What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-10-26 compared with 2023-07-27 · 90 added, 81 removed, 266 unchanged (39% of the section changed)

24 unchanged sentences

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 as of June 30, 2023 and December 31, 2022, and of our total consolidated revenues for each of the three and six months ended June 30, 2023 and 2022.

We are closely monitoring the unfolding events of the Russian invasion of Ukraine and the current armed conflict in Israel and the Gaza Strip.

While these events are still evolving and the outcome remains highly uncertain, we do not believe the conflicts will have a material impact on our business and results of operations.

However, if the conflicts continue or worsen, leading to greater global economic disruptions and uncertainty, our business and results of operations could be materially impacted.

Our customers in these regions represented an immaterial portion of our net assets as of September 30, 2023 and December 31, 2022, and of our total consolidated revenues for each of the three and nine months ended September 30, 2023 and 2022.

Additionally, other recent macroeconomic events, including rising interest rates, global inflation and bank failures, have led to further economic uncertainty in the global economy.

1 unchanged sentence

We have not experienced any impact to our liquidity or to our current and projected business operations and financial condition due to recent bank failures.

In addition, we have policy restrictions in place on the types of securities that can be purchased as part of our available-for-sale securities portfolio.

In addition, we have policy restrictions in place on the types of securities that can be purchased as part of our available-for-sale debt securities portfolio.

These restrictions take industry and company concentration limits into consideration among other things.

7 unchanged sentences

Current remaining performance obligations (“cRPO”) represents RPO that will be recognized as revenue in the next 12 months.

As of June 30, 2023, our RPO was $14.2 billion, of which 51% represented cRPO.

RPO and cRPO increased by 24% and 25%, respectively, compared to June 30, 2022.

As of September 30, 2023, our RPO was $14.4 billion, of which 52% represented cRPO.

RPO and cRPO increased by 26% compared to September 30, 2022.

Factors that may cause our RPO to vary from period to period include the following:

20 unchanged sentences

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 1,724 and 1,466 customers with ACV greater than $1 million as of June 30, 2023 and 2022, respectively.

We had 1,789 and 1,535 customers with ACV greater than $1 million as of September 30, 2023 and 2022, 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.

9 unchanged sentences

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.

We define free cash flow, a non-GAAP financial measure, as GAAP net cash provided by operating activities plus cash paid for legal settlements, repayments of convertible senior notes attributable to debt discount and business combination and other related costs including compensation expense, reduced by purchases of property and equipment.

Purchases of property and equipment are included in cash used in investing activities under GAAP.

2 unchanged sentences

A calculation of free cash flow is provided below:

Six Months Ended June 30, % Change

Nine Months Ended September 30, % Change

(dollars in millions)

2 unchanged sentences

Purchases of property and equipment (433) (406) 7 %

Business combination and other related costs

Free cash flow $ 1,384 $ 1,160 19 %

11 unchanged sentences

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 99% for each of the three months ended June 30, 2023 and 2022, and 98% for each of the six months ended June 30, 2023 and 2022.

Our renewal rate was 98% for each of the three and nine months ended September 30, 2023 and 2022.

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.

16 unchanged sentences

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% of our total revenues for each of the three and six months ended June 30, 2023 and 2022.

Revenues from our direct sales organization represented 79% of our total revenues for each of the three and nine months ended September 30, 2023 and 2022.

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.

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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 9% and 10% for each of the three and six months ended June 30, 2023, respectively, and 13% and 12% for each of the three and six months ended June 30, 2022, respectively.

Cost of revenues associated with our professional services engagements contracted with third-party partners as a percentage of professional services and other revenues was 10% for each of the three and nine months ended September 30, 2023 and 14% and 13% for each of the three and nine months ended September 30, 2022, respectively.

Sales and Marketing

7 unchanged sentences

General and administrative (“G&A”) expenses consist primarily of personnel-related expenses for our executive, finance, legal, human resources, facilities and administrative personnel, including salaries, benefits, bonuses, stock-based compensation, external legal, accounting and other professional services fees, other corporate expenses, amortization of intangible assets and allocated overhead.

