Our customers operate in a wide variety of industries, including financial services, consumer products, ITservices, health care, technology and government. No single customer accounted for more than 10% of our revenues for any of the periods presented. BacklogBacklog represents future unearned revenue amounts to be invoiced under our existing agreements and is not included in the deferred revenue on ourconsolidated balance sheets. As of December 31, 2016 and 2015, we had backlog of approximately $1.9 billion and $1.3 billion, respectively. We expectbacklog will change from period to period for several reasons, including the timing and duration of customer subscription and professional servicesagreements, varying billing cycles of subscription agreements, and the timing of customer renewals.4Financial Information about Segments and Geographic AreasWe manage our operations and allocate resources as a single organizational entity, and therefore we manage, monitor and report our financials as asingle reporting segment. For information regarding our revenue, revenue by geographic area and long-lived assets by geographic area, please refer to Note 2and Note 17 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. For financial information aboutour segment, please refer to the section entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of PartII and to our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. For informationregarding risks associated with our international operations, please refer to the section entitled “Risk Factors” in Item 1A of Part I in this Annual Report onForm 10-K.Research and Development Our research and development organization is responsible for the design, development, testing and certification of our software solutions. We focus ondeveloping new services and core technologies and further enhancing the functionality, reliability and performance of existing solutions. We focus ourefforts on anticipating customer demand and then bringing new services and new versions of existing services to market quickly in order to remaincompetitive in the marketplace. We have made, and will continue to make, significant investments in research and development to strengthen our existingapplications, expand the number of applications on our platform and develop additional automation and machine intelligence technologies. Total researchand development expense was $285.2 million, $217.4 million and $148.3 million for the years ended December 31, 2016, 2015 and 2014, respectively.Competition The markets for our solutions and enterprise cloud services generally are fragmented, rapidly evolving and highly competitive, with relatively lowbarriers to entry. As the market for service management matures, we expect competition to intensify. We compete primarily with large, well-established,enterprise application software vendors, in-house solutions, large integrated systems vendors and established and emerging cloud vendors. Many prospectivecustomers have invested substantial personnel and financial resources to implement and integrate their current enterprise software into their businesses andtherefore may be reluctant or unwilling to migrate away from their current solution to an enterprise cloud solution. Accordingly, we compete with bothenterprise application software vendors that provide on-premise software and with vendors providing cloud based services.Our competitors vary in size and in the breadth and scope of the products and services offered. Our primary competitors include BMC Software, Inc.,Microsoft Corporation, Oracle Corporation, SAP and Salesforce.com. Further, other potential competitors not currently offering competitive products mayexpand their services to compete with our services. As we continue to expand the breadth of our services to include offerings for service domains outside ofIT, we expect increasing competition from platform vendors and from application development vendors focused on these other markets.Various factors influence purchase decisions in our industry, including total cost of ownership, level of customer satisfaction, breadth and depth ofproduct functionality, security and adherence to industry standards, brand awareness, flexibility and performance. We believe that we compete favorably withour competitors on each of these factors. However, many of our competitors have substantially greater financial, technical and other resources and may beable to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards and customer requirements. An existingcompetitor or new entrant could introduce new technology that reduces demand for our services. In addition, some of our competitors offer their products orservices at a lower price, which has resulted in pricing pressures. Some of our larger competitors also have the operating flexibility to bundle competingproducts and services with other software offerings, including offering them at a lower price as part of a larger sale. As competition intensifies, we expectpricing competition to continue or increase.Intellectual Property We rely upon a combination of copyright, trade secret, patent and trademark laws in the United States and other jurisdictions as well as confidentialityprocedures and contractual restrictions, such as confidentiality and license agreements, to establish, protect and grow our intellectual property (IP) rights. Wealso enter into confidentiality and proprietary rights agreements with our employees, partners, vendors, consultants and other third parties and control accessto our IP and other proprietary information. We also purchase or license technology that we incorporate into our products or services.5We continue to grow our patent portfolio and IP rights around the world that relate to our products, services, research and development and otheractivities, and our success depends in part upon our ability to protect our core technology and IP. We file patent applications to protect our IP and believethat the duration of our issued patents is sufficient when considering the expected lives of our products. However, we cannot be certain that any of our patentapplications will result in the issuance of a patent or whether the examination process will result in patents of value or applicability. In addition, any patentsthat may be issued may be contested, circumvented, found unenforceable or invalidated, and we may not be able to prevent third parties from infringingthem.Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or obtain and use our technology to develop products andservices that provide features and functionality that are similar to our solutions. Policing unauthorized use of our technology is difficult. The laws of thecountries in which we market our services may offer little or no effective protection of our proprietary technology. Our competitors could also independentlydevelop services equivalent to ours, and our intellectual property rights may not be broad enough for us to prevent competitors from doing so. Reverseengineering, unauthorized copying or other misappropriation of our proprietary technology could enable third parties to benefit from our technology withoutpaying us for it, which would significantly harm our business.Our industry is characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets and frequent claims and relatedlitigation regarding patent and other intellectual property rights. From time to time, third parties may assert patent, copyright, trademark and otherintellectual property rights against us, our channel partners or our customers. In addition, based on our greater visibility and market exposure as a publiccompany, we face a higher risk of being the subject of intellectual property infringement claims from third parties. For example, in 2016 we settled twopatent-related litigation matters and recorded a one-time charge of $270.0 million related to aggregate legal settlements. See “Risk Factors-Claims by othersthat we infringe their proprietary technology or other rights could harm our business” and “Legal Proceedings” below for additional information.Employees As of December 31, 2016, we had 4,801 full-time employees worldwide, including 1,225 in cloud operations, professional services, training andcustomer support, 1,875 in sales and marketing, 1,054 in research and development and 647 in general and administrative roles. None of our U.S. employeesis represented by a labor union with respect to his or her employment. Employees in certain European countries are represented by workers' councils and alsohave the benefits of collective bargaining arrangements at the national level. We consider our relations with our employees to be very good and have notexperienced interruptions of operations or work stoppages due to labor disagreements.Available InformationYou can obtain copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other filings with theSEC, and all amendments to these filings, free of charge from our website at www.servicenow.com as soon as reasonably practicable following our filing ofany of these reports with the SEC. The public may read and copy any materials we have filed with the SEC at the SEC’s Public Reference Room at 100 FStreet, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that fileelectronically with the SEC at www.sec.gov. The contents of these websites are not incorporated into this filing and our references to the URLs for thesewebsites are intended to be inactive textual references only.6ITEM 1A. RISK FACTORS Investing in our securities involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with allof the other information in this Annual Report on Form 10-K, including our consolidated financial statements and related notes report, before making aninvestment decision. We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition,results of operations and future prospects. Our business could be harmed by any of these risks. The trading price of our common stock could decline due toany of these risks, and you may lose all or part of your investment. Risks Related to Our Business and IndustryWe expect our revenue growth rate to continue to decline, and we expect to continue to incur losses in accordance with U.S. Generally AcceptedAccounting Principles (GAAP).We have experienced significant revenue growth in prior periods; however, our revenue growth rate is declining and we expect that it will continue todecline into the foreseeable future. We also expect our costs to increase in future periods as we continue to invest in our capacity to support anticipatedgrowth. These investments may not result in increased revenues or growth in our business. Even if our revenues continue to increase, we expect to continue toincur a loss in accordance with GAAP during future periods due to increased costs such as non-cash charges associated with equity awards, businesscombinations and other expenses. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays and other unforeseen orunpredictable factors that may result in increased costs. Furthermore, it is difficult to predict the size and growth rate of our market, customer demand for ourproducts, customer adoption and renewal rates, and the entry of competitive products or the success of existing competitive products. As a result, we may notachieve or maintain profitability in the future, our gross margins may be negatively impacted, and our ability to generate cash flow from operations may benegatively impacted. If we fail to grow our revenues sufficiently to keep pace with our growing investments and other expenses, our business, operatingresults and growth prospects will be adversely affected.We have recently introduced products in new markets that are important to our growth prospects and for which we do not have a substantial operatinghistory. If we are unsuccessful in competing in these new markets, our revenue growth rate, business and operating results will be adversely affected.We have recently introduced products in the markets for IT operations management, customer service, security operations, HR service management andthe use of our platform for other service management applications outside of enterprise IT. Our successful entry into these and other new markets is importantto our revenue growth prospects. We do not have a substantial operating history with these products, which limits our ability to forecast operating results, andthe success of our efforts to address these markets depends on many factors, including: the degree of differentiation of our products and services from thoseoffered by more established competitors in these markets; whether our product and services offer compelling benefits and value to customers; the time-frameand quality of our research and development efforts; the rigor and effectiveness of our quality testing and controls; and our ability to successfully market andsell into new markets with which our marketing and sales personnel are less experienced. We may not have the necessary resources, including employees withthe required product management, engineering, marketing and sales expertise, to compete effectively in these new markets. Any new service that we developmay not be introduced in a timely or cost-effective manner, may not be priced appropriately, may not offer compelling customer benefits compared tocompeting products and services, and may not achieve the broad market acceptance necessary to generate significant revenues. In addition, the partnerecosystem for some of our new products is less developed than for our more mature products, and some of our new products require a commitment ofresources and expertise by our customers, which they may lack, to ensure a successful implementation. If we are not able to successfully develop, market, selland implement these and other newly introduced products and services to our existing customers and prospective new customers our revenue growth rate,business and operating results will be adversely affected.7If we suffer a cyber-security event we may lose customers and incur significant liabilities, any of which would harm our business and operating results.Our operations involve the storage, transmission and processing of our customers’ confidential, proprietary and sensitive information, including in somecases personally identifiable information, protected health information and credit card and other sensitive financial information. While we have securitymeasures in place designed to protect customer information and prevent data loss, they may be breached as a result of third-party action, includingintentional misconduct by computer hackers, employee error, malfeasance or otherwise, and result in someone obtaining unauthorized access to ourcustomers’ data or our data, including our intellectual property and other confidential business information. Moreover, computer malware, viruses andhacking, phishing and denial of service attacks by third parties have become more prevalent in our industry, and have occurred on our systems in the past andmay occur on our systems in the future. Because techniques used to obtain unauthorized access to or sabotage systems change frequently and generally arenot recognized until successfully launched against a target, we may be unable to anticipate these techniques or to implement adequate preventativemeasures. As cyber-security threats develop and grow, it may be necessary to make significant further investments to protect data and infrastructure. Asecurity breach or unauthorized access or loss of data could result in a disruption to our service, litigation, the triggering of indemnification and othercontractual obligations, regulatory investigations, government fines and penalties, reputational damage, loss of sales and customers, mitigation andremediation expenses and other liabilities. We do not have insurance sufficient to compensate us for the potentially significant losses that may result fromsecurity breaches.Disruptions or defects in our services could damage our customers’ businesses, subject us to substantial liability and harm our reputation and financialresults.From time to time, we experience defects in our services, and new defects may be detected in the future. For example, we provide regular updates to ourservices, which frequently contain undetected defects when first introduced or released. Defects may also be introduced by our use of third-party software,including open source software. Disruptions may result from errors we make in delivering, configuring or hosting our services, or designing, installing,expanding or maintaining our cloud infrastructure. Disruptions in service can also result from incidents that are outside of our control, including denial ofservice attacks. We currently serve our customers primarily using equipment managed by us and co-located in third-party data center facilities operated byseveral different providers located around the world. These centers are vulnerable to damage or interruption from earthquakes, floods, fires, power loss andsimilar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct, equipment failure and adverse eventscaused by operator error. Despite precautions taken at these facilities, problems at these facilities could result in lengthy interruptions in our services and theloss of customer data. In addition, our customers may use our services in ways that cause disruptions in service for other customers. Our customers use ourservices to manage important aspects of their own businesses, and our reputation and business will be adversely affected if our customers and potentialcustomers believe our services are unreliable. Disruptions or defects in our services may reduce our revenues, cause us to issue credits or pay penalties,subject us to claims and litigation, cause our customers to delay payment or terminate or fail to renew their subscriptions, and adversely affect our ability toattract new customers. The occurrence of payment delays, or service credit, warranty, termination for material breach or other claims against us, could result inan increase in our bad debt expense, an increase in collection cycles for accounts receivable, an increase to our warranty provisions or service level creditaccruals or other increased expenses or risks of litigation. We do not have insurance sufficient to compensate us for the potentially significant losses that mayresult from claims arising from disruptions in our services.8Our stock price can be volatile, including if we fail to meet the financial performance expectations of investors or securities analysts and the price of ourcommon stock could decline substantially.The trading price of our common stock has been, and is likely to continue to be, volatile and could be subject to wide fluctuations in response tovarious factors, some of which are beyond our control. For any quarterly or annual period, there is a risk that our financial performance will not meet thefinancial guidance we have previously given for that period, or that we may otherwise fail to meet the financial performance expectations of the securitiesanalysts who issue reports on our company and our common stock price, or of investors in our common stock. There is also a risk that we may issue forward-looking financial guidance for a quarterly or annual period that fails to meet the expectations of such securities analysts or investors. If any of the foregoingoccurs, for any reason either within or outside of our control, the price of our common stock could decline substantially and investors in our common stockcould incur substantial losses. Some of the important factors that may cause our revenues, operating results and cash flows, or our forward-looking financialguidance, to fall below the expectations of such securities analysts or investors, or otherwise cause our stock price to be volatile, include:•our ability to attract new customers, retain and increase sales to existing customers, and satisfy our customers’ requirements;•changes in foreign currency exchange rates;•the rate of expansion and productivity of our sales force;•the number of new employees added;•the cost, timing and management effort for our development of new products and services;•general economic conditions that may adversely affect either our customers’ ability or willingness to purchase additional subscriptions, delay aprospective customer’s purchasing decision, reduce the value of new subscription contracts or adversely affect renewal rates;•the amount and timing of operating costs and capital expenditures related to the operation and expansion of our business;•seasonality in terms of when we enter into customer agreements for our services;•the length of the sales cycle for our services;•changes to our management team;•changes in our pricing policies, whether initiated by us or as a result of competition;•significant security breaches, technical difficulties or interruptions of our services;•new solutions, products or changes in pricing policies introduced by our competitors;•changes in effective tax rates;•changes in the average contract term of our customer agreements and changes in billings duration;•changes in our renewal and upsell rates;•the timing of customer payments and payment defaults by customers;•extraordinary expenses such as litigation costs or damages, including settlement payments;•the costs associated with acquiring new businesses and technologies and the follow-on costs of integration, including the tax effects ofacquisitions;•the impact of new accounting pronouncements, including the new revenue recognition standards that are effective for us beginning January 1,2018;•changes in laws or regulations impacting the delivery of our services;•the amount and timing of stock awards and the related financial statement expenses; and•our ability to accurately estimate the total addressable market for our products and services.Unanticipated changes in our effective tax rate could impact our financial results.We are subject to income taxes in the United States and various foreign jurisdictions. We believe that our provision for income taxes is reasonable, butthe ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period orperiods in which such determination is made. Our effective tax rate could be adversely affected by changes in the mix of earnings and losses in countries withdiffering statutory tax rates, certain non-deductible expenses, the valuation of deferred tax assets and liabilities and the effects of acquisitions. Increases inour effective tax rate would reduce our profitability or in some cases increase our losses.9Additionally, our future effective tax rate could be impacted by changes in accounting principles, changes in U.S. federal, state or international tax lawsor tax rulings. For example, the current U.S. administration and key members of Congress have made public statements indicating that tax reform is a priority.Certain changes to U.S. tax laws, including limitations on the ability to defer U.S. taxation on earnings outside of the United States until those earnings arerepatriated to the United States, could affect the tax treatment of our foreign earnings. Many countries are actively considering changes to existing tax laws orhave proposed or enacted new laws, such as legislation recently enacted in the United Kingdom and in Australia. In October 2015, the Organization forEconomic Co-Operation and Development released guidance, and is expected to continue to issue guidance and proposals, that may change various aspectsof the existing framework under which our tax obligations are determined in many of the countries in which we do business and which could ultimatelyimpact our tax liabilities. Any changes in federal, state or international tax laws or tax rulings may increase our worldwide effective tax rate and harm ourfinancial position and results of operations.In addition, we may be subject to income tax audits by tax jurisdictions throughout the world, many of which have not established clear guidance onthe tax treatment of cloud computing companies. Although we believe our income tax liabilities are reasonably estimated and accounted for in accordancewith applicable laws and principles, an adverse resolution of one or more uncertain tax positions in any period could have a material impact on the results ofoperations for that period.Our financial results may be adversely affected by changes in accounting principles applicable to us.We prepare our financial statements in accordance with GAAP which are subject to interpretation or changes by the Financial Accounting StandardsBoard (FASB), the SEC and other various bodies formed to promulgate and interpret appropriate accounting principles. New accounting pronouncements andchanges in accounting principles have occurred in the past and are expected to occur in the future which may have a significant effect on our financialresults. For example, in May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606),”which supersedes nearly all existing revenue recognition guidance under GAAP. Under the new standard, revenue is recognized when a customer obtainscontrol of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for thosegoods or services. This new standard is effective for our interim and annual periods beginning January 1, 2018, and we expect the new standard to have amaterial impact on the timing of revenue and expense recognition for our contracts related to on-premises offerings and on our deferred commissions assetand the related amortization expense. We are continuing to evaluate the impact of the adoption of this standard on our consolidated financial statements andour preliminary assessments are subject to change. Refer to Note 2 in the notes to our consolidated financial statements included elsewhere in this AnnualReport on Form 10-K for additional information on the new guidance and its potential impact on us. Adoption of this standard and any difficulties inimplementation of changes in accounting principles, including the ability to modify our accounting systems, could cause us to fail to meet our financialreporting obligations, which could result in regulatory discipline and harm investors’ confidence in us.Foreign currency exchange rate fluctuations could harm our financial results.We conduct significant transactions, including revenue transactions and intercompany transactions, in currencies other than the U.S. Dollar or thefunctional operating currency of the transactional entities. In addition, our international subsidiaries maintain significant net assets that are denominated incurrencies other than the functional operating currencies of these entities. Accordingly, changes in the value of currencies relative to the U.S. Dollar mayimpact our consolidated revenues and operating results due to transactional and translational remeasurement that is reflected in our earnings. It is particularlydifficult to forecast any impact from exchange rate movements, so there is risk that unanticipated currency fluctuations could adversely affect our results orcause our results to differ from investor expectations or our own guidance in any future periods. In addition, the June 23, 2016 referendum by British voters toexit the European Union adversely impacted global markets, including currencies, and resulted in a decline in the value of the British pound, as compared tothe U.S. Dollar and other currencies. Volatility in exchange rates may continue as the United Kingdom negotiates its exit from the European Union.We do not currently maintain a program to hedge transactional exposures in foreign currencies. However, in the future, we may use derivativeinstruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use ofsuch hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates overthe limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effectivehedges with such instruments.10The markets in which we participate are intensely competitive, and if we do not compete effectively our business and operating results will be adverselyaffected.The markets for our enterprise cloud solutions are rapidly evolving and highly competitive, with relatively low barriers to entry. As the market forservice management matures, we expect competition to intensify. We compete primarily with large, well-established, enterprise application software vendors,in-house solutions, large integrated systems vendors, and established and emerging cloud vendors. Our primary competitors include BMC Software, Inc.Microsoft Corporation, Oracle Corporation, SAP and Salesforce.com. Many prospective customers have invested substantial personnel and financialresources to implement and integrate their current enterprise software into their businesses and therefore may be reluctant or unwilling to migrate away fromtheir current solution to an enterprise cloud solution. Many of our competitors and potential competitors are larger, have greater name recognition, longeroperating histories, more established customer relationships, larger marketing budgets and greater resources than we do. Further, other potential competitorsnot currently offering competitive products may expand their services to compete with our services. As we expand the breadth of our services to includeofferings in the markets for IT operations management, customer service, security operations, HR service management and use of our platform for otherservice management applications outside of enterprise IT, we expect increasing competition from platform vendors and from application developmentvendors focused on these other markets. Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities,technologies, standards and customer requirements. In addition, some of our competitors offer their products or services at a lower price, which has resulted inpricing pressures. Larger competitors with more diverse product and service offerings may reduce the price of products or subscriptions that compete withours or may bundle them with other products and subscriptions. We expect that smaller competitors and new entrants may accelerate pricing pressure,including in the IT service management market, which is our more mature offering and from which we derive the substantial majority of our revenues. For allof these reasons, we may not be able to compete successfully and competition could result in reduced sales, reduced margins, losses or the failure of oursolutions to achieve or maintain market acceptance, any of which could harm our business.Lawsuits against us by third-parties that allege we infringe their intellectual property rights could harm our business and operating results.There is considerable patent and other intellectual property development activity in our industry. Many companies in our industry, including ourcompetitors and other third parties, as well as non-practicing entities, own large numbers of patents, copyrights, trademarks and trade secrets, which they mayuse to assert claims of patent infringement, misappropriation or other violations of intellectual property rights against us.Moreover, the patent portfolios of most of our competitors are larger than ours. This disparity may increase the risk that our competitors may sue us forpatent infringement and may limit our ability to counterclaim for patent infringement or settle through patent cross-licenses. From time to time, ourcompetitors or other third parties, including patent holding companies seeking to monetize patents they have purchased or otherwise obtained, may claimthat we are infringing upon their intellectual property rights. For example, in 2016 we settled two patent-related litigation matters and recorded a one-timecharge of $270.0 million related to aggregate legal settlements.In any intellectual property litigation, regardless of the scope or merits of the claims at issue, we may incur substantial attorney’s fees and otherlitigation expenses and, if the claims are successfully asserted against us and we are found to be infringing upon the intellectual property rights of others, wecould be required to: pay substantial damages and make substantial ongoing royalty payments; cease offering our products and services; modify our productsand services; comply with other unfavorable terms, including settlement terms; and indemnify our customers and business partners and obtain costly licenseson their behalf and refund fees or other payments previously paid to us. Moreover, the mere existence of any lawsuit, or any interim or final outcomes, and thecourse of its conduct and the public statements related to it (or absence of such statements) by the courts, press, analysts and litigants, could be unsettling toour customers and prospective customers and could cause an adverse impact to our customer satisfaction and related renewal rates and cause us to losepotential sales, and could also be unsettling to investors or prospective investors in our common stock and could cause a substantial decline in the price ofour common stock. Accordingly, any claim or litigation against us could be costly, time-consuming and divert the attention of our management and keypersonnel from our business operations and harm our financial condition and operating results.11Our intellectual property protections may not provide us with a competitive advantage, and defending our intellectual property may result in substantialexpenses that harm our operating results.Our success depends to a significant degree on our ability to protect our proprietary technology and our brand under a combination of patent and otherintellectual property laws of the United States and other jurisdictions. Though we seek patent protection for our technology, we may not be successful inobtaining patent protection, and any patents issued in the future may not provide us with competitive advantages, or may be successfully challenged by thirdparties. