ServiceNow,ServiceNow’s purpose is to make the company that makesworld of work, work better for people. We believe that people isshould 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 leading providerjob to flow naturally across disparate departments, systems and processes of enterprise cloud computing services that define, structure, manage and automate digital workflows for global enterprises. a business. When work flows naturally, great experiences follow.

We deliver digital workflows that help our customers create great experiences and unlock productivity. Ouron a single enterprise cloud platform called the Now Platform enables enterprise-wide experiences and productivity by simplifying and streamlining processes across systems, functions and departments.Platform®. Our product portfolio focusesis currently focused on delivering better information technologyproviding Information Technology (IT), employeeEmployee and customerCustomer workflows and enablingin pre-packaged product offerings. We also enable our customers to use the Now Platform App Engine to design and build any workflow applicationapplications that makes senseare purpose built for their own business.

We market and sell our products and services to enterprises in a wide variety ofacross industries, including consumer products, education,government, financial services, government, health care,healthcare, telecommunications, manufacturing, IT services, technology, oil and technology.gas, education and consumer products. We sell our products through subscription services and primarily through direct sales and, to a lesser extent, through indirect channel sales. We also offer a portfolio of professional and other services, both directly and through partners, to help our network of partners.customers deploy and utilize our products and platform.

We were incorporated as Glidesoft, Inc. in California in June 2004 and changed our name to Service-now.com in February 2006. In May 2012, we reincorporated in Delaware as ServiceNow, Inc.

 

Our portfolio includes the Now Platform, and pre-packaged applications specifically designed for automating IT, Employee and Customer workflows. The Now Platform supports custom workflow creation and application development (the Now Platform App Engine) and a third-party application marketplace (the ServiceNow Store). Each of our products supportsand services helps in critical aspects of our customers’ digital transformation process. Theseprocess, and some of these products when implemented alone or together, deliver value to our customers across three workflows: IT, Employee, and Customer. As shownservices, as captured in the graphic and described below, certain products that are applicable throughout the enterprise may be purchased by customers to supportused in multiple workflows.

The Now Platform

Our platform also features the Now Platform App Engine, alsowhich enables customers and third-party developers across the enterprise to create, test and deploy their own applicationsapplications. They can do so within an integrated development environment while leveraging the single data model and common services of the Now Platform. Examples of applications our platform.customers have developed include: an application developed by a company with a large network of seasonal retail stores and offices to track progress and identify issues in opening and closing their seasonal retail stores and offices, which enabled significant cost savings; an application developed by the IT office of a university that allocated and billed costs associated with IT maintenance, allowing the university to retire multiple legacy software systems; and an application developed by a mortgage company to ensure that loan files were complete and accurate prior to packaging and selling the loans to investors. These types of applications which extend the automation of our customers’ workflows have been developed and deployed by our customers and third-party developers using the Now Platform App Engine, and many are available through our marketplace (ServiceNow Store).

OurAs our flagship product suite, IT Service Management (ITSM) product suite defines, structures, consolidates, manages and automates the IT services that are offered to an enterprise’senterprise offers its employees, customers and partners. Among its capabilities, ourthe ITSM product suite recordssuite’s capabilities are recording incidents, remediatesremediating problems and automatesautomating routine tasks.tasks and requests. With ITSM, our customers can elevate their IT service experience by improving IT productivity, achieving new insights and consolidating IT services. For example, we enable our customers to provide service portals where their employees can request IT services, order software and hardware and submit IT incidents.incidents all in one place.

Our IT Operations Management (ITOM) product suite connects a customer’s physical and cloud-based IT infrastructure with our applications and platform. It identifies a customer’s IT infrastructure components (e.g., servers) and associated business services (e.g., email) which are dependent upon that infrastructure. It also maintains a single data record for all IT configurable items, which allows our customers to exercise control over their on-premises or cloud-based infrastructures and orchestrate key processes and tasks. With ITOM, our customers can enhance visibility of IT resources, manage service health and optimize cloud delivery and spend.

Our security operations product connects with third-partyinternal and other sources ofthird-party security alerts from a customer’s infrastructure to prioritize and respond to incidents and vulnerabilities according to their potential impact on a customer’s business. SecurityOur security operations management capabilities includeproduct includes security incident management, threat enrichment intelligence, vulnerability response management and security incident intelligence sharing. With our security operations product, we help simplify our customers’ incident response by allowing them to replace manual tasks with automated security orchestration and to prioritize and remediate vulnerabilities and security incidents.

Our governance,integrated risk and compliancemanagement product creates a common set of policies and controls to help our customers meet the requirements of an ever-expanding regulatory environment, andenvironment. It also allows our customers to be more resilient and monitor risk and compliance events in real time to take action to remediate and mitigate risks. With our integrated risk management product, customers can assess risk and make strategic decisions with confidence by being able to continuously monitor and prioritize risks.

Our human resources (HR)HR service delivery product defines, structures, consolidates, manages and automates HR services related to employee requests. HR service delivery capabilities include HR case management, employee self-service, knowledge management and management of employee lifecycle events across multiple departments, such as onboarding, transfers and off-boarding. For example, tasks that start in HR but require action from other departments, such as new hire equipment selection and fulfillment, can be easily automated and orchestrated. With HR service delivery, we make it easy for our customers’ employees to get the services they need, allowing our customers to use fewer resources to serve more employees, streamline employee lifecycle events, and increase visibility, staffing efficiency and delivery of services.

Our customer service management product defines, structures, consolidates, manages and automates customer service cases and requests. It allows common customer requests, such as password resets, to be automated with out-of-the-box self-service, and for other cases it routes work from the customer service agent to field service, engineering, operations, finance or legal personnel to resolve the underlying issues. With customer service management, we help our customers elevate their customer service by boosting resolution efficiency and improving service quality through service automation and management.

Our field service management applicationproduct allows field service agents to be effectively assigned, deployed and managed on the same underlying customer service management platform that created and managed the customer incident. With field service management, we help our customers efficiently manage location-based work tasks, including dynamic scheduling and visual dispatch.

Our professional services include expert services and customer success programs, offered by ServiceNow alone and in a co-delivery model with our network of partners, to help drivecustomers become proficient in the use of our customers’ business objectivesplatform and deriveto maximize the value fromof their ServiceNow investment. Our professionalExpert services include customer success management, which provides advisory services to our customers for a fee, and also include process design (including identifying inefficiencies in existing workflows), implementation,configuration, architecture and optimization services. We also offer strategic services toOur focus is on supporting customers embarkingas they embark on significant businessenterprise digital transformations to reimagine their service management strategy and roadmap – from first insight to final implementation. Our network of partners also provides professional services and training to our customers.

As part of their subscription, customers receive support 24 hours a day, seven days a week around the globe, from technical resources located in the United States and internationally. We also offer self-service technical support through our support portal, which provides access to documentation, knowledge base articles, online training, online support forums and online incident filing.

