SERVICENOW, INC. The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with the 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, uncertainties and other factors. You should carefully read the "Risk Factors" section of this filing for a discussion of important factors, including, but not limited to, impacts on our business, future financial performance and general economic conditions due to the current COVID-19 pandemic, 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, 2020 and 2019, and year-to-year comparisons between fiscal 2020 and fiscal 2019. A discussion of our financial condition and results of operations for the fiscal year endedDecember 31, 2018 and year-to-year comparisons between fiscal 2019 and fiscal 2018 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, 2019 , filed onFebruary 20, 2020 .
COVID-19 Environment
The COVID-19 pandemic has created significant global economic uncertainty,
adversely impacted the business of our customers, partners and vendors, and
impacted our business and results of operations. As of the filing date, the
extent to which the COVID-19 pandemic may continue to impact our business and
future financial condition or results of operations remains uncertain. We are
continuing to monitor the actual and potential effects of the COVID-19 pandemic
across our business. While our revenues, billings and earnings are relatively
predictable as a result of our subscription-based business model, the effect of
the COVID-19 pandemic, along with the seasonality we historically experience,
may not be fully reflected in our results of operations and overall financial
performance until future periods, if at all, and could cause our future results
of operations to vary significantly from period to period. As the uncertainty
continues, we may experience an increase in curtailed customer demand, reduced
customer spend or contract duration, delayed collections, lengthened payment
terms, lengthened sales cycles or competition due to changes in terms and
conditions and pricing of our competitors' products and services, our business,
results of operations and overall financial performance in future periods could
be materially adversely affected. Additionally, it is unclear to what extent
certain reduction in expenditures noted in the current year due to actions taken
in response to COVID-19 will continue to be reduced below historical levels. The
extent and continued impact of the COVID-19 pandemic on our operational and
financial performance will depend on certain developments, including: the
duration and spread of the outbreak; government responses, including the
effectiveness, extent and duration of mitigation efforts such as "shelter in
place" and similar directives; impact on our customers, sales cycles and ability
to generate new business; impact on our customer, industry or employee events;
extent of delays in hiring and onboarding new employees mainly in our general
and administrative functions; and effect on our partners, vendors and supply
chains; all of which are highly uncertain and difficult to predict.
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In response to the COVID-19 pandemic, we focused on maintaining business
continuity, helping our employees, customers and communities, and preparing for
the future and the long-term success of our business. In 2020, we released four
Emergency Response applications to help customers navigate the COVID-19 pandemic
management and the Safe Workplace applications, a four-application suite and
dashboard, designed to help companies manage the essential steps for returning
employees to the workplace and to support their health and safety. Additionally,
we canceled our in-person, annual Knowledge user conference ("Knowledge") and
replaced it with a digital event experience. In the first quarter of 2020, we
also temporarily closed most of our offices and encouraged our employees to work
remotely. These changes remain in effect in the first quarter of 2021 and could
extend into future quarters. The impact, if any, of these and any additional
operational changes we may implement is uncertain, but changes we have
implemented have not affected and are not expected to affect our ability to
maintain operations, including financial reporting systems, internal control
over financial reporting and disclosure controls and procedures. See the section
"Risk Factors" for further discussion of the possible impact of the COVID-19
pandemic on our business.
Overview
ServiceNow's purpose is to make the world of work, work better for people. We
believe that people want the technology they use in their work to be more
efficient and easier to use. We build applications to meet that demand by
automating existing processes and creating efficient, digitized workflows with a
consumer grade user experience. 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 standard and
enhanced 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 generate sales through our direct sales team and,
to a lesser extent, indirectly through resale partners and third-party
referrals. We also generate revenues from professional services and for training
of customer and partner personnel. Our professional services organization is
focused on strategic advisory, implementation and consulting services to
accelerate platform adoption and drive customer outcomes. 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
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. Current remaining performance obligations ("cRPO")
represents RPO that will be recognized as revenue in the next 12 months.
