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Item 1. Financial Statements

2023-07-27 compared with 2023-04-27 · 153 added, 125 removed, 400 unchanged (41% of the section changed)

3 unchanged sentences

(in millions)

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Assets (unaudited)

37 unchanged sentences

SERVICENOW, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions, except number of shares which are reflected in thousands and per share data)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Subscription $ 2,075 $ 1,658 $ 4,099 $ 3,289

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Income before income taxes 174 29 362 114

Provision for income taxes 38 10

(Benefit from) provision for income taxes ( 870 ) 9 ( 832 ) 19

Net income $ 1,044 $ 20 $ 1,194 $ 95

3 unchanged sentences

Weighted-average shares used to compute net income per share - diluted 205,351 203,018 204,690 203,228

Other comprehensive income (loss):

Other comprehensive (loss) income:

Foreign currency translation adjustments $ — $ ( 62 ) $ 13 $ ( 74 )

Unrealized gain (loss) on investments, net of tax 19 ( 38 )

Other comprehensive income (loss) 32 ( 50 )

Comprehensive income $ 182 $ 25

Unrealized loss on investments, net of tax ( 21 ) ( 22 ) ( 2 ) ( 60 )

Other comprehensive (loss) income ( 21 ) ( 84 ) 11 ( 134 )

Comprehensive income (loss) $ 1,023 $ ( 64 ) $ 1,205 $ ( 39 )

(1) Includes stock-based compensation as follows:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Cost of revenues:

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(in millions, except number of shares which are reflected in thousands)

Three Months Ended March 31, 2023

Three Months Ended June 30, 2023 Three Months Ended June 30, 2022

Common Stock Additional

2 unchanged sentences

Stockholders’

Shares Amount

Balance at December 31, 2022 202,882 $ — $ 4,796 $ 338 $ ( 102 ) $ 5,032

Equity Common Stock Additional

Capital Retained Earnings Accumulated

Comprehensive Loss Total

Stockholders’

Shares Amount Shares Amount

Balance at beginning of the period 203,740 $ — $ 5,182 $ 488 $ ( 70 ) $ 5,600 200,457 $ — $ 3,925 $ 88 $ ( 16 ) $ 3,997

Common stock issued under employee stock plans 527 — — — — — 554 — 1 — — 1

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Stock-based compensation — — 397 — — 397 — — 351 — — 351

Other comprehensive income, net of tax — — — — 32 32

Settlement of 2022 Warrants — — — — — — 603 — — — — —

Settlement of 2022 Notes conversion feature — — — — — — — — ( 212 ) — — ( 212 )

Benefit from exercise of 2022 Note Hedge — — — — — — — — 212 — — 212

Other comprehensive loss, net of tax — — — — ( 21 ) ( 21 ) — — — — ( 84 ) ( 84 )

Net income — — — 1,044 — 1,044 — — — 20 — 20

Balance at March 31, 2023 203,740 $ — $ 5,182 $ 488 $ ( 70 ) $ 5,600

Three Months Ended March 31, 2022

Balance at end of the period 204,267 $ — $ 5,485 $ 1,532 $ ( 91 ) $ 6,926 201,614 $ — $ 4,186 $ 108 $ ( 100 ) $ 4,194

Six Months Ended June 30, 2023 Six Months Ended June 30, 2022

Common Stock Additional

Capital Retained Earnings Accumulated

Comprehensive Loss Total

Stockholders’

Equity Common Stock Additional

Capital Retained Earnings (Accumulated Deficit) Accumulated

1 unchanged sentence

Stockholders’

Shares Amount

Balance at December 31, 2021 199,608 $ — $ 3,665 $ ( 4 ) $ 34 $ 3,695

Shares Amount Shares Amount

Balance at beginning of the period 202,882 $ — $ 4,796 $ 338 $ ( 102 ) $ 5,032 199,608 $ — $ 3,665 $ ( 4 ) $ 34 $ 3,695

Cumulative-effect adjustment from adoption of Accounting Standards Update (ASU) 2020-06 — — — — — — — — ( 19 ) 17 — ( 2 )

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Stock-based compensation — — 778 — — 778 — — 675 — — 675

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 — — — — ( 50 ) ( 50 )

Other comprehensive income (loss), net of tax — — — — 11 11 — — — — ( 134 ) ( 134 )

