Edgar Filing: ServiceNow, Inc.

NOW-2015.6.30-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2015



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

Commission File Number: 001-35580

SERVICENOW, INC.

(Exact name of registrant as specified in its charter)



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

ServiceNow, Inc.

3260 Jay Street

Santa Clara, California 95054

(408) 501-8550

(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company ¨

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

As of July 31, 2015, there were approximately 156.1 million shares of the Registrant’s Common Stock outstanding.

TABLE OF CONTENTS



		Page
	PART I
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of June 30, 2015 (Unaudited) and December 31, 2014	1
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2015 and 2014 (Unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (Unaudited)	3
	Notes to Condensed Consolidated Financial Statements (Unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33

	PART II
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults Upon Senior Securities	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
Item 6.	Exhibits	55
	Signatures

PART I

ITEM 1. FINANCIAL STATEMENTS

SERVICENOW, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)



	June 30,			December 31,
	2015			2014
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	325,354		$	252,455
Short-term investments	397,170			416,336
Accounts receivable, net	143,206			159,171
Current portion of deferred commissions	44,346			43,232
Prepaid expenses and other current assets	43,998			35,792
Total current assets	954,074			906,986
Deferred commissions, less current portion	28,193			29,453
Long-term investments	333,284			266,772
Property and equipment, net	124,902			104,237
Intangible assets, net	47,432			54,526
Goodwill	57,412			55,016
Other assets	18,014			8,089
Total assets	$	1,563,311		$	1,425,079
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	20,966		$	17,829
Accrued expenses and other current liabilities	83,085			79,497
Current portion of deferred revenue	487,582			409,671
Total current liabilities	591,633			506,997
Deferred revenue, less current portion	15,112			12,567
Convertible senior notes, net	459,011			443,764
Other long-term liabilities	34,442			33,076
Total liabilities	1,100,198			996,404
Stockholders’ equity:
Common stock	155			150
Additional paid-in capital	953,831			799,221
Accumulated other comprehensive loss	(12,272		)	(12,113		)
Accumulated deficit	(478,601		)	(358,583		)
Total stockholders’ equity	463,113			428,675
Total liabilities and stockholders’ equity	$	1,563,311		$	1,425,079

See accompanying notes to condensed consolidated financial statements

SERVICENOW, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(in thousands, except share and per share data)



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Revenues:
Subscription	$	200,461		$	132,724		$	380,368		$	250,099
Professional services and other	46,255			34,033			78,312			55,748
Total revenues	246,716			166,757			458,680			305,847
Cost of revenues⁽¹⁾:
Subscription	45,392			33,243			87,836			64,432
Professional services and other	34,325			25,695			68,780			47,620
Total cost of revenues	79,717			58,938			156,616			112,052
Gross profit	166,999			107,819			302,064			193,795
Operating expenses⁽¹⁾:
Sales and marketing	136,574			91,937			246,631			161,353
Research and development	53,276			35,439			103,124			66,549
General and administrative	30,384			24,914			59,776			46,545
Total operating expenses	220,234			152,290			409,531			274,447
Loss from operations	(53,235		)	(44,471		)	(107,467		)	(80,652		)
Interest and other expense, net	(7,186		)	(5,231		)	(10,060		)	(11,194		)
Loss before provision for income taxes	(60,421		)	(49,702		)	(117,527		)	(91,846		)
Provision for income taxes	1,504			661			2,491			1,828
Net loss	$	(61,925	)	$	(50,363	)	$	(120,018	)	$	(93,674	)
Net loss per share - basic and diluted	$	(0.40	)	$	(0.35	)	$	(0.78	)	$	(0.65	)
Weighted-average shares used to compute net loss per share - basic and diluted	154,465,367			144,456,675			153,041,433			143,267,181
Other comprehensive income (loss):
Foreign currency translation adjustments	$	3,720		$	511		$	(339	)	$	686
Unrealized gain (loss) on investments	(491		)	365			281			390
Tax provision (benefit)	(177		)	—			101			—
Other comprehensive income (loss), net of tax	3,406			876			(159		)	1,076
Comprehensive loss	$	(58,519	)	$	(49,487	)	$	(120,177	)	$	(92,598	)


(1)	Includes stock-based compensation as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Cost of revenues:
Subscription	$	6,067	$	3,825	$	11,232	$	6,901
Professional services and other	5,771		3,224		10,984		5,616
Sales and marketing	26,105		12,383		48,679		21,426
Research and development	17,935		10,452		33,573		18,291
General and administrative	10,468		7,720		19,952		14,599

See accompanying notes to condensed consolidated financial statements

Table of Contents

SERVICENOW, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)



	Six Months Ended June 30,
	2015			2014
Cash flows from operating activities:
Net loss	$	(120,018	)	$	(93,674	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	28,857			16,630
Amortization of premiums on investments	3,612			3,859
Amortization of deferred commissions	31,281			23,635
Amortization of debt discount and issuance costs	15,285			14,283
Stock-based compensation	124,420			66,833
Tax benefit from exercise of stock options	(597		)	(617		)
Other	(4,240		)	(1,590		)
Changes in operating assets and liabilities:
Accounts receivable	11,339			(2,098		)
Deferred commissions	(32,832		)	(27,966		)
Prepaid expenses and other assets	(8,026		)	(1,101		)
Accounts payable	1,634			10,976
Deferred revenue	90,557			63,312
Accrued expenses and other liabilities	5,682			(6,206		)
Net cash provided by operating activities	146,954			66,276
Cash flows from investing activities:
Purchases of property and equipment	(41,820		)	(27,405		)
Acquisition, net of cash acquired	(1,100		)	—
Purchases of investments	(331,496		)	(241,312		)
Sale of investments	138,362			68,893
Maturities of investments	146,660			67,168
Purchase of strategic investment	(10,000		)	—
Restricted cash	66			(55		)
Net cash used in investing activities	(99,328		)	(132,711		)
Cash flows from financing activities:
Proceeds from employee stock plans	41,684			28,811
Taxes paid related to net share settlement of equity awards	(12,446		)	—
Tax benefit from exercise of stock options	597			617
Net cash provided by financing activities	29,835			29,428
Foreign currency effect on cash and cash equivalents	(4,562		)	(21		)
Net increase (decrease) in cash and cash equivalents	72,899			(37,028		)
Cash and cash equivalents at beginning of period	252,455			366,303
Cash and cash equivalents at end of period	$	325,354		$	329,275
Supplemental disclosures of non-cash investing activities:
Property and equipment included in accounts payable, accrued expenses and other liabilities	$	19,318		$	12,669

See accompanying notes to condensed consolidated financial statements

SERVICENOW, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

(1) Description of the Business

(2) Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and condensed footnotes have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for fair statement of results for the interim periods presented have been included. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the year ended December 31, 2015 or for other interim periods or for future years. The condensed consolidated balance sheet as of December 31, 2014 is derived from audited financial statements as of that date, however, it does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Form 10-K for the year ended December 31, 2014, which was filed with the Securities and Exchange Commission on February 27, 2015.

Principles of Consolidation

The condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles, or GAAP, and include our accounts and the accounts of our wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Warranties and Indemnification

Our cloud-based service to automate services across the global enterprise is typically warranted to perform in material conformance with specifications.

We include service-level commitments to our customers that permit those customers to receive credits in the event we fail to meet those levels. We establish an accrual based on historical credits paid and an evaluation of the performance of our services including an assessment of the impact, if any, of any known service disruptions. Service-level credit accrual charges are recorded against revenue. The service-level credit accrual was not material as of June 30, 2015 and December 31, 2014.

