ServiceNow, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section of our Annual Report on Form 10-K discusses our financial condition and results of operations for the fiscal years ended December 31, 2023 and 2022, and year-to-year comparisons between fiscal 2023 and fiscal 2022 in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). A discussion of our financial condition and results of operations for the fiscal year ended December 31, 2021 and year-to-year comparisons between fiscal 2022 and fiscal 2021 that is not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed on January 31, 2023. Our free cash flow measure included in the section entitled “—Key Business Metrics—Free Cash Flow,” is not in accordance with GAAP. This non-GAAP financial measure is not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. This measure may be different from non-GAAP financial measures used by other companies, limiting its usefulness for comparison purposes. We encourage investors to carefully consider our results under GAAP, as well as our supplemental non-GAAP results, to more fully understand our business. Overview ServiceNow was founded on a simple premise: to make work flow better. Our purpose is to make the world work better for everyone. Our intelligent platform, the Now Platform, is a cloud-based solution with embedded artificial intelligence and machine learning capabilities that helps global enterprises across industries, universities and governments unify and digitize their workflows. The Now Platform automates workflows across an entire enterprise by connecting disparate departments, systems and silos in a seamless way to unlock productivity and improve experiences for both employees and customers. Our workflow applications built on the Now Platform are organized along four primary areas: Technology, Customer and Industry, Employee and Creator. 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 C-suite, employees and consumers. 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 and total consolidated revenues both as of and for the year ended December 31, 2023 and December 31, 2022. Additionally, other macroeconomic events, including rising interest rates, global inflation and bank failures, have led to economic uncertainty in the global economy. To mitigate risk, our cash and cash equivalents are distributed across several large financial institutions and are not concentrated in one financial institution. 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. Further, we have policy restrictions 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. Furthermore, the majority of our non-marketable equity investments do not have material relationships with any one financial institution, and therefore, we believe that our exposure to loss is immaterial. We will continue to monitor the direct and indirect impact of macroeconomic events on our business and financial results. See the “Risk Factors” section in Part I, Item 1A of this Annual Report for further discussion of the possible impact of the above conflicts and macroeconomic events on our business and financial results . 34 Table of Contents Key Business Metrics Remaining performance obligations. Transaction price allocated to remaining performance obligations (“RPO”) represents contracted revenue that has not yet been recognized, which includes deferred revenue and non-cancellable amounts that will be invoiced and recognized as revenue in future periods. RPO excludes contracts that are billed in arrears, such as certain time and materials contracts, as we apply the “right to invoice” practical expedient under relevant accounting guidance. Current remaining performance obligations (“cRPO”) represents RPO that will be recognized as revenue in the next 12 months. As of December 31, 2023, our RPO was $18.0 billion, of which 48% represented cRPO. RPO and cRPO increased by 29% and 24%, respectively, compared to December 31, 2022. Factors that may cause our RPO to vary from period to period include the following: • Foreign currency exchange rates . While a majority of our contracts have historically been in U.S. Dollars, an increasing percentage of our contracts in recent periods has been in foreign currencies, particularly the Euro and British Pound Sterling. Fluctuations in foreign currency exchange rates as of the balance sheet date will cause variability in our RPO. • Mix of offerings . In a minority of cases, we allow our customers to host our software by themselves or through a third-party service provider. In self-hosted offerings, we recognize a portion of the revenue upfront upon the delivery of the software and as a result, such revenue is excluded from RPO. • Subscription start date . From time to time, we enter into contracts with a subscription start date in the future and these amounts are included in RPO if such contracts are signed by the balance sheet date. • Timing of contract renewals . While customers typically renew their contracts at the end of the contract term, from time to time, customers may do so either before or after the scheduled expiration date. For example, in cases where we are successful in selling additional products or services to an existing customer, a customer may decide to renew its existing contract early to ensure that all its contracts expire on the same date. In other cases, prolonged negotiations or other factors may result in a contract not being renewed until after it has expired. • Contract duration . While we typically enter into multi-year subscription services, the duration of our contracts varies. Further, we continue to see an increase in the number of 12-month agreements entered into with the U.S. federal government throughout the year, with the highest number of agreements entered into in the quarter ended September 30, driven primarily by timing of their annual budget expenditures. We sometimes also enter into contracts with durations that have a 12-month or shorter term to enable the contracts to co-terminate with the existing contract. The contract duration will cause variability in our RPO. Number of customers with ACV greater than $1 million. We count the total number of customers with annual contract value (“ACV”) greater than $1 million as of the end of the period. We had 1,897, 1,643, and 1,350 customers with ACV greater than $1 million as of December 31, 2023, 2022 and 2021, respectively. For purposes of customer count, a customer is defined as an entity that has a unique Dunn & Bradstreet Global Ultimate (“GULT”) Data Universal Numbering System (“DUNS”) number and an active subscription contract as of the measurement date. The DUNS number is a global standard for business identification and tracking. We make exceptions for holding companies, government entities and other organizations for which the GULT, in our judgment, does not accurately represent the ServiceNow customer. For example, while all U.S. government agencies roll up to “Government of the United States” under the GULT, we count each government agency that we contract with as a separate customer. Our customer count is subject to adjustments for acquisitions, spin-offs and other market activity; accordingly, we restate previously disclosed number of customers with ACV greater than $1 million calculations to allow for comparability. ACV is calculated based on the foreign exchange rate in effect at the time the contract was signed. Foreign exchange rate fluctuations could cause some variability in the number of customers with ACV greater than $1 million. We believe information regarding the total number of customers with ACV greater than $1 million provides useful information to investors because it is an indicator of our growing customer base and demonstrates the value customers are receiving from the Now Platform. 35 Table of Contents Free cash flow. We define free cash flow, a non-GAAP financial measure, as GAAP net cash provided by operating activities plus cash outflows 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 otherwise included in cash used in investing activities under GAAP. We believe information regarding free cash flow provides useful information to investors because it is an indicator of the strength and performance of our business operations. However, our calculation of free cash flow may not be comparable to similar measures used by other companies. A calculation of free cash flow is provided below: Year Ended December 31, 2023 2022 2021 (in millions) Free cash flow: Net cash provided by operating activities $ 3,398 $ 2,723 $ 2,191 Purchases of property and equipment (694) (550) (392) Repayments of convertible senior notes attributable to debt discount — — 15 Business combination and other related costs 24 7 53 Free cash flow $ 2,728 $ 2,180 $ 1,867 We have historically seen higher collections in the quarter ended March 31 due to seasonality in timing of entering into customer contracts, which is significantly higher in the quarter ended December 31. Additionally, we have historically seen higher disbursements in the quarters ended March 31 and September 30 due to payouts under our annual commission plans, purchases under our employee stock purchase plan, payouts under our bonus plans and coupon payments related to our 2030 Notes beginning in 2021. Renewal rate. We calculate our renewal rate by subtracting our attrition rate from 100%. Our attrition rate for a period is equal to the ACV from customers lost during the period, divided by the sum of (i) the total ACV from all customers that renewed during the period, excluding changes in price or users, and (ii) the total ACV from all customers lost during the period. Accordingly, our renewal rate is calculated based on ACV and is not based on the number of customers that have renewed. Further, our renewal rate does not reflect increased or decreased purchases from our customers to the extent such customers are not lost customers or lapsed renewals. A lost customer is a customer that did not renew an expiring contract and that, in our judgment, will not be renewed. Typically, a customer that reduces its subscription upon renewal is not considered a lost customer. However, in instances where the subscription decrease represents the majority of the customer’s ACV, we may deem the renewal as a lost customer. For our renewal rate calculation, we define a customer as an entity with a separate production instance of our service and an active subscription contract as of the measurement date, instead of an entity with a unique GULT or DUNS number. We adjust our renewal rate for acquisitions, consolidations and other customer events that cause the merging of two or more accounts occurring at the time of renewal. Our renewal rate was 98% for each of the years ended December 31, 2023, 2022, and 2021. As our renewal rate is impacted by the timing of renewals, which could occur in advance of, or subsequent to the original contract end date, period-to-period comparison of renewal rates may not be meaningful. Critical Accounting Policies and Significant Judgments and Estimates Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenues and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions and such differences could be material. 36 Tabl e of Contents While our significant accounting policies are more fully described in Note 2 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our audited consolidated financial statements. Revenue Recognition We derive our revenues predominately from subscription revenues, which are primarily comprised of subscription fees that give customers access to the ordered subscription service, related support and updates, if any, to the subscribed service during the subscription term. For our cloud services, we recognize subscription revenues ratably over the contract term beginning on the commencement date of each contract, the date we make our services available to our customers. Our contracts with customers typically include a fixed amount of consideration and are generally non-cancellable and without any refund-type provisions. Subscription revenues also include revenues from self-hosted offerings in which customers deploy, or we grant customers the option to deploy without significant penalty, our subscription service internally or contract with a third party to host the software. For these contracts, we account for the software element separately from the related support and updates as they are distinct performance obligations. The transaction price is allocated to separate performance obligations on a relative standalone selling price (“SSP”) basis. The transaction price allocated to the software element is recognized when transfer of control of the software to the customer is complete. The transaction price allocated to the related support and updates are recognized ratably over the contract term. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. For these contracts, the transaction price is allocated to the separate performance obligations on a relative SSP basis. Evaluating the terms and conditions included within our customer contracts for appropriate revenue recognition and determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Deferred Commissions Deferred commissions are the incremental selling costs that are associated with acquiring customer contracts and consist primarily of sales commissions paid to our sales organization and referral fees paid to independent third parties. Commissions and referral fees earned upon the execution of initial and expansion contracts are primarily deferred and amortized over a period of benefit that we have determined to be five years consistent with prior year. Commissions earned upon the renewal of customer contracts are deferred and amortized over the average renewal term. Additionally, for self-hosted offerings, consistent with the recognition of subscription revenues for self-hosted offerings, a portion of the commission cost is expensed upfront when the self-hosted offering is made available. Determining the period of benefit, including average renewal term, requires judgment for which we take into consideration our customer contracts, our technology life cycle and other factors. Business Combinations The allocation of the purchase price in a business combination requires management to make significant estimates in determining the fair value of acquired assets and assumed liabilities, especially with respect to intangible assets. The excess of the purchase price in a business combination over the fair value of these tangible and intangible assets acquired and liabilities assumed is recorded as goodwill. Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows, discount rates, revenue growth rates, the time and expense to recreate the assets and profit margin a market participant would receive. These estimates are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. We evaluate these estimates and assumptions as new information is obtained and may record adjustments to the fair value of the tangible and intangible assets acquired and liabilities assumed but not later than one year from the acquisition date. 37 Tabl e of Contents Income Taxes Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authorities. Significant judgment is required in determining our tax expense (benefit) and in evaluating our tax positions, including evaluating uncertainties and the complexity of taxes on foreign earnings. We review our tax positions quarterly and adjust the balances as new information becomes available. Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including future growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, historical earnings, taxable income in prior years, if carryback is permitted under the law, carryforward periods and prudent and feasible tax planning strategies. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. To the extent sufficient positive evidence becomes available, we may release all or a portion of our valuation allowance in one or more future periods. A release of the valuation allowance, if any, would result in the recognition of certain deferred tax assets and a material income tax benefit for the period in which such release is recorded. We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. 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 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. Of the $1.2 billion valuation allowance as of December 31, 2022, we released $1.05 billion of our valuation allowance during the year ended December 31, 2023. We maintained a valuation allowance of $196 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. See Note 16 – Income Taxes, in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information on discussion on valuation allowance. Our tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. We recognize the tax benefit of an uncertain tax position only if it is more likely than not the position is sustainable upon examination by the taxing authority based on the technical merits. We measure the tax benefit recognized as the largest amount of benefit which is more likely than not to be realized upon settlement with the taxing authority. We recognize interest accrued and penalties related to unrecognized tax benefits in our tax provision. Significant judgment is required to evaluate uncertain tax positions. Our evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law or guidance, correspondence with tax authorities during the course of audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in our income tax expense in the period in which we make the change, which could have a material impact on our effective tax rate and operating results. We calculate the current and deferred income tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years and record adjustments based on filed income tax returns when identified. The amount of income taxes paid is subject to examination by U.S. federal, state and foreign tax authorities. The estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts and circumstances existing at that time. To the extent the assessment of such tax position changes, we record the change in estimate in the period in which we make the determination. 38 Tabl e of Contents Change in Accounting Estimate In January 2024, we completed an assessment of the useful life of our data center equipment and determined we should increase the estimated useful life of data center equipment from four to five years. This change in accounting estimate will be effective beginning fiscal year 2024. Based on the carrying amount of data center equipment included in property and equipment, net that are in-service as of December 31, 2023, it is estimated this change will increase our fiscal year 2024 operating income by approximately $100 million. Components of Results of Operations Revenues Subscription revenues . Subscription revenues are primarily comprised of fees that give customers access to the ordered subscription service for both self-hosted offerings and cloud-based subscription offerings, and related standard and enhanced support and updates, if any, to the subscription service during the subscription term. For our cloud-based offerings, we recognize revenue ratably over the subscription term. For self-hosted offerings, a substantial portion of the sales price is recognized upon delivery of the software, which may cause greater variability in our subscription revenues and subscription gross margin. Pricing includes multiple instances, hosting and support services, data backup and disaster recovery services, as well as future updates, when and if available, offered during the subscription term. We typically invoice our customers for subscription fees in annual increments upon execution of the initial contract or subsequent renewal. Our contracts are generally non-cancellable during the subscription term, though a customer can terminate for breach if we materially fail to perform. Professional services and other revenues . Our arrangements for professional services are primarily on a time-and-materials basis, and we generally invoice our customers monthly in arrears for the professional services based on actual hours and expenses incurred. Some of our professional services arrangements are on a fixed fee. Professional services revenues are recognized as services are delivered. Other revenues primarily consist of fees from customer training delivered on-site or through publicly available classes. Typical payment terms require our customers to pay us within 30 days of invoice. We sell our subscription services primarily through our direct sales organization. We also sell services through managed service providers and resale partners. We also generate revenues from certain professional services and from training of customers and partner personnel, through both our direct team and indirect channel sales. Revenues from our direct sales organization represented 79% of our total revenues for each of the years ended December 31, 2023, 2022 and 2021. For purposes of calculating revenues from our direct sales organization, revenues from systems integrators and managed services providers are included as part of the direct sales organization. Seasonality . We have historically experienced seasonality in terms of when we enter into customer agreements. We sign a significantly higher percentage of agreements with new customers, as well as expansion with existing customers, in the fourth quarter of each year. The increase in customer agreements for the fourth quarter is primarily a result of both large enterprise account buying patterns typical in the software industry, which are driven primarily by the expiration of annual authorized budgeted expenditures, and the terms of our commission plans, which incentivize our direct sales organization to meet their annual quotas by December 31. Furthermore, we usually sign a significant portion of these agreements during the last month, and often the last two weeks, of each quarter. This seasonality of entering into customer agreements is sometimes not immediately apparent in our revenues, due to the fact that we recognize subscription revenues from our cloud offering contracts over the term of the subscription agreement, which is generally 12 to 36 months. In addition, we continue to see an increase in the number of 12-month agreements entered into with the U.S. federal government throughout the year, with the highest number of agreements entered into in the third quarter, driven primarily by the timing of their annual budget expenditures. This larger mix of contracts with 12-month renewal terms in the third quarter will generally cause variability in our RPO and cRPO in subsequent quarters until they are renewed. Although these seasonal factors may be common in the technology industry, historical patterns should not be considered a reliable indicator of our future sales activity or performance. 39 Tabl e of Contents Cost of Revenues Cost of subscription revenues . Cost of subscription revenues consists primarily of expenses related to hosting our services and providing support to our customers. These expenses are comprised of data center capacity costs, which include colocation costs associated with our data centers as well as interconnectivity between data centers, depreciation related to our infrastructure hardware equipment dedicated for customer use, amortization of intangible assets, expenses associated with software, public cloud service costs, IT services and dedicated customer support, personnel-related costs directly associated with data center operations and customer support, including salaries, benefits, bonuses and stock-based compensation and allocated overhead. Cost of professional services and other revenues . Cost of professional services and other revenues consists primarily of personnel-related costs directly associated with our professional services and training departments, including salaries, benefits, bonuses and stock-based compensation, the costs of contracted third-party partners, travel expenses and allocated overhead. Professional services are performed directly by our services team, as well as by contracted third-party partners. Fees paid by us to third-party partners are primarily recognized as cost of revenues as the professional services are delivered. Cost of revenues associated with our professional services engagements contracted with third-party partners as a percentage of professional services and other revenues was 10%, 12% and 14% for the years ended December 31, 2023, 2022 and 2021, respectively. Sales and Marketing Sales and marketing expenses consist primarily of personnel-related expenses directly associated with our sales and marketing staff, including salaries, benefits, bonuses and stock-based compensation. Sales and marketing expenses also include the amortization of commissions paid to our sales employees, including related payroll taxes and fringe benefits. In addition, sales and marketing expenses include branding expenses, marketing program expenses, which include events such as Knowledge, and costs associated with purchasing advertising and marketing data, software and subscription services dedicated for sales and marketing use and allocated overhead. Research and Development Research and development expenses consist primarily of personnel-related expenses directly associated with our research and development staff, including salaries, benefits, bonuses and stock-based compensation and allocated overhead. Research and development expenses also include data center capacity costs, costs associated with outside services contracted for research and development purposes and depreciation of infrastructure hardware equipment that is used solely for research and development purposes. General and Administrative General and administrative expenses consist primarily of personnel-related expenses for our executive, finance, legal, human resources, facilities and administrative personnel, including salaries, benefits, bonuses and stock-based compensation, external legal, accounting and other professional services fees, other corporate expenses, amortization of intangible assets and allocated overhead. (Benefit from) Provision for Income Taxes (Benefit from) provision for income taxes consists of federal, state and foreign income taxes. Our income tax benefit for the year ended December 31, 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 research and development tax credit generation to exceed our ability to use the credits in future years. 40 Tabl e of Contents Comparison of the years ended December 31, 2023 and 2022 Revenues Year Ended December 31, % Change 2023 2022 (dollars in millions) Revenues: Subscription $ 8,680 $ 6,891 26 % Professional services and other 291 354 (18 %) Total revenues $ 8,971 $ 7,245 24 % Percentage of revenues: Subscription 97 % 95 % Professional services and other 3 % 5 % Total 100 % 100 % Subscription revenues increased by $1.8 billion for the year ended December 31, 2023, compared to the prior year, primarily driven by increased purchases by new and existing customers. Included in subscription revenues is $322 million and $253 million of revenues recognized upfront from the delivery of software associated with self-hosted offerings during the years ended December 31, 2023 and 2022, respectively. We expect subscription revenues for the year ending December 31, 2024 to increase in absolute dollars and remain relatively flat 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, 2023. Our expectations for revenues, cost of revenues and operating expenses for the year ending December 31, 2024 are based on the 31-day average of foreign exchange rates for December 31, 2023. Subscription revenues consist of the following: Year Ended December 31, % Change 2023 2022 (dollars in millions) Digital workflow products $ 7,679 $ 6,077 26 % ITOM products 1,001 814 23 % Total subscription revenues $ 8,680 $ 6,891 26 % Our digital workflow products include most of our product offerings and are generally priced on a per user basis. Our remaining product offerings, primarily comprised of our IT Operations Management (“ITOM”) products are predominantly priced on a subscription unit basis. Professional services and other revenues decreased by $63 million for the year ended December 31, 2023, compared to the prior year, due to a decrease in services and trainings provided to new and existing customers as we focused on deploying our internal professional services organization as a strategic resource and worked with our partner ecosystem to contract directly with customers for implementation services delivery. We expect professional services and other revenues for the year ending December 31, 2024 to increase in absolute dollars and to remain relatively flat as a percentage of revenue compared to the year ended December 31, 2023 as we continue to execute our professional services strategy. 