Net income — — — 1,194 — 1,194 — — — 95 — 95

Balance at March 31, 2022 200,457 $ — $ 3,925 $ 88 $ ( 16 ) $ 3,997

Balance at end of the period 204,267 $ — $ 5,485 $ 1,532 $ ( 91 ) $ 6,926 201,614 $ — $ 4,186 $ 108 $ ( 100 ) $ 4,194

See accompanying notes to condensed consolidated financial statements

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(in millions)

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from operating activities:

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Deferred income taxes ( 904 ) ( 3 )

Other ( 2 ) 19

Changes in operating assets and liabilities, net of effect of business combinations:

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Purchases of property and equipment ( 297 ) ( 244 )

Business combinations, net of cash acquired — ( 57 )

Purchases of investments ( 2,821 ) ( 1,774 )

1 unchanged sentence

Sales and maturities of investments 1,953 1,131

Other 13 ( 1 )

Net cash used in investing activities $ ( 1,198 ) $ ( 1,080 )

3 unchanged sentences

Taxes paid related to net share settlement of equity awards ( 206 ) ( 241 )

Net cash provided by (used in) financing activities $ 5 $ ( 51 )

Net cash used in financing activities $ ( 89 ) $ ( 229 )

Foreign currency effect on cash, cash equivalents and restricted cash — ( 49 )

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The accompanying unaudited condensed consolidated financial statements and condensed footnotes have been prepared in accordance with the applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting.

Accordingly, they do not include all of the information and footnotes required by U.S.

generally accepted accounting principles (“GAAP”) for complete financial statements due to the permitted exclusion of certain disclosures for interim reporting.

Accordingly, they do not include all of the information and footnotes required by United States (“U.S.”) generally accepted accounting principles (“GAAP”) for complete financial statements due to the permitted exclusion of certain disclosures for interim reporting.

In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary under GAAP for fair statement of results for the interim periods presented have been included.

As a result of displaying amounts in millions, rounding differences may exist in the condensed consolidated financial statements and footnote tables.

The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023 or for other interim periods or future years.

The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023 or for other interim periods or future years.

The condensed consolidated balance sheet as of December 31, 2022 is derived from audited consolidated financial statements;

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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 March 31, 2023 and December 31, 2022, there were no customers that represented more than 10% of our accounts receivable balance.

As of June 30, 2023, we had one customer, a U.S.

federal channel partner and systems integrator, that represented 14 % of our accounts receivable balance.

Based on our periodic credit evaluations, there have been no historical collection concerns with this customer.

As of December 31, 2022, 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.

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The following is a summary of our available-for-sale debt securities recorded within short-term and long-term investments on the condensed consolidated balance sheets (in millions):

March 31, 2023

June 30, 2023

Losses Estimated

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Total available-for-sale securities $ 5,000 $ — $ ( 73 ) $ 4,927

As of March 31, 2023, the contractual maturities of our available-for-sale debt securities, excluding those securities classified within cash and cash equivalents on the condensed consolidated balance sheet and mortgage-backed and asset-backed securities that do not have a single maturity, did not exceed 36 months.

As of June 30, 2023, the contractual maturities of our available-for-sale debt securities, excluding those securities classified within cash and cash equivalents on the condensed 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):

March 31, 2023

June 30, 2023

Due within 1 year $ 3,084

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Total $ 5,824

As of March 31, 2023 and December 31, 2022, the fair value of available-for-sale securities in a continuous unrealized loss position totaled $ 3,841 million and $ 4,232 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 material as of March 31, 2023.

As of June 30, 2023 and December 31, 2022, the fair value of available-for-sale securities in a continuous unrealized loss position totaled $ 5,231 million and $ 4,232 million, respectively, the majority of which has been in a continuous unrealized loss position for greater than 12 months.

Non-Marketable Equity Investments

As of March 31, 2023 and December 31, 2022, the total amount of non-marketable equity investments in privately held companies included in other assets on our condensed consolidated balance sheets was $ 277 million and $ 252 million, respectively.

As of June 30, 2023 and December 31, 2022, the total amount of non-marketable equity investments in privately held companies included in other assets on our condensed consolidated balance sheets was $ 279 million and $ 252 million, respectively.

These balances include a $ 100 million investment in the common and preferred shares of Celonis SE, a privately held company that develops and sells process mining software.