We designed our cloud-based services to support global enterprises. We operate a multi-instance architecture that provides each customer with its own dedicated application logic and database. This architecture is designed to deliver high-availability, scalability, performance, security and ease of upgrading. We have a standardized, Java-based development environment, with the majority of our software written in industry-standard software programming languages. Our cloud infrastructure primarily consists of industry-standard servers, networks and storage components. Our operating system is Linux and databases are Linux, and MySQL and MariaDB. We host our full software-as-a-service experience on our own private cloud and intend to host it using public cloud service providers for certain highly regulated customers.

Our data centers operate in paired configurations to enable replication for high-availability and redundancy. We currently operate data centers in Australia, Brazil, Canada, Germany, Hong Kong, Japan, the Netherlands, Singapore, Switzerland, the United Kingdom and the United States, and we continuously evaluate our data center operations and capacity in existing and new geographies.

We offer customers the option to deploy our services on dedicated hardware in our data centers. Our architecture also gives us the added flexibility to allow customers the option of deploying our services internally or under contract with a third party to host the software in order to support unique regulatory or security requirements, and, while there are some limitations on agility and flexibility as compared to our cloud offering, a minority of our customers have elected this alternative. The customer support we provide for self-hosted customers is similar to the support we provide to customers deployed in our own managed data centers.

 

We sell our product offerings and services primarily through our global direct sales organization. Additionally, weWe also sell such services indirectly through managed services providers and resale partners, particularly in less developed markets.partners.

Our marketing efforts and lead generation activities consist primarily of customer referrals, Internetdigital advertising (including via our website), trade shows, industry events, brand campaigns and press releases. We also host our annual Knowledge user conference, webinars and other user forums, including regional forums which we call Now@Work, where customers and partners both participate in and present on a variety of programs designed to educate them on industry best practices and help accelerate their success with our services.

We are continuingcontinue to expand our sales capabilities in new geographies, including through investments in direct and indirect sales channels, professional services capabilities, customer support resources, post-sales customer support resources and strategic alliance and implementation partners. In addition to adding new geographies, weWe also plan to increase our investment in our existing locations in order to achieve scale efficiencies in our sales and marketing efforts.

 

We primarily sell our services to large enterprise customers. Wecustomers, and we host and support large, enterprise-wide deployments for our customers. As of December 31, 2018,2019, we had approximately 5,4006,200 enterprise customers. Our customers operate in a wide variety of industries, including consumer products, education.government, financial services, government, health care,healthcare, manufacturing, IT services, technology, oil and technology.gas, telco, education and consumer products. No single customer accounted for more than 10% of our revenues for any of the periods presented.

 

Total backlog consistsOur remaining performance obligations (RPO) were $6.6 billion and $4.9 billion as of unbilled backlog,December 31, 2019 and 2018, respectively. 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. We believe RPO, which excludes customer deposits. Unbilled backlogdeposits and time and materials contracts, is an operational measure representing future unearned revenue amountsindicator of customer backlog orders believed to be firm that areis aligned with the current revenue recognition standard. Refer to be invoiced under our existing agreements and are not includedNote 9 in the deferred revenue or customer deposits onnotes to our consolidated balance sheets. For information regarding our total backlog, please refer to the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Key Business Metrics–Total backlog” in Item 7 of Part IIfinancial statements included elsewhere in this Annual Report on Form 10-K.10-K for additional information on remaining performance obligations.

 

Our research and development organization is responsible for the design, development, testing and certificationvalidation of our solutions. We focus on innovating and developing new services and core technologies and further enhancing the functionality, reliability and performance of our existing solutions. We focus our efforts on anticipatingUsing emerging technologies, we can anticipate customer demanddemands and then bringingbring new services and new versions of existing services to market quickly in order to remain competitive in the marketplace. We have made, and will continue to make, significant investments in research and development to strengthen our existing applications, expand the number of applications on our platform, enhance our user experience and develop additional mobile, automation and machine intelligence technologies.

In addition to continuing to invest in our own research and development efforts, we have made acquisitions and investments in the past and will continue to assess opportunities for strategic acquisitions and investments to complement our technology and skill sets and expand our product reach. We are focusedOur focus is on building out our platform and products through both acquisitions and investments that will satisfy growingto support customer needs.

 

TheWe compete in markets for our solutions generallythat are rapidly evolving and highly competitive, with relatively low barriers to entry. As thethese markets in which we operate continue to mature and new technologies and competitors enter such markets, we expect competition to intensify. Our current competitors include:

Many prospective customers have invested substantial personnel and financial resources to implement and integrate their current enterprise software into their businesses and therefore may be reluctant or unwilling to migrate away from their current solution to an enterprise cloud solution.ours. Accordingly, we compete with both cloud-based and traditional, enterprise applicationenterprise-application, software vendors. Our competitors vary in size and in the breadth and scope of the products and services offered.they offer. As we continue to expand the breadth of our services to include offerings for service domains outside of IT,in new markets, we expect increasing competition from platform and application development vendors focused on these other markets.

Various factors influence purchase decisions in our industry, including total cost of ownership, level of customer satisfaction, breadth and depth of product functionality, security, adherence to industry standards, brand awareness, flexibility and performance. We believe that we compete favorably with our competitors on each of these factors. However, many of our competitors have substantially greater financial, technical and other resources andresources. They may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, customer requirements and buying practices. An existing competitor or new entrantpotential competitor could introduce new technology, or more effectively utilize existing technology, that reduces demand for our services. Acquisitions, integrations and consolidation by and among other companies in our industry may allow potential competitors to offer integrated or bundled products, enhanced functionality, or other advantages, which may impact our competitive position. In addition, some of our competitors offer their products or services at a lower price, which has resulted in pricing pressures. Some of our largerLarger competitors may also have the operating flexibility to bundle competing products and services with other software offerings, which may enable them to offer suchtheir products and services at a lower price as part of a larger sale.price. As competition intensifies, we expect pricing competition to continue or increase.

 

We rely upon a combination of U.S. and international copyright, trade secret, patent and trademark laws in the United States and other jurisdictions as well as confidentiality procedures and contractual restrictions, such as confidentiality and license agreements, to establish, protect and grow our intellectual property (IP) rights. We alsoIn addition, we enter into confidentiality and proprietary rights agreements with our employees, partners, vendors, consultants and other third parties and control access to our IP and other proprietary information. We also purchase or license technology that we incorporate into our products or services. In certain of our partnership arrangements, our partners may develop technology on the Now Platform that may be subject to copyright or other intellectual property rights that we may agree to with the partner.

We continue to grow our global patent portfolio and IP rights around the world that relate to our platform, applications, services, research and development and other activities, and ouractivities. Our success depends in part upon our ability to protect our core technology and IP. We have over 600700 U.S. and foreign patents, including patents acquired from third parties, and over 500780 pending patent applications. We do not believe that our proprietary technology is dependent on any single patent or other IP right or groupsgroup of related patents or IP rights. We file patent applications to protect our IP and have in the past and may in the futurecontinue to acquire additional patents, patent portfolios, or patent applications. However, we cannot be certain that any of our patent applications will result in the issuance of a patent or whether the examination process will result in patents of value or applicability. In addition, any patents that have been or may be issued or acquired may be contested, circumvented, found unenforceable or invalidated, and we may not be able to prevent third parties from infringing upon them.