We have also agreed to indemnify our directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by us, arising out of that person’s services as a director or officer of our company or that person’s services provided to any other company or enterprise at our request. We maintain director and officer insurance coverage that may enable us to recover a portion of any future amounts paid. The fair values of these obligations are not material as of each balance sheet date.

Our arrangements include provisions indemnifying customers against intellectual property and other third-party claims. We have not incurred any costs as a result of such indemnifications and have not recorded any liabilities related to such obligations in the consolidated financial statements.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued an update to ASC 606 Revenue from Contracts with Customers, or ASC 606, that will supersede virtually all existing revenue guidance. Under this update, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. As such, an entity will need to use more judgment and make more estimates than under the current guidance. This update should be applied retrospectively either to each prior reporting period presented in the financial statements, or only to the most current reporting period presented in the financial statements with a cumulative effect adjustment recorded in the retained earnings. This update is effective for our interim and annual reporting periods beginning January 1, 2018. Early adoption is permitted for us on January 1, 2017. We are currently evaluating the impact of this update on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. To simplify presentation of debt issuance costs, this new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance will become effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. This ASU is not expected to have a material impact on our consolidated financial statements or disclosures.

(3) Investments

Marketable securities

The following is a summary of our available-for-sale investment securities, excluding those securities classified within cash and cash equivalents on the consolidated balance sheets (in thousands):



	June 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-sale securities:
Commercial paper	$	11,362	$	6	$	—		$	11,368
Corporate notes and bonds	566,472		54		(688		)	565,838
Certificates of deposit	41,505		19		(3		)	41,521
U.S. government agency securities	111,686		44		(3		)	111,727
Total available-for-sale securities	$	731,025	$	123	$	(694	)	$	730,454



	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-sale securities:
Commercial paper	$	8,195	$	1	$	—		$	8,196
Corporate notes and bonds	554,421		56		(845		)	553,632
Certificates of deposit	27,251		8		(2		)	27,257
U.S. government agency securities	94,093		2		(72		)	94,023
Total available-for-sale securities	$	683,960	$	67	$	(919	)	$	683,108

As of June 30, 2015, the contractual maturities of our investments did not exceed 24 months. The fair values of available-for-sale investments, by remaining contractual maturity, are as follows (in thousands):



	June 30, 2015
Due in 1 year or less	$	397,170
Due in 1 year through 2 years	333,284
Total	$	730,454

We had certain available-for-sale securities in a gross unrealized loss position, substantially all of which had been in such position for less than 12 months. There were no impairments considered "other-than-temporary" as it is more likely than not we will hold the securities until maturity or a recovery of the cost basis. The following table shows the fair values and the gross unrealized losses of these available-for-sale securities aggregated by investment types (in thousands):



	June 30, 2015					December 31, 2014
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Corporate notes and bonds	$	417,641	$	(688	)	$	436,140	$	(845	)
Certificates of deposit	9,103		(3		)	7,999		(2		)
U.S. government agency securities	25,104		(3		)	80,014		(72		)
Total	$	451,848	$	(694	)	$	524,153	$	(919	)

Strategic investment

During the three months ended June 30, 2015, we purchased a non-marketable equity investment in a privately-held company. This investment is accounted for under the cost method as we have less than a 20% ownership interest and we do not have the ability to exercise significant influence over the operations of the company. The carrying value of our investment was $10.0 million as of June 30, 2015 which is included in Other assets on the consolidated balance sheets. We monitor this non-marketable equity investment for impairment and will make an appropriate reduction in carrying value if we determine that an impairment charge is required based primarily on the financial condition and near-term prospects of the privately-held company.

(4) Fair Value Measurements

The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis at June 30, 2015 (in thousands):



	Level 1		Level 2		Total
Cash equivalents:
Money market funds	$	45,954	$	—	$	45,954
Commercial paper	—		—		—
Short-term investments:
Commercial paper	—		11,367		11,367
Corporate notes and bonds	—		312,217		312,217
Certificates of deposit	—		32,518		32,518
U.S. government agency securities	—		41,068		41,068
Long-term investments:
Corporate notes and bonds	—		253,621		253,621
Certificates of deposit	—		9,004		9,004
U.S. government agency securities	—		70,659		70,659
Total	$	45,954	$	730,454	$	776,408

The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis at December 31, 2014 (in thousands):



	Level 1		Level 2		Total
Cash equivalents:
Money market funds	$	46,541	$	—	$	46,541
Commercial paper	—		4,600		4,600
Short-term investments:
Commercial paper	—		8,196		8,196
Corporate notes and bonds	—		342,864		342,864
Certificates of deposit	—		25,258		25,258
U.S. government agency securities	—		40,018		40,018
Long-term investments:
Corporate notes and bonds	—		210,768		210,768
Certificates of deposit	—		1,999		1,999
U.S. government agency securities	—		54,005		54,005
Total	$	46,541	$	687,708	$	734,249

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

(5) Goodwill and Intangible Assets

Goodwill balances are presented below (in thousands):



	Carrying Amount
Balance as of December 31, 2014	$	55,016
Goodwill acquired	1,442
Foreign currency translation adjustments	954
Balance as of June 30, 2015	$	57,412

On February 27, 2015, we completed the acquisition of Intreis, Inc., a professional services company with domain expertise in enterprise governance, risk and compliance solutions. Of the $1.6 million in total purchase consideration, $0.2 million is allocated to net tangible assets and $1.4 million is allocated to goodwill, which represents the synergies expected from the workforce integration. The goodwill balance is deductible for U.S. income tax purposes. $0.5 million of the total purchase consideration will be paid one year following the close of the acquisition. The results of operations of Intreis have been included in our consolidated financial statements from the date of purchase. This business combination did not have a material impact on our consolidated financial statements, and therefore pro forma disclosures have not been presented.

Intangible assets consist of the following (in thousands):



	June 30, 2015
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Developed technology	$	58,546	$	(12,079	)	$	46,467
Backlog	591		(382		)	209
Other acquisition-related intangible assets	567		(467		)	100
Acquisition-related intangible assets	59,704		(12,928		)	46,776
Other intangible assets	1,075		(419		)	656
Total intangible assets	$	60,779	$	(13,347	)	$	47,432



	December 31, 2014
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Developed technology	$	59,895	$	(6,727	)	$	53,168
Backlog	588		(184		)	404
Other acquisition-related intangible assets	597		(398		)	199
Acquisition-related intangible assets	61,080		(7,309		)	53,771
Other intangible assets	1,075		(320		)	755
Total intangible assets	$	62,155	$	(7,629	)	$	54,526

Amortization expense for intangible assets for the three months ended June 30, 2015 and 2014 was approximately $2.9 million and $0.5 million, respectively, and for the six months ended June 30, 2015 and 2014 was approximately $5.9 million and $0.9 million, respectively.