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(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 March 31, 2023 (in millions):

The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis as of June 30, 2023 (in millions):

Level 1 Level 2 Total

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Deposits 585 — 585

government and agency securities — 33 33

Marketable securities:

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See Note 8 for the fair value measurement of our derivative contracts and Note 10 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 March 31, 2023 and December 31, 2022.

Our marketable equity investments are classified within Level 1 and are immaterial as of June 30, 2023 and December 31, 2022.

(5) Business Combinations

During the three months ended June 30, 2022, we completed an acquisition for total consideration of $ 57 million primarily to enhance our products with the acquired technology and engineering workforce.

The acquisition was not material to our condensed consolidated financial statements.

(6) Intangible Assets

Intangible assets consist of the following (in millions):

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Developed technology $ 436 $ 434

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Intangible assets, net $ 191 $ 232

The weighted-average useful life of the acquired developed technology for the three months ended March 31, 2023 and 2022 was approximately five years .

Amortization expense for intangible assets for each of the three months ended March 31, 2023 and 2022 was $ 20 million.

The following table presents the estimated future amortization expense related to intangible assets held at March 31, 2023 (in millions):

The weighted-average useful life of the acquired developed technology for the six months ended June 30, 2023 and 2022 was approximately five years .

Amortization expense for intangible assets for the three months ended June 30, 2023 and 2022 was $ 22 million and $ 20 million, respectively, and for the six months ended June 30, 2023 and 2022 was $ 42 million and $ 40 million, respectively.

The following table presents the estimated future amortization expense related to intangible assets held at June 30, 2023 (in millions):

Years Ending December 31,

3 unchanged sentences

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Computer equipment $ 1,799 $ 1,606

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Property and equipment, net $ 1,148 $ 1,053

Construction in progress consists of costs related to leasehold and other improvements.

Depreciation expense for the three months ended March 31, 2023 and 2022 was $ 81 million and $ 58 million, respectively .

Construction in progress consists of costs primarily related to leasehold and other improvements.

Depreciation expense for the three months ended June 30, 2023 and 2022 was $ 88 million and $ 61 million, respectively, and for the six months ended June 30, 2023 and 2022 was $ 169 million and $ 119 million, respectively .

(8) Derivative Contracts

As of March 31, 2023 and December 31, 2022, we had foreign currency forward contracts with total notional values of $ 1,556 million and $ 1,360 million, respectively, which are not designated as hedging instruments.

As of June 30, 2023 and December 31, 2022, we had foreign currency forward contracts with total notional values of $ 3,275 million and $ 1,360 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 condensed consolidated balance sheets.

The gross fair value of these foreign currency forward contracts was immaterial as of March 31, 2023 and December 31, 2022.

The gains (losses) recognized for these foreign currency forward contracts were immaterial for each of the three months ended March 31, 2023 and 2022.

The gross fair value of these foreign currency forward contracts was immaterial as of June 30, 2023 and December 31, 2022.

The gains (losses) recognized for these foreign currency forward contracts were immaterial for each of the three and six months ended June 30, 2023 and 2022.

(9) Deferred Revenue and Performance Obligations

Revenues recognized during the three months ended March 31, 2023 from amounts included in deferred revenue as of December 31, 2022 were $ 1.8 billion.

Revenues recognized during the three months ended March 31, 2022 from amounts included in deferred revenue as of December 31, 2021 were $ 1.4 billion.

Revenues recognized during the three months ended June 30, 2023 and 2022 from amounts included in deferred revenue as of March 31, 2023 and 2022 were $ 1.9 billion and $ 1.5 billion, respectively.

Revenues recognized during the six months ended June 30, 2023 and 2022 from amounts included in deferred revenue as of December 31, 2022 and 2021 were $ 3.2 billion and $ 2.5 billion, respectively.

Remaining Performance Obligations

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RPO excludes contracts that are billed in arrears, such as certain time and materials contracts, as we apply the “right to invoice” practical expedient under relevant accounting guidance.

As of March 31, 2023, the total non-cancellable RPO under our contracts with customers was $ 14.0 billion and we expect to recognize revenues on approximately 50 % of these RPO over the following 12 months.

As of June 30, 2023, the total non-cancellable RPO under our contracts with customers was $ 14.2 billion and we expect to recognize revenues on approximately 51 % 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.

The carrying value of our outstanding debt, net of unamortized debt discount and issuance costs of $ 14 million, was $ 1,486 million for each of the periods ended March 31, 2023 and December 31, 2022.