41 Tabl e of Contents Cost of Revenues and Gross Profit Percentage Year Ended December 31, % Change 2023 2022 (dollars in millions) Cost of revenues: Subscription $ 1,606 $ 1,187 35 % Professional services and other 315 386 (18 %) Total cost of revenues $ 1,921 $ 1,573 22 % Gross profit percentage: Subscription 82 % 83 % Professional services and other (8 %) (9 %) Total gross profit percentage 79 % 78 % Gross profit: $ 7,050 $ 5,672 24 % Cost of subscription revenues increased by $419 million for the year ended December 31, 2023, compared to the prior year, primarily due to increased headcount and increased costs to support the growth of our subscription offerings including costs to support customers in regulated markets. Personnel-related costs including stock-based compensation and overhead expenses increased by $229 million as compared to prior year. Depreciation expense related to infrastructure hardware equipment dedicated for customer use increased by $97 million for the year ended December 31, 2023, as compared to prior year and maintenance costs to support the expansion of our data center capacity, including public cloud service costs, increased by $77 million, as compared to prior year. We expect our cost of subscription revenues for the year ending December 31, 2024 to increase in absolute dollars as we provide subscription services to more customers and increase usage within our customer instances but remain relatively flat as a percentage of revenue compared to the year ended December 31, 2023. We will continue to incur incremental costs to attract customers in regulated markets by adopting public cloud offerings as well as increased support for customers impacted by new and evolving data residency requirements. To the extent future acquisitions are consummated, our cost of subscription revenues may increase due to additional non-cash charges associated with the amortization of intangible assets acquired. Our subscription gross profit percentage was 82% and 83% for the years ended December 31, 2023 and 2022, respectively. We expect our subscription gross profit percentage to remain relatively flat for the year ending December 31, 2024 compared to the year ended December 31, 2023. Cost of professional services and other revenues decreased by $71 million for the year ended December 31, 2023 as compared to the prior year. The decrease was 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 8% for the year ended December 31, 2023, compared to 9% in the prior year, primarily due to decreased headcount resulting in a decrease in personnel-related costs and a decrease in contracted third-party partners spend. We expect our professional services and other gross loss percentage to improve for the year ending December 31, 2024 compared to the year ended December 31, 2023. 42 Tabl e of Contents Sales and Marketing Year Ended December 31, % Change 2023 2022 (dollars in millions) Sales and marketing $ 3,301 $ 2,814 17 % Percentage of revenues 37 % 39 % Sales and marketing expenses increased by $487 million for the year ended December 31, 2023, compared to the prior year, primarily due to increased headcount resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of $334 million, compared to the prior year. Amortization expenses associated with deferred commissions increased by $99 million, compared to the prior year, due to an increase in contracts with new customers, expansion and renewal contracts. Other sales and marketing program expenses, which include branding, costs associated with purchasing advertising, marketing events and market data, increased by $44 million compared to 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, 2024 to increase in absolute dollars and to decrease as a percentage of revenue compared to the year ended December 31, 2023, as we continue to see leverage from increased sales productivity and marketing efficiencies in 2024. Research and Development Year Ended December 31, % Change 2023 2022 (dollars in millions) Research and development $ 2,124 $ 1,768 20 % Percentage of revenues 24 % 24 % Research and development expenses (“R&D”) increased by $356 million during the year ended December 31, 2023, compared to the prior year, primarily due to increased headcount resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of $312 million compared to prior year. 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 $27 million for the year ended December 31, 2023, compared to the prior year. We expect R&D expenses for the year ending December 31, 2024 to increase in absolute dollars but remain relatively flat as a percentage of revenue compared to the year ended December 31, 2023, as we continue to improve the existing functionality of our services, develop new applications to fill market needs and enhance our core platform. General and Administrative Year Ended December 31, % Change 2023 2022 (dollars in millions) General and administrative $ 863 $ 735 17 % Percentage of revenues 10 % 10% General and administrative expenses (“G&A”) increased by $128 million during the year ended December 31, 2023, compared to the prior year, primarily due to increased headcount resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of $83 million. Non-personnel-related costs and outside services increased by $32 million for the year ended December 31, 2023 compared to the prior year. 43 Tabl e of Contents We expect G&A expenses for the year ending December 31, 2024 to increase in absolute dollars but decrease slightly as a percentage of revenue compared to the year ended December 31, 2023, as we continue to see leverage from continued G&A productivity. Stock-based Compensation Year Ended December 31, % Change 2023 2022 (dollars in millions) Cost of revenues: Subscription $ 202 $ 157 29 % Professional services and other 52 67 (22 %) Operating expenses: Sales and marketing 505 459 10 % Research and development 579 495 17 % General and administrative 266 223 19 % Total stock-based compensation $ 1,604 $ 1,401 14 % Percentage of revenues 18 % 19 % Stock-based compensation increased by $203 million during the year ended December 31, 2023, compared to the prior year, primarily due to additional grants to current and new employees. Stock-based compensation is inherently difficult to forecast due to fluctuations in our stock price. Based upon our stock price as of December 31, 2023, we expect stock-based compensation to continue to increase in absolute dollars for the year ending December 31, 2024 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, 2023. We expect stock-based compensation as a percentage of revenue to decline over time as we continue to grow. Foreign Currency Exchange Our international operations have provided and will continue to provide a significant portion of our total revenues. Revenues outside North America represented 36% and 35% of total revenues for the years ended December 31, 2023 and 2022, respectively. Because we primarily transact in foreign currencies for sales outside of the United States, the general weakening of the U.S. Dollar relative to certain major foreign currencies (primarily the Euro and British Pound Sterling) during the year ended December 31, 2023 had a favorable impact on our revenues. For entities reporting in currencies other than the U.S. Dollar, if we had translated our results for the year ended December 31, 2023 at the exchange rates in effect for the year ended December 31, 2022 rather than the actual exchange rates in effect during the period, our reported subscription revenues would have been $34 million lower fo r the year ended December 31, 2023. T he impact from the foreign currency movements from the year ended December 31, 2022 to the year ended December 31, 2023 was not material to professional services and other revenues. In addition, because we primarily transact in foreign currencies for cost of revenues and operating expenses outside of the United States, the general strengthening of the U.S. Dollar relative to other major foreign currencies had a favorable impact on our R&D expenses during the year ended December 31, 2023. For entities reporting in currencies other than the U.S. Dollar, if we had translated our results for the year ended December 31, 2023 at the exchange rates in effect for the year ended December 31, 2022 rather than the actual exchange rates in effect during the period, our reported R&D expenses would have been $12 million higher for the year ended December 31, 2023. The impact from the foreign currency movements from the year ended December 31, 2022 to the year ended December 31, 2023 was not material to cost of revenues, sales and marketing and G&A expenses. 44 Tabl e of Contents Interest Income Year Ended December 31, % Change 2023 2022 (dollars in millions) Interest income $ 302 $ 82 268 % Percentage of revenues 3 % 1 % Interest income increased during the year ended December 31, 2023, compared to the prior year 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 Year Ended December 31, % Change 2023 2022 (dollars in millions) Interest expense $ (24) $ (27) (11 %) Other (32) (11) 191 % Other expense, net $ (56) $ (38) 47 % Percentage of revenues (1 %) (1%) Other expense, net increased by $18 million during the year ended December 31, 2023, compared to the prior year, primarily driven by higher unrealized losses on foreign currency forward contracts. To mitigate our risks associated with fluctuations in foreign currency exchange rates, we enter into foreign currency derivative contracts with maturities of 12 months or less to hedge a portion of our net outstanding monetary assets and liabilities. These hedging contracts may reduce, but cannot entirely eliminate, the impact of adverse currency exchange rate movements. The gains (losses) recognized for these foreign currency forward contracts in other expense, net, were immaterial for each of the years ended December 31, 2023 and 2022. 45 Tabl e of Contents (Benefit from) provision for Income Taxes Year Ended December 31, % Change 2023 2022 (dollars in millions) Income before income taxes $ 1,008 $ 399 153 % (Benefit from) provision for income taxes (723) 74 NM Effective tax rate (72 %) 19 % NM NM - Not meaningful Our effective tax rate was (72%) and 19% for the year ended December 31, 2023 and December 31, 2022. The difference in rates was primarily attributable to the release of the valuation allowance against certain U.S. federal and state deferred tax assets, excluding California in the year ended December 31, 2023. The income tax benefit was $723 million for the year ended December 31, 2023. The income tax benefit was primarily attributable to the release of the valuation allowance of certain U.S. federal and state deferred tax assets. We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. 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 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. Of the $1.2 billion valuation allowance as of December 31, 2022, we released $1.05 billion of our valuation allowance during the year ended December 31, 2023. We maintained a valuation allowance of $196 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. In December 2021, the Organization for Economic Cooperation and Development adopted model rules for a 15% global minimum tax (Pillar 2) and has continued to issue administrative guidance and interpretations. Approximately 20 countries have enacted the rules into their domestic tax legislation. The United States has not enacted the rules. Due to the uncertainty of whether the United States and other countries will enact the rules, the timing of individual country legislative action and the underlying complexity of the rules, the impact, if any, on the Company is not reasonably estimable. See Note 16– Income Taxes, in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for our reconciliation of income taxes at the statutory federal rate to the provision for income taxes. 