SERVICENOW, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing under "Consolidated Financial Statements and Supplementary Data" in Item 8 of this filing. Some of the information contained in this discussion and analysis or set forth elsewhere in this filing, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should carefully read the "Risk Factors" section of this filing for a discussion of important 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 contained in the following discussion and analysis. Our free cash flow and billings measures included in the sections entitled "-Key Business Metrics-Free Cash Flow" and "-Key Business Metrics-Billings" are not in accordance withU.S. Generally Accepted Accounting Principles (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 encourage investors to carefully consider our results under GAAP, as well as our supplemental non-GAAP results, to more fully understand our business. This section of our Annual Report on Form 10-K discusses our financial condition and results of operations for the fiscal years endedDecember 31, 2019 and 2018, and year-to-year comparisons between fiscal 2019 and fiscal 2018. A discussion of our financial condition and results of operations for the fiscal year endedDecember 31, 2017 and year-to-year comparisons between fiscal 2018 and fiscal 2017, which have been accounted for and presented to reflect our adoption of Topic 606, that is not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 , filed onFebruary 28, 2019 . 32
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Overview
ServiceNow's purpose is to make the world of work, work better for people. We believe that people should work the way they want to, so we build applications that help automate existing processes and create efficient, digitized workflows. Our products and services enable the steps of a job to flow naturally across disparate departments, systems and processes of a business. When work flows naturally, great experiences follow. We primarily deliver our software via the Internet as a service through a simple and easy-to-use interface so that we can rapidly deploy our packaged offerings, and customers can easily build their custom applications. In a minority of cases, customers choose to host our software by themselves or through a third-party service provider. 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. Pricing for our subscription services is based on a number of factors, including duration of subscription term, volume, mix of products purchased, and discounts. We sell our products as subscription services and primarily through direct sales. We also offer professional services, both directly and through partners, to help our customers understand and utilize our products and platform more effectively. We also generate revenues from certain professional services and for training of customer and partner personnel. Our professional services organization provides strategic advisory and consulting services to help customers maximize the value of theirServiceNow investment. 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.
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$1 million as of the end of the period. We had 892, 677, and 505 customers with ACV greater than$1 million as ofDecember 31, 2019 , 2018 and 2017, respectively. For purposes of customer count, a customer is defined as an entity that has a unique Dunn & Bradstreet Global Ultimate (GULT) Data Universal Numbering System (DUNS) number and an active subscription contract as of the measurement date. The DUNS number is a global standard for business identification and tracking. We make exceptions for holding companies, government entities and other organizations for which the GULT, in our judgment, does not accurately represent theServiceNow customer. For example, while allU.S. government agencies roll up to "Government ofthe United States " under the 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; accordingly, we restate previously disclosed number of customers with ACV greater than$1 million calculations 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 . Remaining performance obligations. Transaction price allocated to remaining performance obligations (RPO) represents contracted revenue that has not yet been recognized, which includes deferred revenue and non-cancelable amounts that will be invoiced and recognized as revenue in future periods. RPO excludes contracts that are billed in arrears, such as certain time and materials contracts, as we apply the "right to invoice" practical expedient under relevant accounting guidance. As ofDecember 31, 2019 , our RPO was approximately$6.6 billion and we expect to recognize revenues on approximately 50% of these RPO over the following 12 months, with the balance to be recognized thereafter. Factors that may cause our RPO to vary from period to period include the following:
• Foreign currency exchange rates. While a majority of our contracts have
historically been in
contracts in recent periods has been in foreign currencies, particularly
the Euro and British Pound Sterling. Fluctuations in foreign currency
exchange rates as of the balance sheet date will cause variability in our
RPO.
• Mix of offerings. In a minority of cases, we allow our customers to host
our software by themselves or through a third-party service provider. In
self-hosted offerings, we recognize a portion of the revenue upfront upon
the delivery of the software and as a result, such revenue is excluded
from RPO.
• Subscription start date. From time to time, we enter into contracts with a
subscription start date in the future and these amounts are included in
RPO if such contracts are signed by the balance sheet date.
• Timing of contract renewals. While customers typically renew theircontracts at the end of the contract term, from time to time, customers
may do so either before or after the scheduled expiration date. For
example, in cases where we are
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successful in selling additional products or services to an existing customer, a customer may decide to renew its existing contract early to ensure that all its contracts expire on the same date. In other cases, prolonged negotiations or other factors may result in a contract not being renewed until after it has expired.
• Contract duration. While we typically enter into multi-year subscription
services, the duration of our contracts varies. We sometimes also enter
into contracts with durations that have a 12-month or shorter term to
enable the contracts to co-terminate with the existing contract. The
contract duration will cause variability in our RPO.
Free cash flow. We define free cash flow, a non-GAAP financial measure, as GAAP
net cash provided by operating activities reduced by purchases of property and
equipment. Purchases of property and equipment are otherwise included in cash
used in investing activities under GAAP. We believe information regarding free
cash flow provides useful information to investors because it is an indicator of
the strength and performance of our business operations. However, our
calculation of free cash flow may not be comparable to similar measures used by
other companies. The calculation of free cash flow is provided below:
Year Ended December 31,
2019 2018 2017
(in thousands)
Free cash flow:
Net cash provided by operating activities $ 1,235,972 $ 811,089 $ 642,940
Purchases of property and equipment (264,892 ) (224,462 ) (150,510 )
Free cash flow (1) $ 971,080 $ 586,627 $ 492,430 (1) Free cash flow for the year ended
of
attributable to debt discount. Refer to Note 11 in the notes to our
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K for further details.
Billings. We define billings, a non-GAAP financial measure, as GAAP revenues
recognized plus the change in total GAAP unbilled receivables, deferred revenue
and customer deposits as presented on the consolidated statements of cash flows.