(6) Property and Equipment

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



	June 30,			December 31,
	2015			2014
Computer equipment and software	$	156,684		$	128,546
Furniture and fixtures	19,693			18,253
Leasehold improvements	16,993			14,929
Building	6,529			—
Construction in progress	7,390			9,762
	207,289			171,490
Less: Accumulated depreciation	(82,387		)	(67,253		)
Total property and equipment, net	$	124,902		$	104,237

During the year ended December 31, 2014, we entered into a new lease for office space in Tel Aviv, Israel. We concluded for accounting purposes, that we were considered the owner of the building during the construction period as we were responsible to fund the construction costs related to structural improvements necessary to make the space ready for use. Following completion of construction during the three months ended March 31, 2015, we concluded we retained continuing involvement to preclude de-recognition of the building. As such, we continue to account for the building as owned real estate and record a financing obligation for our obligation to the legal owner. The building is reflected as an asset on our balance sheet through May 31, 2025, the period of intended use, and depreciated on a straight-line basis over a period of approximately 39 years. Rent payments made under this lease will be recorded as interest expense and principal reduction to the financing obligation.

Construction in progress consists primarily of leasehold improvements and in-process software development costs. Depreciation expense for the three months ended June 30, 2015 and 2014 was $12.1 million and $8.2 million, respectively, and for the six months ended June 30, 2015 and 2014 was $22.9 million and $15.7 million, respectively.

(7) Accrued Expenses and Other Current Liabilities

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



	June 30,		December 31,
	2015		2014
Taxes payable	$	6,526	$	7,625
Bonuses and commissions	23,195		28,228
Accrued compensation	17,103		14,961
Other employee expenses	16,943		16,080
Other	19,318		12,603
Total accrued expenses and other current liabilities	$	83,085	$	79,497

(8) Convertible Senior Notes

In November 2013, we issued 0% convertible senior notes due November 1, 2018 with an aggregate principal amount of $575 million, or the Notes. The Notes will not bear interest. The Notes mature on November 1, 2018 unless converted or repurchased in accordance with their terms prior to such date. We cannot redeem the Notes prior to maturity.

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

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

The Notes are convertible up to 7.8 million shares of our common stock at an initial conversion rate of approximately 13.54 shares of common stock per $1,000 principal amount, which is equal to an initial conversion price of approximately $73.88 per share of common stock, subject to adjustment. Holders of the Notes may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding July 1, 2018, only under the following circumstances:

•

during any calendar quarter commencing after the calendar quarter ending on March 31, 2014 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;


•	during the five business day period after any five consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of the Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or


•	upon the occurrence of specified corporate events.

On or after July 1, 2018, a holder may convert all or any portion of its notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date regardless of the foregoing conditions. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.

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

In accounting for the issuance of the Notes, we separated the Notes into liability and equity components. The carrying cost of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes. The difference between the principal amount of the Notes and the proceeds allocated to the liability component, or the debt discount, is amortized to interest expense using the effective interest method over the term of the Note. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the transaction costs related to the issuance of the Notes, we allocated the total amount incurred to the liability and equity components based on their relative fair values. Transaction costs attributable to the liability component are being amortized to interest expense over the term of the Notes, and transaction costs attributable to the equity component were netted with the equity component of the Notes in stockholders’ equity. The Notes consisted of the following (in thousands):



	June 30, 2015			December 31, 2014
Liability:
Principal	$	575,000		$	575,000
Less: debt discount, net of amortization	(115,989		)	(131,236		)
Net carrying amount	$	459,011		$	443,764

We consider the fair value of the Notes at June 30, 2015 and December 31, 2014 to be a Level 2 measurement. The estimated fair values of the Notes were $675.1 million and $653.3 million at June 30, 2015 and December 31, 2014, respectively. The fair value was determined based on the closing trading price per $100 of the Notes on June 30, 2015. The Notes are not convertible as of June 30, 2015 and December 31, 2014.

As of June 30, 2015, the remaining life of the Notes is 40 months. The following table sets forth total interest expense recognized related to the Notes (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Amortization of debt issuance cost	$	413	$	386	$	820	$	766
Amortization of debt discount	7,294		6,816		14,465		13,517
Total	$	7,707	$	7,202	$	15,285	$	14,283
Effective interest rate of the liability component	6.5%

Note Hedge

To minimize the impact of potential economic dilution upon conversion of the Notes, we entered into convertible note hedge transactions, or the Note Hedge, with respect to our common stock concurrent with the issuance of the Notes. The Note Hedge covers approximately 7.8 million shares of our common stock at a strike price per share that corresponds to the initial conversion price of the Notes, subject to adjustment, and is exercisable upon conversion of the Notes. We paid an aggregate amount of $135.8 million for the Note Hedge. The Note Hedge will expire upon maturity of the Notes. The Note Hedge is intended to reduce the potential economic dilution upon conversion of the Notes in the event that the fair value per share of our common stock at the time of exercise is greater than the conversion price of the Notes. The Note Hedge is a separate transaction and is not part of the terms of the Notes. The Note Hedge does not impact earnings per share, as it was entered into to offset any dilution from the Notes.

Warrants

Separately, we entered into warrant transactions, or the Warrants, whereby we sold warrants to acquire up to 7.8 million shares of our common stock, at a strike price of $107.46 per share, subject to adjustment. We received aggregate proceeds of $84.5 million from the sale of the Warrants. If the average market value per share of our common stock for the reporting period, as measured under the Warrants, exceeds the strike price of the Warrants, the Warrants will have a dilutive effect on our earnings per share. The Warrants are separate transactions and are not remeasured through earnings each reporting period. The Warrants are not part of the Notes or the Note Hedge, and have been accounted for as part of additional paid-in capital.

(9) Accumulated Other Comprehensive Loss

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



	June 30,			December 31,
	2015			2014
Foreign currency translation adjustment	$	(11,600	)	$	(11,261	)
Net unrealized loss on investments	(672		)	(852		)
Accumulated other comprehensive loss	$	(12,272	)	$	(12,113	)

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

(10) Stockholders' Equity

Common Stock

We were authorized to issue 600,000,000 shares of common stock as of June 30, 2015. Holders of our common stock are not entitled to receive dividends unless declared by our board of directors. As of June 30, 2015, we had 155,367,736 shares of common stock outstanding and had reserved shares of common stock for future issuance as follows:



	June 30, 2015
Stock option plans:
Options outstanding	12,017,564
RSUs	13,079,988
Stock awards available for future grants:
2012 Equity Incentive Plan⁽¹⁾	17,065,080
2012 Employee Stock Purchase Plan⁽¹⁾	7,754,674
Total reserved shares of common stock for future issuance	49,917,306


(1)	Refer to Note 11 for a description of these plans.

During the six months ended June 30, 2015 and 2014, we issued a total of 6,034,044 shares and 4,825,594 shares, respectively, from stock option exercises, vesting of restricted stock units, or RSUs, and purchases from the employee stock purchase plan, or ESPP.

(11) Stock Awards

We have a 2005 Stock Option Plan, or 2005 Plan, which provides for grants of stock awards, including options to purchase shares of common stock, stock purchase rights and RSUs to certain employees, officers, directors and consultants.

Our 2012 Equity Incentive Plan, or 2012 Plan, provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, RSUs, performance-based stock awards and other forms of equity compensation, or collectively, stock awards. In addition, the 2012 Plan provides for the grant of performance cash awards. Incentive stock options may be granted only to employees. All other awards may be granted to employees, including officers, as well as directors and consultants. The share reserve may increase to the extent outstanding stock options under the 2005 Plan expire or terminate unexercised. The share reserve also automatically increases on January 1 of each year until January 1, 2022, by up to 5% of the total number of shares of common stock outstanding on December 31 of the preceding year as determined by the board of directors. On January 1, 2015, 7,475,454 shares of common stock were automatically added to the 2012 Plan pursuant to the provision described in the preceding sentence.

