ServiceNow
Annual Report 2017

Plain-text annual report

Table of ContentsUNITED 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, 2017OR ¨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, a smaller reporting company or an emerging growth company.See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨(Do not check if a smaller reporting company)Emerging growth company ¨If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No 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, 2017, theaggregate market value of its shares (based on a closing price of $106.00 per share on June 30, 2017 as reported on the New York Stock Exchange) held by non-affiliates wasapproximately $12.6 billion.As of January 31, 2018, there were approximately 174.7 million shares of the Registrant’s Common Stock outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant’s definitive proxy statement for its 2018 Annual Meeting of Stockholders (Proxy Statement) to be filed within 120 days of the Registrant’s fiscal year endedDecember 31, 2017, 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 Factors6Item 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 Risk54Item 8Consolidated Financial Statements and Supplementary Data56Item 9Changes in and Disagreements with Accountants on Accounting and Financial Disclosure94Item 9AControls and Procedures94Item 9BOther Information94 PART III Item 10Directors, Executive Officers and Corporate Governance95Item 11Executive Compensation95Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters95Item 13Certain Relationships and Related Party Transactions and Director Independence95Item 14Principal Accounting Fees and Services95 PART IV Item 15Exhibits and Financial Statement Schedules95Item 16Form 10-K Summary99Signatures 99Index to Exhibits 97 Table of ContentsPART 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.We help our customers improve service quality 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 to include service management for customerservice, human resources, security operations and other enterprise departments where a patchwork of semi-automated and manual processes had been used inthe past. Using our cloud services, users can easily request business services from these departments, actions and responses can be automated within theenterprise, the quality of service provided by these departments improves, 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. Our 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 offer a portfolio of professional and other services, both directly and through our network of partners.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 in Delaware as ServiceNow, Inc.Our Cloud Services Now PlatformAll of our products are built on a single platform, which is the foundation for all of our cloud-based services. Our platform allows our customers to createa single system of record for their systems and workflows, and it is the foundation of our ability to deliver specific enterprise applications and services. Oursingle system of record also allows customers to complement their other vertical applications and achieve various business objectives such as better dataintegrity, faster updates and better responsiveness to user needs. Among the most popular services that our platform supports are workflow automation,electronic service catalogs and portals, configuration management systems, data benchmarking, performance analytics, encryption and collaboration anddevelopment tools. Our platform also enables developers in IT and other departments across the enterprise to create, test and deploy their own applicationswithin an integrated development environment while leveraging the single data model and common services of our platform.1Table of ContentsInformation 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 automates IT asset management. Our second product suite, ITOperations 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-premises 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) Service DeliveryOur HR service delivery product defines, structures, consolidates, manages and automates HR services related to employee requests. HR service deliverycapabilities include HR case management, employee self-service, knowledge management and management of employee lifecycle events such asonboarding, transfers and off-boarding.Security OperationsOur security operations product defines, structures, consolidates, manages and automates security operations management requirements of third-partyand other sources of security alerts from a customer's infrastructure. Security operations management capabilities include security incident management,threat enrichment intelligence, vulnerability response management and security incident intelligence sharing. Our governance, risk and compliance productdefines, structures, consolidates, manages and automates cross-functional governance, risk and compliance workflows such as compliance controls and riskmitigation.Professional Services Our professional services include process design, implementation and configuration, and optimization services to help customers achieve their businessobjectives and derive value from their ServiceNow investment. We also offer strategic services to customers embarking on significant businesstransformations to reimagine their service management strategy and roadmap - from first insight to final implementation. Our network of partners alsoprovides professional services and training to our customers.We provide an expansive portfolio of training and certification programs for service management across IT, HR, customer service, and otherdepartments. Flexible training options, plus topic- and role-based content, help engage our customers' employees, optimize business processes and enhanceefficiency.Customer SupportAs part of their subscription, customers receive support 24 hours a day, seven days a week around the globe, from technical resources located in theUnited States and internationally. We also offer self-service technical support through our support portal, which provides access to documentation,knowledge base articles, online support forums and online incident filing. 2Table of ContentsOur Technology and OperationsWe designed our cloud-based services to support global enterprises. We operate a multi-instance architecture that provides each customer with its owndedicated application logic and database. This architecture is designed to deliver high-availability, scalability, performance, security and ease of upgrading.We have a standardized Java-based development environment, with the majority of our software written in industry-standard software programminglanguages. Our cloud infrastructure primarily consists of industry-standard servers and network components. Our operating system and databases are Linux,and MySQL and MariaDB.Our data centers operate in paired configurations 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 offer customers the option to deploy our services on dedicated hardware in our data centers. Our architecture also gives us the added flexibility todeploy our services on-premises at a customer data center in order to support regulatory or security requirements, and a minority of our customers haveelected to do so. The customer support we provide for on-premises customers is similar to the support we provide to customers deployed in our own manageddata centers.Sales and Marketing We sell our services primarily through our global direct sales organization. Additionally, we 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 (including via our website), trade shows,industry events and press releases. We also host our annual Knowledge user conference, webinars and other user forums where customers and partners bothparticipate in and present on a variety of programs designed to help accelerate success with our services and platform.We are continuing to expand our sales capabilities in new geographies, including through investments in direct and indirect sales channels,professional services capabilities, customer support resources and implementation partners. In addition to adding new geographies, we also plan to increaseour investment in our existing locations in order to achieve 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, 2017, we had approximately 4,400 enterprise customers, including more than 40% of the Global 2000. Our customers operate in a wide variety ofindustries, including financial services, consumer products, IT services, health care, government, education and technology. No single customer accountedfor 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 that are not included in the deferred revenue on ourconsolidated balance sheets. As of December 31, 2017 and 2016, we had backlog of approximately $2.6 billion and $1.9 billion, respectively. We expectbacklog to fluctuate from period to period due to a number of factors, including the timing and duration of customer subscription and professional servicesagreements, variations in the billing cycle of subscription agreements, the timing of customer renewals and foreign exchange rate fluctuations.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.3Table of ContentsResearch and Development Our research and development organization is responsible for the design, development, testing and certification of our solutions. We focus ondeveloping new services and core technologies and further enhancing the functionality, reliability and performance of our 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, enhance our user experience, and develop additional mobile, automation and machineintelligence technologies. Total research and development expense was $377.5 million, $285.2 million and $217.4 million for the years ended December 31,2017, 2016 and 2015, respectively.Acquisitions and Investments In addition to continuing to invest in our own research and development efforts, we have made acquisitions and investments in the past and willcontinue to assess opportunities for strategic acquisitions and investments to complement our technology and skill sets and expand our product reach. We arefocused on building out the core capabilities of our platform through both acquisitions and investments that will satisfy growing customer needs.Competition The markets for our solutions generally are rapidly evolving and highly competitive, with relatively low barriers to entry. As the markets in which weoperate continue to mature, we expect competition to intensify. We compete primarily with large, well-established, enterprise application software vendors,in-house solutions, large integrated systems vendors, established and emerging cloud vendors and vendors of products and services for developmentoperations. Many prospective customers have invested substantial personnel and financial resources to implement and integrate their current enterprisesoftware into their businesses and therefore may be reluctant or unwilling to migrate away from their current solution to an enterprise cloud solution.Accordingly, we compete with both enterprise application software vendors that provide on-premises software and with vendors providing cloud-basedservices. Our competitors vary in size and in the breadth and scope of the products and services offered. As we continue to expand the breadth of our servicesto include offerings for service domains outside of IT, we expect increasing competition from platform and application development vendors focused onthese 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, 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, which may enable them to offer such products and services at a lower price as part of a larger sale. Ascompetition intensifies, we expect pricing 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.We continue to grow our patent portfolio and IP rights around the world that relate to our platform, applications, services, research and developmentand other activities, and our success depends in part upon our ability to protect our core technology and IP. We have over 350 U.S. and foreign patents,including patents acquired from third parties, and over 250 pending patent applications. We do not believe that our proprietary technology is dependent onany single patent or other IP right or groups of related patents or IP rights. We file patent applications to protect our IP and have in the past and may in thefuture acquire additional patents, patent portfolios, or patent applications. However, we cannot be certain that any of our patent applications will result in theissuance of a patent or whether the examination process will result in patents of value or applicability. In addition, any patents that have been or may beissued or acquired may be contested, circumvented, found unenforceable or invalidated, and we may not be able to prevent third parties from infringing them.4Table of ContentsDespite 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 frequent claims and related litigation regarding patent and other intellectual property rights. From time to time, thirdparties may assert patent, copyright, trademark and other intellectual property rights against us, our channel partners or our customers. In addition, based onour greater visibility, expanding solutions footprint, and market exposure as a public company, we face a higher risk of being the subject of intellectualproperty infringement claims from third parties. For example, in 2016 we settled two patent-related litigation matters and recorded a one-time charge of$270.0 million related to aggregate legal settlements. See “Risk Factors–Claims by others that we infringe their proprietary technology or other rights couldharm our business” for additional information.Employees As of December 31, 2017, we had 6,222 full-time employees worldwide, including 1,498 in cloud operations, professional services, training andcustomer support, 2,413 in sales and marketing, 1,419 in research and development and 892 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.5Table of ContentsITEM 1A.RISK FACTORSInvesting 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, 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 may continue to incur losses in accordance with U.S. Generally Accepted AccountingPrinciples (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 of these andother factors, we may not achieve or maintain profitability in the future, our gross margins may be negatively impacted, and our ability to generate cash flowfrom operations may be negatively impacted. If we fail to increase our revenues sufficiently to keep pace with our growing investments and other expenses,our business, operating results and growth prospects will be adversely affected.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, includingpersonally identifiable information, protected health information and credit card and other financial information. While we have security measures in placedesigned to protect customer information and prevent data loss, these measures may be breached as a result of third-party actions, including intentionalmisconduct by computer hackers, employee error, malfeasance or otherwise, and result in someone obtaining unauthorized access to our customers’ data orour data, including our intellectual property and other confidential business information. Moreover, computer malware, viruses and hacking, phishing anddenial of service attacks by third parties have become more prevalent in our industry, and have occurred on our systems in the past and may occur on oursystems in the future. Because techniques used to obtain unauthorized access to or sabotage systems change frequently and generally are not recognized untilsuccessfully launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. As cyber-securitythreats develop and evolve, it may be necessary to make significant further investments to protect data and infrastructure. A security breach or unauthorizedaccess or loss of data could result in a disruption to our service, litigation, the triggering of indemnification and other contractual obligations, regulatoryinvestigations, government fines and penalties, reputational damage, loss of sales and customers, mitigation and remediation expenses and other liabilities.We do not have insurance sufficient to compensate us for the potentially significant losses that may result from security breaches.6Table of ContentsIf we do not accurately predict, prepare for, and respond promptly to rapidly evolving technological and market developments, our competitive positionand business prospects may be harmed.The markets in which we compete have evolved rapidly, and the pace of innovation will continue to accelerate, as cloud, mobile, workflow, consumerproduct-like user experiences, social, collaboration, machine learning, artificial intelligence, internet connected devices, robotic automation, security,cryptography, development tools and other digital technologies increasingly become the basis for customer purchases. At the same time, our customers andprospective customers are facing their own competitive imperatives to adopt digital technologies, resulting in the ongoing disruption of almost every sectorof the global economy. Accordingly, to compete effectively in our rapidly changing markets, we must: identify and innovate in the right emergingtechnologies among the many in which we could make investments knowing that we cannot make substantial investments in all of them; accurately predictour customers’ changing business needs; successfully deliver new platform technologies and products that meet these business needs; efficiently integratewith other technologies within our customers’ digital environments; profitably market and sell new products in markets where our sales and marketing teamshave less experience; and effectively deliver, either directly or through our ecosystem of partners, the business process planning, IT systems architectureplanning, and product implementation services that our customers require to be successful. If we fail to meet any of these requirements, our competitiveposition and business prospects may be harmed.Delays in the release of, or actual or perceived defects in, new or updated products may slow the adoption of our most recent technologies, reduce ourability to efficiently provide our services, decrease customer satisfaction, increase our vulnerability to cyber attacks, and adversely impact sales ofadditional products to our customers.We must successfully continue to release new products and updates to existing products. The success of any release depends on a number of factors,including our ability to manage the risks associated with quality or other defects or deficiencies, delays in the timing of releases, and other complications thatmay arise during the early stages of introduction. If releases are delayed or if customers perceive that our releases contain bugs or other defects, customeradoption of our new products or updates may be adversely impacted, customer satisfaction may decrease, our ability to efficiently provide our services maybe reduced, and our growth prospects may be harmed.Various factors, including our customers’ business, integration, migration and security requirements, or errors by us or our partners, may causeimplementations of our products to be delayed, inefficient or otherwise unsuccessful.Our business depends upon the successful implementation of our products by our customers. Increasingly, we, as well as our customers, rely on ournetwork of partners to deliver implementation services, and there may not be enough qualified implementation partners available to meet customer demand.Further, various factors, including our customers’ business, integration, migration and security requirements, or errors by us or our partners, may causeimplementations to be delayed, inefficient or otherwise unsuccessful. For example, changes in the functional requirements of our customers, delays intimeline, or deviation from recommended best practices may occur during the course of an implementation project. As a result of these and other risks, we orour customers may incur significant implementation costs in connection with the purchase and implementation of our products. Some customerimplementations may take longer than planned or fail to meet our customers’ expectations, which may delay our ability to upsell additional products orresult in customers canceling or failing to renew their subscriptions before our products have been fully implemented. Unsuccessful, lengthy, or costlycustomer implementation and integration projects could result in claims from customers, harm to our reputation, and opportunities for competitors to displaceour products, each of which could have an adverse effect on our business and operating results.7Table of ContentsDisruptions 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 service level credit accruals or other increasedexpenses or risks of litigation. We do not have insurance sufficient to compensate us for the potentially significant losses that may result from claims arisingfrom disruptions in our services.Our operating results may vary significantly from period to period, and if we fail to meet the financial performance expectations of investors or securitiesanalysts, the price of our common stock could decline substantially.Our operating results may vary significantly from period to period as a result of various factors, some of which are beyond our control. For any quarterlyor annual period, there is a risk that our financial performance will not meet the financial guidance we have previously given for that period, or that we mayotherwise fail to meet the financial performance expectations of the securities analysts who issue reports on our company and our common stock price, or ofinvestors 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 theexpectations of such securities analysts or investors. If any of the foregoing occurs, for any reason either within or outside of our control, the price of ourcommon stock could decline substantially and investors in our common stock could incur substantial losses. Some of the important factors that may causeour revenues, operating results and cash flows to vary widely, or cause our forward-looking financial guidance, to fall below the expectations of suchsecurities analysts or investors, include:•our ability to attract new customers, retain and increase sales to existing customers, and satisfy our customers’ requirements;•changes in our mix of products and services;•changes in foreign currency exchange rates and our ability to effectively hedge our foreign currency exposure;•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, changes in timing of renewals 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;8Table of Contents•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 were effective for us beginning January 1,2018;•changes in laws or regulations impacting the delivery of our services;•our ability to comply with privacy laws and regulations, including the General Data Protection Regulation (GDPR);•the amount and timing of equity awards and the related financial statement expenses; and•our ability to accurately estimate the total addressable market for our products and services.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 outcome is determined. Our effective tax rate could be adversely affected by changes in the mix of earnings and losses in countrieswith differing statutory tax rates, certain non-deductible expenses, the valuation of deferred tax assets and liabilities and the effects of acquisitions. Increasesin our effective tax rate would reduce our profitability or in some cases increase our losses.Additionally, our future effective tax rate could be impacted by changes in accounting principles or changes in U.S. federal, state or international taxlaws or tax rulings. The U.S. recently enacted significant tax reform, and certain provisions of the new law may adversely affect us. Many countries andorganizations such as the Organization for Economic Cooperation and Development are actively considering changes to existing tax laws or have proposedor enacted new laws that could increase our tax obligations in countries where we do business or cause us to change the way we operate our business. Anychanges in federal, state or international tax laws or tax rulings may increase our worldwide effective tax rate and harm our financial position and results ofoperations.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.Uncertainties in the interpretation and application of the 2017 Tax Cuts and Jobs Act could materially affect our tax obligations and effective tax rate.The 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted on December 22, 2017, and significantly changes how the U.S. imposes income tax onmultinational corporations. The U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantlyimpact how we will apply the law and affect our results of operations in the period issued.The Tax Act requires complex computations not previously provided in U.S. tax law. As such, the application of accounting guidance for such items iscurrently uncertain. Further, compliance with the Tax Act and the accounting for such provisions require accumulation of information not previouslyrequired or regularly produced. As a result, we have provided a provisional estimate on the effect of the Tax Act in our financial statements. As additionalregulatory guidance is issued by the applicable taxing authorities, accounting treatment is clarified, we perform additional analysis on the application of thelaw, and we refine estimates in calculating the impact, our final analysis, which will be recorded in the period completed, may be different from our currentprovisional amounts, which could materially affect our tax obligations and effective tax rate.9Table of ContentsOur 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 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 (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606),”which supersedes nearly all existing revenue recognition guidance under GAAP. Under this 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 this 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. Refer to Note 2 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form10-K for additional information on the new guidance and its impact on us. Adoption of this standard and any difficulties in implementation of changes inaccounting principles, including the ability to modify our accounting systems and internal controls, could cause us to fail to meet our financial reportingobligations, 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 financialresults or cause our results to differ from investor expectations or our own guidance in any future periods. In addition, the June 23, 2016 referendum byBritish voters to exit the European Union adversely impacted global markets, including currencies, and resulted in a decline in the value of the Britishpound, as compared to the U.S. Dollar and other currencies. Volatility in exchange rates and global financial markets may continue due to a number offactors, including the continued negotiation of the United Kingdom's exit from the European Union and the recent political and economic uncertaintyglobally.While we have not engaged in the hedging of our foreign currency transactions to date, in 2018 we expect to begin using derivative instruments, suchas foreign currency forwards, swaps and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. These hedgingcontracts may reduce, but cannot entirely eliminate, the impact of adverse currency exchange rate movements. Further, unanticipated changes in currencyexchange rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree ofcorrelation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary.Moreover, for a number of reasons, including our limited experience with these hedging contracts, we may not seek or be able to establish a perfect oreffective correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us fromachieving the intended hedge and expose us to risk of loss.10Table of ContentsThe 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, established and emerging cloud vendors and vendors of products and services for developmentoperations. Many prospective customers have invested substantial personnel and financial resources to implement and integrate their current enterprisesoftware into their businesses and therefore may be reluctant or unwilling to migrate away from their current solution to our enterprise cloud solutions. Manyof our competitors and potential competitors are larger, have greater name recognition, longer operating histories, more established customer relationships,larger marketing budgets and greater resources than we do. Further, other potential competitors not currently offering competitive products may expand theirservices to compete with our services. We have expanded the breadth of our services to include offerings in the markets for IT operations management,customer service management, security operations management, HR service delivery and use of our platform by developers of custom applications. As aresult, we expect increasing competition from platform vendors and from application development vendors focused on these other markets. Our competitorsmay be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards and customer requirements. Inaddition, some of our competitors offer their products or services at a lower price, which has resulted in pricing pressures. Larger competitors with morediverse product and service offerings may reduce the price of products or subscriptions that compete with ours or may bundle them with other products andsubscriptions. We expect that smaller competitors and new entrants may accelerate pricing pressures, including in the IT service management market, whichis our more mature offering and from which we derive the substantial majority of our revenues. For all of these reasons, we may not be able to competesuccessfully and competition could result in reduced sales, reduced margins, losses or the failure of our solutions 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, we recorded charges for aggregate legal settlements of $270.0 million in ourconsolidated statement of comprehensive loss during the year ended December 31, 2016. The charge covers the fulfillment by us of all financial obligationsunder settlement agreements with BMC and HPE, with no remaining financial obligations under either settlement.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. Further, upon expiration of the term of any third-party agreements that allow us to usetheir intellectual property, we may be unable to renew such agreements on favorable terms, if at all, in which case we may face intellectual property litigation.The mere existence of any lawsuit, or any interim or final outcomes, and the course of its conduct and the public statements related to it (or absence of suchstatements) by the courts, press, analysts and litigants, could be unsettling to our customers and prospective customers and could cause an adverse impact toour customer satisfaction and related renewal rates and cause us to lose potential sales, and could also be unsettling to investors or prospective investors inour common stock and could cause a substantial decline in the price of our common stock. Accordingly, any claim or litigation against us could be costly,time-consuming and divert the attention of our management and key personnel from our business operations and harm our financial condition and operatingresults.11Table of ContentsOur 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 acquired in the future may not provide us with competitive advantages, or may be successfully challenged bythird parties. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Any ofour intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Effective patent, trademark,copyright and trade secret protection may not be available to us in every country in which our services are available. The laws of some foreign countries maynot be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may beinadequate. We may be required to spend significant resources to monitor and protect our intellectual property rights. We have, and in the future may, initiateclaims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any litigation, whetheror not it is resolved in our favor, could result in significant expense to us, divert the efforts of our technical and management personnel and may result incounter-claims with respect to infringement of intellectual property rights by us. If we are unable to prevent third parties from infringing upon ormisappropriating our intellectual property, or are required to incur substantial expenses in defending our intellectual property rights, our business andoperating results may be adversely 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 33% and 32% of our total revenues for each of the years ended December 31, 2017 and 2016,respectively. Our business and future prospects depend on increasing our international sales as a percentage of our total revenues, and the failure to growinternationally will harm our business. Additionally, operating in international markets requires significant investment and management attention and willsubject us to regulatory and economic risks that are different from those in the United States. We have made, and will continue to make, substantialinvestments in data centers and cloud computing infrastructure, sales, marketing, personnel and facilities as we enter and expand in new geographic markets.When we make these investments, it is typically unclear whether, and when, sales in the new market will justify our investments, and we may significantlyunderestimate the level of investment and time required to be successful, or whether we will be successful. Our rate of acquisition of new Global 2000customers, a key factor effecting our growth, has generally been lower in Africa, Asia, Eastern Europe, South America and other markets in which we are lessestablished, as compared to North America, Australia and areas within Western Europe. Over time an increasing proportion of the Global 2000 companies thatare not yet our customers are located in emerging markets where we are less established. We have experienced, and may continue to experience, difficulties insome of our investments in geographic expansion, 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Table of ContentsIf 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, including our Chief Executive Officer, and many key individualcontributors. From time to time, there may be changes in our management team resulting from the hiring or departure of executives. For example, in 2017,Frank Slootman stepped down as our President and Chief Executive Officer, and John J. Donahoe was appointed as his successor. Such changes may result ina loss of institutional knowledge and cause disruptions to our business.In the technology industry, there is substantial and continuous competition for engineers with high levels of experience in designing, developing andmanaging software and Internet-related solutions, as well as competition for sales executives and operations personnel. We may not be successful inattracting and retaining qualified personnel. We have from time to time experienced, and we may continue to experience, difficulty in hiring and retaininghighly skilled employees with appropriate qualifications, and may not be able to fill positions in desired geographic areas or at all. In particular, competitionfor experienced software and cloud computing infrastructure engineers in the San Francisco Bay area, San Diego, Seattle, London and Amsterdam, ourprimary operating locations, is intense. Our employees, including our executive officers, are employed by us on an “at-will” basis, which means they mayterminate their employment with us at any time. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and futuregrowth 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.National and local governments or agencies have in the past adopted, and may in the future adopt, laws and regulations affecting data privacy, the useof the Internet as a commercial medium, and data sovereignty requirements concerning the location of data centers that store and process data. Changinglaws, regulations and standards applying to the collection, transfer, processing, storage or use of personal data could affect our customers’ ability to use andshare data, potentially restricting our ability to store, process and share data with our customers in connection with providing our services, and in some cases,could impact our ability to offer our services in certain locations or our customers’ ability to deploy our services globally. For example, the European Union(EU) and United States agreed to a framework to facilitate the transfer of data from the EU to the United States, called Privacy Shield, but this new frameworkhas been challenged by private parties and may face additional challenges by national regulators or private parties. Additionally, in 2016 the EU adopted anew regulation governing data privacy called the General Data Protection Regulation (GDPR), which takes effect in May 2018. Further, laws such as the EU’sproposed e-Privacy Regulation are increasingly aimed at the use of personal information for marketing purposes, and the tracking of individuals’ onlineactivities. The costs of compliance with, and other burdens imposed by, GDPR, the e-Privacy Regulation and other privacy laws, regulations and standards maycause us to incur substantial operational costs or require us to modify our data handling practices, may limit the use and adoption of our services and reduceoverall demand for our services. In addition, non-compliance could result in proceedings against us by governmental entities or others, significant fines, andmay otherwise adversely impact our business, financial condition and operating results.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 generally recognize revenues from our subscription service over the subscription term, a decrease in new or renewed subscriptions during areporting period may not be immediately reflected in our operating results for that period.We generally recognize revenues from customers ratably over the terms of their subscriptions. As a result, most of the revenues we report in each periodare derived from the recognition of deferred revenues relating to subscriptions entered into during previous periods. Consequently, a decrease in new orrenewed subscriptions in any single reporting period will have a limited impact on our revenues for that period. In addition, our ability to adjust our coststructure in the event of a decrease in new or renewed subscriptions may be limited.13Table of ContentsFurther, a decline in new or renewed subscriptions in a given period will negatively affect our revenues in future periods. Accordingly, the effect ofsignificant downturns in sales and market acceptance of our services, and changes in our rate of renewals, may not be fully reflected in our results ofoperations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenues through additional sales in any period,as revenues from new customers are generally recognized over the applicable subscription term. Additionally, due to the complexity of certain of ourcustomer contracts, the actual revenue recognition treatment required under Topic 606 will depend on contract-specific terms and may result in greatervariability in revenues from period to period.A decrease in new or renewed subscriptions in a reporting period may not be immediately reflected in our billings results for that period due to factors thatmay offset the decrease.A decrease in new or renewed subscriptions in a reporting period may not have an immediate impact on billings for that period due to factors that mayoffset the decrease, such as an increase in billings duration, the dollar value of contracts with future start dates, or the dollar value of collections in the currentperiod related to contracts with future start dates.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 and technologies in the past as part of our business strategy and may continue to evaluate potentialstrategic transactions, including acquisitions of, or investments in, businesses, technologies, services, products and other assets in the future. We also mayenter into relationships with other businesses to expand our service offerings, functionality or our ability to provide services in international locations, whichcould involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in other companies. Acquisitions andinvestments 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;•dependence on acquired technologies or licenses for which alternatives may not be available to us without significant cost or complexity;•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Table of ContentsA 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 financial servicesand 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 became effective for us beginning January 1, 2018,require significant changes to our existing processes and controls. We may not be able to effectively implement system and process changes required for newstandards on a timely basis. Any delays or failure to update our systems and processes could also lead to a material weakness. 15Table of ContentsGlobal 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. From time to time, the United States and other key international economies have beenimpacted by geopolitical instability, high levels of bad debt globally, falling demand for a variety of goods and services, high levels of persistentunemployment and wage and income stagnation in some geographic markets, restricted credit, poor liquidity, reduced corporate profitability, volatility incredit, equity and foreign exchange markets, bankruptcies and overall uncertainty with respect to the economy. These conditions can arise suddenly andaffect the rate of information technology spending and could adversely affect our customers’ ability or willingness to purchase our services, delayprospective customers’ purchasing decisions, reduce the value or duration of their subscriptions, or affect renewal rates, all of which could harm our operatingresults. In addition, the effects, if any, of global financial conditions on our business can be difficult to distinguish from the effects on our business fromproduct, pricing, and other developments in the markets specific to our products and our relative competitive strength. If we make incorrect judgments aboutour business for this reason our business and results of operations could be adversely 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 could 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 2022 (2022 Notes) and Our 0% Convertible Senior Notes Due 2018 (2018 Notes)We may not have the ability to raise the funds necessary to settle conversions of the convertible senior notes in cash or to repurchase the convertible seniornotes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the convertiblesenior notes.Holders of the 2022 Notes and 2018 Notes have the right to require us to repurchase all or a portion of their 2022 Notes and 2018 Notes upon theoccurrence of a fundamental change (as defined in the indenture for each of the 2022 Notes and 2018 Notes, as applicable) at a repurchase price equal to100% of the principal amount of the 2022 Notes and 2018 Notes to be repurchased, plus accrued and unpaid special interest, if any. In addition, if a make-whole fundamental change (as defined in the indenture for each of the 2022 Notes and 2018 Notes, as applicable) occurs prior to the maturity date of the2022 Notes or 2018 Notes, we will in some cases be required to increase the conversion rate for a holder that elects to convert its 2022 Notes or 2018 Notes inconnection with such make-whole fundamental change. Upon conversion of the 2022 Notes or 2018 Notes, unless we elect to deliver solely shares of ourcommon stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments inrespect of the 2022 Notes or 2018 Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we arerequired to make repurchases of the 2022 Notes or 2018 Notes surrendered therefor or pay cash with respect to the 2022 Notes or 2018 Notes 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 indentures governing each of the 2022 Notes and 2018 Notes from incurringadditional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that could have the effect of diminishing ourability to make payments on the 2022 Notes and 2018 Notes when due. Furthermore, the indentures for each of the 2022 Notes and 2018 Notes prohibit usfrom engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the 2022 Notes and 2018Notes and their respective indentures. These and other provisions in each of the indentures could deter or prevent a third party from acquiring us even whenthe acquisition may be favorable to holders of the 2022 Notes and 2018 Notes.16Table of ContentsIn addition, our ability to repurchase or to pay cash upon conversion of the 2022 Notes or 2018 Notes may be limited by law, regulatory authority oragreements governing our future indebtedness. Our failure to repurchase 2022 Notes or 2018 Notes at a time when the repurchase is required by eachindenture or to pay cash upon conversion of the 2022 Notes or 2018 Notes as required by each indenture would constitute a default. A default under eachindenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. Moreover, the occurrence of afundamental change under each indenture could constitute an event of default under any such agreements. If the payment of the related indebtedness were tobe accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the 2022 Notes or2018 Notes, or to pay cash upon conversion of the 2022 Notes or 2018 Notes.The conditional conversion feature of the 2022 Notes and 2018 Notes, if triggered, may adversely affect our financial condition and operating results.The holders of the 2022 Notes and 2018 Notes may elect to convert their notes during any calendar quarter (and only during such calendar quarter) ifthe last reported sale price of our common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day ofthe immediately preceding calendar quarter is greater than or equal to $175.18, in the case of the 2022 Notes, or $96.04, in the case of the 2018 Notes (ineach case, the Conversion Condition). The Conversion Condition was met for the 2018 Notes during the three months ended June 30, 2017, September 30,2017, and December 31, 2017, respectively. Accordingly, the 2018 Notes were convertible at the holders’ option during each of the three months endedSeptember 30, 2017 and December 31, 2017 and will continue to be convertible at the holders’ option through the three months ending March 31, 2018.During the year ended December 31, 2017, we paid cash to settle an immaterial principal amount of the 2018 Notes. Based on additional conversion requestswe have received through the filing date, we expect to settle in cash an aggregate of $37.3 million in principal amount of the 2018 Notes during the firstquarter of 2018 and $7.3 million in principal amount of the 2018 Notes during the second quarter of 2018. We may receive additional conversion requeststhat require settlement in the second quarter or the remainder of the year 2018. If one or more holders elect to convert their 2018 Notes (or 2022 Notes, if theConversion Condition is triggered) in future periods, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock(other than paying cash in lieu of delivering any fractional share), we may settle all or a portion of our conversion obligation in cash, which could adverselyaffect our liquidity and result in a material adverse effect on our financial position, results of operations and cash flows. In addition, to the extent we receiveconversion requests, we may also record a loss on extinguishment of the 2018 Notes (or 2022 Notes, if the Conversion Condition is triggered) converted bynoteholders based on the difference between the fair market value allocated to the liability component on the settlement date and the net carrying amount ofthe liability component and unamortized debt issuance on the settlement date.The convertible note hedge and warrant transactions may affect the value of the 2022 Notes and 2018 Notes and our common stock.In connection with the sale of the 2022 Notes and 2018 Notes, we entered into convertible note hedge (the 2022 Note Hedge and 2018 Note Hedge,respectively) transactions with certain financial institutions (option counterparties). We also entered into warrant transactions with the option counterpartiespursuant to which we sold warrants for the purchase of our common stock (the 2022 Warrants and 2018 Warrants, respectively). The 2022 Note Hedge and2018 Note Hedge transactions are expected generally to reduce the potential dilution upon any conversion of the 2022 Notes or 2018 Notes and/or offset anycash payments we are required to make in excess of the principal amount of converted 2022 Notes or 2018 Notes, as the case may be. The warrant transactionscould separately have a dilutive effect to the extent that the market price per share of our common stock exceeds the exercise price of the 2022 Warrants or2018 Warrants, which is $203.40 and $107.46, respectively.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 2022 Notes or 2018Notes (and are likely to do so during any observation period related to a conversion of 2022 Notes or 2018 Notes, or following any repurchase of 2022 Notesor 2018 Notes by us on any fundamental change repurchase date (as defined in the indentures for the 2022 Notes and 2018 Notes) or otherwise). This activitycould also cause or avoid an increase or a decrease in the market price of our common stock or the 2022 Notes or 2018 Notes, which could affect noteholders’ ability to convert the 2022 Notes or 2018 Notes and, to the extent the activity occurs during any observation period related to a conversion of the2022 Notes or 2018 Notes, it could affect the amount and value of the consideration that note holders will receive upon conversion of the 2022 Notes or2018 Notes.17Table of ContentsThe potential effect, if any, of these transactions and activities on the market price of our common stock or the 2022 Notes or 2018 Notes will depend inpart on market conditions and cannot be ascertained at this time. Any of these activities could adversely affect the value of our common stock and the valueof the 2022 Notes and 2018 Notes (and as a result, the value of the consideration, the amount of cash and/or the number of shares, if any, that note holderswould receive upon the conversion of any 2022 Notes or 2018 Notes) and, under certain circumstances, the ability of the note holders to convert the 2022Notes or 2018 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 2022 Notes or 2018 Notes or our common stock. In addition, we do not make any representation that the option counterparties will engagein these transactions or that these transactions, once commenced, will not be discontinued without notice.We are subject to counterparty risk with respect to the 2022 Note Hedge and 2018 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 2022 Note Hedge or2018 Note Hedge transactions. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. Recent global economicconditions have resulted in the actual or perceived failure or financial difficulties of many financial institutions. If an option counterparty becomes subject toinsolvency proceedings, we will become an unsecured creditor in those proceedings, with a claim equal to our exposure at that time under our transactionswith that option counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be correlated to an increase in themarket price and in the volatility of our common stock. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences andmore dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of theoption counterparties. 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:•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 2022 Notes or 2018 Notes or in connection with the 2022 Note Hedge and 2022Warrant transactions relating to the 2022 Notes, or 2018 Note Hedge and 2018 Warrant transactions relating to the 2018 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.18Table of ContentsWe 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.Provisions in our charter documents, Delaware law, our 2022 Notes and our 2018 Notes might discourage, delay or prevent a change of control of ourcompany or changes in our 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 (though our restated bylaws have implemented stockholder proxy access).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 2022 Notes or 2018 Notes may delay or prevent a change in control of our company, because thoseprovisions allow note holders to require us to repurchase such notes upon the occurrence of a fundamental change.19Table of ContentsITEM 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 PROCEEDINGSFrom 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, we are not presently a party to any legal proceedings that, if determined adversely to us, would individually or takentogether have a material adverse effect on our business, financial position, results of operations or cash flows.ITEM 4.MINE SAFETY DISCLOSURESNot applicable.20PART IIITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIESMarket 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, 2017 First Quarter$94.72 $74.63 Second Quarter$110.66 $84.03 Third Quarter$118.64 $103.00 Fourth Quarter$131.26 $112.84 Year 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 $72.80Dividend 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, 2017, there were 11 registered stockholders of record (not including an indeterminate number of beneficial holders of stock held instreet name through brokers and other intermediaries) of our common stock.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 with the SEC 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 each of the last five fiscal years ended December 31, 2013 through December 31, 2017, assumingan initial investment of $100. Data for the NYSE Composite Index and the Standard & Poor Systems Software Index assume reinvestment of dividends.21Table of ContentsThe 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 Dec 31, 2012 Dec 31, 2013 Dec 31, 2014 Dec 31, 2015 Dec 31, 2016 Dec 31, 2017ServiceNow, Inc.$100.00 $186.51 $225.94 $288.25 $247.55 $434.20NYSE Composite100.00 126.28 134.81 129.29 144.73 171.83S&P Systems Software100.00 132.90 163.47 180.59 204.49 280.92Unregistered 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, 2017.Issuer Purchases of Equity SecuritiesDuring the quarter ended December 31, 2017, we did not purchase any of our equity securities that are registered under Section 12 of the Exchange Act.22Table of ContentsITEM 6.SELECTED CONSOLIDATED FINANCIAL DATAThe 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, 2017, 2016 and 2015, and the selected consolidatedbalance sheet data as of December 31, 2017 and 2016 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, 2014, and 2013, and the selected consolidated balance sheet data as of December31, 2015, 2014, and 2013 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, 2017 2016 2015 2014 2013 (in thousands, except share and per share data)Consolidated Statements of Operations Data: Revenues: Subscription$1,739,795 $1,221,639 $848,278 $567,217 $349,804Professional services and other193,231 168,874 157,202 115,346 74,846Total revenues1,933,026 1,390,513 1,005,480 682,563 424,650Cost of revenues (1): Subscription315,570 235,414 183,400 142,687 87,928Professional services and other184,202 163,268 146,013 106,089 67,331Total cost of revenues499,772 398,682 329,413 248,776 155,259Gross profit1,433,254 991,831 676,067 433,787 269,391Operating expenses (1): Sales and marketing946,617 700,464 498,439 341,119 195,190Research and development377,518 285,239 217,389 148,258 78,678General and administrative210,533 158,936 126,604 96,245 61,790Legal settlements (2)— 270,000 — — —Total operating expenses1,534,668 1,414,639 842,432 585,622 335,658Loss from operations(101,414) (422,808) (166,365) (151,835) (66,267)Interest expense(53,394) (33,278) (31,097) (29,059) (3,498)Interest income and other income (expense), net5,804 6,035 4,450 5,354 (1,432)Loss before income taxes(149,004) (450,051) (193,012) (175,540) (71,197)Provision for income taxes126 1,753 5,414 3,847 2,511Net loss$(149,130) $(451,804) $(198,426) $(179,387) $(73,708)Net loss per share - basic and diluted$(0.87) $(2.75) $(1.27) $(1.23) $(0.54)Weighted-average shares used to compute net loss per share - basic anddiluted171,175,577 164,533,823 155,706,643 145,355,543 135,415,80923Table of Contents(1)Stock-based compensation included in the statements of operations data above was as follows: Year Ended December 31, 2017 2016 2015 2014 2013 (in thousands)Cost of revenues: Subscription$35,334 $28,420 $23,416 $14,988 $8,434Professional services and other27,475 26,442 23,265 13,116 4,749Sales and marketing170,527 131,571 102,349 54,006 21,609Research and development92,025 81,731 70,326 42,535 16,223General and administrative68,717 49,416 38,357 29,674 14,566Total stock-based compensation$394,078 $317,580 $257,713 $154,319 $65,581 (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, 2017 2016 2015 2014 2013 (in thousands)Consolidated Balance Sheet Data: Cash and cash equivalents and investments$2,170,740 $1,162,020 $1,223,917 $935,563 $889,910Working capital, excluding current portion of deferred revenue andconvertible senior notes, net2,133,850 1,132,819 947,002 809,660 722,214Total assets3,397,904 2,033,767 1,807,052 1,424,752 1,168,077Deferred revenue, current and non-current portion1,320,383 895,101 603,754 422,238 266,722Convertible senior notes, net, current and non-current portion1,173,436 507,812 474,534 443,437 414,378Total stockholders’ equity584,132 386,961 566,814 428,675 394,25924Table of ContentsITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYou 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 filingfor a discussion of important factors that could cause actual results and the timing of certain events to differ materially from future results expressed orimplied by 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,” and “—Key Business Metrics—FreeCash Flow” are not in accordance with U.S. Generally Accepted Accounting Principles (GAAP). These non-GAAP financial measures are not intended to beconsidered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. These measures maybe different from non-GAAP financial measures used by other companies, limiting their usefulness for comparison purposes. We encourage investors tocarefully consider our results under GAAP, as well as our supplemental non-GAAP results, to more fully understand our business.25Table of ContentsOverview ServiceNow is a leading provider of enterprise cloud computing solutions that define, structure, manage and automate services for global enterprises.We help our customers improve service quality and reduce costs while scaling and automating their businesses.We generally offer our services on an annual subscription fee basis, which includes access to the ordered subscription service and related support,including updates to the subscription service during the subscription term. We provide a scaled pricing model based on the duration of the subscription term,and we frequently extend discounts to our customers based on the number of users. We generate sales through our direct sales team and, to a lesser extent,indirectly through resale partners and third-party referrals. We also generate revenues from professional 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 6,222 as of December 31, 2017 from 4,801 as of December31, 2016.New Revenue Recognition Standard under Topic 606In May 2014, the Financial Accounting Standards Board issued a new standard related to revenue recognition from contracts with customers (Topic606), which is effective beginning January 1, 2018. Topic 606 supersedes the prior revenue recognition standard (Topic 605) for periods beginning January1, 2018. The most significant impacts of the standard relate to the timing of revenue recognition related to our on-premises offerings, in which we grantcustomers the right to deploy our software on the customer’s own servers without significant penalty, the accounting for incremental costs to obtain acontract and the classification of proceeds from Knowledge and other user forums as a reduction in sales and marketing expenses instead of professionalservices and other revenues.Our results of operations below are presented under Topic 605. Our expectations for 2018 revenues, cost of revenues and operating expenses, includingthe comparison period amounts used to derive the expected trends, are based on Topic 606. In addition, our expectations for 2018 revenues, cost of revenuesand operating expenses are based on foreign exchange rates as of December 31, 2017. Refer to Note 2 in the notes to our consolidated financial statementsincluded elsewhere in this Annual Report on Form 10-K for details regarding Topic 606, including adjusted amounts for historical periods.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 500, 350 and 231 customers with ACV greater than $1 million as of December 31, 2017, 2016 and 2015,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) number and an active subscription contract as of the measurement date. The DUNS number is a global standard for businessidentification and tracking. We make exceptions for holding companies, government entities and other organizations for which the GULT, in our judgment,does not accurately represent the ServiceNow customer. For example, while all U.S. government agencies roll up to “Government of the United States” underthe GULT, 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 termcalculations are restated to allow for comparability. ACV is calculated based on the foreign exchange rate in effect at the time the contract was signed.Foreign exchange rate fluctuations could cause some variability in the number of customers with ACV greater than $1 million.26Table of ContentsG2K 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. For example, we add a G2K customer when a G2K company that is not our customer acquires a company in our existing customer base that isnot a G2K company. When we enter into a contract with a G2K parent company, or any of its related subsidiaries, or any combination of entities within a G2Kcompany, we count only one G2K customer. We do not count further penetration into entities within a given G2K as a new customer in the G2K customercount. Our G2K customer count also excludes customers that have only purchased our Express product offering, which is our entry-level IT servicemanagement solution. Our G2K customer count was 840, 737 and 637 as of December 31, 2017, 2016 and 2015, respectively.Average ACV per G2K customer. We calculate average ACV for our G2K customers by taking aggregate ACV from G2K customers as of the end of theperiod divided by the total number of G2K customers as of the end of the period. ACV is calculated based on the foreign exchange rate in effect at the timethe contract was entered into, and as a result, foreign currency rate fluctuations could cause variability in the average ACV per G2K customer. Prior G2Kcustomer counts used in calculating ACV per G2K are adjusted for the most recent Forbes Global 2000 list for comparability purposes. Our average ACV perG2K customer was approximately $1.3 million, $1.1 million and $0.9 million as of December 31, 2017, 2016 and 2015, respectively.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 fromcustomers lost during the period, divided by the total ACV from all customers that renewed during the period, excluding changes in price or users, and totalACV from all customers lost during the period. Accordingly, our renewal rate is calculated based on ACV and is not based on the number of customers thathave renewed. A lost customer is a customer that did not renew an expiring contract and that, in our judgment, will not be renewed. Typically, a customer thatreduces its subscription upon renewal is not considered a lost customer. However, in instances where the subscription decrease represents the majority of thecustomer's ACV, we may deem the renewal as a lost customer. For our renewal rate calculation, we define a customer as an entity with a separate productioninstance of our service and an active subscription contract as of the measurement date, instead of an entity with a unique GULT or DUNS number. Ourrenewal rate was 97% for the year ended December 31, 2017 and 98% for the years ended December 31, 2016 and 2015. As our renewal rate is impacted bythe timing of renewals, which could occur in advance of, or subsequent to the original contract end date, period-to-period comparison of renewal rates maynot be meaningful.Billings. We define billings, a non-GAAP financial measure, as revenues recognized plus the change in total deferred revenue as presented on theconsolidated statements of cash flows. The change in total deferred revenue as presented on the consolidated statements of cash flows represents the changein deferred revenues in local currencies translated into U.S. dollars using an average foreign currency exchange rate, and aligns actual billings with theexchange rates in effect at the time of the billings. 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, 2017 2016 2015 (dollars in thousands)Billings: Total revenues$1,933,026 $1,390,513 $1,005,480Change in deferred revenue from the consolidated statements of cashflows381,562 300,167 195,900Total billings$2,314,588 $1,690,680 $1,201,380Year-over-year percentage change in total billings37% 41% 41%Billings consists of amounts invoiced for subscription contracts with existing customers, renewals, upsells and new customers, and contracts forprofessional services, training, and our Knowledge and other user forum events. Factors that may cause our billings results to vary from period to periodinclude the following:•Billings duration. While we typically bill customers annually for our subscription services, customers sometimes request, and we accommodate,billings with durations less than or greater than the typical 12-month term.27Table of Contents•Contract start date. From time to time, we enter into contracts with a contract start date in the future, and we exclude these amounts from billings asthese amounts are not included in our consolidated balance sheets, unless such amounts have been paid as of the balance sheet date.