46 Tabl e of Contents Liquidity and Capital Resources We generate cash inflows from operations primarily from selling subscription services which are generally paid in advance of provisioning services, and cash outflows to develop new services and core technologies that further enhance the Now Platform, engage our customer and enhance their experience, and enable and transform our business operations. Subscription services arrangements typically have a three-year duration, and we have experienced a renewal rate of 98% for each of the years ended December 31, 2023, 2022 and 2021. Cash outflows from operations are principally comprised of the salaries, bonuses, commissions, and benefits for our workforce, licenses and services arrangements that are integral to our business operations and data centers and operating lease arrangements that underlie our facilities. We have generated positive operating cash flows for more than ten years as we continue to grow our business in pursuit of our business strategy, and we expect to grow our business and generate positive cash flows from operations during 2024. When assessing sources of liquidity, we also include cash and cash equivalents, short-term investments and long-term investments totaling $8.1 billion as of December 31, 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. Non-cancellable purchase commitments for business operations total $1.6 billion as of December 31, 2023, due primarily over the next five years. Operating lease obligations totaling $937 million are principally associated with leased facilities and have varying maturities with $515 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 year ended December 31, 2023, we repurchased 0.9 million shares of our common stock for $538 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 December 31, 2023, $962 million 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. Our capital expenditures are typically under cancellable arrangements primarily used to support the installed base and growth of our hosted business. We have also issued long-term debt to finance our business . In August 2020, we issued 1.40% fixed rate ten-year notes with an aggregate principal amount of $1.5 billion due on September 1, 2030 (the “2030 Notes”). Our free cash flows, together with our other sources of liquidity, are available to service our liabilities as well as our cancellable and non-cancellable arrangements. We anticipate cash flows generated from operations, cash, cash equivalents and investments will be sufficient to meet our liquidity needs for at least the next 12 months. As we look beyond the next 12 months, we seek to continue to grow free cash flows necessary to fund our operations and grow our business. If we require additional capital resources, we may seek to finance our operations from the current funds available or additional equity or debt financing. Year Ended December 31, 2023 2022 (in millions) Net cash provided by operating activities $ 3,398 $ 2,723 Net cash used in investing activities (2,167) (2,583) Net cash used in financing activities (803) (344) Net increase/(decrease) in cash, cash equivalents and restricted cash 429 (257) Operating Activities Net cash provided by operating activities was $3.4 billion for the year ended December 31, 2023 compared to $2.7 billion for the prior year. The net increase in operating cash flow was primarily due to higher collections driven by revenue growth. 47 Tabl e of Contents Investing Activities Net cash used in investing activities for the year ended December 31, 2023 was $2.2 billion compared to $2.6 billion for the prior year. The net decrease in cash used in investing activities was primarily due to a $681 million decrease in net purchases of investments, a $92 million decrease in purchases of non-marketable investments, offset by a $191 million increase in business combinations and a $144 million increase in purchases of property and equipment. Financing Activities Net cash used in financing activities for the year ended December 31, 2023 was $803 million compared to $344 million for the prior year. The net increase in cash used in financing activities is primarily due to repurchases of common stock for $538 million, a $32 million increase in taxes paid related to net share settlement of equity awards, offset by a $17 million increase in proceeds from employee stock plans and a $94 million decrease in repayments of convertible senior notes attributable to principal. Contractual Obligations and Commitments Our estimated future obligations consist of leases, a non-cancellable $500 million agreement with Microsoft to purchase cloud services over five years for accelerating the Azure adoption for mutual customers, the second installment of the consideration for the G2K acquisition to be paid in February 2024, purchase obligations, debt and unrecognized tax benefits as of December 31, 2023. Refer to Note 17 “Commitments and Contingencies,” Note 5 “Business Combinations” and Note 16 “(Benefit from) Provision for Income Taxes” to our consolidated financial statements included in this Annual Report on Form 10-K for more information. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Currency Exchange Risk We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. Dollar, primarily the Euro and British Pound Sterling. We are a net receiver of Euro and British Pound Sterling, and therefore benefit from a weakening of the U.S. Dollar relative to these currencies and, conversely, are adversely affected by a strengthening of the U.S. Dollar relative to these currencies. Revenues denominated in U.S. Dollar as a percentage of total revenues was 71%, 72% and 70% for the years ended December 31, 2023, 2022 and 2021, respectively. A hypothetical 10% increase in the U.S. Dollar against other currencies would have resulted in a decrease in operating income of $107 million, $75 million and $62 million for the years ended December 31, 2023, 2022 and 2021, respectively. This analysis disregards the possibilities that rates can move in opposite directions and that losses from one geographic area may be offset by gains from another geographic area. To mitigate our risks associated with fluctuations in foreign currency exchange rates, we enter into foreign currency derivative contracts to hedge a portion of our net outstanding monetary assets and liabilities. These derivative contracts are intended to offset gains or losses related to remeasuring monetary assets and liabilities that are denominated in currencies other than the functional currency of the entities in which they are recorded. These derivative contracts expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the arrangement. We mitigate this credit risk by transacting with major financial institutions with high credit ratings and entering into master netting arrangements, which permit net settlement of transactions with the same counterparty. While the contract or notional amount is often used to express the volume of foreign currency derivative contracts, the amounts potentially subject to credit risk are generally limited to the amounts, if any, by which the counterparties’ obligations under the agreements exceed our obligations to the counterparties. We are not required to pledge, and are not entitled to receive, cash collateral related to these derivative instruments. We do not enter into derivative contracts for trading or speculative purposes. Refer to Note 8 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. 48 Tabl e of Contents Interest Rate Sensitivity We had an aggregate of $8.1 billion in cash, cash equivalents, short-term investments and long-term investments as of December 31, 2023. This amount was invested primarily in money market funds, certificates of deposit, corporate notes and bonds, government and agency securities and other debt securities with a minimum rating of BBB by Standard & Poor’s, Baa2 by Moody’s or BBB by Fitch. The primary objectives of our investment activities are the preservation of capital and support of our liquidity requirements. Our investments are exposed to market risk due to fluctuations in interest rates, which may affect our interest income and the fair market value of our investments. As of December 31, 2023, a hypothetical 100 basis point increase in interest rates would have resulted in an approximate $60 million decline of the fair value of our available-for-sale debt securities. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur. As of December 31, 2022, we had an aggregate of $6.4 billion in cash, cash equivalents, short-term investments and long-term investments, and a hypothetical 100 basis point increase in interest rates would have resulted in an approximate $39 million decline of the fair value of our available-for-sale debt securities. Market Risk In August 2020, we issued 1.40% fixed rate ten-year notes with an aggregate principal amount of $1.5 billion due on September 1, 2030. The 2030 Notes were issued at 99.63% of principal and we incurred approximately $13 million of debt issuance costs. Interest is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2021, and the entire outstanding principal amount is due at maturity on September 1, 2030. The 2030 Notes are unsecured obligations and the indentures governing the 2030 Notes contain customary events of default and covenants that, among others and subject to exceptions, restrict 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. We hold cash balances with multiple financial institutions in various countries and these balances routinely exceed deposit insurance limits. As of December 31, 2023 and 2022, we had $268 million and $252 million, respectively, of non-marketable equity investments in privately held companies. Recording upward and downward adjustments to the carrying value of our non-marketable equity investments requires quantitative assessments of the fair value of our non-marketable equity investments using various valuation methodologies and involves the use of estimates. The timing and amount of observable price changes are influenced by market dynamics that can impact the valuation of our non-marketable equity investments. These changes could be material based on market conditions and events. 49 Tabl e of Contents ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA SERVICENOW, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 51 Consolidated Financial Statements Consolidated Balance Sheets 53 Consolidated Statements of Comprehensive Income 54 Consolidated Statements of Stockholders’ Equity 55 Consolidated Statements of Cash Flows 56 Notes to Consolidated Financial Statements 57 50 Tabl e of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of ServiceNow, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of ServiceNow, Inc. and its subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2023, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 51 Tabl e of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Subscription revenue recognition - customer contracts with multiple performance obligations As described in Note 2 to the consolidated financial statements, the Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Subscription revenues include self-hosted offerings in which customers deploy, or the Company grants customers the option to deploy without significant penalty, the Company’s subscription services internally or contract with a third party to host the software. For these contracts, management accounts for the software element separately from the related support and updates as they are distinct performance obligations. The transaction price allocated to the software element is recognized when transfer of control of the software to the customer is complete. The transaction price allocated to the related support and updates are recognized ratably over the contract term. As disclosed by management, evaluating the terms and conditions included within the Company’s customer contracts for appropriate revenue recognition and determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. The Company recognized subscription revenues of $8.7 billion for the year ended December 31, 2023. The principal consideration for our determination that performing procedures relating to subscription revenue recognition for customer contracts with multiple performance obligations is a critical audit matter is the matter involved significant audit effort in performing procedures related to management’s identification of distinct performance obligations. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the identification of performance obligations and evaluation of the terms and conditions within the customer contracts for appropriate revenue recognition. These procedures also included, among others, testing management’s process for identifying distinct performance obligations and evaluating the terms and conditions within the customer contracts by examining the customer contracts on a test basis for appropriate revenue recognition. /s/ PricewaterhouseCoopers LLP San Jose, California January 25, 2024 We have served as the Company’s auditor since 2011. 52 Tabl e of Contents SERVICENOW, INC. CONSOLIDATED BALANCE SHEETS (in millions, except number of shares which are reflected in thousands and per share data) December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 1,897 $ 1,470 Short-term investments 2,980 2,810 Accounts receivable, net 2,036 1,725 Current portion of deferred commissions 461 369 Prepaid expenses and other current assets 403 280 Total current assets 7,777 6,654 Deferred commissions, less current portion 919 742 Long-term investments 3,203 2,117 Property and equipment, net 1,358 1,053 Operating lease right-of-use assets 715 682 Intangible assets, net 224 232 Goodwill 1,231 824 Deferred tax assets 1,508 636 Other assets 452 359 Total assets $ 17,387 $ 13,299 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 126 $ 274 Accrued expenses and other current liabilities 1,365 975 Current portion of deferred revenue 5,785 4,660 Current portion of operating lease liabilities 89 96 Total current liabilities 7,365 6,005 Deferred revenue, less current portion 81 70 Operating lease liabilities, less current portion 707 650 Long-term debt, net 1,488 1,486 Other long-term liabilities 118 56 Total liabilities 9,759 8,267 Commitments and contingencies Stockholders’ equity: Preferred stock, $ 0.001 par value; 10,000 shares authorized; no shares issued or outstanding — — Common stock, $ 0.001 par value; shares authorized: 600,000 ; shares issued: 205,619 and 202,882 ; shares outstanding: 204,724 and 202,882 — — Treasury stock, at cost (shares held: 895 and 0 ) ( 535 ) — Additional paid-in capital 6,131 4,796 Accumulated other comprehensive loss ( 37 ) ( 102 ) Retained earnings 2,069 338 Total stockholders’ equity 7,628 5,032 Total liabilities and stockholders’ equity $ 17,387 $ 13,299 See accompanying notes to consolidated financial statements 53 Tabl e of Contents SERVICENOW, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in millions, except number of shares which are reflected in thousands and per share data) Year Ended December 31, 2023 2022 2021 Revenues: Subscription $ 8,680 $ 6,891 $ 5,573 Professional services and other 291 354 323 Total revenues 8,971 7,245 