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Any of ourintellectual property rights may be challenged by others or invalidated through administrative process or litigation. Effective patent, trademark, copyrightand trade secret protection may not be available to us in every country in which our services are available. The laws of some foreign countries may not be asprotective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. Wemay be required to spend significant resources to monitor and protect our intellectual property rights. We have, and in the future may, initiate claims orlitigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any litigation, whether or not itis resolved in our favor, could result in significant expense to us, divert the efforts of our technical and management personnel and may result in counter-claims with respect to infringement of intellectual property rights by us. If we are unable to prevent third parties from infringing upon or misappropriating ourintellectual property, or are required to incur substantial expenses in defending our intellectual property rights, our business and operating results may beadversely affected.If we are unsuccessful in increasing our penetration of international markets or managing the risks associated with foreign markets, our business andoperating results will be adversely affected.Sales outside of North America represented approximately 32% of our total revenues for the year ended December 31, 2016. Our business and futureprospects depend on increasing our international sales as a percentage of our total revenues, and the failure to grow internationally will harm our business.Additionally, operating in international markets requires significant investment and management attention and will subject us to regulatory and economicrisks that are different from those in the United States. We have made, and will continue to make, substantial investments in data centers and cloudcomputing infrastructure, sales, marketing, personnel and facilities as we enter and expand in new geographic markets. When we make these investments, it istypically unclear whether, and when, sales in the new market will justify our investments, and we may significantly underestimate the level of investment andtime required to be successful, or whether we will be successful. Our rate of acquisition of new Global 2000 customers, a key factor effecting our growth, hasgenerally been lower in Africa, Asia, Eastern Europe, South America and other markets in which we are less established, as compared to North America,Australia and areas within Western Europe. Over time an increasing proportion of the Global 2000 companies that are not yet our customers are located inemerging markets where we are less established. We have experienced, and may continue to experience, difficulties in some of our investments in geographicexpansion, including in hiring qualified sales management personnel and managing foreign operations.Risks inherent with international sales include without limitation:•compliance with multiple, conflicting and changing governmental laws and regulations, including employment, tax, competition, privacy anddata protection laws and regulations;•compliance by us and our business partners with international bribery and anti-corruption laws, including the UK Bribery Act and the ForeignCorrupt Practices Act;•the risk that illegal or unethical activities of our business partners will be attributed to or result in liability to us;•longer and potentially more complex sales cycles;•longer accounts receivable payment cycles and other collection difficulties;•tax treatment of revenues from international sources and changes to tax codes, including being subject to foreign tax laws and being liable forpaying withholding, income or other taxes in foreign jurisdictions;•different pricing and distribution environments;•foreign currency fluctuations which may cause transactional and translational remeasurement losses;•potential changes in international trade policies and agreements;•local business practices and cultural norms that may favor local competitors; and•localization of our services, including translation into foreign languages and associated expenses.If we are unable to manage these risks, if our required investments in these international markets are greater than anticipated, or if we are unsuccessful inincreasing sales in emerging markets, our revenue growth rate, business and operating results will be adversely affected.12If we are unable to continuously enhance our products and services to deliver consumer product-like experiences, mobility, messaging and ease of use, theycould become less competitive or obsolete and our business and operating results will be adversely affected.We believe that enterprises are increasingly focused on delivering a consumer product-like technology experience to users within the enterprise, suchas employees, and to individuals interacting with the enterprise, such as customers, partners and suppliers. Accordingly, our ability to attract new customersand to renew and increase revenues from existing customers depends on our ability to continuously enhance our products and services and provide them inways that are broadly accepted. In particular, we need to continuously modify and improve our products and services to keep pace with changes in userexpectations, including for intuitive and attractive consumer product-like interfaces, use and mobility features, messaging, social networking, andcommunication, database, hardware and security technologies. If we are unable to consistently and timely meet these requirements, our products and servicesmay become less marketable and less competitive or obsolete, and our business and operating results will be adversely affected.If we lose key employees or are unable to attract and retain the employees we need, our business and operating results will be adversely affected.Our success depends largely upon the continued services of our management team and many key individual contributors. From time to time, there maybe changes in our management team resulting from the hiring or departure of employees, which could disrupt our business. For example, our founder andChief Product Officer, Frederic Luddy, retired in October 2016, although he continues to serve as a member of our board of directors, and Daniel R. McGeeresigned as our Chief Operating Officer in December 2016. Effective as of April 3, 2017, Frank Slootman will resign and John J. Donahoe will be appointed asour President and Chief Executive Officer, although Mr. Slootman will continue to serve as the Chairman of our board of directors. Our employees aregenerally employed on an at-will basis, which means that our employees could terminate their employment with us at any time. The loss of one or moremembers of our management team or other key employees could have a serious impact on our business. In the technology industry, there is substantial andcontinuous competition for engineers with high levels of experience in designing, developing and managing software and Internet-related solutions, as wellas competition for sales executives and operations personnel. We may not be successful in attracting and retaining qualified personnel. We have from time totime experienced, and we may continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Inparticular, competition for experienced software and cloud computing infrastructure engineers in the San Francisco Bay area, San Diego, Seattle, London andAmsterdam, our primary operating locations, is intense. If we fail to attract new personnel or fail to retain and motivate our current personnel, our businessand future growth prospects could be adversely affected.Privacy laws and concerns, evolving regulation of cloud computing, cross-border data transfer restrictions, other foreign and domestic regulations andstandards related to personal data and the Internet may adversely affect our business.Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws and regulations affecting dataprivacy, the use of the Internet as a commercial medium, and data sovereignty requirements concerning the location of data centers that store and processdata. Changing laws, regulations and standards applying to the solicitation, collection, transfer, processing, storage or use of personal or consumerinformation could affect our customers’ ability to use and share data, potentially restricting our ability to store, process and share data with our customers inconnection with providing our services, and in some cases could impact our ability to offer our services in certain locations or our customers’ ability todeploy our services globally. For example, the European Court of Justice in October 2015 issued a ruling immediately invalidating the U.S.-EU Safe Harborframework that had been in place since 2000, which our customers relied upon to facilitate the transfer of personal data from the European Economic Area tothe United States in compliance with applicable European data protection laws. Notwithstanding the recent adoption of the Privacy Shield Framework by theEuropean Union and the United States, there is uncertainty surrounding how data transfers from the European Economic Area to the United States will beauthorized in the future. In addition, the June 23, 2016 referendum by British voters to exit the European Union may further exacerbate many of the risks anduncertainties described above.Moreover, complying with the recently adopted E.U. General Data Protection Regulation or other new data protection laws and regulations may causeus to incur substantial operational costs or require us to modify our data handling practices, may limit the use and adoption of our services and reduce overalldemand for our services. In addition, non-compliance could result in proceedings against us by governmental entities or others and may otherwise adverselyimpact our business, financial condition and operating results.13In addition to government activity, privacy advocacy groups and the technology and other industries have established or may establish various new,additional or different self-regulatory standards that may place additional burdens on us. Our customers may expect us to meet voluntary certifications oradhere to other standards established by third parties. If we are unable to maintain these certifications or meet these standards, it could reduce demand for ourapplications and adversely affect our business.Because we recognize revenues from our subscription service over the subscription term, downturns or upturns in new sales and renewals will not beimmediately reflected in our operating results.We generally recognize revenues from customers ratably over the terms of their subscriptions. As a result, most of the revenues we report in each quarterare derived from the recognition of deferred revenues relating to subscriptions entered into during previous quarters. Consequently, a decline in new orrenewed subscriptions in any single quarter will likely have only a small, and perhaps no apparent, impact on our revenue results for that quarter. Further, adecline in new or renewed subscriptions in a quarter may not have an immediately apparent impact on billings for that quarter due to factors that may offsetthe decline, such as an increase in billings duration, a decline in the amount of contracts with future start dates and an increase in collections in the currentquarter related to contracts with future start dates. Billings consists of amounts invoiced for contracts with new customers, upsells, renewals, backlog,professional services, training, and our Knowledge and other customer forum events. While we typically bill customers annually for our subscription services,customers sometimes request, and we accommodate, billings durations that differ from the typical twelve month term. In addition, we frequently enter intocontracts with a contract start date in the future, and we exclude these amounts from billings as these amounts are not included in our consolidated balancesheets, unless such amounts have been paid as of the balance sheet date. Factors such as the weighted average billings duration and the timing of contractstart dates and the timing of collections create variability in billings.Further, a decline in new or renewed subscriptions in any given quarter will negatively affect our revenues and billings in future quarters. Accordingly,the effect of significant downturns in sales and market acceptance of our services, and potential changes in our rate of renewals, may not be fully reflected inour results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenues through additional sales inany period, as revenues from new customers must be recognized over the applicable subscription term. In addition, we may be unable to adjust our coststructure to reflect the changes in revenues.As we acquire or invest in companies and technologies, we may not realize the expected business or financial benefits and the acquisitions and investmentsmay divert our management’s attention and result in additional dilution to our stockholders.We have acquired or invested in companies in the past as part of our business strategy and may continue to evaluate potential strategic transactions,including acquisitions of, or investments in, businesses, technologies, services, products and other assets in the future. We also may enter into relationshipswith other businesses to expand our service offerings or our ability to provide services in international locations, which could involve preferred or exclusivelicenses, additional channels of distribution, discount pricing or investments in other companies. Acquisitions and investments involve numerous risks,including:•assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies;•failing to achieve the expected benefits of the acquisition or investment;•potential loss of key employees of the acquired company;•inability to maintain relationships with customers and partners of the acquired business;•unanticipated expenses related to acquired technology and its integration into our existing technology;•potential adverse tax consequences;•inability to generate sufficient revenue to offset acquisition or investment costs;•disruption to our business and diversion of management attention and other resources;•potential financial and credit risks associated with acquired customers;•in the case of foreign acquisitions, the challenges associated with integrating operations across different cultures and languages and any currencyand regulatory risks associated with specific countries; and•potential unknown liabilities associated with the acquired businesses.In addition, we may have to pay cash, incur debt, or issue equity or equity linked securities to pay for any future acquisitions, each of which couldadversely affect our financial condition or the market price of our common stock. Furthermore, if we finance acquisitions by issuing equity or convertible orother debt securities or loans, our existing stockholders may be diluted, or we could face constraints related to the terms of and repayment obligation relatedto the incurrence of indebtedness that could affect the market price of our common stock. The occurrence of any of these risks could harm our business,operating results and financial condition.14A portion of our revenues are generated by sales to government entities and heavily regulated organizations, which are subject to a number of challengesand risks.A portion of our sales are to governmental agencies. Additionally, many of our current and prospective customers, such as those in the financialservices and health care industries, are highly regulated and may be required to comply with more stringent regulations in connection with subscribing to andimplementing our services. Selling to these entities can be highly competitive, expensive and time consuming, often requiring significant upfront time andexpense without any assurance that we will successfully complete a sale. Furthermore, engaging in sales activities to foreign governments introducesadditional compliance risks specific to the Foreign Corrupt Practices Act, the UK Bribery Act and other similar statutory requirements prohibiting bribery andcorruption in the jurisdictions in which we operate. Government and highly regulated entities often require contract terms that differ from our standardarrangements and impose compliance requirements that are complicated, require preferential pricing or “most favored nation” terms and conditions, or areotherwise time consuming and expensive to satisfy. If we undertake to meet special standards or requirements and do not meet them, we could be subject toincreased liability from our customers or regulators. Even if we do meet them, the additional costs associated with providing our services to government andhighly regulated customers could harm our margins. Moreover, changes in the underlying regulatory conditions that affect these types of customers couldharm our ability to efficiently provide our services to them and to grow or maintain our customer base.Our use of open source software could harm our ability to sell our services and subject us to possible litigation.Our products incorporate software licensed to us by third-party authors under open source licenses, and we may continue to incorporate open sourcesoftware into other services in the future. We attempt to monitor our use of open source software in an effort to avoid subjecting our services to adverselicensing conditions. However, there can be no assurance that our efforts have been or will be successful. There is little or no legal precedent governing theinterpretation of the terms of open source licenses, and therefore the potential impact of these terms on our business is uncertain and enforcement of theseterms may result in unanticipated obligations regarding our services and technologies. For example, depending on which open source license governs opensource software included within our services or technologies, we may be subjected to conditions requiring us to offer our services to users at no cost; makeavailable the source code for modifications and derivative works based upon, incorporating or using the open source software; and license suchmodifications or derivative works under the terms of the particular open source license. Moreover, if an author or other third party that distributes such opensource software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legalcosts defending ourselves against such allegations, be subject to significant damages or be enjoined from the distribution of our services.If we are unable to maintain effective internal control over financial reporting, the accuracy and timeliness of our financial reporting may be adverselyaffected.The Sarbanes-Oxley Act requires us, among other things, to assess and report on the effectiveness of our internal control over financial reportingannually and disclosure controls and procedures quarterly. In addition, our independent registered public accounting firm is required to audit theeffectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act annually. Our independent registeredpublic accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed oroperating. Moreover, our testing, or the subsequent testing by our independent registered public accounting firm, may reveal material weaknesses. If materialweaknesses are identified or we are not able to comply with the requirements of Section 404 in a timely manner, our reported financial results could bematerially misstated or could subsequently require restatement, we could receive an adverse opinion regarding our internal control over financial reportingfrom our independent registered public accounting firm, we could be subject to investigations or sanctions by regulatory authorities and we could incursubstantial expenses. New accounting principles, such as the new revenue recognition standards that are effective for us beginning January 1, 2018, requiresignificant changes to our existing processes and controls. We may not be able to effectively implement system and process changes required for the newstandards on a timely basis. Any delays or failure to update our systems and processes could also lead to a material weakness. 15Weakened global economic conditions may harm our industry, business and results of operations.We operate globally and as a result our business and revenues are impacted by global macroeconomic conditions. Global financial developmentsseemingly unrelated to us or the software industry may harm us. The United States and other key international economies have been impacted by high levelsof bad debt globally, geopolitical instability, slowing economic growth in China, falling demand for a variety of goods and services including oil and othercommodities, high levels of persistent unemployment and wage and income stagnation in some geographic markets, restricted credit, poor liquidity, reducedcorporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies and overall uncertainty with respect to the economy. Inaddition, the June 23, 2016 referendum by British voters to exit the European Union creates significant future economic uncertainties across the EuropeanEconomic Area, including the United Kingdom. These conditions affect the rate of information technology spending and could adversely affect ourcustomers’ ability or willingness to purchase our services, delay prospective customers’ purchasing decisions, reduce the value or duration of theirsubscriptions, or affect renewal rates, all of which could harm our operating results. In addition, the effects, if any, of global financial conditions on ourbusiness can be difficult to distinguish from the effects on our business from product, pricing, and other developments in the markets specific to our productsand our relative competitive strength. If we make incorrect judgments about our business for this reason our business and results of operations could beadversely affected. Natural disasters and other events beyond our control could harm our business.Natural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce and the global economy, andthus could have a negative effect on us. Our business operations are subject to interruption by natural disasters, flooding, fire, power shortages, pandemics,terrorism, political unrest and other events beyond our control. Although we maintain crisis management and disaster response plans, such events could makeit difficult or impossible for us to deliver our services to our customers, could decrease demand for our services, and would cause us to incur substantialexpense. Our insurance may not be sufficient to cover losses or additional expense that we may sustain in connection with any natural disaster. The majorityof our research and development activities, corporate offices, information technology systems, and other critical business operations are located near majorseismic faults in California and Washington. Customer data could be lost, significant recovery time could be required to resume operations and our financialcondition and operating results could be adversely affected in the event of a major natural disaster or catastrophic event.Risks Related to Our 0% Convertible Senior Notes Due 2018 (Notes)We may not have the ability to raise the funds necessary to settle conversions of the Notes in cash or to repurchase the Notes upon a fundamental change,and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the Notes.Holders of the Notes will have the right to require us to repurchase all or a portion of their Notes upon the occurrence of a fundamental change (asdefined in the indenture for the Notes) at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaidspecial interest, if any. In addition, if a make-whole fundamental change (as defined in the indenture for the Notes) occurs prior to the maturity date of theNotes, we will in some cases be required to increase the conversion rate for a holder that elects to convert its Notes in connection with such make-wholefundamental change. Upon conversion of the Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than payingcash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted. However, we may not haveenough available cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered therefor or pay cash with respect toNotes being converted.We and our subsidiaries may incur substantial additional debt in the future, subject to the restrictions contained in our future debt instruments, some ofwhich may be secured debt. We are not restricted under the terms of the indenture governing the Notes from incurring additional debt, securing existing orfuture debt, recapitalizing our debt or taking a number of other actions that could have the effect of diminishing our ability to make payments on the Noteswhen due. Furthermore, the indenture for the Notes prohibits us from engaging in certain mergers or acquisitions unless, among other things, the survivingentity assumes our obligations under the Notes and the indenture. These and other provisions in the indenture could deter or prevent a third party fromacquiring us even when the acquisition may be favorable to note holders.16In addition, our ability to repurchase or to pay cash upon conversion of the Notes may be limited by law, regulatory authority or agreements governingour future indebtedness. Our failure to repurchase Notes at a time when the repurchase is required by the indenture or to pay cash upon conversion of theNotes as required by the indenture would constitute a default under the indenture. A default under the indenture or the fundamental change itself could alsolead to a default under agreements governing our future indebtedness. Moreover, the occurrence of a fundamental change under the indenture couldconstitute an event of default under any such agreements. If the payment of the related indebtedness were to be accelerated after any applicable notice orgrace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or to pay cash upon conversion of the Notes.The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.In the event the conditional conversion feature of the Notes is triggered, holders of Notes will be entitled to convert the Notes at any time duringspecified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solelyshares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of ourconversion obligation in cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Notes, we could berequired under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability,which would result in a material reduction of our net working capital.The convertible note hedge and warrant transactions may affect the value of the Notes and our common stock.In connection with the sale of the Notes, we entered into convertible note hedge (Note Hedge) transactions with certain financial institutions (optioncounterparties). We also entered into warrant transactions with the option counterparties pursuant to which we sold warrants for the purchase of our commonstock, or Warrants. The Note Hedge transactions are expected generally to reduce the potential dilution upon any conversion of Notes and/or offset any cashpayments we are required to make in excess of the principal amount of converted Notes, as the case may be. The warrant transactions could separately have adilutive effect to the extent that the market price per share of our common stock exceeds the strike price of the Warrants.The option counterparties and/or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives withrespect to our common stock and/or purchasing or selling our common stock in secondary market transactions prior to the maturity of the Notes (and arelikely to do so during any observation period related to a conversion of Notes or following any repurchase of Notes by us on any fundamental changerepurchase date (as defined in the indenture for the Notes) or otherwise). This activity could also cause or avoid an increase or a decrease in the market priceof our common stock or the Notes, which could affect note holders’ ability to convert the Notes and, to the extent the activity occurs during any observationperiod related to a conversion of Notes, it could affect the amount and value of the consideration that note holders will receive upon conversion of the Notes.The potential effect, if any, of these transactions and activities on the market price of our common stock or the Notes will depend in part on marketconditions and cannot be ascertained at this time. Any of these activities could adversely affect the value of our common stock and the value of the Notes(and as a result, the value of the consideration, the amount of cash and/or the number of shares, if any, that note holders would receive upon the conversion ofany Notes) and, under certain circumstances, the ability of the note holders to convert the Notes.We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may haveon the price of the Notes or our common stock. In addition, we do not make any representation that the option counterparties will engage in thesetransactions or that these transactions, once commenced, will not be discontinued without notice.17We are subject to counterparty risk with respect to the Note Hedge transactions.The option counterparties are financial institutions, and we will be subject to the risk that any or all of them may default under the Note Hedgetransactions. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. Recent global economic conditions haveresulted in the actual or perceived failure or financial difficulties of many financial institutions. If an option counterparty becomes subject to insolvencyproceedings, we will become an unsecured creditor in those proceedings, with a claim equal to our exposure at that time under our transactions with thatoption counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be correlated to an increase in the marketprice and in the volatility of our common stock. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences and moredilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the optioncounterparties. Risks Related to Ownership of Our Common StockThe market price of our common stock has historically been and is likely to continue to be volatile and could subject us to litigation.The trading price of our common stock has been, and is likely to continue to be, volatile and could be subject to wide fluctuations in response tovarious factors, some of which are beyond our control. In addition, the trading prices of the securities of technology companies in general have been highlyvolatile, and the volatility in market price and trading volume of securities is often unrelated or disproportionate to the financial performance of thecompanies issuing the securities. Factors affecting the market price of our common stock, some of which are beyond our control, include:•our operating performance and the performance of other similar companies;•whether our operating results meet the expectations of securities analysts or investors;•changes in the estimates of our operating results or changes in recommendations by securities analysts that elect to follow our common stock;•announcements of new products, services or technologies, new applications or enhancements to services, strategic alliances, acquisitions, or othersignificant events by us or by our competitors;•fluctuations in the valuation of companies perceived by investors to be comparable to us, such as high-growth or cloud companies;•changes to our management team;•trading activity by directors, executive officers and significant stockholders, or the perception in the market that the holders of a large number ofshares intend to sell their shares;•the size of our market float;•the volume of trading in our common stock, including sales upon exercise of outstanding options or vesting of equity awards or sales andpurchases of any common stock issued upon conversion of the Notes or in connection with the Note Hedge and Warrant transactions relating tothe Notes;•the economy as a whole, market conditions in our industry, and the industries of our customers; and•overall performance of the equity markets.Following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against thatcompany. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have amaterial adverse effect on our business, operating results, and financial condition.We do not intend to pay dividends on our common stock so any returns will be limited to changes in the value of our common stock.We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain future earnings for thedevelopment, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition,our ability to pay cash dividends on our common stock may be prohibited or limited by the terms of any future debt financing arrangement. Any return tostockholders will therefore be limited to the increase, if any, of our stock price.18Provisions in our charter documents, Delaware law and our Notes might discourage, delay or prevent a change of control of our company or changes inour management and, therefore, depress the market price of our common stock. Our restated certificate of incorporation and restated bylaws contain provisions that could depress the market price of our common stock by acting todiscourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deemadvantageous. These provisions among other things: •establish a classified board of directors so that not all members of our board are elected at one time;•permit the board of directors to establish the number of directors;•provide that directors may only be removed “for cause” and only with the approval of 66 2/3% of our stockholders;•require super-majority voting to amend some provisions in our restated certificate of incorporation and restated bylaws;•authorize the issuance of “blank check” preferred stock that our board could use to implement a stockholder rights plan;•eliminate the ability of our stockholders to call special meetings of stockholders;•prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;•provide that the board of directors is expressly authorized to make, alter or repeal our restated bylaws; and•establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders atannual stockholder meetings.In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company. Section 203imposes certain restrictions on merger, business combinations and other transactions between us and holders of 15% or more of our common stock.Further, the fundamental change provisions of our Notes may delay or prevent a change in control of our company, because those provisions allow noteholders to require us to repurchase such notes upon the occurrence of a fundamental change.19ITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESOur principal office is located in Santa Clara, California.We also maintain offices in various North American, South American, European and Asian countries. All of our properties are currently leased. Webelieve our existing facilities are adequate to meet our current requirements. See Note 16 in the notes to our consolidated financial statements includedelsewhere in this Annual Report on Form 10-K for more information about our lease commitments. We expect to expand our facilities capacity as ouremployee base grows. We believe we will be able to obtain such space on acceptable and commercially reasonable terms.ITEM 3. LEGAL PROCEEDINGSOn February 6, 2014, Hewlett-Packard Company (Hewlett-Packard) filed a lawsuit against us in the U.S. District Court for the Northern District ofCalifornia. The lawsuit alleged patent infringement and sought damages and an injunction. On or about November 1, 2015, Hewlett Packard EnterpriseCompany (HPE) separated from Hewlett-Packard as an independent company, and Hewlett-Packard assigned to HPE all right, title, and interest in the eightHewlett-Packard patents in the lawsuit and HPE was substituted as plaintiff in the litigation. On March 4, 2016, we entered into a confidential settlementagreement resolving the lawsuit with HPE (HPE Settlement). As a result, on March 9, 2016, the lawsuit was dismissed.BMC Software, Inc. (BMC) filed lawsuits against us in the U.S. District Court for the Eastern District of Texas on September 23, 2014 and February 12,2016, and in the Dusseldorf (Germany) Regional Court, Patent Division, on March 2, 2016. Each of the lawsuits alleged patent infringement and soughtdamages and an injunction. On April 8, 2016, we entered into a confidential settlement agreement resolving all the lawsuits with BMC (BMC Settlement). Asa result, the second Texas lawsuit was dismissed on April 14, 2016, and each of the initial Texas lawsuit and the German lawsuit was dismissed on April 25,2016.We recorded charges for aggregate legal settlements of $270.0 million in our consolidated statement of comprehensive loss for the year ended December31, 2016. The charge covers the fulfillment by us of all financial obligations under both the BMC Settlement and HPE Settlement with no remainingfinancial obligations under either settlement. Refer to Note 16 in the notes to our consolidated financial statements included elsewhere in this Annual Reporton Form 10-K for further details of these matters.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.20PART IIITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESMarket Information for Common StockOur common stock is listed on the New York Stock Exchange under the symbol “NOW.”The following table sets forth for the indicated periods the high and low sales prices of our common stock as reported by the New York Stock Exchange. High LowYear ended December 31, 2016 First Quarter$85.67 $46.00 Second Quarter$77.76 $60.05 Third Quarter$80.31 $64.31 Fourth Quarter$89.79 $72.80 Year ended December 31, 2015 First Quarter$81.24 $62.55 Second Quarter$83.52 $70.32 Third Quarter$81.21 $64.29 Fourth Quarter$91.28 $67.65Dividend PolicyWe have never paid any cash dividends on our common stock. Our board of directors currently intends to retain any future earnings to supportoperations and to finance the growth and development of our business, and therefore does not intend to pay cash dividends on our common stock for theforeseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors.StockholdersAs of December 31, 2016, there were 14 registered stockholders of record (not including beneficial holders of stock held in street names) of our commonstock.Securities Authorized for Issuance under Equity Compensation PlansThe information required by this item will be included in an amendment to this Annual Report on Form 10-K or incorporated by reference from ourdefinitive proxy statement to be filed pursuant to Regulation 14A.Stock Performance GraphThe following shall not be deemed incorporated by reference into any of our other filings under the Securities Exchange Act of 1934, as amended, theExchange Act or the Securities Act except to the extent we specifically incorporate it by reference into such filing.The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the NYSE CompositeIndex and the Standard & Poor Systems Software Index for the period beginning on June 29, 2012 (the date our common stock commenced trading on theNew York Stock Exchange) through December 31, 2016, assuming an initial investment of $100. Data for the NYSE Composite Index and the Standard &Poor Systems Software Index assume reinvestment of dividends.21The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of ourcommon stock. Base Period Jun 29, 2012 Dec 31, 2012 Dec 31, 2013 Dec 31, 2014 Dec 31, 2015 Dec 31, 2016ServiceNow, Inc.