•Foreign currency exchange rates. While a majority of our billings have historically been in U.S. Dollars, an increasing percentage of our billings inrecent periods has been in foreign currencies, particularly the Euro and British Pound Sterling.•Timing of contract renewals. While customers typically renew their contracts at the end of the contract term, from time to time customers may do soeither before or after the scheduled expiration date. For example, in cases where we are successful in upselling additional products or services, acustomer may decide to renew its existing contract early to ensure that all its contracts expire on the same date. In other cases, prolongednegotiations or other factors may result in a contract not being renewed until after it has expired.Accordingly, while we believe billings is a useful leading indicator regarding the performance of our business, an increase or decrease in new orrenewed subscriptions in a reporting period may not have an immediate impact on billings for that reporting period.To facilitate greater year-over-year comparability in our billings results, we disclose the impact that foreign currency rate fluctuations and fluctuationsin billings duration had on our billings. The impact of foreign currency rate fluctuations is calculated by translating the current period results for entitiesreporting in currencies other than U.S. Dollars into U.S. Dollars at the average 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 replacing the portion of multi-year billingsin excess of 12 months during the current period with the portion of multi-year billings in excess of 12 months during the prior period presented.Notwithstanding the adjustments described above, the comparability of billings results from period to period remains subject to the impact of variations inthe dollar value of contracts with future start dates and the timing of contract renewals, for which no adjustments have been presented.Foreign currency rate fluctuations had a favorable impact of $8.3 million and an unfavorable impact of $8.4 million on billings for the years endedDecember 31, 2017 and 2016, respectively. Changes in billings duration had a favorable impact of $1.6 million and $16.3 million for the years endedDecember 31, 2017 and 2016, respectively.In May 2014, the Financial Accounting Standards Board issued a new standard related to revenue recognition from contracts with customers (Topic606), which is effective beginning on January 1, 2018. Under Topic 606, due to the change in timing of revenue recognition under certain of our contracts,our definition of billings will be revenues recognized plus the change in total deferred revenue, unbilled receivables, and customer deposits as presented onor derived from our consolidated statements of cash flows. Refer to Note 2 in the notes to our consolidated financial statements included elsewhere in thisAnnual Report on Form 10-K for details regarding Topic 606.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. Purchases of property and equipment are otherwise included in cash used in investing activities under GAAP. We believeinformation regarding free cash flow provides useful information to investors because it is an indicator of the strength and performance of our businessoperations. However, our calculation of free cash flow may not be comparable to similar measures used by other companies. A calculation of free cash flow isprovided below: Year Ended December 31, 2017 2016 2015 (dollars in thousands)Free cash flow: Net cash provided by operating activities$642,825 $159,921 $317,754Purchases of property and equipment(150,510) (105,562) (87,481)Free cash flow (1)$492,315 $54,359 $230,273(1) 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.28Table of ContentsAverage 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, 2017, 2016 and 2015.The average upsell contract term was 26 months for the years ended December 31, 2017, 2016 and 2015. The average renewal contract term was 27 months,28 months, and 25 months for the years ended December 31, 2017, 2016 and 2015, respectively. Components of Results of Operations RevenuesSubscription revenues. Subscription revenues are primarily comprised of fees that give customers access to the ordered subscription service, and relatedsupport and updates, if any, to the subscription service during the subscription term. Pricing includes multiple instances, hosting and support services, databackup and disaster recovery services, as well as future updates, 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 professional services. Our arrangements forprofessional services are primarily on a time-and-materials basis. We generally invoice our professional services monthly in arrears based on actual hours andexpenses incurred. Other revenues primarily consist of fees from customer training delivered on-site or through publicly available classes and registration andsponsorship fees for our annual Knowledge user conference and other user forums. Typical payment terms require our customers to pay us within 30 days ofinvoice.We generate sales directly through our sales team and, to a lesser extent, through our resale partners. Revenues from our direct sales organizationrepresented 88% of our total revenues for the years ended December 31, 2017 and 2016 and 89% of our total revenues for the year ended December 31, 2015.We make sales to our resale partners at a discount and record those revenues at the discounted price when all revenue recognition criteria have been met.From time to time, other third parties provide us referrals for which we pay a referral fee. We include revenues associated with these referrals as part ofrevenues from our direct sales organization. Referral fees paid to these third parties are between 5% and 15% of the customer's ACV, depending on the levelof activity these third parties perform in the sales process. We include these fees in sales and marketing expense.Allocation of Overhead CostsOverhead 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 RevenuesCost 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 include facility costs associated with our data centers as well asinterconnectivity between data centers, depreciation related to our infrastructure hardware equipment dedicated for customer use, amortization of intangibleassets and personnel-related costs directly associated with data center operations and customer support, including salaries, benefits, bonuses and stock-basedcompensation 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 are performed directly by our services team, as well as by contracted third-party partners. Fees paid to third-party partners areprimarily recognized as cost of revenues as the professional services are delivered. Cost of revenues associated with our professional services engagementscontracted with third-party partners as a percentage of professional services and other revenues was 19% for the years ended December 31, 2017 and 2016and 21% for the year ended December 31, 2015. Sales and MarketingSales 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 include events other than Knowledge, and costs associated with purchasingadvertising and marketing data, and allocated overhead.29Table of ContentsResearch 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, costs associated with outside services contracted for research and development purposes, amortization of intangible assets and depreciation ofinfrastructure hardware equipment that is used solely for research and development purposes. General and Administrative General and administrative expenses consist primarily of personnel-related expenses for our executive, finance, legal, human resources, facilities 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 regarding 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, 2017 and 2016. 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.30Table of ContentsResults 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, 2017 2016 2015 (in thousands)Revenues: Subscription$1,739,795$1,221,639$848,278Professional services and other193,231168,874157,202Total revenues1,933,0261,390,5131,005,480Cost of revenues (1): Subscription315,570235,414183,400Professional services and other184,202163,268146,013Total cost of revenues499,772398,682329,413Gross profit1,433,254991,831676,067Operating expenses (1): Sales and marketing946,617700,464498,439Research and development377,518285,239217,389General and administrative210,533158,936126,604Legal settlements (2)— 270,000 —Total operating expenses1,534,6681,414,639842,432Loss from operations(101,414)(422,808)(166,365)Interest expense(53,394) (33,278) (31,097)Interest income and other income (expense), net5,8046,0354,450Loss before income taxes(149,004)(450,051)(193,012)Provision for income taxes1261,7535,414Net loss$(149,130)$(451,804)$(198,426) (1)Stock-based compensation included in the statements of operations data above was as follows: Year Ended December 31, 2017 2016 2015 (in thousands)Cost of revenues: Subscription$35,334 $28,420 $23,416Professional services and other27,475 26,442 23,265Sales and marketing170,527 131,571 102,349Research and development92,025 81,731 70,326General and administrative68,717 49,416 38,357Total stock-based compensation$394,078 $317,580 $257,713(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Table of Contents Year Ended December 31, 2017 2016 2015Revenues: Subscription90 % 88 % 84 %Professional services and other10 12 16Total revenues100 100 100Cost of revenues (1): Subscription16 17 18Professional services and other10 12 15Total cost of revenues26 29 33Gross profit74 71 67Operating expenses (1): Sales and marketing49 50 50Research and development19 21 22General and administrative11 11 12Legal settlements (2)— 19 —Total operating expenses79 101 84Loss from operations(5) (30) (17)Interest expense(3) (2) (3)Interest income and other income (expense), net— — 1Loss before income taxes(8) (32) (19)Provision for income taxes— — 1Net loss(8)% (32)% (20)% (1)Stock-based compensation included in the statements of operations above as a percentage of revenues was as follows: Year Ended December 31, 2017 2016 2015 (in thousands)Cost of revenues: Subscription2% 2% 2%Professional services and other1 2 2Sales and marketing9 9 10Research and development5 6 8General and administrative3 4 4Total stock-based compensation20% 23% 26% (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.32Table of ContentsComparison of the years ended December 31, 2017 and 2016As described above under the section entitled “New Revenue Recognition Standard under Topic 606,” the results of operations below are presentedunder Topic 605. Our expectations for 2018 revenues, cost of revenues and operating expenses, including the comparison period amounts used to derive theexpected trends are based on the new Topic 606 revenue recognition standard. In addition, our expectations for 2018 revenues, cost of revenues andoperating expenses are based on foreign exchange rates as of December 31, 2017. Refer to Note 2 in the notes to our consolidated financial statementsincluded elsewhere in this Annual Report on Form 10-K for details regarding Topic 606, including adjusted amounts for historical periods.Revenues Year Ended December 31, % Change 2017 2016 (dollars in thousands) Revenues: Subscription$1,739,795 $1,221,639 42%Professional services and other193,231 168,874 14%Total revenues$1,933,026 $1,390,513 39%Percentage of revenues: Subscription90% 88% Professional services and other10 12 Total100% 100% Subscription revenues increased $518.2 million during the year ended December 31, 2017, compared to the prior year, driven by our 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 31,2018 as we continue to add new customers and upsell to existing customers.Subscription revenues consist of the following: Year Ended December 31, % Change 2017 2016 (dollars in thousands) Service management products$1,526,382 $1,108,846 38%ITOM products213,413 112,793 89%Total subscription revenues$1,739,795 $1,221,639 42%Our service management products include our platform, ITSM, ITBM, customer service management, HR service delivery and security operations,which have similar features and functions and are generally priced on a per user basis. Our ITOM products, which improve visibility, availability and agilityof enterprise services, are generally priced on a per node basis.Professional services and other revenues increased $24.4 million during the year ended December 31, 2017, compared to the prior year, due to anincrease in the services provided to our growing customer base. Included within our total professional services and other revenues are the revenues from ourannual Knowledge user conference, which increased to $17.1 million during the year ended December 31, 2017, compared to $12.8 million in the prior year,due to an increase in registration and sponsorship fees in the current year.We expect professional services and other revenues under Topic 606 for the year ending December 31, 2018 to remain flat in absolute dollar termswhen compared to professional services and other revenues for the year ended December 31, 2017, as adjusted for Topic 606. This reflects our plan to focuson deploying our internal professional services organization as a strategic resource while relying on our partner ecosystem to contract directly with customersfor service delivery. As described above under the section entitled “New Revenue Recognition Standard under Topic 606,” with the adoption of Topic 606,proceeds from Knowledge and other user forums will be classified as a reduction in sales and marketing expense instead of as professional services and otherrevenues.33Table of ContentsOur international operations have provided and will continue to provide a significant portion of our total revenues. Revenues outside North Americarepresented 33% and 32% of total revenues for the years ended December 31, 2017 and 2016, respectively. Because we primarily transact in foreigncurrencies for sales outside of the United States, the general weakening of the U.S. Dollar relative to other major foreign currencies (primarily the Euro andBritish Pound Sterling) from the year ended December 31, 2016 to the year ended December 31, 2017 had a favorable impact on our revenues. For entitiesreporting in currencies other than the U.S. Dollar, if we had translated our results for the year ended December 31, 2017 at the average exchange rates in effectfor the year ended December 31, 2016 rather than the actual exchange rates in effect during the period, our reported subscription revenues would have been$6.3 million lower. The impact from the foreign currency movements from the year ended December 31, 2016 to the year ended December 31, 2017 is notmaterial to professional services and other revenues.Cost of Revenues and Gross Profit Percentage Year Ended December 31, % Change 2017 2016 (dollars in thousands) Cost of revenues: Subscription$315,570 $235,414 34%Professional services and other184,202 163,268 13%Total cost of revenues$499,772 $398,682 25%Gross profit percentage: Subscription82% 81% Professional services and other5% 3% Total gross profit percentage74% 71% Gross profit:$1,433,254 $991,831 45%Headcount (at period end) Subscription936 729 28%Professional services and other562 496 13%Total headcount1,498 1,225 22% Cost of subscription revenues increased $80.2 million during the year ended December 31, 2017, compared to the prior year, primarily due to increasedheadcount resulting in an increase of $30.8 million in personnel-related costs excluding stock-based compensation, an increase of $8.0 million in otheroverhead expenses and an increase of $6.9 million in stock-based compensation. In addition, there was an increase of $17.8 million in depreciation expenseprimarily due to purchases of infrastructure hardware equipment for our data centers, an increase of $7.2 million in data center capacity costs primarily due tothe addition of new data centers and the expansion of existing data centers, and an increase of $2.3 million in amortization of intangibles as a result ofacquisitions. Service and technical support agreement and software subscription costs increased $5.0 million, and outside service costs increased $1.2million during year ended December 31, 2017 compared to the prior year.Our subscription gross profit percentage increased to 82% for the year ended December 31, 2017, from 81% for the year ended December 31, 2016, 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 revenues, leading to a slight increase in our subscription gross profit percentage for the year ended December 31, 2018as we continue to leverage the investments we have made in our existing data center infrastructure. To the extent future acquisitions are consummated, ourcost of 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 $20.9 million during the year ended December 31, 2017 compared to the prior year, primarilydue to increased headcount resulting in an increase of $11.7 million in personnel-related costs excluding stock-based compensation, an increase of $2.1million in overhead expenses, and an increase of $1.0 million in stock-based compensation. Outside service costs increased $4.6 million during year endedDecember 31, 2017 compared to the prior year, primarily due to increased utilization of contracted third-party partners for the implementation andconfiguration of our subscription services.34Table of ContentsOur professional services and other gross profit percentage increased to 5% during the year ended December 31, 2017, compared to 3% in the prior year,primarily due to the increase in revenues from our annual Knowledge user conference. Costs associated with Knowledge are included in sales and marketingexpense. Knowledge contributed $17.1 million, or 10 percentage points, to the professional services and other gross profit percentage for the year endedDecember 31, 2017. Knowledge contributed $12.8 million, or 8 percentage points, to the professional services and other gross profit percentage for the yearended December 31, 2016.The impact from the foreign currency movements from the year ended December 31, 2016 to the year ended December 31, 2017 is not material to costof revenues. Sales and Marketing Year Ended December 31 % Change 2017 2016 (dollars in thousands) Sales and marketing$946,617 $700,464 35%Percentage of revenues49% 50% Headcount (at period end)2,413 1,875 29% Sales and marketing expenses increased $246.2 million during the year ended December 31, 2017, compared to the prior year, primarily due toincreased headcount resulting in an increase of $120.7 million in personnel-related costs excluding stock-based compensation, an increase of $39.0 millionin stock-based compensation, an increase of $22.0 million in overhead expenses, and an increase of $30.2 million in commission expense. Commissions andreferral fee expenses amounted to 7% of subscription revenues for each of the years ended December 31, 2017 and 2016. Expenses related to our annualKnowledge user conference increased $8.2 million, from $24.0 million for the year ended December 31, 2016 to $32.2 million for the year ended December31, 2017, due to a 29% increase in registrations year-over-year. Other marketing program expenses, which include expenses related to events other thanKnowledge and costs associated with purchasing advertising and marketing data, increased $17.4 million for the year ended December 31, 2017 compared tothe prior year. Outside services increased $7.0 million primarily due to an increase in contractors and professional fees to support our sales and marketingfunctions.Because we primarily transact in foreign currencies for sales and marketing expenses outside of the United States, the general weakening of the U.S.Dollar relative to other major foreign currencies from the year ended December 31, 2016 to the year ended December 31, 2017 had an unfavorable impact onour sales and marketing expenses. For entities reporting in currencies other than the U.S. Dollar, if we had translated our results for the year ended December31, 2017 at the average exchange rates in effect for the year ended December 31, 2016 rather than the actual exchange rates in effect during the period, oursales and marketing expenses would have been $2.5 million lower.We expect sales and marketing expenses to increase for the year ended December 31, 2018 in absolute dollar terms when compared to sales andmarketing expenses for the year ended December 31, 2017, as adjusted for Topic 606, but decrease slightly as a percentage of total revenues as we continueto expand our direct sales force, increase our marketing activities, grow our international operations, build brand awareness and sponsor additional marketingevents. As described above under the section entitled “New Revenue Recognition Standard under Topic 606,” with the adoption of Topic 606, proceeds fromKnowledge and other user forums will be classified as a reduction in sales and marketing expense instead of professional services and other revenues.35Table of ContentsResearch and Development Year Ended December 31 % Change 2017 2016 (dollars in thousands) Research and development$377,518 $285,239 32%Percentage of revenues19% 21% Headcount (at period end)1,419 1,054 35% Research and development expenses increased $92.3 million during the year ended December 31, 2017, compared to the prior year, primarily due toincreased headcount resulting in an increase of $60.2 million in personnel-related costs excluding stock-based compensation, an increase of $14.4 million inoverhead expenses, and an increase of $10.3 million in stock-based compensation. Outside services increased $3.6 million primarily due to an increase incontractors and consultants that support our research and development functions. Research and development expenses also increased $1.8 million due todepreciation of infrastructure hardware equipment that are used solely for research and development purposes.Because we primarily transact in foreign currencies for research and development expenses outside of the United States, the general weakening of theU.S. Dollar relative to other major foreign currencies from the year ended December 31, 2016 to the year ended December 31, 2017 had an unfavorableimpact on our research and development expenses. For entities reporting in currencies other than the U.S. Dollar, if we had translated our results for the yearended December 31, 2017 at the average exchange rates in effect for the year ended December 31, 2016 rather than the actual exchange rates in effect duringthe period, our research and development expenses would have been $1.3 million lower. We expect research and development expenses to increase for the year ended December 31, 2018 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 enhanceour core platform.36Table of ContentsGeneral and Administrative Year Ended December 31 % Change 2017 2016 (dollars in thousands) General and administrative$210,533 $158,936 32%Percentage of revenues11% 11% Headcount (at period end)892 647 38% General and administrative expenses increased $51.6 million during the year ended December 31, 2017, compared to the prior year, primarily due toincreased headcount resulting in an increase of $22.4 million in personnel-related costs excluding stock-based compensation, an increase of $19.3 million instock-based compensation, and an increase of $2.3 million in overhead expenses. Software subscription costs increased $4.6 million, and outside servicescosts, which include costs related to contractors and consultants, increased $2.3 million to support our administrative function. Amortization of intangiblesincreased $1.5 million, and acquisition-related costs increased $1.4 million from acquisitions in 2017.The impact from the foreign currency movements from the year ended December 31, 2016 to the year ended December 31, 2017 is not material togeneral and administrative expenses.We expect general and administrative expenses to increase for the year ended December 31, 2018 in absolute dollar terms as we continue to hire newemployees, but remain relatively flat as a percentage of total revenues as we continue to grow.Legal Settlements Year Ended December 31 % Change 2017 2016 (dollars in thousands) Legal settlements$— $270,000 NMPercentage of revenues—% 19% NM - Not meaningful. Legal settlements expense decreased $270.0 million during the year ended December 31, 2017 compared to the prior year, reflecting the legalsettlement agreements with HPE and BMC in the prior year. Refer to Note 16 in the notes to our consolidated financial statements included elsewhere in thisAnnual Report on Form 10-K for further details. 37Table of ContentsStock-based Compensation Year Ended December 31 % Change 2017 2016 (dollars in thousands) Cost of revenues: Subscription$35,334 $28,420 24%Professional services and other27,475 26,442 4%Sales and marketing170,527 131,571 30%Research and development92,025 81,731 13%General and administrative68,717 49,416 39%Total stock-based compensation$394,078 $317,580 24%Percentage of revenues20% 23% Stock-based compensation expense increased $76.5 million during the year ended December 31, 2017, compared to the prior year, primarily due toincreased headcount and increased weighted-average grant date fair value of equity awards.Stock-based compensation expense is inherently difficult to forecast due to fluctuations in our stock price. Based upon our stock price as of December31, 2017, we expect stock-based compensation expense to continue to increase for the year ended December 31, 2018 in absolute dollar terms, but decreaseas a percentage of total revenues as we continue to grow. Interest Expense Year Ended December 31 % Change 2017 2016 (dollars in thousands) Interest expense$(53,394) $(33,278) 60%Percentage of revenues(3)% (2)% Interest expense increased $20.1 million during the year ended December 31, 2017, compared to the prior year, due to the increase in amortizationexpense of debt discount and issuance costs related to our convertible senior notes, including the 2022 Notes issued in the three months ended June 30,2017. During the year ended December 31, 2018, we expect to incur approximately $63.3 million in amortization expense of debt discount and issuancecosts related to the convertible notes.Interest Income and Other Income (Expense), net Year Ended December 31 % Change 2017 2016 (dollars in thousands) Interest income$16,677 $8,528 96 %Foreign currency exchange loss(11,117) (2,248) NMOther244 (245) NMInterest income and other income (expense), net$5,804 $6,035 (4)%Percentage of revenues—% —% NM - Not meaningful. Interest income and other income (expense), net decreased $0.2 million during the year ended December 31, 2017, compared to the prior year, primarilydue to increased foreign exchange loss, partially offset by increased interest income. Foreign exchange losses increased $8.9 million for the year endedDecember 31, 2017 compared to the prior year as a result of fluctuations in foreign currency exchange rates. Interest income increased $8.1 million due to thehigher cash balances and higher yields on our invested balances during the year ended December 31, 2017 compared to the prior year.38Table of ContentsOur expanding international operations will continue to increase our exposure to currency risks, though we cannot presently predict the impact of thisexposure on our consolidated financial statements. While we have not engaged in the hedging of our foreign currency transactions to date, we currentlyexpect to initiate a hedging program to hedge selected significant transactions denominated in currencies other than the U.S. Dollar in 2018. Provision for Income Taxes Year Ended December 31 % Change 2017 2016 (dollars in thousands) Loss before income taxes$(149,004) $(450,051) (67)%Provision for income taxes126 1,753 (93)%Effective tax rate— % — % Our effective tax rate was 0% for the year ended December 31, 2017 and 2016. Our tax expense decreased $1.6 million during the year ended December31, 2017, compared to the prior year, primarily due to the tax effects of unrealized gains in investment securities. See Note 15 in the notes to our consolidatedfinancial statements included elsewhere in this Annual Report on Form 10-K for our reconciliation of income taxes at the statutory federal rate to theprovision for income taxes.On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted into law, changing how the U.S. imposes income tax onmultinational corporations. Significant changes include, but are not limited to, a reduction of the corporate income tax rate from 35% to 21%, a transition taxon accumulated foreign earnings, and a transition from a worldwide to a territorial tax system. We are required to recognize the effect of the Tax Act in theperiod of enactment, such as remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets andliabilities.In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB118), which allows us to record provisional amounts during a measurement period not to extend more than one year beyond the Tax Act enactment date.Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months,we consider the accounting for deferred tax remeasurements, the impact of the transition of U.S. international taxation from a worldwide tax system to aterritorial system, and other provisions to be incomplete due to the forthcoming guidance and our ongoing analysis. We expect to complete our analysiswithin the measurement period in accordance with SAB 118.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 payable in various jurisdictions. The cash tax expenses are impacted by each jurisdiction’s individual tax rates, laws ontiming of recognition of income and deductions, and availability of net operating losses and tax credits. Given the full valuation allowance, sensitivity ofcurrent cash taxes to local rules and our foreign structuring, we expect that our effective tax rate could fluctuate significantly on a quarterly basis and couldbe adversely affected to the extent earnings are lower than anticipated in countries that have lower statutory rates and higher than anticipated in countriesthat have higher statutory rates. Prior to the enactment of the Tax Act, we considered earnings from foreign operations to be indefinitely reinvested outside ofthe United States. We are currently evaluating whether to change our indefinite reinvestment assertion in light of the Tax Act and consider that assessment tobe incomplete as permitted under guidance issued by the SEC. We expect to reach a final determination within the measurement period described above.39Table of ContentsNet Loss Year Ended December 31 % Change 2017 2016 (dollars in thousands) Net loss$(149,130) $(451,804) (67)%Percentage of revenues(8)% (32)% Net loss decreased $302.7 million during the year ended December 31, 2017, primarily reflecting the settlement agreements we entered into with HPEand BMC during the prior year. Refer to Note 16 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further details. We expect to continue to incur a GAAP loss for the year ended December 31, 2018, due to increased costs and expenses including non-cash charges associated with equity awards, amortization of purchased intangibles from acquisitions, and other expenses. 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.Subscription revenues consist of the following: Year Ended December 31, % Change 2016 2015 (dollars in thousands) Service management products$1,108,846 $783,603 42%ITOM products112,793 64,675 74%Total subscription revenues$1,221,639 $848,278 44%Our service management products include our platform, ITSM, ITBM, customer service management, HR service delivery and security operations,which have similar features and functions and are generally priced on a per user basis. Our ITOM products, which improve visibility, availability and agilityof 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 currentyear.40Table of ContentsOur 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. Because we primarily transact in foreign currenciesfor sales outside of the United States, the general strengthening of the U.S. Dollar relative to other major foreign currencies (primarily Euro and the BritishPound Sterling) from the year ended December 31, 2015 to the year ended December 31, 2016 had an unfavorable impact on our revenues. For entitiesreporting in currencies other than the U.S. Dollar, if we had translated our results for the year ended December 31, 2016 at the average exchange rates in effectfor the year ended December 31, 2015 rather than the actual exchange rates in effect during the period, our subscription revenues would have increased by anadditional $6.3 million. The impact from the foreign currency movements from the year ended December 31, 2015 to the year ended December 31, 2016 isnot material to professional services and other revenues.