(Benefit from) provision for Income Taxes

(Benefit from) provision for income taxes consists of federal, state and foreign income taxes.

Our income tax benefit is primarily attributable to the release of the valuation allowance against certain U.S.

Provision for (Benefit from) Income Taxes

Provision for (benefit from) income taxes consists of federal, state and foreign income taxes.

Our income tax benefit for the nine months ended September 30, 2023 is primarily attributable to the release of the valuation allowance against certain U.S.

federal and state deferred tax assets, excluding California.

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 R&D tax credit generation to exceed our ability to use the credits in future years.

Comparison of the Three and Six Months Ended June 30, 2023 and 2022

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

Comparison of the Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

7 unchanged sentences

Total 100% 100% 100% 100%

Subscription revenues increased by $417 million and $810 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022, primarily driven by increased purchases by new and existing customers.

Included in subscription revenues is $48 million and $49 million of revenues recognized upfront from the delivery of software associated with self-hosted offerings during the three months ended June 30, 2023 and 2022, respectively, and $143 million and $126 million during the six months ended June 30, 2023 and 2022, respectively.

Subscription revenues increased by $474 million and $1,284 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022, primarily driven by increased purchases by new and existing customers.

Included in subscription revenues is $67 million and $53 million of revenues recognized upfront from the delivery of software associated with self-hosted offerings during the three months ended September 30, 2023 and 2022, respectively, and $210 million and $179 million during the nine months ended September 30, 2023 and 2022, respectively.

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 remainder of 2023 are based on the 30-day average of foreign exchange rates for June 30, 2023.

Our expectations for revenues, cost of revenues and operating expenses for the remainder of 2023 are based on the 30-day average of foreign exchange rates for September 30, 2023.

Subscription revenues consist of the following:

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

3 unchanged sentences

Total subscription revenues $ 2,216 $ 1,742 27% $ 6,315 $ 5,031 26%

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.

Professional services and other revenues decreased by $19 million and $38 million during the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022, due to a decrease in services and trainings provided to new and existing customers.

Professional services and other revenues decreased by $17 million and $55 million during the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022, due to a decrease 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.

1 unchanged sentence

Cost of Revenues and Gross Profit Percentage

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

9 unchanged sentences

Gross profit $ 1,792 $ 1,431 $ 5,129 $ 4,147

Cost of subscription revenues increased by $102 million and $181 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022, 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 $57 million and $105 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022.

Depreciation expense related to infrastructure hardware equipment dedicated for customer use increased by $25 million and $45 million and maintenance costs to support the expansion of our data center capacity, including public cloud service costs, increased by $14 million and $22 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022.

Cost of subscription revenues increased by $119 million and $300 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022, 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 $59 million and $164 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022.

Depreciation expense related to infrastructure hardware equipment dedicated for customer use increased by $29 million and $74 million and maintenance costs to support the expansion of our data center capacity, including public cloud service costs, increased by $27 million and $49 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022.

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.

1 unchanged sentence

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 81% and 82% for the three and six months ended June 30, 2023, respectively, and 83% for each of the three and six months ended June 30, 2022.

Our subscription gross profit percentage was 81% and 82% for the three and nine months ended September 30, 2023, respectively, and 83% for each of the three and nine months ended September 30, 2022.

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 decreased by $20 million and $30 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022, primarily due to a decrease in personnel-related costs including stock-based compensation.

Our professional services and other gross loss percentage was 9% for the three months ended June 30, 2023 and 2022.

Professional services and other gross loss percentage increased to 13% for the six months ended June 30, 2023 compared to 6% for the six months ended June 30, 2022, primarily driven by professional services and other revenue declining at a faster rate than personnel-related costs.

We expect our professional services and other gross loss percentage to increase slightly for the year ending December 31, 2023 compared to the year ended December 31, 2022.

Cost of professional services and other revenues decreased by $23 million and $53 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022, primarily due to a decrease in contracted third-party partners spend and decreased headcount resulting in a decrease in personnel-related costs, including stock-based compensation.