$100.00 $122.07 $227.68 $275.81 $351.87 $302.20NYSE Composite100.00 109.60 138.40 147.74 141.70 158.61S&P Systems Software100.00 97.22 129.20 158.92 175.56 198.80Unregistered Sales of Equity SecuritiesThere were no unregistered sales of equity securities which have not been previously disclosed in a quarterly report on Form 10-Q or a current report onForm 8-K during the year ended December 31, 2016.Issuer Purchases of Equity SecuritiesDuring the year ended December 31, 2016, we did not purchase any of our equity securities that are registered under Section 12 of the Exchange Act.22ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read together with our consolidated financial statements and accompanying notes and“Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this filing. The selected consolidatedfinancial data in this section are not intended to replace our consolidated financial statements and the related notes. Our historical results are not necessarilyindicative of our future results. The selected consolidated statements of operations data for each of the years ended December 31, 2016, 2015 and 2014, and the selected consolidatedbalance sheet data as of December 31, 2016 and 2015 are derived from our audited consolidated financial statements and are included in this Form 10-K. Theconsolidated statements of operations data for the year ended December 31, 2013, and 2012, and the selected consolidated balance sheet data as of December31, 2014, 2013, and 2012 are derived from our audited consolidated financial statements which are not included in this Annual Report on Form 10-K. Theconsolidated financial information below reflects the impact of the Company’s acquisitions. Year Ended December 31, 2016 2015 2014 2013 2012 (in thousands, except share and per share data)Consolidated Statements of Operations Data: Revenues: Subscription$1,221,639 $848,278 $567,217 $349,804 $204,526Professional services and other168,874 157,202 115,346 74,846 39,186Total revenues1,390,513 1,005,480 682,563 424,650 243,712Cost of revenues(1): Subscription235,414 183,400 142,687 87,928 63,258Professional services and other163,268 146,013 106,089 67,331 40,751Total cost of revenues398,682 329,413 248,776 155,259 104,009Gross profit991,831 676,067 433,787 269,391 139,703Operating expenses(1): Sales and marketing700,464 498,439 341,119 195,190 103,837Research and development285,239 217,389 148,258 78,678 39,333General and administrative158,936 126,604 96,245 61,790 34,117Legal settlements(2)270,000 — — — —Total operating expenses1,414,639 842,432 585,622 335,658 177,287Loss from operations(422,808) (166,365) (151,835) (66,267) (37,584)Interest expense(33,278) (31,097) (29,059) (3,498) —Interest income and other income (expense), net6,035 4,450 5,354 (1,432) 1,604Loss before provision for income taxes(450,051) (193,012) (175,540) (71,197) (35,980)Provision for income taxes1,753 5,414 3,847 2,511 1,368Net loss$(451,804) $(198,426) $(179,387) $(73,708) $(37,348)Net loss per share - basic and diluted$(2.75) $(1.27) $(1.23) $(0.54) $(0.51)Weighted-average shares used to compute net loss per share - basic anddiluted164,533,823 155,706,643 145,355,543 135,415,809 73,908,63123(1)Stock-based compensation included in the statements of operations data above was as follows: Year Ended December 31, 2016 2015 2014 2013 2012 (in thousands)Cost of revenues: Subscription$28,420 $23,416 $14,988 $8,434 $3,929Professional services and other26,442 23,265 13,116 4,749 1,574Sales and marketing131,571 102,349 54,006 21,609 10,189Research and development81,731 70,326 42,535 16,223 6,496General and administrative49,416 38,357 29,674 14,566 5,749Total stock-based compensation$317,580 $257,713 $154,319 $65,581 $27,937 (2)For details regarding the legal settlements expenses of $270.0 million included in the year ended December 31, 2016, refer to Note 16 in the notes to our consolidated financialstatements included elsewhere in this Annual Report on Form 10-K. As of December 31, 2016 2015 2014 2013 2012 (in thousands)Consolidated Balance Sheet Data: Cash and cash equivalents and investments$1,162,020 $1,223,917 $935,563 $889,910 $314,691Working capital, excluding deferred revenue1,132,819 947,002 809,660 722,214 364,426Total assets2,033,767 1,807,052 1,424,752 1,168,077 478,114Deferred revenue, current and non-current portion895,101 603,754 422,238 266,722 170,361Convertible senior notes, net507,812 474,534 443,437 414,378 —Total stockholders’ equity386,961 566,814 428,675 394,259 243,40524ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financialstatements and the related notes appearing under "Consolidated Financial Statements and Supplementary Data" in Item 8 of this filing. Some of theinformation contained in this discussion and analysis or set forth elsewhere in this filing, including information with respect to our plans and strategy forour business, includes forward-looking statements that involve risks and uncertainties. You should carefully read the "Risk Factors” section of this filing fora discussion of important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or impliedby the forward-looking statements contained in the following discussion and analysis.Our billings and free cash flow measures included in the sections entitled “—Key Business Metrics—Billings,” “—Key Business Metrics—Free CashFlow,” and “—Seasonality, Cyclicality and Quarterly Trends" are not in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Thesenon-GAAP financial measures are not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared andpresented in accordance with GAAP. These measures may be different from non-GAAP financial measures used by other companies, limiting their usefulnessfor comparison purposes. We believe investors should consider these non-GAAP financial measures in evaluating our results as they are indicative of ourongoing performance and reflect how management evaluates our operational results and trends. 25Overview ServiceNow is a leading provider of enterprise cloud computing solutions that define, structure, manage and automate services for global enterprises.Our mission is to help our customers improve service levels and reduce costs while scaling and automating their businesses. We offer our services on anannual subscription fee basis which includes access to the ordered subscription service and related support including updates to the subscribed service duringthe subscription term. We provide a scaled pricing model based on the duration of the subscription term and we frequently extend discounts to our customersbased on the number of users. We generate sales through our direct sales team and, to a lesser extent, indirectly through channel partners and third-partyreferrals. We also generate revenues from professional services for implementation and configuration services and for training of customer and partnerpersonnel. We generally bill our customers annually in advance for subscription services and monthly in arrears for our professional services as the work isperformed. A majority of our revenues come from large global enterprise customers. We continue to invest in the development of our services, infrastructure andsales and marketing to drive long-term growth. We increased our overall employee headcount to 4,801 as of December 31, 2016 from 3,686 as of December31, 2015.Key Business Metrics Number of customers with ACV greater than $1 million. We count the total number of customers with annualized contract value (ACV) greater than $1million as of the end of the period. We had 341, 227 and 157 customers with ACV greater than $1 million as of December 31, 2016, 2015 and 2014,respectively. For purposes of customer count, a customer is defined as an entity with a unique Dunn & Bradstreet Global Ultimate (GULT), Data UniversalNumbering System (DUNS) and an active subscription contract as of the measurement date. The DUNS number is a global standard for business identificationand tracking. We make exceptions for holding companies, government entities and other organizations for which the GULT, in our judgment, does notaccurately represent the ServiceNow customer. For example, while all U.S. government agencies roll up to "Government of the United States" under theGULT, we count each government agency that we contract with as a separate customer. Our customer count is subject to adjustments for acquisitions, spin-offs and other market activity. Previously disclosed number of customers with ACV greater than $1 million as well as our average contract term calculationsare restated to allow for comparability. ACV is calculated based on the foreign exchange rate in effect at the time the contract was entered into. Foreignexchange rate fluctuations could cause some variability in the number of customers with ACV greater than $1 million.G2K customer count. The Global 2000 (G2K) customer count is defined as the total number of G2K companies in our customer base as of the end of theperiod. The Forbes Global 2000 is an annual ranking of the top 2,000 public companies in the world by Forbes magazine. The ranking is based on a mix offour metrics: sales, profit, assets, and market value. The Forbes Global 2000 is updated annually in the second quarter of the calendar year. Current and priorperiod G2K customer counts are based on the most recent list for comparability purposes. We adjust the G2K count for acquisitions, spin-offs and othermarket activity to ensure the G2K customer count is accurately captured. For example, we add a G2K customer when a G2K company that is not our customeracquires a company in our existing customer base that is not a G2K company. When we enter into a contract with a G2K parent company, or any of its relatedsubsidiaries, or any combination of entities within a G2K company, we count only one G2K customer. We do not count further penetration into entitieswithin a given G2K as a new customer in the G2K customer count. Our G2K customer count also excludes customers that have only purchased our Expressproduct offering, which is our entry-level IT service management solution.Our G2K customer count was 735, 633 and 533 as of December 31, 2016, 2015 and 2014, respectively.Average ACV per G2K customer. We calculate average ACV for our G2K customers by taking cumulative ACV from G2K customers as of the end of theperiod divided by cumulative count of G2K customers as of the end of the period. Foreign currency rate fluctuations could cause variability in the averageACV per G2K customer. Our average ACV per G2K customer was approximately $1.1 million, $0.9 million and $0.7 million as of December 31, 2016, 2015and 2014, respectively.26Renewal rate. We calculate our renewal rate by subtracting our attrition rate from 100%. Our attrition rate for a period is equal to the ACV from lostcustomers, divided by the total ACV from all customers that renewed during the period, excluding changes in price or users, and total ACV from all lostcustomers. Accordingly, our renewal rate is a calculation based on ACV and is not based on the number of customers that have renewed. A lost customer is acustomer that did not renew an expiring contract and that, in our judgment, will not be renewed. Typically, a customer that reduces its subscription uponrenewal is not considered a lost customer. However, in instances where the subscription decrease represents the majority of the customer's ACV, we may deemthe renewal as a lost customer. For our renewal rate calculation, we define a customer as an entity with a separate production instance of our service and anactive subscription contract as of the measurement date, instead of an entity with a unique GULT or DUNS number. Our renewal rate was 98% for the yearsended December 31, 2016 and 2015 and 97% for the year ended December 31, 2014. As renewal rate is impacted by the timing of renewals, which couldoccur in advance of, or subsequent to the original contract end date, period-to-period comparison of renewal rates may not be meaningful.Billings. We define billings as revenue recognized plus the change in total deferred revenue as presented on the consolidated statements of cash flows.The change in total deferred revenue as presented on the consolidated statements of cash flows represent the change in deferred revenues in local currenciestranslated into U.S. dollars using an average foreign currency exchange rate, and aligns actual billings with the exchange rates in effect at the time of thebillings. We believe billings is a useful leading indicator regarding the performance of our business.A calculation of billings is provided below: Year Ended December 31, 2016 2015 2014 (dollars in thousands)Billings: Total revenues$1,390,513 $1,005,480 $682,563Change in deferred revenue from the consolidated statements of cashflows300,167 195,900 168,393Total billings$1,690,680 $1,201,380 $850,956Year-over-year percentage change in total billings41% 41% 64%Billings consists of amounts invoiced for contracts with new customers, upsells, renewals, backlog, professional services, training, and our Knowledgeand other customer forum events. While we typically bill customers annually for our subscription services, customers sometimes request, and weaccommodate, billings durations that differ from the typical twelve month term. In addition, from time to time we enter into contracts with a contract startdate in the future, and we exclude these amounts from billings as these amounts are not included in our consolidated balance sheets, unless such amountshave been paid as of the balance sheet date. Factors such as the weighted average billings duration, the timing of contract start dates and timing of collectionscreate variability in billings. Accordingly, while we believe billings is a useful leading indicator regarding the performance of our business, a decline in newor renewed subscriptions in a reporting period may not have an immediately apparent impact on billings for that reporting period due to factors that mayoffset the decline, such as an increase in billings duration, a decline in the dollar value of contracts with future start dates and an increase in collections in thecurrent period related to contracts with future start dates.To facilitate greater year-over-year comparability in our billings information, we disclose the impact that foreign currency rate fluctuations andfluctuations in billings duration had on our billings. The impact of foreign currency rate fluctuations is calculated by translating the current period results forentities reporting in currencies other than U.S. Dollars into U.S. Dollars at the exchange rates in effect during the prior period presented, rather than the actualexchange rates in effect during the current period. The impact of fluctuations in billings duration is calculated by applying the weighted average billingsduration in effect during the prior period presented rather than the actual weighted average billings duration in effect during the current period. Weightedaverage billings duration refers to the weighted average billings duration for all our customer contracts commencing during the period, unless such amountshave been paid during the period. Although we believe these adjustments improve comparability of our billings information from period to period, a declinein new or renewed subscriptions in a reporting period may not have an immediately apparent impact on billings for that reporting period due to factors thatmay offset the decline, such as a decline in the dollar value of contracts with future start dates and an increase in collections in the current period related tocontracts with future start dates.Foreign currency rate fluctuations had an unfavorable impact of $8.4 million and $74.3 million on billings for the years ended December 31, 2016 and2015, respectively. Changes in weighted average billings duration had a favorable impact of $24.6 million and $1.8 million for the years ended December31, 2016 and 2015 respectively.27 Free cash flow. We define free cash flow, a non-GAAP financial measure, as GAAP net cash provided by operating activities reduced by purchases ofproperty and equipment. We believe information regarding free cash flow provides useful information to investors because it is an indicator of the strengthand performance of our business operations. However, our calculation of free cash flow may not be comparable to similar measures used by other companies.In addition, free cash flow is impacted by the timing of collections and disbursements, including the timing of capital expenditures. A calculation of free cashflow is provided below: Year Ended December 31, 2016 2015 2014 (dollars in thousands)Free cash flow: Net cash provided by operating activities (1)$159,921 $317,754 $140,937Purchases of property and equipment(105,562) (87,481) (54,379)Free cash flow (2)$54,359 $230,273 $86,558(1) During the year ended December 31, 2016, we early adopted Accounting Standards Update 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements toEmployee Share-Based Payment Accounting." Refer to Note 2 Recent Accounting Pronouncements for further details. This adoption resulted in a $2.7 million increase in net cashprovided by operating activities and a corresponding $2.7 million decrease in net cash provided by financing activities for the year ended December 31, 2015, and a $2.0 millionincrease in net cash provided by operating activities and a corresponding $2.0 million decrease in net cash provided by financing activities for the year ended December 31, 2014, ascompared to the amounts previously reported.(2) Free cash flow includes the effect of a $267.5 million payment for aggregate legal settlements for the year ended December 31, 2016. Refer to Note 16 in the notes to ourconsolidated financial statements included elsewhere in this Annual Report on Form 10-K for further details.Average contract term. We calculate the average contract term for new customers, upsells and renewals based on the term of those contracts entered intoduring the period weighted by their ACV. The average new customer contract term was 32 months for the years ended December 31, 2016, 2015 and 2014.The average upsell contract term was 26 months for the years ended December 31, 2016 and 2015, and 25 months for the year ended December 31, 2014. Theaverage renewal contract term was 28 months, 25 months, and 26 months for the years ended December 31, 2016, 2015 and 2014, respectively. Components of Results of Operations RevenuesSubscription revenues. Subscription revenues are primarily comprised of fees that give customers access to the ordered subscription service, relatedsupport and upgrades, if any, to the subscribed service during the subscription term. Pricing includes multiple instances, hosting and support services, databackup and disaster recovery services, as well as future upgrades, when and if available, offered during the subscription term. We typically invoice ourcustomers for subscription fees in annual increments upon execution of the initial contract or subsequent renewal. Our contracts are generally non-cancelableduring the subscription term, though a customer can terminate for breach if we materially fail to perform. Professional services and other revenues. Professional services revenues consist of fees associated with the implementation and configuration of oursubscription service. Our arrangements for professional services are primarily on a time-and-materials basis. We generally invoice our professional servicesmonthly in arrears based on actual hours and expenses incurred. Other revenues primarily include fees from customer training delivered on-site or publiclyavailable classes, attendance and sponsorship fees for our annual Knowledge user conference and other customer forums. Typical payment terms require ourcustomers to pay us within 30 days of invoice.We generate sales directly through our sales team and, to a lesser extent, through our channel partners. Revenues from our direct sales organizationrepresented 88%, 89%, and 87% of our total revenues for the years ended December 31, 2016, 2015 and 2014, respectively. We make sales to our channelpartners at a discount and record those revenues at the discounted price when all revenue recognition criteria are met. From time to time, our channel partnersand other third parties provide us referrals for which we pay a referral fee between 5% and 15% of the customer's ACV, depending on the level of activity thepartner performs in the sales process. We include these fees in sales and marketing expense.28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 researchand development use are allocated to cost of revenues and operating expenses based on headcount.Cost of Revenues Cost of subscription revenues. Cost of subscription revenues consists primarily of expenses related to hosting our services and providing support to ourcustomers. These expenses are comprised of data center capacity costs, which includes facility costs associated with our data centers as well asinterconnectivity between data centers, depreciation related to our cloud-based infrastructure hardware equipment dedicated for customer use, amortizationof intangible assets and personnel related costs directly associated with our cloud-based infrastructure and customer support, including salaries, benefits,bonuses and stock-based compensation and allocated overhead. Cost of professional services and other revenues. Cost of professional services and other revenues consists primarily of personnel related costs directlyassociated with our professional services and training departments, including salaries, benefits, bonuses and stock-based compensation, the costs ofcontracted third-party partners, travel expenses and allocated overhead.Professional services associated with the implementation and configuration of our subscription services are performed directly by our services team, aswell as by contracted third-party partners. Fees paid to third-party partners are primarily recognized as cost of revenues as the professional services aredelivered. Cost of revenues associated with our professional services engagements contracted with third-party partners as a percentage of professionalservices and other revenues was 19%, 20% and 17% for the years ended December 31, 2016, 2015 and 2014, respectively.Sales and Marketing Sales and marketing expenses consist primarily of personnel related expenses directly associated with our sales and marketing staff, including salaries,benefits, bonuses, commissions and stock-based compensation. Sales and marketing expenses also include third-party referral fees, expenses related to ourannual Knowledge user conference, other marketing program expenses, which includes events, advertising and market data, and allocated overhead. Research and Development Research and development expenses consist primarily of personnel related expenses directly associated with our research and development staff,including salaries, benefits, bonuses and stock-based compensation and allocated overhead. Research and development expenses also include data centercapacity costs, amortization of intangible assets and depreciation of cloud-based infrastructure hardware equipment that are used solely for research anddevelopment purposes. General and Administrative General and administrative expenses consist primarily of personnel related expenses for our executive, finance, legal, human resources, facility andadministrative personnel, including salaries, benefits, bonuses and stock-based compensation, external legal, accounting and other professional services fees,other corporate expenses, amortization of intangible assets and allocated overhead. Legal SettlementsLegal settlements consist of one-time aggregate charges related to the settlement agreements with Hewlett Packard Enterprise Company (HPE) andBMC Software, Inc. (BMC). Refer to Note 16 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K forfurther details of these matters.Provision for Income TaxesProvision for income taxes consists of federal, state and foreign income taxes. Due to cumulative losses, we maintain a valuation allowance against ourU.S. deferred tax assets as of December 31, 2016 and 2015. We consider all available evidence, both positive and negative, including but not limited toearnings history, projected future outcomes, industry and market trends and the nature of each of the deferred tax assets in assessing the extent to which avaluation allowance should be applied against our U.S. deferred tax assets.29Results of Operations To enhance comparability, the following table sets forth our results of operations for the periods presented. The period-to-period comparison offinancial results is not necessarily indicative of future results. Year Ended December 31, 2016 2015 2014 (in thousands)Revenues: Subscription$1,221,639$848,278$567,217Professional services and other168,874157,202115,346Total revenues1,390,5131,005,480682,563Cost of revenues(1): Subscription235,414183,400142,687Professional services and other163,268146,013106,089Total cost of revenues398,682329,413248,776Gross profit991,831676,067433,787Operating expenses(1): Sales and marketing700,464498,439341,119Research and development285,239217,389148,258General and administrative158,936126,60496,245Legal settlements(2)270,000 — —Total operating expenses1,414,639842,432585,622Loss from operations(422,808)(166,365)(151,835)Interest expense(33,278) (31,097) (29,059)Interest income and other income (expense), net6,0354,4505,354Loss before provision for income taxes(450,051)(193,012)(175,540)Provision for income taxes1,7535,4143,847Net loss$(451,804)$(198,426)$(179,387) (1)Stock-based compensation included in the statements of operations data above was as follows: Year Ended December 31, 2016 2015 2014 (in thousands)Cost of revenues: Subscription$28,420 $23,416 $14,988Professional services and other26,442 23,265 13,116Sales and marketing131,571 102,349 54,006Research and development81,731 70,326 42,535General and administrative49,416 38,357 29,674Total stock-based compensation$317,580 $257,713 $154,319(2)For details regarding the legal settlements expenses of $270.0 million included in the year ended December 31, 2016, refer to Note 16 in the notes to our consolidated financialstatements included elsewhere in this Annual Report on Form 10-K.30 Year Ended December 31, 2016 2015 2014Revenues: Subscription88 % 84 % 83 %Professional services and other12 16 17Total revenues100 100 100Cost of revenues(1): Subscription17 18 21Professional services and other12 15 16Total cost of revenues29 33 37Gross profit71 67 63Operating expenses(1): Sales and marketing50 50 50Research and development21 22 22General and administrative11 12 14Legal settlements(2)19 — —Total operating expenses101 84 86Loss from operations(30) (17) (23)Interest expense(2) (3) (3)Interest income and other income (expense), net— 1 1Loss before provision for income taxes(32) (19) (25)Provision for income taxes— 1 1Net loss(32)% (20)% (26)% (1)Stock-based compensation included in the statements of operations above as a percentage of revenues was as follows: Year Ended December 31, 2016 2015 2014 (in thousands)Cost of revenues: Subscription2% 2% 2%Professional services and other2 2 2Sales and marketing9 10 8Research and development6 8 7General and administrative4 4 4Total stock-based compensation23% 26% 23% (2)For details regarding the legal settlements expenses of $270.0 million included in the year ended December 31, 2016, refer to Note 16 in the notes to our consolidated financialstatements included elsewhere in this Annual Report on Form 10-K.31Comparison of the years ended December 31, 2016 and 2015 Revenues Year Ended December 31, % Change 2016 2015 (dollars in thousands) Revenues: Subscription$1,221,639 $848,278 44%Professional services and other168,874 157,202 7%Total revenues$1,390,513 $1,005,480 38%Percentage of revenues: Subscription88% 84% Professional services and other12 16 Total100% 100% Subscription revenues increased $373.4 million during the year ended December 31, 2016, compared to the prior year, driven by upsells and anincrease in customer count. We expect subscription revenues to grow in absolute dollars and as a percentage of total revenues in the year ended December 31,2017 as we continue to add new customers and upsell to existing customers. Our expectations for 2017 revenues, cost of revenues and operating expenseswas based on foreign exchange rates as of December 31, 2016.Subscription revenues consist of the following: Year Ended December 31, % Change 2016 2015 (dollars in thousands) Service Management solutions$1,108,846 $783,603 42%IT Operations Management solutions112,793 64,675 74%Total subscription revenues$1,221,639 $848,278 44%Our Service Management solutions include ServiceNow Platform, IT Service Management, IT Business Management, Customer Service, HumanResources and Security Operations, which have similar features and functions and are generally priced on a per user basis. Our IT Operations Managementsolutions, which improve visibility, availability and agility of enterprise services, are generally priced on a per node basis.Professional services and other revenues increased $11.7 million during the year ended December 31, 2016, compared to the prior year, due to anincrease in the services provided to our growing customer base. In addition, revenues from our annual Knowledge user conference increased to $12.8 millionduring the year ended December 31, 2016 compared to $10.9 million in the prior year due to increased sponsorship and paid registrations in the current year.We expect professional services and other revenues to grow at a slower rate compared to subscription revenues as we are increasingly focused on deployingour internal professional services organization as a strategic resource and relying on our partner ecosystem to contract directly with customers for servicedelivery.Our international operations have provided and will continue to provide a significant portion of our total revenues. Revenues outside North Americarepresented 32% and 30% of total revenues for the year ended December 31, 2016 and 2015, respectively. As a result, the general strengthening of the U.S.Dollar relative to other major foreign currencies (primarily Euro) from the year ended December 31, 2015 to the year ended December 31, 2016 had anunfavorable impact on our revenues. For entities reporting in currencies other than the U.S. Dollar, if we had translated our results for the year endedDecember 31, 2016 at the exchange rates for the year ended December 31, 2015 rather than the actual exchange rates in effect during the period, oursubscription revenues would have increased by an additional $6.3 million. The impact from the foreign currency movements from the year ended December31, 2015 to the year ended December 31, 2016 is not material to professional services and other revenues.32Cost of Revenues and Gross Profit Percentage Year Ended December 31, % Change 2016 2015 (dollars in thousands) Cost of revenues: Subscription$235,414 $183,400 28%Professional services and other163,268 146,013 12%Total cost of revenues$398,682 $329,413 21%Gross profit percentage: Subscription81% 78% Professional services and other3% 7% Total gross profit percentage71% 67% Gross profit:$991,831 $676,067 47%Headcount (at period end) Subscription729 579 26%Professional services and other496 486 2%Total headcount1,225 1,065 15% Cost of subscription revenues increased $52.0 million during the year ended December 31, 2016, compared to the prior year, primarily due to increasedheadcount resulting in an increase of $17.3 million in personnel related costs excluding stock-based compensation, an increase of $5.0 million in stock-based compensation, and an increase of $7.2 million in other overhead expenses. In addition, there was an increase of $10.3 million in depreciation expenseprimarily due to purchases of cloud-based infrastructure hardware equipment for our data centers, an increase of $5.3 million in data center capacity costsprimarily due to the expansion of our data centers, and an increase of $1.5 million in amortization of intangible assets as a result of acquisitions in 2016.Our subscription gross profit percentage increased to 81% for the year ended December 31, 2016, from 78% for the year ended December 31, 2015, dueto improved data center utilization and economies of scale. We expect our cost of subscription revenues to increase in absolute dollar terms as we providesubscription services to more customers and increase the number of users within our customer instances, but we expect such increase to be at a slower ratethan the increase in our subscription revenue, leading to a slight increase in our subscription gross profit percentage for the year ended December 31, 2017 aswe continue to leverage the investments we have made in our existing data center infrastructure. To the extent future acquisitions are consummated, our costof subscription revenues may increase due to additional non-cash charges associated with the amortization of intangible assets acquired.Cost of professional services and other revenues increased $17.3 million during the year ended December 31, 2016 compared to the prior year, primarilydue to increased headcount resulting in an increase of $8.0 million in personnel related costs excluding stock-based compensation, an increase of $3.2million in stock-based compensation, and an increase of $3.4 million in overhead expenses.Our professional services and other gross profit percentage decreased to 3% during the year ended December 31, 2016 compared to 7% in the prior yeardue to lower utilization rates as we invest in specialized resources to support our newer products and higher growth rate in our stock-based compensation of14% compared to the growth rate in our professional services and other revenues of 7%, partially offset by the increase in revenues from our annualKnowledge user conference. Costs associated with Knowledge are included in sales and marketing expense. Knowledge contributed $12.8 million, or 8percentage points to the professional services and other gross profit percentage for the year ended December 31, 2016. Knowledge contributed $10.9 million,or 7 percentage points to the professional services and other gross profit percentage for the year ended December 31, 2015. We expect cost of professionalservices and other revenues to increase in absolute dollars as our business grows, but we expect such increase to be at a slower rate than the increase inprofessional services and other revenues, leading to an increase in professional services and other gross profit percentage for the year ended December 31,2017.33The general strengthening of the U.S. Dollar relative to other major foreign currencies from the year ended December 31, 2015 to the year endedDecember 31, 2016 had a favorable impact on our cost of revenues. For entities reporting in currencies other than the U.S. Dollar, if we had translated ourresults for the year ended December 31, 2016 at the exchange rates for the year ended December 31, 2015 rather than the actual exchange rates in effectduring the year ended December 31, 2016, our cost of subscription revenues would have increased by an additional $3.3 million and our cost of professionalservices and other revenues would have increased by an additional $1.6 million. Sales and Marketing Year Ended December 31 % Change 2016 2015 (dollars in thousands) Sales and marketing$700,464 $498,439 41%Percentage of revenues50% 50% Headcount (at period end)1,875 1,416 32% Sales and marketing expenses increased $202.0 million during the year ended December 31, 2016, compared to the prior year, primarily due toincreased headcount resulting in an increase of $106.4 million in personnel related costs excluding stock-based compensation, an increase of $29.2 millionin stock-based compensation, an increase of $23.2 million in overhead expenses, and an increase of $15.7 million in commission expense. Commissions andreferral fee expenses amounted to 7% and 8% of subscription revenues for the years ended December 31, 2016 and 2015, respectively. Outside servicesincreased $3.7 million primarily due to an increase in contractors and professional fees to support our sales and marketing functionsIn addition, expenses related to our annual Knowledge user conference increased $3.0 million, from $21.0 million for the year ended December 31,2015 to $24.0 million for the year ended December 31, 2016, due to a 31% increase in attendance year-over-year. All other marketing program expenses,which include events, advertising and market data, increased $18.6 million for the year ended December 31, 2016 compared to the prior year.The general strengthening of the U.S. Dollar relative to other major foreign currencies from the year ended December 31, 2015 to the year endedDecember 31, 2016 had a favorable impact on our sales and marketing expenses. For entities reporting in currencies other than the U.S. Dollar, if we hadtranslated our results for the year ended December 31, 2016 at the exchange rates for the year ended December 31, 2015 rather than the actual exchange ratesin effect during the period, our sales and marketing expenses would have increased by an additional $6.3 million.We expect sales and marketing expenses to increase for the year ended December 31, 2017 in absolute dollar terms, but decrease slightly as apercentage of total revenues as we continue to expand our direct sales force, increase our marketing activities, grow our international operations, build brandawareness and sponsor additional marketing events.Research and Development Year Ended December 31 % Change 2016 2015 (dollars in thousands) Research and development$285,239 $217,389 31%Percentage of revenues21% 22% Headcount (at period end)1,054 756 39% Research and development expenses increased $67.9 million during the year ended December 31, 2016, compared to the prior year, primarily due toincreased headcount resulting in an increase of $39.9 million in personnel related costs excluding stock-based compensation, an increase of $11.4 million instock-based compensation, and an increase of $10.2 million in overhead expenses. Outside services increased $2.0 million primarily due to increase inprofessional fees to support our research and development functions. Research and development expenses also increased $2.5 million due to an increase indata center capacity costs and depreciation of cloud-based infrastructure hardware equipment that are used solely for research and development purposes.Amortization of intangible assets increased $1.2 million as a result of acquisitions in 2016.34The impact from the foreign currency movements from the year ended December 31, 2015 to the year ended December 31, 2016 is not material toresearch and development expenses. We expect research and development expenses to increase for the year ended December 31, 2017 in absolute dollar terms, but decrease slightly as apercentage of total revenues as we continue to improve the existing functionality of our services, develop new applications to fill market needs and continueto enhance our core platform. General and Administrative Year Ended December 31 % Change 2016 2015 (dollars in thousands) General and administrative$158,936 $126,604 26%Percentage of revenues11% 12% Headcount (at period end)647 449 44% General and administrative expenses increased $32.3 million during the year ended December 31, 2016, compared to the prior year, primarily due toincreased headcount resulting in an increase of $13.3 million in personnel related costs excluding stock-based compensation, an increase of $11.1 million instock-based compensation, and an increase of $6.1 million in overhead expenses.The impact from the foreign currency movements from the year ended December 31, 2015 to the year ended December 31, 2016 is not material togeneral and administrative expenses.We expect general and administrative expenses to increase for the year ended December 31, 2017 in absolute dollar terms as we continue to hire people,but decrease slightly as a percentage of total revenues as we continue to grow.Legal Settlements Year Ended December 31 % Change 2016 2015 (dollars in thousands) Legal settlements$270,000 $— NMPercentage of revenues19% NM Legal settlements increased $270.0 million during the year ended December 31, 2016 compared to the prior year, related to the settlement agreementswith HPE and BMC. Refer to Note 16 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for furtherdetails of these matters. 