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or obtain and use our technology to develop products and services that provide features and functionality that are similar to our solutions.ours. Policing unauthorized use of our technology is difficult. The laws of the countries in which we market our servicesoperate may offer little or no effective protection of our proprietary technology. Our competitors could also independently develop services equivalent to ours, and our intellectual propertyIP rights may not be broad enough for us to prevent competitors from utilizing their developments to compete with us. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technology could enable third parties to benefit from our technology without paying us for it, which would significantly harm our business.

Our industry is characterized by frequent claims and related litigation regarding patent and other intellectual propertyIP rights. From time to time, third parties may assert patent, copyright, trademark and other intellectual propertyIP rights against us, our channel partners or our customers. In addition, based on our greater visibility, expanding solutions footprint, and market exposure as a public company, we face a higher risk of being the subject of intellectual propertyIP infringement claims from third parties.claims. For example, in 2016 we settled two patent-related litigation matters and recorded a one-time charge of $270.0 million related to aggregate legal settlements. See “Risk Factors–ClaimsFactors—Lawsuits against us by othersthird parties that allege we infringe their proprietary technology or otherintellectual property rights could harm our business”business and operating results” for additional information.

 

As of December 31, 2018,2019, we had 8,15410,371 full-time employees worldwide, including 1,835 in cloud operations, professional services, training and customer support, 3,061 in sales and marketing, 2,080 in research and development and 1,178 in general and administrative roles.worldwide. None of our U.S. employees isare represented by a labor union with respect to his or her employment.union. Employees in certain European countries are represented by workers’ councils and also have the benefits of collective bargaining arrangements at the national level. We consider our relations with our employees to be very good and have not experienced interruptions of operations or work stoppages due to labor disagreements.

You can obtain copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other filings with the SEC, and all amendments to these filings, free of charge from our website at www.servicenow.com/company/investor-relations/sec-filings.html as soon as reasonably practicable following our filing of any of these reports with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of these websites are not incorporated into this filing and our references to the URLs for these websites are intended to be inactive textual references only.

The markets for our enterprise cloud solutions are rapidly evolving and highly competitive, with relatively low barriers to entry. As the market for service managementdigital workflow products matures and new technologies and competitors enter the market, we expect competition to intensify. Our current competitors include:

Many prospective customers have invested substantial personnel and financial resources to implement and integrate their current enterprise software into their businesses and therefore may be reluctant or unwilling to migrate away from their current solution to our enterprise cloud solutions.ours. Many of our competitors and potential competitors are larger and have greater name recognition, longer operating histories, more established customer relationships (including at the executive level of large enterprises where decision-making authority is held), larger marketing budgets and greater resources than we do. Further, other potential competitors not currently offering competitive products may expand their services to compete with our services. Acquisitions, integrations and consolidation by and among other companies in our industry may allow potential competitors to offer integrated or bundled products, enhanced functionality, or other advantages, which may impact our competitive position. We have expanded the breadth of our services to include offerings in the markets for IT operations management, customer service management, security operations management, HR service delivery and use ofWhile we believe that our platform by developersand products can largely be complementary to large and established systems that traditionally operate as “systems of custom applications. As a result, we expect increasing competition from platform vendors and from application development vendors focused on these other markets. Ourrecord,” competitors may try to enter our space. They may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, customer requirements and buying practices. In addition, some of our competitorsThey may utilize acquisitions, integrations or consolidations to offer theirintegrated or bundled products, enhanced functionality or services at a lower price, which has resulted in pricing pressures. Larger competitors with more diverse product and service offeringsother advantages. They may reduce the price of products or subscriptions that compete with ours or may bundle them with other products and subscriptions.subscriptions, causing our products to appear relatively more expensive. They may also invest in industry-specific solutions that purport to provide a unique solution for that industry. Other potential competitors not currently offering competitive products may expand their services to compete with our services, or we may shift our products and services to compete with current and future competitors in adjacent markets. We have in the past expanded, and we expect that smallerto continue to expand the breadth of our services to include offerings in new markets and the use of our platform by developers of custom applications. As a result, we expect increasing competition from platform vendors and application development vendors focused on these other markets. Smaller competitors and new entrants may accelerate pricing pressures, including in the IT service managementITSM market, which is our more mature offering and from which we derive the substantial majoritya large portion of our revenues. For all of these reasons, we may not be able to compete successfully, and competition could result in reduced sales, reduced margins, losses or the failure of our solutionsproducts to achieve or maintain market acceptance, any of which could harm our business.

In addition to government activity, privacy advocacy groups and other technology and industry groups have established or may establish various new or different self-regulatory standards that may place additional obligations on us. Our customers may expect us to meet voluntary certifications or adhere to other standards established by third parties. If we are unable to maintain these certifications or meet these standards, it could reduce demand for our products and adversely affect our business.

TheWe compete in markets in which we competethat continue to evolve rapidly, and therapidly. The pace of innovation will continue to accelerate as customers increasingly base their purchases on digital technologies and capabilities, including public and private cloud solutions and infrastructure, massively scalable databases, mobile, workflow, consumer product-like user experiences, social, collaboration, machine learning, artificial intelligence, internet connectedInternet-connected devices, high-velocity robotic automation, security, cryptography, internal software development tools,operations, and other digital technologies increasingly become the basis for customer purchases. At the same time, ourapplication and service awareness. Our customers and prospective customers are either facing their own competitivemust choose among competing imperatives to adopt digital technologies, or have been built on fully digital,fully-digital, modern, dynamic IT technologies, resulting in the ongoing disruption of almost every sector of the global economy. Acquisitions, integrations and consolidation by and among companies in our industry may further accelerate changes in the markets in which we participate.technologies. Accordingly, to compete effectively, in our rapidly changing markets, we must: identify and innovate in the right emerging technologies, among the many in which we could make investments knowing that we cannot make substantial investments in all of them; accurately predict our customers’ changing business needs, priorities and priorities,adoption practices, including their technology infrastructures and buying and budgetary practices; invest in and continually optimize our own technology platform so that it continues to meet the very high performance expectations of our customers; successfully deliver new, scalable platform and database technologies and products that scale to meet these needs and priorities; efficiently integrate with other technologies within our customers’ digital environments; expand our offerings into industries and to buyers who are not familiar with our offerings; profitably market and sell products to companies and buyers in markets where our sales and marketing teams have less experience, including to fully digital companies built on fully-digital, modern, dynamic IT technologies that have historically not been strong buyers of ITSM and ITOM products like ours;products; and effectively deliver, either directly or through our partner ecosystem, of partners, the business process planning, IT systems architecture planning, and product implementation services that our customers require to be successful. If we fail to meet any of these requirements, our competitive position, strategic relevance and business prospects may be harmed.