We consider the fair value of the 2030 Notes at March 31, 2023 and December 31, 2022 to be a Level 2 measurement.

The estimated fair value of the 2030 Notes based on the closing trading price per $ 100 , was $ 1,211 million and $ 1,144 million at March 31, 2023 and December 31, 2022, respectively.

For the periods ended June 30, 2023 and December 31, 2022, the carrying value of our outstanding debt was $ 1,487 million and $ 1,486 million, respectively, net of unamortized debt discount and issuance costs of $ 13 million and $ 14 million, respectively.

We consider the fair value of the 2030 Notes at June 30, 2023 and December 31, 2022 to be a Level 2 measurement.

The estimated fair value of the 2030 Notes based on the closing trading price per $ 100 , was $ 1,187 million and $ 1,144 million at June 30, 2023 and December 31, 2022, respectively.

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”).

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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.

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 our 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.

2022 Notes, Note Hedge and Warrants

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The 2022 Note Hedge offset the dilution and cash payments in excess of the principal amount of the converted 2022 Notes and expired upon the maturity date of the 2022 Notes, which was on June 1, 2022.

Purchase Initial Shares Shares as of March 31, 2023

Purchase Initial Shares Shares as of June 30, 2023

(in millions)

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The following table shows the components of accumulated other comprehensive loss, net of tax, in the stockholders’ equity section of our condensed consolidated balance sheets (in millions):

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Foreign currency translation adjustment $ ( 12 ) $ ( 25 )

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(12) Stockholders' Equity

We are authorized to issue a total of 600 million shares of common stock as of March 31, 2023.

We are authorized to issue a total of 600 million shares of common stock as of June 30, 2023.

Holders of our common stock are not entitled to receive dividends unless declared by our board of directors.

As of March 31, 2023, we had 203.7 million shares of common stock outstanding and had reserved shares of common stock for future issuance as follows (in thousands):

March 31, 2023

As of June 30, 2023, we had 204.3 million shares of common stock outstanding and had reserved shares of common stock for future issuance as follows (in thousands):

June 30, 2023

Options outstanding 1,168

Shares of common stock available for future grants:

2021 Equity Incentive Plan (2)

Amended and Restated 2021 Equity Incentive Plan (2)

Amended and Restated 2012 Employee Stock Purchase Plan (2)

2022 New-Hire Equity Incentive Plan (2)

Total shares of common stock reserved for future issuance 29,597

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(2) Refer to Note 13 for a description of these plans.

During the three months ended March 31, 2023 and 2022, we issued a total of 0.9 million shares and 0.8 million shares, respectively, from stock option exercises, vesting of RSUs, net of employee payroll taxes, and purchases from the employee stock purchase plan (“ESPP”).

We issued a total of 1.4 million shares for each of the six months ended June 30, 2023 and 2022 from stock option exercises, vesting of RSUs, net of employee payroll taxes, and purchases from the employee stock purchase plan (“ESPP”).

In May 2023, our board of directors authorized a program to repurchase up to $ 1.5 billion of our common stock (the “Share Repurchase Program”).

Under this new program, we may repurchase our common stock from time to time through open market purchases, in privately negotiated transactions, or by other means, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, in accordance with applicable securities laws and other restrictions.

The Share Repurchase Program does not have a fixed expiration date, may be suspended or discontinued at any time, and does not obligate us to acquire any amount of common stock.

The timing, manner, price, and amount of any repurchases will be determined by us at our discretion and will depend on a variety of factors, including business, economic and market conditions, prevailing stock prices, corporate and regulatory requirements, and other considerations.

As of June 30, 2023, we have not repurchased shares under the Share Repurchase Program.

(13) 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”).

2012 Equity Incentive Plan (the “2012 Plan”), amended and restated 2021 Equity Incentive Plan (the “Restated 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 Restated 2021 Plan was approved by the shareholders on June 1, 2023 to increase shares available for future grants by approximately 10 million shares.

Effective on June 1, 2023, no further awards will be made under the 2022 Plan.

The Restated 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.

In addition, the 2022 Plan, the Restated 2021 Plan and the 2012 Plan provide for the grant of performance cash awards.

Incentive stock options may be granted only to employees.

