ServiceNow, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section of our Annual Report on Form 10-K discusses our financial condition and results of operations for the fiscal years ended December 31, 2022 and 2021, and year-to-year comparisons between fiscal 2022 and fiscal 2021 in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). A discussion of our financial condition and results of operations for the fiscal year ended December 31, 2020 and year-to-year comparisons between fiscal 2021 and fiscal 2020 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 ended December 31, 2021, filed on February 3, 2022. Our free cash flow measure included in the section entitled “—Key Business Metrics—Free Cash Flow,” is not in accordance with GAAP. This non-GAAP financial measure is not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. This measure may be different from non-GAAP financial measures used by other companies, limiting its 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. Overview ServiceNow was founded on a simple premise: a better technology platform will help work flow better. Our purpose is to make the world work better for everyone. We help global enterprises across industries, universities and governments to digitize their workflows. The Now Platform, seamlessly connects workflows across siloed organizations and systems in a way that unlocks productivity, improves experiences for both employees and customers and delivers real business outcomes. We organize our workflow applications along four primary areas: Technology, Customer and Industry, Employee and Creator. The Now Platform enables our customers’ digital transformation from non-integrated enterprise technology solutions with manual and disconnected processes and activities, to integrated enterprise technology solutions with automation and connected processes and activities. The transformation to digital operations, enabled by the Now Platform, increases our customers’ resiliency and security and delivers great experiences and additional value to their employees and consumers. We are closely monitoring the unfolding events of the Russian invasion of Ukraine. While the Russia-Ukraine conflict is still evolving and the outcome remains highly uncertain, we do not believe the Russia-Ukraine conflict will have a material impact on our business and results of operations. However, if the Russia-Ukraine conflict continues or worsens, leading to greater global economic disruptions and uncertainty, our business and results of operations could be materially impacted. Our customers in Russia represented an immaterial portion of our net assets and total consolidated revenues both as of and for the year ended December 31, 2022 and December 31, 2021. See the “Risk Factors” section in Part I, Item 1A of this Annual Report for further discussion of the possible impact of the Russia-Ukraine conflict on our business . 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. 30 Table of Contents As of December 31, 2022, our RPO was $14 billion, of which 49% represented cRPO. RPO and cRPO increased by 22%, respectively, compared to December 31, 2021. Factors that may cause our RPO to vary from period to period include the following: • Foreign currency exchange rates . While a majority of our contracts have historically been in U.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. • 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 the U.S. federal government throughout the year, with the highest number of agreements entered into in the quarter ended September 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 1,637, 1,346, and 1,082 customers with ACV greater than $1 million as of December 31, 2022, 2021 and 2020, 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 the ServiceNow customer. For example, while all U.S. government agencies roll up to “Government of the United States” under the GULT, we count each government agency that we contract with as a separate customer. Our customer count 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: 31 Table of Contents Year Ended December 31, 2022 2021 2020 (in millions) Free cash flow: Net cash provided by operating activities $ 2,723 $ 2,191 $ 1,786 Purchases of property and equipment (550) (392) (419) Free cash flow (1) $ 2,173 $ 1,799 $ 1,367 (1) Free cash flow for the years ended December 31, 2021 and 2020 include the effect of $15 million and $82 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 ended March 31 due to seasonality in timing of entering into customer contracts, which is significantly higher in the quarter ended December 31. Additionally, we have historically seen higher disbursements in the quarters ended March 31 and September 30 due to payouts under our annual commission plans, purchases under our employee stock purchase plan, payouts under our bonus plans and coupon payments related to our 2030 Notes beginning in 2021. 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 renewals. 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. Our renewal rate was 98% for each of the years ended December 31, 2022, 2021 and 2020. 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. 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. 32 Table of Contents 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. 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 consistent with prior year. 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 management 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. The Company evaluates these estimates and assumptions as new information is obtained and may record adjustments to the fair value of the tangible and intangible assets acquired and liabilities assumed but not later than one year from the acquisition date. 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. 33 Table of Contents 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. Due to cumulative losses, including tax deductible stock compensation, 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, 2022. 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, cumulative losses including tax deductible stock compensation expense, future growth, forecasted earnings and future taxable income. However, given our current earnings, anticipated future earnings and future taxable income, we believe there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that the U.S. valuation allowance will no longer be needed. The exact timing and amount of the valuation allowance release are subject to change on the basis of the level of sustained U.S. profitability that the Company is able to actually achieve, as well as the amount of tax deductible stock compensation dependent upon our publicly traded share price, foreign currency movements and macroeconomic conditions, among other factors. See Note 16 – Income Taxes, in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information on discussion on valuation allowance. 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. Change in Accounting Estimate See Note 2 —Summary of Significant Accounting Policies — Use of Estimates, of the notes to our consolidated financial statements included in this Annual Report on Form 10-K for additional information on our change in estimated useful life of our data center equipment during 2022. 34 Table of Contents 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. Professional services revenues are recognized as services are delivered. Other revenues primarily consist of fees from customer training delivered on-site or through publicly available classes. Typical payment terms require our customers to pay us within 30 days of invoice. We sell our subscription services primarily through our direct sales organization. We also sell services through managed 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 79%, 79% and 81% of our total revenues for the years ended December 31, 2022, 2021 and 2020, 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. Seasonality . We have historically experienced seasonality in terms of when we enter into customer agreements. 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 by December 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 of entering into customer agreements is sometimes 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, leading to a higher RPO in the fourth quarter. 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. 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, public cloud service costs, 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 12%, 14% and 10% for the years ended December 31, 2022, 2021 and 2020, respectively. 35 Table of Contents 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. In addition, sales and marketing expenses include branding expenses, marketing program expenses, which include events such as 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. Provision for Income Taxes Provision for income taxes consist of federal, state and foreign income taxes. Due to cumulative losses, we maintain a valuation allowance against our U.S. deferred tax assets as of December 31, 2022 and 2021. 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. Comparison of the years ended December 31, 2022 and 2021 Revenues Year Ended December 31, % Change 2022 2021 (dollars in millions) Revenues: Subscription $ 6,891 $ 5,573 24 % Professional services and other 354 323 10 % Total revenues $ 7,245 $ 5,896 23 % Percentage of revenues: Subscription 95 % 95 % Professional services and other 5 % 5 % Total 100 % 100 % Subscription revenues increased by $1.3 billion for the year ended December 31, 2022, compared to the prior year, primarily driven by increased purchases by new and existing customers. Included in subscription revenues is $253 million and $241 million of revenues recognized upfront from the delivery of software associated with self-hosted offerings during the years ended December 31, 2022 and 2021, respectively. 36 Table of Contents We expect subscription revenues for the year ending December 31, 2023 to increase in absolute dollars and increase slightly as a percentage of revenue as we continue to add new customers and existing customers increase their usage of our products compared to the year ended December 31, 2022. Our expectations for revenues, cost of revenues and operating expenses for the year ending December 31, 2023 are based on the 31-day average of foreign exchange rates for December 31, 2022. Subscription revenues consist of the following: Year Ended December 31, % Change 2022 2021 (dollars in millions) Digital workflow products $ 6,077 $ 4,882 24 % ITOM products 814 691 18 % Total subscription revenues $ 6,891 $ 5,573 24 % Our digital workflow products include the Now Platform, IT Service Management, Strategic Portfolio Management (formerly known as IT Business Management), IT Asset Management and Enterprise Management, Security Operations, Integrated Risk Management (formerly, Governance, Risk and Compliance), ESG Management, HR Service Delivery, Workplace Service Delivery, Legal Service Delivery, Customer Service Management, Field Service Management, Industry Solutions, App Engine, Automation Engine, Platform Privacy and Security, Procurement Operation Management and Impact are generally priced on a per user basis. Our IT Operations Management (“ITOM”) products are generally priced on a subscription unit basis, which allows us to measure customers’ management of various IT resources, and decreasingly on a per node (physical or virtual server) basis. Professional services and other revenues increased by $31 million for the year ended December 31, 2022, 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, 2023 to decrease in absolute dollars and to decrease slightly as a percentage of revenue compared to the year ended December 31, 2022. We continue to be focused on deploying our internal professional services organization as a strategic resource and working with our partner ecosystem to contract directly with customers for implementation services delivery. Cost of Revenues and Gross Profit Percentage Year Ended December 31, % Change 2022 2021 (dollars in millions) Cost of revenues: Subscription $ 1,187 $ 1,022 16 % Professional services and other 386 331 17 % Total cost of revenues $ 1,573 $ 1,353 16 % Gross profit percentage: Subscription 83 % 82 % Professional services and other (9) % (2) % Total gross profit percentage 78 % 77 % Gross profit: $ 5,672 $ 4,543 25 % 37 Table of Contents Cost of subscription revenues increased by $165 million for the year ended December 31, 2022, compared to the prior year, primarily due to increased headcount and increased costs to support the growth of our subscription offerings including costs to support customers in regulated markets. Personnel-related costs including stock-based compensation and overhead expenses increased by $142 million as compared to prior year. Maintenance costs to support the expansion of our data center capacity, including public cloud service costs, increased by $46 million and amortization of intangible assets increased by $8 million as a result of recent acquisitions as compared to the prior year. Depreciation expense related to data center hardware and software decreased by $45 million, primarily due to the change in estimated useful life of data center equipment from three years to four years, for the year ended December 31, 2022, as compared to prior year. We expect our cost of subscription revenues for the year ending December 31, 2023 to increase in absolute dollars as we provide subscription services to more customers and increase usage within our customer instances and to increase slightly as a percentage of revenue compared to the year ended December 31, 2022. We will continue to incur incremental costs to attract customers in regulated markets by adopting public cloud offerings as well as increased support for customers impacted by new and evolving data residency requirements. To the extent future acquisitions are consummated, our cost of subscription revenues may increase due to additional non-cash charges associated with the amortization of intangible assets acquired. Our subscription gross profit percentage was 83% and 82% for the years ended December 31, 2022 and 2021, respectively. We expect our subscription gross profit percentage to decrease slightly for the year ending December 31, 2023 compared to the year ended December 31, 2022. Cost of professional services and other revenues increased by $55 million for the year ended December 31, 2022 as compared to the prior year. The increase was primarily due to increased headcount to support growth resulting in an increase in personnel-related costs including stock-based compensation, travel and overhead expenses. Our professional services and other gross loss percentage increased to 9% for the year ended December 31, 2022, compared to 2% in the prior year, primarily driven by planned increase in headcount costs to support the business growth, increase in travel expense for customer implementations and investment in strategic initiatives. We expect our professional services and other