Our professional services and other gross loss percentage improved to 6% for the three months ended September 30, 2023 compared to 11% for the three months ended September 30, 2022, primarily due to a decrease in contracted third-party partners spend and decreased headcount resulting in a decrease in personnel-related costs.

Professional services and other gross loss percentage increased to 11% for the nine months ended September 30, 2023 compared to 8% for the nine months ended September 30, 2022, primarily driven by professional services and other revenue declining at a faster rate than personnel-related costs and contracted third-party partners spend.

We expect our professional services and other gross loss percentage to remain relatively flat for the year ending December 31, 2023 compared to the year ended December 31, 2022.

Sales and Marketing

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

2 unchanged sentences

Percentage of revenues 35% 38% 38% 39%

Sales and marketing expenses increased by $110 million and $260 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022, primarily due to increased headcount resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of $77 million and $182 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022.

Amortization expenses associated with deferred commissions increased by $25 million and $50 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022, due to an increase in contracts with new customers, expansion and renewal contracts.

Other sales and marketing program expenses, which includes branding, costs associated with purchasing advertising, marketing events and market data, increased by $8 million and $28 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022, primarily due to increased program costs and travel for our annual Sales Kickoff.

Sales and marketing expenses increased by $102 million and $362 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022, primarily due to increased headcount resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of $79 million and $261 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022.

Amortization expenses associated with deferred commissions increased by $20 million and $70 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022, due to an increase in contracts with new customers, expansion and renewal contracts.

Other sales and marketing program expenses, which includes branding, costs associated with purchasing advertising, marketing events and market data, increased by $29 million for the nine months ended September 30, 2023 compared to the same period of the prior year, primarily due to increased program costs and travel for our annual Sales Kickoff.

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

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

2 unchanged sentences

Percentage of revenues 24% 25% 24% 25%

R&D expenses increased by $77 million and $155 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022, primarily due to increased headcount, resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of $73 million and $148 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022.

R&D expenses increased by $93 million and $248 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022, primarily due to increased headcount, resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of $77 million and $225 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022.

The remaining increase was primarily due to an increase in data center capacity costs and depreciation of infrastructure hardware equipment that is used solely for R&D purposes of $8 million and $15 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the 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

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

2 unchanged sentences

Percentage of revenues 9% 10% 10% 10%

G&A expenses increased by $34 million and $54 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022, primarily due to increased headcount, resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of $23 million and $40 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year.

Non personnel-related costs and outside services increased by $11 million and $12 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year.

G&A expenses increased by $26 million and $80 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022, primarily due to increased headcount, resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of $21 million and $61 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year.

Non personnel-related costs and outside services increased by $15 million for the nine months ended September 30, 2023 compared to the same period in the prior year.

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

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

9 unchanged sentences

Percentage of revenues 18% 20% 18% 20%

Stock-based compensation increased by $45 million and $101 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022, primarily due to additional grants to current and new employees.

Stock-based compensation increased by $52 million and $153 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022, 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 June 30, 2023, 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.

Based upon our stock price as of September 30, 2023, 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.

1 unchanged sentence

Our international operations have provided and will continue to provide a significant portion of our total revenues.

Revenues outside North America represented 36% of total revenues for each of the three and six months ended June 30, 2023 and 35% for each of the three and six months ended June 30, 2022 .

Revenues outside North America represented 37% and 36% of total revenues for each of the three and nine months ended September 30, 2023, respectively, and 34% and 35% for each of the three and nine months ended September 30, 2022, respectively.

We primarily transact in certain foreign currencies for sales outside of the United States.

For the three months ended June 30, 2023, the general weakening of the U.S.

Dollar relative to primarily the Euro had an immaterial impact on our subscription revenues.

The general strengthening of the U.S.

Dollar relative to certain major foreign currencies (primarily the Euro and British Pound Sterling) had an unfavorable impact on our revenues for the six months ended June 30, 2023.

The general weakening of the U.S.

Dollar relative to certain major foreign currencies (primarily the Euro and British Pound Sterling) had a favorable impact on our revenues for the three months ended September 30, 2023.