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Stock Options

A summary of stock option activity for the three months ended March 31, 2023 was as follows:

A summary of stock option activity for the six months ended June 30, 2023 was as follows:

Shares Weighted-

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Forfeited ( 55 ) $ 627.21

Outstanding at March 31, 2023 1,233 $ 591.98 8.1 $ 58

Vested and expected to vest as of March 31, 2023 965 $ 572.11 8.0 $ 56

Vested and exercisable as of March 31, 2023 149 $ 171.79 5.1 $ 44

Outstanding at June 30, 2023 1,168 $ 595.01 7.9 $ 73

Vested and expected to vest as of June 30, 2023 931 $ 576.37 7.7 $ 71

Vested and exercisable as of June 30, 2023 149 $ 183.25 5.1 $ 56

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 three months ended March 31, 2023 and 2022 was $ 1 million and $ 22 million, respectively.

The total fair value of stock options vested during the three months ended March 31, 2023 and 2022 was $ 2 million and $ 3 million, respectively.

The weighted-average grant-date fair value of stock options granted during the three months ended March 31, 2022 was $ 273.63 per share.

No stock options were granted during the three months ended March 31, 2023.

As of March 31, 2023, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options was approximately $ 66 million.

The weighted-average remaining vesting period of unvested stock options at March 31, 2023 was approximately one year .

A summary of RSU activity for the three months ended March 31, 2023 was as follows:

The total fair value of stock options vested during the six months ended June 30, 2023 was $ 4 million.

No stock options were granted during the six months ended June 30, 2023.

As of June 30, 2023, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options was approximately $ 46 million.

The weighted-average remaining vesting period of unvested stock options at June 30, 2023 was approximately one year .

A summary of RSU activity for the six months ended June 30, 2023 was as follows:

Shares Weighted-Average Grant-Date Fair Value

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Forfeited ( 260 ) $ 506.61

Outstanding at March 31, 2023 8,421 $ 494.49

Expected to vest as of March 31, 2023 7,210

RSUs outstanding as of March 31, 2023 were comprised of 7.8 million RSUs with only service conditions and 0.6 million RSUs with both service and performance conditions, including certain RSUs with additional market conditions.

The total intrinsic value of the RSUs vested was $ 362 million and $ 494 million for the three months ended March 31, 2023 and 2022, respectively.

As of March 31, 2023, the aggregate intrinsic value of RSUs outstanding was $ 3.9 billion and RSUs expected to vest was $ 3.4 billion.

The weighted-average grant-date fair value of RSUs granted was $ 465.57 and $ 589.15 per share for the three months ended March 31, 2023 and 2022, respectively.

Outstanding at June 30, 2023 7,751 $ 496.60

Expected to vest as of June 30, 2023 6,695

RSUs outstanding as of June 30, 2023 were comprised of 7.2 million RSUs with only service conditions and 0.6 million RSUs with both service and performance conditions, including certain RSUs with additional market conditions.

The total intrinsic value of the RSUs vested was $ 699 million for the six months ended June 30, 2023.

As of June 30, 2023, the aggregate intrinsic value of RSUs outstanding was $ 4.4 billion and RSUs expected to vest was $ 3.8 billion.

The weighted-average grant-date fair value of RSUs granted was $ 467.78 per share for the six months ended June 30, 2023.

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 three months ended March 31, 2023 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 eligible shares subject to PRSUs granted during the six months ended June 30, 2023 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 $ 35 million and $ 29 million of stock-based compensation, net of actual and estimated forfeitures, associated with PRSUs on a graded vesting basis during the three months ended March 31, 2023 and 2022, respectively.

As of March 31, 2023, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs was approximately $ 3.2 billion, and the weighted-average remaining vesting period was approximately three years .

We recognized $ 70 million and $ 65 million of stock-based compensation, net of actual and estimated forfeitures, associated with PRSUs on a graded vesting basis during the six months ended June 30, 2023 and 2022, respectively.

As of June 30, 2023, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs was approximately $ 2.9 billion, and the weighted-average remaining vesting period was approximately three years .

(14) Net Income Per Share

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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):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Net income $ 1,044 $ 20 $ 1,194 $ 95

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RSUs 1,197 1,251 870 1,678

2022 Warrants — 640

ESPP obligations 14 — — —

2022 Notes settlements — 443 — 565

Settlement of 2022 Warrants — 232 — 309

Weighted-average shares outstanding - diluted 205,351 203,018 204,690 203,228

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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):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Common stock options 967 1,022 967 1,022

1 unchanged sentence

ESPP obligations — 159 188 159

2022 Notes — 689

Total potentially dilutive securities 3,446 5,056 3,890 4,638

(14) Income Taxes

(15) (Benefit from) Provision for Income Taxes

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

Our income tax provision was $ 38 million for the three months ended March 31, 2023.