The calculation of billings is provided below:
Year Ended December 31,
2019 2018 2017
(dollars in thousands)
Billings:
Total revenues $ 3,460,437 $ 2,608,816 $ 1,918,494
Change in deferred revenue, unbilled
receivables and customer deposits(1) 541,776 480,019 381,160
Total billings$ 4,002,213 $ 3,088,835 $ 2,299,654 Year-over-year percentage change in total billings 30 % 34 % 37 %
(1) As presented on or derived from our consolidated statements of cash flows.
Billings consists of amounts invoiced for subscription contracts with existing customers, renewal contracts, expansion contracts, contracts with new customers, and contracts for professional services and training. Factors that may cause our billings results to vary from period to period include 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.
• 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 as these 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 ourbillings in recent periods has been in foreign currencies, particularly
the Euro and British Pound Sterling.
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• Timing of contract renewals. While customers typically renew their
contracts at the end of the contract term, from time to time customers may
do so either before or after the scheduled expiration date. For example,
in cases where we are successful in selling additional products or
services to an existing customer, a customer may decide to renew its
existing contract early to ensure that all its contracts expire on the
same date. In other cases, prolonged negotiations or other factors may
result in a contract not being renewed until after it has expired.
While we believe billings is a useful leading indicator regarding the
performance of our business, due to the factors described above, an increase or
decrease in new or renewed 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 fluctuations in
billings duration had on our billings. The impact of foreign currency rate
fluctuations is calculated by translating the current period results for
entities reporting in currencies other than U.S. Dollars into U.S. Dollars at
the exchange rates in effect during the prior period presented, rather than the
actual exchange rates in effect during the current period. The impact of
fluctuations in billings duration is calculated by replacing the portion of
multi-year billings in 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 in the 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 an unfavorable impact of $67.7 million
and a favorable impact of $31.0 million on billings for the years ended December
31, 2019 and 2018, respectively. Changes in billings duration had a favorable
impact of $1.2 million and $7.4 million for the years ended December 31, 2019
and 2018, 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 from customers
lost during the period, divided by the sum of (i) the total ACV from all
customers that renewed during the period, excluding changes in price or users,
and (ii) the total ACV 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 that have renewed. Further, our renewal rate does not reflect
increased or decreased purchases from our customers to the extent such customers
are not lost customers. 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 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 or
lapsed renewal. For our renewal rate calculation, we define a customer as an
entity with a separate production instance of our service and an active
subscription contract as of the measurement date, instead of an entity with a
unique GULT or DUNS number. We adjust our renewal rate for acquisitions,
consolidations and other customer events that cause the merging of two or more
accounts occurring at the time of renewal. Previously disclosed renewal rates
may be restated to reflect such adjustments to allow for comparability. Our
renewal rate was 98% for each of the years ended December 31, 2019 and 2018, and
97% for the year ended December 31, 2017 . As our renewal rate is impacted by the
timing of renewals, which could occur in advance of, or subsequent to the
original contract end date, period-to-period comparison of renewal rates may not
be meaningful.
Components of Results of Operations
Revenues
Subscription revenues. Subscription revenues are primarily comprised of fees
that give customers access to the ordered subscription service for both
self-hosted offerings and cloud-based subscription offerings, and related
support and updates, if any, to the subscription service during the subscription
term. For our cloud-based offerings, we recognize revenue ratably over the
subscription term. For self-hosted offerings, a substantial portion of the sales
price is recognized upon delivery of the software, which may cause greater
variability in our subscription revenues and subscription gross margin. Pricing
includes multiple instances, hosting and support services, data backup and
disaster recovery services, as well as future updates, 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.
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Professional services and other revenues. Our arrangements for professional services are primarily on a time-and-materials basis, and we generally invoice our customers monthly in arrears for these professional services based on actual hours and expenses incurred. Some of our professional services arrangements are on a fixed fee or subscription basis. Professional services revenues are recognized as services are delivered. Other revenues primarily consist of fees from customer training delivered on-site or through publicly available classes. Typical payment terms require our customers to pay us within 30 days of invoice. We sell our subscription services primarily through our direct sales organization. We also sell services through managed services providers and resale partners. We also generate revenues from certain professional services and for training of customers and partner personnel, through both our direct team and indirect channel sales. Revenues from our direct sales organization represented 82%, 84% and 88% for the years endedDecember 31, 2019 , 2018 and 2017, respectively. For purposes of calculating revenues from our direct sales organization, revenues from systems integrators and managed services providers are included as part of the direct sales organization.
Allocation of Overhead Costs
Overhead costs associated with office facilities, IT and certain depreciation related to infrastructure that is not dedicated for customer use or research and development use are allocated to cost of revenues and operating expenses based on headcount. 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, which include colocation costs associated with our data centers as well as interconnectivity between data centers, depreciation related to our infrastructure hardware equipment dedicated for customer use, amortization of intangible assets, expenses associated with software, IT services and support dedicated for customer use, personnel-related costs directly associated with data center operations 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, travel expenses and allocated overhead. Professional services are performed directly by our services team, as well as by contracted third-party partners. Fees paid by us 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%, 18% and 22% for the years endedDecember 31, 2019 , 2018 and 2017, respectively.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related expenses directly associated with our sales and marketing staff, including salaries, benefits, bonuses and stock-based compensation. Sales and marketing expenses also include the amortization of commissions paid to our sales employees, including related payroll taxes and fringe benefits. From time to time, third parties provide us referrals for which we pay a referral fee. We include revenues associated with these referrals as part of revenues from our direct sales organization. Referral fees paid to these third parties are generally 10% of the customer's net new ACV. We defer referral fees paid as they are considered incremental selling costs associated with acquiring customer contracts, and include the amortization of these referral fees in sales and marketing expense. In addition, sales and marketing expenses include branding expenses, expenses offset by proceeds related to our annual Knowledge user conference (Knowledge), other marketing program expenses, which include events other than Knowledge, and costs associated with purchasing advertising and marketing data, software and subscription services dedicated for sales and marketing use and allocated overhead.