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 infrastructure hardware equipment for our data centers, an increase of $5.3 million in data center capacity costs primarily due tothe 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.Cost of professional services and other revenues increased $17.3 million during the year ended December 31, 2016, compared to the prior year,primarily due to increased headcount resulting in an increase of $8.0 million in personnel-related costs excluding stock-based compensation, an increase of$3.2 million 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 prioryear, due to lower utilization rates as we invested in specialized resources to support our newer products and higher growth rate in our stock-basedcompensation of 14% compared to the growth rate in our professional services and other revenues of 7%, partially offset by the increase in revenues from ourannual Knowledge user conference. Costs associated with Knowledge are included in sales and marketing expense. Knowledge contributed $12.8 million, or8 percentage points, to the professional services and other gross profit percentage for the year ended December 31, 2016. Knowledge contributed $10.9million, or 7 percentage points, to the professional services and other gross profit percentage for the year ended December 31, 2015.41Table of ContentsBecause we primarily transact in foreign currencies for cost of revenues outside of the United States, the general strengthening of the U.S. Dollarrelative to other major foreign currencies from the year ended December 31, 2015 to the year ended December 31, 2016 had a favorable impact on our cost ofrevenues. For entities reporting in currencies other than the U.S. Dollar, if we had translated our results for the year ended December 31, 2016 at the averageexchange rates in effect for the year ended December 31, 2015 rather than the actual exchange rates in effect during the year ended December 31, 2016, ourcost of subscription revenues would have increased by an additional $3.3 million and our cost of professional services and other revenues would haveincreased 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 servicesexpenses increased $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 35% increase in registration year-over-year. All other marketing program expenses,which include expenses related to events other than Knowledge and costs associated with purchasing advertising and marketing data, increased $18.6million for the year ended December 31, 2016 compared to the prior year.Because we primarily transact in foreign currencies for sales and marketing expenses outside of the United States, the general strengthening of the U.S.Dollar relative to other major foreign currencies from the year ended December 31, 2015 to the year ended December 31, 2016 had a favorable impact on oursales and marketing expenses. For entities reporting in currencies other than the U.S. Dollar, if we had translated our results for the year ended December 31,2016 at the average exchange rates in effect for the year ended December 31, 2015 rather than the actual exchange rates in effect during the period, our salesand marketing expenses would have increased by an additional $6.3 million.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 expenses increased $2.0 million primarily due to increasein professional 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 infrastructure hardware equipment that are used solely for research and development purposes. Amortization ofintangible assets increased $1.2 million as a result of acquisitions in 2016.42Table of ContentsThe 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. 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.Legal Settlements Year Ended December 31 % Change 2016 2015 (dollars in thousands) Legal settlements$270,000 $— NMPercentage of revenues19% NM NM - Not meaningful. Legal settlements expenses increased $270.0 million during the year ended December 31, 2016, compared to the prior year, related to the settlementagreements with 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 further details regarding these matters. 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 expenses increased $59.9 million during the year ended December 31, 2016, compared to the prior year, primarily due toequity grants to new employees and additional grants to current employees.43Table of ContentsInterest Expense Year Ended December 31 % Change 2016 2015 (dollars in thousands) Interest expense$(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 issued in November 2013.Interest Income and Other Income (Expense), net Year Ended December 31 % Change 2016 2015 (dollars in thousands) Interest income$8,528 $4,858 76 %Foreign currency exchange gain (loss)(2,248) 51 NMOther(245) (459) (47)%Interest income and other income (expense), net$6,035 $4,450 36 %Percentage of revenues—% 1% NM - Not meaningful.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 $3.7 million due to the higher yields during the year ended December 31, 2016 compared to the prior year. Provision for Income Taxes Year Ended December 31 % Change 2016 2015 (dollars in thousands) Loss before income taxes$(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 $3.7 million duringthe year ended December 31, 2016, compared to the prior year, primarily due to a partial release of valuation allowance in connection with businesscombinations. See Note 15 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for ourreconciliation of income taxes at the statutory federal rate to the provision for income taxes.44Table of ContentsNet Loss Year Ended December 31 % Change 2016 2015 (dollars in thousands) Net loss$(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 regarding thesematters.45Table of ContentsQuarterly 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, 2017 Sep 30, 2017 June 30, 2017 March 31, 2017 Dec 31, 2016 Sep 30, 2016 June 30, 2016 March 31, 2016 (in thousands, except per share data)Revenues: Subscription$497,232 $455,421 $411,007 $376,135 $344,604 $318,934 $290,679 $267,422Professionalservices and other49,138 42,749 60,696 40,648 41,062 38,722 50,633 38,457Totalrevenues546,370 498,170 471,703 416,783 385,666 357,656 341,312 305,879Cost of revenues: Subscription87,524 81,878 75,793 70,375 64,707 61,566 56,360 52,781Professionalservices and other46,836 45,402 45,892 46,072 40,229 41,271 40,289 41,479Total costof revenues134,360 127,280 121,685 116,447 104,936 102,837 96,649 94,260Gross profit412,010 370,890 350,018 300,336 280,730 254,819 244,663 211,619Operating expenses: Sales andmarketing260,292 227,015 247,224 212,086 188,857 166,491 186,506 158,610Research anddevelopment104,559 98,465 90,005 84,489 73,933 75,018 70,364 65,924General andadministrative60,291 52,465 51,526 46,251 41,543 40,085 36,071 41,237Legal settlements(1)— — — — — — — 270,000Totaloperatingexpenses425,142 377,945 388,755 342,826 304,333 281,594 292,941 535,771Loss fromoperations(13,132) (7,055) (38,737) (42,490) (23,603) (26,775) (48,278) (324,152)Interest expense(16,813) (16,566) (11,337) (8,678) (8,532) (8,389) (8,248) (8,109)Interest income andother income(expense), net5,065 853 (7,830) 7,716 1,290 1,783 2,260 702Loss before incometaxes(24,880) (22,768) (57,904) (43,452) (30,845) (33,381) (54,266) (331,559)Provision for (benefitfrom) income taxes2,927 1,420 (1,431) (2,790) 1,744 2,877 (4,641) 1,773Net loss$(27,807) $(24,188) $(56,473) $(40,662) $(32,589) $(36,258) $(49,625) $(333,332)Net loss per share -basic and diluted$(0.16) $(0.14) $(0.33) $(0.24) $(0.20) $(0.22) $(0.30) $(2.06)(1)For details regarding the legal settlements expenses of $270.0 million included in the three months ended March 31, 2016, refer to Note 16 in the notes to our consolidatedfinancial statements included elsewhere in this Annual Report on Form 10-K.46Table of ContentsSeasonality, 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, which incentivize our direct sales force tomeet their 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 subscription agreement,which is generally 12 to 36 months. Although these seasonal factors are common in the technology industry, historical patterns should not be considered areliable indicator 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. Our operatingexpenses have increased over the periods presented primarily due to increases in headcount and other related expenses to support our growth. We havehistorically seen an increase in marketing expenses in the quarter ended June 30, and a corresponding decrease in marketing expenses in the quarter endedSeptember 30 due to the expenses incurred for our annual Knowledge user conference. Marketing expenses in the quarter ended December 31 are alsohistorically higher due to user forums we conduct in that quarter. We anticipate operating expenses will continue to increase in future periods as we continueto 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 Our principal sources of liquidity are our cash and cash equivalents, investments, and cash generated from operations. As of December 31, 2017, wehad $1.8 billion in cash and cash equivalents and short-term investments, of which $250.6 million represented cash held by foreign subsidiaries. $191.5million of the $1.8 billion are denominated in currencies other than U.S. Dollar. In addition, we had $391.4 million in long-term investments that provideadditional capital resources. We do not anticipate that we will need funds generated from foreign operations to fund our domestic operations.Prior to the enactment of the Tax Act, we considered earnings from foreign operations to be indefinitely reinvested outside of the United States. We arecurrently evaluating whether to change our indefinite reinvestment assertion in light of the Tax Act and consider that assessment to be incomplete aspermitted under guidance issued by the SEC. We expect to reach a final determination within the measurement period in accordance with SAB 118.In November 2013, we issued the 2018 Notes with an aggregate principal amount of $575.0 million. The 2018 Notes mature on November 1,2018 unless converted or repurchased in accordance with their terms prior to such date. In connection with the issuance of the 2018 Notes, we entered intothe 2018 Note Hedge transactions and 2018 Warrant transactions with certain financial institutions (the option counterparties). We may elect to settle the2018 Notes in cash, shares of our common stock, or a combination of cash and shares. If the 2018 Note Hedges are exercised, we may elect to receive cash,shares of our common stock, or a combination of cash and shares.The price of our common stock was greater than or equal to 130% of the conversion price of the 2018 Notes for at least 20 trading days during the 30consecutive trading days ending on the last trading day of the quarters ended June 30, 2017, September 30, 2017 and December 31, 2017. Therefore, the2018 Notes first became convertible at the holders’ option beginning on July 1, 2017 and continue to be convertible at the holders' option through March 31,2018. The impact of the conversion of the 2018 Notes on our liquidity will depend on the settlement method we elect for each instrument described above.We currently intend to settle the principal amount of any converted 2018 Notes in cash.47Table of ContentsDuring the year ended December 31, 2017, we paid cash to settle an immaterial principal amount of the 2018 Notes due to early conversion requests.Based on additional conversion requests we have received through the filing date, we expect to settle in cash an aggregate of $37.3 million in principalamount of the 2018 Notes during the first quarter of 2018 and $7.3 million in principal amount of the 2018 Notes during the second quarter of 2018. We mayreceive additional conversion requests that require settlement in the second quarter or the remainder of the year 2018.In May and June 2017, we issued the 2022 Notes with an aggregate principal amount of $782.5 million. We currently intend to use approximately$575.0 million of the net proceeds from the 2022 Notes to repay the 2018 Notes. In connection with the issuance of the 2022 Notes, we entered into the 2022Note Hedge transactions and 2022 Warrant transactions with certain financial institutions. Refer to Note 9 in the notes to our consolidated financialstatements and the risk factors included elsewhere in this Annual Report on Form 10-K for additional information on the 2022 Notes, the 2022 Notes Hedgesand the 2022 Warrants. In addition, in May 2017, we used approximately $55.0 million of the net proceeds from the 2022 Notes to repurchase shares of ourcommon stock sold by certain purchasers of the 2022 Notes, and during the three months ended June 30, 2017, we used approximately $73.9 million to paythe cost of the 2022 Note Hedges (after such cost was partially offset by the proceeds from the issuance of the 2022 Warrants).We anticipate our current cash and cash equivalents balance and cash generated from operations will be sufficient to meet our liquidity needs, includingthe repayment of our 2018 Notes, expansion of data centers, lease obligations, expenditures related to the growth of our headcount and the acquisition offixed assets, intangibles, and investments in office facilities, to accommodate our growth for at least the next 12 months. Whether these resources areadequate to meet our liquidity needs beyond that period will depend on our growth, operating results, cash utilized for acquisitions and/or debt retirements ifany are consummated, and the capital expenditures required to meet possible increased demand for our services. If we require additional capital resources togrow our business at any time in the future, we may seek to finance our operations from the current funds available or seek additional equity or debtfinancing. Year Ended December 31, 2017 2016 2015 (dollars in thousands)Net cash provided by operating activities$642,825 $159,921 $317,754Net cash used in investing activities (1)(883,948) (108,238) (231,521)Net cash provided by (used in) financing activities538,892 (55,752) 80,330Net increase (decrease) in cash, cash equivalents and restricted cash netof foreign currency effect325,897 (10,854) 160,050 (1)During the year ended December 31, 2017, we adopted Accounting Standards Update 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires thatamounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We have adopted changes to the consolidated statements of cash flows on a retrospective basis. The impact of theadoption for the years ended December 31, 2016 and 2015 is not material.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 compensation,and changes in operating assets and liabilities during the year.Net cash provided by operating activities was $642.8 million for the year ended December 31, 2017 compared to $159.9 million for the prior year. Theincrease in operating cash flow was primarily due to a decrease in net loss by $302.7 million. The remaining change was due to an increase in non-cashadjustments to reconcile net loss to net cash provided by operations and the favorable impact on operating cash flow from changes in operating assets andliabilities.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.48Table of Contents Investing ActivitiesNet cash used in investing activities for the year ended December 31, 2017 was $883.9 million compared to $108.2 million for the prior year. Theincrease in cash used in investing activities was mainly due to a $714.7 million increase in net purchases of investments, a $44.9 million increase in capitalexpenditures related to the purchases of infrastructure hardware equipment to support the expansion of our data centers as well as investments in leaseholdimprovements, furniture and equipment to support our headcount growth, a $23.9 million increase in business combinations, net of cash and restricted cashacquired, and a $4.3 million increase in purchases of strategic investments. The increase in cash used in investing activities was partially offset by a $12.1million decrease in purchases of other intangibles.Net cash used in investing activities for the year ended December 31, 2016 was $108.2 million compared to $231.5 million for the prior year. Thedecrease in cash used in investing activities was mainly due to a $181.6 million decrease in net purchases of investments and a $10.0 million decrease in thepurchases of strategic investments, partially offset by a $33.2 million increase in business combinations, net of cash and restricted cash acquired, a $17.0million increase in purchases of other intangibles, and a $18.1 million increase in capital expenditures related to the purchase of infrastructure hardwareequipment to support the expansion of our data centers as well as investments in leasehold improvements, furniture and equipment to support our headcountgrowth. Financing Activities Net cash provided by financing activities for the year ended December 31, 2017 was $538.9 million compared to net cash used in financing activitiesof $55.8 million for the prior year. The change was primarily due to a $698.2 million increase in net proceeds from issuance of the 2022 Notes and the 2022Note Hedge and 2022 Warrant transactions entered into during the year ended December 31, 2017 and a $16.2 million increase in proceeds from employeestock plans, partially offset by a $62.0 million increase in taxes paid related to net share settlement of equity awards and a $55.0 million increase in cash usedto repurchase shares of our common stock.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 a $107.1 million increase in taxes paid related to net share settlement of equity awards as aresult of a policy change to net settle shares for all U.S. employees starting in 2016 and a $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.49Table of ContentsContractual Obligations and CommitmentsThe following table represents our future non-cancelable contractual obligations as of December 31, 2017, aggregated by type: Payments Due by Period Total LessThan1 Year 1 – 3Years 3 – 5Years MoreThan5 Years (in thousands)Operating leases (1)$353,859 $44,713 $96,204 $88,828 $124,114Purchase obligations (2)80,974 31,394 34,434 11,053 4,093Principal amount payable on our convertible seniornotes (3)1,357,494 574,994 — 782,500 —Other3,923 574 1,148 1,148 1,053Total contractual obligations$1,796,250 $651,675 $131,786 $883,529 $129,260(1)Consists of future non-cancelable minimum rental payments under operating leases for some of our offices and data centers.(2)Consists of future minimum payments under non-cancelable purchase commitments primarily related to data center and IT operations and sales and marketing activities. Notincluded in the table above are certain purchase commitments related to our future annual Knowledge user conferences and other customer or sales conferences to be held in2019 and 2020. If we were to cancel these contractual commitments as of December 31, 2017, we would have been obligated to pay cancellation penalties of approximately$13.9 million in aggregate.(3)For additional information regarding our convertible senior notes, refer to Note 9 in the notes to our consolidated financial statements included elsewhere in this Annual Reporton Form 10-K.In addition to the obligations in the table above, approximately $4.8 million of unrecognized tax benefits have been recorded as liabilities as ofDecember 31, 2017. 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. 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.50Table of ContentsOur 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 services provided to customers for process design, implementation, configuration and optimization of our products.Professional services and other revenues also include customer training and registration and sponsorship fees for our annual Knowledge user conference andother user 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.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.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.51Table of ContentsIn 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 goodwill impairment test. To calculate any potential impairment, we compare the fair value of a reporting unit with its carrying amount,including goodwill. Any excess of the carrying amount of the reporting unit's goodwill over its fair value is recognized as an impairment loss, and thecarrying value of goodwill is written down. We have determined that we have a single reporting unit. We have not recognized any impairment charges relatedto goodwill during the years ended December 31, 2017, 2016 and 2015 because the aggregate fair value of our company has consistently and materiallyexceeded the carrying value of our single reporting unit.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.52Table of Contents 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.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 PronouncementsOn December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted into law and significantly changed how the U.S. imposes income taxon multinational corporations. Changes include, but are not limited to, a reduction of the corporate income tax rate from 35% to 21%, a transition tax onaccumulated foreign earnings, and a transition from a worldwide to a territorial tax system. We are required to recognize the effect of the Tax Act in the periodof enactment, such as remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets andliabilities.In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB118), which allows us to record provisional amounts during a measurement period not to extend more than one year beyond the Tax Act enactment date.Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months,we consider the accounting for deferred tax remeasurements, the impact of the transition of U.S. international taxation from a worldwide tax system to aterritorial system and other provisions to be incomplete due to the forthcoming guidance and our ongoing analysis. We expect to complete our analysiswithin the measurement period in accordance with SAB 118.53Table of ContentsIn May 2014, the Financial Accounting Standards Board issued a new standard related to revenue recognition from contracts with customers (Topic606), which is effective beginning January 1, 2018. Topic 606 supersedes the prior revenue recognition standard (Topic 605). Under Topic 606, for ouron‑premises offerings, we will recognize a portion of the subscription revenue when the on-premises offering is made available, resulting in a larger amountof upfront subscription revenue, and a smaller amount of deferred revenue compared with Topic 605, which required ratable revenue recognition over thecontract period. Due to the complexity of certain customer contracts, the actual revenue recognition treatment required under Topic 606 will depend oncontract-specific terms and may result in greater variability in revenue from period to period.Under Topic 606, we will defer all incremental commission costs to obtain customer contracts, including indirect costs that are not tied to a specificcontract. On initial contracts, only the portion equivalent to a renewal commission will be amortized over the contract term, while the portion incremental toa renewal commission will be amortized over a period of benefit that we have determined to be five years. On renewal contracts, these costs will be amortizedover the renewal term. Additionally, for our on-premises offerings, consistent with the recognition of subscription revenue for on-premises offerings asdescribed above, a portion of the commission costs will be expensed upfront when the on-premises offering is made available. Under Topic 605, we deferredonly direct and incremental commission costs to obtain a contract and amortized those costs over the contract term, which is generally 12 to 36 months.For details regarding these and other recently issued accounting standards, refer to Note 2, Summary of Significant Accounting Policies, of the notes toour consolidated financial statements included elsewhere in this Annual Report on Form 10-K.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 benefit from a weakening of the U.S. Dollar relative to the Euro and, conversely, areadversely affected by a strengthening of the U.S. Dollar relative to the Euro. Revenues denominated in U.S. Dollar as a percentage of total revenues was 73%during the years ended December 31, 2017 and 2016 and 74% during the year ended December 31, 2015. Changes in exchange rates have recently positivelyaffected, and may continue to positively 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 recognizednet foreign currency losses of $11.1 million and $2.2 million for the years ended December 31, 2017 and 2016, respectively. While we have not engaged inthe hedging of our foreign currency transactions to date, we may do so in 2018.A hypothetical 10% increase in the U.S. Dollar against other currencies would have resulted in an increase in operating loss of approximately $13.7million and $7.7 million for the years ended December 31, 2017 and 2016, respectively. The hypothetical increase in operating loss for the year endedDecember 31, 2017 compared to the year ended December 31, 2016 is due to an assumed decrease in the mix of foreign currency revenue relative to foreigncurrency expenses. This analysis disregards the possibilities that rates can move in opposite directions and that losses from one geographic area may be offsetby gains from another geographic area. Interest Rate Sensitivity We had an aggregate of $2.2 billion in cash, cash equivalents, short-term investments and long-term investments as of December 31, 2017. 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, 2017, a hypothetical 100 basis point increase in interest rates would have resulted in an approximate $10.7 million decline of thefair value of our available-for-sale securities. This estimate is based on a sensitivity model that measures market value changes when changes in interest ratesoccur.54Table of ContentsAs of December 31, 2016, 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 $5.7 million decline of the fair value of our available-for-salesecurities.Market RiskIn November 2013, we issued the 2018 Notes with an aggregate principal amount of $575.0 million, and in May and June 2017, we issued the 2022Notes with an aggregate principal amount of $782.5 million. We carry these instruments at face value less unamortized discount on our consolidated balancesheet. Because these instruments does not bear interest, we have no financial statement risk associated with changes in interest rates. However, the fair valueof fixed rate instruments fluctuates when interest rates change, and in the case of convertible notes, when the market price 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, 2017, we had $5.8 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.55Table of ContentsITEM 8.CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATASERVICENOW, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm57 Consolidated Financial Statements Consolidated Balance Sheets59 Consolidated Statements of Comprehensive Loss60 Consolidated Statements of Stockholders’ Equity61 Consolidated Statements of Cash Flows62 Notes to Consolidated Financial Statements63The 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.56Table of ContentsReport of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of ServiceNow, Inc.Opinions on the Financial Statements and Internal Control over Financial ReportingWe have audited the accompanying consolidated balance sheets of ServiceNow, Inc. and its subsidiaries (the “Company”) as of December 31, 2017 andDecember 31, 2016, and the related consolidated statements of comprehensive loss, of stockholders’ equity and of cash flows for each of the three years in theperiod ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited theCompany's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2017 and December 31, 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31,2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in allmaterial respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - IntegratedFramework (2013) issued by the COSO.Basis for OpinionsThe Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, andfor its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control overFinancial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on theCompany's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company AccountingOversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securitieslaws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonableassurance about whether the consolidated financial statements are free of material misstatements, whether due to error or fraud, and whether effective internalcontrol over financial reporting was maintained in all material respects.Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financialstatements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles usedand significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internalcontrol over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performingsuch other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.Definition and Limitations of Internal Control over Financial ReportingA 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.57Table of ContentsBecause 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, 2018We have served as the Company’s auditor since 2011.58Table of ContentsSERVICENOW, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data) December 31, 2017 2016Assets Current assets: Cash and cash equivalents$726,495 $401,238Short-term investments1,052,803 498,124Accounts receivable, net434,895 322,757Current portion of deferred commissions118,690 76,780Prepaid expenses and other current assets77,681 43,636Total current assets2,410,564 1,342,535Deferred commissions, less current portion85,530 61,990Long-term investments391,442 262,658Property and equipment, net245,124 181,620Intangible assets, net86,916 65,854Goodwill128,728 82,534Other assets49,600 36,576Total assets$3,397,904 $2,033,767Liabilities and Stockholders’ Equity Current liabilities: Accounts payable$32,109 $38,080Accrued expenses and other current liabilities244,605 171,636Current portion of deferred revenue1,280,499 861,782Current portion of convertible senior notes, net543,418 —Total current liabilities2,100,631 1,071,498Deferred revenue, less current portion39,884 33,319Convertible senior notes, net630,018 507,812Other long-term liabilities43,239 34,177Total liabilities2,813,772 1,646,806Commitments 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; 174,275,864 and 167,430,773shares issued and outstanding at December 31, 2017 and 2016, respectively174 167Additional paid-in capital1,731,367 1,405,317Accumulated other comprehensive loss(889) (21,133)Accumulated deficit(1,146,520) (997,390)Total stockholders’ equity584,132 386,961Total liabilities and stockholders’ equity$3,397,904 $2,033,767 See accompanying notes to consolidated financial statements59Table of ContentsSERVICENOW, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(in thousands, except share and per share data) Year Ended December 31, 201720162015Revenues: Subscription$1,739,795 $1,221,639 $848,278Professional services and other193,231 168,874 157,202Total revenues1,933,026 1,390,513 1,005,480Cost of revenues (1): Subscription315,570 235,414 183,400Professional services and other184,202 163,268 146,013Total cost of revenues499,772 398,682 329,413Gross profit1,433,254 991,831 676,067Operating expenses (1): Sales and marketing946,617 700,464 498,439Research and development377,518 285,239 217,389General and administrative210,533 158,936 126,604Legal settlements— 270,000 —Total operating expenses1,534,668 1,414,639 842,432Loss from operations(101,414) (422,808) (166,365)Interest expense(53,394) (33,278) (31,097)Interest income and other income (expense), net5,804 6,035 4,450Loss before income taxes(149,004) (450,051) (193,012)Provision for income taxes126 1,753 5,414Net loss$(149,130) $(451,804) $(198,426)Net loss per share - basic and diluted$(0.87) $(2.75) $(1.27)Weighted-average shares used to compute net loss per share - basic anddiluted171,175,577 164,533,823 155,706,643Other comprehensive income (loss): Foreign currency translation adjustments$14,867 $(4,839) $(3,177)Unrealized gains (losses) on investments, net of tax5,377 588 (1,592)Other comprehensive income (loss)20,244 (4,251) (4,769)Comprehensive loss$(128,886) $(456,055) $(203,195)(1)Includes stock-based compensation as follows: Year Ended December 31, 2017 2016 2015Cost of revenues: Subscription$35,334 $28,420 $23,416Professional services and other27,475 26,442 23,265Sales and marketing170,527 131,571 102,349Research and development92,025 81,731 70,326General and administrative68,717 49,416 38,357See accompanying notes to consolidated financial statements60Table of ContentsSERVICENOW, 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, 2014149,509,092 $150 $799,221 $(358,583) $(12,113) $428,675Common stock issued under employeestock plans11,276,672 10 93,338 — — 93,348Tax benefit from employee stock plans— — 2,663 — — 2,663Taxes paid related to net sharesettlement of equity awards— — (12,795) — — (12,795)Vesting of early exercised stock options— — 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 adjustment for ASU2016-09 adoption— — — 11,423 — 11,423Common stock issued under employeestock 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) $386,961Common stock issued under employeestock plans7,385,897 7 82,552 — — 82,559Repurchases and retirement of commonstock(540,806) — (55,000) — — (55,000)Taxes paid related to net sharesettlement of equity awards— — (182,127) — — (182,127)Stock-based compensation— — 394,680 — — 394,680Equity component of the convertiblenotes, net— — 159,891 — — 159,891Purchase of convertible note hedge— — (128,017) — — (128,017)Issuance of warrants— — 54,071 — — 54,071Other comprehensive loss, net— — — — 20,244 20,244Net loss— — — (149,130) — (149,130)Balance at December 31, 2017174,275,864 $174 $1,731,367 $(1,146,520) $(889) $584,132See accompanying notes to consolidated financial statements61Table of ContentsSERVICENOW, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year Ended December 31, 2017 2016 2015Cash flows from operating activities: Net loss$(149,130) $(451,804) $(198,426)Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization113,875 83,082 60,356Amortization of premiums on investments3,092 4,725 7,064Amortization of deferred commissions115,262 81,217 65,541Amortization of debt discount and issuance costs53,394 33,278 31,097Stock-based compensation394,078 317,580 257,713Deferred income tax(9,078) (3,424) (1,282)Other(3,997) (962) (6,223)Changes in operating assets and liabilities, net of effect of business combinations: Accounts receivable(98,432) (125,106) (50,855)Deferred commissions(174,503) (136,459) (80,142)Prepaid expenses and other assets(46,138) (21,500) (10,961)Accounts payable(5,504) (3,554) 14,785Deferred revenue381,562 300,167 195,900Accrued expenses and other liabilities68,344 82,681 33,187Net cash provided by operating activities642,825 159,921 317,754Cash flows from investing activities: Purchases of property and equipment(150,510) (105,562) (87,481)Business combinations, net of cash and restricted cash acquired(58,203) (34,297) (1,100)Purchases of other intangibles(6,670) (18,750) (1,750)Purchases of investments(1,189,511) (518,664) (712,782)Purchases of strategic investments(4,750) (500) (10,500)Sales of investments85,106 297,998 277,045Maturities of investments440,590 271,537 305,047Net cash used in investing activities(1)(883,948) (108,238) (231,521)Cash flows from financing activities: Net proceeds from borrowings on convertible senior notes772,127 — —Principal payments on convertible senior notes(4) — —Proceeds from issuance of warrants54,071 — —Purchases of convertible note hedges(128,017) — —Repurchases and retirement of common stock(55,000) — —Proceeds from employee stock plans82,567 66,378 93,348Taxes paid related to net share settlement of equity awards(181,938) (119,907) (12,795)Payments on financing obligations(4,914) (2,223) (223)Net cash provided by (used in) financing activities538,892 (55,752) 80,330Foreign currency effect on cash, cash equivalents and restricted cash(1)28,128 (6,785) (6,513)Net increase (decrease) in cash, cash equivalents and restricted cash(1)325,897 (10,854) 160,050Cash, cash equivalents and restricted cash at beginning of period(1)401,932 412,786 252,736Cash, cash equivalents and restricted cash at end of period(1)$727,829 $401,932 $412,786Cash, cash equivalents and restricted cash at end of period: Cash and cash equivalents$726,495 $401,238 $412,305Current portion of restricted cash included in prepaid expenses and other currentassets1,301 694 481Non-current portion of restricted cash included in other assets33 — —Total cash, cash equivalents and restricted cash shown in the consolidated statement ofcash flows$727,829 $401,932 $412,786Supplemental disclosures of other cash flow information: Income taxes paid, net of refunds$7,899 $4,338 $3,630Non-cash investing and financing activities: Property and equipment included in accounts payable and accrued expenses$15,007 $15,381 $14,427Intangible assets included in accrued expenses and other liabilities$6,750 $— $—Financing obligations for purchases of other intangibles$— $6,210 $— (1)During the year ended December 31, 2017, we adopted Accounting Standards Update 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires thatamounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We have adopted changes to the consolidated statements of cash flows on a retrospective basis. The impact of theadoption for the years ended December 31, 2016 and 2015 is not material.See accompanying notes to consolidated financial statements62Table of ContentsSERVICENOW, 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.and its consolidated subsidiaries.