As of
•Foreign currency exchange rates. While a majority of our contracts have historically been inU.S. Dollars, an increasing percentage of our 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. 32 -------------------------------------------------------------------------------- Table of Contents •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. •Contract duration. While we typically enter into multi-year subscription services, the duration of our contracts varies. Further, we continue to see an increase in the number of 12-month agreements entered into with theU.S. Federal government throughout the year which has been the highest in the quarter endedSeptember 30 , driven primarily by timing of their annual budget expenditures. 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. Number of customers with ACV greater than$1 million . We count the total number of customers with annual contract value ("ACV") greater than$1 million as of the end of the period. We had 1,093, 891, and 682 customers with ACV greater than$1 million as ofDecember 31, 2020 , 2019 and 2018, 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 . We believe information regarding the total number of customers with ACV greater than$1 million provides useful information to investors because it is an indicator of our growing customer base and demonstrates the value customers are receiving from the Now Platform. Free cash flow. We define free cash flow, a non-GAAP financial measure, as GAAP net cash provided by operating activities reduced by purchases of property and equipment. Purchases of property and equipment are otherwise included in cash used in investing activities under GAAP. We believe information regarding free cash flow provides useful information to investors because it is an indicator of the strength and performance of our business operations. However, our calculation of free cash flow may not be comparable to similar measures used by other companies. A calculation of free cash flow is provided below: Year Ended December 31, 2020 2019 2018 (in thousands) Free cash flow: Net cash provided by operating activities$ 1,786,599 $ 1,235,972 $ 811,089 Purchases of property and equipment (419,327) (264,892) (224,462) Free cash flow (1)$ 1,367,272 $ 971,080 $ 586,627 (1)Free cash flow for the years endedDecember 31, 2020 and 2018 include the effect of$82 million and$145 million , respectively relating to the repayments of convertible senior notes 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. We have historically seen higher collections in the quarter endedMarch 31 due to seasonality in timing of entering into customer contracts which is significantly higher with new customers, as well as expansion with existing customers, in the quarter endedDecember 31 . Additionally, we have historically seen higher disbursements in the quarters endedMarch 31 andSeptember 30 due to payouts under our annual commission plans, purchases under our employee stock purchase plan and payouts under our bonus plans. 33 -------------------------------------------------------------------------------- Table of Contents 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 or lapsed renewal. 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. 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. Additionally, starting in 2020, we simplified our methodology related to contracts less than 12 months to derive ACV used to calculate renewal rate. Previously disclosed renewal rates may be restated to reflect such adjustments or methodology simplification to allow for comparability. While the previously disclosed renewal rates for the years endedDecember 31, 2019 and 2018 were restated due to the methodology simplification to allow for comparability, there were no material changes to such previously disclosed renewal rates. Our renewal rate was 98% for each of the years endedDecember 31, 2020 , 2019 and 2018. 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 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, 2020 2019 2018 (dollars in thousands) Billings: Total revenues$ 4,519,484
709,522 541,776 480,019
Total billings $ 5,229,006 $ 4,002,213 $ 3,088,835
Year-over-year percentage change in total billings 31 % 30 % 34 %
(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 in advance 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 inU.S. Dollars, an increasing percentage of our billings in recent periods has been in foreign currencies, particularly the Euro and British Pound Sterling. Fluctuations in foreign currency exchange rates will cause variability in our billings. Foreign currency rate fluctuations had a favorable impact of$21 million and$68 million on billings for the years endedDecember 31, 2020 and 2019, respectively. •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. 34
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•Seasonality. 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 expansion with existing customers, in the fourth quarter of each year. The increase in customer agreements for the fourth quarter is primarily a result of both large enterprise account buying patterns typical in the software industry, which are driven primarily by the expiration of annual authorized budgeted expenditures, and the terms of our commission plans which incentivize our direct sales organization to meet their annual quotas byDecember 31 . Furthermore, we usually sign a significant portion of these 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. Further, the seasonal factors could be heightened due to the impact of the current gross domestic product contraction and other impacts unknown at this time on our customers and sales cycles caused by the COVID-19 pandemic. While we believe billings is one indicator of the performance of our business, due to the factors described above, an increase or decrease in billings may not reflect the actual performance 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 thanU.S. Dollars intoU.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.
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 GAAP. 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 derive our revenues predominately from subscription revenues which 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.
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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
separately from the related support and updates as they are distinct performance
obligations. 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.
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 organization and referral fees paid to independent third-parties. 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. Determining the period of benefit including average renewal term requires judgment for which we take into consideration our customer contracts, our technology life cycle and other factors.