35Stock-based Compensation Year Ended December 31 % Change 2016 2015 (dollars in thousands) Cost of revenues: Subscription$28,420 $23,416 21%Professional services and other26,442 23,265 14%Sales and marketing131,571 102,349 29%Research and development81,731 70,326 16%General and administrative49,416 38,357 29%Total stock-based compensation$317,580 $257,713 23%Percentage of revenues23% 26% Stock-based compensation increased $59.9 million during the year ended December 31, 2016, compared to the prior year, primarily due to equity grantsto new employees and additional grants to current employees.Stock-based compensation is inherently difficult to forecast due to fluctuations in our stock price. Based upon our stock price as of December 31, 2016,we expect stock-based compensation to continue to increase for the year ended December 31, 2017 in absolute dollar terms, but decrease as a percentage oftotal revenues as we continue to grow. Interest Expense Year Ended December 31 % Change 2016 2015 (dollars in thousands) Interest expense$(33,278) $(31,097) 7%Percentage of revenues(2)% (3)% Interest expense increased $2.2 million during the year ended December 31, 2016, compared to the prior year, due to the increase in amortizationexpense of debt discount and issuance costs related to our convertible senior notes (Notes) issued in November 2013. During the year ended December 31,2017, we expect to incur approximately $35.6 million in amortization expense of debt discount and issuance costs related to the Notes.Interest Income and Other Income (Expense), net Year Ended December 31 % Change 2016 2015 (dollars in thousands) Interest income$8,032 $4,749 69 %Foreign currency exchange gain (loss)(2,248) 51 NMOther251 (350) (172)%Interest income and other income (expense), net$6,035 $4,450 36 %Percentage of revenues—% 1% Interest income and other income (expense), net, increased $1.6 million during the year ended December 31, 2016, compared to the prior year, primarilydue to increased interest income, partially offset by increased foreign exchange losses. We had foreign exchange losses of $2.2 million for the year endedDecember 31, 2016 compared to gains of $0.1 million for the year ended December 31, 2015 as a result of fluctuations in foreign currency exchange rates.Interest income increased $3.3 million due to the higher yields during the year ended December 31, 2016 compared to the prior year.36Our expanding international operations will continue to increase our exposure to currency risks, though we cannot presently predict the impact of thisexposure on our consolidated financial statements. While we have not engaged in the hedging of our foreign currency transactions to date, we are conductingan ongoing evaluation of the costs and benefits of initiating such a program and in the future may hedge selected significant transactions denominated incurrencies other than the U.S. Dollar. Provision for Income Taxes Year Ended December 31 % Change 2016 2015 (dollars in thousands) Loss before income taxes$(450,051) $(193,012) 133 %Provision for income taxes1,753 5,414 (68)%Effective tax rate— % (3)% Our effective tax rate was 0% for the year ended December 31, 2016 compared to (3)% for the prior year. Our tax expense decreased $3.7 million duringthe year ended December 31, 2016, compared to the prior year, primarily due to a partial release of valuation allowance in connection with acquisitions. SeeNote 15 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for our reconciliation of income taxesat the statutory federal rate to the provision for income taxes.We continue to maintain a full valuation allowance on our U.S. federal and state deferred tax assets, and the significant components of the tax expenserecorded are current cash taxes in various jurisdictions. The cash tax expenses are impacted by each jurisdiction’s individual tax rates, laws on timing ofrecognition of income and deductions, and availability of net operating losses and tax credits. Given the full valuation allowance, sensitivity of current cashtaxes to local rules and our foreign structuring, we expect our effective tax rate could fluctuate significantly on a quarterly basis and could be adverselyaffected to the extent earnings are lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higherstatutory rates. We consider the earnings of our foreign subsidiaries to be indefinitely reinvested outside of the United States.Net Loss Year Ended December 31 % Change 2016 2015 (dollars in thousands) Net loss$(451,804) $(198,426) 128%Percentage of revenues(32)% (20)% Net loss increased $253.4 million during the year ended December 31, 2016, compared to the prior year primarily due to legal settlements. Refer toNote 16 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further details of these matters. Weexpect to continue to incur a GAAP loss for the year ended December 31, 2017, due to increased costs and expenses including non-cash charges associatedwith equity awards, amortization of purchased intangibles from business combinations and other expenses. 37Comparison of the years ended December 31, 2015 and 2014 Revenues Year Ended December 31, % Change 2015 2014 (dollars in thousands) Revenues: Subscription$848,278 $567,217 50%Professional services and other157,202 115,346 36%Total revenues$1,005,480 $682,563 47%Percentage of revenues: Subscription84% 83% Professional services and other16 17 Total100% 100% Subscription revenues increased $281.1 million during the year ended December 31, 2015, compared to the prior year, driven by upsells and an increasein customer count.Subscription revenues consist of the following: Year Ended December 31, % Change 2015 2014 (dollars in thousands) Service Management solutions$783,603 $532,045 47%IT Operations Management solutions64,675 35,172 84%Total subscription revenues$848,278 $567,217 50%Our Service Management solutions include ServiceNow Platform, IT Service Management, IT Business Management, Customer Service, HumanResources and Security Operations, which have similar features and functions and are generally priced on a per user basis. Our IT Operations Managementsolutions, which improve visibility, availability and agility of enterprise services, are generally priced on a per node basis.Professional services and other revenues increased $41.9 million during the year ended December 31, 2015, compared to the prior year, due to anincrease in the services provided to our growing customer base. In addition, revenues from our annual Knowledge user conference increased to $10.9 millionduring the year ended December 31, 2015 compared to $8.2 million in the prior year due to increased sponsorship and paid registrations in the current year.Our international operations provided a significant portion of our total revenues. Revenues outside North America represented 30% and 32% of totalrevenues for the year ended December 31, 2015 and 2014, respectively. As a result, the general strengthening of the U.S. Dollar relative to other major foreigncurrencies (primarily Euro) from the year ended December 31, 2014 to the year ended December 31, 2015 had an unfavorable impact on our revenues. Forentities reporting in currencies other than the U.S. Dollar, if we had translated our results for the year ended December 31, 2015 at the exchange rates for theyear ended December 31, 2014 rather than the actual exchange rates in effect during the period, our subscription revenues would have increased by anadditional $48.0 million and our professional services and other revenues would have increased by an additional $12.0 million.38Cost of Revenues and Gross Profit Percentage Year Ended December 31, % Change 2015 2014 (dollars in thousands) Cost of revenues: Subscription$183,400 $142,687 29%Professional services and other146,013 106,089 38%Total cost of revenues$329,413 $248,776 32%Gross profit percentage: Subscription78% 75% Professional services and other7% 8% Total gross profit percentage67% 63% Gross profit:$676,067 $433,787 56%Headcount (at period end) Subscription579 478 21%Professional services and other486 416 17%Total headcount1,065 894 19% Cost of subscription revenues increased $40.7 million during the year ended December 31, 2015, compared to the prior year, primarily due to increasedheadcount resulting in an increase of $11.2 million in personnel related costs excluding stock-based compensation, an increase of $8.4 million in stock-based compensation, an increase of $6.0 million in depreciation expense primarily due to purchases of cloud-based infrastructure hardware equipment for ourdata centers and an increase of $6.0 million in other overhead expenses. Data center capacity costs increased $1.0 million primarily due to the expansion ofour data centers. Amortization of intangible assets increased $4.8 million as a result of the acquisition of Neebula in July 2014.Our subscription gross profit percentage increased to 78% for the year ended December 31, 2015, from 75% for the year ended December 31, 2014, dueto improved data center utilization and economies of scale.Cost of professional services and other revenues increased $39.9 million during the year ended December 31, 2015 compared to the prior year, primarilydue to increased headcount resulting in an increase of $11.2 million in personnel related costs excluding stock-based compensation, an increase of $10.1million in stock-based compensation, an increase of $5.3 million in overhead expenses, and an increase of $13.2 million in contracted third-party costs.Our professional services and other gross profit percentage decreased to 7% during the year ended December 31, 2015 compared to 8% in the prior yeardue to increased stock-based compensation. The decrease in gross profit percentage was partially offset by the increase in revenues from our annualKnowledge user conference. Costs associated with Knowledge are included in sales and marketing expense. Knowledge contributed $10.9 million, or 7percentage points to the professional services and other gross profit percentage for the year ended December 31, 2015. Knowledge contributed $8.2 million,or 7 percentage points to the professional services and other gross profit percentage for the year ended December 31, 2014.The general strengthening of the U.S. Dollar relative to other major foreign currencies from the year ended December 31, 2014 to the year endedDecember 31, 2015 had a favorable impact on our cost of revenues. For entities reporting in currencies other than the U.S. Dollar, if we had translated ourresults for the year ended December 31, 2015 at the exchange rates for the year ended December 31, 2014 rather than the actual exchange rates in effectduring the year ended December 31, 2015, our cost of subscription revenues would have increased by an additional $8.0 million and our cost of professionalservices and other revenues would have increased by an additional $7.8 million. 39Sales and Marketing Year Ended December 31 % Change 2015 2014 (dollars in thousands) Sales and marketing$498,439 $341,119 46%Percentage of revenues50% 50% Headcount (at period end)1,416 1,011 40% Sales and marketing expenses increased $157.3 million during the year ended December 31, 2015, compared to the prior year, primarily due toincreased headcount resulting in an increase of $57.7 million in personnel related costs excluding stock-based compensation, an increase of $48.3 million instock-based compensation, an increase of $19.0 million in overhead expenses, and an increase of $15.3 million in commission expense. Commissions andreferral fee expenses amounted to 8% and 10% of subscription revenues for the years ended December 31, 2015 and 2014, respectively.In addition, expenses related to our annual Knowledge user conference increased $5.7 million, from $15.3 million for the year ended December 31,2014 to $21.0 million for the year ended December 31, 2015, due to a 31% increase in attendance year-over-year. All other marketing program expenses,which include events, advertising and market data, increased $10.2 million for the year ended December 31, 2015 compared to the prior year.The general strengthening of the U.S. Dollar relative to other major foreign currencies from the year ended December 31, 2014 to the year endedDecember 31, 2015 had a favorable impact on our sales and marketing expenses. For entities reporting in currencies other than the U.S. Dollar, if we hadtranslated our results for the year ended December 31, 2015 at the exchange rates for the year ended December 31, 2014 rather than the actual exchange ratesin effect during the period, our sales and marketing expenses would have increased by an additional $20.9 million.Research and Development Year Ended December 31 % Change 2015 2014 (dollars in thousands) Research and development$217,389 $148,258 47%Percentage of revenues22% 22% Headcount (at period end)756 585 29% Research and development expenses increased $69.1 million during the year ended December 31, 2015, compared to the prior year, primarily due toincreased headcount resulting in an increase of $27.8 million in stock-based compensation, an increase of $25.4 million in personnel related costs excludingstock-based compensation and an increase of $10.6 million in overhead expenses. Research and development expenses also increased $3.5 million due to anincrease in data center capacity costs and depreciation of cloud-based infrastructure hardware equipment that are used solely for research and developmentpurposes.The general strengthening of the U.S. Dollar relative to other major foreign currencies from the year ended December 31, 2014 to the year endedDecember 31, 2015 had a favorable impact on our research and development expenses. For entities reporting in currencies other than the U.S. Dollar, if wehad translated our results for the year ended December 31, 2015 at the exchange rates for the year ended December 31, 2014 rather than the actual exchangerates in effect during the year ended December 31, 2015, our research and development expenses would have increased by an additional $4.2 million. 40General and Administrative Year Ended December 31 % Change 2015 2014 (dollars in thousands) General and administrative$126,604 $96,245 32%Percentage of revenues12% 14% Headcount (at period end)449 336 34% General and administrative expenses increased $30.4 million during the year ended December 31, 2015, compared to the prior year, primarily due to anincrease of $14.2 million in outside services primarily driven by an increase in legal fees associated with our litigation and an increase in the number ofcontractors to support our administrative functions. In addition, stock-based compensation increased $8.7 million and personnel related costs excludingstock-based compensation increased $7.4 million, primarily driven by the increased headcount.The impact from the foreign currency movements from the year ended December 31, 2014 to the year ended December 31, 2015 is not material togeneral and administrative expenses. Stock-based Compensation Year Ended December 31 % Change 2015 2014 (dollars in thousands) Cost of revenues: Subscription$23,416 $14,988 56%Professional services and other23,265 13,116 77%Sales and marketing102,349 54,006 90%Research and development70,326 42,535 65%General and administrative38,357 29,674 29%Total stock-based compensation$257,713 $154,319 67%Percentage of revenues26% 23% Stock-based compensation increased $103.4 million during the year ended December 31, 2015, compared to the prior year, primarily due to additionalannual grants of equity incentive awards, increased headcount, an increase in the weighted-average grant date fair value of stock awards and performanceRSUs granted to our executives in the current year. The new equity incentive awards granted in the current year, including the performance RSUs, resulted inan increase of $102.1 million in stock-based compensation. The weighted-average grant date exercise price per stock option share was $75.76 and $61.40 forthe year ended December 31, 2015 and 2014, respectively. The weighted-average grant date fair value per restricted stock unit was $73.98 and $61.13 for theyear ended December 31, 2015 and 2014, respectively.Interest Expense Year Ended December 31 % Change 2015 2014 (dollars in thousands) Interest expense$(31,097) $(29,059) 7%Percentage of revenues(3)% (3)% Interest expense increased $2.0 million during the year ended December 31, 2015, compared to the prior year, due to the increase in amortizationexpense of debt discount and issuance costs related to our Notes issued in November 2013.41Interest Income and Other Income (Expense), net Year Ended December 31 % Change 2015 2014 (dollars in thousands) Interest income$4,749 $2,964 60 %Foreign currency exchange gain (loss)51 2,490 (98)%Other(350) (100) 250 %Interest income and other income (expense), net$4,450 $5,354 (17)%Percentage of revenues1% 1% Interest income and other expense, net, decreased $0.9 million during the year ended December 31, 2015, compared to the prior year, primarily due to alower foreign currency gain, partially offset by increased interest income. Our foreign currency exchange gain decreased $2.4 million during the year endedDecember 31, 2015 compared to the prior year primarily due to the strengthening of the U.S. Dollar against other major currencies and an increase in ourforeign operations. Interest income increased $1.8 million due to the higher investment balances during the year ended December 31, 2015 compared to theprior year. Provision for Income Taxes Year Ended December 31 % Change 2015 2014 (dollars in thousands) Loss before income taxes$(193,012) $(175,540) 10%Provision for income taxes5,414 3,847 41%Effective tax rate(3)% (2)% Our effective tax rate was (3)% for the year ended December 31, 2015 compared to (2)% for the prior year. Our tax expense increased $1.6 millionduring the year ended December 31, 2015, compared to the prior year, primarily due to a higher proportion of taxable earnings in foreign jurisdictions. SeeNote 15 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for our reconciliation of income taxesat the statutory federal rate to the provision for income taxes.We continue to maintain a full valuation allowance on our U.S. federal and state deferred tax assets, and the significant components of the tax expenserecorded are current cash taxes in various jurisdictions. The cash tax expenses are impacted by each jurisdiction’s individual tax rates, laws on timing ofrecognition of income and deductions, and availability of net operating losses and tax credits. Given the full valuation allowance, sensitivity of current cashtaxes to local rules and our foreign structuring, we expect our effective tax rate could fluctuate significantly on a quarterly basis and could be adverselyaffected to the extent earnings are lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higherstatutory rates. We consider the earnings of our foreign subsidiaries to be indefinitely reinvested outside of the United States.Net Loss Year Ended December 31 % Change 2015 2014 (dollars in thousands) Net loss$(198,426) $(179,387) 11%Percentage of revenues(20)% (26)% Net loss increased $19.0 million during the year ended December 31, 2015, compared to the prior year as the growth in our expenses, particularly stock-based compensation, exceeded our revenue growth. 42Quarterly Results of OperationsThe following table sets forth our unaudited quarterly consolidated statements of operations. We have prepared the quarterly data on a consistent basiswith the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. In the opinion of management, the financialinformation reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data. This informationshould be read in conjunction with the audited consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form10-K. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period. For the Three Months Ended Dec 31, 2016 Sep 30, 2016 June 30, 2016 March 31, 2016 Dec 31,2015 Sep 30,2015 June 30,2015 March 31,2015 (in thousands, except per share data)Revenues: Subscription$344,604 $318,934 $290,679 $267,422 $244,702 $223,208 $200,461 $179,907Professionalservices and other41,062 38,722 50,633 38,457 40,948 37,942 46,255 32,057Totalrevenues385,666 357,656 341,312 305,879 285,650 261,150 246,716 211,964Cost of revenues: Subscription64,707 61,566 56,360 52,781 49,511 46,053 45,392 42,444Professionalservices and other40,229 41,271 40,289 41,479 41,398 35,835 34,325 34,455Total costof revenues104,936 102,837 96,649 94,260 90,909 81,888 79,717 76,899Gross profit280,730 254,819 244,663 211,619 194,741 179,262 166,999 135,065Operating expenses: Sales andmarketing188,857 166,491 186,506 158,610 133,909 117,899 136,574 110,057Research anddevelopment73,933 75,018 70,364 65,924 58,443 55,822 53,276 49,848General andadministrative41,543 40,085 36,071 41,237 33,247 33,581 30,384 29,392Legal settlements(1)— — — 270,000 — — — —Totaloperatingexpenses304,333 281,594 292,941 535,771 225,599 207,302 220,234 189,297Loss fromoperations(23,603) (26,775) (48,278) (324,152) (30,858) (28,040) (53,235) (54,232)Interest expense(8,532) (8,389) (8,248) (8,109) (7,973) (7,839) (7,707) (7,578)Interest income andother income(expense), net1,290 1,783 2,260 702 3,177 (3,952) 521 4,704Loss before provisionfor income taxes(30,845) (33,381) (54,266) (331,559) (35,654) (39,831) (60,421) (57,106)Provision for incometaxes1,744 2,877 (4,641) 1,773 1,724 1,199 1,504 987Net loss$(32,589) $(36,258) $(49,625) $(333,332) $(37,378) $(41,030) $(61,925) $(58,093)Net loss per share -basic and diluted$(0.20) $(0.22) $(0.30) $(2.06) $(0.23) $(0.26) $(0.40) $(0.38)(1)For details regarding the legal settlements expenses of $270.0 million included in the year ended December 31, 2016, refer to Note 16 in the notes to our consolidated financialstatements included elsewhere in this Annual Report on Form 10-K.43Seasonality, Cyclicality and Quarterly TrendsWe have historically experienced seasonality in terms of when we enter into customer agreements for our services. We sign a significantly higherpercentage of agreements with new customers, as well as renewal agreements with existing customers, in the quarter ended December 31. The increase incustomer agreements for the quarter ended December 31 is primarily a result of the terms of our commission plans to incentivize our direct sales force to meettheir annual quotas by December 31 and large enterprise account buying patterns typical in the software industry which are driven primarily by theexpiration of annual authorized budgeted expenditures. Furthermore, we usually sign a significant portion of these agreements during the last month, andoften the last two weeks, of each quarter. This seasonality in the timing of entering into customer contracts is sometimes not immediately apparent, in ourbillings, due to the fact that we exclude contracts with a future start date from our billings. Similarly, this seasonality is reflected to a much lesser extent, andsometimes is not immediately apparent in our revenues, due to the fact that we recognize subscription revenues over the term of the license agreement, whichis generally 12 to 36 months. Although these seasonal factors are common in the technology industry, historical patterns should not be considered a reliableindicator of our future sales activity or performance. Our revenues have increased over the periods presented due to increased sales to new customers, as well as upsells to existing customers. We havehistorically seen an increase in professional services and other revenues in the quarter ended June 30, and a corresponding decrease in professional servicesand other revenues in the quarter ended September 30 due to the revenues earned from our annual Knowledge user conference that occurs in the quarterended June 30. Our operating expenses have increased over the periods presented primarily due to increases in headcount and other related expenses tosupport our growth. We have historically seen an increase in marketing expenses in the quarter ended June 30, and a corresponding decrease in marketingexpenses in the quarter ended September 30 due to the expenses incurred for our annual Knowledge user conference. Marketing expenses in the quarterended December 31 are also historically higher due to customer forums we conduct in that quarter. We anticipate operating expenses will continue toincrease in future periods as we continue to focus on investing in the long-term growth of our business.Our free cash flow is impacted by the timing of collections and disbursements, including the timing of capital expenditures. We have historically seenhigher collections in the quarter ended March 31 due to seasonality in timing of entering into customer contracts as described above.Liquidity and Capital Resources Year Ended December 31, 2016 2015 2014 (dollars in thousands)Net cash provided by operating activities$159,921$317,754 $140,937Net cash used in investing activities(108,448)(231,743) (316,928)Net cash (used in) provided by financing activities(55,752)80,330 68,735Net increase (decrease) in cash and cash equivalents, net of impact ofexchange rates on cash(11,067)159,850 (113,848) Our principal sources of liquidity are our cash and cash equivalents, investments, and cash generated from operations. As of December 31, 2016, wehad $899.4 million in cash and cash equivalents and short-term investments, of which $184.5 million represented cash owned by foreign subsidiaries. Inaddition, we had $262.7 million in long-term investments that provide additional capital resources.We anticipate our current cash and cash equivalents balance and cash generated from operations will be sufficient to meet our liquidity needs includingthe expansion of data centers, lease obligations, expenditures related to the growth of our headcount and the acquisition of fixed assets, intangibles, andinvestments in office facilities to accommodate our growth for at least the next 12 months. Whether these resources are adequate to meet our liquidity needsbeyond that period will depend on our growth, operating results, cash utilized for acquisitions and/or debt retirements if any are consummated, and thecapital expenditures required to meet possible increased demand for our services. If we require additional capital resources to grow our business at any time inthe future, we may seek to finance our operations from the current funds available or seek additional equity or debt financing. 44Operating ActivitiesCash provided by operating activities mainly consists of our net loss adjusted for certain non-cash items, including depreciation and amortization,amortization of premiums on investments, amortization of deferred commissions, amortization of issuance cost and debt discount, stock-based compensationand changes in operating assets and liabilities during the year.Net cash provided by operating activities was $159.9 million for the year ended December 31, 2016 compared to $317.8 million for the prior year. Thedecrease in operating cash flow was primarily due to $267.5 million cash paid for aggregate legal settlements during the year ended December 31, 2016 (referto Note 16 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further details). The remainingchange was due to an increase in non-cash adjustments to reconcile net loss to net cash provided by operations and the favorable impact on operating cashflow from changes in operating assets and liabilities.Net cash provided by operating activities was $317.8 million for the year ended December 31, 2015 compared to $140.9 million for the prior year. Theincrease in operating cash flow was primarily due to an increased net loss offset by a substantial increase in non-cash adjustments to reconcile net loss to netcash provided by operations and the favorable impact on operating cash flow from changes in operating assets and liabilities. Net cash flow from theaggregate of changes in accounts receivable, deferred commissions and deferred revenue increased due to increased sales for the year ended December 31,2015. Net cash flows from the aggregate of changes in accrued liabilities, accounts payable and prepaid expenses increased due to the growth of our businessand increased headcount of 30% for the year ended December 31, 2015, as well as timing of our cash payments. Investing ActivitiesNet cash used in investing activities for the year ended December 31, 2016 was $108.4 million compared to $231.7 million for the prior year. Thedecrease in cash used in investing activities was mainly due to the $181.6 million decrease in the net purchases of investments and $10.0 million decrease inthe purchases of strategic investments, partially offset by $33.2 million increase in business combinations, net of cash acquired, $17.0 million increase inpurchase of other intangibles and $18.1 million increase in capital expenditures related to the purchase of cloud-based infrastructure hardware equipment tosupport the expansion of our data centers as well as investments in leasehold improvements, furniture and equipment to support our headcount growth.Net cash used in investing activities for the year ended December 31, 2015 was $231.7 million compared to $316.9 million for the prior year. Thedecrease in cash used in investing activities was mainly due to the $32.0 million decrease in the net purchases of investments and the $98.7 million decreasein cash used for acquisitions, offset by the $33.1 million increase in capital expenditures related to the purchase of cloud-based infrastructure hardwareequipment to support the expansion of our data centers as well as investments in leasehold improvements, furniture and equipment to support our headcountgrowth and the $10.5 million increase in the purchases of strategic investments. Financing Activities Net cash used in financing activities for the year ended December 31, 2016 was $55.8 million compared to net cash provided by financing activities of$80.3 million for the prior year. The change was primarily due to the $107.1 million increase in taxes paid related to net share settlement of equity awards asa result of a policy change to net settle shares for all U.S. employees starting in 2016 and $27.0 million decrease in proceeds from employee stock plans dueto a reduction in the number of stock options issued in the last four years. Based upon our stock price as of December 31, 2016, we expect an increase in taxespaid related to net share settlement of equity awards for the year ended December 31, 2017.Net cash provided by financing activities for the year ended December 31, 2015 was $80.3 million compared to $68.7 million for the prior year. Theincrease in cash provided by financing activities was primarily due to the $24.0 million increase in proceeds from employee stock plans, offset by the $12.1million increase in taxes paid related to net share settlement of equity awards.45Contractual Obligations and CommitmentsThe following table represents our future non-cancelable contractual obligations as of December 31, 2016, aggregated by type: Payments Due by Period Total LessThan1 Year 1 – 3Years 3 – 5Years MoreThan5 Years (in thousands)Operating leases, net of sublease income (1)$298,471 $33,855 $71,929 $70,044 $122,643Purchase obligations (2)43,940 17,933 19,930 6,077 —Convertible Senior Notes (3)575,000 — 575,000 — —Other4,050 517 1,034 1,034 1,465Total contractual obligations$921,461 $52,305 $667,893 $77,155 $124,108(1)Consists of future non-cancelable minimum rental payments under operating leases for some of our offices and data centers, net of future non-cancelable sublease income.(2)Consists of future minimum payments under non-cancelable purchase commitments primarily related to data center and IT operations. Not included in the table above are certainpurchase commitments related to our future Knowledge user conferences. If we were to cancel these agreements as of December 31, 2016, we would have been obligated to paycancellation penalties of approximately $18.1 million in aggregate.(3)Refer to Note 9 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.Subsequent to the year ended December 31, 2016, we entered into certain lease agreements for additional office space. Total future minimum leasepayments under these operating leases of approximately $52.1 million in aggregate are not included in the table above. $29.6 million of the $52.1 millionrelates to an expansion and lease term extension of our existing San Diego office facility.In addition to the obligations in the table above, approximately $4.0 million of unrecognized tax benefits have been recorded as liabilities as ofDecember 31, 2016. It is uncertain as to if or when such amounts may be settled.Off-Balance Sheet Arrangements During all periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred toas structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or othercontractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged inthose types of relationships.Critical Accounting Policies and Significant Judgments and EstimatesOur management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, whichhave been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financialstatements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets andliabilities at the date of the consolidated financial statements, as well as the reported revenues and expenses during the reporting periods. These items aremonitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base ourestimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis formaking judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected inreported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions and suchdifferences could be material.While our significant accounting policies are more fully described in Note 2 in the notes to our consolidated financial statements included elsewhere inthis Annual Report on Form 10-K, we believe that the following accounting policies are critical to the process of making significant judgments and estimatesin the preparation of our audited consolidated financial statements. 