The income tax provision was primarily attributable to the mix of earnings and losses in countries with differing statutory tax rates and the valuation allowance in the United States.

Our income tax provision was $ 10 million for the three months ended March 31, 2022.

The income tax provision was primarily attributable to the mix of earnings and losses in countries with differing statutory tax rates and the valuation allowance in the United States.

We maintain a full valuation allowance against our U.S.

The income tax benefit was $ 870 million and $ 832 million for the three and six months ended June 30, 2023, respectively.

The income tax benefit was primarily attributable to the release of the valuation allowance of certain U.S.

federal and state deferred tax assets.

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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.

As of December 31, 2022, the three-year cumulative U.S.

pre-tax income of $ 338 million was offset by the three-year total U.S.

permanent differences and other comprehensive losses of approximately $ 720 million, resulting in a three-year cumulative U.S.

loss of approximately $ 380 million.

Due to the cumulative U.S.

losses during the prior twelve quarters, including permanent differences and other comprehensive losses, and based on all available positive and negative evidence, as of March 31, 2023 and December 31, 2022, we have determined that it is more likely than not that our U.S.

deferred tax assets will not be realized.

However, given our current U.S.

earnings and anticipated future earnings, we believe there is a reasonable possibility that prior to the fourth quarter of 2023 sufficient positive evidence of sustained U.S.

profitability 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 estimated to be $ 1.0 billion to $ 1.2 billion in the fiscal year the release is recorded.

The exact timing and amount of the valuation allowance release are subject to change based on the level of sustained U.S.

profitability the Company is able to actually achieve.

As of June 30, 2023, we achieved cumulative U.S.

income during the prior twelve quarters when considering pre-tax income adjusted for permanent differences and other comprehensive losses.

Based on all available positive and negative evidence, having demonstrated sustained profitability which is objective and verifiable, and taking into account anticipated future earnings, we concluded it is more likely than not that our U.S.

federal and state deferred tax assets will be realizable, with the exception of California.

We continue to maintain a valuation allowance of $ 177 million against our California deferred tax assets due to the uncertainty regarding realizability of these deferred tax assets as they have not met the “more likely than not” realization criteria, particularly as we expect research and development tax credit generation to exceed our ability to use the credits in future years.

When a change in valuation allowance is recognized during an interim period, the change in valuation allowance resulting from current year income is included in the annual effective tax rate and the release of valuation allowance supported by projections of future taxable income is recorded as a discrete tax benefit in the interim period.

We released $ 910 million of our valuation allowance as a discrete tax benefit and $ 55 million as part of the effective tax rate during the three months ended June 30, 2023.

The remaining $ 86 million is expected to be released during the remaining two quarters of 2023.

We will continue to monitor the need for a valuation allowance against our deferred tax assets on a quarterly basis.

Our income tax provision was $ 9 million and $ 19 million for the three and six months ended June 30, 2022, respectively.

The income tax provision was primarily attributable to the mix of earnings and losses in countries with differing statutory tax rates and the valuation allowance in the United States.

We are subject to taxation in the United States and foreign jurisdictions.

As of March 31, 2023, our tax years 2004 to 2022 remain subject to examination in most jurisdictions.

As of June 30, 2023, our tax years 2004 to 2022 remain subject to examination in most jurisdictions.

Due to differing interpretations of tax laws and regulations, tax authorities may dispute our tax filing positions.

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Operating Leases

For some of our offices and data centers, we have entered into non-cancellable 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 were $ 31 million and $ 27 million, excluding short-term lease costs, variable lease costs and sublease income, each of which were immaterial, for the three months ended March 31, 2023 and 2022, respectively.

For each of the three months ended March 31, 2023 and 2022, total cash paid for amounts included in the measurement of operating lease liabilities was $ 19 million.

Operating lease liabilities arising from obtaining operating right-of-use assets totaled $ 24 million and $ 15 million for the three months ended March 31, 2023 and 2022, respectively.

As of March 31, 2023, the weighted-average remaining lease term is approximately nine years , and the weighted-average discount rate is 4 %.