Business combinations
The allocation of the purchase price in a business combination requires us to make significant estimates in determining the fair value of acquired assets and assumed liabilities, especially with respect to intangible assets. The excess of the purchase price in a business combination over the fair value of these tangible and intangible assets acquired and liabilities assumed is recorded as goodwill. Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows, discount rates, the time and expense to recreate the assets and profit margin a market participant would receive. These estimates are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Income Taxes
Our annual tax rate is based on our income, statutory tax rates and tax planning
opportunities available to us in the various jurisdictions in which we operate.
Tax laws are complex and subject to different interpretations by the taxpayer
and respective government taxing authorities. Significant judgment is required
in determining our tax expense (benefit) and in evaluating our tax positions,
including evaluating uncertainties and the complexity of taxes on foreign
earnings. We review our tax positions quarterly and adjust the balances as new
information becomes available.
Deferred tax assets represent amounts available to reduce income taxes payable
on taxable income in future years. Such assets arise because of temporary
differences between the financial reporting and tax bases of assets and
liabilities, as well as from net operating loss and tax credit carryforwards. We
evaluate the recoverability of these future tax deductions and credits by
assessing the adequacy of future expected taxable income from all sources,
including 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. 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. 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.
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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
our U.S. deferred tax assets will not be realizable as of December 31, 2020 . We
recognized an income tax benefit of $574 million due to the release of the
valuation allowance on the Irish deferred tax assets for the year ended
December 31, 2019 . These Irish deferred tax assets were created primarily as a
result of the difference between the tax basis in our Irish subsidiary and the
cost reported in our consolidated financial statements resulting from the
transfer of intangible assets to the Irish subsidiary as part of our foreign
restructuring in 2018. Management applied significant judgment in assessing the
positive and negative evidence available in the determination of the amount of
deferred tax assets that were more likely than not to be realized in the future.
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 2020, historical earnings, future
growth, forecasted earnings, and future taxable income.
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 by U.S. federal, state and foreign tax authorities. The estimate
of the potential outcome of any uncertain tax issue is subject to management's
assessment of relevant risks, facts and circumstances existing at that time. To
the extent the assessment of such tax position changes, we record the change in
estimate in the period in which we make the determination.
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.
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
standard and enhanced 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.
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 the 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.
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We sell our subscription services primarily through our direct sales organization. We also sell services through managed service providers and resale partners. We also generate revenues from certain professional services and from training of customers and partner personnel, through both our direct team and indirect channel sales. Revenues from our direct sales organization represented 81%, 82% and 84% of our total revenues for the years endedDecember 31, 2020 , 2019 and 2018, 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.
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 dedicated customer support, 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 10%, 15% and 18% for the years endedDecember 31, 2020 , 2019 and 2018, 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 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.
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.
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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, 2020 and 2019. 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,
2020 2019 % Change
(dollars in thousands)
Revenues:
Subscription $ 4,285,797 $ 3,255,079 32 %
Professional services and other 233,687 205,358 14 %
Total revenues $ 4,519,484 $ 3,460,437 31 %
Percentage of revenues:
Subscription 95 % 94 %
Professional services and other 5 % 6 %
Total 100 % 100 %
Subscription revenues increased by $1.0 billion for the year ended December 31,
2020 , compared to the prior year, driven by increased purchases by existing
customers and an increase in customer count. Included in subscription revenues
is $205 million and $164 million of revenues recognized upfront from the
delivery of software associated with self-hosted offerings during the years
ended December 31, 2020 and 2019, respectively.
We expect subscription revenues for the year ending December 31, 2021 to
increase in absolute dollars as we continue to add new customers and existing
customers increase their usage of our products, but remain relatively flat as a
percentage of revenue compared to the year ended December 31, 2020 . We continue
to monitor the COVID-19 pandemic in 2021 and its impact on customer acquisition
and renewal rates.
Our expectations for revenues, cost of revenues and operating expenses for the
year ending December 31, 2021 are based on foreign exchange rates as of December
31, 2020 .
Subscription revenues consist of the following:
Year Ended December 31,
2020 2019 % Change
(dollars in thousands)
Digital workflow products $ 3,749,118 $ 2,810,887 33 %
ITOM products 536,679 444,192 21 %
Total subscription revenues $ 4,285,797 $ 3,255,079 32 %
Our digital workflow products include the Now Platform, IT Service Management,
IT Business Management, DevOps, IT Asset Management, Security Operations,
Governance, Risk and Compliance, HR Service Delivery, Safe Workplace Suite of
applications, Workplace Service Delivery, Legal Service Delivery, Customer
Service Management, Field Service Management, Connected Operations, App Engine
and IntegrationHub, 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."