46Revenue RecognitionWe derive our revenues from two sources: (i) subscriptions and (ii) professional services and other. Subscription revenues are primarily comprised ofsubscription fees that give customers access to the ordered subscription service, related support and updates, if any, to the subscribed service during thesubscription term.Our contracts typically do not give the customer the right to take possession of the software supporting the services. Professional services and otherrevenues consist of fees associated with the implementation and configuration of our services. Professional services and other revenues also include customertraining and attendance and sponsorship fees for Knowledge, our annual user conference and other customer forums.We commence revenue recognition when all of the following conditions are met:There is persuasive evidence of an arrangement;The service has been provided to the customer;The collection of related fees is reasonably assured; andThe amount of fees to be paid by the customer is fixed or determinable.We use a signed contract together with a signed order form as evidence of an arrangement for a new customer. In subsequent transactions with anexisting customer, including an upsell or a renewal, we consider the existing signed contract and either the new signed order form or new purchase order asevidence of an arrangement.We recognize subscription revenues ratably over the contract term beginning on the commencement date of each contract, the date we make ourservices available to our customers. Once our services are available to customers, we record amounts due in accounts receivable and in deferred revenue. Tothe extent we bill customers in advance of the contract commencement date, the accounts receivable and corresponding deferred revenue amounts are nettedto zero on our consolidated balance sheets, unless such amounts have been paid as of the balance sheet date.Our professional services arrangements are primarily on a time-and-materials basis and revenues on these arrangements are recognized as the servicesare delivered. Professional services revenues associated with fixed fee arrangements are recognized using a proportional performance model. In instanceswhere certain milestones are required to be met before revenues are recognized, we defer professional services revenues and the associated costs untilmilestone criteria have been met.We assess collectibility based on a number of factors such as past collection history with the customer and creditworthiness of the customer. If wedetermine collectibility is not reasonably assured, we defer revenue recognition until collectibility becomes reasonably assured. We assess whether the fee isfixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Ourarrangements are generally non-cancelable and do not contain refund-type provisions.We have multiple element arrangements comprised of subscription fees and professional services. We account for subscription and professional servicesrevenues as separate units of accounting. To qualify as a separate unit of accounting, the delivered item must have value to the customer on a standalonebasis. We have concluded that our subscription service has standalone value as it is routinely sold separately by us. In addition, the applications offeredthrough this subscription service are fully functional without any additional development, modification or customization. We provide customers access toour subscription service at the beginning of the contract term. In determining whether professional services have standalone value, we considered thefollowing factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the timingof when the professional services contract was signed in comparison to the subscription service start date and the contractual dependence of the subscriptionservice on the customer’s satisfaction with the professional services work. Our professional services, including implementation and configuration services, arenot so unique and complex that other vendors cannot provide them. In some instances, customers independently contract with third-party vendors to do theimplementation and we regularly outsource implementation services to contracted third-party vendors. As a result, we concluded professional services,including implementation and configuration services, have standalone value.47The total arrangement consideration for a multiple element arrangement is allocated to the identifiable separate units of accounting based on a relativeselling price hierarchy. We determined the relative selling price for a deliverable based on its vendor-specific objective evidence (VSOE) of selling price orthird-party evidence (TPE) of selling price if VSOE does not exist. If neither VSOE nor TPE of selling price exists for a deliverable, the selling price isdetermined using the best estimate of selling price (BESP). We determine the BESP for each deliverable primarily by considering the historical selling priceof these deliverables in similar transactions as well as other factors, including, but not limited to, market competition, review of stand-alone sales and currentpricing practices. In determining the appropriate pricing structure, we consider the available information regarding the competitive pricing of similarproducts and marketing analysis.In limited circumstances, we grant certain customers the right to deploy our subscription service on the customers’ own servers. These arrangements aresubject to software revenue recognition guidance since the customer deploys our software. As we never sell the non-software elements separately from thesoftware elements, we have determined that we do not have sufficient VSOE of fair value for all undelivered non-software elements. Consequently, we deferall revenue and related costs under the arrangement until the last element in the transaction has been delivered or starts to be delivered. Once the delivery ofthe last element has commenced, we recognize the entire fee and related costs from the arrangement ratably over the remaining period of the arrangement.Deferred revenue consists primarily of payments received in advance of revenue recognition for our subscriptions and professional services and otherrevenues and is recognized as the revenue recognition criteria are met.Deferred Commissions Deferred commissions are the incremental selling costs that are directly associated with our customer contracts and consist of sales commissions paid toour direct sales force and referral fees paid to independent third-parties. The majority of commissions and referral fees are deferred and amortized on astraight-line basis over the terms of the related customer contracts. We include amortization of deferred commissions in sales and marketing expense in theconsolidated statements of comprehensive loss. We believe this is the preferable method of accounting as the commission charges are so closely related to therevenue from the customer contracts that they should be recorded as an asset and charged to expense over the same period that the revenue is recognized. Thecommission payments are generally paid in full the month after the customer’s initial service under the contract commences. Goodwill, Intangible Assets and Other Long Lived AssetsGoodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Theallocation of the purchase price requires us to make significant estimates in determining the fair value of acquired assets and assumed liabilities, especiallywith respect to intangible assets. These estimates are based upon a number of factors, including historical experience, market conditions and informationobtained from the management of the acquired company. Critical estimates in valuing certain intangible assets included, but are not limited to, cash flowsthat 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 amarket participant would receive. These estimates are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.We evaluate and test the recoverability of goodwill for impairment at least annually during our fourth quarter or more frequently if circumstancesindicate that goodwill may not be recoverable. We perform the impairment testing by first assessing qualitative factors to determine whether the existence ofevents 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, afterassessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount,we perform a two-step impairment test. The first step requires the identification of the reporting units and comparison of the fair value of a reporting unit withits carrying amount, including goodwill. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists forthe reporting unit and the second step of the impairment test is performed to compute the amount of the impairment. Under the second step, an impairmentloss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. We have determined thatwe have a single reporting unit. We have not recognized any impairment charges related to goodwill during the years ended December 31, 2016, 2015 and2014 because the aggregate fair value of our company has consistently and materially exceeded the carrying value of our single reporting unit.48We periodically review the carrying amounts of long-lived assets, such as property and equipment, and purchased intangible assets for impairmentwhenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We measure the recoverability of theseassets 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 assetsto 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 periodicallyevaluate the estimated remaining useful lives of long-lived assets to determine whether events or changes in circumstances warrant a revision to theremaining period of depreciation or amortization. Our intangible assets are amortized over their useful lives ranging from 18 months to ten years.Screening for and assessing whether impairment indicators exist or if events or changes in circumstances have occurred, including market conditions,operating fundamentals, competition and general economic conditions, requires significant judgment. Additionally, changes in the technology industryoccur frequently and quickly. Therefore, there can be no assurance that a charge to operating expenses will not occur as a result of future goodwill, intangibleassets and other long-lived assets impairment tests.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 wecan reasonably estimate the amount of loss or range of loss and when, based on the advice of counsel, it is probable that we will incur the loss. Because ofuncertainties related to these matters, we base our estimate on the information available at the time of our assessment. As additional information becomesavailable, we reassess our potential liability and may revise our estimate. Any revisions in the estimate of potential liabilities could have a material impact onour consolidated financial statements. Stock-based Compensation We recognize compensation expense related to stock options and restricted stock units (RSUs) on a straight-line basis over the requisite service period,which is generally the vesting term of four years. For RSUs granted with a performance condition, the expenses are recognized on a graded vesting basis overthe vesting period, after assessing the probability of achieving requisite performance criteria. This has the impact of greater stock-based compensationexpense during the initial years of the vesting period as stock-based compensation cost is recognized over the requisite service period for each separatelyvesting tranche of the award as though the award were, in substance, multiple awards. We recognize compensation expense related to shares issued pursuantto the employee stock purchase plan (ESPP) on a straight-line basis over the offering period. We estimate the fair value of options using the Black-Scholesoptions pricing model and fair value of RSU awards using the fair value of our common stock on the date of grant. We recognize compensation expense netof estimated forfeiture activity, which is based on historical forfeiture rates. We evaluate the forfeiture rates at least annually or when events or circumstancesindicate a change may be needed. This may cause a fluctuation in our stock-based compensation in the period of change.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 taxconsequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respectivetax bases. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporarydifferences are expected to be reversed. We recognize the effect on deferred tax assets and liabilities of a change in tax rates as income and expense in theperiod 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 notbe realized. In determining the need for a valuation allowance, we consider future growth, forecasted earnings, future taxable income, the mix of earnings inthe jurisdictions in which we operate, historical earnings, taxable income in prior years, if carryback is permitted under the law, carryforward periods andprudent 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 taxposition 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 thetax benefit recognized as the largest amount of benefit which is more likely than not to be realized upon settlement with the taxing authority. We recognizeinterest accrued and penalties related to unrecognized tax benefits in our tax provision. Significant judgment is required to evaluate uncertain tax positions.Our evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law or guidance, correspondence with taxauthorities during the course of audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions couldresult in material increases or decreases in our income tax expense in the period in which we make the change, which could have a material impact on oureffective tax rate and operating results.49We calculate the current and deferred income tax provision based on estimates and assumptions that could differ from the actual results reflected inincome tax returns filed in subsequent years and record adjustments based on filed income tax returns when identified. The amount of income taxes paid issubject to examination by U.S. federal, state and foreign tax authorities. The estimate of the potential outcome of any uncertain tax issue is subject tomanagement’s assessment of relevant risks, facts and circumstances existing at that time. To the extent the assessment of such tax position changes, we recordthe change in estimate in the period in which we make the determination. New Accounting Pronouncements Adopted in 2016In March 2016, the FASB issued ASU 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based PaymentAccounting," which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes,forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This standard is effective for our interim andannual reporting periods beginning January 1, 2017, and early adoption is permitted. We elected to early adopt this standard during the three months endedJune 30, 2016. The impact of the early adoption was as follows:•The standard eliminates additional paid in capital (APIC) pools and requires excess tax benefits and tax deficiencies to be recorded in the incomestatement as a discrete item when the awards vest or are settled. The adoption of this guidance on a prospective basis resulted in the recognition ofexcess tax benefits in our provision for income taxes of $2.5 million for the year ended December 31, 2016.•The standard requires excess tax benefits be recognized regardless of whether the benefit reduces taxes payable. The adoption of this guidance on amodified retrospective basis resulted in the recognition of a cumulative-effect adjustment of $11.4 million that reduced our accumulated deficit andincreased our foreign long-term deferred income tax as of January 1, 2016. The previously unrecognized domestic excess tax effects were recorded as adeferred tax asset net of a valuation allowance.•We have elected to continue to estimate forfeitures expected to occur to determine the amount of stock-based compensation cost to be recognized ineach period. As such, the guidance relating to forfeitures did not have an impact on our accumulated deficit as of January 1, 2016.•We elected to apply the statement of cash flows guidance that cash flows related to excess tax benefits be presented as an operating activityretrospectively, which resulted in a $2.7 million increase to net cash provided by operating activities and a corresponding decrease to net cash providedby financing activities in the accompanying consolidated statement of cash flows for the year ended December 31, 2015, and a $2.0 million increase tonet cash provided by operating activities and a corresponding decrease to net cash provided by financing activities in the accompanying consolidatedstatement of cash flows for the year ended December 31, 2014, as compared to the amounts previously reported.•The statement of cash flows guidance that cash flows related to employee taxes paid for withheld shares be presented as a financing activity had noimpact on our consolidated financial statements as we have historically presented such cash flows as a financing activity.In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments (Topic 805),” which eliminatesthe requirement to restate prior period financial statements for measurement period adjustments in business combinations. This new standard requires that thecumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustmentis identified. We adopted this standard during the three months ended March 31, 2016 on a prospective basis and the adoption had no material impact on ourconsolidated financial statements.In April 2015, the FASB issued ASU 2015-05, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accountingfor Fees Paid in a Cloud Computing Arrangement." ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includessoftware. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangementconsistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should accountfor the arrangement as a service contract. We adopted this standard during the three months ended March 31, 2016 on a prospective basis and the adoptionhad no material impact on our consolidated financial statements.50Pending Accounting PronouncementsIn January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," whicheliminates Step 2 from the goodwill impairment test. The standard requires an entity to perform its annual, or interim, goodwill impairment test by comparingthe fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amountexceeds the reporting unit’s fair value. In addition, this new standard eliminates the requirements for any reporting unit with a zero or negative carryingamount to perform a qualitative assessment. This standard is effective for our interim and annual reporting periods beginning after December 15, 2019, andearly adoption is permitted. We do not anticipate this standard will have a material impact on our consolidated financial statements.In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which clarifies thedefinition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions(or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill andconsolidation. This standard is effective for our interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. Weare currently evaluating the impact of this standard on our consolidated financial statements.In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging IssuesTask Force," which requires that amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalentswhen reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This standard is effective for our interimand annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We do not anticipate this standard will have a materialimpact on our consolidated financial statements.In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory," which includes arevision of the accounting for the income tax consequences of intra-entity transfers of assets other than inventory to reduce the complexity in accountingstandards. This standard is effective for our interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We arecurrently evaluating the impact of this standard on our consolidated financial statements.In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,"which provides guidance on eight specific cash flow issues. Among these issues, this standard requires, at the settlement of zero-coupon debt instruments orother debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowings, the portion of the cashpayment attributable to the accreted interest related to the debt discount to be classified as cash flows for operating activities, and the portion of the cashpayments attributable to the principal to be classified as cash outflows for financing activities. This standard is effective for our interim and annual reportingperiods beginning after December 15, 2017, and early adoption is permitted. We are currently evaluating the impact of this standard on our consolidatedfinancial statements.In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on FinancialInstruments," which requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Credit lossesrelating to available-for-sale debt securities should be recorded through an allowance for credit losses. This standard is effective for our interim and annualreporting periods beginning after December 15, 2019. We are currently evaluating the impact of this standard on our consolidated financial statements.In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires lessees to generally recognize on the balance sheet operatingand financing lease liabilities and corresponding right-of-use assets, and to recognize on the income statement the expenses in a manner similar to currentpractice. This new standard is effective for our interim and annual periods beginning January 1, 2019 and early adoption is permitted. While we are currentlyevaluating the impact of this standard on our consolidated financial statements, we anticipate this standard will have a material impact on our consolidatedbalance sheets given that we had operating lease commitments of approximately $300 million as of December 31, 2016. However, we do not anticipate thisstandard will have a material impact on our consolidated statements of comprehensive loss since the expense recognition under this new standard will besimilar to current practice.In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assetsand Financial Liabilities," which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This newstandard is effective for our interim and annual periods beginning January 1, 2018. We are currently evaluating the impact of this standard on ourconsolidated financial statements.51In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." Under the new standard, revenue is recognizedwhen a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects toreceive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue andcash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including clarification on accounting forlicenses of intellectual property and identifying performance obligations. These new standards are effective for our interim and annual periods beginningJanuary 1, 2018 and early adoption beginning January 1, 2017 is permitted. We are planning to adopt these new standards beginning January 1, 2018.The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method) or retrospectivelywith the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). We currentlyanticipate adopting the standard using the full retrospective method to restate each prior reporting period presented. We expect the new standard to impact the timing of revenue and expense recognition for our contracts related to on-premises offerings, in which wegrant customers the right to deploy our subscription service on the customer’s own servers. Under this new standard, the requirement to have vendor specificobjective evidence (VSOE) for undelivered elements is eliminated. As such, we may be required to recognize as revenue a portion of the sales price upondelivery of the software compared to the current practice of recognizing the entire sales price ratably over an estimated subscription period due to the lack ofVSOE. Currently, revenues from our on-premises offerings, under the ratable recognition model, represent less than 10% of our total revenues. Costsassociated with our on-premises offerings, including commissions paid on the software, will be expensed immediately under the new standard.In addition, we expect the new standard to impact our deferred commissions asset and the related amortization expense as the types of incremental costsrequiring capitalization as well as the expense amortization period could change from our current practice. We currently expect the deferred commissionsasset to increase and the related amortization expense in each reporting period to decrease under the new standard due to an increase in the average term overwhich such commissions are amortized.We are continuing to evaluate the impact of the adoption of this standard on our consolidated financial statements and our preliminary assessments aresubject to change.ITEM 7A.QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKForeign Currency Exchange RiskWe have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. Dollar, primarily the Euroand British Pound Sterling. We are a net receiver of Euro and therefore are adversely affected by a strengthening of the U.S. Dollar relative to the Euro.Revenues denominated in U.S. Dollar as a percentage of total revenue was 73%, 74% and 72% during the years ended December 31, 2016, 2015 and 2014,respectively. Changes in exchange rates have recently and may continue to negatively affect our total revenues. We have experienced and expect to continue to experience fluctuations in our net loss as a result of transaction gains or losses related to remeasuringmonetary assets and liabilities that are denominated in currencies other than the functional currency of the entities in which they are recorded. We recognizeda net foreign currency loss of $2.2 million and a foreign currency gain $0.1 million for the years ended December 31, 2016 and 2015, respectively. While wehave not engaged in the hedging of our foreign currency transactions to date, we may do so in the future.A hypothetical 10% decrease in the U.S. Dollar against other currencies would result in a decrease in operating loss of approximately $9.4 million and$2.4 million for the years ended December 31, 2016 and 2015, respectively. The change in hypothetical reduction in operating loss for the year endedDecember 31, 2016 compared to the year ended December 31, 2015 is due to an increase in the mix of foreign currency revenue relative to foreign currencyexpenses. This analysis disregards the possibilities that rates can move in opposite directions and that losses from one geographic area may be offset by gainsfrom another geographic area. 52Interest Rate Sensitivity We had an aggregate of $1.2 billion in cash, cash equivalents, short-term investments and long-term investments at December 31, 2016. This amountwas invested primarily in money market funds, time deposits, corporate notes and bonds, government securities and other debt securities with a minimumrating of BBB by Standard & Poor's. Baa2 by Moody's or BBB by Fitch. The primary objectives of our investment activities are the preservation of capitaland support of our liquidity requirements. Our investments are exposed to market risk due to fluctuations in interest rates, which may affect our interestincome and the fair market value of our investments. As of December 31, 2016, a hypothetical 100 basis point increase in interest rates would have resulted inan approximate $5.7 million decline of the fair value of our available-for-sale securities. This estimate is based on a sensitivity model that measures marketvalue changes when changes in interest rates occur.As of December 31, 2015, we had an aggregate of $1.2 billion in cash, cash equivalents, short-term investments and long-term investments, and ahypothetical 100 basis point increase in interest rates would have resulted in an approximate $7.4 million decline of the fair value of our available-for-salesecurities.Market RiskIn November 2013, we issued Notes with an aggregate principal amount of $575.0 million. We carry this instrument at face value less unamortizeddiscount on our consolidated balance sheet. Because this instrument does not bear interest, we have no financial statement risk associated with changes ininterest rates. However, the fair value of fixed rate instruments fluctuates when interest rates change, and in the case of convertible notes, when the marketprice of our stock fluctuates.We hold cash balances with multiple financial institutions in various countries and these balances routinely exceed deposit insurance limits.As of December 31, 2016, we had $11.0 million invested in privately-held companies that are in the development stage. The fair value of theseinvestments may fluctuate depending on the financial condition and near-term prospects of these companies, and we may be required to record an impairmentcharge if the carrying value of these investments exceed their fair value.53ITEM 8.CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA SERVICENOW, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm55 Consolidated Financial Statements Consolidated Balance Sheets56 Consolidated Statements of Comprehensive Loss57 Consolidated Statements of Stockholders’ Equity58 Consolidated Statements of Cash Flows59 Notes to Consolidated Financial Statements60The supplementary financial information required by this Item 8, is included in Part II, Item 7 under the caption "Quarterly Results of Operations", which isincorporated herein by reference.54Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of ServiceNow, Inc.In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive loss, of stockholders’ equity, and ofcash flows present fairly, in all material respects, the financial position of ServiceNow, Inc. and its subsidiaries at December 31, 2016 and December 31, 2015,and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accountingprinciples generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, formaintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, includedin Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financialstatements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reportingwas maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overallfinancial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on theassessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits providea reasonable basis for our opinions.As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for certain elements of its employeeshare-based payments in 2016.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP San Jose, CaliforniaFebruary 28, 201755SERVICENOW, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data) December 31, 2016 2015Assets Current assets: Cash and cash equivalents$401,238 $412,305Short-term investments498,124 388,945Accounts receivable, net322,757 203,333Current portion of deferred commissions76,780 51,976Prepaid expenses and other current assets43,636 29,076Total current assets1,342,535 1,085,635Deferred commissions, less current portion61,990 33,016Long-term investments262,658 422,667Property and equipment, net181,620 144,714Intangible assets, net65,854 43,005Goodwill82,534 55,669Other assets36,576 22,346Total assets$2,033,767 $1,807,052Liabilities and Stockholders’ Equity Current liabilities: Accounts payable$38,080 $37,369Accrued expenses and other current liabilities171,636 101,264Current portion of deferred revenue861,782 593,003Total current liabilities1,071,498 731,636Deferred revenue, less current portion33,319 10,751Convertible senior notes, net507,812 474,534Other long-term liabilities34,177 23,317Total liabilities1,646,806 1,240,238Commitments and contingencies Stockholders’ equity: Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding— —Common stock $0.001 par value; 600,000,000 shares authorized; 167,430,773 and 160,785,764shares issued and outstanding at December 31, 2016 and 2015, respectively167 160Additional paid-in capital1,405,317 1,140,545Accumulated other comprehensive loss(21,133) (16,882)Accumulated deficit(997,390) (557,009)Total stockholders’ equity386,961 566,814Total liabilities and stockholders’ equity$2,033,767 $1,807,052 See accompanying notes to consolidated financial statements56SERVICENOW, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(in thousands, except share and per share data) Year Ended December 31, 201620152014Revenues: Subscription$1,221,639 $848,278 $567,217Professional services and other168,874 157,202 115,346Total revenues1,390,513 1,005,480 682,563Cost of revenues(1): Subscription235,414 183,400 142,687Professional services and other163,268 146,013 106,089Total cost of revenues398,682 329,413 248,776Gross profit991,831 676,067 433,787Operating expenses(1): Sales and marketing700,464 498,439 341,119Research and development285,239 217,389 148,258General and administrative158,936 126,604 96,245Legal settlements270,000 — —Total operating expenses1,414,639 842,432 585,622Loss from operations(422,808) (166,365) (151,835)Interest expense(33,278) (31,097) (29,059)Interest income and other income (expense), net6,035 4,450 5,354Loss before provision for income taxes(450,051) (193,012) (175,540)Provision for income taxes1,753 5,414 3,847Net loss$(451,804) $(198,426) $(179,387)Net loss per share - basic and diluted$(2.75) $(1.27) $(1.23)Weighted-average shares used to compute net loss per share - basic anddiluted164,533,823 155,706,643 145,355,543Other comprehensive loss: Foreign currency translation adjustments$(4,839) $(3,177) $(11,027)Unrealized (loss) gain on investments, net of tax588 (1,592) (610)Other comprehensive loss(4,251) (4,769) (11,637)Comprehensive loss$(456,055) $(203,195) $(191,024)(1)Includes stock-based compensation as follows: Year Ended December 31, 2016 2015 2014Cost of revenues: Subscription$28,420 $23,416 $14,988Professional services and other26,442 23,265 13,116Sales and marketing131,571 102,349 54,006Research and development81,731 70,326 42,535General and administrative49,416 38,357 29,674See accompanying notes to consolidated financial statements57SERVICENOW, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands, except share data) Common Stock AdditionalPaid-inCapital AccumulatedDeficit AccumulatedOtherComprehensiveLoss TotalStockholders’Equity Shares Amount Balance at December 31, 2013140,354,605 $140 $573,791 $(179,196) $(476) $394,259Common stock issued underemployee stock plans9,154,487 10 68,723 — — 68,733Tax benefit from employeestock plans— — 2,001 — — 2,001Vesting of early exercised stockoptions— — 167 — — 167Stock-based compensation— — 154,539 — — 154,539Other comprehensive loss, net — — (11,637) (11,637)Net loss — (179,387) — (179,387)Balance at December 31, 2014149,509,092 $150 $799,221 $(358,583) $(12,113) $428,675Common stock issued underemployee stock plans11,276,672 10 93,338 — — 93,348Tax benefit from employeestock plans— — 2,663 — — 2,663Taxes paid related to net sharesettlement of equity awards— — (12,795) — — (12,795)Vesting of early exercised stockoptions— — 44 — — 44Stock-based compensation— — 258,074 — — 258,074Other comprehensive loss, net — — (4,769) (4,769)Net loss — (198,426) — (198,426)Balance at December 31, 2015160,785,764 $160 $1,140,545 $(557,009) $(16,882) $566,814Cumulative effect adjustmentfor ASU 2016-09 adoption (seeNote 2)— — — 11,423 — 11,423Common stock issued underemployee stock plans6,645,009 7 66,361 — — 66,368Taxes paid related to net sharesettlement of equity awards— — (119,914) — — (119,914)Stock-based compensation— — 318,325 — — 318,325Other comprehensive loss, net— — — — (4,251) (4,251)Net loss— — — (451,804) — (451,804)Balance at December 31, 2016167,430,773 $167 $1,405,317 $(997,390) $(21,133) $386,961See accompanying notes to consolidated financial statements58SERVICENOW, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year Ended December 31, 2016 2015 2014Cash flows from operating activities: Net loss$(451,804) $(198,426) $(179,387)Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization83,082 60,356 42,059Amortization of premiums on investments4,725 7,064 8,084Amortization of deferred commissions81,217 65,541 51,270Amortization of debt discount and issuance costs33,278 31,097 29,059Stock-based compensation317,580 257,713 154,319Deferred income tax(3,424) (1,282) (1,198)Other(962) (6,223) (4,469)Changes in operating assets and liabilities, net of effect of businesscombinations: Accounts receivable(125,106) (50,855) (56,785)Deferred commissions(136,459) (80,142) (73,786)Prepaid expenses and other assets(21,500) (10,961) (5,540)Accounts payable(3,554) 14,785 10,223Deferred revenue300,167 195,900 168,393Accrued expenses and other liabilities82,681 33,187 (1,305)Net cash provided by operating activities(1)159,921 317,754 140,937Cash flows from investing activities: Purchases of property and equipment(105,562) (87,481) (54,379)Business combinations, net of cash acquired(34,297) (1,100) (99,813)Purchases of other intangibles(18,750) (1,750)—Purchases of investments(518,664) (712,782) (521,393)Purchases of strategic investments(500) (10,500) —Sales of investments297,998 277,045 166,997Maturities of investments271,537 305,047 191,715Restricted cash(210) (222) (55)Net cash used in investing activities(108,448) (231,743) (316,928)Cash flows from financing activities: Proceeds from employee stock plans66,378 93,348 69,396Taxes paid related to net share settlement of equity awards(119,907) (12,795) (661)Payments on financing obligations(2,223) (223) —Net cash (used in) provided by financing activities(1)(55,752) 80,330 68,735Foreign currency effect on cash and cash equivalents(6,788) (6,491) (6,592)Net increase (decrease) in cash and cash equivalents(11,067) 159,850 (113,848)Cash and cash equivalents at beginning of period412,305 252,455 366,303Cash and cash equivalents at end of period$401,238 $412,305 $252,455Supplemental disclosures of other cash flow information: Income taxes paid, net of refunds$4,338 $3,630 $12,604Non-cash investing and financing activities: Property and equipment included in accounts payable and accruedexpenses$15,381 $14,427 $10,313Financing obligations for purchases of other intangibles6,210 — —Financing obligation for property and equipment— — 6,161 (1)During the year ended December 31, 2016, we early adopted Accounting Standards Update 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements toEmployee Share-Based Payment Accounting." Refer to Note 2 Recent Accounting Pronouncements for further details. This adoption resulted in a $2.7 million increase in net cashprovided by operating activities and a corresponding $2.7 million decrease in net cash provided by financing activities for the year ended December 31, 2015, and a $2.0 millionincrease in net cash provided by operating activities and a corresponding $2.0 million decrease in net cash provided by financing activities for the year ended December 31,2014, as compared to the amounts previously reported.See accompanying notes to consolidated financial statements59SERVICENOW, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSUnless the context requires otherwise, references in this report to “ServiceNow,” the "Company", “we,” “us,” and “our” refer to ServiceNow, Inc. andits consolidated subsidiaries.