Global economic conditionsIn addition, public sector customers may harmhave contractual, statutory or regulatory rights to terminate current contracts with us or our industry,third-party distributors or resellers for convenience or due to a default, though such risk may be assumed by such third-party distributor or reseller. If a contract is terminated for convenience, we may only be able to collect fees for products or services delivered prior to termination and settlement expenses. If a contract is terminated due to a default, we may be liable for excess costs incurred by the customer for procuring alternative products or services or be precluded from doing further business with government entities. Further, entities providing services to governments are required to comply with a variety of complex laws, regulations, and contractual provisions relating to the formation, administration, or performance of government contracts that give public sector customers substantial rights and remedies, many of which are not typically found in commercial contracts. These may include rights with respect to price protection, the accuracy of information provided to the government, contractor compliance with supplier diversity policies, and other terms that are particular to government contracts, such as termination rights. These rules may apply to us and/or third-party resellers or distributors whose practices we may not control. Such parties’ non-compliance could impose repercussions with respect to contractual and customer satisfaction issues.

Our customers also include a number of non-U.S. governments, to which similar procurement, budgetary, contract, and audit risks of U.S. government contracting also apply, particularly in certain emerging markets where our customer base is less established. In addition, compliance with complex regulations and contracting provisions in a variety of jurisdictions can be expensive and consume significant management resources. In certain jurisdictions, our ability to win business may be constrained by political and other factors unrelated to our competitive position in the market. Each of these difficulties could materially adversely affect our business and results of operations.

Sales outside of North America represented approximately 34% of our total revenues for each of the years ended December 31, 2019 and 2018. Our business and future prospects depend on increasing our international sales as a percentage of our total revenues. The failure to grow internationally will harm our business. Additionally, operating in international markets requires significant investment and management attention and subjects us to different regulatory, political and economic risks from those in the United States (the US). We have made, and will continue to make, substantial investments in data centers, cloud computing infrastructure, sales, marketing, personnel and facilities as we enter and expand in new geographic markets. When we make these investments, it is typically unclear whether, and when, sales in the new market will justify our investments. We may significantly underestimate the level of investment and time required to be successful, or whether we will be successful. Our rate of acquisition of new large enterprise customers, a factor affecting our growth, has generally been lower in Africa, Asia, Eastern Europe, South America and other markets in which we are impactedless established and where there may be increased or changing regulations and operational and intellectual property risks, as compared to North America, Australia and Western Europe. An increasing proportion of the large enterprises that are not yet our customers are located in emerging markets where we are less established. We have experienced, and may continue to experience, difficulties in some of our investments in geographic expansion, including hiring qualified sales management personnel, penetrating the target market, anticipating and ensuring compliance with regulatory developments, and managing foreign operations in such locales.

We have acquired or invested in companies and technologies in the past as part of our business strategy and may continue to evaluate and execute potential strategic transactions, including acquisitions of or investments in businesses, technologies, services, products and other assets in the future. We also may enter into relationships with other businesses to expand our service offerings, functionality or our ability to provide services in international locations, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in other companies. Although we conduct reasonably extensive due diligence with each of the entities we engage for a variety of goods and services, high levels of persistent unemployment and wage and income stagnation in some geographic markets, restricted credit, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies, international trade agreements, trade restrictions and overall uncertaintystrategic transaction, our due diligence efforts may not reveal every material concern that may exist either with respect to the economy.target entity or our assumptions surrounding the resulting combination. These conditions can arise suddenlystrategic transactions involve numerous risks, including:

In addition, we may have to pay cash, incur debt, or issue equity or equity-linked securities to pay for any future acquisitions, each of which could adversely affect our customers’ abilityfinancial condition or willingnessour stock price. Furthermore, if we finance acquisitions by issuing equity, convertible or other debt securities or loans, our existing stockholders may be diluted, or we could face constraints related to purchasethe terms of and repayment obligation related to the incurrence of indebtedness that could affect our services, delay prospective customers’ purchasing decisions, reduce the value or durationstock price. The occurrence of their subscriptions, or affect renewal rates, allany of whichthese risks could harm our business, operating results. In 2019, for example, the growth rate in the economy of the EU, China, or the US, trade relations between the USresults and China, political uncertainty in the Middle East and other geopolitical events could directly or indirectly affect our business. Additionally, in connection with the June 2016 referendum by British voters to exit the EU (Brexit), the United Kingdom (the UK) and the EU announced in March 2018 an agreement in principle to transitional provisions under which E.U. law would remain in force in the UK until the end of December 2020, but this remains subjectfinancial condition.

DelaysOur success depends largely upon the continued services of our management team, including our Chief Executive Officer and Chief Financial Officer, and many key individual contributors. From time to time in the releaseordinary course of business, there may be changes in our management team resulting from the hiring or actualdeparture of executives. For example, our current President and Chief Executive Officer was appointed in November 2019 and our current Chief Financial Officer was appointed in January 2020. While we seek to manage these transitions carefully, including by establishing strong processes and procedures and succession planning, such changes may result in a loss of institutional knowledge and cause disruptions to our business.

In the technology industry, there is substantial and continuous competition for engineers with high levels of experience in designing, developing and managing software and Internet-related solutions, sales executives and operations personnel. We may not be successful in attracting and retaining qualified personnel, and we may experience increased compensation and training costs that may not be offset by either improved productivity or perceived defectshigher sales. We have from time to time experienced, and we may continue to experience, difficulty in newhiring and retaining highly-skilled employees with appropriate qualifications, and may not be able to fill positions in desired geographic areas or updated products may slowat all. In particular, competition for experienced software and cloud computing infrastructure engineers in the adoptionSan Francisco Bay area, San Diego, Seattle, London, Amsterdam and Hyderabad, our primary operating locations, is intense. Many of our most recent technologies, reduceemployees, including all of our executive officers, are employed “at-will” and may terminate their employment with us at any time. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be adversely affected.

In addition, we believe our corporate culture of fostering innovation, teamwork and employee satisfaction has been a key contributor to our success to date. As we continue to grow and expand globally, we may find it difficult to maintain important aspects of our corporate culture, which could negatively affect our ability to efficiently provideretain and recruit personnel who are essential to our future success.

Natural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce and the global economy, and thus could have a negative effect on us. Our business operations are subject to interruption by natural disasters, flooding, fire, power shortages, pandemics such as the recent spread of the coronavirus, terrorism, political unrest, telecommunications failure, vandalism, cyber-attacks, geopolitical instability, war, the effects of climate change (such as drought, wildfires, increased storm severity and sea level rise) and other events beyond our control. Although we maintain crisis management and disaster response plans, such events could make it difficult or impossible for us to deliver our services decrease customer satisfaction, increase our vulnerability to cyber attacks, and adversely impact sales of additional products to our customers.