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Professional services and other revenues increased by $28 million for the year
ended December 31, 2020 , compared to the prior year, due to an increase in
services and trainings provided to new and existing customers. We expect
professional services and other revenues for the year ending December 31, 2021
to increase in absolute dollars, but remain relatively flat as a percentage of
revenue compared to the year ended December 31, 2020 . 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 implementation services delivery.
Cost of Revenues and Gross Profit Percentage
Year Ended December 31,
2020 2019 % Change
(dollars in thousands)
Cost of revenues:
Subscription $ 730,835 $ 549,642 33 %
Professional services and other 256,278 247,003 4 %
Total cost of revenues $ 987,113 $ 796,645 24 %
Gross profit percentage:
Subscription 83 % 83 %
Professional services and other (10) % (20) %
Total gross profit percentage 78 % 77 %
Gross profit: $ 3,532,371 $ 2,663,792 33 %
Cost of subscription revenues increased by $181 million for the year ended
December 31, 2020 , compared to the prior year, primarily due to increased
headcount and increased costs to support the growth of our subscription
offerings. Personnel-related costs including stock-based compensation and
overhead expenses increased by $80 million and depreciation expense related to
data center hardware and software and maintenance costs to support the expansion
of our data center capacity increased by $88 million as compared to the prior
year. In addition, amortization of intangibles increased by $12 million as a
result of acquisitions.
We expect our cost of subscription revenues for the year ending December 31,
2021 to increase in absolute dollars as we provide subscription services to more
customers and increase usage within our customer instances.
Our subscription gross profit percentage was 83% for each of the years ended
December 31, 2020 and 2019. We expect our subscription gross profit percentage
to slightly decrease for the year ended December 31, 2021 compared to the year
ended December 31, 2020 . 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 by $9 million for the
year ended December 31, 2020 as compared to the prior year, primarily due to
increased headcount resulting in increase of personnel-related costs including
stock-based compensation offset by a decrease in third-party implementation
costs as we continue to invest and deploy our internal professional service
organization to increase their utilization and a reduction in travel expenses
resulting from travel restrictions due to the COVID-19 pandemic.
Our professional services and other gross loss percentage decreased to 10% for
the year ended December 31, 2020 , compared to 20% in the prior year, primarily
driven by the increased utilization of our internal professional services
organization and the reduction in certain travel expenses. We expect our
professional services and other gross loss percentage to increase for the year
ending December 31, 2021 as we expect utilization of our internal professional
services organization to stabilize resulting in additional support cost for the
business growth and increases in travel expenses compared to the year ended
December 31, 2020 .
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Sales and Marketing
Year Ended December 31,
2020 2019 % Change
(dollars in thousands)
Sales and marketing $ 1,855,016 $ 1,534,284 21 %
Percentage of revenues 41 % 44 %
Sales and marketing expenses increased by $321 million for the year ended
December 31, 2020 , compared to the prior year. The increase was primarily due to
increased headcount, resulting in an increase in personnel-related costs
including stock-based compensation and overhead expenses of $255 million ,
compared to the prior year. Amortization of deferred commissions and third-party
referral fees increased by $51 million , compared to the prior year, due to an
increase in contracts with new customers, expansion and renewal contracts. Other
sales and marketing program expenses, which include branding, purchase of
advertising and market data and outside services, increased by $73 million
compared to the prior year.
Amid the ongoing regulatory restrictions imposed by governments worldwide in
response to the COVID-19 pandemic, we temporarily closed most of our offices to
ensure the well-being and safety of our global employees, office staff and
communities, and encouraged our employees to work remotely and limit travel.
Further, in response to the pandemic, we canceled Knowledge and other in-person
events and either replaced them with digital events or postponed them to future
periods and implemented travel restrictions which resulted in a decrease of $66
million for the year ended December 31, 2020 compared to prior year.