gross loss percentage to increase for the year ending December 31, 2023 compared to the year ended December 31, 2022. Sales and Marketing Year Ended December 31, % Change 2022 2021 (dollars in millions) Sales and marketing $ 2,814 $ 2,292 23 % Percentage of revenues 39 % 39 % Sales and marketing expenses increased by $522 million for the year ended December 31, 2022, compared to the prior year, primarily due to increased headcount resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of $411 million, compared to the prior year. Amortization expenses associated with deferred commissions increased by $68 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, costs associated with purchasing advertising, marketing events and market data, increased by $33 million compared to the prior year, primarily due to increased program costs and travel for our annual Knowledge user conference. We expect sales and marketing expenses for the year ending December 31, 2023 to increase in absolute dollars and to decrease slightly as a percentage of revenue compared to the year ended December 31, 2022, as we continue to see leverage from increased sales productivity and marketing efficiencies offset by growth in our international operations in 2023. Research and Development Year Ended December 31, % Change 2022 2021 (dollars in millions) Research and development $ 1,768 $ 1,397 27 % Percentage of revenues 24 % 24 % 38 Table of Contents Research and development expenses (“R&D”) increased by $371 million during the year ended December 31, 2022, compared to the prior year, primarily due to increased headcount resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of $363 million compared to prior year. We expect R&D expenses for the year ending December 31, 2023 to increase in absolute dollars, but remain relatively flat as a percentage of revenue compared to the year ended December 31, 2022, as we continue to improve the existing functionality of our services, develop new applications to fill market needs and enhance our core platform. General and Administrative Year Ended December 31, % Change 2022 2021 (dollars in millions) General and administrative $ 735 $ 597 23 % Percentage of revenues 10 % 10 % General and administrative expenses (“G&A”) increased by $138 million during the year ended December 31, 2022, compared to the prior year, primarily due to increased headcount resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of $142 million. We expect G&A expenses for the year ending December 31, 2023 to increase in absolute dollars but remain relatively flat as a percentage of revenue compared to the year ended December 31, 2022, as we continue to see leverage from continued G&A productivity. Stock-based Compensation Year Ended December 31, % Change 2022 2021 (dollars in millions) Cost of revenues: Subscription $ 157 $ 128 23 % Professional services and other 67 59 14 % Sales and marketing 459 389 18 % Research and development 495 395 25 % General and administrative 223 160 39 % Total stock-based compensation $ 1,401 $ 1,131 24 % Percentage of revenues 19 % 19 % Stock-based compensation increased by $270 million during the year ended December 31, 2022, compared to the prior year, primarily due to additional grants to current and new employees. Stock-based compensation is inherently difficult to forecast due to fluctuations in our stock price. Based upon our stock price as of December 31, 2022, we expect stock-based compensation to continue to increase in absolute dollars for the year ending December 31, 2023 as we continue to issue stock-based awards to our employees, but decrease slightly as a percentage of revenue compared to the year ended December 31, 2022. We expect stock-based compensation as a percentage of revenue to decline over time as we continue to grow. 39 Table of Contents Foreign Currency Exchange Our international operations have provided and will continue to provide a significant portion of our total revenues. Revenues outside North America represented 35% and 36% of total revenues for the years ended December 31, 2022 and 2021, respectively. Because we primarily transact in foreign currencies for sales outside of the United States, the general strengthening of the U.S. Dollar relative to other major foreign currencies (primarily the Euro and British Pound Sterling) during the year ended December 31, 2022 had an unfavorable impact on our revenues. For entities reporting in currencies other than the U.S. Dollar, if we had translated our results for the year ended December 31, 2022 at the exchange rates in effect for the year ended December 31, 2021 rather than the actual exchange rates in effect during the period, our reported subscription revenues and professional services and other revenues would have been $274 million and $19 million higher fo r the year ended December 31, 2022, respectively. In addition, because we primarily transact in foreign currencies for cost of revenues and operating expenses outside of the United States, the general strengthening of the U.S. Dollar relative to other major foreign currencies had a favorable impact on our cost of revenue, sales and marketing expense and R&D expenses during the year ended December 31, 2022. For entities reporting in currencies other than the U.S. Dollar, if we had translated our results for the year ended December 31, 2022 at the exchange rates in effect for the year ended December 31, 2021 rather than the actual exchange rates in effect during the period, our reported cost of revenues, sales and marketing and R&D expenses would have been $48 million, $78 million and $19 million higher for the year ended December 31, 2022, respectively. The impact from the foreign currency movements from the year ended December 31, 2021 to the year ended December 31, 2022 was not material to G&A expenses. Interest Expense Year Ended December 31, % Change 2022 2021 (dollars in millions) Interest expense $ (27) $ (28) (4 %) Percentage of revenues — % — % Interest expense decreased during the year ended December 31, 2022, compared to the prior year. For the year ending December 31, 2023, we expect to incur approximately $23 million of interest expense related to the 2030 Notes. Other Income (Expense), net Year Ended December 31, % Change 2022 2021 (dollars in millions) Interest income $ 82 $ 20 310 % Other (11) — NM Other income (expense), net $ 71 $ 20 255 % NM - Not meaningful Other income (expense), net increased by $51 million during the year ended December 31, 2022, compared to the prior year, primarily driven by an increase in investment income from our managed portfolio resulting from the increase in interest rates. 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. The gains (losses) recognized for these foreign currency forward contracts in other income (expense), net were immaterial for the years ended December 31, 2022 and 2021. 40 Table of Contents Provision for Income Taxes Year Ended December 31, % Change 2022 2021 (dollars in millions) Income before income taxes $ 399 $ 249 60 % Provision for income taxes 74 19 289 % Effective tax rate 19 % 8 % 138 % Our effective tax rate was 19% and 8% for the year ended December 31, 2022 and December 31, 2021. The difference in rates was primarily attributable to revaluation of our deferred taxes to account for a change in United Kingdom tax rate and a partial valuation allowance related to acquired Lightstep, Inc. deferred tax liabilities in the year ended December 31, 2021. The income tax provision for the year ended December 31, 2022 was primarily attributable to the mix of earnings and losses in foreign jurisdictions with differing tax rates, state tax expense and the valuation allowance in the United States. We continue to maintain a full valuation allowance on our U.S. federal and state deferred tax assets and the significant components of the tax 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 our U.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. See Note 16– Income Taxes, 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. Liquidity and Capital Resources We generate cash inflows from operations primarily from selling subscription services which are generally paid in advance of provisioning services, and cash outflows to develop new services and core technologies that further enhance the Now Platform, engage our customer and enhance their experience, and enable and transform our business operations. Subscription services arrangements typically have a three-year duration, and we have experienced a renewal rate of 98% for the years ended December 31, 2022, 2021 and 2020. Cash outflows from operations are principally comprised of the salaries, bonuses, commissions, and benefits for our workforce; licenses and services arrangements that are integral to our business operations and data centers; and operating lease arrangements that underlie our facilities. We have generated positive operating cash flows for more than ten years as we continue to grow our business in pursuit of our business strategy, and we expect to grow our business and generate positive cash flows from operations during 2023. When assessing sources of liquidity, we also include cash and cash equivalents, short-term investments and long-term investments totaling $6.4 billion as of December 31, 2022. Our working capital requirements are principally comprised of non-contract workforce salaries, bonuses, commissions, and benefits and, to a lesser extent, cancellable and non-cancelable licenses and services arrangements that are integral to our business operations, and operating lease obligations. In addition, we made the payment for the investment in Celonis SE of $100 million during the year ended December 31, 2022. Non-cancelable purchase commitments for business operations total $1,271 million as of December 31, 2022, due primarily over the next five years. Operating lease obligations totaling $895 million are principally associated with leased facilities and have varying maturities with $467 million due over the next five years. 41 Table of Contents To grow our business, we also invest in capital and other resources to expand our data centers and enable our workforce, and we acquire technology and businesses to supplement our technology portfolio. Our capital expenditures are typically under cancelable arrangements primarily used to support the installed base and growth of our hosted business. We have also issued long-term debt to finance our business . In August 2020, we issued 1.40% fixed rate ten-year notes with an aggregate principal amount of $1.5 billion due on September 1, 2030 (the “2030 Notes”). In May and June 2017, we issued the 2022 Notes with an aggregate principal amount of $782.5 million. During the year ended December 31, 2022, we paid cash to settle $94 million in principal of the 2022 Notes, which was comprised of early conversions of $6 million and remaining principal of $88 million for final settlement on June 1, 2022, the maturity date of our 2022 Notes. Our free cash flows, together with our other sources of liquidity, are available to service our liabilities as well as our cancellable and non-cancellable arrangements. We anticipate cash flows generated from operations, cash, cash equivalents and investments will be sufficient to meet our liquidity needs for at least the next 12 months. As we look beyond the next 12 months, we seek to continue to grow free cash flows necessary to fund our operations and grow our business. If we require additional capital resources, we may seek to finance our operations from the current funds available or additional equity or debt financing. Year Ended December 31, 2022 2021 (in millions) Net cash provided by operating activities $ 2,723 $ 2,191 Net cash used in investing activities (2,583) (1,607) Net cash used in financing activities (344) (506) Net (decrease)/increase in cash, cash equivalents and restricted cash (257) 53 Operating Activities Net cash provided by operating activities was $2.7 billion for the year ended December 31, 2022 compared to $2.2 billion for the prior year. The net increase in operating cash flow was primarily due to higher collections driven by revenue growth. Investing Activities Net cash used in investing activities for the year ended December 31, 2022 was $2.6 billion compared to $1.6 billion for the prior year. The net increase in cash used in investing activities was primarily due to a $1,427 million increase in net purchases of investments, a $96 million increase in non-marketable investments mainly in Celonis SE and a $158 million increase in purchases of property and equipment, offset by a $694 million decrease in business combinations. Financing Activities Net cash used in financing activities for the year ended December 31, 2022 was $344 million compared to $506 million for the prior year. The net decrease in cash used in financing activities is primarily due to a $185 million decrease in taxes paid related to net share settlement of equity awards, a $10 million increase in proceeds from employee stock plans, offset by a $33 million increase in repayments of convertible senior notes attributable to principal. Contractual Obligations and Commitments Our estimated future obligations consist of leases, a non-cancelable $500 million agreement with Microsoft to purchase cloud services over five years for accelerating the Azure adoption for mutual customers, purchase obligations, debt and unrecognized tax benefits as of December 31, 2022. Refer to Note 17 “Commitments and Contingencies” to our consolidated financial statements included in this Annual Report on Form 10-K for more information. 