Research and Development
Research and development expenses consist primarily of personnel-related
expenses directly associated with our research and development staff, including
salaries, benefits, bonuses and stock-based compensation and allocated overhead.
Research and development expenses also include data center capacity costs, costs
associated with outside services contracted for research and development
purposes and depreciation of infrastructure hardware equipment that is used
solely for research and development purposes.
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General and Administrative
General and administrative expenses consist primarily of personnel-related expenses for our executive, finance, legal, human resources, facilities and administrative 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.
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 ourU.S. deferred tax assets as ofDecember 31, 2019 and 2018. 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 ourU.S. and foreign deferred tax assets.
Comparison of the years ended
Revenues
Year Ended December 31,
2019 2018 % Change
(dollars in thousands)
Revenues:
Subscription $ 3,255,079 $ 2,421,313 34 %Professional services and other 205,358 187,503 10 % Total revenues
$ 3,460,437 $ 2,608,816 33 % Percentage of revenues: Subscription 94 % 93 % Professional services and other 6 % 7 % Total 100 % 100 % Subscription revenues increased$833.8 million during the year endedDecember 31, 2019 , compared to the prior year, driven by increased purchases by existing customers and an increase in customer count. Included in subscription revenues is$164.1 million and$118.5 million of revenues recognized upfront from the delivery of software associated with self-hosted offerings during the year endedDecember 31, 2019 and 2018, respectively. We expect subscription revenues for the year endingDecember 31, 2020 to increase in absolute dollars as we continue to add new customers and existing customers increase their usage of our products, and increase slightly as a percentage of total revenues compared to the year endedDecember 31, 2019 . Our expectations for revenues, cost of revenues and operating expenses for the year endingDecember 31, 2020 are based on foreign exchange rates as ofDecember 31, 2019 . 37
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Subscription revenues consist of the following:
Year Ended December 31,
2019 2018 % Change
(dollars in thousands)
Digital workflow products(1)
444,192 309,611 43 %
Total subscription revenues
(1) As we have expanded the scope of IntegrationHub (formerly included within our
ITOM offering) beyond ITOM to align more closely with our broader platform
offering, revenues associated with IntegrationHub have been reclassified from
ITOM products to platform, which is part of our digital workflow products.
Revenues reclassified from ITOM product revenues to digital workflow products
revenues were
result in a restatement of prior period financial statements.
Our digital workflow products include the Now Platform, Now IT Service Management, Now IT Business Management, Now DevOps, Now IT Asset Management, Now Security Operations, Now Integrated Risk Management, Now HR Service Delivery, Now Finance Operations Management, Now Customer Service Management, and Now Field Service Management, and are generally priced on a per user basis. Our ITOM products are generally priced on a per node (physical or virtual server) basis. In previously issued consolidated financial statements, we referred to digital workflow products as "service management products." Professional services and other revenues increased$17.9 million during the year endedDecember 31, 2019 , compared to the prior year, due to an increase in the services provided to new and existing customers. We expect professional services and other revenues for the year endingDecember 31, 2020 to increase in absolute dollars, but decrease slightly as a percentage of total revenues compared to the year endedDecember 31, 2019 as we are increasingly focused on deploying our internal professional services organization as a strategic resource and relying on our partner ecosystem to contract directly with customers for service delivery.
Cost of Revenues and Gross Profit Percentage
Year Ended December 31,
2019 2018 % Change
(dollars in thousands)
Cost of revenues:
Subscription $ 549,642 $ 417,421 32 %
Professional services and other 247,003 205,237 20 %
Total cost of revenues $ 796,645 $ 622,658 28 %
Gross profit percentage:
Subscription 83 % 83 %
Professional services and other (20 %) (9 %)
Total gross profit percentage 77 % 76 %
Gross profit: $ 2,663,792 $ 1,986,158 34 %
Cost of subscription revenues increased $132.2 million during the year ended
December 31, 2019 , compared to the prior year, primarily due to increased
headcount resulting in an increase of $30.1 million in personnel-related costs
excluding stock-based compensation, an increase of $24.0 million in stock-based
compensation and an increase of $10.8 million in other overhead expenses. The
remaining increase of $61.7 million was primarily due to increases in data
center hardware, software and maintenance costs to support the expansion of our
data center capacity. Amortization of intangibles increased $5.1 million as a
result of current year acquisitions.