Despite the uncertainty around the continued impact of COVID-19 and its
duration, we expect sales and marketing expenses for the year ending
Research and Development
Year Ended December 31,
2020 2019 % Change
(dollars in thousands)
Research and development $ 1,024,327 $ 748,369 37 %
Percentage of revenues 23 % 22 %
Research and development expenses increased by $276 million during the year
ended December 31, 2020 , compared to the prior year. The increase was primarily
due to increased headcount, resulting in an increase in personnel-related costs
including stock-based compensation and overhead expenses of $251 million
compared to prior year. The remaining increase was primarily due to increase in
hosting costs and data center related depreciation costs to support research and
development activities.
We expect research and development expenses for the year ending December 31,
2021 to increase in absolute dollars, but remain relatively flat as a percentage
of revenue compared to the year ended December 31, 2020 , as we continue to
improve the existing functionality of our services, develop new applications to
fill market needs and enhance our core platform.
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General and Administrative
Year Ended December 31,
2020 2019 % Change
(dollars in thousands)
General and administrative $ 454,165 $ 339,016 34 %
Percentage of revenues 10 % 10 %
General and administrative expenses increased by $115 million during the year
ended December 31, 2020 , compared to the prior year. The increase was primarily
due to increased headcount, resulting in an increase in personnel-related costs
including stock-based compensation and overhead expenses of $91 million and $12
million increase in outside services, compared to the prior year, primarily from
digital transformation projects across functions to improve processes.
We expect general and administrative expenses for the year ending December 31,
2021 to increase in absolute dollars, but remain relatively flat as a percentage
of revenue compared to the year ended December 31, 2020 , as we continue to hire
new employees and focus on digital transformation.
Stock-based Compensation
Year Ended December 31,
2020 2019 % Change
(dollars in thousands)
Cost of revenues:
Subscription $ 98,258 $ 72,728 35 %
Professional services and other 51,553 43,123 20 %
Sales and marketing 320,328 268,408 19 %
Research and development 282,244 194,821 45 %
General and administrative 118,070 83,115 42 %
Total stock-based compensation $ 870,453 $ 662,195 31 %
Percentage of revenues 19 % 19 %
Stock-based compensation increased by
Stock-based compensation is inherently difficult to forecast due to fluctuations in our stock price. Based upon our stock price as ofDecember 31, 2020 , we expect stock-based compensation to continue to increase in absolute dollars for the year endingDecember 31, 2021 as we continue to issue stock-based awards to our employees, but remain relatively flat as a percentage of revenue compared to the year endedDecember 31, 2020 but we expect this to decline over time as we continue to grow. Foreign Currency Exchange Our international operations have provided and will continue to provide a significant portion of our total revenues. Revenues outsideNorth America represented 35% and 34% of total revenues for the years endedDecember 31, 2020 and 2019, respectively. Because we primarily transact in foreign currencies for sales outside ofthe United States , the general weakening of theU.S. Dollar relative to other major foreign currencies (primarily the Euro and British Pound Sterling) during the year endedDecember 31, 2020 had a favorable 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, 2020 at the exchange rates in effect for the year endedDecember 31, 2019 rather than the actual exchange rates in effect during the period, our reported subscription revenues would have been$14 million lower. The impact from the foreign currency movements was not material for professional services and other revenues for the year endedDecember 31, 2020 . 42 -------------------------------------------------------------------------------- Table of Contents In addition, because we primarily transact in foreign currencies for cost of revenues and operating expenses outside ofthe United States , the general weakening of theU.S. Dollar relative to other major foreign currencies during the year endedDecember 31, 2020 , for the most part, had an unfavorable impact but overall, did not have a material impact if we had translated our results for the year endedDecember 31, 2020 at the average exchange rates in effect for the year endedDecember 31, 2019 rather than the actual exchange rates in effect during the period. Interest Expense Year Ended December 31, 2020 2019 % Change (dollars in thousands) Interest expense$ (32,746) $ (33,283) (2 %) Percentage of revenues (1 %) (1 %) Interest expense slightly decreased during the year endedDecember 31, 2020 , compared to the prior year, due to the decrease in amortization expense of debt discount and issuance costs as a result of the 2022 Notes Repurchase offset by increase in debt discount, issuance cost and interest related to 2030 Notes. For the year endingDecember 31, 2021 , we expect to incur approximately$30 million related to the 2030 Notes and 2022 Notes. Other Income (Expense), net Year Ended December 31, 2020 2019 % Change (dollars in thousands) Interest income$ 39,483 $ 55,409 (29) % Foreign currency exchange loss, net of derivative contracts (14,076) (594) NM Loss on extinguishment of 2022 Notes (46,614) - NM Other 4,275 3,530 21 % Other income (expense), net$ (16,932) $ 58,345 (129) % NM - Not meaningful. Other income (expense), net decreased by$75 million during the year endedDecember 31, 2020 , compared to the prior year, primarily driven by loss on extinguishment resulting from the 2022 Notes Repurchase and the early conversions of$47 million and increase in foreign currency exchange loss, net of derivative contracts of$13 million compared to the prior year. Additionally, interest income decreased compared to the same period in the prior year despite an increase in investments primarily due to the decline in interest rates during the year and change in our investment strategy to higher quality bonds in response to the global market disruptions and uncertainties resulting from the COVID-19 pandemic. To mitigate our risks associated with fluctuations in foreign currency exchange rates, we enter into foreign currency derivative contracts with maturities of 12 months or less to hedge a portion of our net outstanding monetary assets and liabilities. These hedging contracts may reduce, but cannot entirely eliminate, the impact of adverse currency exchange rate movements. 43 -------------------------------------------------------------------------------- Table of Contents Provision for (benefit from) Income Taxes Year Ended December 31, 2020 2019 % Change (dollars in thousands) Income before income taxes$ 149,185 $ 67,185 122 % Provision for (benefit from) income taxes 30,682 (559,513) (105 %) Effective tax rate 21 % (833) % (103) % Our effective tax rate was 21% for the year endedDecember 31, 2020 compared to (833)% for the prior year endedDecember 31, 2019 , primarily due to the release of the valuation allowance on the Irish deferred tax assets of$574 million in the year endedDecember 31, 2019 . The income tax provision for the year endedDecember 31, 2020 was primarily attributable to the mix of earnings and losses in countries with differing statutory tax rates, the valuation allowance in theU.S. and the intercompany sale of certain intellectual property rights. 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, 2020 and 2019, respectively. 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,
2020 2020 June 30, 2020 March 31, 2020 2019 2019 June 30, 2019 March 31, 2019
(in thousands, except per share data)
Total revenues $ 1,250,330 $ 1,151,972 $ 1,070,842 $ 1,046,340 $ 951,774 $ 885,833 $ 833,904 $ 788,926
Gross profit $ 971,226 $ 900,268 $ 837,903 $ 822,974 $ 740,321 $ 685,040 $ 635,757 $ 602,674
Net income (loss)(1) $ 16,648 $ 12,858 $ 0.09 $ 0.07
$ 0.21 $ 0.25
0.22
$ 0.08 $ 0.06
$ 0.20 $ 0.24
0.21$ (0.06) $ (0.01) Weighted-average shares used to compute net income (loss) per share - basic 195,461 193,237 191,319 190,163 189,042 188,074 186,678 182,062 Weighted-average shares used to compute net income (loss) per share - diluted 202,455 201,861 201,453 199,938 197,843 197,878 186,678 182,062 44
-------------------------------------------------------------------------------- Table of Contents (1)The amounts for the three months endedDecember 31, 2019 reflect the impact of an income tax benefit of$574 million from the release of the valuation 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. 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 generally conduct in that quarter. However, during the year endedDecember 31, 2020 , in response to the COVID-19 pandemic, we took several measures to ensure the well-being and safety of our employees including reduction of travel and cancellation of live events to be replaced with digital events. Accordingly, timing and amount of marketing expense might not be consistent with historical trends prior to COVID-19. Nonetheless, we still 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.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, investments, and cash generated from operations. As ofDecember 31, 2020 , we had$3 billion in cash and cash equivalents and short-term investments, of which$450 million represented cash held by foreign subsidiaries and$417 million is denominated in currencies other than theU.S. Dollar. In addition, we had$1 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. InAugust 2020 , we issued 1.40% fixed rate ten-year notes with an aggregate principal amount of$1.5 billion due onSeptember 1, 2030 (the "2030 Notes"). The 2030 Notes were issued at 99.63% of principal and we incurred approximately$13 million for debt issuance costs. Interest is payable semi-annually in arrears onMarch 1 andSeptember 1 of each year, beginning onMarch 1, 2021 , and the entire outstanding principal amount is due at maturity onSeptember 1, 2030 . The 2030 Notes are unsecured obligations and the indentures governing the 2030 Notes contain customary events of default and customary covenants that, among others and subject to exceptions, restrict the Company's ability to incur or guarantee debt secured by liens on specified assets or enter into sale and lease-back transactions with respect to specified properties. 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 Warrants 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, 2020 , 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, 2021 , 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, 2020 , we paid cash to settle$116 million in principal of the 2022 Notes. Additionally, we repurchased$497 million in aggregate principal amount of the 2022 Notes (the "2022 Notes Repurchase") which was accounted for as a debt extinguishment. We used proceeds from the partial unwind of the 2022 Note Hedge of$1.1 billion for the 2022 Notes Repurchase.