42 Table of Contents ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Currency Exchange Risk We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. Dollar, primarily the Euro and British Pound Sterling. We are a net receiver of Euro and British Pound Sterling, and therefore benefit from a weakening of the U.S. Dollar relative to these currencies and, conversely, are adversely affected by a strengthening of the U.S. Dollar relative to these currencies. Revenues denominated in U.S. Dollar as a percentage of total revenues was 72%, 70% and 71% for the years ended December 31, 2022, 2021 and 2020, respectively. A hypothetical 10% increase in the U.S. Dollar against other currencies would have resulted in a decrease in operating income of $75 million, $62 million and $47 million for the years ended December 31, 2022, 2021 and 2020, respectively. This analysis disregards the possibilities that rates can move in opposite directions and that losses from one geographic area may be offset by gains from another geographic area. To mitigate our risks associated with fluctuations in foreign currency exchange rates, we enter into foreign currency derivative contracts to hedge a portion of our net outstanding monetary assets and liabilities. These derivative contracts are intended to offset gains or losses related to remeasuring monetary assets and liabilities that are denominated in currencies other than the functional currency of the entities in which they are recorded. These derivative contracts expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the arrangement. We mitigate this credit risk by transacting with major financial institutions with high credit ratings and entering into master netting arrangements, which permit net settlement of transactions with the same counterparty. While the contract or notional amount is often used to express the volume of foreign currency derivative contracts, the amounts potentially subject to credit risk are generally limited to the amounts, if any, by which the counterparties’ obligations under the agreements exceed our obligations to the counterparties. We are not required to pledge, and are not entitled to receive, cash collateral related to these derivative instruments. We do not enter into derivative contracts for trading or speculative purposes. Refer to Note 8 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. Interest Rate Sensitivity We had an aggregate of $6.4 billion in cash, cash equivalents, short-term investments and long-term investments as of December 31, 2022. This amount was invested primarily in money market funds, certificates of deposit, corporate notes and bonds, government and agency securities and other debt securities with a minimum rating of BBB by Standard & Poor’s, Baa2 by Moody’s or BBB by Fitch. The primary objectives of our investment activities are the preservation of capital and support of our liquidity requirements. Our investments are exposed to market risk due to fluctuations in interest rates, which may affect our interest income and the fair market value of our investments. As of December 31, 2022, a hypothetical 100 basis point increase in interest rates would have resulted in an approximate $39 million decline of the fair value of our available-for-sale securities. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur. As of December 31, 2021, we had an aggregate of $4.9 billion in cash, cash equivalents, short-term investments and long-term investments, and a hypothetical 100 basis point increase in interest rates would have resulted in an approximate $30 million decline of the fair value of our available-for-sale securities. 43 Table of Contents Market Risk In August 2020, we issued 1.40% fixed rate ten-year notes with an aggregate principal amount of $1.5 billion due on September 1, 2030. The 2030 Notes were issued at 99.63% of principal and we incurred approximately $13 million of debt issuance costs. Interest is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2021, and the entire outstanding principal amount is due at maturity on September 1, 2030. The 2030 Notes are unsecured obligations and the indentures governing the 2030 Notes contain customary events of default and 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 and June 2017, we issued the 2022 Notes with an aggregate principal amount of $782.5 million. These 2022 Notes were recorded at face value less unamortized discount on our consolidated balance sheet. Because these instruments do not bear interest, we had no economic interest rate exposure associated with changes in interest rates. However, the fair value of our 2022 Notes was exposed to interest rate risks. In addition, the fair value of the 2022 Notes was affected by our stock price due to the conversion feature and would generally increase as the stock price increases. The remaining principal of 2022 Notes was settled on June 1, 2022. We hold cash balances with multiple financial institutions in various countries and these balances routinely exceed deposit insurance limits. As of December 31, 2022 and 2021, we had $252 million and $99 million, respectively, of non-marketable equity investments in privately held companies. Recording upward and downward adjustments to the carrying value of our non-marketable equity investments requires quantitative assessments of the fair value of our non-marketable equity investments using various valuation methodologies and involves the use of estimates. The timing and amount of observable price changes are influenced by market dynamics that can impact the valuation of our non-marketable equity investments. These changes could be material based on market conditions and events. 44 Table of Contents ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA SERVICENOW, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 46 Consolidated Financial Statements Consolidated Balance Sheets 48 Consolidated Statements of Comprehensive Income 49 Consolidated Statements of Stockholders’ Equity 50 Consolidated Statements of Cash Flows 51 Notes to Consolidated Financial Statements 52 45 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of ServiceNow, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of ServiceNow, Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 46 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Subscription revenue recognition - customer contracts with multiple performance obligations As described in Note 2 to the consolidated financial statements, the Company enters 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. Subscription revenues include self-hosted offerings in which customers deploy, or the Company grants customers the option to deploy without significant penalty, the Company’s subscription services internally or contract with a third party to host the software. For these contracts, management accounts for the software element separately from the related support and updates as they are distinct performance obligations. 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. As disclosed by management, evaluating the terms and conditions included within the Company’s 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. The Company recognized subscription revenues of $6.9 billion for the year ended December 31, 2022. The principal consideration for our determination that performing procedures relating to subscription revenue recognition for customer contracts with multiple performance obligations is a critical audit matter is the matter involved significant audit effort in performing procedures related to management’s identification of distinct performance obligations. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the identification of performance obligations and evaluation of the terms and conditions within the customer contracts for appropriate revenue recognition. These procedures also included, among others, testing management’s process for identifying distinct performance obligations and evaluating the terms and conditions within the customer contracts by examining the customer contracts on a test basis for appropriate revenue recognition. /s/ PricewaterhouseCoopers LLP San Jose, California January 30, 2023 We have served as the Company’s auditor since 2011. 47 Table of Contents SERVICENOW, INC. CONSOLIDATED BALANCE SHEETS (in millions, except number of shares which are reflected in thousands and per share data) December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 1,470 $ 1,728 Short-term investments 2,810 1,576 Accounts receivable, net 1,725 1,390 Current portion of deferred commissions 369 303 Prepaid expenses and other current assets 280 223 Total current assets 6,654 5,220 Deferred commissions, less current portion 742 623 Long-term investments 2,117 1,630 Property and equipment, net 1,053 766 Operating lease right-of-use assets 682 591 Intangible assets, net 232 287 Goodwill 824 777 Deferred tax assets 636 692 Other assets 359 212 Total assets $ 13,299 $ 10,798 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 274 $ 89 Accrued expenses and other current liabilities 975 850 Current portion of deferred revenue 4,660 3,836 Current portion of operating lease liabilities 96 82 Current debt, net — 92 Total current liabilities 6,005 4,949 Deferred revenue, less current portion 70 63 Operating lease liabilities, less current portion 650 556 Long-term debt, net 1,486 1,484 Other long-term liabilities 56 51 Total liabilities 8,267 7,103 Commitments and contingencies Stockholders’ equity: Preferred stock, $ 0.001 par value; 10,000 shares authorized; no shares issued or outstanding — — Common stock, $ 0.001 par value; 600,000 shares authorized; 202,882 and 199,608 shares issued and outstanding at December 31, 2022 and 2021, respectively — — Additional paid-in capital 4,796 3,665 Accumulated other comprehensive income (loss) ( 102 ) 34 Retained earnings (accumulated deficit) 338 ( 4 ) Total stockholders’ equity 5,032 3,695 Total liabilities and stockholders’ equity $ 13,299 $ 10,798 See accompanying notes to consolidated financial statements 48 Table of Contents SERVICENOW, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in millions, except number of shares which are reflected in thousands and per share data) Year Ended December 31, 2022 2021 2020 Revenues: Subscription $ 6,891 $ 5,573 $ 4,286 Professional services and other 354 323 233 Total revenues 7,245 5,896 4,519 Cost of revenues (1) : Subscription 1,187 1,022 731 Professional services and other 386 331 256 Total cost of revenues 1,573 1,353 987 Gross profit 5,672 4,543 3,532 Operating expenses (1) : Sales and marketing 2,814 2,292 1,855 Research and development 1,768 1,397 1,024 General and administrative 735 597 454 Total operating expenses 5,317 4,286 3,333 Income from operations 355 257 199 Interest expense ( 27 ) ( 28 ) ( 33 ) Other income (expense), net 71 20 ( 16 ) Income before income taxes 399 249 150 Provision for income taxes 74 19 31 Net income $ 325 $ 230 $ 119 Net income per share - basic $ 1.61 $ 1.16 $ 0.61 Net income per share - diluted $ 1.60 $ 1.13 $ 0.59 Weighted-average shares used to compute net income per share - basic 201,430 198,094 193,096 Weighted-average shares used to compute net income per share - diluted 203,535 203,167 202,478 Other comprehensive income (loss): Foreign currency translation adjustments $ ( 70 ) $ ( 41 ) $ 66 Unrealized gains (losses) on investments, net of tax ( 66 ) ( 19 ) 3 Other comprehensive income (loss) ( 136 ) ( 60 ) 69 Comprehensive income $ 189 $ 170 $ 188 (1) Includes stock-based compensation as follows: Year Ended December 31, 2022 2021 2020 Cost of revenues: Subscription $ 157 $ 128 $ 98 Professional services and other 67 59 52 Operating expenses: Sales and marketing 459 389 320 Research and development 495 395 282 General and administrative 223 160 118 See accompanying notes to consolidated financial statements 49 Table of Contents SERVICENOW, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in millions, except number of shares which are reflected in thousands) Common Stock Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance at December 31, 2019 189,461 $ — $ 2,455 $ ( 353 ) $ 25 $ 2,127 Common stock issued under employee stock plans 4,099 — 152 — — 152 Taxes paid related to net share settlement of equity awards — — ( 509 ) — — ( 509 ) Stock-based compensation — — 874 — — 874 Settlement of 2022 Warrants 2,285 — — — — — Settlement of 2022 Notes conversion feature — — ( 1,377 ) — — ( 1,377 ) Benefit from exercise of 2022 Note Hedge — — 1,379 — — 1,379 Other comprehensive income, net of tax — — — — 69 69 Net income — — — 119 119 Balance at December 31, 2020 195,845 $ — $ 2,974 $ ( 234 ) $ 94 $ 2,834 Common stock issued under employee stock plans 3,227 — 168 — — 168 Taxes paid related to net share settlement of equity awards — — ( 612 ) — — ( 612 ) Stock-based compensation — — 1,130 — — 1,130 Shares granted related to business combination — — 6 — — 6 Settlement of 2022 Warrants 536 — — — — — Settlement of 2022 Notes conversion feature — — ( 225 ) — — ( 225 ) Benefit from exercise of 2022 Note Hedge — — 224 — — 224 Other comprehensive loss, net of tax — — — — ( 60 ) ( 60 ) Net income — — — 230 — 230 Balance at December 31, 2021 199,608 $ — $ 3,665 $ ( 4 ) $ 34 $ 3,695 Cumulative-effect adjustment from adoption of Accounting Standards Update (ASU) 2020-06 — — ( 19 ) 17 — ( 2 ) Common stock issued under employee stock plans 2,671 — 177 — — 177 Taxes paid related to net share settlement of equity awards — — ( 427 ) — — ( 427 ) Stock-based compensation — — 1,400 — — 1,400 Settlement of 2022 Warrants 603 — — — — — Settlement of 2022 Notes conversion feature — — ( 233 ) — — ( 233 ) Benefit from exercise of 2022 Note Hedge — — 233 — — 233 Other comprehensive loss, net of tax — — — — ( 136 ) ( 136 ) Net income — — — 325 — 325 Balance at December 31, 2022 202,882 $ — $ 4,796 $ 338 $ ( 102 ) $ 5,032 See accompanying notes to consolidated financial statements 50 Table of Contents SERVICENOW, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) Year Ended December 31, 2022 2021 2020 Cash flows from operating activities: Net income $ 325 $ 230 $ 119 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 433 472 336 Amortization of deferred commissions 358 294 218 Amortization of debt discount and issuance costs — 7 24 Stock-based compensation 1,401 1,131 870 Deferred income taxes 15 ( 34 ) ( 24 ) Repayments of convertible senior notes attributable to debt discount — ( 15 ) ( 82 ) Loss on extinguishment of 2022 Notes — 3 47 Other 17 45 ( 2 ) Changes in operating assets and liabilities, net of effect of business combinations: Accounts receivable ( 340 ) ( 401 ) ( 152 ) Deferred commissions ( 566 ) ( 565 ) ( 365 ) Prepaid expenses and other assets ( 39 ) ( 93 ) ( 55 ) Accounts payable 172 55 ( 34 ) Deferred revenue 904 960 711 Accrued expenses and other liabilities 43 102 175 Net cash provided by operating activities 2,723 2,191 1,786 Cash flows from investing activities: Purchases of property and equipment ( 550 ) ( 392 ) ( 419 ) Business combinations, net of cash acquired ( 91 ) ( 785 ) ( 107 ) Purchases of intangibles — ( 7 ) ( 13 ) Purchases of investments ( 4,038 ) ( 2,485 ) ( 2,922 ) Purchases of non-marketable investments ( 167 ) ( 71 ) ( 12 ) Sales and maturities of investments 2,245 2,119 1,965 Other 18 14 1 Net cash used in investing activities ( 2,583 ) ( 1,607 ) ( 1,507 ) Cash flows from financing activities: Net proceeds from borrowings on 2030 Notes — — 1,482 Repayments of convertible senior notes attributable to principal ( 94 ) ( 61 ) ( 1,628 ) Net proceeds from unwind of 2022 Note Hedge — — 1,106 Proceeds from employee stock plans 177 167 146 Taxes paid related to net share settlement of equity awards ( 427 ) ( 612 ) ( 509 ) Net cash provided by (used in) financing activities ( 344 ) ( 506 ) 597 Foreign currency effect on cash, cash equivalents and restricted cash ( 53 ) ( 25 ) 25 Net change in cash, cash equivalents and restricted cash ( 257 ) 53 901 Cash, cash equivalents and restricted cash at beginning of period 1,732 1,679 778 Cash, cash equivalents and restricted cash at end of period $ 1,475 $ 1,732 $ 1,679 Cash, cash equivalents and restricted cash at end of period: Cash and cash equivalents $ 1,470 $ 1,728 $ 1,677 Restricted cash included in prepaid expenses and other current assets 5 4 2 Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows $ 1,475 $ 1,732 $ 1,679 Supplemental disclosures of other cash flow information: Interest paid $ 24 $ 41 $ — Income taxes paid, net of refunds 45 36 39 Non-cash investing and financing activities: Settlement of 2022 Notes conversion feature 233 225 275 