For entities reporting in currencies other than the U.S.

Dollar, if we had translated our results for the six months ended June 30, 2023 at the exchange rates in effect for the six months ended June 30, 2022 rather than the actual exchange rates in effect during the period, our reported subscription revenues would have been $43 million higher.

The impact from the foreign currency movements from the three and six months ended June 30, 2022 to the three and six months ended June 30, 2023 was not material for professional services and other revenues.

Dollar, if we had translated our results for the three months ended September 30, 2023 at the exchange rates in effect for the three months ended September 30, 2022 rather than the actual exchange rates in effect during the period, our reported subscription revenues would have been $43 million lower.

The impact from foreign currency movements from the nine months ended September 30, 2022 to the nine months ended September 30, 2023 was not material for subscription revenues.

The impact from the foreign currency movements from the three and nine months ended September 30, 2022 to the three and nine months ended September 30, 2023 was not material for professional services and other revenues.

In addition, because we primarily transact in several foreign currencies for cost of revenues and operating expenses outside of the United States, the general strengthening of the U.S.

Dollar relative to these major foreign currencies had a favorable impact on our cost of revenues, sales and marketing and R&D expenses for each of the three and six months ended June 30, 2023.

Dollar relative to these major foreign currencies had a favorable impact on our sales and marketing and R&D expenses for the nine months ended September 30, 2023.

For entities reporting in currencies other than the U.S.

Dollar, if we had translated our results for the six months ended June 30, 2023 at the exchange rates in effect for the six months ended June 30, 2022 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 $11 million, $17 million, and $10 million higher for the six months ended June 30, 2023, respectively.

The impact from the foreign currency movements from the three months ended June 30, 2022 to the three months ended June 30, 2023 was not material to cost of revenues, sales and marketing, R&D and G&A expenses.

The impact from the foreign currency movements from the six months ended June 30, 2022 to the six months ended June 30, 2023 was not material to G&A expenses.

Dollar, if we had translated our results for the nine months ended September 30, 2023 at the exchange rates in effect for the nine months ended September 30, 2022 rather than the actual exchange rates in effect during the period, our reported sales and marketing and R&D expenses would have been $10 million and $11 million higher, respectively, for the nine months ended September 30, 2023.

The impact from the foreign currency movements from the three months ended September 30, 2022 to the three months ended September 30, 2023 was not material to cost of revenues, sales and marketing, R&D and G&A expenses.

The impact from the foreign currency movements from the nine months ended September 30, 2022 to the nine months ended September 30, 2023 was not material to cost of revenues and G&A expenses.

Interest Income

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

(dollars in millions) (dollars in millions)

Interest income $ 74 $ 12 NM $ 134 $ 17 NM

Interest income $ 82 $ 26 215% $ 216 $ 43 NM

Percentage of revenues 4 % 1% 3 % 1%

NM - Not meaningful

Interest income increased by $62 million and $117 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022, primarily driven by an increase in investment income from our managed portfolio resulting from the increase in interest rates.

Interest income increased by $56 million and $173 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022, primarily driven by an increase in investment income from our managed portfolio resulting from higher portfolio balances and an increase in interest rates.

Other Expense, net

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

1 unchanged sentence

Interest expense $ (6) $ (8) (25%) $ (18) $ (20) (10%)

Other (11) 1 NM (21) — NM

Other (8) (7) 14% (29) (7) 314%

Other expense, net $ (14) $ (15) (7%) $ (47) $ (27) 74%

Percentage of revenues (1%) (1%) (1%) (1)%

NM - Not meaningful

Other expense, net increased by $12 million and $21 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022, primarily driven by higher foreign exchange loss, unrealized loss on marketable equity securities and impairment of certain non-marketable equity investments.

Other expense, net decreased by $1 million for the three months ended September 30, 2023 and increased by $20 million for the nine months ended September 30, 2023 compared to the same periods in the prior year.

The increase in other expense, net for the nine months ended September 30, 2023 was primarily driven by higher foreign exchange loss, unrealized loss on marketable equity securities and impairment of non-marketable equity investments.