(1) Description of the BusinessServiceNow is a leading provider of enterprise cloud computing solutions that define, structure, manage and automate services for global enterprises.We help our customers improve service quality and reduce costs while scaling and automating their businesses. We typically deliver our software via theInternet as a service, through an easy-to-use, consumer product-like interface, which means it can be easily configured and rapidly deployed. In a minority ofcases, we deploy our software on-premises at a customer data center to support a customer's unique regulatory or security requirements.(2) Summary of Significant Accounting Policies 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 intercompany transactions and balances have been eliminated uponconsolidation.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 are 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, and legal contingencies. Actual results could differ from thoseestimates. 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 infrastructure that is not dedicated for customer use or researchand development use are allocated to cost of revenues and operating expenses based on headcount. 63Table of ContentsRevenue 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 services provided to customers for process design, implementation, configuration and optimization of our products.Professional services and other revenues also include customer training and registration and sponsorship fees for our annual Knowledge user conference andother user 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.64Table of ContentsDeferred 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. 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 or remaining maturities of three months or less when purchased. Cash andcash equivalents are stated at fair value. Investments Investments consist of commercial paper, corporate notes and bonds, certificates of deposit and U.S. government and agency securities. We 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 income (loss), acomponent of stockholders’ equity. We evaluate our investments to assess whether those with unrealized loss positions are other than temporarily impaired.We consider impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely we will sell the securities before therecovery of their cost basis. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specificidentification method and are reported in interest income and other income (expense), net in the consolidated statements of comprehensive loss.Strategic InvestmentsOur strategic investments consist of debt and non-marketable equity investments in privately-held companies. Debt investments in privately-heldcompanies are classified as available-for-sale and are recorded at their estimated fair value with changes in fair value recorded through accumulated othercomprehensive income (loss). We report our investments in non-marketable equity securities in privately-held companies, in which we do not have acontrolling interest or significant influence, at cost or fair value when an event or circumstance indicates an other-than-temporary decline in value hasoccurred. We include these strategic investments in “Other assets” on the consolidated balance sheets. Accounts Receivable We record trade accounts receivable at the net invoice value and such receivables are non-interest bearing. We consider receivables past due based onthe contractual payment terms. We review our exposure to accounts receivable and reserve for specific amounts if collectability is no longer reasonablyassured. 65Table of ContentsProperty 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 andgenerally amortized over the software’s estimated useful life of three to five years. Leases Leases are reviewed and classified as capital or operating at their inception. Some of our lease agreements contain rent escalation, rent holidays, leaseincentives and renewal options. Rent escalation and rent holidays are included in the determination of rent expenses to be recorded over the lease term.Unless determined to be landlord assets, lease incentives to pay for our costs or assets are recognized as a reduction of rent expense on a straight-line basisover the term of the lease. Renewals are not assumed in the determination of the lease term unless they are deemed to be reasonably assured at the inceptionof the lease. We begin recognizing rent expense on the date that we obtain the legal right to use and control the leased space. The difference between rentpayments and straight-line rent expense is recorded as deferred rent in the consolidated balance sheets. Deferred rent that will be recognized during theensuing 12-month period is recorded as the current portion of deferred rent included in “Accrued expenses and other current liabilities” and the remainder isrecorded as long term deferred rent included in “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 goodwill impairment test. To calculate any potential impairment, we compare the fair value of a reporting unit with its carrying amount, includinggoodwill. Any excess of the carrying amount of the reporting unit's goodwill over its fair value is recognized as an impairment loss, and the carrying value ofgoodwill is written down. For purposes of goodwill impairment testing, we have one reporting unit.66Table of ContentsWe 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 user forums, are expensed as incurred and are included insales and marketing expense. These costs for the years ended December 31, 2017, 2016 and 2015 were $57.3 million, $42.1 million and $26.0 million,respectively. Costs related to our annual Knowledge user conference and other user forums are deferred and expensed when the respective events occur.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, RSUs, ESPP obligations, convertible senior notes and warrants. The dilutive potential commonshares are computed using the treasury stock method or the as-if converted method, as applicable. The effects of outstanding common stock options, RSUs,ESPP obligations, convertible senior notes and warrants are excluded from the computation of diluted net loss per common share in periods in which theeffect 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 transactions that may resultfrom counterparties' non-performance. 67Table of ContentsCredit 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, 2017 and 2016, 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, 2017 Allowance for doubtful accounts$2,323 1,688 194 1,090 $3,115Year 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 $1,179Warranties 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, executive officers and certain other officers for costs associated with any fees, expenses, judgments,fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made aparty by reason of the person’s service as a director or officer, including any action by us, arising out of that person’s services as a director or officer of ourcompany or that person’s services provided to any other company or enterprise at our request. We maintain director and officer insurance coverage that mayenable us to recover a portion of any future amounts paid. The fair values of these obligations are not material as of each balance sheet date. Our agreements include provisions indemnifying customers against intellectual property and other third-party claims. We have not incurred any costs 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 within the provision for incometaxes as income and expense in the period that includes the enactment date. A valuation allowance is established if it is more likely than not that all or aportion of the deferred tax asset will not be realized. In determining the need for a valuation allowance, we consider future growth, forecasted earnings, futuretaxable income, the mix of earnings in the jurisdictions in which we operate, historical earnings, taxable income in prior years, if carryback is permitted underthe law, carryforward periods and prudent and feasible tax planning strategies.68Table of ContentsOur 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 2017In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-09, “Compensation-StockCompensation (Topic 718): Scope of Modification Accounting,” which provides guidance about which changes to the terms or conditions of a share-basedpayment award require an entity to apply modification accounting in Topic 718. This new standard is effective for our interim and annual periods beginningJanuary 1, 2018, and early adoption is permitted. We early adopted this new guidance effective October 1, 2017 and the adoption did not have a materialimpact on our consolidated financial statements. In March 2017, the FASB issued ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20)-Premium Amortization onPurchased Callable Debt Securities,” which shortens the amortization period for certain callable debt securities held at a premium to require such premiums tobe amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. This newstandard is effective for our interim and annual periods beginning January 1, 2019, and early adoption is permitted. We early adopted this new guidanceeffective October 1, 2017 and the adoption did not have a material impact on our consolidated financial statements.In 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. This 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 new standard is effective for our interim and annual periods beginning January 1, 2020, and early adoptionis permitted. We early adopted this new guidance effective October 1, 2017, and performed our annual impairment assessment in the fourth quarter of 2017under this new guidance. The adoption of this new guidance did not 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. This new standard is required to be applied on a prospective basis, effective for our interim and annual periodsbeginning January 1, 2018, and early adoption is permitted. We early adopted this new guidance effective October 1, 2017 and the adoption did not have amaterial impact 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 new standard is effective for ourinterim and annual periods beginning January 1, 2018, and early adoption is permitted. We early adopted ASU 2016-18 effective October 1, 2017 and havereclassified our consolidated statements of cash flow for each of the periods presented. The adoption did not have a material impact to our statements of cashflows.69Table of ContentsIn 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 new standard is effective for our interim and annualperiods beginning January 1, 2018, and early adoption is permitted. We early adopted ASU 2016-15 effective October 1, 2017 and applied this new standardin the cash flow presentation for the settlement of early conversion requests received for our 0% convertible senior notes due November 1, 2018 (2018 Notes).We currently expect to settle the remaining principal amount of our 2018 Notes in cash upon maturity. At that time, we expect to classify approximately$155.3 million of debt discount attributable to the difference between the 0% coupon interest rate and the 6.5% effective interest rate as an operating cashoutflow in our consolidated statements of cash flows. The remaining $419.7 million will be presented as a financing cash outflow in our consolidatedstatements of cash flows.New Accounting Pronouncements Pending AdoptionIn January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (GILTI) provisions of the Tax Cutsand Jobs Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. We are currentlyevaluating the impact of the adoption of this standard on our consolidated financial statements and have not yet made a provisional estimate as we have notyet completed our assessment or elected an accounting policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to recordGILTI as period costs if and when incurred.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 new standard is effective for our interim and annual periods beginning January 1, 2018, and early adoption is permitted. The new standard isrequired to be applied on a modified retrospective basis through a cumulative effect adjustment directly to retained earnings as of the beginning of the periodof adoption. The impact upon the adoption of this standard on our consolidated financial statements will not be material.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 new standard is effective for our interim andannual periods beginning January 1, 2020. We are currently evaluating the impact of the adoption 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, including related amendments recently issued by the FASB, is effective for our interim and annual periods beginning January 1,2019, and early adoption is permitted. While we are currently evaluating the impact of the adoption of this standard on our consolidated financial statements,we currently anticipate that the adoption of this standard will have a material impact on our consolidated balance sheets given that we had operating leasecommitments in excess of $300 million as of December 31, 2017. However, we do not anticipate that the adoption of this standard will have a material impacton our consolidated statements of comprehensive loss because the expense recognition under this new standard will be similar to current practice.In January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assetsand Financial Liabilities,” which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments, and requiresequity securities to be measured at fair value with changes in fair value recognized through net income, which results in greater variability in our net income.This new standard allows a measurement alternative for equity investments that do not have readily determinable fair values to be measured at cost, less anyimpairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the sameissuer. This new standard is effective for our interim and annual periods beginning January 1, 2018, and will be adopted by means of a cumulative-effectadjustment to the balance sheet as of the beginning of the fiscal year of adoption, with prospective adoption of the amendments related to equity securitieswithout readily determinable fair values existing as of the date of adoption. We expect the adoption of this standard to impact our strategic investments andour marketable equity securities, and plan to elect the measurement alternative for equity investments that do not have readily determinable fair values. Weexpect to reclassify $10.7 million of unrealized gains on our marketable equity securities as of December 31, 2017 to the accumulated deficit on ourconsolidated balance sheet effective January 1, 2018.70Table of ContentsRevenue from Contracts with CustomersIn May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Topic 606 supersedes the prior revenuerecognition standard (Topic 605). Under the Topic 606 standard, revenue is recognized when a customer obtains control of promised goods or services and isrecognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, this standardrequires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Topic 606 also includesSubtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with acustomer.The Topic 606 guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method) orretrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). Wewill adopt the standard using the full retrospective method to restate each prior reporting period presented.In preparation for adoption of the standard on January 1, 2018, we have implemented internal controls and key system functionality to enable thepreparation of financial information and have reached conclusions on key accounting assessments related to the standard. The most significant impacts of thestandard relate to the timing of revenue recognition related to our on-premises offerings, in which we grant customers the right to deploy our software on thecustomer’s own servers without significant penalty, the accounting for incremental costs to obtain a contract and the classification of proceeds for Knowledgeand other user forums as a reduction in sales and marketing expenses instead of professional services and other revenues.Under the Topic 606 standard, for our on-premises offerings, the requirement to have vendor specific objective evidence (VSOE) for undeliveredelements is eliminated. As a result, we will recognize as subscription revenues a portion of the sales price upon delivery of the software, compared to thecurrent practice of recognizing the entire sales price ratably over an estimated subscription period due to the lack of VSOE. To the extent the amountsrecognized as subscription revenues have not been billed, the revenue will be recorded as “unbilled receivables” and reported under “prepaid expenses andother current assets” for short-term unbilled receivables and “other assets” for long-term unbilled receivables on our consolidated balance sheets. In addition,refundable amounts associated with customer contracts will be recorded as “customer deposits” and presented under “accrued expenses and other currentliabilities” on our consolidated balance sheets.In addition, we expect the Topic 606 standard to change the way we account for commissions paid on both our on-premises offerings and our cloud-based subscription offerings. Our current practice is to defer only direct and incremental commission costs to obtain a contract and amortize those costs overthe contract term, which is generally 12 to 36 months, for both our on-premises offerings and our cloud-based subscription offerings. Under Topic 606, wewill defer all incremental commission costs to obtain customer contracts, including indirect costs that are not tied to a specific contract, for both our on-premises offerings and our cloud-based subscription offerings. On initial contracts, only the portion equivalent to a renewal commission will be amortizedover the contract term, while the portion incremental to a renewal commission will primarily be amortized over a period of benefit that we have determined tobe approximately five years. On renewal contracts, these costs will be amortized over the renewal term. Additionally, for our on-premises offerings, consistentwith the recognition of subscription revenue for on-premises offerings as described above, a portion of the commission cost will be expensed upfront whenthe on-premises offering is made available.The direct effect on income taxes resulting from the above-mentioned changes to revenues and commission expenses would result in additional incometax expense being recorded in each of the prior reporting periods that have been restated. The indirect effect of Topic 606 on income taxes associated withintercompany adjustments will be recorded in the first quarter of 2018.Impact on statements of operationsThe table below provides specified line items from our consolidated statements of operations on (i) an actual basis and (ii) as adjusted to reflect theimpact that the adoption of Topic 606 would have had on such line items if such adoption had been effective for the applicable periods (in thousands, exceptshare and per share data):71Table of Contents Year Ended December 31, 2017 2016 As Reported As Adjusted As Reported As AdjustedRevenues: Subscription and software$1,739,795 $1,739,500 $1,221,639 $1,234,070Professional services and other193,231 178,994 168,874 156,915Total revenues1,933,026 1,918,494 1,390,513 1,390,985Cost of revenues: Professional services and other184,202 184,292 163,268 163,581Total cost of revenues499,772 499,862 398,682 398,995Gross profit1,433,254 1,418,632 991,831 991,990Operating expenses: Sales and marketing946,617 894,977 700,464 659,983Total operating expenses1,534,668 1,483,028 1,414,639 1,374,158Loss from operations(101,414) (64,396) (422,808) (382,168)Interest income and other income (expense), net5,804 4,384 6,035 5,027Loss before income taxes(149,004) (113,406) (450,051) (410,419)Provision for income taxes126 3,440 1,753 3,830Net loss$(149,130) $(116,846) $(451,804) $(414,249)Net loss per share - basic and diluted$(0.87) $(0.68) $(2.75) $(2.52)Weighted-average shares used to compute net lossper share - basic and diluted171,175,577 171,175,577 164,533,823 164,533,823Impact on balance sheetsThe table below provides specified line items from our consolidated balance sheets on (i) an actual basis and (ii) as adjusted to reflect the impact thatthe adoption of Topic 606 would have had on such line items if such adoption had been effective as of the applicable date (in thousands): Year Ended December 31, 2017 As Reported As AdjustedAssets Accounts receivable, net$434,895 $437,051Current portion of deferred commissions118,690 109,643Prepaid expenses and other current assets77,681 95,959Deferred commissions, less current portion85,530 224,252Other assets49,600 51,832Liabilities Accrued expenses and other current liabilities244,605 253,257Current portion of deferred revenue1,280,499 1,210,695Deferred revenue, less current portion39,884 36,120Other long-term liabilities43,239 65,884Stockholder's equity Accumulated other comprehensive (loss) income(889) 5,767Accumulated deficit(1,146,520) (958,564)72Table of ContentsImpact on statements of cash flowsWhile there will be material changes within individual line items included as part of cash provided by (used in) operating activities, we do not expectthe adoption of the Topic 606 standard to have a material impact on net cash provided by (used in) operating, financing, or investing activities in ourconsolidated cash flows statements.Impact on footnote disclosuresIn future periods, Topic 606 will also require us to disclose in the notes to our consolidated financial statements the amount and timing of revenuesexpected to be recognized from remaining performance obligations under customer contracts. (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, 2017 AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses EstimatedFair ValueAvailable-for-sale securities: Commercial paper$258,348 $1 $(5) $258,344Corporate notes and bonds1,006,302 26 (3,084) 1,003,244Certificates of deposit33,084 — — 33,084U.S. government agency securities129,494 — (638) 128,856Marketable equity securities10,000 10,717 — 20,717Total available-for-sale securities$1,437,228 $10,744 $(3,727) $1,444,245 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) $760,782As of December 31, 2017, the contractual maturities of our investment securities, excluding marketable equity securities and those securities classifiedwithin cash and cash equivalents on the consolidated balance sheets, did not exceed 24 months. The fair values of available-for-sale investment securities, byremaining contractual maturity, are as follows (in thousands): December 31,2017Due in one year or less$1,032,086Due in one year through two years391,442Total$1,423,52873Table of ContentsThe 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, excluding those securities classified within cash and cash equivalents onthe consolidated balance sheets (in thousands): December 31, 2017 Less than 12 Months 12 Months or Greater Total Fair Value GrossUnrealizedLosses Fair Value GrossUnrealizedLosses Fair Value GrossUnrealizedLossesCommercial paper$14,809 $(5) $— $— $14,809 $(5)Corporate notes and bonds819,113 (2,703) 141,874 (381) 960,987 (3,084)U.S. government agency securities106,301 (593) 22,555 (45) 128,856 (638)Total$940,223 $(3,301) $164,429 $(426) $1,104,652 $(3,727) 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) As of December 31, 2017, we had a total of 405 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 InvestmentsAs of December 31, 2017 and 2016, the total amount of debt and equity investments in privately-held companies included in other assets on ourconsolidated balance sheets was $5.8 million and $11.0 million, respectively. During the year ended December 31, 2017, we reclassified $10.0 million ofnon-marketable equity securities (at cost) to short-term investments on our consolidated balance sheets due to an initial public offering by the investee, andrecorded an unrealized gain of $10.7 million within other comprehensive income (loss) in our consolidated statements of comprehensive loss. We alsoacquired an additional $4.8 million in strategic investments during the year ended December 31, 2017. The fair value of our debt investments in privately-held companies included within our strategic investments is $1.5 million and $0.5 million as of December 31, 2017 and 2016, respectively. Theseinvestments are recorded at fair value using significant unobservable inputs or data in an inactive market and the valuation requires our judgment due to theabsence of quoted prices in active markets and inherent lack of liquidity and are categorized accordingly as Level 3 in the fair value hierarchy. We have notrecorded any impairment charges for any of our investments in privately-held companies.74Table of Contents(4) Fair Value MeasurementsThe following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis as of December 31, 2017 (in thousands): Level 1 Level 2 TotalCash equivalents: Money market funds$282,507 $— $282,507Commercial paper— 100,456 100,456Corporate notes and bonds— 50,437 50,437Short-term investments: Commercial paper— 258,344 258,344Corporate notes and bonds— 688,316 688,316Certificates of deposit— 17,950 17,950U.S. government agency securities— 67,476 67,476Marketable equity securities20,717 — 20,717Long-term investments: Corporate notes and bonds— 314,928 314,928Certificates of deposit— 15,134 15,134U.S. government agency securities— 61,380 61,380Total$303,224 $1,574,421 $1,877,645 The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis as of 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 $926,409We 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 3 for the fair value measurement of our debt investments in privately-held companies and Note 9 for the fair value measurement of ourconvertible senior notes, which are not included in the table above.Table of Contents(5) Business Combinations2017 Business CombinationsSkyGiraffeOn October 31, 2017, we completed the acquisition of a privately-held company, SkyGiraffe Ltd. (SkyGiraffe), by acquiring all issued and outstandingcommon shares of SkyGiraffe for approximately $32.3 million in an all-cash transaction to enhance the consumer product-like mobile experience of oursolutions.The following table summarizes the allocation of the purchase price to the fair value of the tangible and intangible assets acquired and liabilitiesassumed as of the acquisition date: Purchase Price Allocation(in thousands) Useful Life(in years)Net tangible assets acquired$675 Intangible assets: Developed technology15,600 5Goodwill19,386 Net deferred tax liabilities (1)(3,341) Total purchase price$32,320 (1)Deferred tax liabilities, net primarily relates to purchased identifiable intangible assets and is shown net of deferred tax assets.DxContinuumOn January 20, 2017, we completed the acquisition of a privately-held company, DxContinuum, Inc. (DxContinuum), by acquiring all issued andoutstanding common shares of DxContinuum for approximately $15.0 million in an all-cash transaction to enhance the predictive capabilities of oursolutions.The following table summarizes the allocation of the purchase price to the fair value of the tangible and intangible assets acquired and liabilitiesassumed as of the acquisition date: Purchase Price Allocation(in thousands) Useful Life(in years)Net tangible assets acquired$37 Intangible assets: Developed technology6,400 5Goodwill11,159 Net deferred tax liabilities (1)(2,561) Total purchase price$15,035 (1)Deferred tax liabilities, net primarily relates to purchased identifiable intangible assets and is shown net of deferred tax assets.Other 2017 Business CombinationsWe also completed the acquisitions of Qlue, Inc. and Digital Telepathy, Inc. (Telepathy) during the year ended December 31, 2017 forapproximately $11.6 million in cash, and have included the results of operations of these companies in our consolidated financial statements from theirrespective dates of purchase. In allocating the aggregate purchase price based on the estimated fair value, we recorded $9.1 million of goodwill, $3.5 millionof developed technology intangible assets (to be amortized over estimated useful life of five years) and $1.1 million of deferred tax liabilities. Amountsallocated to the remaining acquired tangible assets and assumed liabilities were not material. $4.1 million of the goodwill balance associated with thesebusiness combinations is deductible for income tax purposes. We are obligated to make cash payments of up to $5.0 million in connection with theacquisition of Telepathy, contingent upon the continued employment by us of certain former employees on specified future dates. We determined that thisadditional consideration was not part of the purchase price and will be recognized as post-acquisition expense over the related requisite service period.76Table of ContentsFor all of our 2017 business combinations, the excess of purchase consideration over the fair value of net tangible and identifiable intangible assetsacquired was recorded as goodwill. We believe the goodwill resulting from these business combinations represents the synergies expected from expandedmarket opportunities when integrating the acquired technologies with our offerings. Aggregate acquisition-related costs associated with our 2017 businesscombinations of $2.4 million for the year ended December 31, 2017 are included in general and administrative expenses in our consolidated statement ofcomprehensive loss.2016 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 of our 2016 business combinations, the excess of purchase consideration over the fair value of net tangible and identifiable intangible assetsacquired was recorded as goodwill. We believe the goodwill represents the synergies expected from expanded market opportunities when integrating theacquired technologies with our offerings. The goodwill balance for both business combinations is not deductible for income tax purposes. Acquisition-related costs of $1.0 million are included in general and administrative expenses in our consolidated statements of comprehensive loss.77Table of ContentsUnaudited Pro Forma Financial InformationThe results of operations of our 2017 and 2016 business combinations have been included in our consolidated financial statements from their respectivedates of purchase. The following pro forma consolidated financial information combines the results of operations from us and all the companies that weacquired since January 1, 2016 for the years ended December 31, 2017 and 2016, as if these acquisitions had occurred on January 1, 2016 (in thousands,except share and per share data): Year Ended December 31, 2017 2016 (Unaudited)Revenue$1,937,374 $1,397,600Net loss$(153,218) $(467,578)Weighted-average shares used to compute net loss per share - basic and diluted171,175,577 164,533,823Net loss per share - basic and diluted$(0.90) $(2.84)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, 2015 $55,669Goodwill acquired 26,695Foreign currency translation adjustments 170Balance as of December 31, 2016 82,534Goodwill acquired 39,668Foreign currency translation adjustments 6,526Balance as of December 31, 2017 $128,728Intangible assets consist of the following (in thousands): December 31, 2017 Gross Carrying Amount AccumulatedAmortization Net Carrying AmountDeveloped technology$102,349 $(43,382) $58,967Patents31,030 (3,239) 27,791Other1,575 (1,417) 158Total intangible assets$134,954 $(48,038) $86,916 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) $65,85478Table of ContentsApart from the business combinations described in Note 5, we acquired $13.4 million and $25.0 million of intangible assets in patents and technologyacquisitions during the years ended December 31, 2017 and December 31, 2016, respectively. Weighted-average useful life for the patents and technologyacquired during the year ended December 31, 2017 is approximately ten years. Weighted average useful life for the patents and technology acquired duringthe year ended December 31, 2016 is approximately nine years and five years, respectively.Amortization expense for intangible assets was approximately $19.7 million, $15.1 million and $11.8 million for the years ended December 31,2017, 2016 and 2015, respectively.The following table presents the estimated future amortization expense related to intangible assets held at December 31, 2017 (in thousands):Years Ending December 31,2018 $22,7722019 22,6912020 12,7362021 10,8052022 6,974Thereafter 10,938Total future amortization expense $86,916(7) Property and EquipmentProperty and equipment, net consists of the following (in thousands): December 31, 2017 2016Computer equipment$326,378 $222,648Computer software46,413 32,132Leasehold and other improvements56,232 37,095Furniture and fixtures38,789 31,574Building7,084 6,379Construction in progress5,341 2,535 480,237 332,363Less: Accumulated depreciation(235,113) (150,743)Total property and equipment, net$245,124 $181,620 Construction in progress consists primarily of leasehold improvements and in-process software development costs. Depreciation expense was $93.2million, $67.8 million and $48.