(1) Description of the Business ServiceNow is a leading provider of enterprise cloud computing solutions that define, structure, manage and automate services for global enterprises.Our mission is to help our customers improve service levels and reduce costs while scaling and automating their businesses.(2) Summary of Significant Accounting Policies Principles of ConsolidationThe consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (U.S.GAAP), and include our accounts and the accounts of our wholly-owned subsidiaries. All significant intercompany transactions and balances have beeneliminated upon consolidation.Prior Period Reclassification Certain reclassifications of prior period amounts have been made to conform to the current period presentation. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions.These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of theconsolidated financial statements, as well as reported amounts of revenues and expenses during the reporting period. Such management estimates andassumptions include, but not limited to, the best estimate of selling price of the deliverables included in multiple elements revenue arrangements, the fairvalue of assets acquired and liabilities assumed for business combinations, stock-based compensation expenses, the assessment of the useful life andrecoverability of our property and equipment, goodwill and identifiable intangible assets, future taxable income and legal contingencies. Actual resultscould 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 andassesses financial performance based upon discrete financial information at the consolidated level. Accordingly, we have determined that we operate as asingle 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 subsidiariesare translated into U.S. Dollars at exchange rates in effect at each period end. Amounts classified in stockholders’ equity are translated at historical exchangerates. Revenues and expenses are translated at the average exchange rates during the period. The resulting translation adjustments are recorded inaccumulated other comprehensive loss as a component of stockholders’ equity. Foreign currency transaction gains and losses are included in interest incomeand other income (expense), net within the consolidated statements of comprehensive loss, and have not been material for all periods presented. Allocation of Overhead Costs Overhead costs associated with office facilities, IT and certain depreciation related to non-cloud-based infrastructure hardware equipment are allocatedto cost of revenues and operating expenses based on headcount. 60Revenue Recognition We derive our revenues from two sources: (i) subscriptions and (ii) professional services and other. Subscription revenues are primarily comprised ofsubscription fees that give customers access to the ordered subscription service, related support and updates to the subscribed service during the subscriptionterm. Our contracts typically do not give the customer the right to take possession of the software supporting the services. Professional services and otherrevenues consist of fees associated with the implementation and configuration of our services. Professional services and other revenues also include customertraining and attendance and sponsorship fees for Knowledge, our annual user conference and other customer forums.We commence revenue recognition when all of the following conditions are met: •There is persuasive evidence of an arrangement;•The service has been provided to the customer;•The collection of related fees is reasonably assured; and•The amount of fees to be paid by the customer is fixed or determinable.Our arrangements are generally non-cancelable and do not contain refund-type provisions.We recognize subscription revenues ratably over the contract term beginning on the commencement date of each contract, the date we make ourservices available to our customers. Once our services are available to customers, we record amounts due in accounts receivable and in deferred revenue. Tothe extent we bill customers in advance of the contract commencement date, the accounts receivable and corresponding deferred revenue amounts are nettedto zero on our consolidated balance sheets, unless such amounts have been paid as of the balance sheet date.Professional services revenues on our time-and materials arrangements are recognized as the services are delivered. Professional services revenuesassociated with fixed fee arrangements are recognized using a proportional performance model. In instances where certain milestones are required to be metbefore revenues are recognized, we defer professional services revenues and the associated costs until milestone criteria have been met. We have multiple element arrangements comprised of subscription fees and professional services. To qualify as a separate unit of accounting, thedelivered item must have value to the customer on a standalone basis. We have concluded that our subscription service and professional services, includingimplementation and configuration services, have standalone value. The total arrangement consideration for a multiple element arrangement is allocated to the identifiable separate units of accounting based on a relativeselling price hierarchy. We determined the relative selling price for a deliverable based on its vendor-specific objective evidence (VSOE) of selling price orthird-party evidence (TPE) of selling price if VSOE does not exist. If neither VSOE nor TPE of selling price exists for a deliverable, the selling price isdetermined using the best estimate of selling price (BESP). We determine the BESP for each deliverable primarily by considering the historical selling priceof these deliverables in similar transactions as well as other factors, including, but not limited to, market competition, review of stand-alone sales and currentpricing practices. In determining the appropriate pricing structure, we consider the extent of competitive pricing of similar products and marketing analysis. In limited circumstances, we grant certain customers the right to deploy our subscription service on the customers’ own servers. These arrangements aresubject to software revenue recognition guidance since the customer deploys our software. As we never sell the non-software elements separately from thesoftware elements, we have determined that we do not have sufficient VSOE of fair value for all undelivered non-software elements. Consequently, we deferall revenue and related costs under the arrangement until the last element in the transaction has been delivered or starts to be delivered. Once the delivery ofthe last element has commenced, we recognize the entire fee and related costs from the arrangement ratably over the remaining period of the arrangement.Deferred revenue consists primarily of payments received in advance of revenue recognition for our subscriptions and professional services and otherrevenues and is recognized as the revenue recognition criteria are met.Deferred CommissionsDeferred commissions are the incremental selling costs that are directly associated with our customer contracts and consist of sales commissions paid toour direct sales force and referral fees paid to independent third-parties. The majority of commissions and referral fees are deferred and amortized on astraight-line basis over the terms of the related customer contracts. We include amortization of deferred commissions in sales and marketing expense in theconsolidated statements of comprehensive loss.61 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 financialstatements 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 thatwould 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 orderlytransaction 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 twoare 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, quotedprices 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 theassets 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 EquivalentsCash and cash equivalents consist of highly liquid investments with original maturities of three months or less. Cash and cash equivalents are stated atcost, which approximates fair value. Investments Investments consist of commercial paper, corporate notes and bonds, certificates of deposit and U.S. government and agency securities. We classifyinvestments as available-for-sale at the time of purchase and reevaluate such classification as of each balance sheet date. All investments are recorded atestimated fair value. Unrealized gains and losses for available-for-sale securities are included in accumulated other comprehensive loss, a component ofstockholders’ equity. We evaluate our investments to assess whether those with unrealized loss positions are other than temporarily impaired. We considerimpairments 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 theircost basis. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method andare reported in interest income and other income (expense), net in the consolidated statements of comprehensive loss.Strategic InvestmentsWe report our investments in non-marketable debt and equity securities in privately-held companies, in which we do not have a controlling interest orsignificant influence, at cost or fair value when an event or circumstance indicates an other-than-temporary decline in value has occurred. We include thesestrategic investments in "Other assets" on the consolidated balance sheets. Accounts Receivable We record trade accounts receivable at the net invoice value and such receivables are non-interest bearing. We consider receivables past due based onthe contractual payment terms. We review our exposure to accounts receivable and reserve for specific amounts if collectability is no longer reasonablyassured. 62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 estimateduseful lives of the assets as follows:Building 39 yearsComputer equipment and software 3—5 yearsFurniture and fixtures 3—7 yearsLeasehold and other improvements shorter of the lease term or estimated useful life When assets are sold, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss isincluded in cost of revenues or operating expenses depending on whether the asset sold is being used in our provision of services to our customers. Repairsand maintenance expenses are charged to our statements of comprehensive loss as incurred. Capitalized Software Development Costs Software development costs for software to be sold, leased, or otherwise marketed are expensed as incurred until the establishment of technologicalfeasibility, at which time those costs are capitalized until the product is available for general release to customers and amortized over the estimated life of theproduct. Technological feasibility is established upon the completion of a working prototype that has been certified as having no critical bugs and is arelease candidate. To date, costs and time incurred between the establishment of technological feasibility and product release have not been significant, andall software development costs have been charged to research and development expense in our consolidated statements of comprehensive loss.Costs incurred to develop our internal administration, finance and accounting systems are capitalized during the application development stage andamortized over the software’s estimated useful life of three to five years. Leases Leases are reviewed and classified as capital or operating at their inception. Some of our lease agreements contain rent escalation, rent holidays, leaseincentives and renewal options. Rent escalation and rent holidays are included in the determination of rent expenses to be recorded over the lease term. Leaseincentives to pay for our costs or assets are recognized as a reduction of rent expense on a straight-line basis over the term of the lease. Renewals are notassumed in the determination of the lease term unless they are deemed to be reasonably assured at the inception of the lease. We begin recognizing rentexpense on the date that we obtain the legal right to use and control the leased space. The difference between rent payments and straight-line rent expense isrecorded as deferred rent in the consolidated balance sheets. Deferred rent that will be recognized during the ensuing 12-month period is recorded as thecurrent portion of deferred rent included in "Accrued expenses and other current liabilities" and the remainder is recorded as long term deferred rent includedin "Other long-term liabilities".Goodwill, Intangible Assets and Other Long Lived AssetsGoodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. Weevaluate and test the recoverability of goodwill for impairment at least annually, during the fourth quarter, or more frequently if circumstances indicate thatgoodwill may not be recoverable. We perform the impairment testing by first assessing qualitative factors to determine whether the existence of events orcircumstances 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 assessingthe 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, weperform a two-step impairment test. The first step requires the identification of the reporting units and comparison of the fair value of a reporting unit with itscarrying amount, including goodwill. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for thereporting unit and the second step of the impairment test is performed to compute the amount of the impairment. Under the second step, an impairment loss isrecognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. For purposes of goodwillimpairment testing, we have one reporting unit.63We periodically review the carrying amounts of long-lived assets, such as property and equipment, and purchased intangible assets for impairmentwhenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We measure the recoverability of theseassets 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 assetsto 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 periodicallyevaluate the estimated remaining useful lives of long-lived assets to determine whether events or changes in circumstances warrant a revision to theremaining period of depreciation or amortization. Our intangible assets are amortized over their useful lives ranging from 18 months to ten years.Advertising CostsAdvertising costs, excluding costs related to our annual Knowledge user conference and other customer forums, are expensed as incurred and areincluded in sales and marketing expense. These costs for the years ended December 31, 2016, 2015 and 2014 were $42.1 million, $26.0 million and $17.2million, respectively.Legal Contingencies From time to time, we are a party to litigation and other legal proceedings in the ordinary course of business. We accrue for loss contingencies when wecan reasonably estimate the amount of loss or range of loss and when, based on the advice of counsel, it is probable that we will incur the loss. Because ofuncertainties related to these matters, we base our estimate on the information available at the time of our assessment. As additional information becomesavailable, we reassess our potential liability and may revise our estimate.Stock-based Compensation We recognize compensation expense related to stock options and restricted stock units (RSUs) on a straight-line basis over the requisite service period,which is generally the vesting term of four years. For RSUs granted with a performance condition, the expenses are recognized on a graded vesting basis overthe vesting period, after assessing the probability of achieving requisite performance criteria. This has the impact of greater stock-based compensationexpense during the initial years of the vesting period as stock-based compensation cost is recognized over the requisite service period for each separatelyvesting tranche of the award as though the award were, in substance, multiple awards. We recognize compensation expense related to shares issued pursuantto the employee stock purchase plan (ESPP) on a straight-line basis over the offering period. We estimate the fair value of options using the Black-Scholesoptions pricing model and fair value of RSUs using the fair value of our common stock on the date of grant. We recognize compensation expense net ofestimated forfeiture activity, which is based on historical forfeiture rates. In some instances, shares are issued on the vesting dates net of the minimumstatutory tax withholding requirements to be paid by us on behalf of our employees. In these instances, we record the liability for withholding amounts to bepaid by us as a reduction to additional paid-in capital when paid, and include these payments as a reduction of cash flows from financing activities. Net Loss Per ShareBasic net loss per share attributable to common stockholders is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss attributable to commonstockholders by the weighted-average number of shares of common stock outstanding during the period, adjusted for the effects of dilutive common shares,which are comprised of outstanding common stock options, convertible preferred stock, RSUs, common stock subject to repurchase, ESPP obligations,convertible senior notes and warrants. The dilutive potential common shares are computed using the treasury stock method or the as-if converted method, asapplicable. In periods where the effect of the conversion of preferred stock is dilutive, net loss attributable to common stockholders is adjusted by theassociated preferred dividends and accretions. The effects of outstanding common stock options, convertible preferred stock, RSUs, common stock subject torepurchase, ESPP obligations, convertible senior notes and warrants are excluded from the computation of diluted net loss per common share in periods inwhich the effect would be antidilutive. Concentration of Credit Risk and Significant Customers Financial instruments potentially exposing us to credit risk consist primarily of cash, cash equivalents, investments and accounts receivable. We holdcash at financial institutions that management believes are high credit, quality financial institutions and invest in securities with a minimum rating of BBBby Standard & Poor's. Baa2 by Moody's or BBB by Fitch. We are also exposed to credit risk under the convertible note hedge (Note Hedge) transactions thatmay result from counterparties' non-performance. 64Credit risk arising from accounts receivable is mitigated due to our large number of customers and their dispersion across various industries andgeographies. As of December 31, 2016 and 2015, there were no customers that represented more than 10% of our accounts receivable balance. There were nocustomers that individually exceeded 10% of our revenues in any of the periods presented. For purposes of assessing concentration of credit risk andsignificant 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 delinquentaccounts to determine if an allowance for doubtful accounts is necessary. Individual accounts receivable are written off when we become aware of a specificcustomer’s inability to meet its financial obligation, and all collection efforts are exhausted. The following table presents the changes in the allowance fordoubtful accounts (in thousands): Balance atBeginning ofYear Additions(Deductions):Charged toOperations Additions(Deductions):Charged toDeferred Revenue Less:Write-offs Balance at Endof YearYear ended December 31, 2016 Allowance for doubtful accounts$1,179 2,219 (391) 684 $2,323Year ended December 31, 2015 Allowance for doubtful accounts$809 841 (70) 401 $1,179Year ended December 31, 2014 Allowance for doubtful accounts$1,143 395 (523) 206 $809Warranties 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 werenot material for all periods presented. We have also agreed to indemnify our directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlementamounts 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 theperson’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’sservices provided to any other company or enterprise at our request. We maintain director and officer insurance coverage that may enable us to recover aportion 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 asa 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 taxconsequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respectivetax bases. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporarydifferences are expected to be reversed. We recognize the effect on deferred tax assets and liabilities of a change in tax rates as income and expense in theperiod 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 notbe realized. In determining the need for a valuation allowance, we consider future growth, forecasted earnings, future taxable income, the mix of earnings inthe jurisdictions in which we operate, historical earnings, taxable income in prior years, if carryback is permitted under the law, carryforward periods andprudent and feasible tax planning strategies.65Our tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. We recognize the tax benefit of an uncertain taxposition 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 thetax benefit recognized as the largest amount of benefit which is more likely than not to be realized upon settlement with the taxing authority. We recognizeinterest 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 inincome tax returns filed in subsequent years and record adjustments based on filed income tax returns when identified. The amount of income taxes paid issubject to examination by U.S. federal, state and foreign tax authorities. The estimate of the potential outcome of any uncertain tax issue is subject tomanagement’s assessment of relevant risks, facts and circumstances existing at that time. To the extent the assessment of such tax position changes, we recordthe change in estimate in the period in which we make the determination.New Accounting Pronouncements Adopted in 2016In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, "Compensation—StockCompensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which simplifies several aspects of the accounting for employeeshare-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classificationin the statement of cash flows. This standard is effective for our interim and annual reporting periods beginning January 1, 2017, and early adoption ispermitted. We elected to early adopt this standard during the three months ended June 30, 2016. The impact of the early adoption was as follows:•The standard eliminates additional paid in capital (APIC) pools and requires excess tax benefits and tax deficiencies to be recorded in the incomestatement as a discrete item when the awards vest or are settled. The adoption of this guidance on a prospective basis resulted in the recognition ofexcess tax benefits in our provision for income taxes of $2.5 million for the year ended December 31, 2016.•The standard requires excess tax benefits to be recognized regardless of whether the benefit reduces taxes payable. The adoption of this guidance on amodified retrospective basis resulted in the recognition of a cumulative-effect adjustment of $11.4 million that reduced our accumulated deficit andincreased our foreign long-term deferred income tax as of January 1, 2016. The previously unrecognized U.S. excess tax effects were recorded as adeferred tax asset net of a valuation allowance.•We have elected to continue to estimate forfeitures expected to occur to determine the amount of stock-based compensation cost to be recognized ineach period. As such, the guidance relating to forfeitures did not have an impact on our accumulated deficit as of January 1, 2016.•We elected to apply the statement of cash flows guidance that cash flows related to excess tax benefits be presented as an operating activityretrospectively, which resulted in a $2.7 million increase to net cash provided by operating activities and a corresponding decrease to net cash providedby financing activities in the accompanying consolidated statement of cash flows for the year ended December 31, 2015, and a $2.0 million increase tonet cash provided by operating activities and a corresponding decrease to net cash provided by financing activities in the accompanying consolidatedstatement of cash flows for the year ended December 31, 2014, as compared to the amounts previously reported.•The statement of cash flows guidance that cash flows related to employee taxes paid for withheld shares be presented as a financing activity had noimpact on our consolidated financial statements as we have historically presented such cash flows as a financing activity.In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments (Topic 805),” which eliminatesthe requirement to restate prior period financial statements for measurement period adjustments in business combinations. This new standard requires that thecumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustmentis identified. We adopted this standard during the three months ended March 31, 2016 on a prospective basis and the adoption had no material impact on ourconsolidated financial statements.66In April 2015, the FASB issued ASU 2015-05, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accountingfor Fees Paid in a Cloud Computing Arrangement." ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includessoftware. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangementconsistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should accountfor the arrangement as a service contract. We adopted this standard during the three months ended March 31, 2016 on a prospective basis and the adoptionhad no material impact on our consolidated financial statements.Pending Accounting PronouncementsIn January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," whicheliminates Step 2 from the goodwill impairment test. The standard requires an entity to perform its annual, or interim, goodwill impairment test by comparingthe fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amountexceeds the reporting unit’s fair value. In addition, this new standard eliminates the requirements for any reporting unit with a zero or negative carryingamount to perform a qualitative assessment. This standard is effective for our interim and annual reporting periods beginning after December 15, 2019, andearly adoption is permitted. We do not anticipate this standard will have a material impact on our consolidated financial statements.In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which clarifies thedefinition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions(or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill andconsolidation. This standard is effective for our interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. Weare currently evaluating the impact of this standard on our consolidated financial statements.In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging IssuesTask Force," which requires that amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalentswhen reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This standard is effective for our interimand annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We do not anticipate this standard will have a materialimpact on our consolidated financial statements.In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory," which includes arevision of the accounting for the income tax consequences of intra-entity transfers of assets other than inventory to reduce the complexity in accountingstandards. This standard is effective for our interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We arecurrently evaluating the impact of this standard on our consolidated financial statements.In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,"which provides guidance on eight specific cash flow issues. Among these issues, this standard requires, at the settlement of zero-coupon debt instruments orother debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowings, the portion of the cashpayment attributable to the accreted interest related to the debt discount to be classified as cash flows for operating activities, and the portion of the cashpayments attributable to the principal to be classified as cash outflows for financing activities. This standard is effective for our interim and annual reportingperiods beginning after December 15, 2017, and early adoption is permitted. We are currently evaluating the impact of this standard on our consolidatedfinancial statements.In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on FinancialInstruments," which requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Credit lossesrelating to available-for-sale debt securities should be recorded through an allowance for credit losses. This standard is effective for our interim and annualreporting periods beginning after December 15, 2019. We are currently evaluating the impact of this standard on our consolidated financial statements.67In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires lessees to generally recognize on the balance sheet operatingand financing lease liabilities and corresponding right-of-use assets, and to recognize on the income statement the expenses in a manner similar to currentpractice. This new standard is effective for our interim and annual periods beginning January 1, 2019 and early adoption is permitted. While we are currentlyevaluating the impact of this standard on our consolidated financial statements, we anticipate this standard will have a material impact on our consolidatedbalance sheets given that we had operating lease commitments of approximately $300 million as of December 31, 2016. However, we do not anticipate thisstandard will have a material impact on our consolidated statements of comprehensive loss since the expense recognition under this new standard will besimilar to current practice.In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assetsand Financial Liabilities," which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This newstandard is effective for our interim and annual periods beginning January 1, 2018. We are currently evaluating the impact of this standard on ourconsolidated financial statements.In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." Under the new standard, revenue is recognizedwhen a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects toreceive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue andcash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including clarification on accounting forlicenses of intellectual property and identifying performance obligations. These new standards are effective for our interim and annual periods beginningJanuary 1, 2018 and early adoption beginning January 1, 2017 is permitted. We are planning to adopt these new standards beginning January 1, 2018.The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method) or retrospectivelywith the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). We currentlyanticipate adopting the standard using the full retrospective method to restate each prior reporting period presented. We expect the new standard to have a material impact on the timing of revenue and expense recognition for our contracts related to on-premisesofferings, in which we grant customers the right to deploy our subscription service on the customer’s own servers. Under this new standard, the requirement tohave vendor specific objective evidence (VSOE) for undelivered elements is eliminated. As such, we may be required to recognize as revenue a portion of thesales price upon delivery of the software, compared to the current practice of recognizing the entire sales price ratably over an estimated subscription perioddue to the lack of VSOE. Currently, revenues from our on-premises offerings, under the ratable recognition model, represent less than 10% of our totalrevenues. Costs associated with our on-premises offerings, including commissions paid on the software, will be expensed immediately under the newstandard.In addition, we expect the new standard to impact our deferred commissions asset and the related amortization expense as the types of incremental costsrequiring capitalization as well as the expense amortization period could change from our current practice. We currently expect the deferred commissionsasset to increase and the related amortization expense in each reporting period to decrease under the new standard due to an increase in the average term overwhich such commissions are amortized.We are continuing to evaluate the impact of the adoption of this standard on our consolidated financial statements and our preliminary assessments aresubject to change.68(3) Investments Marketable SecuritiesThe following is a summary of our available-for-sale investment securities, excluding those securities classified within cash and cash equivalents on theconsolidated balance sheets (in thousands): December 31, 2016 AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses EstimatedFair ValueAvailable-for-sale securities: Commercial paper$56,839 $— $— $56,839Corporate notes and bonds628,054 91 (1,590) 626,555Certificates of deposit35,355 — — 35,355U.S. government agency securities42,088 7 (62) 42,033Total available-for-sale securities$762,336 $98 $(1,652) $760,782 December 31, 2015 AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses EstimatedFair ValueAvailable-for-sale securities: Commercial paper$32,430 $2 $(38) $32,394Corporate notes and bonds617,054 7 (2,027) 615,034Certificates of deposit29,610 2 (17) 29,595U.S. government agency securities134,962 1 (374) 134,589Total available-for-sale securities$814,056 $12 $(2,456) $811,612As of December 31, 2016, the contractual maturities of our investment securities did not exceed 24 months. The fair values of available-for-saleinvestment securities, by remaining contractual maturity, are as follows (in thousands): December 31,2016Due in one year or less$498,124Due in one year through two years262,658Total$760,78269The following table shows the fair values and the gross unrealized losses of these securities, classified by the length of time that the securities havebeen in a continuous unrealized loss position, and aggregated by investment types (in thousands): December 31, 2016 Less than 12 Months 12 Months or Greater Total Fair Value GrossUnrealizedLosses Fair Value GrossUnrealizedLosses Fair Value GrossUnrealizedLossesCorporate notes and bonds$492,503 $(1,530) $47,940 $(60) $540,443 $(1,590)U.S. government agency securities30,033 (62) — — 30,033 (62)Total$522,536 $(1,592) $47,940 $(60) $570,476 $(1,652) December 31, 2015 Less than 12 Months 12 Months or Greater Total Fair Value GrossUnrealizedLosses Fair Value GrossUnrealizedLosses Fair Value GrossUnrealizedLossesCommercial paper$24,913 $(38) $— $— $24,913 $(38)Corporate notes and bonds539,586 (1,897) 60,099 (130) 599,685 (2,027)Certificates of deposit19,750 (17) — — 19,750 (17)U.S. government agency securities132,581 (374) — — 132,581 (374)Total$716,830 $(2,326) $60,099 $(130) $776,929 $(2,456) As of December 31, 2016, we had a total of 274 available-for-sale securities, excluding those securities classified within cash and cash equivalents onthe consolidated balance sheet in an unrealized loss position. There were no impairments considered "other-than-temporary" as it is more likely than not wewill hold the securities until maturity or a recovery of the cost basis.Strategic InvestmentsWe account for our investments in non-marketable equity securities of certain privately-held companies under the cost method, as we have less than a20% ownership interest and we do not have the ability to exercise significant influence over the operations of these companies. We utilize Level 3 inputs aspart of our impairment analysis, including pre- and post-money valuations of recent financing events and the impact of those on its fully diluted ownershippercentages, as well as other available information such as the issuer's financial results and earnings trends to identify indicators of other-than-temporaryimpairment. We have not recorded any impairment charges for any of our investments in privately-held companies and the carrying value of theseinvestments was $11.0 million and $10.5 million as of December 31, 2016 and 2015, respectively.70(4) Fair Value MeasurementsThe following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis at December 31, 2016 (in thousands): Level 1 Level 2 TotalCash equivalents: Money market funds$165,627 $— $165,627Short-term investments: Commercial paper— 56,839 56,839Corporate notes and bonds 388,429 388,429Certificates of deposit— 35,355 35,355U.S. government agency securities— 17,501 17,501Long-term investments: Corporate notes and bonds— 238,125 238,125U.S. government agency securities— 24,533 24,533Total$165,627 $760,782 $926,409 The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis at December 31, 2015 (in thousands): Level 1 Level 2 TotalCash equivalents: Money market funds$263,515 $— $263,515Commercial paper— 2,000 2,000Corporate notes and bonds— 1,119 1,119Short-term investments: Commercial paper— 32,394 32,394Corporate notes and bonds— 303,567 303,567Certificates of deposit— 23,736 23,736U.S. government agency securities— 29,248 29,248Long-term investments: Corporate notes and bonds— 311,467 311,467Certificates of deposit— 5,859 5,859U.S. government agency securities— 105,341 105,341Total$263,515 $814,731 $1,078,246We determine the fair value of our security holdings based on pricing from our service provider and market prices from industry-standard independentdata providers. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other thanquoted prices that are observable either directly or indirectly (Level 2 inputs), such as yield curve, volatility factors, credit spreads, default rates, loss severity,current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures.See Note 9 for the fair value measurement of our convertible senior notes.(5) Business Combinations2016 Business CombinationsBrightPoint SecurityOn June 3, 2016, we completed the acquisition of a privately-held company, BrightPoint Security, Inc. (BrightPoint), by acquiring all issued andoutstanding common shares of BrightPoint for approximately $19.6 million in an all-cash transaction to expand our security operations solutions. Thefollowing table summarizes the allocation of the purchase price to the fair value of the tangible and intangible assets acquired and liabilities assumed as ofthe acquisition date: Purchase Price Allocation(in thousands) Useful Life(in years)Intangible assets: Developed technology$8,100 6Customer contracts and related relationships500 1.5Goodwill15,258 Net tangible liabilities acquired(1,339) Net deferred tax liabilities(1)(2,890) Total purchase price$19,629 (1)Deferred tax liabilities, net primarily relates to purchased identifiable intangible assets and is shown net of deferred tax assets.ITappOn April 8, 2016, we completed the acquisition of a privately-held company, ITapp Inc. (ITapp), by acquiring all issued and outstanding commonshares of ITapp for approximately $14.5 million in an all-cash transaction to expand our IT Operations Management solutions. The following tablesummarizes the allocation of the purchase price to the fair value of the tangible and intangible assets acquired and liabilities assumed as of the acquisitiondate: Purchase Price Allocation(in thousands) Useful Life(in years)Net tangible assets acquired$140 Intangible assets: Developed technology4,700 5Customer contracts and related relationships200 1.5Goodwill11,437 Net deferred tax liabilities(1)(2,015) Total purchase price$14,462 (1)Deferred tax liabilities, net primarily relates to purchased identifiable intangible assets and is shown net of deferred tax assets.For both business combinations, the excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired wasrecorded as goodwill. We believe the goodwill represents the synergies expected from expanded market opportunities when integrating the acquiredtechnologies with our offerings. The goodwill balance for both business combinations is not deductible for income tax purposes. Acquisition-related costsof $1.0 million are included in general and administrative expenses in our consolidated statements of comprehensive loss.72The results of operations of both BrightPoint and ITapp have been included in our consolidated financial statements from their respective dates ofpurchase. The following unaudited pro forma consolidated financial information combines the results of operations from us, BrightPoint and ITapp for theyears ended December 31, 2016 and 2015, as if the acquisitions of BrightPoint and ITapp had occurred on January 1, 2015 (in thousands, except share andper share data): Year Ended December 31, 2016 2015 (Unaudited)Revenue$1,391,220 $1,007,752Net loss$(455,146) $(207,748)Weighted-average shares used to compute net loss per share - basic and diluted164,533,823 155,706,643Net loss per share - basic and diluted$(2.77) $(1.33)The pro forma results as presented above are based on estimates and assumptions, which we believe are reasonable. They are not necessarily indicativeof our consolidated results of operations in future periods or the results that actually would have been realized had we been a combined company during theperiods presented. The pro forma results include adjustments primarily related to amortization of acquired intangible assets and acquisition-related costs.2014 Business CombinationNeebula Systems Ltd.On July 11, 2014, we completed the acquisition of a privately-held company, Neebula Systems Ltd. (Neebula), by acquiring all issued and outstandingcommon shares of Neebula for approximately $100 million in an all-cash transaction to expand our IT Operations Management solutions. The followingtable summarizes the allocation of the purchase price to the fair value of the tangible and intangible assets acquired and liabilities assumed as of theacquisition date: Purchase Price Allocation(in thousands) Useful Life(in years)Net tangible assets acquired$102 Intangible assets: Developed technology56,200 5.5Order backlog600 1.5Trade names300 1.5Goodwill53,788 Net deferred tax liabilities (1)(10,527) Total purchase price$100,463 (1)Deferred tax liabilities, net primarily relates to purchased identifiable intangible assets and is shown net of deferred tax assets.The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. Webelieve the goodwill represents the synergies expected from expanded market opportunities when integrating Neebula technologies with our offerings. Thegoodwill balance is not deductible for U.S. income tax purposes. Acquisition-related costs of $1.2 million are primarily included in general andadministrative expenses on our consolidated statements of comprehensive loss.73The results of operations of Neebula have been included in our consolidated financial statements from the date of purchase. The following unauditedpro forma consolidated financial information combines the results of operations for us and Neebula for the year ended December 31, 2014, as if theacquisition of Neebula had occurred on January 1, 2014 (in thousands, except share and per share data): Year Ended December 31, 2014 (Unaudited)Total revenues$683,426Net loss(189,457)Weighted-average shares used to compute net loss per share - basic and diluted145,355,543Net loss per share - basic and diluted$(1.30)The pro forma results as presented above are based on estimates and assumptions, which we believe are reasonable. They are not necessarily indicativeof our consolidated results of operations in future periods or the results that actually would have been realized had we been a combined company during theperiods presented. The pro forma results include adjustments primarily related to amortization of acquired intangible assets and acquisition-related costs.(6) Goodwill and Intangible AssetsGoodwill balances are presented below (in thousands): Carrying AmountBalance as of December 31, 2014 $55,016Goodwill acquired 1,442Foreign currency translation adjustments (789)Balance as of December 31, 2015 55,669Goodwill acquired 26,695Foreign currency translation adjustments 170Balance as of December 31, 2016 $82,534Intangible assets consist of the following (in thousands): December 31, 2016 Gross Carrying Amount AccumulatedAmortization Net Carrying AmountDeveloped technology$79,206 $(30,858) $48,348Patents17,610 (867) 16,743Other1,775 (1,012) 763Total intangible assets$98,591 $(32,737) $65,854 December 31, 2015 Gross Carrying Amount AccumulatedAmortization Net Carrying AmountDeveloped technology$58,144 $(17,463) $40,681Patents1,750 — 1,750Other1,945 (1,371) 574Total intangible assets$61,839 $(18,834) $43,00574Apart from the business combinations described in Note 5, we acquired $25.0 million and $1.8 million of intangible assets in patents and technologyacquisitions during the years ended December 31, 2016 and December 31, 2015 respectively. Weighted average useful life for these patents and technologyis approximately 9 years and 5 years, respectively.Amortization expense for intangible assets was approximately $15.1 million, $11.8 million and $6.8 million for the years ended December 31,2016, 2015 and 2014, respectively.The following table presents the estimated future amortization expense related to intangible assets held at December 31, 2016 (in thousands):Years Ending December 31,2017 $16,9102018 15,7622019 15,6822020 6,0722021 4,170Thereafter 7,258Total future amortization expense $65,854(7) Property and EquipmentProperty and equipment, net consists of the following (in thousands): December 31, 2016 2015Computer equipment and software$254,780 $180,197Leasehold improvements37,095 31,659Furniture and fixtures31,574 26,017Building6,379 6,318Construction in progress2,535 1,886 332,363 246,077Less: Accumulated depreciation(150,743) (101,363)Total property and equipment, net$181,620 $144,714 Construction in progress consists primarily of leasehold improvements and in-process software development costs. Depreciation expense was $67.8million, $48.5 million and $35.3 million for the years ended December 31, 2016, 2015 and 2014, respectively.(8) Accrued Expenses and Other Current LiabilitiesAccrued expenses and other current liabilities consist of the following (in thousands): December 31, 2016 2015Taxes payable$19,472 $9,080Bonuses and commissions67,259 33,124Accrued compensation30,816 17,089Other employee expenses28,812 21,529Other25,277 20,442Total accrued expenses and other current liabilities$171,636 $101,26475(9) Convertible Senior NotesIn November 2013, we issued 0% convertible senior notes due November 1, 2018 with an aggregate principal amount of $575 million (Notes). TheNotes will not bear interest. The Notes mature on November 1, 2018 unless converted or repurchased in accordance with their terms prior to such date. Wecannot redeem the Notes prior to maturity.The Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence ofindebtedness or the issuance or repurchase of securities by us or any of our subsidiaries.Upon conversion, we may choose to pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of ourcommon stock. We intend to settle the principal amount of the Notes with cash.The Notes are convertible into 7.8 million shares of our common stock at an initial conversion rate of approximately 13.54 shares of common stock per$1,000 principal amount, which is equal to an initial conversion price of approximately $73.88 per share of common stock, subject to adjustment. Holders ofthe Notes may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding July 1, 2018, onlyunder the following circumstances:•during any calendar quarter commencing after the calendar quarter ending on March 31, 2014 (and only during such calendar quarter), if the lastreported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading daysending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on eachapplicable trading day;•during the five business day period after any five consecutive trading day period, or the measurement period, in which the trading price per $1,000principal 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 ourcommon stock and the conversion rate on each such trading day; or•upon the occurrence of specified corporate events.On or after July 1, 2018, a holder may convert all or any portion of its notes at any time prior to the close of business on the second scheduled tradingday immediately preceding the maturity date regardless of the foregoing conditions. Upon conversion, we will pay or deliver, as the case may be, cash, sharesof our common stock or a combination of cash and shares of our common stock, at our election.The conversion price will be subject to adjustment in some events. Holders of the Notes who convert their notes in connection with certain corporateevents that constitute a “make-whole fundamental change” are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, inthe event of a corporate event that constitutes a “fundamental change,” holders of the Notes may require us to purchase with cash all or a portion of the Notesupon the occurrence of a fundamental change, at a purchase price equal to 100% of the principal amount of the Notes plus any accrued and unpaid interest.In accounting for the issuance of the Notes, we separated the Notes into liability and equity components. The carrying cost of the liability componentwas calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equitycomponent representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes. Thedifference between the principal amount of the Notes and the proceeds allocated to the liability component, or the debt discount, is amortized to interestexpense using the effective interest method over the term of the Notes. The equity component is not remeasured as long as it continues to meet the conditionsfor 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 equitycomponents based on their relative fair values. Transaction costs attributable to the liability component are being amortized to interest expense over the termof the Notes, and transaction costs attributable to the equity component were netted with the equity component of the Notes in stockholders’ equity. TheNotes consisted of the following (in thousands):76 December 31, 2016 2015Liability: Principal$575,000 $575,000Less: debt issuance cost and debt discount, net of amortization(67,188) (100,466)Net carrying amount$507,812 $474,534We consider the fair value of the Notes at December 31, 2016 and 2015 to be a Level 2 measurement. The estimated fair values of the Notes were $681.4million and $741.8 million at December 31, 2016 and 2015 respectively (based on the closing trading price per $100 of the Notes on December 31, 2016 and2015, respectively). The Notes were not convertible as of December 31, 2016 and 2015. As of December 31, 2016, the remaining life of the Notes is 22 months. The following table sets forth total interest expense recognized related to theNotes (in thousands): Year Ended December 31, 2016 2015 2014Amortization of debt issuance cost$1,785 $1,668 $1,558Amortization of debt discount31,493 29,429 27,501Total$33,278 $31,097 $29,059Effective interest rate of the liability component6.5%Note HedgeTo minimize the impact of potential economic dilution upon conversion of the Notes, we entered into convertible note hedge transactions (NoteHedge), with respect to our common stock concurrent with the issuance of the Notes. The Note Hedge covers approximately 7.8 million shares of our commonstock at a strike price per share that corresponds to the initial conversion price of the Notes, subject to adjustment, and is exercisable upon conversion of theNotes. We paid an aggregate amount of $135.8 million for the Note Hedge. The Note Hedge will expire upon maturity of the Notes. The Note Hedge isintended to reduce the potential economic dilution upon conversion of the Notes in the event that the fair value per share of our common stock at the time ofexercise is greater than the conversion price of the Notes. The Note Hedge is a separate transaction and is not part of the terms of the Notes. The Note Hedgedoes not impact earnings per share, as it was entered into to offset any dilution from the Notes.WarrantsSeparately, we entered into warrant transactions (Warrants), whereby we sold warrants to acquire up to 7.8 million shares of our common stock, at astrike price of $107.46 per share, subject to adjustment. We received aggregate proceeds of $84.5 million from the sale of the Warrants. If the average marketvalue per share of our common stock for the reporting period, as measured under the Warrants, exceeds the strike price of the Warrants, the Warrants will havea dilutive effect on our earnings per share. The Warrants are separate transactions and are not remeasured through earnings each reporting period. TheWarrants are not part of the Notes or the Note Hedge, and have been accounted for as part of additional paid-in capital.(10) Accumulated Other Comprehensive LossThe components of accumulated other comprehensive loss consist of the following (in thousands): December 31, 2016 2015Foreign currency translation adjustment$(19,277) $(14,438)Net unrealized loss on investments, net of tax(1,856) (2,444) Accumulated other comprehensive loss$(21,133) $(16,882)Reclassification adjustments out of accumulated other comprehensive loss into net loss were immaterial for all periods presented.77(11) Stockholders' EquityCommon StockWe are authorized to issue a total of 600,000,000 shares of common stock as of December 31, 2016. Holders of our common stock are not entitled toreceive dividends unless declared by our board of directors. As of December 31, 2016, we had 167,430,773 shares of common stock outstanding and hadreserved shares of common stock for future issuance as follows: December 31, 2016Stock option plans: Options outstanding 5,818,435RSUs 12,222,282Stock awards available for future grants: 2012 Equity Incentive Plan(1) 20,901,3952012 Employee Stock Purchase Plan(1) 8,566,803Total reserved shares of common stock for future issuance 47,508,915 (1)Refer to Note 12 for a description of these plans.During the years ended December 31, 2016 and 2015, we issued a total of 6,645,009 shares and 11,276,672 shares, respectively, from stock optionexercises, vesting of RSUs and ESPP.Preferred StockOur board of directors has the authority, without further action by stockholders, to issue up to 10,000,000 shares of preferred stock in one or more series.Our board of directors may designate the rights, preferences, privileges and restrictions of the preferred stock, including dividend rights, conversion rights,voting rights, terms of redemption, liquidation preference and number of shares constituting any series or the designation of any series. The issuance ofpreferred stock could have the effect of restricting dividends on our common stock, diluting the voting power of our common stock, impairing the liquidationrights of our common stock, or delaying or preventing a change in control. At December 31, 2016 and 2015, no shares of preferred stock were outstanding.(12) Stock AwardsWe have a 2005 Stock Option Plan (2005 Plan) which provides for grants of stock awards, including options to purchase shares of common stock, stockpurchase rights and RSUs to certain employees, officers, directors and consultants. As of December 31, 2016, there were 52,968,233 total shares of commonstock authorized for issuance under the 2005 Plan, which includes shares already issued under such plan and shares reserved for issuance pursuant tooutstanding options and RSUs.On April 27, 2012, the board of directors approved the 2012 Equity Incentive Plan (2012 Plan) and the 2012 Employee Stock Purchase Plan (2012ESPP) which became effective on June 27, 2012 and June 28, 2012, respectively. Our 2012 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, RSUs, performance-based stockawards and other forms of equity compensation, or collectively, stock awards. In addition, the 2012 Plan provides for the grant of performance cash awards.Incentive stock options may be granted only to employees. All other awards may be granted to employees, including officers, as well as directors andconsultants. The share reserve may increase to the extent outstanding stock options under the 2005 Plan expire or terminate unexercised. The share reservealso automatically increases on January 1 of each year until January 1, 2022, by up to 5% of the total number of shares of common stock outstanding onDecember 31 of the preceding year as determined by the board of directors. As of December 31, 2016, there were 45,063,064 total shares of common stockauthorized for issuance under the 2012 Plan, excluding 8,371,539 shares of common stock automatically added to the 2012 Plan on January 1, 2017 pursuantto the provision described in the preceding sentence. 78Our 2012 ESPP authorizes the issuance of shares of common stock pursuant to purchase rights granted to our employees. The number of shares ofcommon 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 ofcommon stock outstanding on December 31 of the preceding year as determined by the board of directors. The price at which common stock is purchasedunder the 2012 ESPP is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. Offeringperiods are six months long and begin on February 1 and August 1 of each year. As of December 31, 2016, we had 8,566,803 total shares of common stockreserved for issuance under the 2012 ESPP, excluding 1,674,308 shares of common stock automatically added to the 2012 Plan on January 1, 2017.Stock OptionsThe 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 determinedby our board of directors or, for those stock options issued subsequent to our IPO, the closing price of our common stock as reported on the New York StockExchange 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 datethe requisite service period begins and continue to vest monthly for each month of continued employment over the remaining three years. Options grantedgenerally are exercisable for a period of up to ten years. Option holders under the 2005 Plan can exercise unvested options to acquire restricted stock. Upontermination of service, we have the right to repurchase at the original purchase price any unvested (but issued) shares of common stock. A summary of the stock option activity was as follows: Number ofShares Weighted-AverageExercisePrice Weighted-AverageRemainingContractualTerm (Years) AggregateIntrinsic Value(in thousands)Outstanding at December 31, 201415,897,422 $11.96 Granted316,048 75.76 Exercised(7,695,815) 8.89 $523,127Canceled(262,101) 31.31 Outstanding at December 31, 20158,255,554 16.65 Granted617,985 71.17 Exercised(2,587,173) 13.36 $157,774Canceled(467,931) 58.01 Outstanding at December 31, 20165,818,435 $20.57 5.43 $313,823Vested and expected to vest as of December 31, 20165,721,902 $19.72 5.36 $313,398Vested and exercisable as of December 31, 20164,968,001 $12.53 4.85 $307,276 Aggregate intrinsic value represents the difference between the estimated fair value of our common stock and the exercise price of outstanding, in-the-money options. The total intrinsic value of the options exercised was $406.6 million for the year ended December 31, 2014. The weighted-average grant datefair value per share of options granted was $28.01, $32.64 and $29.66 for the years ended December 31, 2016, 2015 and 2014, respectively. The total fairvalue of shares vested was $17.0 million, $34.5 million and $39.1 million for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options wasapproximately $18.9 million. The weighted-average remaining vesting period of unvested stock options at December 31, 2016 was 2.84 years. 79RSUsA summary of RSU activity was as follows: Number ofShares Weighted Average GrantDate Fair Value(Per Share) AggregateIntrinsic Value(in thousands)Outstanding at December 31, 20149,941,074 $51.19 Granted6,941,008 73.98 Vested(3,290,220) 50.25 $254,691Forfeited(1,174,057) 59.67 Outstanding at December 31, 201512,417,805 63.38 Granted6,870,285 61.22 Vested(5,213,662) 59.95 $354,320Forfeited(1,852,146) 63.18 Outstanding at December 31, 201612,222,282 $63.66 $908,604Expected to vest as of December 31, 201610,221,726 $759,883RSUs granted under the 2005 Plan and the 2012 Plan to employees generally vest over a four-year period. The total intrinsic value of the RSUs vestedwas $73.7 million for the year ended December 31, 2014.Included in the RSU activity table above are shares with both service and performance-based vesting criteria that were granted to certain executives.These performance RSUs are considered as eligible to vest when approved by the compensation committee in January of the year following the grant. Theshares granted in each year will vest in four quarterly increments from August of the following year contingent on the continuous employment of eachexecutive. We recognized $36.1 million, $30.8 million, and $19.2 million of stock-based compensation expense, net of actual and estimated forfeitures,associated with performance RSUs on a graded vesting basis during the year ended December 31, 2016, 2015, and 2014, respectively.As of December 31, 2016, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs was approximately$570.4 million and the weighted-average remaining vesting period was 2.78 years.(13) Stock-Based Compensation We use the Black-Scholes options pricing model to estimate the fair value of our stock option grants. This model incorporates various assumptionsincluding expected volatility, expected term, risk-free interest rates and expected dividend yields. The following assumptions were used for each respectiveperiod to calculate our stock-based compensation for each stock option grant on the date of the grant: Year Ended December 31, 2016 2015 2014 Stock Options: Expected volatility41% - 42% 41% - 46% 47% - 50%Expected term (in years)4.89 - 5.60 5.50 - 6.08 6.08Risk-free interest rate1.18% - 1.87% 1.48% - 1.94% 1.78% - 2.06%Dividend yield—% —% —% 80The following assumptions were used to calculate our stock-based compensation for each stock purchase right granted under the 2012 ESPP: Year Ended December 31, 2016 2015 2014 ESPP: Expected volatility31% - 49% 31% - 49% 33% - 49%Expected term (in years)0.50 0.50 0.50Risk-free interest rate0.17% - 0.47% 0.05% - 0.17% 0.05% - 0.08%Dividend yield—% —% —% Expected volatility. Prior to the third quarter of 2015, we used the historic volatility of publicly traded peer companies as an estimate for expectedvolatility. In considering peer companies, characteristics such as industry, stage of development, size and financial leverage are considered. Beginning in thethird quarter of 2015, we began to include our own historical volatility in addition to publicly traded peers to calculate our expected volatility for a periodsimilar to our expected term. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount ofhistorical information regarding the volatility of our own common stock share price becomes available. Expected term. Prior to the third quarter of 2015, we used the simplified method for calculating the expected term of options as described in the SEC'sStaff Accounting Bulletin No. 107, Share-Based Payment. The simplified method calculates the expected term as the mid-point between the vesting date andthe contractual expiration date of the award. Beginning in the third quarter of 2015, we determined the expected term based on historical experience ofsimilar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior,because we now believe there is sufficient historical information to derive a reasonable estimate. We estimate the expected term for ESPP using the purchaseperiod. Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the stock-based award. Expected dividend yield. Our expected dividend yield is zero, as we have not and do not currently intend to declare dividends in the foreseeable future. (14) Net Loss Per Share The following tables present the calculation of basic and diluted net loss per share attributable to common stockholders (in thousands, except share andper share data): Year Ended December 31, 2016 2015 2014Numerator: Net loss$(451,804) $(198,426) $(179,387)Denominator: Weighted-average shares outstanding - basic and diluted164,533,823 155,706,643 145,355,543Net loss per share - basic and diluted$(2.75) $(1.27) $(1.23) 81Potentially dilutive securities that are not included in the calculation of diluted net loss per share because doing so would be antidilutive are asfollows: Year Ended December 31, 2016 2015 2014Common stock options5,818,435 8,255,554 15,897,422Restricted stock units12,222,282 12,417,805 9,941,074Common stock subject to repurchase— — 13,597ESPP obligations366,529 254,728 272,294Convertible senior notes7,783,023 7,783,023 7,783,023Warrants related to the issuance of convertible senior notes7,783,023 7,783,023 7,783,023Total potentially dilutive securities33,973,292 36,494,133 41,690,433(15) Income TaxesThe provision for income taxes consists of the following (in thousands): Year Ended December 31, 2016 2015 2014Current provision: Federal$(55) $682 $2State135 211 216Foreign5,097 6,125 5,046 5,177 7,018 5,264Deferred provision: Federal(4,462) — (232)State(746) — (24)Foreign1,784 (1,604) (1,161) (3,424) (1,604) (1,417)Provision for income taxes$1,753 $5,414 $3,847 The components of loss before provision for income taxes by U.S. and foreign jurisdictions were as follows (in thousands): Year Ended December 31, 2016 2015 2014United States$(432,631) $(150,593) $(109,087)Foreign(17,420) (42,419) (66,453)Total$(450,051) $(193,012) $(175,540) 82The effective income tax rate differs from the federal statutory income tax rate applied to the loss before provision for income taxes due to the following(in thousands): Year Ended December 31, 2016 2015 2014Tax computed at U.S. federal statutory rate$(153,017) $(65,624) $(59,684)State taxes, net of federal benefit37 53 95Tax rate differential for international subsidiaries10,910 18,681 26,169Stock-based compensation(27,133) 13,597 9,049Tax credits(16,452) (11,961) (9,481)Other2,642 2,865 2,231Valuation allowance184,766 47,803 35,468Provision for income taxes$1,753 $5,414 $3,847Significant components of our deferred tax assets are shown below (in thousands). A valuation allowance has been recognized to offset our deferred taxassets, as necessary, by the amount of any tax benefits that, based on evidence, are not expected to be realized. December 31, 2016 2015Deferred tax assets: Net operating loss carryforwards$640,312 $27,570Accrued expenses10,424 6,030Credit carryforwards50,559 32,824Stock-based compensation46,530 53,249Note Hedge20,520 30,593Other13,733 12,025Total deferred tax assets782,078 162,291Less valuation allowance(728,870) (110,311) 53,208 51,980Deferred tax liabilities: Depreciation and amortization(18,914) (13,103)Convertible notes(23,605) (35,054)Other— (4)Net deferred tax assets$10,689 $3,819 As of December 31, 2016, we had U.S. federal net operating loss and federal tax credit carryforwards of approximately $1.7 billion and $40.5 million,respectively. The federal net operating loss carryforwards and federal tax credits will begin to expire in 2024 if not utilized. In addition, we had state netoperating loss and state tax credit carryforwards of approximately $941.7 million and $32.5 million, respectively. The state net operating loss will begin toexpire in 2017 if not utilized, and the tax effected amount due to expire in 2017 is immaterial. State tax credits can be carried forward indefinitely. Utilizationof our net operating loss and credit carryforwards may be subject to annual limitation due to the ownership change limitations provided by the InternalRevenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carryforwardsbefore utilization. 83We maintain a full valuation allowance against our U.S. deferred tax assets as of December 31, 2016. We regularly assess the need for a valuationallowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realizationof 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 assetswill 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 thatnet deferred tax assets in the United States will not be realized. We have determined that $10.7 million related to deferred tax assets in certain foreignjurisdictions are realizable since the foreign entities have cumulative income and expected future income. The valuation allowance increased $618.6 millionduring the year ended December 31, 2016. This change is primarily attributable to an increase in current year net operating loss carryforwards of $186.5million and an increase of $417.0 million related to the early adoption of ASU 2016-09 "Improvements to Employee Share-Based Payment Accounting,"upon which previously unrecognized U.S. excess tax effects have been recorded as additional net operating loss carryforwards within our deferred tax asset.We will continue to assess the likelihood of realization of the deferred tax assets in each of the applicable jurisdictions in future periods and will adjust thevaluation allowance accordingly.We have not recorded a provision for deferred U.S. tax expense that could result from the remittance of foreign undistributed earnings since we intend toreinvest the earnings of the foreign subsidiaries indefinitely.Our share of the undistributed earnings of foreign corporations not included in our consolidated federal income tax returns that could be subject toadditional U.S. income tax if remitted is immaterial. The determination of the amount of unrecognized U.S federal deferred income tax liability forundistributed earnings is not practicable.A reconciliation of the beginning and ending balance of total unrecognized tax benefits is as follows (in thousands): Year Ended December 31, 2016 2015 2014Balance, beginning period$11,737 $9,158 $4,810Tax positions taken in prior period: Gross increases1,122 2 45Gross decreases(50) (1,017) (313)Tax positions taken in current period: Gross increases5,673 3,768 4,704Gross decreases— (73) —Lapse of statute of limitations(42) (101) (88)Balance, end of period$18,440 $11,737 $9,158 As of December 31, 2016, we had gross unrecognized tax benefits of approximately $18.4 million, of which $4.0 million would impact the effective taxrate, if recognized. We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense. Accrued interest and penaltiesincluded in our liability related to unrecognized tax benefits were $0.4 million and $0.5 million at December 31, 2016 and 2015, respectively. The amount ofunrecognized tax benefits could be reduced upon expiration of the applicable statutes of limitations. The potential reduction in unrecognized tax benefitsduring the next 12 months is not expected to be material. Interest and penalties accrued on these uncertain tax positions will be released upon the expirationof the statutes of limitations and these amounts are also not material. We are subject to taxation in the United States and foreign jurisdictions. As of December 31, 2016, our tax years 2004 to 2016 remain subject toexamination 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 andamount of deductions and allocations of income among various tax jurisdictions. We periodically evaluate our exposures associated with our tax filingpositions. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations, and we do notanticipate 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 significantlychange 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 possibleadjustments to the balance of gross unrecognized tax benefits.84(16) Commitments and ContingenciesOperating Leases and Other Contractual Commitments For some of our offices and data centers, we have entered into non-cancelable operating lease agreements with various expiration dates. Rent expenseassociated with office space leases was $34.2 million, $22.0 million and $15.0 million for the years ended December 31, 2016, 2015 and 2014, respectively. Payments for data center square footage as well as data center capacity for certain data centers, are primarily included in cost of revenues. These costswere $17.3 million, $13.7 million and $13.