To mitigate our risks associated with fluctuations in foreign currency exchange rates, we enter into foreign currency forward 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 expense, net were immaterial for each of the three and six months ended June 30, 2023 and 2022.

(Benefit from) provision for Income Taxes

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

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

Provision for (benefit from) Income Taxes

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

(dollars in millions) (dollars in millions)

Income before income taxes $ 174 $ 29 NM $ 362 $ 114 218%

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

Income before income taxes $ 299 $ 102 193% $ 661 $ 216 206%

Provision for (benefit from) income taxes $ 57 $ 22 159% $ (775) $ 41 NM

Effective tax rate 19% 22% (117%) 19%

NM - Not meaningful

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 R&D 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.

6 unchanged sentences

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 R&D 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.

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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 $7.5 billion as of June 30, 2023.

When assessing sources of liquidity, we also include cash and cash equivalents, short-term investments and long-term investments totaling $7 billion as of September 30, 2023.

Our working capital requirements are principally comprised of non-contract workforce salaries, bonuses, commissions and benefits and, to a lesser extent, cancellable and non-cancellable licenses and services arrangements that are integral to our business operations and operating lease obligations.

Operating lease obligations totaling $919 million are principally associated with leased facilities and have varying maturities with $487 million due over the next five years.

We may repurchase our shares of common stock in the open market, in privately negotiated transactions or by other means, with the objective to return value to our stockholders and manage the dilution from future employee equity grants and employee stock purchase programs.

In May 2023, our board of directors authorized a program to repurchase up to $1.5 billion of our common stock.

During the quarter 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.

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.

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If we require additional capital resources, we may seek to finance our operations from the current funds available or additional equity or debt financing.

Six Months Ended June 30,

Nine Months Ended September 30,

(dollars in millions)

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Net cash used in financing activities $ (422) $ (269)

Net increase (decrease) in cash, cash equivalents and restricted cash $ 195 $ (62)

Net decrease in cash, cash equivalents and restricted cash

$ (356) $ (478)

Operating Activities

Net cash provided by operating activities was $1,482 million for the six months ended June 30, 2023 compared to $1,296 million for the six months ended June 30, 2022.

Net cash provided by operating activities was $1,793 million for the nine months ended September 30, 2023 compared to $1,561 million for the nine months ended September 30, 2022.

The net increase in operating cash flows was primarily due to higher collections driven by revenue growth.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2023 was $1,198 million compared to $1,080 million for the six months ended June 30, 2022.

The net increase in cash used in investing activities was primarily due to a $225 million increase in net purchases of investments and a $53 million increase in purchases of property and equipment, partially offset by a $90 million decrease in purchases of non-marketable investments and a $57 million decrease in business combinations.

Net cash used in investing activities for the nine months ended September 30, 2023 was $1,723 million compared to $1,709 million for the nine months ended September 30, 2022.

The net increase in cash used in investing activities was primarily due to a $225 million increase in business combinations, a $27 million increase in purchases of property and equipment, partially offset by a $174 million decrease in net purchases of investments and a $82 million decrease in purchases of non-marketable investments.

Financing Activities

Net cash used in financing activities was $89 million for the six months ended June 30, 2023 compared to net cash used in financing activities of $229 million for the six months ended June 30, 2022.

The decrease in cash used in financing activities is primarily due to a $94 million decrease related to repayments of convertible senior notes attributable to principal, a $35 million decrease in taxes paid related to net share settlement of equity awards, and an $11 million increase in proceeds from employee stock plans.

Net cash used in financing activities was $422 million for the nine months ended September 30, 2023 compared to net cash used in financing activities of $269 million for the nine months ended September 30, 2022.

The increase in cash used in financing activities was due to repurchases of common stock of $282 million, partially offset by a $94 million decrease related to repayments of convertible senior notes attributable to principal, a $19 million decrease in taxes paid related to net share settlement of equity awards and a $16 million increase in proceeds from employee stock plans.

Critical Accounting Policies and Significant Judgments and Estimates

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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 2. Management’s Discussion and Analysis