Our 2012 Employee Stock Purchase Plan, or 2012 ESPP, authorizes the issuance of shares of common stock pursuant to purchase rights granted to our employees. The number of shares of common stock reserved for issuance automatically increases on January 1 of each year until January 1, 2022, by up to 1% of the total number of shares of common stock outstanding on December 31 of the preceding year as determined by the board of directors. The price at which common stock is purchased under the 2012 ESPP is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. Offering periods are six months long and begin on February 1 and August 1 of each year. On January 1, 2015, 1,495,090 shares of common stock were automatically added to the 2012 ESPP pursuant to the provision described in the preceding sentence.

Stock Options

A summary of the stock option activity for the six months ended June 30, 2015 is as follows:



	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2014	15,897,422		$	11.96
Granted	156,048		75.34
Exercised	(3,875,335	)	7.41			$	261,976
Canceled	(160,571	)	22.44
Outstanding at June 30, 2015	12,017,564		$	14.10	6.47	$	723,701
Vested and expected to vest as of June 30, 2015	11,914,682		$	13.82	6.46	$	720,874
Vested and exercisable as of June 30, 2015	8,983,792		$	8.20	6.09	$	593,921

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 weighted-average grant date fair value per share of options granted was $33.71 for the six months ended June 30, 2015. The total fair value of shares vested was $20.5 million for the six months ended June 30, 2015.

As of June 30, 2015, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options was approximately $41.7 million. The weighted-average remaining vesting period of unvested stock options at June 30, 2015 was 2.24 years.

RSUs

A summary of RSU activity for the six months ended June 30, 2015 is as follows:



	Number of Shares		Weighted Average Grant Date Fair Value (Per Share)		Aggregate Fair Value (in thousands)
Outstanding at December 31, 2014	9,941,074		$	51.19
Granted	5,643,680		72.82
Vested	(1,888,777	)	45.08		$	140,972
Forfeited	(615,989	)	57.35
Non-vested and outstanding at June 30, 2015	13,079,988		$	61.11	$	971,974
Expected to vest as of June 30, 2015	11,559,798				$	859,009

RSUs granted under the 2005 Plan and the 2012 Plan to employees generally vest annually over a four-year period. As of June 30, 2015, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs was approximately $614.9 million and the weighted-average remaining vesting period was 3.15 years.

(12) Interest and other expense, net

The components of interest and other expense, net, consist of the following (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Interest expense related to the Notes	$	(7,707	)	$	(7,202	)	$	(15,285	)	$	(14,283	)
Interest income	1,074			739			2,022			1,402
Foreign currency exchange gain/(loss)	(534		)	1,230			3,292			1,681
Other	(19		)	2			(89		)	6
Interest and other expense, net	$	(7,186	)	$	(5,231	)	$	(10,060	)	$	(11,194	)

(13) Net Loss Per Share

The following table presents the calculation of basic and diluted net loss per share (in thousands, except share and per share data):



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Numerator:
Net loss	$	(61,925	)	$	(50,363	)	$	(120,018	)	$	(93,674	)
Denominator:
Weighted-average shares outstanding—basic and diluted	154,465,367			144,456,675			153,041,433			143,267,181
Net loss per share:
Basic	$	(0.40	)	$	(0.35	)	$	(0.78	)	$	(0.65	)
Diluted	$	(0.40	)	$	(0.35	)	$	(0.78	)	$	(0.65	)

Potentially dilutive securities that are not included in the calculation of diluted net loss per share because doing so would be antidilutive are as follows:



	June 30,
	2015	2014
Common stock options	12,017,564	19,375,640
Restricted stock units	13,079,988	8,353,408
Common stock subject to repurchase	21	45,879
ESPP obligations	196,836	187,649
Convertible senior notes	7,783,023	7,783,023
Warrants related to the issuance of convertible senior notes	7,783,023	7,783,023
Total potentially dilutive securities	40,860,455	43,528,622

(14) Income Taxes

We compute our provision for income taxes by applying the estimated annual effective tax rate to year-to-date loss from recurring operations and adjust the provision for discrete tax items recorded in the period.

Our effective tax rate for the three and six months ended June 30, 2015 was (2)%, which was lower than the U.S. federal statutory tax rate of 34%. The lower tax rate was primarily attributable to our loss from operations, the foreign tax rate differential, non-deductible expenses arising from stock-based compensation and the tax effects of unrealized gains in investment securities.

Our effective tax rate for the three and six months ended June 30, 2014 was (1)% and (2)%, respectively, which was lower than the federal statutory tax rate of 34%. The lower tax rate was primarily attributable to our loss from operations, the foreign tax rate differential, and non-deductible expenses arising from stock-based compensation.

We are subject to taxation in the United States and foreign jurisdictions. As of June 30, 2015, our tax years 2005 to 2014 remain subject to examination in most jurisdictions. We are currently protesting the results of the examination by the U.S. Internal Revenue Service for the June 30, 2011 and December 31, 2011 tax years.

There are differing interpretations of tax laws and regulations, and as a result, disputes may arise with tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. We periodically evaluate our exposures associated with our tax filing positions. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations, and we do not anticipate a significant impact to our gross unrecognized tax benefits within the next 12 months related to these years. Although the timing of the resolution, settlement, and closure of any audit is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years that remain subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.

(15) Commitments and Contingencies

Leases

We lease facilities for data center capacity and office space under non-cancelable operating lease agreements with various expiration dates. There have been no material changes in our commitments under contractual obligations, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

Legal Proceedings

From time to time, we are party to litigation and other legal proceedings in the ordinary course of business. While the results of any litigation or other legal proceedings are uncertain, management does not believe the ultimate resolution of any pending legal matters is likely to have a material adverse effect on our financial position, results of operations or cash flows, except as discussed below and for those matters for which we have recorded a loss contingency. We accrue for loss contingencies when it is both probable that we will incur the loss and when we can reasonably estimate the amount of the loss or range of loss.

Generally, our subscription agreements require us to defend our customers for third-party intellectual property infringement and other claims. Any adverse determination related to intellectual property claims or other litigation could prevent us from offering our services and adversely affect our financial condition and results of operations.

On February 6, 2014, Hewlett-Packard Company filed a lawsuit against us in the U.S. District Court for the Northern District of California that alleges that some of our services infringe the claims of eight Hewlett-Packard patents. Hewlett-Packard is seeking unspecified damages and an injunction. We filed an answer to the complaint on March 28, 2014 denying the allegations and asserting various affirmative defenses. The parties are currently conducting discovery. Hewlett-Packard served infringement contentions on July 3, 2014 and November 18, 2014. We served invalidity contentions on January 9, 2015. On March 10, 2015, the court granted our motion for summary judgment, finding that the asserted claims of four of the eight asserted Hewlett-Packard patents are invalid for failing to claim patentable subject matter. A claim construction hearing is scheduled for December 18, 2015. The trial is currently scheduled to begin on May 16, 2016. We have filed petitions challenging the validity of each of the asserted patents with the United States Patent and Trademark Office, including inter partes review petitions of all eight asserted patents and covered business method review petitions of two asserted patents.