Benefit from exercise of 2022 Note Hedge 233 224 273 Property and equipment included in accounts payable, accrued expenses and other liabilities 74 63 35 See accompanying notes to consolidated financial statements 51 Table of Contents SERVICENOW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unless the context requires otherwise, references in this report to “ServiceNow,” the “Company,” “we,” “us” and “our” refer to ServiceNow, Inc. and its consolidated subsidiaries. (1) Description of the Business ServiceNow was founded on a simple premise: a better technology platform will help work flow better. We help global enterprises across industries, universities and governments to digitize their workflows. We organize our workflow applications along four primary areas: Technology, Customer and Industry, Employee and Creator. The products under each of our workflows help customers connect, automate and empower work across systems and silos to enable great outcomes for businesses and great experiences for people. The Now Platform integrates with our customers’ cloud platforms and systems of choice, allowing our customers to deliver workflows across their current and future preferred systems of record and collaboration platforms. (2) Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements have been prepared in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”), and include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as reported amounts of revenues and expenses during the reporting period. Such management estimates and assumptions include, but are not limited to, standalone selling price (“SSP”) for each distinct performance obligation included in customer contracts with multiple performance obligations, the period of benefit for deferred commissions, valuation of intangible assets, the useful life of property and equipment and identifiable intangible assets, stock-based compensation expense and income taxes. Actual results could differ from those estimates. In January 2022, we completed an assessment of the useful life of our data center equipment and determined we should increase the estimated useful life of data center equipment from three to four years . This change in accounting estimate was effective beginning fiscal year 2022. Based on the carrying amount of data center equipment included in property and equipment, net as of December 31, 2021, the effect of this change in estimate for the year ended December 31, 2022, was a reduction in depreciation expense of $ 81 million and an increase in net income of $ 76 million, or $ 0.38 per share basic and $ 0.37 per share diluted. Segments Our chief operating decision maker allocates resources and assesses financial performance based upon discrete financial information at the consolidated level. There are no segment managers who are held accountable by the chief operating decision maker, or anyone else, for operations, operating results and planning for levels or components below the consolidated unit level. Accordingly, we have determined that we operate as a single operating and reportable segment. Foreign Currency Translation and Transactions The functional currencies for our foreign subsidiaries are primarily their respective local currencies. Assets and liabilities of the wholly-owned foreign subsidiaries are translated into U.S. Dollars at exchange rates in effect at each period end. Amounts classified in stockholders’ equity are translated at historical exchange rates. Revenues and expenses are translated at the average exchange rates during the period. The resulting translation adjustments are recorded in accumulated other comprehensive income (loss) as a component of stockholders’ equity. Foreign currency transaction gains and losses are included in other income (expense), net within the consolidated statements of comprehensive income, and have not been material for all periods presented. 52 Table of Contents Revenue Recognition Revenues are recognized when control of services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Subscription revenues Subscription revenues are primarily comprised of subscription fees that give customers access to the ordered subscription service, related support and updates, if any, to the subscribed service during the subscription term. We recognize subscription revenues ratably over the contract term beginning on the commencement date of each contract, which is the date we make our services available to our customers. Our contracts with customers typically include a fixed amount of consideration and are generally non-cancelable and without any refund-type provisions. We typically invoice our customers annually in advance for our subscription services upon execution of the initial contract or subsequent renewal, and our invoices are typically due within 30 days from the invoice date. Subscription revenues also include revenues from self-hosted offerings in which customers deploy, or we grant customers the option to deploy without significant penalty, our subscription service internally or contract with a third party to host the software. For these contracts, we account for the software element separately from the related support and updates as they are distinct performance obligations. Refer to the discussion below related to contracts with multiple performance obligations for further details. The transaction price is allocated to separate performance obligations on a relative SSP basis. The transaction price allocated to the software element is recognized when transfer of control of the software to the customer is complete. The transaction price allocated to the related support and updates are recognized ratably over the contract term. Professional services and other revenues Our professional services arrangements are primarily on a time-and-materials basis, and we generally invoice our customers monthly in arrears for these professional services based on actual hours and expenses incurred. Some of our professional services arrangements are on a fixed fee. Professional services revenues are recognized as services are delivered. Other revenues mainly 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 from the invoice date. Contracts with multiple performance obligations We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. We evaluate the terms and conditions included within our customer contracts to ensure appropriate revenue recognition, including whether products and services are considered distinct performance obligations that should be accounted for separately versus together. For contracts with multiple performance obligations, the transaction price is allocated to the separate performance obligations on a relative SSP basis. We determine SSP by considering the historical selling price of these performance obligations in similar transactions as well as other factors, including, but not limited to, competitive pricing of similar products, other software vendor pricing, industry publications and current pricing practices. Contract balances Unbilled receivables represent subscription revenues that are recognized upon delivery of the software prior to being invoiced. Unbilled receivables are primarily presented under prepaid expenses and other current assets on our consolidated balance sheets. Deferred revenue consists primarily of payments received related to unsatisfied performance obligations at the end of the period. Once our services are available to customers, we record amounts due in accounts receivable and in deferred revenue. To the extent we bill customers in advance of the billing period commencement date, the accounts receivable and corresponding deferred revenue amounts are netted to zero on our consolidated balance sheets, unless such amounts have been paid as of the balance sheet date. Customer deposits primarily relate to payments received from customers which could be refundable pursuant to the terms of the contract and are presented under accrued expenses and other current liabilities on our consolidated balance sheets. 53 Table of Contents 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. Deferred commissions also include the associated payroll taxes and fringe benefit costs associated with payments to our sales employees to the extent they are incremental. Commissions and referral fees earned upon the execution of initial and expansion contracts are primarily deferred and amortized over a period of benefit that we have determined to be five years . Commissions earned upon the renewal of customer contracts are deferred and amortized over the average renewal term. Additionally, for self-hosted offerings, consistent with the recognition of subscription revenue for self-hosted offerings, a portion of the commission cost is expensed upfront when the self-hosted offering is made available and the remaining portion of the commission cost is expensed over the period of benefit. We determine the period of benefit by taking into consideration our customer contracts, our technology life cycle and other factors. The amortization of deferred commissions is included in sales and marketing expense in our consolidated statements of comprehensive income. There was no impairment loss in relation to the incremental selling costs capitalized for all periods presented. Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We use a fair value hierarchy that is based on three levels of inputs, of which the first two are considered observable and the last unobservable. The three levels of the fair value hierarchy are as follows: Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2—Other inputs that are directly or indirectly observable in the marketplace; and Level 3— Significant unobservable inputs that are supported by little or no market activity. Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid investments with original or remaining maturities of three months or less at the date of purchase. Cash and cash equivalents are stated at fair value. Accounts Receivable, net We record trade accounts receivable at the net invoice value and such receivables are non-interest bearing. We consider receivables past due based on the contractual payment terms. We reserve for specific amounts if collectability is no longer reasonably assured based on assessment of various factors including historical loss rates and expectations of forward-looking loss estimates. Individual accounts receivable are written off when we become aware of a specific customer’s inability to meet its financial obligation, and all collection efforts are exhausted. Investments Investments consist of commercial paper, corporate notes and bonds, certificates of deposit, U.S. government and agency securities and mortgage-backed and asset-backed securities. We classify investments as available-for-sale at the time of purchase. All investments are recorded at estimated fair value and investments with original maturities of less than one year at time of purchase is classified as short-term. Unrealized gains and losses are included in accumulated other comprehensive income (loss), net of tax, a component of stockholders’ equity, except for credit-related impairment losses for available-for-sale debt securities. We evaluate investments with unrealized loss positions for other than temporary impairment by assessing if they are related to deterioration in credit risk and whether we expect to recover the entire amortized cost basis of the security, our intent to sell and whether it is more likely than not that we will be required to sell the securities before the recovery of their cost basis. Credit-related impairment losses, not to exceed the amount that fair value is less than the amortized cost basis, are recognized through an allowance for credit losses with changes in the allowance for credit losses recorded in other income (expense), net in the consolidated statements of comprehensive income. For purposes of identifying and measuring impairment, the policy election was made to exclude the applicable accrued interest from both the fair value and amortized cost basis. Applicable accrued interest, net of the allowance for credit losses (if any) of $ 28 million and $ 12 million, is recorded in prepaid expenses and other current assets on the consolidated balance sheets as of December 31, 2022 and 2021, respectively. 54 Table of Contents Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in other income (expense), net in the consolidated statements of comprehensive income. Strategic Investments Strategic investments consist of debt and non-marketable equity investments in privately held companies in which we do not have a controlling interest or significant influence. We have elected to apply the measurement alternative for equity investments that do not have readily determinable fair values, measuring them at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. An impairment loss is recorded when an event or circumstance indicates a decline in value has occurred. We include these strategic investments in other assets on our consolidated balance sheets. Derivative Financial Instruments We use derivative financial instruments, mainly forward contracts with maturities of 12 months or less, to manage foreign currency risks. These derivative contracts are not designated as hedging instruments and changes in the fair value are recorded in other income (expense), net on the consolidated statements of comprehensive income. Realized gains (losses) from settlement of the derivative assets and liabilities are classified as investing activities in the consolidated statements of cash flows. Property and Equipment, net Property and equipment are stated at cost net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets as follows: Computer equipment and software 3 - 5 years Furniture and fixtures 3 - 7 years Leasehold and other improvements shorter of the lease term or estimated useful life Capitalized Software Development Costs Software development costs for software to be sold, leased or otherwise marketed are expensed as incurred until the establishment of technological feasibility, at which time those costs are capitalized until the product is available for general release to customers and amortized over the estimated life of the product. Costs and time incurred between the establishment of technological feasibility and product release have not been material, and all software development costs have been charged to research and development expense in our consolidated statements of comprehensive income. Leases We determine if an arrangement is or contains a lease at inception. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease payments consist primarily of the fixed payments under the arrangement, less any lease incentives. We generally use an incremental borrowing rate estimated based on the information available at the lease commencement date to determine the present value of lease payments, unless the implicit rate is readily determinable. Lease expense for lease payments is recognized on a straight-line basis over the lease term. We account for lease and non-lease components as a single lease component for office leases. Lease and non-lease components for all other leases are generally accounted for separately. Additionally, we do not record leases on the balance sheet that, at the lease commencement date, have a lease term of 12 months or less. Operating leases are included in operating lease right-of-use assets, current portion of operating lease liabilities, and operating lease liabilities, less current portion in our consolidated balance sheets. We did not have any financing leases in any of the periods presented. 55 Table of Contents Business Combinations We allocate the acquisition purchase price to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. The excess of the purchase price over the fair value of these assets acquired and liabilities assumed is recorded as goodwill. Allocation of the purchase price requires significant estimates in determining the fair value of acquired assets and assumed liabilities, especially with respect to intangible assets. Critical estimates 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. During the measurement period, which may not be later than one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. Goodwill and Intangible Assets Goodwill is evaluated for impairment at least annually or more frequently if circumstances indicate that goodwill may not be recoverable. A qualitative assessment is performed to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount. If the reporting unit does not pass the qualitative assessment, the carrying amount of the reporting unit, including goodwill, is compared to fair value and goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. Any excess of the carrying value of the goodwill above its fair value is recognized as an impairment loss. Intangible assets consist of developed technologies and other intangible assets, including patents and contractual agreements. Intangible assets are amortized over the period of estimated benefit using the straight-line method and estimated useful lives ranging from two to twelve years . Impairment of Long-Lived Assets We evaluate long-lived assets, including purchased intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability is measured by comparing the carrying amount to the future undiscounted cash flows we expect the asset to generate. Any excess of the carrying value of the asset above its fair value is recognized as an impairment loss. Advertising Costs Advertising costs, excluding costs related to our annual Knowledge user conference and other user forums, are expensed as incurred and are included in sales and marketing expense. These costs for the years ended December 31, 2022, 2021 and 2020 were $ 201 million, $ 198 million and $ 172 million, respectively. Stock-based Compensation We recognize compensation expense related to stock options and restricted stock units (“RSUs”) with only service conditions on a straight-line basis over the requisite service period. For stock options and RSUs with service, performance and market conditions (performance-based RSUs (“PRSUs”)), expenses are recognized on a graded vesting basis over the requisite service period and for awards with performance conditions, when it is probable that the performance condition will be achieved. The probability of achievement is assessed periodically to determine whether the performance metric continues to be probable. When there is a change in the probability of achievement, any cumulative effect of the change in requisite service period is recognized in the period of the change with the change to be amortized over the respective vesting period. We recognize compensation expense related to shares issued pursuant to the employee stock purchase plan (“ESPP”) on a straight-line basis over the six-month offering period. We recognize compensation expense net of estimated forfeiture activity. Amounts withheld related to the minimum statutory tax withholding requirements paid by us on behalf of our employees are recorded as a liability and a reduction to additional paid-in capital when paid and are included as a reduction of cash flows from financing activities. We estimate the fair value of stock options with only service conditions and shares issued pursuant to the ESPP using the Black-Scholes options pricing model and the fair value of RSU awards (including PRSUs) using the fair value of our common stock on the date of grant. For stock options and PRSUs with service, performance and market conditions, we estimate the fair value of the options granted and the corresponding derived service periods using the Monte Carlo simulation, which requires the use of various assumptions, including the stock price volatility and risk-free interest rate as of the valuation date corresponding to the length of time remaining in the performance period. 56 Table of Contents Concentration of Credit Risk and Significant Customers Financial instruments potentially exposing us to credit risk consist primarily of cash, cash equivalents, derivative contracts, investments and accounts receivable. We hold cash at financial institutions that management believes are high credit quality financial institutions and invest in investment-grade debt securities. Our derivative contracts expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the arrangement. We mitigate this credit risk by transacting with major financial institutions with high credit ratings and entering into master netting arrangements, which permit net settlement of transactions with the same counterparty. We are not required to pledge, and are not entitled to receive, cash collateral related to these derivative instruments. Credit risk arising from accounts receivable is mitigated to a certain extent due to our large number of customers and their dispersion across various industries and geographies. As of December 31, 2022 and 2021, there were no customers that represented more than 10% of our accounts receivable balance. There were no customers that individually exceeded 10% of our total revenues in any of the periods presented. For purposes of assessing concentration of credit risk and significant customers, a group of customers under common control or customers that are affiliates of each other are regarded as a single customer. The allowance for doubtful accounts and write offs were not material for each of the periods ending December 31, 2022, 2021 and 2020. Income Taxes We use the asset and liability method of accounting for income taxes, in which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be reversed. We recognize the effect on deferred tax assets and liabilities of a change in tax rates within the provision for income taxes as income and expense in the period that includes the enactment date. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. In determining the need for a valuation allowance, we consider future growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, historical earnings, taxable income in prior years, if carryback is permitted under the law, carryforward periods and prudent and feasible tax planning strategies. 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. 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. Prior Period Reclassifications Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications did not result in a restatement of prior period financial statements. 57 Table of Contents Recently Adopted Accounting Pronouncements Debt with Conversion Options In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, “Debt–Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging–Contracts in Entity’s Own Equity (Subtopic 815-40)” to simplify the accounting for convertible instruments and contracts on an entity’s own equity. The standard results in our 2022 Notes being accounted for as a single unit of debt and requires the if-converted method to calculate diluted earnings per share calculation. We adopted this standard effective January 1, 2022 using a modified retrospective method, under which the basis of all convertible instruments outstanding at adoption have been adjusted to the amounts that would have been recorded had the new guidance been applied from inception. The previously recorded equity component of the convertible instrument outstanding and amortization of the debt discount and issuance costs classified as equity are reclassified from equity to debt through an adjustment to the opening balance of accumulated deficit as of January 1, 2022, which will result in reduced interest expense in future periods. Adoption of the standard resulted in a decrease to accumulated deficit of $ 17 million, decrease to additional paid-in capital of $ 19 million and an increase to debt, current of $ 2 million. Acquired Contract Assets and Contract Liabilities In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Acquired Contract Assets and Contract Liabilities,” which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured in accordance with Topic 606, Revenue from Contracts with Customers, as if the acquirer had originated the contracts. The new standard is effective for interim and annual periods beginning after December 15, 2022. We adopted this standard in the second quarter beginning April 1, 2022. The adoption had no impact to our consolidated financial statements for the year ended December 31, 2022. 58 Table of Contents (3) Investments Marketable Debt Securities The following is a summary of our available-for-sale debt securities recorded within short-term and long-term investments on the consolidated balance sheets (in millions): December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Available-for-sale securities: Commercial paper $ 558 $ — $ ( 2 ) $ 556 Corporate notes and bonds 3,414 — ( 52 ) 3,362 Certificates of deposit 162 — — 162 U.S. government and agency securities 768 — ( 2 ) 766 Mortgage-backed and asset-backed securities 98 — ( 17 ) 81 Total available-for-sale securities $ 5,000 $ — $ ( 73 ) $ 4,927 December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Available-for-sale securities: Commercial paper $ 528 $ — $ — $ 528 Corporate notes and bonds 2,418 1 ( 7 ) 2,412 Certificates of deposit 28 — — 28 U.S. government and agency securities 140 — — 140 Mortgage-backed and asset-backed securities 100 — ( 2 ) 98 Total available-for-sale securities $ 3,214 $ 1 $ ( 9 ) $ 3,206 As of December 31, 2022, the contractual maturities of our available-for-sale debt securities, excluding those securities classified within cash and cash equivalents on the consolidated balance sheet and mortgage-backed and asset-backed securities that do not have a single maturity, did not exceed 36 months. The fair values of available-for-sale securities, by remaining contractual maturity, are as follows (in millions): December 31, 2022 Due within 1 year $ 2,810 Due in 1 year through 5 years 2,036 Instruments not due in single maturity 81 Total $ 4,927 As of December 31, 2022 and 2021, the fair value of available-for-sale securities in a continuous unrealized loss position totaled $ 4,232 million and $ 2,416 million, respectively, the majority of which has been in a continuous unrealized loss position for greater than 12 months. The decline in fair value below amortized cost basis was not considered other than temporary as it is more likely than not we will hold the securities until maturity or a recovery of the cost basis, and credit-related impairment losses were not deemed material as of December 31, 2022. 59 Table of Contents Non-Marketable Equity Investments As of December 31, 2022 and 2021, the total amount of non-marketable equity investments in privately held companies included in other assets on our consolidated balance sheets was $ 252 million and $ 99 million, respectively. Our non-marketable equity investments are accounted for using the measurement alternative, which measures the investments at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes resulting from the issuance of similar or identical securities in an orderly transaction by the same issuer. Determining whether an observed transaction is similar to a security within our portfolio requires judgment based on the rights and preferences of the securities. Recording upward and downward adjustments to the carrying value of our non-marketable equity investments as a result of observable price changes requires quantitative assessments of the fair value of our non-marketable equity investments using various valuation methodologies and involves the use of estimates. We classify these fair value measurements as Level 3 within the fair value hierarchy. In March 2022, we purchased $ 100 million of common and preferred shares of Celonis SE, a privately held company that develops and sells process mining software, in exchange for cash. (4) Fair Value Measurements The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis as of December 31, 2022 (in millions): Level 1 Level 2 Total Cash equivalents: Money market funds $ 738 $ — $ 738 Commercial paper — 36 36 Corporate notes and bonds — 10 10 Certificates of deposit — 2 2 Deposits 124 — 124 U.S. government and agency securities — 8 8 Marketable securities: Commercial paper — 556 556 Corporate notes and bonds — 3,362 3,362 Certificates of deposit — 162 162 U.S. government and agency securities — 766 766 Mortgage-backed and asset-backed securities — 81 81 Total $ 862 $ 4,983 $ 5,845 60 Table of Contents The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis as of December 31, 2021 (in millions): Level 1 Level 2 Total Cash equivalents: Money market funds $ 706 $ — $ 706 Commercial paper — 110 110 Corporate notes and bonds — 28 28 Certificates of deposit — 8 8 Deposits 235 — 235 Marketable securities: Commercial paper — 528 528 Corporate notes and bonds — 2,412 2,412 Certificates of deposit — 28 28 U.S. government and agency securities — 140 140 Mortgage-backed and asset-backed securities — 98 98 Total $ 941 $ 3,352 $ 4,293 We determine the fair value of our security holdings based on pricing from our service providers and market prices from industry-standard independent data providers. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs), pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) or using unobservable inputs that are supported by little or no market activity (Level 3 inputs). Our non-marketable equity investments are not included in the table above and are discussed in Note 3. See Note 8 for the fair value measurement of our derivative contracts and Note 11 for the fair value measurement of our long-term debt, which are also not included in the table above. Our marketable equity investments are classified within Level 1 and are immaterial as of December 31, 2022 and 2021. (5) Business Combinations 2022 Business Combinations During the year ended December 31, 2022, we completed certain acquisitions for total purchase consideration of $ 92 million primarily to enhance our products with the acquired technology and engineering workforce. The acquisitions were not material to our consolidated financial statements, either individually or in the aggregate. 