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Our subscription gross profit percentage was 83% for each of the years endedDecember 31, 2019 and 2018. The increase in revenues recognized upfront from the delivery of software associated with self-hosted offerings contributed to approximately one percentage point improvement in our subscription gross profit percentage for each of the years endedDecember 31, 2019 and 2018. We expect our cost of subscription revenues to increase in absolute dollars as we provide subscription services to more customers and increase usage within our customer instances, and our subscription gross profit percentage to remain relatively flat for the year endingDecember 31, 2020 compared to the year endedDecember 31, 2019 . 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. Cost of professional services and other revenues increased$41.8 million during the year endedDecember 31, 2019 compared to the prior year, primarily due to increased headcount resulting in an increase of$24.9 million in personnel-related costs excluding stock-based compensation, an increase of$10.3 million in stock-based compensation and an increase of$5.4 million in overhead expenses. Our professional services and other gross loss percentage increased to 20% during the year endedDecember 31, 2019 , compared to 9% in the prior year, primarily due to stock-based compensation and other personnel-related costs increasing at a higher rate than professional services and other revenues as we continue to invest in specialized resources to support our expanding product portfolio and new on-demand training, increasing the training content available online. Sales and Marketing Year Ended December 31 2019 2018 % Change (dollars in thousands)
Sales and marketing
46 %
Sales and marketing expenses increased $331.2 million during the year ended
December 31, 2019 , compared to the prior year, primarily due to increased
headcount resulting in an increase of $154.8 million in personnel-related costs
excluding stock-based compensation and commissions, an increase of $40.4 million
in stock-based compensation and an increase of $37.1 million in overhead
expenses. Expenses associated with commissions and third-party referral fees
increased $26.2 million for the year ended December 31, 2019 compared to the
prior year, due to an increase in contracts with new customers, expansion and
renewal contracts. Outside services costs increased $12.3 million during the
year ended December 31, 2019 compared to the prior year, primarily due to an
increase in contractors and professional fees to support our sales and marketing
functions. Branding and marketing program expenses, and costs associated with
purchasing advertising and market data, increased $56.9 million for the year
ended December 31, 2019 compared to the prior year.
We expect sales and marketing expenses for the year ending December 31, 2020 to
increase in absolute dollars as we continue to expand our direct sales
organization, increase our marketing activities, grow our international
operations and build brand awareness, but decrease slightly as a percentage of
total revenues compared to the year ended December 31, 2019 .
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Research and Development
Year Ended December 31
2019 2018 % Change
(dollars in thousands)
Research and development $ 748,369 $ 529,501 41 %
Percentage of revenues 22 % 20 %
Research and development expenses increased $218.9 million during the year ended
December 31, 2019 , compared to the prior year, primarily due to increased
headcount, which resulted in an increase of $114.0 million in personnel-related
costs excluding stock-based compensation, an increase of $59.6 million in
stock-based compensation and an increase of $33.9 million in overhead expenses.
The remaining increase of $4.3 million was primarily due to increases in data
center capacity and depreciation costs.
We expect research and development expenses for the year ending December 31,
2020 to increase in absolute dollars as we continue to improve the existing
functionality of our services, develop new applications to fill market needs and
enhance our core platform, and increase slightly as a percentage of total
revenues compared to the year ended December 31, 2019 .
General and Administrative
Year Ended December 31
2019 2018 % Change
(dollars in thousands)
General and administrative
10 % 12 %
General and administrative expenses increased $43.0 million during the year
ended December 31, 2019 , compared to the prior year, primarily due to increased
headcount, which resulted in an increase of $36.3 million in personnel-related
costs excluding stock-based compensation, an increase of $7.4 million in
overhead and other expenses. Amortization of intangibles increased $4.1 million
during the year ended December 31, 2019 compared to the prior year, as a result
of acquisitions. Outside services costs increased $10.7 million during the year
ended December 31, 2019 compared to the prior year, primarily due to an increase
in contractors and professional fees to support our administrative function.
These increases were partially offset by a decrease in stock-based compensation
of $16.0 million , primarily attributable to the forfeiture of certain awards by
our former Chief Executive Officer and former Chief Financial Officer.
We expect general and administrative expenses to increase in absolute dollars
for the year ending December 31, 2020 as we continue to hire new employees, but
remain relatively flat as a percentage of total revenues compared to December
31, 2019 .
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Stock-based Compensation
Year Ended December 31
2019 2018 % Change
(dollars in thousands)
Cost of revenues:
Subscription $ 72,728 $ 48,738 49 %Professional services and other 43,123 32,816 31 % Sales and marketing
268,408 228,045 18 %
Research and development 194,821 135,203 44 %
General and administrative 83,115 99,151 (16 %)
Total stock-based compensation
19 % 21 %
Stock-based compensation expense increased $118.2 million during the year ended
December 31, 2019 , compared to the prior year, primarily due to additional
grants to current and new employees and increased weighted-average grant date
fair value of stock awards.
Stock-based compensation expense is inherently difficult to forecast due to
fluctuations in our stock price. Based upon our stock price as of December 31,
2019 , we expect stock-based compensation expense to continue to increase in
absolute dollars for the year ending December 31, 2020 as we continue to issue
stock-based awards to our employees, but remain relatively flat as a percentage
of total revenues compared to the year ended December 31, 2019 .
Foreign Currency Exchange
Our international operations have provided and will continue to provide a significant portion of our total revenues. Revenues outsideNorth America represented 34% of total revenues for each of the years endedDecember 31, 2019 and 2018. Because we primarily transact in foreign currencies for sales outside ofthe United States , the general strengthening of theU.S. Dollar relative to other major foreign currencies (primarily the Euro and British Pound Sterling) from the year endedDecember 31, 2018 to the year endedDecember 31, 2019 had an unfavorable impact on our revenues. For entities reporting in currencies other than theU.S. Dollar, if we had translated our results for the year endedDecember 31, 2019 at the average exchange rates in effect for the year endedDecember 31, 2018 rather than the actual exchange rates in effect during the period, our reported subscription revenues would have been$57.6 million higher and our reported professional services and other revenues would have been$4.8 million higher. In addition, because we primarily transact in foreign currencies for cost of sales and operating expenses outside ofthe United States , the general strengthening of theU.S. Dollar relative to other major foreign currencies from the year endedDecember 31, 2018 to the year endedDecember 31, 2019 had a favorable impact on our cost of sales and operating expenses. For entities reporting in currencies other than theU.S. Dollar, if we had translated our results for the year endedDecember 31, 2019 at the average exchange rates in effect for the year endedDecember 31, 2018 rather than the actual exchange rates in effect during the period, our reported cost of subscription revenues, cost of professional services and other revenues, sales and marketing expenses and research and development expenses would have been$8.0 million ,$4.0 million ,$19.1 million and$2.3 million higher, respectively. The impact from the foreign currency movements from the year endedDecember 31, 2018 to the year endedDecember 31, 2019 is not material to general and administrative expenses. 41
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Interest Expense
Year Ended December 31
2019 2018 % Change
(dollars in thousands)
Interest expense $ (33,283 ) $ (52,733 ) (37 %)
Percentage of revenues (1 %) (2 %)
Interest expense decreased
Interest Income and Other Income (Expense), net
Year Ended December 31
2019 2018 % Change
(dollars in thousands)
Interest income $ 55,409 $ 34,624 60 %
Foreign currency exchange gain
(loss), net of derivative contracts (594 ) 6,632 NM
Realized gain on marketable equity
securities - 19,257 (100 %)
Loss on early note conversions - (4,063 ) 100 %
Other 3,530 (314 ) NM
Interest income and other income
(expense), net $ 58,345 $ 56,135 4 %
NM - Not meaningful.