5,896 Cost of revenues (1) : Subscription 1,606 1,187 1,022 Professional services and other 315 386 331 Total cost of revenues 1,921 1,573 1,353 Gross profit 7,050 5,672 4,543 Operating expenses (1) : Sales and marketing 3,301 2,814 2,292 Research and development 2,124 1,768 1,397 General and administrative 863 735 597 Total operating expenses 6,288 5,317 4,286 Income from operations 762 355 257 Interest income 302 82 20 Other expense, net ( 56 ) ( 38 ) ( 28 ) Income before income taxes 1,008 399 249 (Benefit from) provision for income taxes ( 723 ) 74 19 Net income $ 1,731 $ 325 $ 230 Net income per share - basic $ 8.48 $ 1.61 $ 1.16 Net income per share - diluted $ 8.42 $ 1.60 $ 1.13 Weighted-average shares used to compute net income per share - basic 204,137 201,430 198,094 Weighted-average shares used to compute net income per share - diluted 205,591 203,535 203,167 Other comprehensive income (loss): Foreign currency translation adjustments $ 27 $ ( 70 ) $ ( 41 ) Unrealized gains (losses) on investments, net of tax 38 ( 66 ) ( 19 ) Other comprehensive income (loss) 65 ( 136 ) ( 60 ) Comprehensive income $ 1,796 $ 189 $ 170 (1) Includes stock-based compensation as follows: Year Ended December 31, 2023 2022 2021 Cost of revenues: Subscription $ 202 $ 157 $ 128 Professional services and other 52 67 59 Operating expenses: Sales and marketing 505 459 389 Research and development 579 495 395 General and administrative 266 223 160 See accompanying notes to consolidated financial statements 54 Table of Contents SERVICENOW, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in millions, except number of shares which are reflected in thousands) Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Shares Amount Balance as of December 31, 2020 195,845 $ — — $ — $ 2,974 $ ( 234 ) $ 94 $ 2,834 Common stock issued under employee stock plans 3,227 — — — 168 — — 168 Taxes paid related to net share settlement of equity awards — — — — ( 612 ) — — ( 612 ) Stock-based compensation — — — — 1,130 — — 1,130 Shares granted related to business combinations — — — — 6 — — 6 Settlement of 2022 Warrants 536 — — — — — — — Settlement of 2022 Notes conversion feature — — — — ( 225 ) — — ( 225 ) Benefit from exercise of 2022 Note Hedge — — — — 224 — — 224 Other comprehensive loss, net of tax — — — — — — ( 60 ) ( 60 ) Net income — — — — — 230 — 230 Balance as of December 31, 2021 199,608 $ — — $ — $ 3,665 $ ( 4 ) $ 34 $ 3,695 Cumulative effect adjustment from adoption of Accounting Standards Update (ASU) 2020-06 — — — — ( 19 ) 17 — ( 2 ) Common stock issued under employee stock plans 2,671 — — — 177 — — 177 Taxes paid related to net share settlement of equity awards — — — — ( 427 ) — — ( 427 ) Stock-based compensation — — — — 1,400 — — 1,400 Settlement of 2022 Warrants 603 — — — — — — — Settlement of 2022 Notes conversion feature — — — — ( 233 ) — — ( 233 ) Benefit from exercise of 2022 Note Hedge — — — — 233 — — 233 Other comprehensive loss, net of tax — — — — — — ( 136 ) ( 136 ) Net income — — — — — 325 — 325 Balance as of December 31, 2022 202,882 $ — — $ — $ 4,796 $ 338 $ ( 102 ) $ 5,032 Common stock and Treasury stock issued under employee stock plans 2,737 — 5 3 190 — — 193 Common stock repurchased — — ( 900 ) ( 538 ) — — — ( 538 ) Taxes paid related to net share settlement of equity awards — — — — ( 459 ) — — ( 459 ) Stock-based compensation — — — — 1,604 — — 1,604 Other comprehensive income, net of tax — — — — — — 65 65 Net income — — — — — 1,731 — 1,731 Balance as of December 31, 2023 205,619 $ — ( 895 ) $ ( 535 ) $ 6,131 $ 2,069 $ ( 37 ) $ 7,628 See accompanying notes to consolidated financial statements 55 Table of Contents SERVICENOW, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) Year Ended December 31, 2023 2022 2021 Cash flows from operating activities: Net income $ 1,731 $ 325 $ 230 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 562 433 472 Amortization of deferred commissions 459 358 294 Stock-based compensation 1,604 1,401 1,131 Deferred income taxes ( 857 ) 15 ( 34 ) Other — 17 40 Changes in operating assets and liabilities, net of effect of business combinations: Accounts receivable ( 300 ) ( 340 ) ( 401 ) Deferred commissions ( 717 ) ( 566 ) ( 565 ) Prepaid expenses and other assets ( 203 ) ( 39 ) ( 93 ) Accounts payable ( 142 ) 172 55 Deferred revenue 1,085 904 960 Accrued expenses and other liabilities 176 43 102 Net cash provided by operating activities 3,398 2,723 2,191 Cash flows from investing activities: Purchases of property and equipment ( 694 ) ( 550 ) ( 392 ) Business combinations, net of cash acquired ( 282 ) ( 91 ) ( 785 ) Purchases of investments ( 4,634 ) ( 4,038 ) ( 2,485 ) Purchases of non-marketable investments ( 75 ) ( 167 ) ( 71 ) Sales and maturities of investments 3,522 2,245 2,119 Other ( 4 ) 18 7 Net cash used in investing activities ( 2,167 ) ( 2,583 ) ( 1,607 ) Cash flows from financing activities: Repayments of convertible senior notes attributable to principal — ( 94 ) ( 61 ) Proceeds from employee stock plans 194 177 167 Repurchases of common stock ( 538 ) — — Taxes paid related to net share settlement of equity awards ( 459 ) ( 427 ) ( 612 ) Net cash used in financing activities ( 803 ) ( 344 ) ( 506 ) Foreign currency effect on cash, cash equivalents and restricted cash 1 ( 53 ) ( 25 ) Net change in cash, cash equivalents and restricted cash 429 ( 257 ) 53 Cash, cash equivalents and restricted cash at beginning of period 1,475 1,732 1,679 Cash, cash equivalents and restricted cash at end of period $ 1,904 $ 1,475 $ 1,732 Cash, cash equivalents and restricted cash at end of period: Cash and cash equivalents $ 1,897 $ 1,470 $ 1,728 Restricted cash included in prepaid expenses and other current assets 7 5 4 Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows $ 1,904 $ 1,475 $ 1,732 Supplemental disclosures of other cash flow information: Interest paid $ 23 $ 24 $ 41 Income taxes paid, net of refunds 127 45 36 Non-cash investing and financing activities: Settlement of 2022 Notes conversion feature — 233 225 Benefit from exercise of 2022 Note Hedge — 233 224 Property and equipment included in accounts payable, accrued expenses and other liabilities 44 74 63 See accompanying notes to consolidated financial statements 56 Table of Contents SERVICENOW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unless the context requires otherwise, references in this report to “ServiceNow,” the “Company,” “we,” “us” and “our” refer to ServiceNow, Inc. and its consolidated subsidiaries. (1) Description of the Business ServiceNow was founded on a simple premise to make work flow better. Our intelligent platform, the Now Platform, is a cloud-based solution with embedded artificial intelligence and machine learning capabilities that helps global enterprises across industries, universities and governments unify and digitize their workflows. Our workflow applications built on the Now Platform are organized along four primary areas: Technology, Customer and Industry, Employee, and Creator. The products under each of our workflows help customers connect, automate and empower work across systems and silos to enable great outcomes for businesses and great experiences for people. The Now Platform orchestrates work across our customers’ cloud platforms and systems of choice, allowing our customers to get work done regardless of their current and future preferred systems of record and collaboration platforms. (2) Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements have been prepared in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) and include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as reported amounts of revenues and expenses during the reporting period. Such management estimates and assumptions include, but are not limited to, standalone selling price (“SSP”) for each distinct performance obligation included in customer contracts with multiple performance obligations, the period of benefit for deferred commissions, valuation of intangible assets, the useful life of property and equipment and identifiable intangible assets, stock-based compensation expense and income taxes. Actual results could differ from those estimates. In January 2024, we completed an assessment of the useful life of our data center equipment and determined we should increase the estimated useful life of data center equipment from four to five years . This change in accounting estimate will be effective beginning fiscal year 2024. Segments Our chief operating decision maker, the Chief Executive Officer, allocates resources and assesses financial performance based upon discrete financial information at the consolidated level. There are no segment managers who are held accountable by the chief operating decision maker, or anyone else, for operations, operating results and planning for levels or components below the consolidated unit level. Accordingly, we have determined that we operate as a single operating and reportable segment. Foreign Currency Translation and Transactions The functional currencies for our foreign subsidiaries are primarily their respective local currencies. Assets and liabilities of the wholly-owned foreign subsidiaries are translated into U.S. Dollars at exchange rates in effect at each period end. Amounts classified in stockholders’ equity are translated at historical exchange rates. Revenues and expenses are translated at the average exchange rates during the period. The resulting translation adjustments are recorded in accumulated other comprehensive income (loss) as a component of stockholders’ equity. Foreign currency transaction gains and losses are included in other expense, net within the consolidated statements of comprehensive income, and have not been material for all periods presented. 57 Table of Contents Revenue Recognition Revenues are recognized when control of services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Subscription revenues Subscription revenues are primarily comprised of subscription fees that give customers access to the ordered subscription service, related support and updates, if any, to the subscribed service during the subscription term. We recognize subscription revenues ratably over the contract term beginning on the commencement date of each contract, which is the date we make our services available to our customers. Our contracts with customers typically include a fixed amount of consideration and are generally non-cancellable and without any refund-type provisions. We typically invoice our customers annually in advance for our subscription services upon execution of the initial contract or subsequent renewal, and our invoices are typically due within 30 days from the invoice date. Subscription revenues also include revenues from self-hosted offerings in which customers deploy, or we grant customers the option to deploy without significant penalty, our subscription service internally or contract with a third party to host the software. For these contracts, we account for the software element separately from the related support and updates as they are distinct performance obligations. Refer to the discussion below related to contracts with multiple performance obligations for further details. The transaction price is allocated to separate performance obligations on a relative SSP basis. The transaction price allocated to the software element is recognized when transfer of control of the software to the customer is complete. The transaction price allocated to the related support and updates are recognized ratably over the contract term. Professional services and other revenues Our professional services arrangements are primarily on a time-and-materials basis, and we generally invoice our customers monthly in arrears for these professional services based on actual hours and expenses incurred. Some of our professional services arrangements are on a fixed fee. Professional services revenues are recognized as services are delivered. Other revenues mainly consist of fees from customer training delivered on-site or through publicly available classes. Typical payment terms require our customers to pay us within 30 days from the invoice date. Contracts with multiple performance obligations We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. We evaluate the terms and conditions included within our customer contracts to ensure appropriate revenue recognition, including whether products and services are considered distinct performance obligations that should be accounted for separately versus together. For contracts with multiple performance obligations, the transaction price is allocated to the separate performance obligations on a relative SSP basis. We determine SSP by considering the historical selling price of these performance obligations in similar transactions as well as other factors, including, but not limited to, competitive pricing of similar products, other software vendor pricing, industry publications and current pricing practices. Contract balances Deferred revenue consists primarily of payments received related to unsatisfied performance obligations at the end of the period. Once our services are available to customers, we record amounts due in accounts receivable and in deferred revenue. To the extent we bill customers in advance of the billing period commencement date, the accounts receivable and corresponding deferred revenue amounts are netted to zero on our consolidated balance sheets, unless such amounts have been paid as of the balance sheet date. Customer deposits primarily relate to payments received from customers which could be refundable pursuant to the terms of the contract and are presented under accrued expenses and other current liabilities on our consolidated balance sheets. 