2021 Business Combinations On June 15, 2021, we acquired Lightstep, Inc., a leading observability solution provider, for $ 512 million in a cash transaction. The purchase price was allocated based on the estimated fair value of developed technology intangible asset of $ 85 million ( five-year estimated useful life), customer related and brand assets of $ 11 million , net tangible assets of $ 8 million, deferred tax liabilities of $ 6 million and goodwill of $ 413 million , which is not deductible for income tax purposes. On January 8, 2021, we acquired all outstanding stock of Element AI Inc., a leading enterprise artificial intelligence solution provider, for $ 228 million in an all-cash transaction. The purchase price was allocated based on the estimated fair value of developed technology intangible asset of $ 85 million ( five-year estimated useful life), net tangible assets of $ 16 million and goodwill of $ 81 million , which is partially deductible for income tax purposes. At time of acquisition, we established an unrecognized tax benefit of $ 43 million on pre-acquisition net operating loss carryforwards and other tax attributes which was subsequently released resulting in establishment of deferred tax asset based on completion of valuation and filing certain tax returns in the third quarter of 2021. Goodwill is primarily attributed to the value expected from synergies resulting from the business combinations. The fair values assigned to tangible and intangible assets acquired, liabilities assumed and income taxes payable and deferred taxes are based on management’s estimates and assumptions. The Company finalized the fair value measurements within one year from the acquisition date. Table of Contents During the year ended December 31, 2021, we also completed certain acquisitions for total purchase consideration of $ 66 million primarily to enhance our products with the acquired technology and engineering workforce. These acquisitions were not material to our consolidated financial statements, either individually or in the aggregate. 2020 Business Combinations During the year ended December 31, 2020, we completed certain acquisitions for total purchase consideration of $ 116 million primarily to enhance our products with the acquired technology and engineering workforce. These acquisitions were not material to our consolidated financial statements, either individually or in the aggregate. We have included the financial results of business combinations in the consolidated financial statements from the respective dates of acquisition, which were not material. Pro forma revenue and earnings amounts on a combined basis have not been presented as it is impracticable due to the lack of availability of historical financial statements that comply with GAAP. Aggregate acquisition-related costs associated with business combinations are not material for the years ended December 31, 2022, 2021 and 2020, respectively, and are included in general and administrative expenses in our consolidated statements of comprehensive income as incurred. (6) Goodwill and Intangible Assets Goodwill balances consist of the following (in millions): Carrying Amount Balance as of December 31, 2020 $ 241 Goodwill acquired 538 Foreign currency translation adjustments ( 2 ) Balance as of December 31, 2021 $ 777 Goodwill acquired 68 Foreign currency translation adjustments ( 21 ) Balance as of December 31, 2022 $ 824 Intangible assets consist of the following (in millions): December 31, 2022 December 31, 2021 Developed technology $ 434 $ 415 Patents 72 69 Other 15 14 Intangible assets, gross $ 521 $ 498 Less: accumulated amortization ( 289 ) ( 211 ) Intangible assets, net $ 232 $ 287 The weighted-average useful life of the acquired developed technology for each of the years ended December 31, 2022 and 2021 was approximately five years . Amortization expense for intangible assets was approximately $ 81 million, $ 76 million and $ 46 million for the years ended December 31, 2022, 2021 and 2020, respectively. 62 Table of Contents The following table presents the estimated future amortization expense related to intangible assets held at December 31, 2022 (in millions): Years Ending December 31, 2023 $ 78 2024 71 2025 51 2026 20 2027 6 Thereafter 6 Total future amortization expense $ 232 (7) Property and Equipment Property and equipment, net consists of the following (in millions): December 31, 2022 2021 Computer equipment $ 1,606 $ 1,226 Computer software 82 77 Leasehold and other improvements 226 200 Furniture and fixtures 81 74 Construction in progress 53 14 Property and equipment, gross 2,048 1,591 Less: Accumulated depreciation ( 995 ) ( 825 ) Property and equipment, net $ 1,053 $ 766 Construction in progress consists of costs related to leasehold and other improvements. Depreciation expense was $ 261 million, $ 312 million and $ 225 million for the years ended December 31, 2022, 2021 and 2020, respectively. (8) Derivative Contracts As of December 31, 2022 and 2021, we had foreign currency forward contracts with total notional values of $ 1,360 million and $ 833 million, respectively, which are not designated as hedging instruments. Our foreign currency forward contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets, such as currency spot and forward rates. Outstanding foreign currency forward contracts are recorded at gross fair value as prepaid expenses and other current assets as well as accrued expenses and other current liabilities on the consolidated balance sheets. The gross fair value of these foreign currency forward contracts was immaterial as of December 31, 2022 and 2021. The gains (losses) recognized for these foreign currency forward contracts were immaterial for each of the years ended December 31, 2022, 2021 and 2020. (9) Deferred Revenue and Performance Obligations Revenues recognized during the year ended December 31, 2022 from amounts included in deferred revenue as of December 31, 2021 were $ 3.7 billion. Revenues recognized during the year ended December 31, 2021 from amounts included in deferred revenue as of December 31, 2020 were $ 2.9 billion. 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 revenues 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. 63 Table of Contents As of December 31, 2022, the total non-cancelable RPO under our contracts with customers was $ 14 billion, and we expect to recognize revenues on approximately 49 % of these RPO over the following 12 months. The majority of the non-current RPO will be recognized over the next 13 to 36 months. (10) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following (in millions): December 31, 2022 2021 Accrued payroll $ 490 $ 444 Taxes payable 109 101 Other employee related liabilities 150 121 Other 226 184 Total accrued expenses and other current liabilities $ 975 $ 850 (11) Debt The following table summarizes the carrying value of our outstanding debt (in millions), net of unamortized debt discount and issuance costs of $ 14 million and $ 18 million at December 31, 2022 and 2021, respectively: December 31, 2022 December 31, 2021 2030 Notes 2022 Notes 2030 Notes 2022 Notes Current, net $ — $ — $ — $ 92 Long-term, net 1,486 — 1,484 — Total debt $ 1,486 $ — $ 1,484 $ 92 We consider the fair value of the 2030 Notes at December 31, 2022, and the 2022 Notes and 2030 Notes at December 31, 2021 to be a Level 2 measurement. The estimated fair value of the 2030 Notes at December 31, 2022, and the 2022 Notes and 2030 Notes at December 31, 2021 is based on the closing trading price per $ 100 of the 2030 Notes and 2022 Notes as follows (in millions): December 31, 2022 December 31, 2021 2022 Notes $ — $ 440 2030 Notes $ 1,144 $ 1,400 2030 Notes In August 2020, we issued 1.40 % fixed rate ten-year notes with an aggregate principal amount of $ 1.5 billion due on September 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. The effective interest rate for the 2030 Notes was 1.53 %, including coupon interest, amortization of debt issuance costs and amortization of the debt discount. Interest is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2021, and the entire outstanding principal amount is due at maturity on September 1, 2030. The 2030 Notes are unsecured obligations and the indentures governing the 2030 Notes contain customary events of default and 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. Table of Contents 2022 Notes In May and June 2017, we issued an aggregate of $ 782.5 million of 0 % convertible senior notes (the “2022 Notes”), which were due June 1, 2022 unless earlier converted or repurchased in accordance with their terms. The 2022 Notes did not bear interest, and we could not redeem the 2022 Notes prior to maturity. The 2022 Notes were unsecured obligations and did not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries. As described in Note 2, we adopted the new accounting standard for debt with conversion options effective January 1, 2022 using a modified retrospective method, under which financial results reported in prior periods were not adjusted. Prior to the adoption of the new standard, in accounting for the issuance of the 2022 Notes and the related transaction costs, we valued and bifurcated the conversion option from the host debt instrument, referred to as debt discount, and recorded the conversion option of $ 160 million in equity at issuance. The resulting debt discount and transaction costs allocated to the liability component were amortized to interest expense using the effective interest method over the term of the 2022 Notes. Upon adoption of the new accounting standard on January 1, 2022, we recombined the liability and equity components of the 2022 Notes, including the related issuance costs, assuming the instrument was accounted for as a single liability from inception to the date of adoption. Issuance costs were presented as a deduction from the outstanding principal balance of the 2022 Notes and amortized to interest expense using the effective interest method over the term of the 2022 Notes. Convertible Date Initial Conversion Price per Share Initial Conversion Rate per $1,000 Par Value Initial Number of Shares (in millions) 2022 Notes February 1, 2022 $ 134.75 7.42 shares 6 Conversion of the 2022 Notes. On or after February 1, 2022 (the “Convertible Date”), a holder was able to convert all or any portion of its 2022 Notes at any time prior to the close of business on the second scheduled trading day immediately preceding maturity, and such conversions were settled on the maturity date. Prior to the Convertible Date, holders of the 2022 Notes could convert their 2022 Notes at their option if, during any calendar quarter 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 130 % of the conversion price on each applicable trading day (in each case, the “Conversion Condition”). The Conversion Condition for the 2022 Notes was met for all the quarters ended June 30, 2018 through December 31, 2021, except for the quarter ended December 31, 2018. Therefore, our 2022 Notes became convertible at the holders’ option beginning on July 1, 2018 through January 31, 2022, except for the quarter ended March 31, 2019 because the Conversion Condition for the 2022 Notes was not met for the quarter ended December 31, 2018. During the year ended December 31, 2022, we paid cash to settle $ 94 million in principal of the 2022 Notes, which was comprised of early conversions of $ 6 million and the remaining principal of $ 88 million for the final settlement on June 1, 2022, the maturity date of our 2022 Notes. As a result of the settlements, we also recorded a net reduction to additional paid-in capital of $ 212 million offset by $ 212 million benefit from the 2022 Note Hedge (as defined below). 65 Table of Contents Repurchase of 2022 Notes On August 11, 2020, we repurchased $ 497 million in aggregate principal amount of the 2022 Notes (the “2022 Notes Repurchase”) funded in part by the $ 1.1 billion proceeds received from the partial unwind of the 2022 Note Hedge (as defined below). The 2022 Notes Repurchase was accounted for as a debt extinguishment in which $ 493 million and $ 1.1 billion were allocated to the liability and equity components of the 2022 Notes, respectively. The cash consideration allocated to the liability component was based on the estimated fair value of the liability component utilizing a discount rate assuming a similar liability per the Company’s credit rating with the same maturity, but without the conversion option, as of the repurchase date. The cash consideration allocated to the equity component was based on the aggregate cash consideration less the estimated fair value of the liability component. The loss on extinguishment of $ 39 million recorded as other income (expense), net, represents the difference between the allocated cash consideration and the carrying value of the liability component, which includes the proportionate amounts of unamortized debt discount and unamortized debt issuance costs in the amount of $ 43 million. Note Hedge To minimize the impact of potential economic dilution upon conversion of the 2022 Notes, we entered into convertible note hedge transactions (the “2022 Note Hedge”) with certain investment banks, with respect to our common stock concurrently with the issuance of the 2022 Notes. Purchase Initial Shares Shares as of December 31, 2022 (in millions) 2022 Note Hedge $ 128 6 — The 2022 Note Hedge covered shares of our common stock at a strike price per share that corresponded to the initial conversion price of the 2022 Notes, subject to adjustment, and were exercisable upon conversion of the 2022 Notes. The 2022 Note Hedge expired upon the maturity of the 2022 Notes and since the quarter ended June 30, 2022, the 2022 Note Hedge is no longer outstanding. The 2022 Note Hedge was intended to reduce the potential economic dilution upon conversion of the 2022 Notes in the event that the fair value per share of our common stock at the time of exercise is greater than the conversion price of the 2022 Notes. The 2022 Note Hedge was a separate transaction and was not part of the terms of the 2022 Notes. Holders of the 2022 Notes did not have any rights with respect to the 2022 Note Hedge. The 2022 Note Hedge did not impact earnings per share, as it was entered into to offset any dilution from the 2022 Notes. On August 11, 2020, in connection with the 2022 Notes Repurchase, we entered into partial unwind agreements (the “Note Hedge Unwind”) to reduce the number of options corresponding to the principal amount of the 2022 Notes Repurchase. We received $ 1.1 billion for the Note Hedge Unwind and the aggregate number of shares underlying the call options under the 2022 Note Hedge was reduced by 3.7 million shares. Consistent with early conversions of the 2022 Notes, proceeds received by the Company from the Note Hedge Unwind were used to settle a portion of the 2022 Notes Repurchase. Warrants Proceeds Initial Shares Strike Price First Expiration Date Shares as of December 31, 2022 (in millions) (in millions) (in millions) 2022 Warrants $ 54 6 $ 203.40 September 1, 2022 — Separately, we entered into warrant transactions with certain investment banks, whereby we sold warrants to acquire, subject to adjustment, the number of shares of our common stock shown in the table above (the “2022 Warrants”). If the average market value per share of our common stock for the reporting period, as measured under the 2022 Warrants, exceeded the strike price of the respective 2022 Warrants, such 2022 Warrants would have a dilutive effect on our earnings per share to the extent we report net income. The 2022 Warrants were separate transactions and were not remeasured through earnings each reporting period. The 2022 Warrants were not part of the 2022 Notes or 2022 Note Hedge. In connection with the 2022 Notes Repurchase and early note conversions, we entered into partial unwind agreements to reduce the number of warrants outstanding under the 2022 Warrants by delivering an aggregate of 0.5 million shares of our common stock during the year ended December 31, 2021. 