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.Future minimum payments under our non-cancelable operating leases and other contractual commitments as of December 31, 2016 are presented in thetable below (in thousands): Leases, net of SubleaseIncome Purchase Obligations (1) Other TotalYears Ending December 31, 2017$33,855 $17,933 $517 $52,305201835,887 13,401 517 49,805201936,042 6,529 517 43,088202035,197 3,950 517 39,664202134,847 2,127 517 37,491Thereafter122,643 — 1,465 124,108Total$298,471 $43,940 $4,050 $346,461 (1)Consists of future minimum payments under non-cancelable purchase commitments primarily related to data center and IT operations. Not included in the table above are certainpurchase commitments related to our future Knowledge user conferences. If we were to cancel these agreements as of December 31, 2016, we would have been obligated to paycancellation penalties of approximately $18.1 million in aggregate.In November 2012, we entered into a lease agreement for 148,704 square feet of office space located in Santa Clara, California. The lease commenced inApril 2013 and has a term of approximately 11 years. Rent is paid on a monthly basis and will increase incrementally over the term of the lease for totalminimum lease payments of approximately $48.8 million.In December 2014, we entered into a lease agreement for 328,867 square feet of space, located in Santa Clara, California. The lease commenced inAugust 2015 for an initial term of 12 years, with two options to renew the lease for additional terms of five years each. Rent is paid on a monthly basis andwill increase incrementally over the term of the lease for total minimum lease payments of approximately $151.1 million.Subsequent to the year ended December 31, 2016, we entered into certain lease agreements for additional office space. Total future minimum leasepayments under these operating leases of approximately $52.1 million in aggregate are not included in the table above. $29.6 million of the $52.1 millionrelates to an expansion and lease term extension of our existing San Diego office facility.In addition to the amounts above, the repayment of our 0% convertible senior notes with an aggregate principal amount of $575 million is due onNovember 1, 2018. Refer to Note 9 for further information regarding our convertible senior notes.Legal Proceedings From time to time, we are party to litigation and other legal proceedings in the ordinary course of business. While the results of any litigation or otherlegal proceedings are uncertain, management does not believe the ultimate resolution of any pending legal matters is likely to have a material adverse effecton our financial position, results of operations or cash flows, except as discussed below and for those matters for which we have recorded a loss contingency.We accrue for loss contingencies when it is both probable that we will incur the loss and when we can reasonably estimate the amount of the loss or range ofloss.85Generally, our subscription agreements require us to defend our customers for third-party intellectual property infringement and other claims. Anyadverse determination related to intellectual property claims or other litigation could prevent us from offering our services and adversely affect our financialcondition and results of operations.On February 6, 2014, Hewlett-Packard Company (Hewlett-Packard) filed a lawsuit against us in the U.S. District Court for the Northern District ofCalifornia. The lawsuit alleged patent infringement and sought damages and an injunction. On or about November 1, 2015, Hewlett Packard EnterpriseCompany (HPE) separated from Hewlett-Packard as an independent company, and Hewlett-Packard assigned to HPE all right, title, and interest in the eightHewlett-Packard patents in the lawsuit and HPE was substituted as plaintiff in the litigation. On March 4, 2016, we entered into a confidential settlementagreement resolving the lawsuit with HPE (HPE Settlement). As a result, on March 9, 2016, the lawsuit was dismissed.BMC Software, Inc. (BMC) filed lawsuits against us in the U.S. District Court for the Eastern District of Texas on September 23, 2014 and February 12,2016, and in the Dusseldorf (Germany) Regional Court, Patent Division, on March 2, 2016. Each of the lawsuits alleged patent infringement and soughtdamages and an injunction. On April 8, 2016, we entered into a confidential settlement agreement resolving all the lawsuits with BMC (BMC Settlement). Asa result, the second Texas lawsuit was dismissed on April 14, 2016, and each of the initial Texas lawsuit and the German lawsuit was dismissed on April 25,2016.These settlements are considered multiple element arrangements for accounting purposes. We evaluated the accounting treatment of these settlementsby identifying each element of the arrangements, which included amongst other elements, a release of past infringement claims and a covenant not to sue fora specified term of years. The primary benefit we received from the arrangements was the settlement and termination of all existing litigation, the avoidanceof future litigation expenses and the avoidance of future management and customer disruptions. We determined that none of the elements of the settlementagreements have identifiable future benefits that would be capitalized as an asset. Accordingly, we recorded charges for aggregate legal settlements of $270.0million in our consolidated statement of comprehensive loss for the year ended December 31, 2016. The charge covers the fulfillment by us of all financialobligations under both the BMC Settlement and HPE Settlement with no remaining financial obligations under either settlement.(17) Information about Geographic Areas and ProductsRevenues by geographic area, based on the location of our users, were as follows for the periods presented (in thousands): Year Ended December 31, 2016 2015 2014Revenues by geography North America (1)$946,956 $702,985 $465,332EMEA (2)339,341 233,378 173,635Asia Pacific and other104,216 69,117 43,596Total revenues$1,390,513 $1,005,480 $682,563Property and equipment, net by geographic area were as follows (in thousands): December 31, 2016 2015Property and equipment, net: North America (3)$132,671 $104,085EMEA (2)37,449 32,027Asia Pacific and other11,500 8,602Total property and equipment, net$181,620 $144,714 (1)Revenues attributed to the United States were approximately 95% of North America revenues for the years ended December 31, 2016 and 2015, and 94% for the year endedDecember 31, 2014.(2)Europe, the Middle East and Africa (EMEA)(3)Property and equipment, net attributed to the United States were approximately 92% and 98% of property and equipment, net attributable to North America for the years endedDecember 31, 2016 and 2015, respectively.86Subscription revenues consist of the following (in thousands): Year Ended December 31, 2016 2015 2014Service Management solutions$1,108,846 $783,603 $532,045IT Operations Management solutions112,793 64,675 35,172Total subscription revenues$1,221,639 $848,278 $567,217Our Service Management solutions include ServiceNow Platform, IT Service Management, IT Business Management, Customer Service, HumanResources and Security Operations, which have similar features and functions, and are generally priced on a per user basis. Our IT Operations Managementsolutions, which improve visibility, availability and agility of enterprise services, are generally priced on a per node basis.(18) Related Party Transactions We have entered into indemnification agreements with each of our directors, executive officers and certain other officers. These agreements require usto indemnify such individuals, to the fullest extent permitted by Delaware law, for certain liabilities to which they may become subject as a result of theiraffiliation with us.All contracts with related parties are executed in ordinary course of business. There were no material related party transactions in 2016, 2015 or 2014.As of December 31, 2016 and 2015, there were no material amounts payable to or amounts receivable from related parties.(19) Subsequent Events Events subsequent to December 31, 2016 have been evaluated through the date these consolidated financial statements were issued to determinewhether they should be disclosed to keep the consolidated financial statements from being misleading. Our management noted the following subsequentevents that should be disclosed:On January 20, 2017, we acquired all issued and outstanding common shares of DxContinuum, Inc. for approximately $15.0 million in an all-cashtransaction to enhance the predictive capabilities of our solutions. Our accounting and analysis of this transaction is pending completion.On February 27, 2017, we announced Frank Slootman will resign from his position as President and Chief Executive Officer, effective April 3, 2017.Mr. Slootman will continue to serve as Chairman of our board of directors. We also announced on February 27, 2017 that our board of directors approved andappointed John J. Donahoe as President and Chief Executive Officer and expects to appoint Mr. Donahoe as a member of our board of directors each effectiveas of April 3, 2017.ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINACIAL DISCLOSURENone.87ITEM 9A.CONTROLS AND PROCEDURES(a) Evaluation of disclosure controls and proceduresOur management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosurecontrols and procedures as of December 31, 2016. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under theExchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in thereports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rulesand forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to bedisclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management,including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Managementrecognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives,and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.Based on the evaluation of our disclosure controls and procedures as of December 31, 2016, our Chief Executive Officer and Chief Financial Officerconcluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.(b) Management's Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidatedfinancial statements for external purposes in accordance with generally accepted accounting principles.Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of ourinternal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013), issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effectiveas of December 31, 2016.The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by PricewaterhouseCoopers LLP, anindependent registered public accounting firm, as stated in their report which is included in Item 8 of this Annual Report on Form 10-K.(c) Changes in internal control over financial reportingThere were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d)of the Exchange Act during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control overfinancial reporting.ITEM 9B.OTHER INFORMATIONNone.PART IIIITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by this item will be included in an amendment to this Annual Report on Form 10-K or incorporated by reference from ourdefinitive proxy statement to be filed pursuant to Regulation 14A.88ITEM 11.EXECUTIVE COMPENSATIONThe information required by this item will be included in an amendment to this Annual Report on Form 10-K or incorporated by reference from ourdefinitive proxy statement to be filed pursuant to Regulation 14A.ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERSThe information required by this item will be included in an amendment to this Annual Report on Form 10-K or incorporated by reference from ourdefinitive proxy statement to be filed pursuant to Regulation 14A.ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCEThe information required by this item will be included in an amendment to this Annual Report on Form 10-K or incorporated by reference from ourdefinitive proxy statement to be filed pursuant to Regulation 14A.ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by this item will be included in an amendment to this Annual Report on Form 10-K or incorporated by reference from ourdefinitive proxy statement to be filed pursuant to Regulation 14A.PART IVITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULESThe following documents are filed as a part of this Annual Report on Form 10-K:(a) Financial StatementsThe information concerning our financial statements, and Report of Independent Registered Public Accounting Firm required by this Item isincorporated by reference herein to the section of this Annual Report on Form 10-K in Item 8, entitled “ Consolidated Financial Statements andSupplementary Data.”(b) Financial Statement SchedulesAll schedules have been omitted because the required information is not present or not present in amounts sufficient to require submission of theschedules, or because the information required is included in Item 8, entitled the "Consolidated Financial Statements and Supplementary Data."(c) Exhibits The list of exhibits filed with this report is set forth in the Exhibit Index following the signature pages and is incorporated herein by reference.89ITEM 16.FORM 10-K SUMMARYNone.SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.Dated: February 28, 2017 SERVICENOW, INC. By: /s/ Frank Slootman Frank SlootmanChairman, President and Chief Executive OfficerPOWER OF ATTORNEYKNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Frank Slootman and Michael P.Scarpelli, and each of them, as his true and lawful attorneys-in-fact and agents, each with the full power of substitution, for him and in his name, place orstead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to doand perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might orcould do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their or his substitute or substitutes, may lawfully do or causeto be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this report has been signed by the following persons in the capacities and on the datesindicated.Signature Title Date /s/ Frank Slootman Chairman, President, Chief Executive Officer and Director(Principal Executive Officer) February 28, 2017Frank Slootman /s/ Michael P. Scarpelli Chief Financial Officer(Principal Financial Officer and Principal AccountingOfficer) February 28, 2017Michael P. Scarpelli /s/ Susan L. Bostrom Director February 28, 2017Susan L. Bostrom /s/ Jonathan C. Chadwick Director February 28, 2017Jonathan C. Chadwick /s/ Paul E. Chamberlain Director February 28, 2017Paul E. Chamberlain /s/ Ronald E.F. Codd Director February 28, 2017Ronald E. F. Codd /s/ Charles Giancarlo Director February 28, 2017Charles Giancarlo /s/ Frederic B. Luddy Director February 28, 2017Frederic B. Luddy /s/ Jeffrey A. Miller Director February 28, 2017Jeffrey A. Miller /s/ Anita M. Sands Director February 28, 2017Anita M. Sands /s/ William L. Strauss Director February 28, 2017William L. Strauss 91EXHIBIT INDEXExhibitNumberDescription of Document Incorporated by Reference FiledHerewithForm File No. Exhibit Filing Date 3.1Restated Certificate of Incorporation. 10-Q 001-35580 3.1 8/10/2012 3.2Restated Bylaws. 8-K 001-35580 3.1 12/10/2014 4.1Form of Common Stock Certificate. S-1/A 333-180486 4.1 6/19/2012 4.2Indenture dated November 13, 2013 between ServiceNow,Inc. and Wells Fargo Bank, National Association. 8-K 001-35580 4.1 11/13/2013 4.3Third Amended and Restated Investors Rights Agreementdated November 25, 2009 among the Registrant andcertain of its stockholders. S-1 333-180486 4.2 3/30/2012 10.1*Form of Indemnification Agreement. 10-K 001-35580 10.1 2/27/2015 10.2*2005 Stock Plan, Forms of Stock Option Agreement andForm of Restricted Stock Unit Agreement thereunder. S-1 333-180486 10.2 3/30/2012 10.3*2012 Equity Incentive Plan, Forms of Stock Option AwardAgreement, Restricted Stock Agreement, StockAppreciation Right Award Agreement and Restricted StockUnit Award Agreement thereunder. S-1/A 333-180486 10.3 6/19/2012 10.4*Form of Stock Option Award Agreement and RestrictedStock Unit Award Agreement under 2012 Equity IncentivePlan adopted as of January 26, 2016. 10-K 001-35580 10.4 2/25/2016 10.5*2012 Employee Stock Purchase Plan and Form ofSubscription Agreement thereunder. 10-K 001-35580 10.4 3/8/2013 10.6*Form of Subscription Agreement under 2012 EmployeeStock Purchase Plan adopted as of January 26, 2016. 10-K 001-35580 10.6 2/25/2016 10.7*Employment Agreement dated May 2, 2011 among theRegistrant and Frank Slootman. S-1 333-180486 10.5 3/30/2012 10.8*First Amendment to Employment Agreement dated April23, 2014 among Registrant and Frank Slootman. 10-Q 001-35580 10.1 8/7/2014 10.9*Employment Agreement dated May 12, 2011 among theRegistrant and Michael P. Scarpelli. S-1 333-180486 10.6 3/30/2012 10.10*First Amendment to Employment Agreement dated August15, 2014 among Registrant and Michael P. Scarpelli. 10-Q 001-35580 10.2 11/5/2014 10.11*Employment Agreement dated May 21, 2011 among theRegistrant and David L. Schneider. S-1 333-180486 10.7 3/30/2012 10.12*First Amendment to Employment Agreement dated July 3,2014 among Registrant and David L. Schneider. 10-Q 001-35580 10.1 11/5/2014 10.13*Employment Agreement dated August 1, 2011 among theRegistrant and Daniel R. McGee. S-1 333-180486 10.8 3/30/2012 10.14*First Amendment to Employment Agreement dated August15, 2014 among Registrant and Daniel R. McGee. 10-Q 001-35580 10.3 11/5/2014 92ExhibitNumberDescription of Document Incorporated by Reference FiledHerewithForm File No. Exhibit Filing Date 10.15*Employment Agreement dated December 6, 2016 amongthe Registrant and Chirantan J. Desai. x10.16Employment Agreement dated February 22, 2017 amongthe Registrant and John J. Donahoe. 8-K 001-35580 10.1 2/27/2017 10.17Lease Agreement dated November 8, 2012 between theRegistrant and Jay Ridge LLC. S-1/A 333-184674 10.12 11/9/2012 10.18Office Lease dated December 12, 2014 betweenRegistrant and S1 55 LLC 8-K 001-35580 10.1 12/15/2014 10.19Form of Base Convertible Note Hedge TransactionConfirmation. 8-K 001-32224 99.1 11/13/2013 10.20Form of Base Warrant Transaction Confirmation. 8-K 001-32224 99.2 11/13/2013 10.21Form of Additional Convertible Note Hedge TransactionConfirmation. 8-K 001-32224 99.3 11/13/2013 10.22Form of Additional Warrant Transaction Confirmation. 8-K 001-32224 99.4 11/13/2013 21.1Subsidiaries of the Registrant. x23.1Consent of independent registered public accountingfirm. x24.1Power of Attorney. Reference is made to the signaturepage hereto. x31.1Certification of Periodic Report by Chief ExecutiveOfficer under Section 302 of the Sarbanes-Oxley Act of2002 x31.2Certification of Periodic Report by Chief FinancialOfficer under Section 302 of the Sarbanes-Oxley Act of2002 x32.1Certification of Chief Executive Officer Pursuant to 18U.S.C. Section 1350 as Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002 x32.2Certification of Chief Financial Officer Pursuant to 18U.S.C. Section 1350 as Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002 x101.INS**XBRL Instance Document - the instance document doesnot appear in the Interactive Data File because its XBRLtags are embedded within the Inline XBRL document. x101.SCH**XBRL Taxonomy Extension Schema Document. x101.CAL**XBRL Taxonomy Extension Calculation LinkbaseDocument. x101.DEF**XBRL Taxonomy Extension Definition LinkbaseDocument. x93ExhibitNumberDescription of Document Incorporated by Reference FiledHerewithForm File No. Exhibit Filing Date 101.LAB**XBRL Taxonomy Extension Label Linkbase Document. x101.PRE**XBRL Taxonomy Extension Presentation LinkbaseDocument. x*Indicates a management contract, compensatory plan or arrangement.** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not “filed” for purposes of Sections 11 or 12 of theSecurities Act, are deemed not “filed” for purposes of Section 18 of the Exchange Act, and otherwise are not subject to liability under those Sections.94EXHIBIT 10.15December 6, 2016Dear Chirantan:I am pleased to offer you a full-time position with ServiceNow, Inc. (the “Company”) for the position of Chief Product Officer. Initially, you will report toFrank Slootman. This offer letter agreement sets forth the terms and conditions of your employment with the Company.CompensationYou will be paid a salary of $18,750 on a semi-monthly basis, which is equal to $450,000 annually, less required deductions and withholdings. Your positionis classified as exempt under federal and state law and therefore you are not eligible for overtime pay.Variable CompensationYou will be eligible to participate in the Company’s Quarterly Corporate Incentive Bonus Plan (the “Bonus Plan”) and your annual incentive bonus targetwill be $300,000, which is 67% of your base salary and which you may be awarded based upon both Company performance and your individualperformance. Your eligibility and compensation under this Bonus Plan will be governed under the terms of the Bonus Plan and applicable Company policy,as established from time to time. Whether you earn any bonus under the Bonus Plan, and the amount of any such bonus, shall be determined by the Companyin its sole discretion. Participants must be actively employed by the Company on the last day of quarter to be eligible to earn a bonus payment, and no pro-rata bonuses will be earned. The Company reserves the right to review, amend or replace the Bonus Plan at any time. All eligible employees will be notifiedin writing of any such amendment or replacement.Company EquitySubject to approval by the Company’s Board of Directors, management recommends you be granted: (1) an option to purchase 150,000 shares of theCompany’s Common Stock at the fair market value as determined by the Board as of the date of grant; and (2) 150,000 restricted stock units (“RSUs”).If approved, the proposed options will begin vesting upon your start date, and you will vest and earn the right to exercise the option over a period of four (4)years so long as you remain an employee of the Company. Twenty-five percent (25%) of your option shares will vest on the one (1) year anniversary of yourstart date. The remaining option shares will vest in equal amounts each month thereafter, at each anniversary of your start date so as to be fully vested afterfour (4) years of continuous employment from your start date. Generally, equity is granted in the calendar month following the employee’s date of hirepursuant to the terms of the Company’s Equity Award Policy.The proposed RSUs, if approved, will vest as follows: 25% of the shares shall vest and settle one year from February (if your start date is in the monthsNovember, December or January); May (if your start date is in the months February, March or April); August (if your start date is in the months of May, Juneor July); or November (if your start date is in the months August, September or October). The remaining shares will vest and settle thereafter in equal quarterlyinstallments over the next three years, provided you continue to be employed by or otherwise provide services to the Company.You shall be entitled to immediate accelerated vesting of fifty (50%) percent of the then-unvested shares subject to your outstanding stock options and RSUsupon your termination of employment by the Comp any other than for "Cause" (as defined below), or upon a resignation for "Good Reason" (as definedbelow), in either event where such termination is within twelve (12) months following the consummation of a Change of Control (as defined in theCompany's 2012 Stock Plan or any successor plan); provided that such accelerated vesting shall be contingent on the execution and non-revocation of abinding release acceptable to the Company within sixty (60) days of your employment termination date (the "Release").Please note that all of the above terms remain subject to approval by the Board of Directors, and that any granted shares will be subject to all applicable state,federal and local securities and tax laws and the additional terms and conditions found in the Company’s equity incentive plan and related plan documentsand agreements.BenefitsAs a full-time employee, you will be eligible on your first day of employment to participate in the Company’s full benefit package as currently and hereafterprovided to other employees. This includes: medical, dental and vision, life insurance, short and long-term disability, a 401(K) program, Flexible Spending125 and employee assistance program, all pursuant to the terms of these benefit plans as set forth in the plan documents (which are available for your review). Also, you will be eligible to receive vacation during your first year of employment in addition to sick time and paid holidays in accordance with theCompany’s vacation/sick/holiday policy. We have placed a great deal of emphasis on our benefits and expect that they will continue to evolve as we growand as the needs of our employees and their families change.At-Will EmploymentYour employment with the Company is for no specified period and constitutes at-will employment. As a result, you are free to resign at any time, for anyreason or for no reason. Similarly, the Company is free to conclude its employment relationship with you at any time, with or without cause, and with orwithout advance notice. Although your job duties, title, compensation and benefits, as well as the Company’s personnel policies and procedures, may changefrom time-to-time in the Company’s sole discretion, the “at-will” nature of your employment may only be changed in writing signed by you and the Presidentof the Company.SeveranceIf, at any time, the Company terminates your employment without Cause (as defined below) or you resign your employment for Good Reason (as definedbelow), and if you sign the Release and allow it to become effective, then the Company shall pay you three (3) months base salary in one lump sum, lessstandard deductions and withholdings, within five (5) days following the Effective Date of the Release.DefinitionsFor purposes of this offer letter agreement:"Cause" shall mean the occurrence of any of the following events, as determined by the Company in its sole discretion:(i)Your commission of any crime involving fraud, dishonesty or moral turpitude;(ii)Your commission of or participation in a fraud or act of dishonesty against the Company that results in (or might have reasonably resulted in)material harm to the business of the Company;(iii)Your violation of any contractual, common law or statutory obligation you owe to the Company; or(iv)Your conduct that constitutes gross insubordination, incompetence or habitual neglect of duties and that results in (or might have reasonablyresulted in) material harm to the business of the Company;Provided, however, that the action or conduct described in clauses (iii) and (iv) above will constitute "Cause" only if such action or conduct continues afterthe Company has provided you with written notice thereof and thirty (30) days to cure the same, if such action or conduct is reasonably susceptible to beingcured."Good Reason" shall mean the occurrence of any of the following events without your consent:(i)the assignment to you of any duties or responsibilities that results in a material diminution in your authority, duties or responsibilities as ineffect immediately prior to such reduction or a material diminution in the ability, duties or responsibilities of the person or persons to whomyou are required to report; provided, however, that a change solely in your title or reporting relationships of persons reporting to you shall notby itself provide the basis for a voluntary termination with Good Reason;(ii)a material reduction by the Company in your annual base salary, as initially set forth herein or as increased thereafter; provided, however, thatGood Reason shall not be deemed to have occurred in the event of a reduction in your annual base salary that is pursuant to a salary reductionprogram affecting substantially all of the employees of the Company and that does not adversely affect you to a greater extent than othersimilarly situated employees;(iii)a relocation of your business office to a location more than fifty (50) miles from the location at which you performed your duties immediatelyprior to the relocation, except for required travel by you on the Company's business to an extent substantially consistent with your businesstravel obligations prior to the relocation; or(iv)a material breach by the Company of this agreement.Provided, however, that, any such termination by you shall only be deemed for Good Reason pursuant to this definition if: (1) you give the Company writtennotice of your intent to terminate for Good Reason within ninety (90) days following the first occurrence of the condition(s) that you believes constitute(s)Good Reason, which notice shall describe such condition(s); (2) the Company fails to remedy such condition(s) within thirty (30) days following receipt ofthe written notice (the "Cure Period"); and (3) you voluntarily terminate your employment within thirty (30) days following the end of the Cure Period.Other AgreementsIn accepting this offer, you are representing to us that: (a) you are not a party to any employment agreement or other contract or arrangement which prohibitsyour full-time employment with the Company; (b) you do not know of any conflict which would restrict your employment with the Company; and (c) youhave not and will not bring with you to your employment with the Company, and will not upload onto the Company’s systems, any documents, records orother confidential information belonging to former employers.ContingenciesThis offer is contingent upon the following items:•You must successfully complete a background and reference check. Enclosed with this letter is a Summary of Your Rights Under the Fair CreditReporting Act and the forms for you to sign and return to us, permitting the Company, through a third party, to perform and receive the results ofthe background check.•You must successfully complete a pre-employment standard employment drug test. Consent forms for this drug test are included with this offerletter.•You must sign and return with your offer letter agreement both the Company’s At-Will Employment, Confidential Information and InventionAssignment Agreement and the Arbitration Agreement.If an export control license is required in connection with your employment, the Company must obtain an export control license and any similar approvals.Your employment with the Company will commence following receipt of such export control license and governmental approvals; and is conditioned uponyour (a) maintaining your employment with the Company, and (b) continued compliance with all conditions and limitations placed on such a license. If forany reason such export license and governmental approvals cannot be obtained within six (6) months from your date of signature, this offer willautomatically terminate and have no force and effect.•Some of our positions may require a governmental security clearance (“clearance”). If a clearance is required, you also must obtain and maintainin good standing that clearance. Further, if for whatever reason you are unable to maintain the required clearance, your employment may besubject to immediate termination.ServiceNow reserves the right to withdraw its job offer based on information discovered during the pre-employment screening process. Until you have beeninformed in writing by the Company that all of these contingencies have been met, you should defer reliance on this offer.Entire AgreementThis offer letter agreement, along with the At-Will Employment, Confidential Information and Invention Assignment Agreement, and Arbitration Agreementbetween you and the Company, sets forth all of the terms of your employment with the Company and supersedes any prior representations or agreements,whether written or oral. This letter may not be modified or amended except by a written agreement, signed by an officer of the Company and by you.We are extremely excited that you are interested in the Company and I believe that you will find ServiceNow a truly exciting and fulfilling place to work. Toindicate your acceptance of the Company’s offer, please sign below, indicate your start date in the space provided and return this letter with the executed At-Will Employment, Confidential Information and Invention Assignment Agreement and Arbitration Agreement to Candice Gordon no later than Wednesday,December 21,2016. This offer is valid until this date but should you have any questions or concerns, please contact Candice Gordon or Shelly Begun.We look forward to having you join the ServiceNow team!Sincerely, /s/ Heather CardosoHeather CardosoManager, HR Staffing________________________________I accept the terms of employment stated above:/s/ Chirantan J. Desai 12/7/2016Chirantan J. Desai DateExpected Start Date: 12/12/2016EXHIBIT 21.1SUBSIDIARIES Name of Subsidiary Jurisdiction of Incorporation or Organization ServiceNow Australia Pty Ltd AustraliaServiceNow GmbH AustriaServiceNow Belgium BVBA BelgiumSN Europe C.V. BermudaServiceNow Brasil Gerenciamento De Servicos Ltda BrazilServiceNow Canada Inc. CanadaBrightpoint Security, Inc. DelawareDxContinuum, Inc. DelawareServiceNow Delaware LLC DelawareITApp, Inc. DelawareServiceNow Denmark ApS DenmarkServiceNow Finland OY FinlandServiceNow France SAS FranceService-now.com GmbH GermanyServiceNow Hong Kong Limited Hong KongServiceNow Software Development India Private Limited IndiaServiceNow Service Management Limited IrelandServiceNow Israel 2012 A.B. Ltd IsraelNeebula Systems Ltd IsraelServiceNow Italy S.R.L. ItalyServiceNow Japan KK JapanServiceNow Operations Mexico S DE RL DE CV MexicoServiceNow Nederland B.V. NetherlandsServiceNow Norway AS NorwayServiceNow Poland z. Sp. o.o. PolandServiceNow Pte. Ltd. SingaporeServiceNow South Africa (Pty) Ltd. South AfricaServiceNow Spain S.R.L. SpainServiceNow Sweden AB SwedenServiceNow Switzerland GmbH SwitzerlandServiceNow Turkey Bilisim Sanayi Ve Ticaret Limited Sirketi TurkeyService-now.com UK Ltd United KingdomEXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-182445, 333-188462, 333-194210, 333-202331and 333-209785) of ServiceNow, Inc. of our report dated February 28, 2017 relating to the financial statements and the effectiveness of internal control overfinancial reporting, which appears in this Form 10-K./s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaFebruary 28, 2017EXHIBIT 31.1CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002I, Frank Slootman, certify that:1.I have reviewed this annual report on Form 10-K of ServiceNow, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting.Date: February 28, 2017 /s/ Frank Slootman Frank SlootmanChairman, President and Chief Executive Officer(Principal Executive Officer)EXHIBIT 31.2CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002I, Michael P. Scarpelli, certify that:1.I have reviewed this annual report on Form 10-K of ServiceNow, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting.Date: February 28, 2017 /s/ Michael P. Scarpelli Michael P. ScarpelliChief Financial Officer(Principal Financial and Accounting Officer)EXHIBIT 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350AS ADOPTED PURSUANT TO SECTION 906OF THE SARBANES-OXLEY ACT OF 2002I, Frank Slootman, Chief Executive Officer of ServiceNow, Inc. (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002, that:•the Annual Report on Form 10-K of the Company for the period ended December 31, 2016 (the "Report") fully complies with the requirements ofSection 13(a) or 15(d) of the Securities Exchange Act of 1934; and•the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company atthe dates and for the periods presented therein.Date: February 28, 2017 /s/ Frank Slootman Frank SlootmanChairman, President and Chief Executive Officer(Principal Executive Officer)A signed original of this written statement required by Section 906 has been provided to ServiceNow, Inc. and will be retained by it and furnished to theSecurities and Exchange Commission or its staff upon request.EXHIBIT 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350AS ADOPTED PURSUANT TO SECTION 906OF THE SARBANES-OXLEY ACT OF 2002I, Michael P. Scarpelli, Chief Financial Officer of ServiceNow, Inc. (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:•the Annual Report on Form 10-K of the Company for the period ended December 31, 2016 (the "Report") fully complies with the requirements ofSection 13(a) or 15(d) of the Securities Exchange Act of 1934; and•the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company atthe dates and for the periods presented therein.Date: February 28, 2017 /s/ Michael P. Scarpelli Michael P. ScarpelliChief Financial Officer(Principal Financial and Accounting Officer)A signed original of this written statement required by Section 906 has been provided to ServiceNow, Inc. and will be retained by it and furnished to theSecurities and Exchange Commission or its staff upon request.

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