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.79(8) Accrued Expenses and Other Current LiabilitiesAccrued expenses and other current liabilities consist of the following (in thousands): December 31, 2017 2016Taxes payable$25,617 $19,472Bonuses and commissions84,972 67,259Accrued compensation45,428 30,816Other employee related liabilities44,284 28,812Other44,304 25,277Total accrued expenses and other current liabilities$244,605 $171,636Table of Contents(9) Convertible Senior NotesIn May and June 2017, we issued $782.5 million of 0% convertible senior notes (the 2022 Notes), due June 1, 2022 unless earlier converted orrepurchased in accordance with their terms. In November 2013, we issued $575.0 million of 0% convertible senior notes (the 2018 Notes, and together withthe 2022 Notes, the Notes), due November 1, 2018 unless earlier converted or repurchased in accordance with their terms. The Notes do not bear interest, andwe cannot redeem the Notes prior to maturity.The Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence ofindebtedness or the issuance or repurchase of securities by us or any of our subsidiaries.Upon conversion of the Notes, we may choose to pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash andshares of our common stock. We currently intend to settle the principal amount of the Notes with cash. Convertible Date Initial Conversion Priceper Share Initial Conversion Rateper $1,000 Par Value Initial Number of Shares2022 NotesFebruary 1, 2022 $134.75 7.42 shares 5,806,9362018 NotesJuly 1, 2018 $73.88 13.54 shares 7,783,023Holders of the Notes may convert their Notes at their option at any time prior to the close of business on the business day immediately precedingFebruary 1, 2022 and July 1, 2018, for the 2022 Notes and 2018 Notes, respectively (each, a Convertible Date), only under the following circumstances:•during any calendar quarter (and only during such calendar quarter) if the last reported sale price of our common stock for at least 20 trading days(whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendarquarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; or•during the five-business day period after any five-consecutive trading day period, or the measurement period, in which the trading price per $1,000principal 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 applicable conversion rate on each such trading day; or•upon the occurrence of specified corporate events.On or after the applicable Convertible Date, a holder may convert all or any portion of its Notes at any time prior to the close of business on the secondscheduled trading day immediately preceding the maturity date regardless of the foregoing conditions. Upon conversion, we will pay or deliver, as the casemay be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. As noted above, we currently intend tosettle the principal amount of the Notes with cash.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 respective Notes plus any accrued and unpaidspecial interest, if any.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 respective Notes. The equity component is not remeasured as long as it continues to meet theconditions for equity classification.81Table of ContentsIn 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 therespective terms of the Notes, and transaction costs attributable to the equity component were netted with the equity component of the Notes in stockholders’equity. The Notes consisted of the following (in thousands): December 31, 2017 December 31, 2016Liability component: Principal: 2022 Notes$782,500 $—2018 Notes574,994 575,000Less: debt issuance cost and debt discount, net of amortization 2022 Notes(152,482) —2018 Notes(31,576) (67,188)Net carrying amount$1,173,436 $507,812 2022 Notes 2018 NotesEquity component recorded at issuance: Note$162,039 $155,319Issuance cost(2,148) (3,257)Net amount recorded in equity$159,891 $152,062The price of our common stock was greater than or equal to 130% of the conversion price of the 2018 Notes for at least 20 trading days during the 30consecutive trading days ending on the last trading day of the quarter ended June 30, 2017. Therefore, the 2018 Notes first became convertible at the holders’option beginning on July 1, 2017 and continue to be convertible at the holders' option through March 31, 2018. During the year ended December 31, 2017,we paid cash to settle an immaterial principal amount of the 2018 Notes. Based on additional conversion requests we have received through the filing date,we expect to settle in cash an aggregate of $37.3 million in principal amount of the 2018 Notes during the first quarter of 2018 and $7.3 million in principalamount of the 2018 Notes during the second quarter of 2018. We may receive additional conversion requests that require settlement in the second quarter orthe remainder of the year 2018.As we have the option to settle the principal amount in shares and we are less than 12 months away from the maturity date, we have classified the netcarrying amount of our 2018 Notes as a current liability and the equity component of our 2018 Notes continues to remain in permanent equity. Our 2018Notes were not convertible as of December 31, 2016. Our 2022 Notes were not convertible as of December 31, 2017.We consider the fair value of the Notes at December 31, 2017 to be a Level 2 measurement. The estimated fair values of the Notes at December 31, 2017and December 31, 2016 based on the closing trading price per $100 of the Notes were as follows (in thousands): December 31, 2017 December 31, 20162022 Notes$897,778 N/A2018 Notes$1,015,554 $681,37582Table of ContentsAs of December 31, 2017, the remaining life of the 2022 Notes and 2018 Notes are 53 months and 10 months, respectively. The following table setsforth total interest expense recognized related to the Notes (in thousands): Year Ended December 31, 2017 2016 2015Amortization of debt issuance cost 2022 Notes$860 $— $—2018 Notes1,911 1,785 1,668Amortization of debt discount 2022 Notes16,921 — —2018 Notes33,702 31,493 29,429Total$53,394 $33,278 $31,097Effective interest rate of the liability component 2022 Notes4.75%2018 Notes6.50%Note HedgesTo minimize the impact of potential economic dilution upon conversion of the Notes, we entered into convertible note hedge transactions (the 2022Note Hedge and 2018 Note Hedge, respectively, and collectively, the Note Hedges) with certain investment banks, with respect to our common stockconcurrently with the issuance of the 2022 Notes and 2018 Notes. Purchase Shares (in thousands) 2022 Note Hedge$128,017 5,806,9362018 Note Hedge$135,815 7,783,023The Note Hedges cover shares of our common stock at a strike price per share that corresponds to the initial conversion price of the respective Notes,subject to adjustment, and are exercisable upon conversion of the Notes. If exercised, we may elect to receive cash, shares of our common stock, or acombination of cash and shares. We have accounted for the aggregate amount of purchase price for the Note Hedges as a reduction to additional paid-incapital. The Note Hedges will expire upon the maturity of the Notes. The Note Hedges are intended to reduce the potential economic dilution uponconversion of the Notes in the event that the fair value per share of our common stock at the time of exercise is greater than the conversion price of the Notes.The Note Hedges are separate transactions and are not part of the terms of the Notes. Holders of the Notes will not have any rights with respect to the NoteHedges. The Note Hedges do not impact earnings per share, as they were entered into to offset any dilution from the Notes. As of December 31, 2017,7,782,946 shares remain subject to the 2018 Note Hedge due to early conversions that have occurred during the year ended December 31, 2017.Warrants Proceeds Shares Strike Price First Expiration Date (in thousands) 2022 Warrants$54,071 5,806,936 $203.40 September 20222018 Warrants$84,525 7,783,023 $107.46 February 2019Separately, we entered into warrant transactions with certain investment banks, whereby we sold warrants to acquire, subject to adjustment, the numberof shares of our common stock shown in the table above (the 2022 Warrants and 2018 Warrants, respectively, and collectively, the Warrants). If the averagemarket value per share of our common stock for the reporting period, as measured under the Warrants, exceeds the strike price of the respective Warrants, suchWarrants would have a dilutive effect on our earnings per share to the extent we report net income. According to the terms of each of the Warrants, theWarrants will be automatically exercised over a 60 trading day period beginning on the first expiration date of the respective Warrants as set forth above. TheWarrants are separate transactions and are not remeasured through earnings each reporting period. The Warrants are not part of the Notes or Note Hedges, andhave been accounted for as part of additional paid-in capital.83(10) Accumulated Other Comprehensive LossThe components of accumulated other comprehensive loss consist of the following (in thousands): December 31, 2017 2016Foreign currency translation adjustment$(4,410) $(19,277)Net unrealized gain (loss) on investments, net of tax3,521 (1,856) Accumulated other comprehensive loss$(889) $(21,133)Reclassification adjustments out of accumulated other comprehensive loss into net loss were immaterial for all periods presented.(11) Stockholders' EquityCommon StockWe are authorized to issue a total of 600,000,000 shares of common stock as of December 31, 2017. Holders of our common stock are not entitled toreceive dividends unless declared by our board of directors. As of December 31, 2017, we had 174,275,864 shares of common stock outstanding and hadreserved shares of common stock for future issuance as follows: December 31, 2017Stock plans: Options outstanding 3,369,732RSUs (1) 11,403,341Stock awards available for future grants: 2012 Equity Incentive Plan (2) 25,813,8482012 Employee Stock Purchase Plan (2) 9,581,944Total reserved shares of common stock for future issuance 50,168,865 (1)Represents the number of shares issuable upon settlement of outstanding RSUs and performance RSUs, assuming 100% of the target number of shares for performance RSUs, asdiscussed under the section entitled “RSUs” in Note 12.(2)Refer to Note 12 for a description of these plans.During the years ended December 31, 2017 and 2016, we issued a total of 7,385,897 shares and 6,645,009 shares, respectively, from stock optionexercises, vesting of RSUs, net of employee payroll taxes and purchases from ESPP. In May 2017, we repurchased and retired 540,806 shares of our commonstock for approximately $55.0 million, or $101.70 per share, from certain purchasers of the 2022 Notes in connection with the 2022 Notes offering. We hadno similar repurchases or retirements of common stock during the year ended December 31, 2016.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, 2017 and 2016, no shares of preferred stock were outstanding.(12) Equity AwardsWe currently have two equity incentive plans, our 2005 Stock Option Plan (the 2005 Plan) and our 2012 Equity Incentive Plan (the 2012 Plan). Our2005 Plan was terminated in connection with our initial public offering in 2012 but continues to govern the terms of outstanding stock options that weregranted prior to the termination of the 2005 Plan. We no longer grant equity awards pursuant to our 2005 Plan. 84Table of ContentsOur 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 (collectively, equity awards). In addition, the 2012 Plan provides for the grant of performance cash awards.Incentive stock options may be granted only to employees. All other equity awards may be granted to employees, including officers, as well as directors 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 our board of directors. On January 1, 2018, 8,713,793 shares of common stock were automatically addedto the 2012 Plan pursuant to the provision described in the preceding sentence.Our 2012 Employee Stock Purchase Plan (the 2012 ESPP) authorizes the issuance of shares of common stock pursuant to purchase rights granted to ouremployees. The price at which common stock is purchased under the 2012 ESPP is equal to 85% of the fair market value of our common stock on the first orlast day of the offering period, whichever is lower. Offering periods are six months long and begin on February 1 and August 1 of each year. The number ofshares of common stock reserved for issuance automatically increases on January 1 of each year until January 1, 2022, by up to 1% of the total number ofshares of common stock outstanding on December 31 of the preceding year as determined by our board of directors. On January 1, 2018, 1,742,758 shares ofcommon stock were automatically added to the 2012 ESPP pursuant to the provision described in the preceding sentence.Stock OptionsStock options are exercisable at a price equal to the market value of the underlying shares of common stock on the date of the grant as determined byour 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. A summary of stock option activity was as follows: Number ofShares Weighted-AverageExercisePrice Weighted-AverageRemainingContractualTerm (Years) AggregateIntrinsic Value(in thousands)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 Granted616,720 86.33 Exercised(2,970,914) 12.44 $277,670Canceled(94,509) 68.88 Outstanding at December 31, 20173,369,732 $38.43 5.62 $309,892Vested and expected to vest as of December 31, 20173,283,791 $37.62 5.54 $304,651Vested and exercisable as of December 31, 20172,426,777 $21.96 4.38 $263,144 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 $523.1 million for the year ended December 31, 2015. The weighted-average grant datefair value per share of options granted was $37.57, $28.01 and $32.64 for the years ended December 31, 2017, 2016 and 2015, respectively. The total fairvalue of shares vested was $11.8 million, $17.0 million and $34.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. Included in the number of options granted during the year ended December 31, 2017 are 396,720 options with both service and market-based criteria,which were granted to our new President and Chief Executive Officer, who started his employment with us during the year. The fair values of the optionsgranted and the corresponding derived service periods were calculated using a Monte Carlo simulation, which estimates the potential outcome of reachingthe market condition based on simulated future stock prices. The stock-based compensation expense associated with these options are recorded on a gradedvesting basis.85Table of ContentsAs of December 31, 2017, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options wasapproximately $23.7 million. The weighted-average remaining vesting period of unvested stock options at December 31, 2017 was 3.16 years. 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, 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 Granted6,320,457 95.70 Vested(5,502,004) 60.79 $573,861Forfeited(1,637,394) 72.69 Outstanding at December 31, 201711,403,341 $81.50 $1,486,882Expected to vest as of December 31, 201710,191,316 $1,328,846RSUs 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 $254.7 million for the year ended December 31, 2015.Included in the RSU activity table above are shares with both service and performance-based vesting criteria that were granted to certain executives.The number of shares eligible to vest for these performance RSUs will depend upon achievement of a performance metric and are considered as eligible tovest when approved by the compensation committee in January of the year following the grant. The ultimate number of shares eligible to vest forperformance RSUs range from 0% to 180% of the target number of shares depending on achievement relative to the performance metric over the applicableperiod. The shares granted in each year will primarily vest in four quarterly increments from August of the following year contingent on the continuousemployment of each executive. The number of RSUs granted in each year in the table above reflects the shares that could be eligible to vest at 100% of targetfor performance RSUs in each applicable period and includes adjustments for over or under achievement for performance RSUs granted in the prior year. Werecognized $40.5 million, $36.1 million, and $30.8 million of stock-based compensation expense, net of actual and estimated forfeitures, associated withperformance RSUs on a graded vesting basis during the year ended December 31, 2017, 2016, and 2015, respectively.As of December 31, 2017, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs was approximately$671.0 million and the weighted-average remaining vesting period was 2.77 years.86Table of Contents(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, 2017 2016 2015 Stock Options: Expected volatility39% - 42% 41% - 42% 41% - 46%Expected term (in years)4.89 4.89 - 5.60 5.50 - 6.08Risk-free interest rate1.78% - 2.47% 1.18% - 1.87% 1.48% - 1.94%Dividend yield—% —% —% The following assumptions were used to calculate our stock-based compensation for each stock purchase right granted under the 2012 ESPP: Year Ended December 31, 2017 2016 2015 ESPP: Expected volatility28% - 49% 31% - 49% 31% - 49%Expected term (in years)0.50 0.50 0.50Risk-free interest rate0.40% - 1.15% 0.17% - 0.47% 0.05% - 0.17%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. 87(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, 2017 2016 2015Numerator: Net loss$(149,130) $(451,804) $(198,426)Denominator: Weighted-average shares outstanding - basic and diluted171,175,577 164,533,823 155,706,643Net loss per share - basic and diluted$(0.87) $(2.75) $(1.27) Potentially dilutive securities that are not included in the calculation of diluted net loss per share because doing so would be antidilutive are asfollows: Year Ended December 31, 2017 2016 2015Common stock options3,369,732 5,818,435 8,255,554Restricted stock units11,403,341 12,222,282 12,417,805ESPP obligations361,688 366,529 254,7282018 Notes7,782,946 7,783,023 7,783,0232018 Warrants7,783,023 7,783,023 7,783,0232022 Notes5,806,933 — —2022 Warrants5,806,933 — —Total potentially dilutive securities42,314,596 33,973,292 36,494,133(15) Income TaxesThe provision for income taxes consists of the following (in thousands): Year Ended December 31, 2017 2016 2015Current provision: Federal$(445) $(55) $682State137 135 211Foreign9,512 5,097 6,125 9,204 5,177 7,018Deferred provision: Federal(5,934) (4,462) —State(886) (746) —Foreign(2,258) 1,784 (1,604) (9,078) (3,424) (1,604)Provision for income taxes$126 $1,753 $5,414 88Table of ContentsThe components of loss before provision for income taxes by U.S. and foreign jurisdictions were as follows (in thousands): Year Ended December 31, 2017 2016 2015United States$(80,636) $(432,631) $(150,593)Foreign(68,368) (17,420) (42,419)Total$(149,004) $(450,051) $(193,012) The effective income tax rate differs from the federal statutory income tax rate applied to the loss before provision for income taxes due to the following(in thousands): Year Ended December 31, 2017 2016 2015Tax computed at U.S. federal statutory rate$(50,661) $(153,017) $(65,624)State taxes, net of federal benefit64 37 53Tax rate differential for international subsidiaries29,312 10,910 18,681Stock-based compensation(116,953) (27,133) 13,597Tax credits(21,038) (16,452) (11,961)Other7,337 7,850 2,865Valuation allowance152,065 179,558 47,803Provision for income taxes$126 $1,753 $5,414Significant 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, 2017 2016Deferred tax assets: Net operating loss carryforwards$518,620 $640,312Accrued expenses10,613 10,424Credit carryforwards75,879 50,559Stock-based compensation35,782 46,530Note hedge35,181 20,520Other14,771 13,733Total deferred tax assets690,846 782,078Less valuation allowance(614,177) (728,870) 76,669 53,208Deferred tax liabilities: Depreciation and amortization(20,708) (18,914)Convertible notes(43,616) (23,605)Other(1,759) —Net deferred tax assets$10,586 $10,689 89Table of ContentsOn December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted into law and significantly changed how the U.S. imposes income taxon multinational corporations. Changes include, but are not limited to, a reduction of the corporate income tax rate from 35% to 21%, a transition tax onaccumulated foreign earnings and a transition from a worldwide to a territorial tax system. We are required to recognize the effect of the Tax Act in the periodof enactment, such as remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets andliabilities. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected toreverse in the future, was $264.4 million and is offset by our valuation allowance. We have a cumulative deficit in foreign earnings. Accordingly, weestimated the transition tax did not have a material effect on our tax expense as of December 31, 2017.In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB118), which allows us to record provisional amounts during a measurement period not to extend more than one year beyond the Tax Act enactment date.Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months,we consider the accounting for deferred tax remeasurements, the impact of the transition of U.S. international taxation from a worldwide tax system to aterritorial system and other provisions to be incomplete due to the forthcoming guidance and our ongoing analysis. We expect to complete our analysiswithin the measurement period in accordance with SAB 118.As of December 31, 2017, we had U.S. federal net operating loss and federal tax credit carryforwards of approximately $2.1 billion and $56.6 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 $1.2 billion and $48.0 million, respectively. The state net operating loss will begin toexpire in 2018 if not utilized, and the tax effected amount due to expire in 2018 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. We maintain a full valuation allowance against our U.S. deferred tax assets as of December 31, 2017. 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 $10.6 million related to deferred tax assets in certain foreignjurisdictions are realizable since the foreign entities have cumulative income and expected future income. We remeasured the U.S. non-current assets andliabilities at the applicable tax rate of 21% in accordance with the Tax Act. The valuation allowance decreased $114.7 million during the year endedDecember 31, 2017. This change is primarily attributable to a decrease in the deferred tax balance of $264.4 million due to the reduction in the U.S. incometax rate, offset by increases in deferred tax assets primarily related to net operating losses. We will continue to assess the likelihood of realization of thedeferred tax assets in each of the applicable jurisdictions in future periods and will adjust the valuation allowance accordingly.Prior to the enactment of the Tax Act, we considered earnings from foreign operations to be indefinitely reinvested outside of the United States. We arecurrently evaluating whether to change our indefinite reinvestment assertion in light of the Tax Act and consider that assessment to be incomplete aspermitted under guidance issued by the SEC. We expect to reach a final determination within the measurement period in accordance with SAB 118 asdescribed above.90Table of ContentsA reconciliation of the beginning and ending balance of total unrecognized tax benefits is as follows (in thousands): Year Ended December 31, 2017 2016 2015Balance, beginning period$18,440 $11,737 $9,158Tax positions taken in prior period: Gross increases398 1,122 2Gross decreases— (50) (1,017)Tax positions taken in current period: Gross increases8,810 5,673 3,768Gross decreases— — (73)Lapse of statute of limitations— (42) (101)Balance, end of period$27,648 $18,440 $11,737 As of December 31, 2017, we had gross unrecognized tax benefits of approximately $27.6 million, of which $4.8 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 $0.5 million and $0.4 million at December 31, 2017 and 2016, 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, 2017, 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.(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 $39.7 million, $34.2 million and $22.0 million for the years ended December 31, 2017, 2016 and 2015, 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 $22.5 million, $17.3 million and $13.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.91Table of ContentsFuture minimum payments under our non-cancelable operating leases and other contractual commitments as of December 31, 2017 are presented in thetable below (in thousands): Operating Leases Purchase Obligations (1) Other TotalYears Ending December 31, 2018$44,713 $31,394 $574 $76,681201947,986 22,698 574 71,258202048,218 11,736 574 60,528202145,590 7,248 574 53,412202243,238 3,805 574 47,617Thereafter124,114 4,093 1,053 129,260Total$353,859 $80,974 $3,923 $438,756 (1)Consists of future minimum payments under non-cancelable purchase commitments primarily related to data center and IT operations and sales and marketing activities. Notincluded in the table above are certain purchase commitments related to our future annual Knowledge user conferences and other customer or sales conferences to be held in2019 and 2020. If we were to cancel these contractual commitments as of December 31, 2017, we would have been obligated to pay cancellation penalties of approximately$13.9 million in aggregate.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. Total future minimum payments under this operating lease as of December 31, 2017 was $131.8million, which is included in the table above.In January 2017, we entered into a lease agreement related to an expansion and lease term extension of our existing San Diego office facility. Rent ispaid on a monthly basis and will increase incrementally over the term of the lease. Total future minimum payments under this operating lease as ofDecember 31, 2017 was $46.2 million, which is included in the table above.In addition to the amounts above, the repayment of our 2022 Notes with an aggregate principal amount of $782.5 million is due on June 1, 2022, andthe repayment of our 2018 Notes with an aggregate principal amount of $575.0 million is due on November 1, 2018. Refer to Note 9 for further informationregarding 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.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 25,2016.92Table of ContentsThese 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, 2017 2016 2015Revenues by geography North America (1)$1,299,950 $946,956 $702,985EMEA (2)478,686 339,341 233,378Asia Pacific and other154,390 104,216 69,117Total revenues$1,933,026 $1,390,513 $1,005,480Property and equipment, net by geographic area were as follows (in thousands): December 31, 2017 2016Property and equipment, net: North America (3)$164,040 $132,671EMEA (2)50,028 37,449Asia Pacific and other31,056 11,500Total property and equipment, net$245,124 $181,620 (1)Revenues attributed to the United States were approximately 94% of North America revenues for the years ended December 31, 2017, and 95% for the year ended December31, 2016 and 2015.(2)Europe, the Middle East and Africa (EMEA)(3)Property and equipment, net attributed to the United States were approximately 89% and 92% of property and equipment, net attributable to North America for the years endedDecember 31, 2017 and 2016, respectively.Subscription revenues consist of the following (in thousands): Year Ended December 31, 2017 2016 2015Service management products$1,526,382 $1,108,846 $783,603ITOM products213,413 112,793 64,675Total subscription revenues$1,739,795 $1,221,639 $848,278Our service management products include our platform, ITSM, ITBM, customer service management, HR service delivery and security operations,which have similar features and functions, and are generally priced on a per user basis. Our ITOM products, which improve visibility, availability and agilityof 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.93Table of ContentsITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINACIAL DISCLOSURENone.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, 2017. 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, 2017, 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, 2017.The effectiveness of our internal control over financial reporting as of December 31, 2017 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 ReportingDuring the quarter ended December 31, 2017, we implemented new revenue and commission accounting modules to our existing accounting systemand related controls, which enabled us to prepare our financial statements under Topic 605, as well as prepare us for our adoption of Topic 606 on a fullretrospective basis effective January 1, 2018. There were no other changes in our internal control over financial reporting identified in management’sevaluation pursuant to Rules 13a or 15(d) of the Exchange Act that occurred during the quarter ended December 31, 2017 that have materially affected, or arereasonably likely to materially affect, our internal control over financial reporting.ITEM 9B.OTHER INFORMATIONNone.PART III94ITEM 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.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 RELATED STOCKHOLDERMATTERSThe 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.95Table of ContentsTable of ContentsITEM 16.FORM 10-K SUMMARYNone.