66 Table of Contents During the quarter ended June 30, 2022. we entered into unwind agreements to settle the remaining portion of the 2022 Warrants by delivering an aggregate of 0.6 million shares of our common stock. Accordingly, the 2022 Warrants were no longer outstanding as of June 30, 2022. (12) Accumulated Other Comprehensive Income (Loss) The following table shows the components of accumulated other comprehensive income (loss), net of tax, in the stockholders’ equity section of our consolidated balance sheets (in millions): December 31, 2022 2021 Foreign currency translation adjustment $ ( 25 ) $ 46 Net unrealized loss on investments ( 77 ) ( 12 ) Accumulated other comprehensive income (loss) $ ( 102 ) $ 34 Reclassification adjustments out of accumulated other comprehensive income (loss) into net income were not material for all periods presented. (13) Stockholders' Equity Common Stock We are authorized to issue a total of 600 million shares of common stock as of December 31, 2022. Holders of our common stock are not entitled to receive dividends unless declared by our board of directors. As of December 31, 2022, we had 202.9 million shares of common stock outstanding and had reserved shares of common stock for future issuance as follows (in thousands): December 31, 2022 Stock plans: Options outstanding 1,237 RSUs (1) 5,737 Shares of common stock available for future grants: 2021 Equity Incentive Plan (2) 5,312 Amended and Restated 2012 Employee Stock Purchase Plan (2) 8,996 2022 New-Hire Equity Incentive Plan (2) 1,045 Total shares of common stock reserved for future issuance 22,327 (1) Represents the number of shares issuable upon settlement of outstanding RSUs and PRSUs, as discussed in Note 14. (2) Refer to Note 14 for a description of these plans. During the years ended December 31, 2022 and 2021, we issued a total of 2.7 million shares and 3.2 million shares, respectively, from stock option exercises, vesting of RSUs, net of employee payroll taxes and purchases from ESPP. In addition, as described in Note 11, during the years ended December 31, 2022 and 2021, we issued 0.6 million and 0.5 million shares of our common stock upon the settlement of the remaining portion and partial unwind of the 2022 Warrants, respectively. Preferred Stock Our board of directors has the authority, without further action by stockholders, to issue up to 10 million shares of preferred stock in one or more series. Our board of directors may designate the rights, preferences, privileges and restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preference and number of shares constituting any series or the designation of any series. The issuance of preferred stock could have the effect of restricting dividends on our common stock, diluting the voting power of our common stock, impairing the liquidation rights of our common stock or delaying or preventing a change in control. At December 31, 2022 and 2021, no shares of preferred stock were outstanding. 67 Table of Contents (14) Equity Awards We currently have three equity incentive plans: 2012 Equity Incentive Plan (the “2012 Plan”), 2021 Equity Incentive Plan (the “2021 Plan”) and 2022 New-Hire Equity Incentive Plan (the “2022 Plan”). The 2012 Plan was terminated in connection with the approval of the 2021 Plan on June 7, 2021 but continues to govern the terms of outstanding equity awards that were granted prior to the termination of the 2012 Plan. As of June 7, 2021, we no longer grant equity awards pursuant to the 2012 Plan. On November 7, 2022, the 2022 Plan was approved for newly hired employees prospectively. The 2021 Plan and the 2012 Plan provide for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, RSUs, performance-based stock awards and other forms of equity compensation (collectively, “equity awards”). The 2022 Plan permits the grant of any of the foregoing awards with the exception of incentive stock options. In addition, the 2022 Plan, the 2021 Plan and the 2012 Plan provide for the grant of performance cash awards. Incentive stock options may be granted only to employees. All other equity awards may be granted to employees, including officers, as well as directors and consultants. Prior to June 7, 2021, the 2012 Plan share reserve was increased to the extent outstanding stock options under the 2005 Plan expire or terminate unexercised. Our Amended and Restated 2012 Employee Stock Purchase Plan (the “2012 ESPP”) authorizes the issuance of shares of common stock pursuant to purchase rights granted to our employees. The price at which common stock is purchased under the 2012 ESPP is equal to 85 % of the fair market value of our common stock on the first or last day of the offering period, whichever is lower. Offering periods are six months long and begin on February 1 and August 1 of each year. Prior to June 7, 2021, the number of shares of common stock reserved for issuance automatically increased on January 1 of each year, by up to 1 % of the total number of shares of common stock outstanding on December 31 of the preceding year as determined by our board of directors. As of June 7, 2021, the automatic increase provision was removed. Therefore, for the remaining term of the 2012 ESPP, the share reserve will not be increased without shareholder approval. Stock Options Stock options are exercisable at a price equal to the market value of the underlying shares of common stock on the date of the grant as determined by our board of directors or, for those stock options issued subsequent to our initial public offering, the closing price of our common stock as reported on the New York Stock Exchange on the date of grant. Stock options granted under the 2005 Plan and the 2012 Plan to new employees generally vest 25 % one year from the date the requisite service period begins and continue to vest monthly for each month of continued employment over the remaining three years . Options granted generally are exercisable for a period of up to ten years contingent on each holder’s continuous status as a service provider. A summary of stock option activity was as follows: Number of Shares Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Term Aggregate Intrinsic Value (in thousands) (in years) (in millions) Outstanding at December 31, 2021 1,305 $ 551.39 Granted 23 $ 591.66 Exercised ( 85 ) $ 32.30 $ 40 Canceled ( 6 ) $ 66.58 Outstanding at December 31, 2022 1,237 $ 590.36 8.3 $ 43 Vested and expected to vest as of December 31, 2022 1,075 $ 578.24 8.3 $ 43 Vested and exercisable as of December 31, 2022 142 $ 165.31 5.2 $ 32 Aggregate intrinsic value represents the difference between the estimated fair value of our common stock and the exercise price of outstanding, in-the-money options. The total intrinsic value for stock options exercised for the years ended December 31, 2022, 2021 and 2020, was $ 40 million, $ 140 million and $ 199 million, respectively. 68 Table of Contents The total fair value of shares vested was $ 11 million, $ 10 million and $ 7 million for the years ended December 31, 2022, 2021 and 2020, respectively. The weighted-average grant-date fair values of stock options granted was $ 273.63 and $ 248.85 per share for the years ended December 31, 2022 and 2021, respectively. No stock options were granted during the year ended December 31, 2020. During the year ended December 31, 2021, a one-time long-term performance-based option award was granted to the Chief Executive Officer (“2021 CEO Performance Award") and to certain executives (collectively “2021 Performance Awards”) under the 2021 Plan at a total grant date fair value of $ 232 million. The 2021 Performance Awards will vest in eight equal tranches based on service and achievement of both performance and market conditions, subject to continued employment and specifically for the 2021 CEO Performance Award, as CEO or Executive Chairman of the Company, through each vesting date. The performance and market condition for a particular tranche may be achieved at different points in time and in any order but will become eligible to vest only when all service, performance and market conditions for the respective tranche are met but no earlier than two years . The performance and market condition must be achieved by September 30, 2026 (the "Performance Period"). The stock price metric will be achieved when both the 180-Day volume weighted-average price ("VWAP") and the 30-Day VWAP equal or exceed the respective tranche stock price metric on any day during the Performance Period. The performance metric is achieved when the trailing four quarter cumulative GAAP subscription revenues equal or exceed the respective tranche performance target. Shares acquired upon exercise of the options cannot be sold, transferred or disposed until after the end of the Performance Period and the 2021 Performance Awards will expire ten years from the respective date of grant. The fair value of the 2021 Performance Awards and the corresponding derived service periods were estimated using the Monte Carlo simulation. Stock-based compensation expense is recognized on a graded vesting basis over the requisite service period for each respective tranche, but not shorter than the two -year minimum service period, and includes an assessment of when it is probable the performance condition will be achieved, which involves a subjective assessment of our future financial projection. As of December 31, 2022, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options was approximately $ 84 million. The weighted-average remaining vesting period of unvested stock options at December 31, 2022 was two years . RSUs A summary of RSU activity was as follows: Number of Shares Weighted-Average Grant-Date Fair Value Per Share (in thousands) Outstanding at December 31, 2021 5,808 $ 416.00 Granted 3,719 $ 541.24 Vested ( 3,075 ) $ 389.27 Forfeited ( 715 ) $ 469.06 Outstanding at December 31, 2022 5,737 $ 505.79 Expected to vest as of December 31, 2022 4,983 RSUs outstanding as of December 31, 2022 were comprised of 5.3 million RSUs with only service conditions and 0.4 million RSUs with both service conditions and performance conditions, including certain RSUs with additional market conditions. The total intrinsic value of the RSUs vested was $ 1.5 billion, $ 2.1 billion and $ 1.8 billion for the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, the aggregate intrinsic value of RSUs outstanding was $ 2.2 billion and RSUs expected to vest was $ 1.9 billion. The weighted-average grant-date fair value of RSUs granted was $ 541.24 , $ 577.26 and $ 367.52 per share for the years ended December 31, 2022, 2021 and 2020, respectively. 69 Table of Contents For the years ended December 31, 2022 and 2021, PRSUs with service, performance and market vesting criteria are considered as eligible to vest when approved by the compensation committee of our board of directors in January of the year following the grant. The ultimate number of shares eligible to vest for PRSUs range from 0 % to 200 % of the target number of shares depending on achievement relative to the performance metrics and, for certain PRSUs, depend on our total shareholder return relative to that of the S&P 500 index over the applicable measurement period. The eligible shares subject to PRSUs granted during the year ended December 31, 2022 will vest in February of the following year and semi-annually for the remaining two years contingent on each holder’s continuous status as a service provider on the applicable vesting dates. The number of PRSUs granted included in the table above reflects the shares that could be eligible to vest at 100 % of target for PRSUs and includes adjustments for over or under achievement for PRSUs granted in the prior year. We recognized $ 121 million, $ 124 million, and $ 70 million of stock-based compensation expense, net of actual and estimated forfeitures, associated with PRSUs on a graded vesting basis during the year ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs was approximately $ 2.2 billion and the weighted-average remaining vesting period was approximately three years . Valuation Assumption s The following assumptions were used in the Black-Scholes options pricing model and the Monte Carlo simulation model, to estimate our stock-based compensation on the date of grant for ESPP, stock options and PRSUs, respectively, as applicable. Year Ended December 31, 2022 2021 2020 Risk Free Interest Rate ESPP 0.06 % - 2.96 % 0.06 % - 0.11 % 0.11 % - 2.04 % Stock Options 2.04 % 1.20 % - 1.45 % * PRSU 1.76 % 0.19 % - 0.20 % ** Expected Term (in years) ESPP 0.5 0.5 0.5 Stock Options 10 7.5 - 10 * Expected Volatility ESPP 35 % - 59 % 35 % - 60 % 30 % - 60 % Stock Options 40 % 38 % - 41 % * PRSU 42 % 41 % - 42 % ** * There were no stock option grants in 2020. ** There were no grants with market conditions for the respective fiscal year. Expected volatility . The expected volatility is based on the historical volatility of our common stock for a period similar to our expected term. Expected term . We determine the expected term based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. We estimate the expected term for ESPP using the purchase period. Risk-free interest rate . The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the stock-based award. Expected dividend yield . Our expected dividend yield is zero , as we have not and do not currently intend to declare dividends in the foreseeable future. 70 (15) Net Income Per Share Basic net income per share attributable to common stockholders is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, adjusted for the effects of dilutive shares of common stock, which are comprised of outstanding stock options, RSUs, ESPP obligations, the 2022 Notes and the 2022 Warrants. Stock awards with performance or market conditions are included in dilutive shares to the extent all conditions are met. The dilutive potential shares of common stock are computed using the treasury stock method or the as-if converted method, as applicable. The effects of outstanding stock options, RSUs, ESPP obligations, 2022 Notes and 2022 Warrants are excluded from the computation of diluted net income per share in periods in which the effect would be antidilutive. The following tables present the calculation of basic and diluted net income per share attributable to common stockholders (in millions, except for number of shares reflected in thousands and per share data): Year Ended December 31, 2022 2021 2020 Numerator: Net income $ 325 $ 230 $ 119 Denominator: Weighted-average shares outstanding - basic 201,430 198,094 193,096 Weighted-average effect of potentially dilutive securities: Common stock options 117 293 547 RSUs 1,555 3,429 4,421 2022 Notes — 535 842 2022 Notes settlements 280 116 1,931 2022 Warrants — 649 920 Settlement of 2022 Warrants 153 51 721 Weighted-average shares outstanding - diluted 203,535 203,167 202,478 Net income per share - basic $ 1.61 $ 1.16 $ 0.61 Net income per share - diluted $ 1.60 $ 1.13 $ 0.59 Potentially dilutive securities that are not included in the calculation of diluted net income per share because doing so would be antidilutive are as follows (in thousands): Year Ended December 31, 2022 2021 2020 Common stock options 1,084 998 — RSUs 3,265 381 347 ESPP obligations 309 209 224 Total potentially dilutive securities 4,658 1,588 571 71 Table of Contents (16) Income Taxes The components of income before income taxes by U.S. and foreign jurisdictions were as follows (in millions): Year Ended December 31, 2022 2021 2020 United States $ 173 $ 152 $ 13 Foreign 226 97 137 Total $ 399 $ 249 $ 150 The provision for income taxes consists of the following (in millions): Year Ended December 31, 2022 2021 2020 Current provision: Federal $ — $ — $ — State 13 1 — Foreign 46 52 53 59 53 53 Deferred provision: Federal ( 1 ) ( 3 ) ( 5 ) State ( 1 ) ( 3 ) ( 1 ) Foreign 17 ( 28 ) ( 16 ) 15 ( 34 ) ( 22 ) Provision for income taxes $ 74 $ 19 $ 31 The effective income tax rate differs from the federal statutory income tax rate applied to the income before income taxes due to the following (in millions): Year Ended December 31, 2022 2021 2020 Tax computed at U.S. federal statutory rate $ 84 $ 53 $ 31 State taxes, net of federal benefit 10 — — U.S. tax on foreign earnings 96 — — Tax rate differential for international subsidiaries 18 6 8 Stock-based compensation 7 ( 160 ) ( 157 ) Executive compensation 22 23 25 Tax credits ( 70 ) ( 76 ) ( 64 ) Other 7 4 4 Valuation allowance ( 100 ) 169 184 Provision for income taxes $ 74 $ 19 $ 31 Significant components of our deferred tax assets are shown below (in millions). A valuation allowance has been recognized to offset our deferred tax assets, as necessary, by the amount of any tax benefits that, based on evidence, are not expected to be realized. 72 Table of Contents December 31, 2022 2021 Deferred tax assets: Net operating loss carryforwards $ 605 $ 1,061 Credit carryforwards 388 318 Lease liability 178 152 Capitalized research and development 262 — Depreciation and amortization 553 587 Other 159 126 Total deferred tax assets 2,145 2,244 Less valuation allowance ( 1,228 ) ( 1,326 ) 917 918 Deferred tax liabilities: Right of use asset ( 162 ) ( 141 ) Other ( 129 ) ( 94 ) Net deferred tax assets $ 626 $ 683 The unremitted earnings of our foreign subsidiaries are not considered indefinitely reinvested, except in certain designated jurisdictions in which the resident entity is a service provider that is not expected to generate substantial amounts of cash in excess of what may be reinvested by the local entity. We have not provided for state income or withholding taxes on the undistributed earnings of foreign subsidiaries, which are considered indefinitely invested outside of the U.S. The amount of unrecognized deferred tax liability on these undistributed earnings is not material as of December 31, 2022. As of December 31, 2022, we had U.S. federal net operating loss and federal tax credit carryforwards of approximately $ 2.0 billion and $ 313 million, respectively. The federal tax credits will begin to expire in 2024 if not utilized. In addition, as of December 31, 2022, we had state net operating loss and state tax credit carryforwards of approximately $ 1.5 billion and $ 229 million, respectively. The state net operating loss will begin to expire in 2023 if not utilized; however, the tax-effected amount due to expire in 2023 is immaterial. State tax credits and a portion of the federal net operating loss carryforwards can be carried forward indefinitely. Utilization of our net operating loss and credit carryforwards may be subject to annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carryforwards before utilization. We maintain a full valuation allowance against our U.S. deferred tax assets as of December 31, 2022. We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. Due to cumulative losses in the U.S. during the prior three years, including tax deductible stock compensation, 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 realized as of December 31, 2022. However, given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that the U.S. valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of material U.S. federal and state deferred tax assets and a corresponding decrease to income tax expense for the period the release is recorded. The exact timing and amount of the valuation allowance release are subject to change on the basis of the level of sustained U.S. profitability that the Company is able to actually achieve, as well as the amount of tax deductible stock compensation dependent upon our publicly traded share price, foreign currency movements and macroeconomic conditions, among other factors. The $ 98 million decrease in the 2022 valuation allowance was primarily attributable to a decrease in deferred tax assets related to the utilization of net operating losses. The $ 197 million increase in the 2021 valuation allowance was primarily attributable to an increase in deferred tax assets related to net operating losses and R&D tax credits partially offset by a valuation allowance release related to Lightstep, Inc. acquired deferred tax liabilities. The $ 210 million increase in the 2020 valuation allowance was primarily attributable to an increase in deferred tax assets related to net operating losses. 73 Table of Contents A reconciliation of the beginning and ending balance of total unrecognized tax benefits is as follows (in millions): Year Ended December 31, 2022 2021 2020 Balance, beginning period $ 124 $ 81 $ 37 Tax positions taken in prior period: Gross increases — 5 6 Gross decreases ( 1 ) — ( 1 ) Tax positions taken in current period: Gross increases 38 38 39 Lapse of statute of limitations — — — Settlements ( 2 ) — — Balance, end of period $ 159 $ 124 $ 81 As of December 31, 2022, we had gross unrecognized tax benefits of approximately $ 159 million, of which $ 31 million would impact the effective tax rate, if recognized. We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense. Accrued interest and penalties included in our liability related to unrecognized tax benefits were $ 5 million and $ 4 million at December 31, 2022 and 2021, respectively. The amount of unrecognized tax benefits could be reduced upon expiration of the applicable statutes of limitations. The potential reduction in unrecognized tax benefits during the next 12 months is not expected to be material. Interest and penalties accrued on these uncertain tax positions are recognized as income tax expense and will be released upon the expiration of the statutes of limitations. These amounts are also not material for any periods presented. We are subject to taxation in the United States and foreign jurisdictions. As of December 31, 2022, our tax years 2004 to 2021 remain subject to examination in most jurisdictions. There are differing interpretations of tax laws and regulations, and as a result, disputes may arise with tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. We periodically evaluate our exposures associated with our tax filing positions. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations, and we do not anticipate a significant impact to our gross unrecognized tax benefits within the next 12 months related to these years. Although the timing of the resolution, settlement and closure of any audit is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years that remain subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits. (17) Commitments and Contingencies Operating Leases For some of our offices and data centers, we have entered into non-cancelable operating lease agreements with various expiration dates through 2035. Certain lease agreements include options to renew or terminate the lease, which are not reasonably certain to be exercised and therefore are not factored into our determination of lease payments. Total operating lease costs was $ 112 million, $ 100 million and $ 83 million, excluding short-term lease costs, variable lease costs and sublease income each of which were immaterial, for each of the years ended December 31, 2022, 2021 and 2020, respectively. 74 Table of Contents Total cash paid for amounts included in the measurement of operating lease liabilities was $ 75 million for each of the years ended December 31, 2022 and 2021. Operating lease liabilities arising from obtaining operating right-of-use assets was $ 192 million and $ 223 million for the years ended December 31, 2022 and 2021, respectively, which is largely related to additional office facilities located in Santa Clara, California in line with the original commitment. As of December 31, 2022, the weighted-average remaining lease term is approximately ten years and the weighted-average discount rate is 3.5 %. Maturities of operating lease liabilities as of December 31, 2022 are presented in the table below (in millions): Years Ending December 31, 2023 $ 115 2024 100 2025 100 2026 81 2027 71 Thereafter 428 Total operating lease payments 895 Less: imputed interest ( 149 ) Present value of operating lease liabilities $ 746 In addition to the amounts above, as of December 31, 2022, we have operating leases, primarily for offices, that have not yet commenced with undiscounted cash flows of $ 103 million. These operating leases are expected to commence in 2023 with lease terms of ten to twelve years . Othe r Contractual Commitments Other contractual commitments consist of data center and IT operations and sales and marketing activities related to our daily business operations. Future minimum payments under our non-cancelable purchase commitments as of December 31, 2022 are presented in the table below (in millions): Purchase Obligations (1) Years Ending December 31, 2023 $ 289 2024 219 2025 98 2026 69 2027 542 Thereafter 54 Total $ 1,271 (1) 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 2023 and future years. If we had canceled these contractual commitments as of December 31, 2022, we would have been obligated to pay cancellation penalties of approximately $ 56 million in aggregate. In addition, during 2022, we entered into a non-cancelable $ 500 million agreement with Microsoft to purchase cloud services over five years, as we accelerate Azure adoption for mutual customers. The unutilized consumption is included within the table above. In addition to the amounts above, the repayment of our 2030 Notes with an aggregate principal amount of $ 1.5 billion is due on September 1, 2030. Refer to Note 11 for further information regarding our 2030 Notes. Further, $ 31 million of unrecognized tax benefits have been recorded as liabilities as of December 31, 2022. 75 Table of Contents Legal Proceedings From time to time, we are party to litigation and other legal proceedings in the ordinary course of business. While the results of any litigation or other legal proceedings are uncertain, management does not believe the ultimate resolution of any pending legal matters is likely to have a material adverse effect on our financial position, results of operations or cash flows, except for those matters for which we have recorded a loss contingency. We accrue for loss contingencies when it is both probable that we will incur the loss and when we can reasonably estimate the amount of the loss or range of loss. Generally, our subscription agreements require us to defend our customers for third-party intellectual property infringement and other claims. Any adverse determination related to intellectual property claims or other litigation could prevent us from offering our services and adversely affect our financial condition and results of operations. Indemnification Provisions Our agreements include provisions indemnifying customers against intellectual property and other third-party claims. In addition, we have entered into indemnification agreements with our directors, executive officers and certain other officers that will require us, among other things, to indemnify them against certain liabilities that may arise as a result of their affiliation with us. We have not incurred any costs as a result of such indemnification obligations and have not recorded any liabilities related to such obligations in the consolidated financial statements. (18) Information about Geographic Areas and Products Revenues by geographic area, based on the location of our users, were as follows for the periods presented (in millions): Year Ended December 31, 2022 2021 2020 North America (1) $ 4,723 $ 3,752 $ 2,960 EMEA (2) 1,778 1,551 1,132 Asia Pacific and other 744 593 427 Total revenues $ 7,245 $ 5,896 $ 4,519 Property and equipment, net by geographic area were as follows (in millions): December 31, 2022 2021 Property and equipment, net: North America (3) $ 664 $ 484 EMEA (2) 221 176 Asia Pacific and other 168 106 Total property and equipment, net $ 1,053 $ 766 (1) Revenues attributed to the United States were 94 % of North America revenues for each of the years ended December 31, 2022, 2021 and 2020. (2) Europe, the Middle East and Africa (“EMEA”) (3) Property and equipment, net attributed to the United States were approximately 85 % and 84 % of property and equipment, net attributable to North America as of December 31, 2022 and 2021, respectively. 76 Table of Contents Subscription revenues consist of the following (in millions): Year Ended December 31, 2022 2021 2020 Digital workflow products $ 6,077 $ 4,882 $ 3,749 ITOM products 814 691 537 Total subscription revenues $ 6,891 $ 5,573 $ 4,286 Our digital workflow products include the Now Platform, IT Service Management, Strategic Portfolio Management (formerly known as IT Business Management), IT Asset Management and Enterprise Asset Management, Security Operations, Integrated Risk Management (formerly Governance, Risk and Compliance), ESG Management, HR Service Delivery, Workplace Service Delivery, Legal Service Delivery, Customer Service Management, Field Service Management, Industry Solutions, App Engine, Automation Engine, Platform Privacy and Security, Procurement Operations Management and Impact, and are generally priced on a per user basis. Our ITOM products are generally priced on a subscription unit basis, which allows us to measure customers’ management of various IT resources, and decreasingly on a per node (physical or virtual server) basis. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.