Based on conversion requests received through the filing date, we expect to
settle in cash an aggregate of approximately
During the year endedDecember 31, 2020 , we issued 2.3 million shares of our common stock upon partial unwind of the 2022 Warrants. We expect to issue additional shares of our common stock in the second half of 2022 upon the automatic exercise of the remaining portion of the 2022 Warrants. As the remaining portion of 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 remaining portion of the 2022 Warrants, which will beSeptember 1, 2022 . In addition, we issued 4.3 million shares of our common stock upon the automatic exercise of a portion of the 2018 Warrants during the year endedDecember 31, 2019 . The 2018 Warrants were no longer outstanding as ofJune 30, 2019 . 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. 45 -------------------------------------------------------------------------------- Table of Contents Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and other risks detailed in Part I, Item 1A titled "Risk Factors". However, we anticipate our current cash, cash equivalents and investments balance and anticipated cash flows generated from operations based on our current business plan and revenue prospects will be sufficient to meet our liquidity needs, including the repayment of any early conversions of our 2022 Notes, debt service costs, 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 operations 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 or repay our 2022 Notes 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.
Year Ended
December 31, 2020 December 31, 2019
(in thousands)
Net cash provided by operating activities $ 1,786,599 $ 1,235,972
Net cash used in investing activities (1,506,872) (724,477)
Net cash provided by (used in) financing activities 596,647 (301,856)
Net increase in cash, cash equivalents and restricted cash 901,439 209,453
Operating Activities
Net cash provided by operating activities was $1.8 billion for the year ended
December 31, 2020 compared to $1.2 billion for the prior year. The net increase
in operating cash flow was primarily due to an increase in adjustments for
non-cash items to reconcile net income to net cash provided by operations,
driven by stock-based compensation, depreciation and amortization from increased
capital expenditures and deferred commissions and the overall favorable impact
from changes in operating assets and liabilities offset by the repayment of 2022
Notes attributable to debt discount.
Investing Activities
Net cash used in investing activities for the year endedDecember 31, 2020 was$1.5 billion compared to$724 million for the prior year. The increase in cash used in investing activities was primarily due to$566 million increase in net purchases of investments,$154 million increase in capital expenditures related to infrastructure hardware equipment as well as office related expenditures to support our headcount growth and$40 million , net increase in business combinations, net of cash and restricted cash acquired, and purchases of intangibles.
Financing Activities
Net cash provided by financing activities for the year endedDecember 31, 2020 was$597 million compared to net cash used in financing activities of$302 million for the prior year due to proceeds of$1.5 billion from the issuance of the 2030 Notes, net of discount and issuance costs, offset by the 2022 Notes Repurchase of$1.6 billion attributable to principal, funded in part by the proceeds received from the partial unwind of the 2022 Note Hedge of$1.1 billion . In addition, an increase in proceeds from employee equity plans by$38 million was offset by a$99 million increase in taxes paid related to net share settlement of equity awards. 46 -------------------------------------------------------------------------------- Table of Contents 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) $ 582,907 $ 87,832
283,230 119,990 122,301 36,938 4,001
Principal amount payable on our
long-term debt(3) 1,669,224 - $ 169,224 - 1,500,000
Total contractual obligations
(1)Consists of future non-cancelable minimum rental payments under operating leases for 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 ofDecember 31, 2020 , we would have been obligated to pay cancellation penalties of approximately$36 million in aggregate. (3)For additional information regarding our long-term debt, 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,$20 million of unrecognized tax benefits have been recorded as liabilities as ofDecember 31, 2020 . 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 purposes 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.
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