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 10/25/2017 4.1Form of Common Stock Certificate S-1/A 333-180486 4.1 6/19/2012 4.2Indenture dated November 13, 2013 between theRegistrant and Wells Fargo Bank, National Association 8-K 001-35580 4.1 11/13/2013 4.3Indenture dated May 30, 2017 between the Registrant andWells Fargo Bank, National Association 8-K 001-35580 4.1 5/30/2017 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 X10.4*Form of Stock Option Award Agreement under 2012Equity Incentive Plan, adopted as of April 25, 2017 10-Q 001-35580 10.3 8/8/2017 10.5*Form of Restricted Stock Unit Award Agreement under2012 Equity Incentive Plan, adopted as of April 25, 2017 10-Q 001-35580 10.4 8/8/2017 10.6*2012 Employee Stock Purchase Plan and Form ofSubscription Agreement thereunder 10-K 001-35580 10.4 3/8/2013 10.7*Form of Subscription Agreement under 2012 EmployeeStock Purchase Plan, adopted as of April 25, 2017 10-Q 001-35580 10.5 8/8/2017 10.8*Employment Agreement dated May 2, 2011 between theRegistrant and Frank Slootman S-1 333-180486 10.5 3/30/2012 10.9*First Amendment to Employment Agreement dated April23, 2014 between the Registrant and Frank Slootman 10-Q 001-35580 10.1 8/7/2014 10.10*Employment Agreement dated May 12, 2011 between theRegistrant and Michael P. Scarpelli S-1 333-180486 10.6 3/30/2012 10.11*First Amendment to Employment Agreement dated August15, 2014 between the Registrant and Michael P. Scarpelli 10-Q 001-35580 10.2 11/5/2014 10.12*Amendment No. 2 to Employment Agreement, datedAugust 8, 2017, between the Registrant and Michael P.Scarpelli 10-Q 001-35580 10.2 8/8/2017 Table of ContentsExhibitNumberDescription of Document Incorporated by Reference FiledHerewithForm File No. Exhibit Filing Date 10.13*Employment Agreement dated May 21, 2011 between theRegistrant and David L. Schneider S-1 333-180486 10.7 3/30/2012 10.14*First Amendment to Employment Agreement dated July 3,2014 between the Registrant and David L. Schneider 10-Q 001-35580 10.1 11/5/2014 10.15*Amendment No. 2 to Employment Agreement, dated June6, 2017, between the Registrant and David L. Schneider 10-Q 001-35580 10.1 8/8/2017 10.16*Employment Agreement dated February 22, 2017 betweenthe Registrant and John J. Donahoe 8-K 001-35580 10.1 2/27/2017 10.17*Confirmatory Employment Letter Agreement datedOctober 31, 2017, between the Registrant and Chirantan J.Desai 10-Q 001-35580 10.1 11/6/2017 10.18Lease Agreement dated November 8, 2012 between theRegistrant and Jay Ridge LLC S-1/A 333-184674 10.12 11/9/2012 10.19Office Lease dated December 12, 2014 between Registrantand S1 55 LLC 8-K 001-35580 10.1 12/15/2014 10.20Form of Base Convertible Note Hedge TransactionConfirmation 8-K 001-32224 99.1 11/13/2013 10.21Form of Base Convertible Note Hedge TransactionConfirmation 8-K 001-35580 99.1 5/30/2017 10.22Form of Base Warrant Transaction Confirmation 8-K 001-32224 99.2 11/13/2013 10.23Form of Base Warrant Transaction Confirmation 8-K 001-35580 99.2 5/30/2017 10.24Form of Additional Convertible Note Hedge TransactionConfirmation 8-K 001-32224 99.3 11/13/2013 10.25Form of Additional Convertible Note Hedge TransactionConfirmation 8-K 001-35580 99.1 6/22/2017 10.26Form of Additional Warrant Transaction Confirmation 8-K 001-32224 99.4 11/13/2013 10.27Form of Additional Warrant Transaction Confirmation 8-K 001-35580 99.2 6/22/2017 10.28+Settlement Agreement between the Registrant and BMCSoftware, Inc., dated March 7, 2016 10-Q 001-35580 10.1 8/3/2016 21.1Subsidiaries of the Registrant X23.1Consent of independent registered public accounting firm X24.1Power of Attorney. Reference is made to the signature pagehereto X31.1Certification of Periodic Report by Chief Executive Officerunder Section 302 of the Sarbanes-Oxley Act of 2002 X98Table of ContentsExhibitNumberDescription of Document Incorporated by Reference FiledHerewithForm File No. Exhibit Filing Date 31.2Certification 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 X101.LAB**XBRL Taxonomy Extension Label Linkbase Document X101.PRE**XBRL Taxonomy Extension Presentation LinkbaseDocument X+ Registrant has omitted portions of the relevant exhibit and filed such exhibit separately with the Securities and Exchange Commission pursuant to arequest for confidential treatment granted under Rule 406 under the Securities Act of 1933, as amended.* 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.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, 2018 SERVICENOW, INC. By: /s/ John J. Donahoe John J. DonahoePresident and Chief Executive Officer99Table of ContentsPOWER OF ATTORNEYKNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John J. Donahoe 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/ John J. Donahoe President, Chief Executive Officer and Director(Principal Executive Officer) February 28, 2018John J. Donahoe /s/ Michael P. Scarpelli Chief Financial Officer(Principal Financial Officer and Principal AccountingOfficer) February 28, 2018Michael P. Scarpelli /s/ Frank Slootman Chairman of the Board of Directors February 28, 2018Frank Slootman /s/ Susan L. Bostrom Director February 28, 2018Susan L. Bostrom /s/ Jonathan C. Chadwick Director February 28, 2018Jonathan C. Chadwick /s/ Paul E. Chamberlain Director February 28, 2018Paul E. Chamberlain /s/ Ronald E.F. Codd Director February 28, 2018Ronald E. F. Codd /s/ Frederic B. Luddy Director February 28, 2018Frederic B. Luddy /s/ Jeffrey A. Miller Director February 28, 2018Jeffrey A. Miller /s/ Anita M. Sands Director February 28, 2018Anita M. Sands 100EXHIBIT 10.3SERVICENOW, INC.2012 EQUITY INCENTIVE PLAN1.PURPOSE. The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whosepresent and potential contributions are important to the success of the Company, and any Parents and Subsidiaries that exist now or inthe future, by offering them an opportunity to participate in the Company’s future performance through the grant of Awards.Capitalized terms not defined elsewhere in the text are defined in Section 27.2.SHARES SUBJECT TO THE PLAN.21.1Number of Shares Available. Subject to Sections 2.6 and 21 and any other applicable provisions hereof, thetotal number of Shares reserved and available for grant and issuance pursuant to this Plan as of the date of adoption of the Plan by theBoard, is 9,600,000 Shares plus (i) any reserved shares not issued or subject to outstanding grants under the Company’s 2005 StockPlan (the “Prior Plan”) on the Effective Date (as defined below), (ii) shares that are subject to stock options or other awards grantedunder the Prior Plan that cease to be subject to such stock options or other awards by forfeiture or otherwise after the Effective Date, (iii)shares issued under the Prior Plan before or after the Effective Date pursuant to the exercise of stock options that are, after the EffectiveDate, forfeited, (iv) shares issued under the Prior Plan that are repurchased by the Company at the original issue price and (v) sharesthat are subject to stock options or other awards under the Prior Plan that are used to pay the exercise price of an option or withheld tosatisfy the tax withholding obligations related to any award.21.2Lapsed, Returned Awards. Shares subject to Awards, and Shares issued under the Plan under any Award,will again be available for grant and issuance in connection with subsequent Awards under this Plan to the extent such Shares: (a) aresubject to issuance upon exercise of an Option or SAR granted under this Plan but which cease to be subject to the Option or SAR forany reason other than exercise of the Option or SAR; (b) are subject to Awards granted under this Plan that are forfeited or arerepurchased by the Company at the original issue price; (c) are subject to Awards granted under this Plan that otherwise terminatewithout such Shares being issued; or (d) are surrendered pursuant to an Exchange Program. To the extent an Award under the Plan ispaid out in cash rather than Shares, such cash payment will not result in reducing the number of Shares available for issuance under thePlan. Shares used to pay the exercise price of an Award or withheld to satisfy the tax withholding obligations related to an Award willbecome available for future grant or sale under the Plan. For the avoidance of doubt, Shares that otherwise become available for grantand issuance because of the provisions of this Section 2.2 shall not include Shares subject to Awards that initially became availablebecause of the substitution clause in Section 21.2 hereof.21.3Minimum Share Reserve. At all times the Company shall reserve and keep available a sufficient number ofShares as shall be required to satisfy the requirements of all outstanding Awards granted under this Plan.21.4Automatic Share Reserve Increase. The number of Shares available for grant and issuance under the Planshall be increased on January 1, of each of the ten (10) calendar years during the term of the Plan, by the lesser of (i) five percent (5%)of the number of Shares issued and outstanding on each December 31 immediately prior to the date of increase or (ii) such number ofShares determined by the Board.21.5Limitations. No more than fifty million (50,000,000) Shares shall be issued pursuant to the exercise of ISOs.21.6Adjustment of Shares. If the number of outstanding Shares is changed by a stock dividend, recapitalization,stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company,without consideration, then (a) the number of Shares reserved for issuance and future grant under the Plan set forth in Section 2.1,(b) the Exercise Prices of and number of Shares subject to outstanding Options and SARs, (c) the number of Shares subject to otheroutstanding Awards, (d) the maximum number of shares that may be issued as ISOs set forth in Section 2.5, (e) the maximum numberof Shares that may be issued to an individual or to a new Employee in any one calendar year set forth in Section 3 and (f) the number ofShares that are granted as Awards to Non-Employee Directors as set forth in Section 12, shall be proportionately adjusted, subject toany required action by the Board or the stockholders of the Company and in compliance with applicable securities laws; provided thatfractions of a Share will not be issued.3.ELIGIBILITY. ISOs may be granted only to Employees. All other Awards may be granted to Employees,Consultants, Directors and Non-Employee Directors of the Company or any Parent or Subsidiary of the Company; provided suchConsultants, Directors and Non-Employee Directors render bona fide services not in connection with the offer and sale of securities in acapital-raising transaction. No Participant will be eligible to receive more than three million (3,000,00) Shares in any calendar yearunder this Plan pursuant to the grant of Awards except that new Employees of the Company or of a Parent or Subsidiary of theCompany (including new Employees who are also officers and directors of the Company or any Parent or Subsidiary of the Company)are eligible to receive up to a maximum of six million (6,000,000) Shares in the calendar year in which they commence theiremployment.4.ADMINISTRATION.21.1Committee Composition; Authority. This Plan will be administered by the Committee or by the Board actingas the Committee. Subject to the general purposes, terms and conditions of this Plan, and to the direction of the Board, the Committeewill have full power to implement and carry out this Plan, except, however, the Board shall establish the terms for the grant of an Awardto Non-Employee Directors. The Committee will have the authority to:(a)construe and interpret this Plan, any Award Agreement and any other agreement or documentexecuted pursuant to this Plan;(b)prescribe, amend and rescind rules and regulations relating to this Plan or any Award;(c)select persons to receive Awards;(d)determine the form and terms and conditions, not inconsistent with the terms of the Plan, of anyAward granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Awardsmay vest and be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions,and any restriction or limitation regarding any Award or the Shares relating thereto, based in each case on such factors as theCommittee will determine;(e)determine the number of Shares or other consideration subject to Awards;(f)determine the Fair Market Value in good faith and interpret the applicable provisions of this Plan andthe definition of Fair Market Value in connection with circumstances that impact the Fair Market Value, if necessary;(g)determine whether Awards will be granted singly, in combination with, in tandem with, inreplacement of, or as alternatives to, other Awards under this Plan or any other incentive or compensation plan of the Company or anyParent or Subsidiary of the Company;(h)grant waivers of Plan or Award conditions;(i)determine the vesting, exercisability and payment of Awards;(j)correct any defect, supply any omission or reconcile any inconsistency in this Plan, any Award or anyAward Agreement;(k)determine whether an Award has been earned;(l)determine the terms and conditions of any, and to institute any Exchange Program;(m)reduce or waive any criteria with respect to Performance Factors;(n)adjust Performance Factors to take into account changes in law and accounting or tax rules as theCommittee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoidwindfalls or hardships;(o)adopt rules and/or procedures (including the adoption of any subplan under this Plan) relating to theoperation and administration of the Plan to accommodate requirements of local law and procedures outside of the United States;(p)make all other determinations necessary or advisable for the administration of this Plan; and(q) delegate any of the foregoing to a subcommittee consisting of one or more executive officers pursuant to aspecific delegation.21.2Committee Interpretation and Discretion. Any determination made by the Committee with respect to anyAward shall be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of the Planor Award, at any later time, and such determination shall be final and binding on the Company and all persons having an interest in anyAward under the Plan. Any dispute regarding the interpretation of the Plan or any Award Agreement shall be submitted by theParticipant or Company to the Committee for review. The resolution of such a dispute by the Committee shall be final and binding onthe Company and the Participant. The Committee may delegate to one or more executive officers the authority to review and resolvedisputes with respect to Awards held by Participants who are not Insiders, and such resolution shall be final and binding on theCompany and the Participant.21.3Section 16 of the Exchange Act. Awards granted to Participants who are subject to Section 16 of theExchange Act must be approved by two or more “non-employee directors” (as defined in the regulations promulgated under Section 16of the Exchange Act).4.4 Documentation. The Award Agreement for a given Award, the Plan and any other documents may be delivered to,and accepted by, a Participant or any other person in any manner (including electronic distribution or posting) that meets applicablelegal requirements.5.OPTIONS. The Committee may grant Options to Participants and will determine whether such Options will beIncentive Stock Options within the meaning of the Code (“ISOs”) or Nonqualified Stock Options (“NQSOs”), the number of Sharessubject to the Option, the Exercise Price of the Option, the period during which the Option may vest and be exercised, and all otherterms and conditions of the Option, subject to the following:21.1Option Grant. Each Option granted under this Plan will identify the Option as an ISO or an NQSO. AnOption may be, but need not be, awarded upon satisfaction of such Performance Factors during any Performance Period as are set outin advance in the Participant’s individual Award Agreement. If the Option is being earned upon the satisfaction of Performance Factors,then the Committee will: (x) determine the nature, length and starting date of any Performance Period for each Option; and (y) selectfrom among the Performance Factors to be used to measure the performance, if any. Performance Periods may overlap and Participantsmay participate simultaneously with respect to Options that are subject to different performance goals and other criteria.21.2Date of Grant. The date of grant of an Option will be the date on which the Committee makes thedetermination to grant such Option, or a specified future date. The Award Agreement and a copy of this Plan will be delivered to theParticipant within a reasonable time after the granting of the Option.21.3Exercise Period. Options may be vested and exercisable within the times or upon the conditions as set forthin the Award Agreement governing such Option; provided, however, that no Option will be exercisable after the expiration of ten (10)years from the date the Option is granted; and provided further that no ISO granted to a person who, at the time the ISO is granted,directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Companyor of any Parent or Subsidiary of the Company (“Ten Percent Stockholder”) will be exercisable after the expiration of five (5) yearsfrom the date the ISO is granted. The Committee also may provide for Options to become exercisable at one time or from time to time,periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines.21.4Exercise Price. The Exercise Price of an Option will be determined by the Committee when the Option isgranted; provided that: (i) the Exercise Price of an Option will be not less than one hundred percent (100%) of the Fair Market Value ofthe Shares on the date of grant and (ii) the Exercise Price of any ISO granted to a Ten Percent Stockholder will not be less than onehundred ten percent (110%) of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased may bemade in accordance with Section 11 and the Award Agreement and in accordance with any procedures established by the Company.21.5Method of Exercise. Any Option granted hereunder will be vested and exercisable according to the terms ofthe Plan and at such times and under such conditions as determined by the Committee and set forth in the Award Agreement. AnOption may not be exercised for a fraction of a Share. An Option will be deemed exercised when the Company receives: (i) notice ofexercise (in such form as the Committee may specify from time to time) from the person entitled to exercise the Option, and (ii) fullpayment for the Shares with respect to which the Option is exercised (together with applicable withholding taxes). Full payment mayconsist of any consideration and method of payment authorized by the Committee and permitted by the Award Agreement and the Plan.Shares issued upon exercise of an Option will be issued in the name of the Participant. Until the Shares are issued (as evidenced by theappropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receivedividends or any other rights as a stockholder will exist with respect to the Shares, notwithstanding the exercise of the Option. TheCompany will issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for adividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 2.6 of the Plan.Exercising an Option in any manner will decrease the number of Shares thereafter available, both for purposes of the Plan and for saleunder the Option, by the number of Shares as to which the Option is exercised.21.6Termination. The exercise of an Option will be subject to the following (except as may be otherwiseprovided in an Award Agreement):(a)If the Participant is Terminated for any reason except for Cause or the Participant’s death or Disability,then the Participant may exercise such Participant’s Options only to the extent that such Options would have been exercisable by theParticipant on the Termination Date no later than ninety (90) days after the Termination Date (or such shorter time period or longer timeperiod not exceeding five (5) years as may be determined by the Committee, with any exercise beyond three (3) months after theTermination Date deemed to be the exercise of an NQSO), but in any event no later than the expiration date of the Options.(b)If the Participant is Terminated because of the Participant’s death (or the Participant dies within ninety(90) days after a Termination other than for Cause or because of the Participant’s Disability), then the Participant’s Options may beexercised only to the extent that such Options would have been exercisable by the Participant on the Termination Date and must beexercised by the Participant’s legal representative, or authorized assignee, no later than twelve (12) months after the Termination Date(or such shorter time period not less than six (6) months or longer time period not exceeding five (5) years as may be determined by theCommittee), but in any event no later than the expiration date of the Options.(c)If the Participant is Terminated because of the Participant’s Disability, then the Participant’s Optionsmay be exercised only to the extent that such Options would have been exercisable by the Participant on the Termination Date and mustbe exercised by the Participant (or the Participant’s legal representative or authorized assignee) no later than twelve (12) months afterthe Termination Date (with any exercise beyond (a) three (3) months after the Termination Date when the Termination is for a Disabilitythat is not a “permanent and total disability” as defined in Section 22(e)(3) of the Code, or (b) twelve (12) months after the TerminationDate when the Termination is for a Disability that is a “permanent and total disability” as defined in Section 22(e)(3) of the Code,deemed to be exercise of an NQSO), but in any event no later than the expiration date of the Options.(d)If the Participant is terminated for Cause, then Participant’s Options shall expire on such Participant’sTermination Date, or at such later time and on such conditions as are determined by the Committee, but in any no event later than theexpiration date of the Options. Unless otherwise provided in the Award Agreement, Cause will have the meaning set forth in the Plan.21.7Limitations on Exercise. The Committee may specify a minimum number of Shares that may be purchasedon any exercise of an Option, provided that such minimum number will not prevent any Participant from exercising the Option for thefull number of Shares for which it is then exercisable.21.8Limitations on ISOs. With respect to Awards granted as ISOs, to the extent that the aggregate Fair MarketValue of the Shares with respect to which such ISOs are exercisable for the first time by the Participant during any calendar year (underall plans of the Company and any Parent or Subsidiary) exceeds one hundred thousand dollars ($100,000), such Options will be treatedas NQSOs. For purposes of this Section 5.8, ISOs will be taken into account in the order in which they were granted. The Fair MarketValue of the Shares will be determined as of the time the Option with respect to such Shares is granted. In the event that the Code or theregulations promulgated thereunder are amended after the Effective Date to provide for a different limit on the Fair Market Value ofShares permitted to be subject to ISOs, such different limit will be automatically incorporated herein and will apply to any Optionsgranted after the effective date of such amendment.21.9Modification, Extension or Renewal. The Committee may modify, extend or renew outstanding Options andauthorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of aParticipant, impair any of such Participant’s rights under any Option previously granted. Any outstanding ISO that is modified,extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. Subject to Section 18 of this Plan,by written notice to affected Participants, the Committee may reduce the Exercise Price of outstanding Options without the consent ofsuch Participants; provided, however, that the Exercise Price may not be reduced below the Fair Market Value on the date the action istaken to reduce the Exercise Price.21.10No Disqualification. Notwithstanding any other provision in this Plan, no term of this Plan relating to ISOswill be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify thisPlan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of theCode.6.RESTRICTED STOCK AWARDS.21.1Awards of Restricted Stock. A Restricted Stock Award is an offer by the Company to sell to a ParticipantShares that are subject to restrictions (“Restricted Stock”). The Committee will determine to whom an offer will be made, the number ofShares the Participant may purchase, the Purchase Price, the restrictions under which the Shares will be subject and all other terms andconditions of the Restricted Stock Award, subject to the Plan.21.2Restricted Stock Purchase Agreement. All purchases under a Restricted Stock Award will be evidenced byan Award Agreement. Except as may otherwise be provided in an Award Agreement, a Participant accepts a Restricted Stock Award bysigning and delivering to the Company an Award Agreement with full payment of the Purchase Price, within thirty (30) days from thedate the Award Agreement was delivered to the Participant. If the Participant does not accept such Award within thirty (30) days, thenthe offer of such Restricted Stock Award will terminate, unless the Committee determines otherwise.21.3Purchase Price. The Purchase Price for a Restricted Stock Award will be determined by the Committee andmay be less than Fair Market Value on the date the Restricted Stock Award is granted. Payment of the Purchase Price must be made inaccordance with Section 11 of the Plan, and the Award Agreement and in accordance with any procedures established by the Company.21.4Terms of Restricted Stock Awards. Restricted Stock Awards will be subject to such restrictions as theCommittee may impose or are required by law. These restrictions may be based on completion of a specified number of years of servicewith the Company or upon completion of Performance Factors, if any, during any Performance Period as set out in advance in theParticipant’s Award Agreement. Prior to the grant of a Restricted Stock Award, the Committee shall: (a) determine the nature, lengthand starting date of any Performance Period for the Restricted Stock Award; (b) select from among the Performance Factors to be usedto measure performance goals, if any; and (c) determine the number of Shares that may be awarded to the Participant. PerformancePeriods may overlap and a Participant may participate simultaneously with respect to Restricted Stock Awards that are subject todifferent Performance Periods and having different performance goals and other criteria.21.5Termination of Participant. Except as may be set forth in the Participant’s Award Agreement, vesting ceaseson such Participant’s Termination Date (unless determined otherwise by the Committee).7.STOCK BONUS AWARDS.21.1Awards of Stock Bonuses. A Stock Bonus Award is an award to an eligible person of Shares for services tobe rendered or for past services already rendered to the Company or any Parent or Subsidiary. All Stock Bonus Awards shall be madepursuant to an Award Agreement. No payment from the Participant will be required for Shares awarded pursuant to a Stock BonusAward.21.2Terms of Stock Bonus Awards. The Committee will determine the number of Shares to be awarded to theParticipant under a Stock Bonus Award and any restrictions thereon. These restrictions may be based upon completion of a specifiednumber of years of service with the Company or upon satisfaction of performance goals based on Performance Factors during anyPerformance Period as set out in advance in the Participant’s Stock Bonus Agreement. Prior to the grant of any Stock Bonus Award theCommittee shall: (a) determine the nature, length and starting date of any Performance Period for the Stock Bonus Award; (b) selectfrom among the Performance Factors to be used to measure performance goals; and (c) determine the number of Shares that may beawarded to the Participant. Performance Periods may overlap and a Participant may participate simultaneously with respect to StockBonus Awards that are subject to different Performance Periods and different performance goals and other criteria.21.3Form of Payment to Participant. Payment may be made in the form of cash, whole Shares, or a combinationthereof, based on the Fair Market Value of the Shares earned under a Stock Bonus Award on the date of payment, as determined in thesole discretion of the Committee.21.4Termination of Participation. Except as may be set forth in the Participant’s Award Agreement, vestingceases on such Participant’s Termination Date (unless determined otherwise by the Committee).8.STOCK APPRECIATION RIGHTS.21.1Awards of SARs. A Stock Appreciation Right (“SAR”) is an award to a Participant that may be settled incash, or Shares (which may consist of Restricted Stock), having a value equal to (a) the difference between the Fair Market Value on thedate of exercise over the Exercise Price multiplied by (b) the number of Shares with respect to which the SAR is being settled (subject toany maximum number of Shares that may be issuable as specified in an Award Agreement). All SARs shall be made pursuant to anAward Agreement.21.2Terms of SARs. The Committee will determine the terms of each SAR including, without limitation: (a) thenumber of Shares subject to the SAR; (b) the Exercise Price and the time or times during which the SAR may be settled; (c) theconsideration to be distributed on settlement of the SAR; and (d) the effect of the Participant’s Termination on each SAR. The ExercisePrice of the SAR will be determined by the Committee when the SAR is granted, and may not be less than Fair Market Value. A SARmay be awarded upon satisfaction of Performance Factors, if any, during any Performance Period as are set out in advance in theParticipant’s individual Award Agreement. If the SAR is being earned upon the satisfaction of Performance Factors, then the Committeewill: (x) determine the nature, length and starting date of any Performance Period for each SAR; and (y) select from among thePerformance Factors to be used to measure the performance, if any. Performance Periods may overlap and Participants may participatesimultaneously with respect to SARs that are subject to different Performance Factors and other criteria.21.3Exercise Period and Expiration Date. A SAR will be exercisable within the times or upon the occurrence ofevents determined by the Committee and set forth in the Award Agreement governing such SAR. The SAR Agreement shall set forththe expiration date; provided that no SAR will be exercisable after the expiration of ten (10) years from the date the SAR is granted. TheCommittee may also provide for SARs to become exercisable at one time or from time to time, periodically or otherwise (including,without limitation, upon the attainment during a Performance Period of performance goals based on Performance Factors), in suchnumber of Shares or percentage of the Shares subject to the SAR as the Committee determines. Except as may be set forth in theParticipant’s Award Agreement, vesting ceases on such Participant’s Termination Date (unless determined otherwise by the Committee).Notwithstanding the foregoing, the rules of Section 5.6 also will apply to SARs.21.4Form of Settlement. Upon exercise of a SAR, a Participant will be entitled to receive payment from theCompany in an amount determined by multiplying (i) the difference between the Fair Market Value of a Share on the date of exerciseover the Exercise Price; times (ii) the number of Shares with respect to which the SAR is exercised. At the discretion of the Committee,the payment from the Company for the SAR exercise may be in cash, in Shares of equivalent value, or in some combination thereof.The portion of a SAR being settled may be paid currently or on a deferred basis with such interest or dividend equivalent, if any, as theCommittee determines, provided that the terms of the SAR and any deferral satisfy the requirements of Section 409A of the Code.21.5Termination of Participation. Except as may be set forth in the Participant’s Award Agreement, vestingceases on such Participant’s Termination Date (unless determined otherwise by the Committee).9.RESTRICTED STOCK UNITS.21.1Awards of Restricted Stock Units. A Restricted Stock Unit (“RSU”) is an award to a Participant covering anumber of Shares that may be settled in cash, or by issuance of those Shares (which may consist of Restricted Stock). All RSUs shall bemade pursuant to an Award Agreement.21.2Terms of RSUs. The Committee will determine the terms of an RSU including, without limitation: (a) thenumber of Shares subject to the RSU; (b) the time or times during which the RSU may be settled; (c) the consideration to be distributedon settlement; and (d) the effect of the Participant’s Termination on each RSU. An RSU may be awarded upon satisfaction of suchperformance goals based on Performance Factors during any Performance Period as are set out in advance in the Participant’s AwardAgreement. If the RSU is being earned upon satisfaction of Performance Factors, then the Committee will: (x) determine the nature,length and starting date of any Performance Period for the RSU; (y) select from among the Performance Factors to be used to measurethe performance, if any; and (z) determine the number of Shares deemed subject to the RSU. Performance Periods may overlap andparticipants may participate simultaneously with respect to RSUs that are subject to different Performance Periods and differentperformance goals and other criteria.21.3Form and Timing of Settlement. Payment