Maturities of operating lease liabilities as of March 31, 2023 are presented in the table below (in millions):

For some of our offices and data centers, we have entered into non-cancellable 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 were $ 32 million and $ 63 million, excluding short-term lease costs, variable lease costs and sublease income, each of which were immaterial, for the three and six months ended June 30, 2023, respectively.

Total operating lease costs were $ 28 million and $ 56 million, excluding short-term lease costs, variable lease costs and sublease income, each of which were immaterial, for the three and six months ended June 30, 2022, respectively.

For the six months ended June 30, 2023 and 2022, total cash paid for amounts included in the measurement of operating lease liabilities was $ 40 million and $ 38 million, respectively.

Operating lease liabilities arising from obtaining operating right-of-use assets totaled $ 24 million and $ 68 million for the six months ended June 30, 2023 and 2022, respectively.

As of June 30, 2023, the weighted-average remaining lease term is approximately nine years , and the weighted-average discount rate is 4 %.

Maturities of operating lease liabilities as of June 30, 2023 are presented in the table below (in millions):

Remainder of 2023 $ 54

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Present value of operating lease liabilities $ 725

In addition to the amounts above, as of March 31, 2023, we have operating leases, primarily for offices, that have not yet commenced with undiscounted cash flows of $ 70 million.

In addition to the amounts above, as of June 30, 2023, we have operating leases, primarily for offices, that have not yet commenced with undiscounted cash flows of $ 69 million.

These operating leases are expected to commence in 2023 with lease terms of twelve years .

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Other contractual commitments consist of data center and IT operations and sales and marketing activities related to our daily business operations.

There were no material contractual obligations that were entered into during the three months ended March 31, 2023 that were outside the ordinary course of business.

There were no material contractual obligations that were entered into during the six months ended June 30, 2023 that were outside the ordinary course of business.

During the three months ended September 30, 2022, we entered into a non-cancellable, $ 500 million agreement with Microsoft to purchase cloud services over five years , as we accelerate Azure adoption for mutual customers.

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Refer to Note 10 for further information regarding our 2030 Notes.

Further, $ 33 million of unrecognized tax benefits have been recorded as liabilities as of March 31, 2023.

Further, $ 39 million of unrecognized tax benefits have been recorded as liabilities as of June 30, 2023.

Legal Proceedings

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Revenues by geographic area, based on the location of our users, were as follows for the periods presented (in millions):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

North America (1)

$ 1,369 $ 1,139 $ 2,713 $ 2,255

547 433 1,079 867

Asia Pacific and other 234 180 454 352

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Property and equipment, net by geographic area were as follows (in millions):

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

North America (3)

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Total property and equipment, net $ 1,148 $ 1,053

(1) Revenues attributed to the United States were 94 % of North America revenues for each of the three months ended March 31, 2023 and 2022.

(1) Revenues attributed to the United States were 94 % of North America revenues for each of the three and six months ended June 30, 2023 and 2022.

(2) Europe, the Middle East and Africa (“EMEA”).

(3) Property and equipment, net attributed to the United States were approximately 83 % and 85 % of property and equipment, net attributable to North America as of March 31, 2023 and December 31, 2022, respectively.

(3) Property and equipment, net attributed to the United States were approximately 83 % and 85 % of property and equipment, net attributable to North America as of June 30, 2023 and December 31, 2022, respectively.

Subscription revenues consist of the following (in millions):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Digital workflow products $ 1,836 $ 1,463 $ 3,626 $ 2,903

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Total subscription revenues $ 2,075 $ 1,658 $ 4,099 $ 3,289

Our digital workflow products are generally priced on a per user basis and 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, Source-to-Pay Operations (formerly known as Procurement Operations Management) and Impact.

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.

(18) Subsequent Events

In July 2023, we acquired all outstanding shares of G2K Group GmbH, an artificial intelligence powered platform, for total consideration of approximately $ 500 million in cash.

The acquisition is intended to enhance our Now Platform with the acquired smart Internet of Things (“IoT”) technology, enabling businesses to intelligently action digital and in-store data with enterprise-grade workflows .

The consideration is paid in two installments, the first installment made at the close of the transaction in July 2023 and the second installment to be paid in February 2024.

We are currently in the process of finalizing the accounting for this transaction and expect to complete the preliminary purchase price allocation in the third quarter of 2023.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements