What changed in this filing

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Item 1. Financial Statements

2023-10-26 compared with 2023-07-27 · 135 added, 114 removed, 439 unchanged (36% of the section changed)

3 unchanged sentences

(in millions)

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Assets (unaudited)

30 unchanged sentences

Common stock — —

Treasury stock, at cost ( 282 ) —

Additional paid-in capital 5,847 4,796

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

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Income before income taxes 299 102 661 216

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

Provision for (benefit from) income taxes 57 22 ( 775 ) 41

Net income $ 242 $ 80 $ 1,436 $ 175

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Weighted-average shares used to compute net income per share - diluted 206,277 203,121 205,194 203,350

Other comprehensive (loss) income:

Other comprehensive loss:

Foreign currency translation adjustments $ ( 64 ) $ ( 51 ) $ ( 51 ) $ ( 125 )

Unrealized loss on investments, net of tax ( 2 ) ( 21 ) ( 4 ) ( 81 )

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

Other comprehensive loss

( 66 ) ( 72 ) ( 55 ) ( 206 )

Comprehensive income (loss) $ 176 $ 8 $ 1,381 $ ( 31 )

(1) Includes stock-based compensation as follows:

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

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

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

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

Common Stock Additional

Three Months Ended September 30, 2023 Three Months Ended September 30, 2022

Common Stock Treasury Stock Additional

Capital Retained Earnings Accumulated

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Capital Retained Earnings Accumulated

Comprehensive Loss Total

Comprehensive Loss

Stockholders’

Shares Amount Shares Amount

Shares Amount Shares Amount Shares Amount

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

Common stock issued under employee stock plans 788 — — — 76 — — 76 751 — 71 — — 71

Common stock repurchased — — ( 500 ) ( 282 ) — — — ( 282 ) — — — — — —

Taxes paid related to net share settlement of equity awards — — — — ( 127 ) — — ( 127 ) — — ( 111 ) — — ( 111 )

Stock-based compensation — — — — 413 — — 413 — — 361 — — 361

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 — — — — — — ( 66 ) ( 66 ) — — — — ( 72 ) ( 72 )

1 unchanged sentence

Balance at end of the period 205,055 $ — ( 500 ) $ ( 282 ) $ 5,847 $ 1,774 $ ( 157 ) $ 7,182 202,365 $ — $ 4,507 $ 188 $ ( 172 ) $ 4,523

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

Common Stock Additional

Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022

Common Stock Treasury Stock Additional

Capital Retained Earnings Accumulated

5 unchanged sentences

Stockholders’

Shares Amount Shares Amount

Shares Amount 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

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Common stock issued under employee stock plans 2,173 — — — 193 — — 193 2,154 — 177 — — 177

Common stock repurchased — — ( 500 ) ( 282 ) — — — ( 282 ) — — — — — —

Taxes paid related to net share settlement of equity awards — — — — ( 333 ) — — ( 333 ) — — ( 352 ) — — ( 352 )

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Benefit from exercise of 2022 Note Hedge — — — — — — — — — — 233 — — 233

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

Other comprehensive loss, net of tax

— — — — — — ( 55 ) ( 55 ) — — — — ( 206 ) ( 206 )

Net income — — — — — 1,436 — 1,436 — — — 175 — 175

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(in millions)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities:

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Sales and maturities of investments 2,868 1,700

Other ( 15 ) 3

Net cash used in investing activities $ ( 1,723 ) $ ( 1,709 )

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Proceeds from employee stock plans 193 177

Repurchases of common stock ( 282 ) —

Taxes paid related to net share settlement of equity awards ( 333 ) ( 352 )

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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 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 results of operations for the three and nine months ended September 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 June 30, 2023, we had one customer, a U.S.

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

federal channel partner and systems integrator, that represented 26 % of our accounts receivable balance.

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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):

June 30, 2023

September 30, 2023

Losses Estimated

Available-for-sale securities:

Available-for-sale debt securities:

Commercial paper $ 475 $ — $ ( 1 ) $ 474

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Mortgage-backed and asset-backed securities 103 — ( 22 ) 81

Total available-for-sale securities $ 5,898 $ 2 $ ( 76 ) $ 5,824

Total available-for-sale debt securities $ 5,972 $ — $ ( 78 ) $ 5,894

December 31, 2022

Losses Estimated

Available-for-sale securities:

Available-for-sale debt securities:

Commercial paper $ 558 $ — $ ( 2 ) $ 556

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Mortgage-backed and asset-backed securities 98 — ( 17 ) 81

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

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):

June 30, 2023

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

As of September 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 debt securities, by remaining contractual maturity, are as follows (in millions):

September 30, 2023

Due within 1 year $ 2,955

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Total $ 5,894

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.

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 June 30, 2023.

As of September 30, 2023 and December 31, 2022, the fair value of available-for-sale debt securities in a continuous unrealized loss position totaled $ 5,289 million and $ 4,232 million, respectively.

As of September 30, 2023, unrealized losses of $ 41 million from available-for-sale debt securities is from securities in a continuous unrealized loss position greater than 12 months.

For all available-for-sale debt securities that were in unrealized loss positions, we have determined that it is more likely than not we will hold the securities until maturity or a recovery of the cost basis.

Unrealized losses on available-for-sale debt securities were due primarily to changes in market interest rates, and credit-related impairment losses were not material as of September 30, 2023.

Non-Marketable Equity Investments

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.

As of September 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 $ 288 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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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.

The adjustments made during the three and nine months ended September 30, 2023 and 2022 are immaterial.

We classify these fair value measurements as Level 3 within the fair value hierarchy.

(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 June 30, 2023 (in millions):

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

Level 1 Level 2 Total

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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 June 30, 2023 and December 31, 2022.

Our marketable equity investments are classified within Level 1 and are immaterial as of September 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.

On July 17, 2023, we acquired all outstanding shares of G2K Group GmbH, an artificial intelligence powered platform, for $ 464 million in a cash transaction.

The consideration is paid in two installments.

The first installment was made at the close of the transaction in July 2023.

The second installment will be paid in February 2024 and is recognized as accrued expenses and other current liabilities, which is a non-cash financing activity as of September 30, 2023.

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 purchase price was preliminarily allocated based on the estimated fair value of the developed technology intangible asset of $ 75 million ( six-year estimated useful life), net tangible liabilities of $ 1 million, deferred tax liabilities of $ 23 million and goodwill of $ 413 million, which is not deductible for income tax purposes.

Goodwill is primarily attributed to the value expected from synergies resulting from the business combination.

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 provisional measurements of fair value for certain assets and liabilities, which encompass primarily deferred taxes and income taxes payable, may be subject to change as additional information is received.

The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.

We have included the financial results of the business combination in the condensed consolidated financial statements from the date of acquisition, which was not material.

During the nine months ended September 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

(6) Goodwill and Intangible Assets

Goodwill balance consists of the following (in millions):

Carrying Amount

Balance as of December 31, 2022 $ 824

Goodwill acquired 413

Foreign currency translation adjustments ( 33 )

Balance as of September 30, 2023 $ 1,204

` Intangible assets consist of the following (in millions):

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Developed technology $ 507 $ 434

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Intangible assets, net $ 242 $ 232

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):

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

Amortization expense for intangible assets for the three months ended September 30, 2023 and 2022 was $ 21 million and $ 20 million, respectively, and for the nine months ended September 30, 2023 and 2022 was $ 63 million and $ 60 million, respectively.

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

Years Ending December 31,

Remainder of 2023 $ 22

Thereafter 24

Total future amortization expense $ 242

1 unchanged sentence

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

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Computer equipment $ 1,902 $ 1,606

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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 .

Depreciation expense for the three months ended September 30, 2023 and 2022 was $ 98 million and $ 66 million, respectively, and for the nine months ended September 30, 2023 and 2022 was $ 267 million and $ 185 million, respectively .

(8) Derivative Contracts

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.

As of September 30, 2023 and December 31, 2022, we had foreign currency forward contracts with total notional values of $ 1,592 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 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.

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

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

(9) Deferred Revenue and Performance Obligations

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.

Revenues recognized during the three months ended September 30, 2023 and 2022 from amounts included in deferred revenue as of June 30, 2023 and 2022 were $ 2.0 billion and $ 1.6 billion, respectively.

Revenues recognized during the nine months ended September 30, 2023 and 2022 from amounts included in deferred revenue as of December 31, 2022 and 2021 were $ 4.1 billion and $ 3.3 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 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.

As of September 30, 2023, the total non-cancellable RPO under our contracts with customers was $ 14.4 billion and we expect to recognize revenues on approximately 52 % 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.

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.

For the periods ended September 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 September 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 $ 1,152 million and $ 1,144 million at September 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”).

The 2030 Notes were issued at 99.63 % of principal and we incurred approximately $ 13 million for debt issuance costs.

The 2030 Notes were issued at 99.63 % of principal and we incurred $ 13 million for debt issuance costs.

The effective interest rate for the 2030 Notes was 1.53 % and included interest payable, amortization of debt issuance cost and amortization of debt discount, as applicable.

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In May and June 2017, we issued an aggregate of $ 782.5 million of 0 % convertible senior notes (the “2022 Notes”), which were converted prior to or settled on June 1, 2022, in accordance with their terms.

Convertible Date Initial Conversion Price per Share Initial Conversion Rate per $1,000 Par Value Initial Number of Shares (in millions)

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

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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 June 30, 2023

Purchase Initial Shares Shares as of September 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):

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Foreign currency translation adjustment $ ( 76 ) $ ( 25 )

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(12) Stockholders' Equity

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

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

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

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

As of September 30, 2023, we had 204.6 million shares of common stock outstanding and had reserved shares of common stock for future issuance as follows (in thousands):

September 30, 2023

Options outstanding 1,158

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

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”).

We issued a total of 2.2 million shares for each of the nine months ended September 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”).

Treasury Stock

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”).

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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.

During the three months ended September 30, 2023, the Company repurchased 0.5 million shares of its common stock for $ 282 million.

All repurchases were made in open market transactions.

Repurchases of common stock are recognized as treasury stock and held for future issuance.

As of September 30, 2023, approximately $ 1.2 billion of the originally authorized amount under the Share Repurchase Program remained available for future repurchases.

(13) Equity Awards

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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.

Upon effectiveness of the Restated 2021 Plan, the 2022 Plan was terminated, and no additional awards under the 2022 Plan have been made since the effective date of the Restated 2021 Plan.

Outstanding equity awards under the 2022 Plan continue to be subject to the terms and conditions of 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”).

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Stock Options

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

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

Shares Weighted-

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Forfeited ( 55 ) $ 626.10

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

Outstanding at September 30, 2023 1,158 $ 599.26 7.7 $ 68

Vested and expected to vest as of September 30, 2023 940 $ 582.46 7.6 $ 67

Vested and exercisable as of September 30, 2023 149 $ 193.82 5.2 $ 54

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 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:

The total fair value of stock options vested during the nine months ended September 30, 2023 was $ 5 million.

No stock options were granted during the nine months ended September 30, 2023.

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

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

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

Shares Weighted-Average Grant-Date Fair Value

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Forfeited ( 386 ) $ 507.13

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.

Outstanding at September 30, 2023 6,964 $ 499.57

Expected to vest as of September 30, 2023 6,135

RSUs outstanding as of September 30, 2023 were comprised of 6.5 million RSUs with only service conditions and 0.5 million RSUs with both service and performance conditions, including certain RSUs with additional market conditions.

The total intrinsic value of the RSUs vested was $ 1.2 billion for the nine months ended September 30, 2023.

As of September 30, 2023, the aggregate intrinsic value of RSUs outstanding was $ 3.9 billion and RSUs expected to vest was $ 3.4 billion.

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 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 eligible shares subject to PRSUs granted during the nine months ended September 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 $ 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 .

We recognized $ 111 million and $ 91 million of stock-based compensation, net of actual and estimated forfeitures, associated with PRSUs on a graded vesting basis during the nine months ended September 30, 2023 and 2022, respectively.

As of September 30, 2023, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs was $ 2.7 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

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Net income per share - diluted $ 1.17 $ 0.39 $ 7.00 $ 0.86

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 June 30, Six Months Ended June 30,

Common stock options, RSUs and ESPP obligations excluded from diluted net income per share because their effect would have been anti-dilutive

3,068 5,255 3,647 4,836

Common stock options 967 1,022 967 1,022

RSUs 2,479 3,875 2,735 3,457

ESPP obligations — 159 188 159

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

(15) (Benefit from) Provision for Income Taxes

(15) Provision for (Benefit from) 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.

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

The income tax provision was $ 57 million for the three months ended September 30, 2023, and our income tax benefit was $ 775 million for the nine months ended September 30, 2023.

The income tax provision was primarily attributable to the mix of earnings and losses in countries with differing statutory tax rates, tax deductible research and development costs and the valuation allowance release through the effective tax rate.

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

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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.

We continue to maintain a valuation allowance 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.

Of the $ 1.2 billion valuation allowance as of December 31, 2022, we released $ 843 million as a discrete tax benefit and $ 142 million as part of the effective tax rate during the nine months ended September 30, 2023.

$ 65 million of the valuation allowance will be released during the fourth quarter of 2023, and we will continue to maintain a valuation allowance of $ 177 million against our California deferred tax assets.

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.

Our income tax provision was $ 22 million and $ 41 million for the three and nine months ended September 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 June 30, 2023, our tax years 2004 to 2022 remain subject to examination in most jurisdictions.

As of September 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 $ 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):

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 $ 33 million and $ 96 million, excluding short-term lease costs, variable lease costs and sublease income, each of which were immaterial, for the three and nine months ended September 30, 2023, respectively.

Total operating lease costs were $ 28 million and $ 84 million, excluding short-term lease costs, variable lease costs and sublease income, each of which were immaterial, for the three and nine months ended September 30, 2022, respectively.

For the nine months ended September 30, 2023 and 2022, total cash paid for amounts included in the measurement of operating lease liabilities was $ 61 million and $ 56 million, respectively.

Operating lease liabilities arising from obtaining operating right-of-use assets totaled $ 93 million and $ 73 million for the nine months ended September 30, 2023 and 2022, respectively, of which the increase is largely related to additional office facilities located in Dublin, Ireland in line with the original commitment.

As of September 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 September 30, 2023 are presented in the table below (in millions):

Remainder of 2023 $ 28

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Present value of operating lease liabilities $ 773

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 .

As of September 30, 2023, we have no operating leases that have not yet commenced.

Other Commitments

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 six months ended June 30, 2023 that were outside the ordinary course of business.

There were no material contractual obligations that were entered into during the nine months ended September 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, $ 39 million of unrecognized tax benefits have been recorded as liabilities as of June 30, 2023.

Further, $ 45 million of unrecognized tax benefits have been recorded as liabilities as of September 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

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

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

North America (3)

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Total property and equipment, net $ 1,199 $ 1,053

(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.

(1) Revenues attributed to the United States were 94 % of North America revenues for each of the three and nine months ended September 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 June 30, 2023 and December 31, 2022, respectively.

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

Subscription revenues consist of the following (in millions):

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

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

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Total subscription revenues $ 2,216 $ 1,742 $ 6,315 $ 5,031

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), Supplier Lifecycle Operations, Accounts Payable Operations and Impact.

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 known as 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), Supplier Lifecycle Operations, Accounts Payable Operations 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 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