58 Table of Contents Deferred Commissions Deferred commissions are the incremental selling costs that are associated with acquiring customer contracts and consist primarily of sales commissions paid to our sales organization and referral fees paid to independent third parties. Deferred commissions also include the associated payroll taxes and fringe benefit costs associated with payments to our sales employees to the extent they are incremental. Commissions and referral fees earned upon the execution of initial and expansion contracts are primarily deferred and amortized over a period of benefit that we have determined to be five years . Commissions earned upon the renewal of customer contracts are deferred and amortized over the average renewal term. Additionally, for self-hosted offerings, consistent with the recognition of subscription revenue for self-hosted offerings, a portion of the commission cost is expensed upfront when the self-hosted offering is made available, and the remaining portion of the commission cost is expensed over the period of benefit. We determine the period of benefit by taking into consideration our customer contracts, our technology life cycle and other factors. The amortization of deferred commissions is included in sales and marketing expense in our consolidated statements of comprehensive income. There was no impairment loss in relation to the incremental selling costs capitalized for all periods presented. Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We use a fair value hierarchy that is based on three levels of inputs, of which the first two are considered observable and the last unobservable. The three levels of the fair value hierarchy are as follows: Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2—Other inputs that are directly or indirectly observable in the marketplace; and Level 3— Significant unobservable inputs that are supported by little or no market activity. Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid investments with original or remaining maturities of three months or less at the date of purchase. Accounts Receivable, net We record trade accounts receivable at the net invoice value and such receivables are non-interest bearing. We consider receivables past due based on the contractual payment terms. We reserve for specific amounts if collectability is no longer reasonably assured based on assessment of various factors including historical loss rates and expectations of forward-looking loss estimates. Individual accounts receivable are written off when we become aware of a specific customer’s inability to meet its financial obligation, and all collection efforts are exhausted. Investments Investments consist of commercial paper, corporate notes and bonds, certificates of deposit, U.S. government and agency securities and mortgage-backed and asset-backed securities. We classify investments in debt securities as available-for-sale at the time of purchase. All investments are recorded at estimated fair value and investments with original maturities of less than one year at time of purchase is classified as short-term. Unrealized gains and losses are included in accumulated other comprehensive income (loss), net of tax, a component of stockholders’ equity, except for credit-related impairment losses for available-for-sale debt securities. 59 Table of Contents For all our available-for-sale debt securities with unrealized loss positions we have determined it is more likely than not we will hold the securities until maturity or a recovery of the cost basis. Available-for-sale securities in an unrealized loss position are written down to its fair value with the corresponding charge recorded in other expense, net on our consolidated statement of comprehensive income, if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, or we have the intention to sell the security. Credit-related impairment losses, not to exceed the amount that fair value is less than the amortized cost basis, are recognized through an allowance for credit losses with changes in the allowance for credit losses recorded in other expense, net in the consolidated statements of comprehensive income. For purposes of identifying and measuring impairment, the policy election was made to exclude the applicable accrued interest from both the fair value and amortized cost basis. Applicable accrued interest, net of the allowance for credit losses (if any) of $ 51 million and $ 28 million, is recorded in prepaid expenses and other current assets on the consolidated balance sheets as of December 31, 2023 and 2022, respectively. Realized gains and losses from the sales of available-for-sale debt securities are determined based on the specific identification method and are reported in other expense, net in the consolidated statements of comprehensive income. Strategic Investments Strategic investments consist of debt and non-marketable equity investments in privately held companies in which we do not have a controlling interest. We have elected to apply the measurement alternative for equity investments that do not have readily determinable fair values, measuring them at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. An impairment loss is recorded when an event or circumstance indicates a decline in value has occurred. We include these strategic investments in other assets on our consolidated balance sheets. Derivative Financial Instruments We use derivative financial instruments, mainly foreign currency forward contracts with maturities of 12 months or less, to manage foreign currency risks. These derivative contracts are not designated as hedging instruments and changes in the fair value are recorded in other expense, net on the consolidated statements of comprehensive income. Outstanding foreign currency forward contracts are recorded at gross fair value as prepaid expenses and other current assets as well as accrued expenses and other current liabilities on the consolidated balance sheets. Realized gains (losses) from settlement of the derivative assets and liabilities are classified as investing activities in the consolidated statements of cash flows. Property and Equipment, net Property and equipment are stated at cost net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets as follows: Computer equipment and software 3 - 5 years Furniture and fixtures 3 - 7 years Leasehold and other improvements shorter of the lease term or estimated useful life Capitalized Software Development Costs Software development costs for software to be sold, leased or otherwise marketed are expensed as incurred until the establishment of technological feasibility, at which time those costs are capitalized until the product is available for general release to customers and amortized over the estimated life of the product. Costs and time incurred between the establishment of technological feasibility and product release have not been material, and all software development costs have been charged to research and development expense in our consolidated statements of comprehensive income. 60 Table of Contents Leases We determine if an arrangement is or contains a lease at inception. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease payments consist primarily of the fixed payments under the arrangement, less any lease incentives. We generally use an incremental borrowing rate estimated based on the information available at the lease commencement date to determine the present value of lease payments, unless the implicit rate is readily determinable. Lease expense for lease payments is recognized on a straight-line basis over the lease term. We account for lease and non-lease components as a single lease component for office leases. Lease and non-lease components for all other leases are generally accounted for separately. Additionally, we do not record leases on the balance sheet that, at the lease commencement date, have a lease term of 12 months or less. Operating leases are included in operating lease right-of-use assets, current portion of operating lease liabilities, and operating lease liabilities, less current portion in our consolidated balance sheets. We did not have any financing leases in any of the periods presented. Business Combinations We allocate the acquisition purchase price to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. The excess of the purchase price over the fair value of these assets acquired and liabilities assumed is recorded as goodwill. Allocation of the purchase price requires significant estimates in determining the fair value of acquired assets and assumed liabilities, especially with respect to intangible assets. Critical estimates include, but are not limited to, future expected cash flows, discount rates, revenue growth rates, the time and expense to recreate the assets and profit margin a market participant would receive. These estimates are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which may not be later than one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. Goodwill and Intangible Assets Goodwill is evaluated for impairment at least annually or more frequently if circumstances indicate that goodwill may not be recoverable. A qualitative assessment is performed to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount. If the reporting unit does not pass the qualitative assessment, the carrying amount of the reporting unit, including goodwill, is compared to fair value and goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. Any excess of the carrying value of the goodwill above its fair value is recognized as an impairment loss. Intangible assets consist of developed technologies and other intangible assets, including patents and contractual agreements. Intangible assets are amortized over the period of estimated benefit using the straight-line method and estimated useful lives ranging from three to twelve years . Impairment of Long-Lived Assets We evaluate long-lived assets, including purchased intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability is measured by comparing the carrying amount to the future undiscounted cash flows we expect the asset to generate. Any excess of the carrying value of the asset above its fair value is recognized as an impairment loss. Advertising Costs Advertising costs, excluding costs related to our annual Knowledge user conference and other user forums, are expensed as incurred and are included in sales and marketing expense. These costs for the years ended December 31, 2023, 2022 and 2021 were $ 221 million, $ 201 million and $ 198 million, respectively. 61 Table of Contents Stock-based Compensation We recognize compensation expense related to stock options and restricted stock units (“RSUs”) with only service conditions on a straight-line basis over the requisite service period. For stock options and RSUs with service, performance and market conditions (performance-based RSUs (“PRSUs”)), expenses are recognized on a graded vesting basis over the requisite service period and for awards with performance conditions, when it is probable that the performance condition will be achieved. The probability of achievement is assessed periodically to determine whether the performance metric continues to be probable. When there is a change in the probability of achievement, any cumulative effect of the change is recognized in the period of the change and the remaining unrecognized compensation will be amortized prospectively over the respective vesting period. We recognize compensation expense related to shares issued pursuant to the employee stock purchase plan (“ESPP”) on a straight-line basis over the six-month offering period. We recognize compensation expense net of estimated forfeiture activity. Amounts withheld related to the minimum statutory tax withholding requirements paid by us on behalf of our employees are recorded as a liability and a reduction to additional paid-in capital when paid and are included as a reduction of cash flows from financing activities. We estimate the fair value of stock options with only service conditions and shares issued pursuant to the ESPP using the Black-Scholes options pricing model and the fair value of RSU awards (including PRSUs) using the fair value of our common stock on the date of grant. For stock options and PRSUs with service, performance and market conditions, we estimate the fair value of the options granted and the corresponding derived service periods using the Monte Carlo simulation, which requires the use of various assumptions, including the stock price volatility and risk-free interest rate as of the valuation date corresponding to the length of time remaining in the performance period. Concentration of Credit Risk and Significant Customers Financial instruments potentially exposing us to credit risk consist primarily of cash, cash equivalents, derivative contracts, investments and accounts receivable. We hold cash at financial institutions that management believes are high credit quality financial institutions and invest in investment-grade debt securities. Our derivative contracts expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the arrangement. We mitigate this credit risk by transacting with major financial institutions with high credit ratings and entering into master netting arrangements, which permit net settlement of transactions with the same counterparty. We are not required to pledge, and are not entitled to receive, cash collateral related to these derivative instruments. Credit risk arising from accounts receivable is mitigated to a certain extent due to our large number of customers and their dispersion across various industries and geographies. As of December 31, 2023 and 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. For purposes of assessing concentration of credit risk and significant customers, a group of customers under common control or customers that are affiliates of each other are regarded as a single customer. The allowance for credit losses and write offs were not material for each of the periods ending December 31, 2023, 2022 and 2021. Income Taxes We use the asset and liability method of accounting for income taxes, in which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be reversed. We recognize the effect on deferred tax assets and liabilities of a change in tax rates within the provision for income taxes as income and expense in the period that includes the enactment date. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. In determining the need for a valuation allowance, we consider future growth, forecasted earnings, forecasted taxable income, the mix of earnings in the jurisdictions in which we operate, historical earnings, taxable income in prior years, if carryback is permitted under the law, carryforward periods and prudent and feasible tax planning strategies. 62 Table of Contents Our tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. We recognize the tax benefit of an uncertain tax position only if it is more likely than not the position is sustainable upon examination by the taxing authority, based on the technical merits. We measure the tax benefit recognized as the largest amount of benefit which is more likely than not to be realized upon settlement with the taxing authority. We recognize interest accrued and penalties related to unrecognized tax benefits in our tax provision. We calculate the current and deferred income tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years and record adjustments based on filed income tax returns when identified. The amount of income taxes paid is subject to examination by U.S. federal, state and foreign tax authorities. The estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts and circumstances existing at that time. To the extent the assessment of such tax position changes, we record the change in estimate in the period in which we make the determination. Prior Period Reclassifications Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications did not result in a restatement of prior period consolidated financial statements. Recently Issued Accounting Pronouncement Pending Adoption In December 2023, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2023-09, “Income Taxes - Improvements to Income Tax Disclosures” requiring enhancements and further transparency to certain income tax disclosures, most notably the tax rate reconciliation and income taxes paid. This ASU is effective for fiscal years beginning after December 15, 2024 on a prospective basis and retrospective application is permitted. We are currently evaluating the impact of the adoption of this standard. 63 Table of Contents (3) Investments Marketable Debt Securities The following is a summary of our available-for-sale debt securities recorded within short-term and long-term investments on the consolidated balance sheets (in millions): December 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Available-for-sale debt securities: Commercial paper $ 349 $ — $ — $ 349 Corporate notes and bonds 3,579 10 ( 13 ) 3,576 Certificates of deposit 94 — — 94 U.S. government and agency securities 2,081 3 ( 6 ) 2,078 Mortgage-backed and asset-backed securities 102 — ( 16 ) 86 Total available-for-sale debt securities $ 6,205 $ 13 $ ( 35 ) $ 6,183 December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Available-for-sale debt securities: Commercial paper $ 558 $ — $ ( 2 ) $ 556 Corporate notes and bonds 3,414 — ( 52 ) 3,362 Certificates of deposit 162 — — 162 U.S. government and agency securities 768 — ( 2 ) 766 Mortgage-backed and asset-backed securities 98 — ( 17 ) 81 Total available-for-sale debt securities $ 5,000 $ — $ ( 73 ) $ 4,927 As of December 31, 2023, the contractual maturities of our available-for-sale debt securities, excluding those securities classified within cash and cash equivalents on the consolidated balance sheet and mortgage-backed and asset-backed securities that do not have a single maturity, did not exceed 37 months. The fair values of available-for-sale debt securities, by remaining contractual maturity, are as follows (in millions): December 31, 2023 Due within 1 year $ 2,980 Due in 1 year through 5 years 3,117 Instruments not due in single maturity 86 Total $ 6,183 As of December 31, 2023 and 2022, the fair value of available-for-sale debt securities in a continuous unrealized loss position totaled $ 3,731 million and $ 4,232 million, respectively. As of December 31, 2023, unrealized losses of $ 26 million from available-for-sale debt securities are from securities in a continuous unrealized loss position greater than 12 months. 64 Table of Contents 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 primarily due to changes in market interest rates, and credit-related impairment losses were not material as of December 31, 2023. Non-Marketable Equity Investments As of December 31, 2023 and 2022, the total amount of non-marketable equity investments in privately held companies included in other assets on our consolidated balance sheets was $ 268 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. Our non-marketable equity investments are primarily accounted for using the measurement alternative, which measures the investments at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes resulting from the issuance of similar or identical securities in an orderly transaction by the same issuer. Determining whether an observed transaction is similar to a security within our portfolio requires judgment based on the rights and preferences of the securities. Recording upward and downward adjustments to the carrying value of our non-marketable equity investments as a result of observable price changes requires quantitative assessments of the fair value of our non-marketable equity investments using various valuation methodologies and involves the use of estimates. The adjustments made during the years ended December 31, 2023, 2022 and 2021 were 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 December 31, 2023 (in millions): Level 1 Level 2 Total Cash equivalents: Money market funds $ 1,215 $ — $ 1,215 Commercial paper — 79 79 Corporate notes and bonds — 2 2 Deposits 295 — 295 U.S. government and agency securities — 4 4 Marketable securities: Commercial paper — 349 349 Corporate notes and bonds — 3,576 3,576 Certificates of deposit — 94 94 U.S. government and agency securities — 2,078 2,078 Mortgage-backed and asset-backed securities — 86 86 Total $ 1,510 $ 6,268 $ 7,778 65 Table of Contents The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis as of December 31, 2022 (in millions): Level 1 Level 2 Total Cash equivalents: Money market funds $ 738 $ — $ 738 Commercial paper — 36 36 Corporate notes and bonds — 10 10 Certificates of deposit — 2 2 Deposits 124 — 124 U.S. government and agency securities — 8 8 Marketable securities: Commercial paper — 556 556 Corporate notes and bonds — 3,362 3,362 Certificates of deposit — 162 162 U.S. government and agency securities — 766 766 Mortgage-backed and asset-backed securities — 81 81 Total $ 862 $ 4,983 $ 5,845 We determine the fair value of our security holdings based on pricing from our service providers and market prices from industry-standard independent data providers. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs), pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) or using unobservable inputs that are supported by little or no market activity (Level 3 inputs). Our non-marketable equity investments are not included in the table above and are discussed in Note 3. See Note 8 for the fair value measurement of our derivative contracts and Note 11 for the fair value measurement of our long-term debt, which are also not included in the table above. Our marketable equity investments are classified within Level 1 and are immaterial as of December 31, 2023 and 2022. (5) Business Combinations 2023 Business Combinations 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 December 31, 2023. The acquisition is intended to enhance our Now Platform with the acquired smart Internet of Things 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. 66 Table of Contents 2022 Business Combinations During the year ended December 31, 2022, we completed certain acquisitions for total purchase consideration of $ 92 million primarily to enhance our products with the acquired technology and engineering workforce. The acquisitions were not material to our consolidated financial statements, either individually or in the aggregate. 2021 Business Combinations On June 15, 2021, we acquired Lightstep, Inc., a leading observability solution provider, for $ 512 million in a cash transaction. The purchase price was allocated based on the estimated fair value of developed technology intangible asset of $ 85 million ( five-year estimated useful life), customer related and brand assets of $ 11 million, net tangible assets of $ 8 million, deferred tax liabilities of $ 6 million and goodwill of $ 413 million, which is not deductible for income tax purposes. On January 8, 2021, we acquired all outstanding stock of Element AI Inc., a leading enterprise artificial intelligence solution provider, for $ 228 million in an all-cash transaction. The purchase price was allocated based on the estimated fair value of developed technology intangible asset of $ 85 million ( five-year estimated useful life), net tangible assets of $ 16 million and goodwill of $ 81 million , which is partially deductible for income tax purposes. At time of acquisition, we established an unrecognized tax benefit of $ 43 million on pre-acquisition net operating loss carryforwards and other tax attributes which was subsequently released resulting in establishment of deferred tax asset based on completion of valuation and filing certain tax returns in the third quarter of 2021. Goodwill is primarily attributed to the value expected from synergies resulting from the business combinations. The fair values assigned to tangible and intangible assets acquired, liabilities assumed and income taxes payable and deferred taxes are based on management’s estimates and assumptions. The Company finalized the fair value measurements within one year from the acquisition date. During the year ended December 31, 2021, we also completed certain acquisitions for total purchase consideration of $ 66 million primarily to enhance our products with the acquired technology and engineering workforce. These acquisitions were not material to our consolidated financial statements, either individually or in the aggregate. We have included the financial results of business combinations in the consolidated financial statements from the respective dates of acquisition, which were not material. Aggregate acquisition-related costs associated with business combinations are not material for each of the years ended December 31, 2023, 2022 and 2021, respectively, and are included in general and administrative expenses in our consolidated statements of comprehensive income as incurred. (6) Goodwill and Intangible Assets The changes in the carrying amounts of g oodwill were as follows (in millions): Carrying Amount Balance as of December 31, 2021 $ 777 Goodwill acquired 68 Foreign currency translation adjustments ( 21 ) Balance as of December 31, 2022 $ 824 Goodwill acquired 413 Foreign currency translation adjustments ( 6 ) Balance as of December 31, 2023 $ 1,231 67 Table of Contents Intangible assets consist of the following (in millions): December 31, 2023 December 31, 2022 Developed technology $ 516 $ 434 Patents 72 72 Other 11 15 Intangible assets, gross $ 599 $ 521 Less: accumulated amortization ( 375 ) ( 289 ) Intangible assets, net $ 224 $ 232 The weighted-average useful life of the acquired developed technology for each of the years ended December 31, 2023 and 2022 was approximately five years . Amortization expense for intangible assets was approximately $ 85 million, $ 81 million and $ 76 million for the years ended December 31, 2023, 2022 and 2021, respectively. The following table presents the estimated future amortization expense related to intangible assets held as of December 31, 2023 (in millions): Years Ending December 31, 2024 $ 84 2025 63 2026 33 2027 19 2028 15 Thereafter 10 Total future amortization expense $ 224 (7) Property and Equipment Property and equipment, net consists of the following (in millions): December 31, 2023 2022 Computer equipment $ 2,136 $ 1,606 Computer software 96 82 Leasehold and other improvements 292 226 Furniture and fixtures 86 81 Construction in progress 33 53 Property and equipment, gross 2,643 2,048 Less: Accumulated depreciation ( 1,285 ) ( 995 ) Property and equipment, net $ 1,358 $ 1,053 Construction in progress consists of costs primarily related to leasehold and other improvements. Depreciation expense was $ 372 million, $ 261 million and $ 312 million for the years ended December 31, 2023, 2022 and 2021, respectively. 68 Table of Contents (8) Derivative Contracts As of December 31, 2023 and 2022, we had foreign currency forward contracts with total notional values of $ 1,727 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. The gross fair value of these foreign currency forward contracts was immaterial as of December 31, 2023 and 2022. The gains (losses) recognized for these foreign currency forward contracts were immaterial for each of the years ended December 31, 2023, 2022 and 2021. (9) Deferred Revenue and Performance Obligations Revenues recognized during the year ended December 31, 2023 from amounts included in deferred revenue as of December 31, 2022 were $ 4.6 billion. Revenues recognized during the year ended December 31, 2022 from amounts included in deferred revenue as of December 31, 2021 were $ 3.7 billion. Remaining Performance Obligations Transaction price allocated to remaining performance obligations (“RPO”) represents contracted revenue that has not yet been recognized, which includes deferred revenue and non-cancellable amounts that will be invoiced and recognized as revenues in future periods. RPO excludes contracts that are billed in arrears, such as certain time and materials contracts, as we apply the “right to invoice” practical expedient under relevant accounting guidance. As of December 31, 2023, the total non-cancellable RPO under our contracts with customers was $ 18.0 billion, and we expect to recognize revenues on approximately 48 % of these RPO over the following 12 months. The majority of the non-current RPO will be recognized over the next 13 to 36 months. (10) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following (in millions): December 31, 2023 2022 Accrued payroll $ 650 $ 490 Taxes payable 123 109 Other employee-related liabilities 167 150 Other 425 226 Total accrued expenses and other current liabilities $ 1,365 $ 975 69 Table of Contents (11) Debt For the periods ended December 31, 2023 and 2022, the carrying value of our outstanding debt was $ 1,488 million and $ 1,486 million, respectively, net of unamortized debt discount and issuance costs of $ 12 million and $ 14 million, respectively. We consider the fair value of the 2030 Notes as of December 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 $ 1,236 million and $ 1,144 million as of December 31, 2023 and December 31, 2022, respectively. 