Our business depends upon the successful implementation of our products by our customers. Increasingly, we as well asand our customers rely on our network of partners to deliver implementation services, and there may not be enough qualified implementation partners available to meet customer demand. Further, various factors, including our customers’ business, integration, migration and security requirements, or errors by us, our partners, or our customers, or other factors may cause implementations to be delayed, inefficient or otherwise unsuccessful. For example, changes in the functional requirements of our customers, delays in timeline, or deviationdeviations from recommended best practices may occur during the course of an implementation project. As a result of these and other risks, we or our customers may incur significant implementation costs in connection with the purchase, implementation and enablement of our products. Some customer implementations may take longer than planned or fail to meet our customers’ expectations, which may delay our ability to sell additional products or result in customers canceling or failing to renew their subscriptions before our products have been fully implemented. Some customers may lack the employee talent or organizational capacity to manage a digital transformation such as our offering and, as a consequence, may be unable to see the benefits of our products. Unsuccessful, lengthy, or costly customer implementation and integration projects could result in claims from customers, reputational harm, to our reputation, and opportunities for competitors to displace our products, each of which could have an adverse effect on our business and operating results.

From time to time, we experience defects in our services, and new defects may be detected in the future. For example, we provide regular updates to our services, which frequently contain undetected defects when first introduced or released. Defects may also be introduced by our use of third-party software, including open source software. Disruptions may result from errors we make in developing, delivering, configuring or hosting our services, or designing, installing, expanding or maintaining our cloud infrastructure. Disruptions in service can also result from incidents that are outside of our control, including denial of service attacks. We currently serve our customers primarily using equipment managed by us and co-located in third-party data center facilitiescenters operated by several different providers located around the world.world, and we plan to serve certain of our customers using data center facilities operated by public cloud service providers. These data centers are vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, power loss and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct, equipment failure and adverse events caused by operator error or negligence. Despite precautions taken at these facilities,centers, problems at these facilitiescenters could result in lengthy interruptions in our services and the loss of customer data. In addition, our customers may use our services in ways that cause disruptions in service for other customers. Our customers use our services to manage important aspects of their own businesses, and our reputation and business will be adversely affected if our customers and potential customers believe our services are unreliable. Disruptions or defects in our services may reduce our revenues, cause us to issue credits or pay penalties, subject us to claims and litigation, cause our customers to delay payment or terminate or fail to renew their subscriptions, and adversely affect our ability to attract new customers. Similarly, customers may have unique requirements for system resiliency that we may not be able to, or may not choose to, meet. The occurrence of payment delays, or service credit, warranty or termination for material breach or other claims against us could result in an increase in our bad debt expense, an increase in collection cycles for accounts receivable, an increase to our service level credit accruals, or other increased expenses or risks of litigation. We may not have insurance sufficient to compensate us for the potentially significant losses that may result from claims arising from disruptions in our services.

Our operating results may vary significantly from period to period as a result of various factors, some of which are beyond our control. For any quarterly or annual period, there is a risk that our financial performance will not meet the financial guidance we have previously given for that period, or that we may otherwise fail to meet the financial performance expectations of the securities analysts who issue reports on our company and our common stock price, or of investors in our common stock. There is also a risk that we may issue forward-looking financial guidance for a quarterly or annual period that fails to meet the expectations of such securities analysts or investors. If any of the foregoing occurs, for any reason, either within or outside of our control, the price of our common stock could decline substantially and investors in our common stock could incur substantial losses. Some of the important factors that may cause our revenues, operating results and cash flowsfinancial performance to vary widely, or cause our forward-looking financial guidance to fall below the expectations of such securities analysts or investors, include:

We are subject to income taxes in the United StatesUS and various foreign jurisdictions. We believe that our provision for income taxes is reasonable, but the ultimate tax outcome may differ from the amounts recorded in our consolidated financial statements and may materially affect our financial results in the period or periods in which such outcome is determined. Our effective tax rate could be adversely affected by changes in the mix of earnings and losses in countries with differing statutory tax rates, certain non-deductible expenses, the valuation of deferred tax assets and liabilities and the effects of acquisitions. Increases in our effective tax rate would reduce our profitability or in some cases increase our losses.

Additionally, our future effective tax rate could be impacted by changes in accounting principles or changes in U.S. federal, state or international tax laws or tax rulings. The U.S. enacted significant tax reform under the Tax Cuts and Jobs Act of 2017 (the Tax Act). The U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the law, which could affect our results of operations in the period issued. Many countries and organizations such as the Organization for Economic Cooperation and Development are actively considering changes to existing tax laws or have proposed or enacted new laws that could increase our tax obligations in countries where we do business or cause us to change the way we operate our business. Recent global tax developments applicable to multinational businesses and increased scrutiny under tax examinations could have a material impact on our business and negatively affect our financial results. Any changes in federal, state or international tax laws or tax rulings may increase our worldwide effective tax rate and harm our financial position and results of operations.

In addition, we may be subject to income tax audits by tax jurisdictions throughout the world, many of which have not established clear guidance on the tax treatment of cloud computing companies. Although we believe our income tax liabilities are reasonably estimated and accounted for in accordance with applicable laws and principles, an adverse resolution of one or more uncertain tax positions in any period could have a material impact on our results of operations for that period.

Although we have reported results that were profitable on a GAAP basis for full-year 2019 and intercompany transactions,certain prior quarters, we have incurred net losses in currencies other than the U.S. Dollar or the functional operating currency of the transactional entities. In addition,all prior fiscal years since our international subsidiaries maintain significant net assets that are denominatedinception. Even if our revenues continue to increase, we may incur losses in currencies other than the functional operating currencies of these entities. Accordingly, changes in the value of currencies relative to the U.S. Dollar may impact our consolidated revenues and operating resultsaccordance with GAAP during future periods due to transactional and translational remeasurement that is reflected in our earnings. It is particularly difficult to forecast any impact from exchange rate movements, so there is risk that unanticipated currency fluctuations could adversely affect our financial results or cause our results to differ from investor expectations or our own guidance in any future periods. In addition, the announcement of Brexit adversely impacted global markets, including currencies, and resulted in a decline in the value of the British pound,increased costs such as compared to the U.S. Dollarnon-cash charges associated with equity awards, business combinations and other currencies. Volatility in exchange ratesexpenses. We may also encounter unforeseen operating expenses, difficulties, complications, delays and global financial markets is expected to continue due to a number ofother unpredictable factors including uncertainty surrounding Brexit and the recent political and economic uncertainty globally.

The Sarbanes-Oxley Act requires us, among other things, to assess and report on the effectiveness of our internal control over financial reporting annually and the reasonable assurance level of our disclosure controls and procedures quarterly. In addition, our independent registered public accounting firm is required to audit the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act annually. Our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Moreover, our testing, or the subsequent testing by our independent registered public accounting firm, may reveal material weaknesses or significant deficiencies. If material weaknesses are identified or we are not able to comply with the requirements of Section 404 in a timely manner, our reported financial results could be materially misstated or could subsequently require restatement, we could receive an adverse opinion regarding our internal control over financial reporting from our independent registered public accounting firm, we could be subject to investigations or sanctions by regulatory authorities and we could incur substantial expenses. New accounting principles, such as the new revenue recognition standards that became effective for us beginning January 1, 2018, require significant changes to our existing processes and controls. We may not be able to effectively implement system and process changes required for new standards on a timely basis. Any delays or failure to update our systems and processes could also lead to a material weakness or significant deficiency.

We operate globally and as a result our business and revenues are impacted by global macroeconomic conditions. Global financial developments seemingly unrelated to us or the software industry may harm us. From time to time, the US and other events beyondkey international economies have been impacted by geopolitical and economic instability, high levels of credit defaults, international trade disputes, falling demand for various goods and services, high levels of persistent unemployment, wage and income stagnation, restricted credit, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies, international trade agreements, trade restrictions and overall economic uncertainty. These conditions can arise suddenly and affect the rate of information technology spending and could adversely affect our controlcustomers’ or prospective customers’ ability or willingness to purchase our services, delay purchasing decisions, reduce the value or duration of their subscriptions, or affect renewal rates, all of which could harm our business.operating results.

Natural disastersIn 2020, for example, the growth rate in the EU, China, or the US, tariffs or trade relations between the US and China or other catastrophic events may cause damage or disruption to our operations, international commerce andcountries, political uncertainty in the global economy, and thus could have a negative effect on us. Our business operations are subject to interruption by natural disasters, flooding, fire, power shortages, pandemics, terrorism, political unrest, telecommunications failure, vandalism, cyber-attacks, geopolitical instability, war, the effects of climate change (such as drought, wildfires, increased storm severity and sea level rise)Middle East and other events beyond our control. Although we maintain crisis management and disaster response plans, suchgeopolitical events could make it difficultdirectly or impossible for us to deliverindirectly affect our services to our customers, could decrease demand for our services, and could cause us to incur substantial expense. Our insurance may not be sufficient to cover losses or additional expense that we may sustainbusiness. Additionally, in connection with Brexit, the impact of the UK’s exit from the EU is still to be fully seen, with the applicable trade agreement to be negotiated before December 2020, or a type of “no-deal” exit would occur. This could be harmful to both the U.K. and E.U. economies and businesses operating there

In addition, the effects, if any, natural disaster. The majority of global financial conditions on our research and development activities, corporate offices, information technology systems,business can be difficult to distinguish from the effects on our business from product, pricing, and other criticaldevelopments in the markets specific to our products and our relative competitive strength. If we make incorrect judgments about our business operations are located near major seismic faults in Californiafor this reason, our business and Washington. Customer dataresults of operations could be lost, significant recovery timeadversely affected.

We conduct significant transactions, including revenue transactions and intercompany transactions, in currencies other than the U.S. Dollar or the functional operating currency of the transactional entities. In addition, our international subsidiaries maintain significant net assets that are denominated in currencies other than the functional operating currencies of these entities. Accordingly, changes in the value of currencies relative to the U.S. Dollar may impact our consolidated revenues and operating results due to transactional and translational remeasurement that is reflected in our earnings. It is particularly difficult to forecast any impact from exchange rate movements, so there is risk that unanticipated currency fluctuations could be adversely affectedaffect our financial results or cause our results to differ from investor expectations or our own guidance in any future periods. In addition, the announcement of Brexit and the continued uncertainty around the full impact of it and the exact trade arrangements upon exit has adversely impacted global markets, including currencies, and resulted in a decline and volatility in the eventvalue of the British pound and the Euro, as compared to the U.S. Dollar and other currencies. Volatility in exchange rates and global financial markets is expected to continue due to a major natural disasternumber of factors, including uncertainty surrounding Brexit trade arrangements and the recent political and economic uncertainty globally.

In 2018, we began using derivative instruments, such as foreign currency forwards, to hedge certain exposures to fluctuations in foreign currency exchange rates. These hedging contracts may reduce, but cannot entirely eliminate, the impact of adverse currency exchange rate movements. Further, unanticipated changes in currency exchange rates may result in poorer overall financial performance than if we had not engaged in any such hedging transactions. Moreover, for a number of reasons, including our limited experience with these hedging contracts, we may not seek or catastrophic event.be able to establish a perfect correlation between such hedging instruments and the exposures being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge, and could expose us to a greater overall risk of loss than if we had not hedged.

Holders of the 2022 Notes have the right to require us to repurchase all or a portion of their 2022 Notes upon the occurrence of a fundamental change (as defined in the indenture for the 2022 Notes)Notes (the Indenture)) at a repurchase price equal to 100% of the principal amount of the 2022 Notes to be repurchased, plus accrued and unpaid special interest, if any. In addition, if a make-whole fundamental change (as defined in the indenture for the 2022 Notes)Indenture) occurs prior to the maturity date of the 2022 Notes, we will in some cases be required to increase the conversion rate for a holder that elects to convert its 2022 Notes in connection with such make-whole fundamental change. Upon conversion of the 2022 Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional shares), we will be required to make cash payments in respect of the 2022 Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of the 2022 Notes surrendered therefor or pay cash with respect to the 2022 Notes being converted.

We and our subsidiaries may incur substantial additional debt in the future, subject to the restrictions contained in our future debt instruments, some of which may be secured debt. We are not restricted under the terms of the indenture governing the 2022 NotesIndenture from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that could have the effect of diminishing our ability to make payments on the 2022 Notes when due. Furthermore, the indenture for the 2022 NotesIndenture prohibits us from engaging in certain mergers or acquisitionsbeing acquired unless, among other things, the surviving entity assumes our obligations under the 2022 Notes and the indenture.Indenture. These and other provisions in the indentureIndenture could deter or prevent a third party from acquiring us even when the acquisition may be favorable to holders of the 2022 Notes.

In addition, our ability to repurchase or to pay cash upon conversion of the 2022 Notes may be limited by law, regulatory authority or agreements governing our future indebtedness. Our failure to repurchase the 2022 Notes at a time when the repurchase is required by each indenturethe Indenture or to pay cash upon conversion of the 2022 Notes as required by the indentureIndenture would constitute a default. A default under the indentureIndenture or thea fundamental change itself could also lead to a default under agreements governing our future indebtedness. Moreover, the occurrence of a fundamental change under the indenture could constitute an event of default under any such agreements. If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the 2022 Notes, or to pay cash upon conversion of the 2022 Notes.

Prior to the business day immediately preceding February 1, 2022, the holders of the 2022 Notes may elect to convert their notes during any calendar quarter (and only during such calendar quarter) if the last reported sale price of our common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to $175.18 (the Conversion Condition). The Conversion Condition was met for the 2022 Notes during the three monthswas met for all quarters ended June 30, 2018 and September 30,through December 31, 2019, except for the quarter ended December 31, 2018. Therefore, theour 2022 Notes became convertible at the holders’ option beginning on July 1, 2018 and continuedcontinue to be convertible atthrough March 31, 2020, except for the holders’ option through Decemberquarter ended March 31, 2018. The2019 because the Conversion Condition for the 2022 Notes was not met for the 2022 Notes for the three monthsquarter ended December 31, 2018,2018. During the year ended December 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 therefore$5.2 million in principal amount of the 2022 Notes are not convertible atduring the holders’ option forfirst and second quarters of 2020, respectively. We may receive additional conversion requests that require settlement in the second quarter ending March 31, 2019.of 2020. If one or more holders elect to convert their 2022 Notes in future periods, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we may settle all or a portion of our conversion obligation in cash, which could adversely affect our liquidity and result in a material adverse effect on our financial position, results of operations and cash flows. In addition, to the extent we receive conversion requests, we may also record a loss on early conversions of the 2022 Notes converted by noteholdersnote holders based on the difference between the fair market value allocated to the liability component on the settlement date and the net carrying amount of the liability component and unamortized debt issuance on the settlement date.

In connection with the sale of the 2022 Notes, and our convertible senior notes due 2018 (the 2018 Notes), we entered into convertible note hedge (the 2022 Note Hedge and 2018 Note Hedge, respectively)Hedge) transactions with certain financial institutions (option counterparties). We also entered into warrant transactions with the option counterparties pursuant to which we sold warrants for the purchase of our common stock (the 2022 Warrants and 2018 Warrants, respectively)Warrants). The 2018 Note Hedge offset the dilution and cash payments in excess of the principal amount of the converted 2018 Notes and expired upon the maturity date of the 2018 Notes, which was November 1, 2018. The 2022 Note Hedge is expected generally to reduce the potential dilution upon any conversion of the 2022 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2022 Notes, as the case may be.applicable. The warrant2022 Warrant transactions could separately have a dilutive effect to the extent that the marketour stock price per share of our common stock exceeds the exercise price of the 2022 Warrants, or 2018 Warrants, which is $203.40 and $107.46, respectively.$203.40. As the 2018 Warrants and the 2022 Warrants will be net share settled, the total number of shares of our common stock we will issue depends on the daily volume-weighted average stock prices over a 60 trading60-trading day period beginning on the first expiration date of the 2018 Warrants, which is was February 1, 2019, and the first expiration date of the 2022 Warrants, which will be September 1, 2022. We have issued and expect to continue to issue additional shares of our common stock in the first half of 2019 upon the automatic exercise of the 2018 Warrants. Additionally, we expect to issue additional shares of our common stock in the second half of 2022 upon the automatic exercise of the 2022 Warrants. Based on the volume-weighted average stock price on February 1, 2019, the total number of shares of our common stock to be issued upon the exercise of the 2018 Warrants would be approximately 4.0 million, resulting in immediate and substantial dilution to our existing stockholders. Similarly, the 2022 Warrants could have a dilutive effect to the extent that the daily volume-weighted average stock prices over a 60 trading day period beginning on September 1, 2022 exceeds the strike price of the 2022 Warrants. Based on the volume-weighted average stock price on February 1,December 31, 2019, the total number of shares of our common stock to be issued upon the automatic exercise of the 2022 warrantsWarrants would be approximately 0.41.6 million. The actual number of shares of our common stock issuable upon the automatic exercise of the 2022 warrants,Warrants, if any, is unknown at this time. 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.

The option counterparties and/or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock in secondary market transactions prior to the maturity of the 2022 Notes (and are likely to do so during any observation period related to a conversion of the 2022 Notes, or following any repurchase of the 2022 Notes by us on any fundamental change repurchase date (as defined in the indentures for the 2022 Notes)Indenture) or otherwise). This activity could also cause or avoid an increase or a decrease in the marketour stock price of our common stock or the 2022 Notes price, which could affect note holders’ ability to convert the 2022 Notes and, to the extent the activity occurs during any observation period related to a conversion of the 2022 Notes, it could affect the amount and value of the consideration that note holders will receive upon conversion of the 2022 Notes.

The potential effect, if any, of these transactions and activities on the marketour stock price of our common stock or the 2022 Notes price will depend in part on market conditions and cannot be ascertained at this time. Any of these activities could adversely affect the value of our common stock and the value of the 2022 Notes (and as a result, the value of the consideration, theresulting amount of cash and/or the number of shares, if any, that note holders would receive upon the conversion of any 2022 Notes)conversion) and, under certain circumstances, the ability of the note holders to convert the 2022 Notes.

We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the price of the 2022 Notes or our common stock. In addition, we do not make any representation that the option counterparties will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

Our principal office is located in Santa Clara, California, where we lease approximately 608,000 square feet of space under three lease agreements.agreements for our business operations and product development. We also have approximately 510,000 square feet of expansion space that is currently under development by the landlord under two additional lease agreements. We also maintain offices in various North American, South American, European and Asian countries.countries and in Australia. All of our properties are currently leased. We believe our existing facilities are adequate to meet our current requirements. See Note 18 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information about our lease commitments. We expect to expand our facilities capacity as our employee base grows. We believe we will be able to obtain such space on acceptable and commercially reasonable terms.

From time to time, we are party to litigation and other legal proceedings in the ordinary course of business. While the results of any litigation or other legal proceedings are uncertain, we are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, financial position, results of operations or cash flows.

Our common stock is listed on the New York Stock Exchange under the symbol “NOW.”

Our board of directors currently intends to retain any future earnings to support operations and to finance the growth and development of our business, and therefore does not intend to pay cash dividends on our common stock for the foreseeable future.

As of December 31, 2018,2019, there were 107 registered stockholders of record (not including an indeterminate number of beneficial holders of stock held in street name through brokers and other intermediaries) of our common stock.

The information required by this item will be included in an amendment to this Annual Report on Form 10-K or incorporated by reference from our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A.

The following shall not be deemed incorporated by reference into any of our other filings under the Securities Exchange Act of 1934, as amended (the Exchange Act) or the Securities Act except to the extent we specifically incorporate it by reference into such filing.

The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the NYSE Composite Index and the Standard & Poor Systems Software Index for each of the last five fiscal years ended December 31, 20142015 through December 31, 2018,2019, assuming an initial investment of $100. Data for the NYSE Composite Index and the Standard & Poor Systems Software Index assume reinvestment of dividends.

The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.

The following selected consolidated financial data should be read together with our consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearingOperations,” which are included elsewhere in this filing. Annual Report on Form 10-K.

The selected consolidated statements of operationscomprehensive income (loss) data for each of the years ended December 31, 2019, 2018 2017 and 20162017 and the selected consolidated balance sheet data as of December 31, 20182019 and 20172018 set forth in the tables below have been updated to comply with the new standards under Topic 606, including previously reported amounts, which are labeled “as adjusted.”derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated statements of operationscomprehensive income (loss) data for the each of the years endended December 31, 20152016 and 20142015 and the selected consolidated balance sheet data as of December 31, 2017, 2016 2015 and 20142015 set forth in the tables below doare derived from audited consolidated financial statements which are not reflect the adoption of Topic 606 and continue to be reported under the standardsincluded in effect for those periods.this Annual Report on Form 10-K. The selected consolidated financial data in this section are not intended to replace our consolidated financial statements and the related notes. Our historical results are not necessarily indicative of our future results.

 

ServiceNow,ServiceNow’s purpose is to make the company that makesworld of work, work better for people. We believe that people is a leading provider of enterprise cloud computing services that define, structure, manage and automate digital workflows for global enterprises. We deliver digital workflowsshould work the way they want to, so we build applications that help our customersautomate 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 and unlock productivity.follow. We typicallyprimarily deliver our software via the Internet as a service through ana simple and easy-to-use consumer product-like interface which means itso that we can berapidly deploy our packaged offerings, and customers can easily configured and rapidly deployed.build their custom applications. In a minority of cases, customers deploychoose to host our software internallyby themselves or contract withthrough a third party to host the software to support their unique regulatory or security requirements.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 generate salessell our products as subscription services and primarily through direct sales. We also offer professional services, both directly and through partners, to help our direct sales teamcustomers understand and to a lesser extent, indirectly through resale partnersutilize our products and third-party referrals.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 their ServiceNow 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. We increased our overall employee headcount to 8,154 as of December 31, 2018 from 6,222 as of December 31, 2017.

Revenues

We generate sales directlysell our subscription services primarily through our direct sales teamorganization. We also sell services through managed services providers and to a lesser extent, indirectly through resale partners. We also offer a portfoliogenerate revenues from certain professional services and for training of professionalcustomers and other services,partner personnel, through both directlyour direct team and through our network of partners.indirect channel sales. Revenues from our direct sales organization represented 82%, 84% for the year ended December 31, 2018, and 88% for each of the years ended December 31, 2019, 2018 and 2017, and 2016.respectively. For purposes of this disclosure,calculating revenues from our direct sales organization, revenues from systems integrators and managed services providers are included as revenues from ourpart 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

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 18%15%, 22%18% and 21%22% for the years ended December 31, 2019, 2018 2017 and 2016,2017, 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, and third-party referral fees, 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. As part of our adoption of Topic 606, during the year ended December 31, 2018, we recorded a decrease in sales and marketing expenses and a corresponding increase to our deferred commissions asset of $5.4 million. These adjustments reflect the correction of previously undercapitalized incremental fringe benefit costs associated with sales commissions that were paid since 2012. We concluded that these adjustments were not material to the current period or any previously reported periods presented, as adjusted for the full retrospective adoption of Topic 606.

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 amortization of intangible assets 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.

Provision for income taxes consists of federal, state and foreign income taxes. Due to cumulative losses, we maintain a valuation allowance against our U.S. and certain foreign deferred tax assets as of December 31, 20182019 and 2017.2018. 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 our U.S. and foreign deferred tax assets.

Subscription revenues increased $681.8$833.8 million during the year ended December 31, 2018,2019, compared to the prior year, driven by increased purchases by existing customers and an increase in customer count. Included in subscription revenues is $118.5$164.1 million and $80.2$118.5 million of revenues recognized upfront from the delivery of software associated with self-hosted offerings during the year ended December 31, 20182019 and 2017,2018, respectively. We expect subscription revenues for the year ending December 31, 2020 to growincrease in absolute dollars as we continue to add new customers and existing customers increase their usage of our products, but remain relatively flatand increase slightly as a percentage of total revenues incompared to the year endingended December 31, 2019. Our expectations for revenues, cost of revenues and operating expenses for the year ending December 31, 20192020 are based on foreign exchange rates as of December 31, 2018.2019.

Cost of subscription revenues increased $101.9$132.2 million during the year ended December 31, 2018,2019, compared to the prior year, primarily due to increased headcount resulting in an increase of $31.4$30.1 million in personnel-related costs excluding stock-based compensation, an increase of $13.4$24.0 million in stock-based compensation and an increase of $9.2$10.8 million in other overhead expenses. Depreciation expense increased $22.7The remaining increase of $61.7 million was primarily due to purchases of infrastructureincreases in data center hardware, equipment for our data centers and expenses associated with software and IT services and technicalmaintenance costs to support increased $10.3 million. In addition, data center capacity costs increased $6.3 million due to the addition of new data centers and the expansion of existingour data centers, amortizationcenter capacity. Amortization of intangibles increased $4.1$5.1 million as a result of acquisitions and outside service costs increased $3.1 million due to an increase in contractors to support our customer contracts.current year acquisitions.

Our subscription gross profit percentage increased towas 83% for each of the yearyears ended December 31, 2018, from 82% for the year ended December 31, 2017, due to improved data center utilization2019 and economies of scale.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 ended December 31, 20182019 and 2017.2018. We expect our cost of subscription revenues to increase in absolute dollar termsdollars as we provide subscription services to more customers and increase usage within our customer instances, but we expect such increase to be at a slower rate than the increase in our subscription revenues, leading to a slight increase inand our subscription gross profit percentage to remain relatively flat for the year ending December 31, 2019 as we continue2020 compared to leverage the investments we have made in our existing data center infrastructure.year ended December 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 $20.9$41.8 million during the year ended December 31, 20182019 compared to the prior year, primarily due to increased headcount resulting in an increase of $17.3$24.9 million in personnel-related costs excluding stock-based compensation, an increase of $5.4$10.3 million in stock-based compensation and an increase of $3.0$5.4 million in overhead expenses, partially offset by a decrease in outside service costs of $4.4 million, primarily due to a decrease in professional services performed by contracted third-party partners.expenses.

Our professional services and other gross loss percentage increased to 9%20% during the year ended December 31, 2018,2019, compared to 3%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 newer products.expanding product portfolio and new on-demand training, increasing the training content available online.

Sales and Marketing

Sales and marketing expenses increased $308.1$331.2 million during the year ended December 31, 2018,2019, compared to the prior year, primarily due to increased headcount resulting in an increase of $115.5$154.8 million in personnel-related costs excluding stock-based compensation and commissions, an increase of $57.5$40.4 million in stock-based compensation and an increase of $27.6$37.1 million in overhead expenses. Expenses associated with commissions and third-party referral fees increased $46.9$26.2 million for the year ended December 31, 20182019 compared to the prior year, due to an increase in contracts with new customers, expansion and renewal contracts. Amortization expenses associated with commissions and third-party referral fees, including as applicable their related payroll taxes and fringe benefits, amounted to 6% of subscription revenues for each of the years ended December 31, 2018 and 2017. Outside services costs increased $10.1$12.3 million during the year ended December 31, 20172019 compared to the prior year, primarily due to an increase in contractors and professional fees to support our sales and marketing functions. MarketingBranding and marketing program expenses, which include events other than Knowledge, and costs associated with purchasing advertising and market data, increased $36.2$56.9 million for the year ended December 31, 20182019 compared to the prior year. Expenses related to Knowledge, net of proceeds increased $6.8 million due to a 21% year-over-year increase in registrations. Loss from write-off of property and equipment increased $4.6 million for the year ended December 31, 2018 compared to the prior year primarily due to write off of internal-use software.

We expect sales and marketing expenses to increase in absolute dollar terms for the year ending December 31, 2019 compared2020 to the year ended December 31, 2018,increase in absolute dollars as we continue to expand our direct sales force,organization, increase our marketing activities, grow our international operations and build brand awareness, but decrease slightly as a percentage of total revenues.revenues compared to the year ended December 31, 2019.