Interest income and other income (expense), net increased $2.2 million during
the year ended December 31, 2019 , compared to the prior year, primarily due to
an increase of $20.8 million in interest income resulting from higher cash and
investment balances and higher yields on our invested balances during the year
ended December 31, 2019 , an increase of $2.1 million in other due to an
unrealized gain on non-marketable securities relating to observable price
changes and the absence of a $4.1 million loss recorded on early note
conversions in the prior year.
These increases were partially offset by a decrease of $19.3 million in realized
gains relating to changes in the market value of our marketable equity
securities held and sold in the prior year, and a decrease of $7.2 million due
to fluctuations in foreign currency exchange rates, net of the effect of our
foreign currency derivative contracts.
To mitigate our risks associated with fluctuations in foreign currency exchange
rates, we enter into foreign currency derivative contracts with maturities of 12
months or less to hedge a portion of our net outstanding monetary assets and
liabilities. These hedging contracts may reduce, but cannot entirely eliminate,
the impact of adverse currency exchange rate movements.
Benefit from Income Taxes
Year Ended December 31
2019 2018 % Change
(dollars in thousands)
Income (loss) before income taxes $ 67,185 $ (39,024 ) NM
Benefit from income taxes (559,513 ) (12,320 ) NM
Effective tax rate (833 %) 32 %
NM - Not meaningful.
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Our effective tax rate was (833%) for the year endedDecember 31, 2019 compared to 32% for the prior year endedDecember 31, 2018 , primarily due to the release of the valuation allowance on the Irish deferred tax assets of$574.2 million . See Note 17 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for our reconciliation of income taxes at the statutory federal rate to the provision for income taxes. We maintained a full valuation allowance on ourU.S. federal and state deferred tax assets as ofDecember 31, 2019 and 2018, respectively. In addition, we maintained a valuation allowance against certain foreign deferred tax assets as ofDecember 31, 2018 . The significant components of the tax expense recorded are current cash taxes payable in various jurisdictions. The cash tax expenses are impacted by each jurisdiction's individual tax rates, laws on timing of recognition of income and deductions, and availability of net operating losses and tax credits. Given the full valuation allowance on ourU.S. federal and state deferred tax assets, sensitivity of current cash taxes to local rules and our foreign structuring, we expect that our effective tax rate could fluctuate significantly on a quarterly basis and could be adversely affected to the extent earnings are lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates. To the extent sufficient positive evidence becomes available, we may release all or a portion of our valuation allowance in one or more future periods. A release of the valuation allowance, if any, would result in the recognition of certain deferred tax assets and a material income tax benefit for the period in which such release is recorded.
Quarterly Results of Operations
The following table sets forth our selected unaudited quarterly consolidated
statements of comprehensive income (loss). We have prepared the quarterly data
on a consistent basis with the audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K. In the opinion of
management, the financial information reflects all necessary adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of this data. This information should be read in conjunction with the audited
consolidated financial statements and related notes thereto included elsewhere
in this Annual Report on Form 10-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
December 31, September 30, December 31, September 30, March 31,
2019 2019 June 30, 2019 March 31, 2019 2018 2018 June 30, 2018 2018
(in thousands, except per share data)
Total revenues $ 951,774 $ 885,833 $ 833,904 $ 788,926 $ 715,441 $ 673,097 $ 631,056 $ 589,222
Gross profit $ 740,321 $ 685,040 $ 635,757 $ 602,674 $ 547,279 $ 515,239 $ 477,891 $ 445,749
Net income
(loss)(1) $ 598,724 $ 40,598 $ (11,079 ) $ (1,545 ) $ 7,015 $ 8,405 $ (52,746 ) $ 10,622
Net income (loss)
per share -
basic(1) $ 3.17 $ 0.22 $ (0.06 ) $ (0.01 ) $ 0.04 $ 0.05 $ (0.30 ) $ 0.06
Net income (loss)
per share -
diluted(1) $ 3.03 $ 0.21 $ (0.06 ) $ (0.01 ) $ 0.04 $ 0.04 $ (0.30 ) $ 0.06
Weighted-average
shares used to
compute net
income (loss) per
share - basic 189,042 188,074 186,678 182,062 179,764 178,720 177,343 175,483
Weighted-average
shares used to
compute net
income (loss) per
share - diluted 197,843 197,878 186,678 182,062 190,662 192,191 177,343 190,250
(1) The amounts for the three months ended
of an income tax benefit of
allowance on the Irish deferred tax assets. Refer to Note 17 in the notes to
our consolidated financial statements included elsewhere in this Annual
Report on Form 10-K for further details.
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Seasonality, Cyclicality and Quarterly Trends
We have historically experienced seasonality in terms of when we enter into customer agreements for our services. We sign a significantly higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in the quarter endedDecember 31 . The increase in customer agreements for the quarter endedDecember 31 is primarily a result of both the terms of our commission plans which incentivize our direct sales organization to meet their annual quotas byDecember 31 and the large enterprise account buying patterns typical in the software industry, which are driven primarily by the expiration of annual authorized budgeted expenditures. As a result, our billings and sequential growth in RPO has been historically highest in the quarter endedDecember 31 . While we continue to see an increase in the number of agreements entered into with theU.S. Federal government throughout the year as it modernizes its IT infrastructure and accelerates its use of modern technology to digitally transform how it operates, the number of agreements entered into with theU.S. federal government has historically been higher in the quarter endedSeptember 30 , driven primarily by timing of annual budget expenditures. Furthermore, we usually sign a significant portion of our customer agreements during the last month, and often the last two weeks, of each quarter. This seasonality in the timing of entering into customer contracts is sometimes not immediately apparent in our billings, due to the fact that we typically exclude cloud-offering contracts with a future start date from our billings, unless such amounts have been paid as of the balance sheet date. Similarly, this seasonality is reflected to a much lesser extent, and sometimes is not immediately apparent in our revenues, due to the fact that we recognize subscription revenues from our cloud offering contracts 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 a reliable indicator of our future sales activity or performance. Our revenues have increased over the periods presented due to increased sales to new and existing customers. Our operating expenses have increased over the periods presented due to increases in headcount, data center operations and other related expenses to support our growth. We have historically seen an increase in marketing expenses in the quarter endedJune 30 , and a corresponding decrease in marketing expenses in the quarter endedSeptember 30 due to the expenses incurred for our annual Knowledge user conference, partially offset by related proceeds. Marketing expenses in the quarter endedDecember 31 are also historically higher due to user forums we conduct in that quarter. We anticipate operating expenses will continue to increase in future periods as we continue to focus on investing in the long-term growth of our business. Our free cash flow is impacted by the timing of collections and disbursements, including the timing of capital expenditures. We have historically seen higher collections in the quarter endedMarch 31 due to seasonality in timing of entering into customer contracts as described above. We have historically seen higher disbursements in the quarters endedMarch 31 andSeptember 30 , due to payouts under our annual commission plans in the quarter endedMarch 31 , purchases under our employee stock purchase plan in both quarters endedMarch 31 andSeptember 30 , and payouts under our bonus plans in both quarters endedMarch 31 andSeptember 30 . 44
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Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, investments, and cash generated from operations. As ofDecember 31, 2019 , we had$1.7 billion in cash and cash equivalents and short-term investments, of which$202.8 million represented cash held by foreign subsidiaries and$192.2 million is denominated in currencies other than theU.S. Dollar. In addition, we had$1.0 billion in long-term investments that provide additional 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 Cuts and Jobs Act of 2017 (the Tax Act), we considered earnings from foreign operations to be indefinitely reinvested outside ofthe United States . Subsequent to the enactment of the Tax Act, we determined that the unremitted earnings of our foreign subsidiaries will no longer be considered indefinitely reinvested, except in certain designated jurisdictions in which the resident entity is a service provider which is not expected to generate substantial amounts of cash in excess of what may be reinvested by the local entity. In May andJune 2017 , we issued the 2022 Notes with an aggregate principal amount of$782.5 million . In connection with the issuance of the 2022 Notes, we entered into the 2022 Note Hedge transactions and 2022 Warrant transactions with certain financial institutions. The price of our common stock was greater than or equal to 130% of the conversion price of the 2022 Notes for at least 20 trading days during the 30 consecutive trading days ending on the last trading day of the quarters endedJune 30, 2018 throughDecember 31, 2019 , except for the quarter endedDecember 31, 2018 . Therefore, our 2022 Notes became convertible at the holders' option beginning onJuly 1, 2018 and continue to be convertible throughMarch 31, 2020 , except for the quarter endedMarch 31, 2019 because the Conversion Condition for the 2022 Notes was not met for the quarter endedDecember 31, 2018 . The impact of the 2022 Notes on our liquidity will depend on the settlement method we elect. We currently intend to settle the principal amount of any converted 2022 Notes in cash. During the year endedDecember 31, 2019 , we paid cash to settle an immaterial principal amount of the 2022 Notes. Based on additional conversion requests we have received through the filing date, we expect to settle in cash an aggregate of approximately$2.5 million and$5.2 million in principal amount of the 2022 Notes during the first and second quarters of 2020, respectively. We may receive additional conversion requests that require settlement in the second quarter of 2020. During the year endedDecember 31, 2019 , we issued approximately 4.3 million shares of our common stock upon the automatic exercise of the 2018 Warrants. The 2018 Warrants were no longer outstanding as of the second quarter of 2019. We expect to issue additional shares of our common stock in the second half of 2022 upon the automatic exercise of the 2022 Warrants. As the 2022 Warrants will be net share settled, there will be no impact on our liquidity. The total number of shares of our common stock we will issue depends on the daily volume-weighted average stock prices over a 60 trading day period beginning on the first expiration date of the 2022 Warrants, which will beSeptember 1, 2022 . Refer to Note 11 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. We anticipate our current cash and cash equivalents balance and cash generated from operations will be sufficient to meet our liquidity needs, including the repayment of our 2022 Notes, expansion of data centers, lease obligations, expenditures related to the growth of our headcount and the acquisition of property and equipment, intangibles, and investments in office facilities, to accommodate our growth for at least the next 12 months. Whether these resources are adequate to meet our liquidity needs beyond that period will depend on our growth, operating results, cash utilized for acquisitions and/or debt retirements if any are consummated, and the capital expenditures required to meet possible increased demand for our services. If we require additional capital resources to grow 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 debt financing. 45
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Year Ended December 31,
2019 2018
(in thousands)
Net cash provided by operating activities $ 1,235,972 $ 811,089
Net cash used in investing activities (724,477 ) (347,422 ) Net cash used in financing activities (301,856 ) (607,428 ) Net increase (decrease) in cash, cash equivalents and restricted cash 209,453 (159,291 ) Operating Activities Cash provided by operating activities mainly consists of our net income (loss) adjusted for repayments of convertible senior notes attributable to debt discount, certain non-cash items, including depreciation and amortization, amortization of deferred commissions, amortization of issuance cost and debt discount, stock-based compensation, deferred income taxes, and changes in operating assets and liabilities during the year. Net cash provided by operating activities was$1.2 billion for the year endedDecember 31, 2019 compared to$811.1 million for the prior year. The increase in operating cash flow was primarily due to the repayments of convertible senior notes attributable to debt discount that were made during the year endedDecember 31, 2018 and the favorable impact on operating cash flow from the change in net income (loss) adjusted for non-cash items to reconcile net income (loss) to net cash provided by operations, offset by the unfavorable impact on operating cash flow from changes in operating assets and liabilities.
Investing Activities
Net cash used in investing activities for the year endedDecember 31, 2019 was$724.5 million compared to$347.4 million for the prior year. The increase in cash used in investing activities was mainly due to a$341.8 million increase in net purchases of investments, a$48.3 million increase in purchases of other intangibles, and a$40.4 million increase in capital expenditures related to the purchases of infrastructure hardware equipment as well as investments in leasehold improvements, furniture and equipment to support our headcount growth. The increase in cash used in investing activities was partially offset by a$30.0 million decrease in cash outflow for business combinations, net of cash and restricted cash acquired and a$23.4 million increase in net realized gains on derivatives not designated as hedging instruments.
Financing Activities
Net cash used in financing activities for the year endedDecember 31, 2019 was$301.9 million compared to$607.4 million for the prior year due to repayments of convertible senior notes attributable to principal of$429.6 million during the year endedDecember 31, 2018 , a$3.7 million increase in proceeds from employee equity plans, and partially offset by a$128.7 million increase in taxes paid related to net share settlement of equity awards. 46
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Contractual Obligations and Commitments
The following table represents our future non-cancelable contractual obligations
as of
Payments Due by Period
Less More
Than 1 - 3 3 - 5 Than
Total 1 Year Years Years 5 Years
(in thousands)
Operating leases, including
imputed interest (1) $ 530,699 $ 67,629 $ 128,688 $ 103,777 $ 230,605
Purchase obligations (2) 180,239 70,819 95,022 11,768 2,630
Principal amount payable on
our convertible senior
notes (3) 782,491 - 782,491 - -
Total contractual
obligations $ 1,493,429 $ 138,448 $ 1,006,201 $ 115,545 $ 233,235 (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
related to our daily business operations. Not included in the table above are
certain purchase commitments related to our future annual Knowledge user
conferences and other customer or sales conferences to be held in 2021 and
future years. If we were to cancel these contractual commitments as of
of approximately
(3) For additional information regarding our convertible senior notes, refer to
Note 11 in the notes to our consolidated financial statements included
elsewhere in this Annual Report on Form 10-K.
In addition to the obligations in the table above, $6.1 million of unrecognized
tax benefits have been recorded as liabilities as of December 31, 2019 . It is
uncertain 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 to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually 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 in those types of relationships.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenues and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions and such differences 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 in this Annual Report on Form 10-K, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our audited consolidated financial statements.
Revenue Recognition
We report our revenues in two categories: (i) subscriptions and (ii) professional services and other.
Revenues are recognized when control of these services is transferred to our
customers, in an amount that reflects the consideration we expect to be entitled
to in exchange for those services.
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We determine revenue recognition through the following steps:
• Identification of the contract, or contracts, with a customer;
• Identification of the performance obligations in the contract;
• Determination of the transaction price;
• Allocation of the transaction price to the performance obligations in
the contract; and
• Recognition of revenue when, or as, we satisfy a performance obligation.
Subscription revenues Subscription revenues are primarily comprised of subscription fees that give customers access to the ordered subscription service, related support and updates, if any, to the subscribed service during the subscription term. For our cloud services, we recognize subscription revenues ratably over the contract term beginning on the commencement date of each contract, the date we make our services available to our customers. Our contracts with customers typically include a fixed amount of consideration and are generally non-cancelable and without any refund-type provisions. We typically invoice our customers annually in advance for our subscription services upon execution of the initial contract or subsequent renewal, and our invoices are typically due within 30 days from the invoice date. Subscription revenues also include revenues from self-hosted offerings in which customers deploy, or we grant customers the option to deploy without significant penalty, our subscription service internally or contract with a third party to host the software. For these contracts, we account for the software element and the related support and updates separately as they are distinct performance obligations (refer to the discussion below related to contracts with multiple performance obligations for further details). The transaction price is allocated to separate performance obligations on a relative standalone selling price (SSP) basis. The transaction price allocated to the software element is recognized when transfer of control of the software to the customer is complete. The transaction price allocated to the related support and updates are recognized ratably over the contract term.
Professional services and other revenues
Our professional services arrangements are primarily on a time-and-materials basis, and we generally invoice our customers monthly in arrears for these professional services based on actual hours and expenses incurred. Some of our professional services arrangements are on a fixed fee or subscription basis. Professional services revenues are recognized as services are delivered. Other revenues consist of fees from customer training delivered on-site or through publicly available classes. Typical payment terms require our customers to pay us within 30 days of invoice.