On September 23, 2014, BMC Software, Inc. filed a lawsuit against us in the U.S. District Court for the Eastern District of Texas that alleges that some of our services willfully infringe the claims of seven BMC patents. BMC is seeking unspecified damages and an injunction. BMC served infringement contentions on January 6, 2015. We served invalidity contentions on March 3, 2015. We filed an answer to the complaint on June 1, 2015 denying the allegations and asserting various affirmative defenses. A claim construction hearing occurred on July 10, 2015. The trial is currently scheduled to begin on March 14, 2016. We have filed petitions challenging the validity of each of the asserted patents with the United States Patent and Trademark Office, including inter partes review petitions of six asserted patents and a covered business method review petition of one asserted patent.

We intend to vigorously defend these lawsuits. These litigation matters are still in their early stages and the final outcome, including our liability, if any, with respect to the claims in the lawsuits, is uncertain. If an unfavorable outcome were to occur in either litigation, the impact could be material to our business, financial condition, cash flow or results of operations, depending on the specific circumstances of the outcome. We cannot make a reasonable estimate of the potential loss or range of loss, if any, arising from these matters.

(16) Information about Geographic Areas

Revenues by geographic area, based on the billing location of the customer, were as follows for the periods presented (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Revenues by geography:
North America ⁽¹⁾	$	174,387	$	114,261	$	323,033	$	209,225
EMEA ⁽²⁾	55,803		42,194		104,333		78,500
Asia Pacific and other	16,526		10,302		31,314		18,122
Total revenues	$	246,716	$	166,757	$	458,680	$	305,847

Long-lived assets by geographic area were as follows (in thousands):



	June 30,		December 31,
	2015		2014
Long-lived assets:
North America⁽³⁾	$	82,417	$	66,489
EMEA⁽²⁾	31,534		27,032
Asia Pacific and other	10,951		10,716
Total long-lived assets	$	124,902	$	104,237


(1)	Revenues attributed to the United States were approximately 95% of North America revenues for the three months ended June 30, 2015, and 94% for the three months ended June 30, 2014, the six months ended June 30, 2015 and the six months ended June 30, 2014.


(2)	Europe, the Middle East and Africa


(3)	Long-lived assets attributed to the United States were approximately 98% and 97% of North America long-lived assets as of June 30, 2015 and December 31, 2014, respectively.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with the (1) unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2014 included in the Form 10-K dated as of, and filed with the Securities and Exchange Commission, or the SEC, on February 27, 2015 (File No. 001-35580). This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors”, set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Certain measures in the section entitled “—Key Factors Affecting Our Performance—Billings,” “—Comparison of the Three Months Ended June 30, 2015 and 2014" and “—Comparison of the Six Months Ended June 30, 2015 and 2014” are presented on a constant currency basis. These measures are not in accordance with U.S. Generally Accepted Accounting Principles, or GAAP. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. These measures may be different from non-GAAP financial measures used by other companies, limiting their usefulness for comparison purposes. We believe investors should consider these non-GAAP financial measures in evaluating our results as they are indicative of our ongoing performance and reflect how management evaluates our operational results and trends.

Overview

ServiceNow is a leading provider of cloud-based solutions that define, structure, manage and automate services across the global enterprise. By applying a service-oriented lens to the activities, tasks and processes that comprise day-to-day work life, we help the modern enterprise operate faster and be more scalable than ever before. We offer our services on an annual subscription fee basis which includes access to the ordered subscription service and related support including updates to the subscribed 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 indirectly through channel partners and third-party referrals. We also generate revenues from professional services for implementation and training of customer personnel. We generally bill our customers annually in advance for subscription services and monthly in arrears for our professional services as the work is performed.

A majority of our revenues come from large global enterprise customers. We continue to invest in the development of our services, infrastructure and sales and marketing to drive long-term growth. We increased our overall employee headcount to 3,187 as of June 30, 2015 from 2,328 as of June 30, 2014.

Key Factors Affecting Our Performance

Renewal rate. We calculate our renewal rate by subtracting our attrition rate from 100%. Our attrition rate for a period is equal to the annualized contract value, or ACV, from lost customers, divided by the total ACV from all customers that renewed during the period, excluding any price changes or upsells, and total ACV from all lost customers. A lost customer is a customer that did not renew a contract expiring in the period and that, in our judgment, will not renew. Typically a customer that reduces its subscription upon renewal is not considered a lost customer. However, in instances where the subscription decrease represents the majority of the customer's ACV, we may deem the renewal as a lost customer. Our renewal rate was 97% for the three and six months ended June 30, 2015, 98% for the three months ended June 30, 2014, and 97% for the six months ended June 30, 2014.

Upsell rate. To grow our business it is important for us to generate additional sales from existing customers, which we refer to as our upsell rate. We calculate our upsell rate as the ACV of upsells, net of losses and reductions in ACV from existing customers during the period, divided by our total ACV signed during the period. The upsell rate was 43% and 40% for the three months ended June 30, 2015 and 2014, respectively, and 38% and 42% for the six months ended June 30, 2015 and 2014, respectively. The decrease in upsell rate for the six months ended June 30, 2015 compared to the same period in the prior year is primarily due to the increase in total signed ACV resulting from higher renewal ACV during the six months ended June 30, 2015.We expect our upsell rate to decrease in the long term as our renewal base continues to grow.

Our upsells are primarily derived from an increase in the number of user accounts purchased by our customers and are also derived from the addition of other subscription services. In the first quarter of 2015, we made a change to our customer count definition to better align to a global standard for business identification and tracking. Refer to the “Total customers” paragraph below for further details about the change. The change in customer count definition increased the upsell rate we had disclosed in the prior year from 33% to 40% for the three months ended June 30, 2014, and from 34% to 42% for the six months ended June 30, 2014.

Total customers. We believe our total customer count is a key indicator of our market penetration, growth and future revenues. We have aggressively invested in, and intend to continue to invest in, our direct sales force and additional partnerships with our indirect sales channel in order to grow our customer base. Based on our new definition of customer count as described below, our total customer count was 2,628 and 2,046, as of June 30, 2015 and 2014, respectively.

In the first quarter of 2015, we changed our definition of customer count to better align to a global standard for business identification and tracking. Previously, we generally defined a customer as an entity with an active subscription contract as of the measurement date. In situations where a single contract applied to entities with multiple subsidiaries or divisions, universities or governmental organizations, each entity that had contracted for a separate production instance of our services was counted as a separate customer. Beginning on January 1, 2015, a customer is defined as an entity with a unique Dunn & Bradstreet Global Ultimate, or GULT, Data Universal Numbering System, or DUNS, and an active subscription contract as of the measurement date. The DUNS number is a global standard for business identification and tracking. We will 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” under the GULT, we count each government agency that we contract with as a separate customer. Our customer count continues to exclude customers of our Express product offering, which is our standardized IT service management solution.

The change in customer count definition reduced our customer count as of June 30, 2014 by 318 customers. As total customer count is a factor used in the calculation of other metrics we disclose (upsell rate, number of customers with ACV greater than $1 million, annual total revenues per customer and average contract term for new customers, upsells and renewals), we have revised previously disclosed numbers for the impacted metrics to ensure comparability across the periods.

Number of customers with ACV greater than $1 million. We count the total number of customers with ACV greater than $1 million as of the end of the period. We had 186 and 111 customers with ACV greater than $1 million as of June 30, 2015 and 2014, respectively.

The number of deals with net new ACV greater than $1 million entered into during the three months ended June 30, 2015 and 2014 were 9 and 4, respectively and 17 and 13 during the six months ended June 30, 2015 and 2014, respectively. We define net new ACV as ACV from new customers and upsells to existing customers, net of losses to those customers.