of earned RSUs shall be made as soon as practicable after thedate(s) determined by the Committee and set forth in the Award Agreement. The Committee, in its sole discretion, may settle earnedRSUs in cash, Shares, or a combination of both. The Committee may also permit a Participant to defer payment under a RSU to a dateor dates after the RSU is earned provided that the terms of the RSU and any deferral satisfy the requirements of Section 409A of theCode.21.4Termination of Participant. Except as may be set forth in the Participant’s Award Agreement, vesting ceaseson such Participant’s Termination Date (unless determined otherwise by the Committee).10.PERFORMANCE AWARDS.21.1Performance Awards. A Performance Award is an award to a Participant of a cash bonus or a PerformanceShare bonus. Grants of Performance Awards shall be made pursuant to an Award Agreement.21.2Terms of Performance Awards. The Committee will determine, and each Award Agreement shall set forth,the terms of each award of Performance Award including, without limitation: (a) the amount of any cash bonus; (b) the number ofShares deemed subject to a Performance Share bonus; (c) the Performance Factors and Performance Period that shall determine the timeand extent to which each Performance Award shall be settled; (d) the consideration to be distributed on settlement; and (e) the effect ofthe Participant’s Termination on each Performance Award. In establishing Performance Factors and the Performance Period theCommittee will: (x) determine the nature, length and starting date of any Performance Period; and (y) select from among thePerformance Factors to be used. Prior to settlement the Committee shall determine the extent to which Performance Awards have beenearned. Performance Periods may overlap and Participants may participate simultaneously with respect to Performance Awards that aresubject to different Performance Periods and different performance goals and other criteria. No Participant will be eligible to receivemore than $[Number] in Performance Awards in any calendar year under this Plan.21.3Value, Earning and Timing of Performance Shares. Any Performance Share bonus will have an initial valueequal to the Fair Market Value of a Share on the date of grant. After the applicable Performance Period has ended, the holder of aPerformance Share bonus will be entitled to receive a payout of the number of Shares earned by the Participant over the PerformancePeriod, to be determined as a function of the extent to which the corresponding Performance Factors or other vesting provisions havebeen achieved. The Committee, in its sole discretion, may pay an earned Performance Share bonus in the form of cash, in Shares(which have an aggregate Fair Market Value equal to the value of the earned Performance Shares at the close of the applicablePerformance Period) or in a combination thereof. Performance Share bonuses may also be settled in Restricted Stock.21.4Termination of Participant. Except as may be set forth in the Participant’s Award Agreement, vesting ceaseson such Participant’s Termination Date (unless determined otherwise by the Committee).11.PAYMENT FOR SHARE PURCHASES.Payment from a Participant for Shares purchased pursuant to this Plan may be made in cash or by check or, whereexpressly approved for the Participant by the Committee and where permitted by law (and to the extent not otherwise set forth in theapplicable Award Agreement):(a)by cancellation of indebtedness of the Company to the Participant;(b)by surrender of shares of the Company held by the Participant that have a Fair Market Value on thedate of surrender equal to the aggregate exercise price of the Shares as to which said Award will be exercised or settled;(c)by waiver of compensation due or accrued to the Participant for services rendered or to be rendered tothe Company or a Parent or Subsidiary of the Company;(d)by consideration received by the Company pursuant to a broker-assisted or other form of cashlessexercise program implemented by the Company in connection with the Plan;(e)by any combination of the foregoing; or(f)by any other method of payment as is permitted by applicable law.12.GRANTS to Non-Employee directors.21.1Types of Awards. Non-Employee Directors are eligible to receive any type of Award offered under this Planexcept ISOs. Awards pursuant to this Section 12 may be automatically made pursuant to policy adopted by the Board, or made fromtime to time as determined in the discretion of the Board.21.2Eligibility. Awards pursuant to this Section 12 shall be granted only to Non-Employee Directors. A Non-Employee Director who is elected or re-elected as a member of the Board will be eligible to receive an Award under this Section 12.21.3Vesting, Exercisability and Settlement. Except as set forth in Section 21, Awards shall vest, becomeexercisable and be settled as determined by the Board. With respect to Options and SARs, the exercise price granted to Non-EmployeeDirectors shall not be less than the Fair Market Value of the Shares at the time that such Option or SAR is granted.12.4 Election to receive Awards in Lieu of Cash. A Non-Employee Director may elect to receive his or her annualretainer payments and/or meeting fees from the Company in the form of cash or Awards or a combination thereof, as determined by theCommittee. Such Awards shall be issued under the Plan. An election under this Section 12.4 shall be filed with the Company on theform prescribed by the Company.13.WITHHOLDING TAXES.21.1Withholding Generally. Whenever Shares are to be issued in satisfaction of Awards granted under this Plan,the Company may require the Participant to remit to the Company, or to the Parent or Subsidiary employing the Participant, an amountsufficient to satisfy applicable U.S. federal, state, local and international withholding tax requirements or any other tax liability legallydue from the Participant prior to the delivery of Shares pursuant to exercise or settlement of any Award. Whenever payments insatisfaction of Awards granted under this Plan are to be made in cash, such payment will be net of an amount sufficient to satisfyapplicable U.S. federal, state, local and international withholding tax requirements or any other tax liability legally due from theParticipant.21.2Stock Withholding. The Committee, in its sole discretion and pursuant to such procedures as it may specifyfrom time to time and to limitations of local law, may require or permit a Participant to satisfy such tax withholding obligation or anyother tax liability legally due from the Participant, in whole or in part by (without limitation) (i) paying cash, (ii) electing to have theCompany withhold otherwise deliverable cash or Shares having a Fair Market Value equal to the minimum statutory amount required tobe withheld, or (iii) delivering to the Company already-owned Shares having a Fair Market Value equal to the minimum amountrequired to be withheld. The Fair Market Value of the Shares to be withheld or delivered will be determined as of the date that the taxesare required to be withheld.14.TRANSFERABILITY.21.1Transfer Generally. Unless determined otherwise by the Committee or pursuant to Section 14.2, an Awardmay not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws ofdescent or distribution. If the Committee makes an Award transferable, including, without limitation, by instrument to an inter vivos ortestamentary trust in which the Awards are to be passed to beneficiaries upon the death of the trustor (settlor) or by gift to a PermittedTransferee, such Award will contain such additional terms and conditions as the Committee deems appropriate. All Awards shall beexercisable: (i) during the Participant’s lifetime only by (A) the Participant, or (B) the Participant’s guardian or legal representative; (ii)after the Participant’s death, by the legal representative of the Participant’s heirs or legatees; and (iii) in the case of all awards exceptISOs, by a Permitted Transferee.21.2Award Transfer Program. Notwithstanding any contrary provision of the Plan, the Committee shall have alldiscretion and authority to determine and implement the terms and conditions of any Award Transfer Program instituted pursuant to thisSection 14.2 and shall have the authority to amend the terms of any Award participating, or otherwise eligible to participate in, theAward Transfer Program, including (but not limited to) the authority to (i) amend (including to extend) the expiration date, post-termination exercise period and/or forfeiture conditions of any such Award, (ii) amend or remove any provisions of the Award relatingto the Award holder’s continued service to the Company, (iii) amend the permissible payment methods with respect to the exercise orpurchase of any such Award, (iv) amend the adjustments to be implemented in the event of changes in the capitalization and othersimilar events with respect to such Award, and (v) make such other changes to the terms of such Award as the Committee deemsnecessary or appropriate in its sole discretion.15.PRIVILEGES OF STOCK OWNERSHIP; RESTRICTIONS ON SHARES.21.1Voting and Dividends. No Participant will have any of the rights of a stockholder with respect to any Sharesuntil the Shares are issued to the Participant, except for any dividend equivalent rights permitted by an applicable Award Agreement.After Shares are issued to the Participant, the Participant will be a stockholder and have all the rights of a stockholder with respect tosuch Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares;provided, that if such Shares are Restricted Stock, then any new, additional or different securities the Participant may become entitled toreceive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure ofthe Company will be subject to the same restrictions as the Restricted Stock; provided, further, that the Participant will have no right toretain such stock dividends or stock distributions with respect to Shares that are repurchased at the Participant’s Purchase Price orExercise Price, as the case may be, pursuant to Section 15.2.21.2Restrictions on Shares. At the discretion of the Committee, the Company may reserve to itself and/or itsassignee(s) a right to repurchase (a “Right of Repurchase”) a portion of any or all Unvested Shares held by a Participant following suchParticipant’s Termination at any time within ninety (90) days after the later of the Participant’s Termination Date and the date theParticipant purchases Shares under this Plan, for cash and/or cancellation of purchase money indebtedness, at the Participant’s PurchasePrice or Exercise Price, as the case may be.16.CERTIFICATES. All Shares or other securities whether or not certificated, delivered under this Plan will be subjectto such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictionsunder any applicable U.S. federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or anystock exchange or automated quotation system upon which the Shares may be listed or quoted and any non-U.S. exchange controls orsecurities law restrictions to which the Shares are subject.17.ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a Participant’s Shares, the Committee mayrequire the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transferapproved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold inescrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictionsto be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for thepurchase of Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased ascollateral to secure the payment of the Participant’s obligation to the Company under the promissory note; provided, however, that theCommittee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, theCompany will have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participant’sShares or other collateral. In connection with any pledge of the Shares, the Participant will be required to execute and deliver a writtenpledge agreement in such form as the Committee will from time to time approve. The Shares purchased with the promissory note maybe released from the pledge on a pro rata basis as the promissory note is paid.18.REPRICING; EXCHANGE AND BUYOUT OF AWARDS. Without prior stockholder approval the Committeemay (i) reprice Options or SARS (and where such repricing is a reduction in the Exercise Price of outstanding Options or SARS, theconsent of the affected Participants is not required provided written notice is provided to them, notwithstanding any adverse taxconsequences to them arising from the repricing), and (ii) with the consent of the respective Participants (unless not required pursuant toSection 5.9 of the Plan), pay cash or issue new Awards in exchange for the surrender and cancellation of any, or all, outstandingAwards.19.SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be effective unless suchAward is in compliance with all applicable U.S. and foreign federal and state securities laws, rules and regulations of any governmentalbody, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted,as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any otherprovision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to: (a)obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and/or (b) completion ofany registration or other qualification of such Shares under any state or federal or foreign law or ruling of any governmental body thatthe Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC orto effect compliance with the registration, qualification or listing requirements of any foreign or state securities laws, stock exchange orautomated quotation system, and the Company will have no liability for any inability or failure to do so.20.NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted under this Plan will confer or bedeemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company orany Parent or Subsidiary of the Company or limit in any way the right of the Company or any Parent or Subsidiary of the Company toterminate Participant’s employment or other relationship at any time.21.CORPORATE TRANSACTIONS. 21.1Assumption or Replacement of Awards by Successor. In the event of a Corporate Transaction any orall outstanding Awards may be assumed or replaced by the successor corporation, which assumption or replacement shall bebinding on all Participants. In the alternative, the successor corporation may substitute equivalent Awards or providesubstantially similar consideration to Participants as was provided to stockholders (after taking into account the existingprovisions of the Awards). The successor corporation may also issue, in place of outstanding Shares of the Company held bythe Participant, substantially similar shares or other property subject to repurchase restrictions no less favorable to theParticipant. In the event such successor or acquiring corporation (if any) refuses to assume, convert, replace or substituteAwards, as provided above, pursuant to a Corporate Transaction, then notwithstanding any other provision in this Plan to thecontrary, such Awards shall have their vesting accelerate as to all shares subject to such Award (and any applicable right ofrepurchase fully lapse) immediately prior to the Corporate Transaction and then such Awards will terminate. In addition, in theevent such successor or acquiring corporation (if any) refuses to assume, convert, replace or substitute Awards, as providedabove, pursuant to a Corporate Transaction, the Committee will notify the Participant in writing or electronically that suchAward will be exercisable for a period of time determined by the Committee in its sole discretion, and such Award willterminate upon the expiration of such period. Awards need not be treated similarly in a Corporate Transaction.21.2Assumption of Awards by the Company. The Company, from time to time, also may substitute or assumeoutstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, byeither; (a) granting an Award under this Plan in substitution of such other company’s award; or (b) assuming such award as if it hadbeen granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Suchsubstitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be grantedan Award under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company assumes anaward granted by another company, the terms and conditions of such award will remain unchanged (except that the Purchase Price orthe Exercise Price, as the case may be, and the number and nature of Shares issuable upon exercise or settlement of any such Awardwill be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option insubstitution rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price.Substitute Awards shall not reduce the number of Shares authorized for grant under the Plan or authorized for grant to a Participant inany calendar year.21.3Non-Employee Directors’ Awards. Notwithstanding any provision to the contrary herein, in the event of aCorporate Transaction, the vesting of all Awards granted to Non-Employee Directors shall accelerate and such Awards shall becomeexercisable (as applicable) in full prior to the consummation of such event at such times and on such conditions as the Committeedetermines.22.ADOPTION AND STOCKHOLDER APPROVAL. This Plan shall be submitted for the approval of the Company’sstockholders, consistent with applicable laws, within twelve (12) months before or after the date this Plan is adopted by the Board.23.TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided herein, this Plan will becomeeffective on the Effective Date and will terminate ten (10) years from the date this Plan is adopted by the Board. This Plan and allAwards granted hereunder shall be governed by and construed in accordance with the laws of the State of Delaware.24.AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate or amend this Plan in anyrespect, including, without limitation, amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan;provided, however, that the Board will not, without the approval of the stockholders of the Company, amend this Plan in any mannerthat requires such stockholder approval; provided further, that a Participant’s Award shall be governed by the version of this Plan thenin effect at the time such Award was granted.25.NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the Board, the submission of this Plan tothe stockholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the powerof the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the grantingof stock awards and bonuses otherwise than under this Plan, and such arrangements may be either generally applicable or applicableonly in specific cases.26.INSIDER TRADING POLICY. Each Participant who receives an Award shall comply with any policy adopted bythe Company from time to time covering transactions in the Company’s securities by Employees, officers and/or directors of theCompany.27.DEFINITIONS. As used in this Plan, and except as elsewhere defined herein, the following terms will have thefollowing meanings:“Award” means any award under the Plan, including any Option, Restricted Stock, Stock Bonus, Stock Appreciation Right,Restricted Stock Unit or award of Performance Shares.“Award Agreement” means, with respect to each Award, the written or electronic agreement between the Company and theParticipant setting forth the terms and conditions of the Award, which shall be in substantially a form (which need not be the same foreach Participant) that the Committee has from time to time approved, and will comply with and be subject to the terms and conditions ofthis Plan.“Award Transfer Program” means any program instituted by the Committee which would permit Participants the opportunity totransfer any outstanding Awards to a financial institution or other person or entity approved by the Committee.“Board” means the Board of Directors of the Company.“Cause” means (i) embezzlement or misappropriation of funds; (ii) conviction of, or entry of a plea of nolo contendre to, afelony involving moral turpitude; (iii) commission of material acts of dishonesty, fraud, or deceit; (iv) breach of any material provisionsof any employment agreement; (v) habitual or willful neglect of duties; (vi) breach of fiduciary duty; or (vii) material violation of anyother duty whether imposed by law or the Board.“Code” means the United States Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.“Committee” means the Compensation Committee of the Board or those persons to whom administration of the Plan, or part ofthe Plan, has been delegated as permitted by law.“Common Stock” means the common stock of the Company.“Company” means ServiceNow, Inc., or any successor corporation.“Consultant” means any person, including an advisor or independent contractor, engaged by the Company or a Parent orSubsidiary to render services to such entity.“Corporate Transaction” means the occurrence of any of the following events: (i) any “person” (as such term is used inSections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act),directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by theCompany’s then-outstanding voting securities; (ii) the consummation of the sale or disposition by the Company of all or substantiallyall of the Company’s assets; (iii) the consummation of a merger or consolidation of the Company with any other corporation, other thana merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuingto represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at leastfifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parentoutstanding immediately after such merger or consolidation or (iv) any other transaction which qualifies as a “corporate transaction”under Section 424(a) of the Code wherein the stockholders of the Company give up all of their equity interest in the Company (exceptfor the acquisition, sale or transfer of all or substantially all of the outstanding shares of the Company).“Director” means a member of the Board.“Disability” means in the case of incentive stock options, total and permanent disability as defined in Section 22(e)(3) of theCode and in the case of other Awards, that the Participant is unable to engage in any substantial gainful activity by reason of anymedically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuousperiod of not less than 12 months.“Effective Date” means the day immediately prior to the date of the underwritten initial public offering of the Company’sCommon Stock pursuant to a registration statement that is declared effective by the SEC.“Employee” means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of theCompany. Neither service as a Director nor payment of a director’s fee by the Company will be sufficient to constitute “employment”by the Company.“Exchange Act” means the United States Securities Exchange Act of 1934, as amended.“Exchange Program” means a program pursuant to which (i) outstanding Awards are surrendered, cancelled or exchanged forcash, the same type of Award or a different Award (or combination thereof) or (ii) the exercise price of an outstanding Award isincreased or reduced.“Exercise Price” means, with respect to an Option, the price at which a holder may purchase the Shares issuable upon exerciseof an Option and with respect to a SAR, the price at which the SAR is granted to the holder thereof.“Fair Market Value” means, as of any date, the value of a share of the Company’s Common Stock determined as follows:(a)if such Common Stock is publicly traded and is then listed on a national securities exchange, itsclosing price on the date of determination on the principal national securities exchange on which the Common Stock is listed oradmitted to trading as reported in The Wall Street Journal or such other source as the Committee deems reliable;(b)if such Common Stock is publicly traded but is neither listed nor admitted to trading on a nationalsecurities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall Street Journalor such other source as the Committee deems reliable;(c)in the case of an Option or SAR grant made on the Effective Date, the price per share at which sharesof the Company’s Common Stock are initially offered for sale to the public by the Company’s underwriters in the initial public offeringof the Company’s Common Stock pursuant to a registration statement filed with the SEC under the Securities Act; or(d)if none of the foregoing is applicable, by the Board or the Committee in good faith.“Insider” means an officer or director of the Company or any other person whose transactions in the Company’s CommonStock are subject to Section 16 of the Exchange Act.“Non-Employee Director” means a Director who is not an Employee of the Company or any Parent or Subsidiary.“Option” means an award of an option to purchase Shares pursuant to Section 5.“Parent” means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company ifeach of such corporations other than the Company owns stock possessing fifty percent (50%) or more of the total combined votingpower of all classes of stock in one of the other corporations in such chain.“Participant” means a person who holds an Award under this Plan.“Performance Award” means cash or stock granted pursuant to Section 10 or Section 12 of the Plan.“Performance Factors” means any of the factors selected by the Committee and specified in an Award Agreement, fromamong the following objective measures, either individually, alternatively or in any combination, applied to the Company as a whole orany business unit or Subsidiary, either individually, alternatively, or in any combination, on a GAAP or non-GAAP basis, andmeasured, to the extent applicable on an absolute basis or relative to a pre-established target, to determine whether the performancegoals established by the Committee with respect to applicable Awards have been satisfied:(a) Profit Before Tax;(b) Billings;(c) Revenue;(d) Net revenue;(e) Earnings (which may include earnings before interest and taxes, earnings before taxes, and net earnings);(f) Operating income;(g) Operating margin;(h) Operating profit;(i) Controllable operating profit, or net operating profit;(j) Net Profit;(k) Gross margin;(l) Operating expenses or operating expenses as a percentage of revenue;(m) Net income;(n) Earnings per share;(o) Total stockholder return;(p) Market share;(q) Return on assets or net assets;(r) The Company’s stock price;(s) Growth in stockholder value relative to a pre-determined index;(t) Return on equity;(u) Return on invested capital;(v) Cash Flow (including free cash flow or operating cash flows)(w) Cash conversion cycle;(x) Economic value added;(y) Individual confidential business objectives;(z) Contract awards or backlog;(aa) Overhead or other expense reduction;(bb) Credit rating;(cc) Strategic plan development and implementation;(dd) Succession plan development and implementation;(ee) Improvement in workforce diversity;(ff) Customer indicators;(gg) New product invention or innovation;(hh) Attainment of research and development milestones;(ii) Improvements in productivity;(jj) Bookings; and(kk) Attainment of objective operating goals and employee metrics; andThe Committee may, in recognition of unusual or non-recurring items such as acquisition-related activities or changes inapplicable accounting rules, provide for one or more equitable adjustments (based on objective standards) to the Performance Factors topreserve the Committee’s original intent regarding the Performance Factors at the time of the initial award grant. It is within the solediscretion of the Committee to make or not make any such equitable adjustments.“Performance Period” means the period of service determined by the Committee, during which years of service or performanceis to be measured for the Award.“Performance Share” means a performance share bonus granted as a Performance Award.“Permitted Transferee” means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling,niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law (including adoptiverelationships) of the Employee, any person sharing the Employee’s household (other than a tenant or employee), a trust in which thesepersons (or the Employee) have more than 50% of the beneficial interest, a foundation in which these persons (or the Employee)control the management of assets, and any other entity in which these persons (or the Employee) own more than 50% of the votinginterests.“Plan” means this ServiceNow, Inc. 2012 Equity Incentive Plan.“Purchase Price” means the price to be paid for Shares acquired under the Plan, other than Shares acquired upon exercise of anOption or SAR.“Restricted Stock Award” means an award of Shares pursuant to Section 6 or Section 12 of the Plan, or issued pursuant to theearly exercise of an Option.“Restricted Stock Unit” means an Award granted pursuant to Section 9 or Section 12 of the Plan.“SEC” means the United States Securities and Exchange Commission.“Securities Act” means the United States Securities Act of 1933, as amended.“Shares” means shares of the Company’s Common Stock and the common stock of any successor security.“Stock Appreciation Right” means an Award granted pursuant to Section 8 or Section 12 of the Plan.“Stock Bonus” means an Award granted pursuant to Section 7 or Section 12 of the Plan.“Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with theCompany if each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) ormore of the total combined voting power of all classes of stock in one of the other corporations in such chain.“Termination” or “Terminated” means, for purposes of this Plan with respect to a Participant, that the Participant has for anyreason ceased to provide services as an employee, officer, director, consultant, independent contractor or advisor to the Company or aParent or Subsidiary of the Company. An employee will not be deemed to have ceased to provide services in the case of any leave ofabsence approved by the Company. In the case of any employee on an approved leave of absence, the Committee may make suchprovisions respecting suspension of vesting of the Award while on leave from the employ of the Company or a Parent or Subsidiary ofthe Company as it may deem appropriate, except that in no event may an Award be exercised after the expiration of the term set forth inthe applicable Award Agreement. In the event of military leave, if required by applicable laws, vesting shall continue for the longestperiod that vesting continues under any other statutory or Company approved leave of absence and, upon a Participant’s returning frommilitary leave (under conditions that would entitle him or her to protection upon such return under the Uniform Services Employmentand Reemployment Rights Act), he or she shall be given vesting credit with respect to Awards to the same extent as would have appliedhad the Participant continued to provide services to the Company throughout the leave on the same terms as he or she was providingservices immediately prior to such leave. An employee shall have terminated employment as of the date he or she ceases to beemployed (regardless of whether the termination is in breach of local laws or is later found to be invalid) and employment shall not beextended by any notice period or garden leave mandated by local law. The Committee will have sole discretion to determine whether aParticipant has ceased to provide services for purposes of the Plan and the effective date on which the Participant ceased to provideservices (the “Termination Date”).“Unvested Shares” means Shares that have not yet vested or are subject to a right of repurchase in favor of the Company (orany successor thereto).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. DelawareITapp Inc. DelawareQlue, Inc. DelawareServiceNow Delaware LLC DelawareSkyGiraffe 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 IndiaITapp Software Private Limited IndiaServiceNow Ireland Limited IrelandService Now A.B Israel 2012 Ltd IsraelSkyGiraffe Ltd IsraelServiceNow Italy S.R.L. ItalyServiceNow Japan K.K. JapanServiceNow Operations Mexico S DE RL DE CV MexicoServiceNow Nederland B.V. NetherlandsServiceNow Norway AS NorwayServiceNow Poland Sp. Z o.o. PolandServiceNow Portugal, Unipessoal LDA PortugalServiceNow Pte. Ltd. SingaporeServiceNow South Africa (Pty) Ltd South AfricaServiceNow Spain SL SpainServiceNow Sweden AB SwedenServiceNow Switzerland GmbH SwitzerlandServiceNow Turkey Bilisim Sanayi Ve Ticaret Limited Sirketi TurkeyServiceNow UK Limited 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 (No. 333-182445, 333-188462, 333-194210, 333-202331,333-209785 and 333-216330) of ServiceNow, Inc. of our report dated February 28, 2018 relating to the financial statements and the effectiveness of internalcontrol over financial reporting, which appears in this Form 10‑K. /s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaFebruary 28, 2018EXHIBIT 31.1CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002I, John J. Donahoe, 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, 2018 /s/ John J. Donahoe John J. DonahoePresident 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, 2018 /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, John J. Donahoe, 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, 2017 (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, 2018 /s/ John J. Donahoe John J. DonahoePresident 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, 2017 (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, 2018 /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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