Contracts with multiple performance obligations
We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. For these contracts, the transaction price is allocated to the separate performance obligations on a relative SSP basis. Evaluating the terms and conditions included within our customer contracts for appropriate revenue recognition and determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.
Deferred Commissions
Deferred commissions are the incremental selling costs that are associated with
acquiring customer contracts and consist primarily of sales commissions paid to
our sales force and referral fees paid to independent third parties. Capitalized
sales commissions also include the associated payroll taxes and fringe benefit
costs associated with payments to our sales employees to the extent they are
incremental. Commissions and referral fees earned upon the execution of initial
and expansion contracts are primarily deferred and amortized over a period of
benefit that we have determined to be five years. Commissions earned upon the
renewal of customer contracts are deferred and amortized over the average
renewal term. Additionally, for self-hosted offerings, consistent with the
recognition of subscription revenues for self-hosted offerings, a portion of the
commission cost is expensed upfront when the self-hosted offering is made
available. The determination of the period of benefit requires significant
judgment by taking into consideration our customer contracts, our technology
life cycle and other factors. We include amortization of deferred commissions in
sales and marketing expense in our consolidated statements of comprehensive
income (loss).
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Table of Contents Business combinations We apply a screen test to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets to determine whether a transaction is accounted for as an asset acquisition or business combination. If the screen test is not met, the integrated set of activities and assets is considered a business based on whether there are inputs and substantive processes in place. The allocation of the purchase price requires us to make significant estimates in determining the fair value of acquired assets and assumed liabilities, especially with respect to intangible assets. The excess of the purchase price in a business combination over the fair value of these tangible and intangible assets acquired and liabilities assumed is recorded as goodwill. These estimates are based upon a number of factors, including historical experience, market conditions and information obtained from the management of the acquired company. Critical estimates in valuing certain intangible assets included, but are not limited to, cash flows that an asset is expected to generate in the future, discount rates, the time and expense that would be necessary to recreate the assets and the profit margin a market participant would receive. These estimates are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Stock-based Compensation We recognize compensation expense related to stock options and restricted stock units (RSUs) with only service conditions on a straight-line basis over the requisite service period, which is generally the four-year vesting term. For stock options and RSUs granted with both service conditions and performance or market conditions, the expenses are recognized on a graded vesting basis over the requisite service period and, for awards with performance conditions, when it is probable that the performance conditions will be achieved. This has the impact of greater stock-based compensation expense during the initial years of the vesting period as stock-based compensation cost is recognized over the requisite service period for each separately vesting tranche of the award as though the award were, in substance, multiple awards. We recognize compensation expense related to shares issued pursuant to the employee stock purchase plan (ESPP) on a straight-line basis over the six-month offering period. We estimate the fair value of stock option grants with only service conditions and shares issued pursuant to the ESPP using the Black-Scholes options pricing model and fair value of RSU awards (including performance-based RSUs) using the fair value of our common stock on the date of grant. We recognize compensation expense net of estimated forfeiture activity, which is based on historical forfeiture rates. We evaluate the forfeiture rates at least annually or when events or circumstances indicate 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 tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be reversed. We recognize the effect on deferred tax assets and liabilities of a change in tax rates as income and expense in the period that includes the enactment date. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. In determining the need for a valuation allowance, we consider future growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, historical earnings, taxable income in prior years, if carryback is permitted under the law, carryforward periods and prudent and feasible tax planning strategies. To the extent sufficient positive evidence becomes available, we may release all or a portion of our valuation allowance in one or more future periods. A release of the valuation allowance, if any, would result in the recognition of certain deferred tax assets and a material income tax benefit for the period in which such release is recorded. Due to cumulative losses over recent years and based on all available positive and negative evidence, we have determined that it is more likely than not that ourU.S. deferred tax assets will not be realizable as ofDecember 31, 2019 . We recognized an income tax benefit of$574.2 million due to the release of the valuation allowance on the Irish deferred tax assets for the year endedDecember 31, 2019 . These Irish deferred tax assets were created primarily as a result of the difference between the tax basis in our Irish subsidiary and the cost reported in our consolidated financial statements resulting from the transfer of intangible assets to the Irish subsidiary as part of our foreign restructuring in 2018. Management applied significant judgment in assessing the positive and negative evidence available in the determination of the amount of deferred tax assets that were more likely than not to be realized in the future. In determining the need, or continued need, for a valuation allowance, we considered the weighting of the positive and negative evidence, which includes, among other things, emergence from a cumulative loss position over the previous three years during the fourth quarter of 2019, historical earnings, future growth, forecasted earnings, and future taxable income. 49
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Our tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. We recognize the tax benefit of an uncertain tax position only if it is more likely than not the position is sustainable upon examination by the taxing authority based on the technical merits. We measure the tax benefit recognized as the largest amount of benefit which is more likely than not to be realized upon settlement with the taxing authority. We recognize interest accrued and penalties related to unrecognized tax benefits in our tax provision. 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 tax authorities during the course of audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result 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 our effective 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 in income tax returns filed in subsequent years and record adjustments based on filed income tax returns when identified. The amount of income taxes paid is subject to examination byU.S. federal, state and foreign tax authorities. The estimate of the potential outcome of any uncertain tax issue is subject to management's assessment of relevant risks, facts and circumstances existing at that time. To the extent the assessment of such tax position changes, we record the change in estimate in the period in which we make the determination.
New Accounting Pronouncements Pending Adoption
The impact of recently issued accounting standards is set forth in Note 2, Summary of Significant Accounting Policies, of the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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