G2K customer count. The Global 2000, or G2K, customer count is defined as the total number of G2K companies in our customer base as of the end of the period. The Forbes Global 2000 is an annual ranking of the top 2000 public companies in the world by Forbes magazine. The ranking is based on a mix of four metrics: sales; profit; assets; and market value. The Forbes list is updated annually in the second quarter of the calendar year. Current and prior period G2K customer counts are based on the most recent list for comparability purposes. We adjust the G2K count for acquisitions, spin-offs, and other market activity to ensure the G2K customer count is accurately captured. For example, we add a G2K customer when a G2K company that is not a customer acquires a company in our existing customer base that is not a G2K company. When we enter into a contract with a G2K parent company, or any of its related subsidiaries, or any combination of entities within a G2K company, we count only one G2K customer. We do not count further penetration into entities within the G2K as a new customer in the G2K customer count. Our G2K customer count based on the most recent Forbes Global 2000 list and adjusted for acquisitions, spin-offs and other market activity was 566 and 478 as of June 30, 2015 and 2014, respectively.

Billings. We define billings as revenue recognized plus the change in total deferred revenue as presented on the consolidated statements of cash flows. We believe billings offers investors useful supplemental information regarding the performance of our business and will help investors better understand the sales volume and performance of our business.

A calculation of billings is provided below:



	Three Months Ended June 30,				% Change		Six Months Ended June 30,				% Change
	2015		2014				2015		2014
	(dollars in thousands)						(dollars in thousands)
Billings:
Total revenues	$	246,716	$	166,757	48	%	$	458,680	$	305,847	50	%
Change in deferred revenue from the consolidated statements of cash flows	34,696		21,140		64	%	90,557		63,312		43	%
Total billings	$	281,412	$	187,897	50	%	$	549,237	$	369,159	49	%

Our international operations provide a significant portion of our total billings and revenues. As a result, the general strengthening of the U.S. Dollar relative to other major foreign currencies (primarily the Euro) from the first six months of 2014 to the first six months of 2015 had an unfavorable impact on our billings and revenues. For entities reporting in currencies other than the U.S. Dollar, if we had translated our results for the second quarter of 2015 at the exchange rates for the second quarter of 2014 rather than the actual exchange rates in effect during the second quarter of 2015, our total billings would have increased by an additional $22.6 million, with $17.7 million of the increase relating to an increase in total revenues and $4.9 million of the increase relating to the change in deferred revenue from the consolidated statements of cash flows. If we had translated our results for the first six months of 2015 at the exchange rates for the first six months of 2014 rather than the actual exchange rates in effect during the first six months of 2015, our total billings would have increased by an additional $42.4 million, with $31.4 million of the increase relating to an increase in total revenues and $11.0 million of the increase relating to the change in deferred revenue from the consolidated statements of cash flows.

Average contract term. We calculate the average contract term for new customers, upsells, and renewals based on the term of those contracts entered into during the period weighted by their ACV. The average new customer contract term was 31 months and 32 months for the three months ended June 30, 2015 and 2014, respectively, and 30 months and 31 months for the six months ended June 30, 2015 and 2014, respectively. The average upsell contract term was 26 months for both the three months ended June 30, 2015 and 2014, and 25 months and 26 months for the six months ended June 30, 2015 and 2014, respectively. The average renewal contract term was 23 months and 29 months for the three months ended June 30, 2015 and 2014, respectively, and 24 months and 27 months for the six months ended June 30, 2015 and 2014, respectively. In the first quarter of 2015, we made a change to our customer count definition to better align to a global standard for business identification and tracking. Refer to the “Total customers” paragraph section above for further details of the change. The change in customer count definition decreased the average new customer contract term from 34 months as disclosed in the prior year to 31 months for the six months ended June 30, 2014. The change to our customer count definition did not affect the average new customer contract term for the three months ended June 30, 2014. Average upsell contract term and average renewal contract term were not included in the financial results for the three and six months ended June 30, 2014, therefore the change in customer count definition had no impact to prior year disclosure.

Components of Results of Operations

Revenues

Subscription revenues. Subscription revenues are primarily comprised of fees that give customers access to the ordered subscription service, related support and upgrades to the subscribed service during the subscription term. Pricing includes multiple instances, hosting and support services, data backup and disaster recovery services, as well as future upgrades, when and if available, offered during the subscription term. We typically invoice our customers for subscription fees in annual increments upon execution of the initial contract or subsequent renewal. Our contracts are generally non-cancelable during the subscription term, though a customer can terminate for breach if we materially fail to perform.

We generate sales directly through our sales team and, to a lesser extent, through our channel partners. Sales to our channel partners are made at a discount and revenues are recorded at the discounted price when all revenue recognition criteria are met. From time to time our channel partners also provide us referrals for which we pay a referral fee. We pay referral fees to channel partners and other third parties, which are typically 15% of the customer's ACV. The referral fees may vary depending on the level of activity the partner performs in the sales process. We include these fees in sales and marketing expense.

Professional services and other revenues. Professional services revenues consist of fees associated with the implementation and configuration of our subscription service. Our pricing for professional services are primarily on a time-and-materials basis. We generally invoice our professional services monthly in arrears based on actual hours and expenses incurred. Other revenues primarily include fees from customer training delivered on-site or publicly available classes, royalties from licensing training materials, attendance and sponsorship fees for our annual Knowledge user conference and other customer forums. Typical payment terms require our customers to pay us within 30 days of invoice.

Allocation of Overhead Costs

Overhead costs associated with office facilities, IT and certain depreciation related to non-cloud-based infrastructure are allocated to cost of revenues and operating expenses based on headcount. Facility costs associated with our data centers (included as part of data center capacity costs) as well as depreciation related to our cloud-based infrastructure hardware equipment are classified as cost of subscription revenues.

Cost of Revenues

Cost of subscription revenues. Cost of subscription revenues consists primarily of expenses related to hosting our services and providing support to our customers. These expenses are comprised of data center capacity costs, depreciation related to our cloud-based infrastructure hardware equipment, amortization of acquired developed technology intangibles, personnel related costs directly associated with our cloud-based infrastructure and customer support, including salaries, benefits, bonuses and stock-based compensation and allocated overhead.

Cost of professional services and other revenues. Cost of professional services and other revenues consists primarily of personnel related costs directly associated with our professional services and training departments, including salaries, benefits, bonuses and stock-based compensation, the costs of contracted third-party partners and allocated overhead.

Professional services associated with the implementation and configuration of our subscription services are performed directly by our services team, as well as by contracted third-party partners. Fees paid to third-party partners are primarily recognized as cost of revenues as the professional services are delivered. Cost of revenues associated with our professional services engagements contracted with third-party partners as a percentage of professional services and other revenues was 15% and 13% in the three months ended June 30, 2015 and 2014, respectively, and 17% and 14% for the six months ended June 30, 2015 and 2014, respectively.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of personnel related expenses directly associated with our sales and marketing staff, including salaries, benefits, bonuses, commissions and stock-based compensation. Sales and marketing expenses also include third-party referral fees, marketing and promotional events, including our annual Knowledge user conference, online marketing, product marketing and allocated overhead.

Research and Development Expenses

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.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel related expenses for our executive, finance, legal, human resources and administrative personnel, including salaries, benefits, bonuses and stock-based compensation, external legal, accounting and other professional services fees, other corporate expenses and allocated overhead.

Provision for Income Taxes

Provision for income taxes consists of federal, state and foreign income taxes. Due to cumulative losses, we maintain a valuation allowance against our U.S. deferred tax assets as of June 30, 2015 and December 31, 2014. We consider all available evidence, both positive and negative, including but not limited to, earnings history, projected future outcomes, industry and market trends and the nature of each of the deferred tax assets in assessing the extent to which a valuation allowance should be applied against our U.S. deferred tax assets.

Recent Accounting Pronouncements

Results of Operations

To enhance comparability, the following table sets forth our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(in thousands)						(in thousands)
Revenues:
Subscription	$	200,461		$	132,724		$	380,368		$	250,099
Professional services and other	46,255			34,033			78,312			55,748
Total revenues	246,716			166,757			458,680			305,847
Cost of revenues⁽¹⁾:
Subscription	45,392			33,243			87,836			64,432
Professional services and other	34,325			25,695			68,780			47,620
Total cost of revenues	79,717			58,938			156,616			112,052
Gross profit	166,999			107,819			302,064			193,795
Operating expenses⁽¹⁾:
Sales and marketing	136,574			91,937			246,631			161,353
Research and development	53,276			35,439			103,124			66,549
General and administrative	30,384			24,914			59,776			46,545
Total operating expenses	220,234			152,290			409,531			274,447
Loss from operations	(53,235		)	(44,471		)	(107,467		)	(80,652		)
Interest and other expense, net	(7,186		)	(5,231		)	(10,060		)	(11,194		)
Loss before provision for income taxes	(60,421		)	(49,702		)	(117,527		)	(91,846		)
Provision for income taxes	1,504			661			2,491			1,828
Net loss	$	(61,925	)	$	(50,363	)	$	(120,018	)	$	(93,674	)


(1)	Stock-based compensation included in the statements of operations above was as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
	(in thousands)				(in thousands)
Cost of revenues:
Subscription	$	6,067	$	3,825	$	11,232	$	6,901
Professional services and other	5,771		3,224		10,984		5,616
Sales and marketing	26,105		12,383		48,679		21,426
Research and development	17,935		10,452		33,573		18,291
General and administrative	10,468		7,720		19,952		14,599



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Revenues:
Subscription	81	%	80	%	83	%	82	%
Professional services and other	19		20		17		18
Total revenues	100		100		100		100
Cost of revenues:
Subscription	18		20		19		21
Professional services and other	14		15		15		16
Total cost of revenues	32		35		34		37
Gross profit	68		65		66		63
Operating expenses:
Sales and marketing	55		55		54		53
Research and development	22		21		22		22
General and administrative	12		15		13		15
Total operating expenses	89		91		89		90
Loss from operations	(21	)	(26	)	(23	)	(26	)
Interest and other expense, net	(3	)	(3	)	(2	)	(4	)
Loss before provision for income taxes	(24	)	(29	)	(25	)	(30	)
Provision for income taxes	1		—		1		1
Net loss	(25	)%	(29	)%	(26	)%	(31	)%



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
	(in thousands)				(in thousands)
Revenues by geography
North America	$	174,387	$	114,261	$	323,033	$	209,225
EMEA ⁽¹⁾	55,803		42,194		104,333		78,500
Asia Pacific and other	16,526		10,302		31,314		18,122
Total revenues	$	246,716	$	166,757	$	458,680	$	305,847

(1) Europe, the Middle East and Africa

Comparison of the Three Months Ended June 30, 2015 and 2014

Revenues



	Three Months Ended June 30,						% Change
	2015			2014			% Change
	(dollars in thousands)
Revenues:
Subscription	$	200,461		$	132,724		51	%
Professional services and other	46,255			34,033			36	%
Total revenues	$	246,716		$	166,757		48	%
Percentage of revenues:
Subscription	81		%	80		%
Professional services and other	19		%	20		%
Total	100		%	100		%

Subscription revenues increased $67.7 million during the three months ended June 30, 2015, compared to the same period in the prior year, driven by our upsells, an increase in our customer count and strong renewals. Revenues from our direct sales organization and channel partners represented 89% and 11%, respectively, for each of the three months ended June 30, 2015 and 2014.

Professional services and other revenues increased $12.2 million during the three months ended June 30, 2015, compared to the same period in the prior year, due to an increase in the services provided to our growing customer base. In addition, revenues from our annual Knowledge user conference increased to $10.9 million for the three months ended June 30, 2015 from $8.2 million for the three months ended June 30, 2014 due to increases in sponsorship and paid registrations. This event is held each year in the second quarter, and all revenues and costs associated with this event are recognized in the quarter in which the event is held. We believe excluding Knowledge revenues facilitates a more meaningful comparison between comparative periods for our professional services and other revenue and gross profit. We expect professional services and other revenues to increase at a slower rate than subscription revenues as we continue to focus on strengthening and supporting our network of professional services partners.

Our annual total revenues per customer increased to approximately $357,000 for the three months ended June 30, 2015, compared to approximately $300,000 for the three months ended June 30, 2014. Our annual total revenues per customer is the sum of average quarterly revenues per customer for the trailing four quarters. We calculate average quarterly revenues per customer by dividing the quarter’s revenues by the average number of customers in the quarter. In the second quarter of 2014, we made a change to our calculation to improve the accuracy of our average revenues per customer. In this report, we have applied this updated calculation combined with our revised customer count definition, and have presented current and past metrics on this consistent basis. As a result, our annual total revenues per customer for the three months ended June 30, 2014 increased by 15% compared to the same period in the prior year.

Our international operations have provided and will continue to provide a significant portion of our total revenues. As a result, the general strengthening of the U.S. Dollar relative to other major foreign currencies (primarily Euro) from the second quarter of 2014 to the second quarter of 2015 had an unfavorable impact on our revenues. For entities reporting in currencies other than the U.S. Dollar, if we had translated our results for the second quarter of 2015 at the exchange rates for the second quarter of 2014 rather than the actual exchange rates in effect during the second quarter of 2015, our subscription revenues would have increased by an additional $13.7 million and our professional services and other revenues would have increased by an additional $4.0 million.

Cost of Revenues and Gross Profit Percentage



	Three Months Ended June 30,						% Change
	2015			2014			% Change
	(dollars in thousands)
Cost of revenues:
Subscription	$	45,392		$	33,243		37	%
Professional services and other	34,325			25,695			34	%
Total cost of revenues	$	79,717		$	58,938		35	%
Gross profit percentage:
Subscription	77		%	75		%
Professional services and other	26		%	24		%
Total gross profit percentage	68		%	65		%
Gross Profit	$	166,999		$	107,819
Headcount (at period end)
Subscription	513			405			27	%
Professional services and other	443			370			20	%
Total headcount	956			775			23	%

Cost of subscription revenues increased $12.1 million during the three months ended June 30, 2015, compared to the same period in the prior year, primarily due to increased headcount resulting in an increase of $2.4 million in personnel related costs excluding stock-based compensation, an increase of $2.2 million in stock-based compensation, an increase of $2.1 million in depreciation expense primarily due to purchases of cloud-based infrastructure hardware equipment for our data centers and an increase of $1.5 million in overhead expenses. Amortization of intangible assets increased $2.4 million as a result of the acquisition of Neebula Systems Ltd., or Neebula, in July 2014.

Our subscription gross profit percentage was 77% and 75% for the three months ended June 30, 2015 and 2014, respectively. We expect our cost of subscription revenues to increase in absolute dollar terms as we provide subscription services to more customers and increase the number of users within our customer instances. We expect our subscription gross profit percentage to remain relatively flat for the remainder of the year as we anticipate our cost of subscription revenues to grow at the same rate as our subscription revenues. To the extent future acquisitions are consummated, our cost of subscription revenues may increase due to additional non-cash charges associated with the amortization of intangible assets acquired. Our forecast for revenues, cost of revenues, and operating expenses was based on foreign exchange rates as of June 30, 2015.

Cost of professional services and other revenues increased $8.6 million during the three months ended June 30, 2015 as compared to the same period in the prior year, primarily due to increased headcount resulting in an increase of $2.8 million in personnel related costs excluding stock-based compensation, an increase of $2.5 million in stock-based compensation, an increase of $2.4 million in contracted third-party partner costs and any increase of $1.4 million in overhead expenses.

Our professional services and other gross profit percentage was 26% and 24% during the three months ended June 30, 2015 and 2014, respectively, and included revenues from our annual Knowledge user conference. Costs associated with Knowledge are included in sales and marketing expense. Knowledge contributed $10.9 million in revenue, or 23 percentage points to the professional services and other gross profit percentage for the three months ended June 30, 2015. For the three months ended June 30, 2014, Knowledge contributed $8.2 million in revenue, or 24 percentage points, to the professional services and other gross profit percentage.

The general strengthening of the U.S. Dollar relative to other major foreign currencies from the second quarter of 2014 to the second quarter of 2015 had an impact on our cost of revenues. For entities reporting in currencies other than the U.S. Dollar, if we had translated our results for the second quarter of 2015 at the exchange rates for the second quarter of 2014 rather than the actual exchange rates in effect during the second quarter of 2015, our cost of subscription revenues would have increased by an additional $2.2 million and our cost of professional services and other revenues would have increased by an additional $2.0 million.

Sales and Marketing



	Three Months Ended June 30,						% Change
	2015			2014			% Change
	(dollars in thousands)
Sales and marketing	$	136,574		$	91,937		49	%
Percentage of revenues	55		%	55		%
Headcount (at period end)	1,169			806			45	%

Sales and marketing expenses increased $44.6 million during the three months ended June 30, 2015 compared to the same period in the prior year, primarily due to increased headcount that resulted in an increase of $15.9 million in personnel related costs excluding stock-based compensation, an increase of $13.7 million in stock-based compensation, an increase of $5.0 million in overhead expenses and an increase of $2.6 million in commissions expense. Commissions increased primarily due to an increase in bookings. Commissions and referral fees amounted to 8% and 11% of subscription revenues for three months ended June 30, 2015 and 2014, respectively.

In addition, expenses related to our annual Knowledge user conference increased by $5.7 million, from $15.3 million for the three months ended June 30, 2014 to $21.0 million for the three months ended June 30, 2015, due to registration increasing by 31% year-over-year. All other marketing program expenses, which include events, advertising and market data, increased $1.7 million during the three months ended June 30, 2015 compared to the same period in the prior year.

The general strengthening of the U.S. Dollar relative to other major foreign currencies from the second quarter of 2014 to the second quarter of 2015 had an impact on our sales and marketing expenses. For entities reporting in currencies other than the U.S. Dollar, if we had translated our results for the second quarter of 2015 at the exchange rates for the second quarter 2014 rather than the actual exchange rates in effect during the second quarter of 2015, our sales and marketing expenses would have increased by an additional $6.2 million.

Excluding the charges related to Knowledge, we expect sales and marketing expenses to increase for the remainder of the year, in absolute dollar terms, but remain relatively flat as a percentage of total revenues as we continue to expand our direct sales force, increase our marketing activities, grow our international operations, build brand awareness and sponsor additional marketing events.

Research and Development



	Three Months Ended June 30,						% Change
	2015			2014			% Change
	(dollars in thousands)
Research and development	$	53,276		$	35,439		50	%
Percentage of revenues	22		%	21		%
Headcount (at period end)	681			470			45	%

Research and development expenses increased $17.8 million during the three months ended June 30, 2015 compared to the same period in the prior year, primarily due to increased headcount, which resulted in an increase of $6.8 million in personnel related costs excluding stock-based compensation, an increase of $7.5 million in stock-based compensation and an increase of $2.5 million in overhead expenses. The impact from the foreign currency movements from the second quarter of 2014 to the second quarter of 2015 is not significant to research and development expenses.

We expect research and development expenses to increase for the remainder of the year in absolute dollar terms, but remain relatively flat as a percentage of total revenues as we continue to expand the development organization and improve the existing functionality of our services, develop new applications to fill market needs and continue to enhance our core platform.

General and Administrative



	Three Months Ended June 30,						% Change
	2015			2014			% Change
	(dollars in thousands)
General and administrative	$	30,384		$	24,914		22	%
Percentage of revenues	12		%	15		%
Headcount (at period end)	381			277			38	%

General and administrative expenses increased $5.5 million during the three months ended June 30, 2015, compared to the same period in the prior year, primarily due to increased headcount which resulted in an increase of $1.6 million in personnel related costs excluding stock-based compensation and an increase of $2.7 million in stock-based compensation. Outside services costs increased $2.1 million primarily due to an increase in legal fees and an increase in contractors for internal information technology support. The impact from the foreign currency movements from the second quarter of 2014 to the second quarter of 2015 is not significant to general and administrative expenses.

We expect general and administrative expenses to increase for the remainder of the year in absolute dollar terms due to increased headcount, legal fees and charges related to the move and expansion of our Santa Clara headquarters in the fourth quarter of 2015, but to remain relatively flat as a percentage of total revenues as we continue to grow.

Stock-based Compensation



	Three Months Ended June 30,						% Change
	2015			2014			% Change
	(dollars in thousands)
Cost of revenues:
Subscription	$	6,067		$	3,825		59	%
Professional services and other	5,771			3,224			79	%
Sales and marketing	26,105			12,383			111	%
Research and development	17,935			10,452			72	%
General and administrative	10,468			7,720			36	%
Total stock-based compensation	$	66,346		$	37,604		76	%
Percentage of revenues	27		%	23		%

Stock-based compensation increased $28.7 million during the three months ended June 30, 2015, compared to the same period in prior year, primarily due to annual grants of equity incentive awards, increased headcount, an increase in the weighted-average grant date fair value of stock awards and performance RSUs granted to our executives in the current year. The new equity incentive awards granted after the same period in prior year, including the performance RSUs, resulted in an increase of $28.8 million in stock-based compensation. The weighted-average grant date fair value per share of stock options granted was $75.42 and $55.94 for the three months ended June 30, 2015 and 2014, respectively. The weighted-average grant date fair value per RSU was $75.99 and $50.75 for the three months ended June 30, 2015 and 2014, respectively.

Stock-based compensation is inherently difficult to forecast due to fluctuations in our stock price and the uncertainty around the achievement of performance criteria associated with our performance RSUs. We expect stock-based compensation to continue to increase for the remainder of the year in absolute dollar terms and as a percentage of total revenues.

We expect to continue to incur a GAAP loss for the remainder of the year, due to increased costs such as non-cash charges associated with equity awards, amortization of purchased intangibles from business combinations and other expenses.

Interest and Other Expense, net



	Three Months Ended June 30,						% Change
	2015			2014			% Change
	(dollars in thousands)
Interest expense related to the Notes	$	(7,707	)	$	(7,202	)	7	%
Interest income	1,074			739			45	%
Foreign currency exchange gain/(loss)	(534		)	1,230			(143	)%
Other	(19