2030 Notes In August 2020, we issued 1.40 % fixed rate ten-year notes with an aggregate principal amount of $ 1.5 billion due on September 1, 2030 (the “2030 Notes”). The 2030 Notes were issued at 99.63 % of principal and we incurred $ 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 the debt discount. Interest is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2021, and the entire outstanding principal amount is due at maturity on September 1, 2030. The 2030 Notes are unsecured obligations and the indentures governing the 2030 Notes contain customary events of default and covenants that, among others and subject to exceptions, restrict 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 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) 2022 Notes February 1, 2022 $ 134.75 7.42 shares 6 To minimize the impact of potential economic dilution upon conversion of the 2022 Notes, we entered into convertible note hedge transactions (the “2022 Note Hedge”) with certain investment banks to purchase 6 million shares for $ 128 million with respect to our common stock concurrently with the issuance of the 2022 Notes. The 2022 Note Hedge offsets 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. Separately, we entered into warrant transactions with certain investment banks, whereby we sold warrants to acquire 6 million shares of our common stock with aggregate proceeds of $ 54 million (the “2022 Warrants”). The 2022 Warrants were separate transactions and were not remeasured through earnings each reporting period. The 2022 Warrants were not part of the 2022 Notes or 2022 Note Hedge. During the quarter ended June 30, 2022, we settled the remaining portion of the 2022 Warrants by delivering an aggregate of 0.6 million shares of our common stock. Accordingly, the 2022 Warrants were no longer outstanding as of June 30, 2022. 70 Table of Contents (12) Accumulated Other Comprehensive Loss The following table shows the components of accumulated other comprehensive loss, net of tax, in the stockholders’ equity section of our consolidated balance sheets (in millions): December 31, 2023 2022 Foreign currency translation adjustment $ 2 $ ( 25 ) Net unrealized loss on investments ( 39 ) ( 77 ) Accumulated other comprehensive loss $ ( 37 ) $ ( 102 ) Reclassification adjustments out of accumulated other comprehensive loss into net income were not material for all periods presented. (13) Stockholders' Equity Common Stock We are authorized to issue a total of 600 million shares of common stock as of December 31, 2023. Holders of our common stock are not entitled to receive dividends unless declared by our board of directors. As of December 31, 2023, we had 204.7 million shares of common stock, net of treasury stock, outstanding and had reserved shares of common stock for future issuance as follows (in thousands): December 31, 2023 Stock plans: Options outstanding 1,150 RSUs (1) 6,262 Shares of common stock available for future grants: Amended and Restated 2021 Equity Incentive Plan (2) 11,908 Amended and Restated 2012 Employee Stock Purchase Plan (2) 8,508 Total shares of common stock reserved for future issuance 27,828 (1) Represents the number of shares issuable upon settlement of outstanding restricted stock units (“RSUs”) and performance-based RSUs (“PRSUs”), as discussed in Note 14. (2) Refer to Note 14 for a description of these plans. During each of the years ended December 31, 2023 and 2022, we issued a total of 2.7 million shares 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”). 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. 71 Table of Contents During the year ended December 31, 2023, the Company repurchased 0.9 million shares of its common stock for $ 538 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 December 31, 2023, $ 962 million of the originally authorized amount remained available for future repurchases. Preferred Stock Our board of directors has the authority, without further action by stockholders, to issue up to 10 million shares of preferred stock in one or more series. Our board of directors may designate the rights, preferences, privileges and restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preference and number of shares constituting any series or the designation of any series. The issuance of preferred stock could have the effect of restricting dividends on our common stock, diluting the voting power of our common stock, impairing the liquidation rights of our common stock or delaying or preventing a change in control. As of December 31, 2023 and 2022, no shares of preferred stock were outstanding. (14) Equity Awards We currently have three equity incentive plans: 2012 Equity Incentive Plan (the “2012 Plan”), amended and restated 2021 Equity Incentive Plan (the “2021 Plan”) and 2022 New-Hire Equity Incentive Plan (the “2022 Plan”). The 2012 Plan was terminated in connection with the initial 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. The 2021 Plan, as amended and restated, was approved by the shareholders on June 1, 2023 to increase shares available for future grants by approximately 10 million shares. Upon effectiveness of the 2021 Plan, as amended and restated, the 2022 Plan was terminated, and no additional awards under the 2022 Plan have been made since the amendment and restatement of the 2021 Plan. Outstanding equity awards under the 2022 Plan continue to be subject to the terms and conditions of the 2022 Plan. The 2021 Plan and the 2012 Plan provide for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, RSUs, performance-based stock awards and other forms of equity compensation (collectively, “equity awards”). The 2022 Plan permits the grant of any of the foregoing awards with the exception of incentive stock options. In addition, the 2022 Plan, the 2021 Plan and the 2012 Plan provide for the grant of performance cash awards. Incentive stock options may be granted only to employees. All other equity awards may be granted to employees, including officers, as well as directors and consultants. Our Amended and Restated 2012 Employee Stock Purchase Plan (the “2012 ESPP”) authorizes the issuance of shares of common stock pursuant to purchase rights granted to our employees. The price at which common stock is purchased under the 2012 ESPP is equal to 85 % of the fair market value of our common stock on the first or last day of the offering period, whichever is lower. Offering periods are six months long and begin on February 1 and August 1 of each year. The number of shares of common stock reserved for issuance will not be increased without shareholder approval. Stock Options Stock options are exercisable at a price equal to the market value of the underlying shares of common stock on the date of the grant as determined by the closing price of our common stock as reported on the New York Stock Exchange on the date of grant. Stock options granted under the 2012 Plan to new employees generally vest 25 % one year from the date the requisite service period begins and continue to vest monthly for each month of continued employment over the remaining three years . Options granted generally are exercisable for a period of up to ten years contingent on each holder’s continuous status as a service provider. 72 Table of Contents A summary of stock option activity for the year ended December 31, 2023 was as follows: Number of Shares Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Term Aggregate Intrinsic Value (in thousands) (in years) (in millions) Outstanding as of December 31, 2022 1,237 $ 590.36 Exercised ( 32 ) $ 68.06 $ 15 Forfeited ( 55 ) $ 625.99 Outstanding as of December 31, 2023 1,150 $ 603.30 7.4 $ 119 Vested and expected to vest as of December 31, 2023 948 $ 588.32 7.4 $ 112 Vested and exercisable as of December 31, 2023 150 $ 203.79 5.1 $ 75 Aggregate intrinsic value represents the difference between the estimated fair value of our common stock and the exercise price of outstanding, in-the-money options. The total intrinsic value for stock options exercised for the years ended December 31, 2023, 2022 and 2021, was $ 15 million, $ 40 million and $ 140 million, respectively. The total fair value of shares vested was $ 7 million, $ 11 million and $ 10 million for the years ended December 31, 2023, 2022 and 2021, respectively. No stock options were granted during the year ended December 31, 2023. The weighted-average grant-date fair values of stock options granted was $ 273.63 and $ 248.85 per share for the years ended December 31, 2022 and 2021, respectively. During the year ended December 31, 2021, a one-time long-term performance-based option award was granted to the Chief Executive Officer (“2021 CEO Performance Award”) and to certain executives (collectively “2021 Performance Awards”) under the 2021 Plan at a total grant date fair value of $ 232 million. The 2021 Performance Awards will vest in eight equal tranches based on service and achievement of both performance and market conditions, subject to continued employment and specifically for the 2021 CEO Performance Award, as CEO or Executive Chairman of the Company, through each vesting date. The performance and market condition for a particular tranche may be achieved at different points in time and in any order but will become eligible to vest only when all service, performance and market conditions for the respective tranche are met but no earlier than two years . The performance and market condition must be achieved by September 30, 2026 (the “Performance Period”). The stock price metric will be achieved when both the 180-Day volume weighted-average price (“VWAP”) and the 30-day VWAP equal or exceed the respective tranche stock price metric on any day during the Performance Period. The performance metric is achieved when the trailing four quarter cumulative GAAP subscription revenues equal or exceed the respective tranche performance target. Shares acquired upon exercise of the options cannot be sold, transferred or disposed until after the end of the Performance Period and the 2021 Performance Awards will expire ten years from the respective date of grant. As of December 31, 2023, none of the tranches have vested. The fair value of the 2021 Performance Awards and the corresponding derived service periods were estimated using the Monte Carlo simulation. Stock-based compensation expense is recognized on a graded vesting basis over the requisite service period for each respective tranche, but not shorter than the two -year minimum service period, and includes an assessment of when it is probable the performance condition will be achieved, which involves a subjective assessment of our future financial projection. As of December 31, 2023, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options was approximately $ 28 million. The weighted-average remaining vesting period of unvested stock options as of December 31, 2023 was one year . 73 Table of Contents RSUs A summary of RSU activity for the year ended December 31, 2023 was as follows: Number of Shares Weighted-Average Grant-Date Fair Value Per Share (in thousands) Outstanding as of December 31, 2022 5,737 $ 505.79 Granted 4,134 $ 479.18 Vested ( 3,096 ) $ 469.20 Forfeited ( 513 ) $ 506.98 Outstanding as of December 31, 2023 6,262 $ 506.77 Expected to vest as of December 31, 2023 5,553 RSUs outstanding as of December 31, 2023 were comprised of 5.8 million RSUs with only service conditions and 0.5 million RSUs with both service conditions and performance conditions, including certain RSUs with additional market conditions. The total intrinsic value of the RSUs vested was $ 1.6 billion, $ 1.5 billion and $ 2.1 billion for the years ended December 31, 2023, 2022 and 2021, respectively. As of December 31, 2023, the aggregate intrinsic value of RSUs outstanding was $ 4.4 billion and RSUs expected to vest was $ 3.9 billion. The weighted-average grant-date fair value of RSUs granted was $ 479.18 , $ 541.24 and $ 577.26 per share for the years ended December 31, 2023, 2022 and 2021, respectively. For the years ended December 31, 2023, 2022, and 2021, PRSUs with service, performance and market vesting criteria are considered as eligible to vest when approved by the compensation committee of our board of directors in January of the year following the grant. The ultimate number of shares eligible to vest for PRSUs range from 0 % to 200 % of the target number of shares depending on achievement relative to the performance metrics and, for certain PRSUs, depend on our total shareholder return relative to that of the S&P 500 index over the applicable measurement period. The eligible shares subject to PRSUs granted during the year ended December 31, 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 $ 145 million, $ 121 million, and $ 124 million of stock-based compensation expense, net of actual and estimated forfeitures, associated with PRSUs on a graded vesting basis during the years ended December 31, 2023, 2022 and 2021, respectively. As of December 31, 2023, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs was $ 2.5 billion and the weighted-average remaining vesting period was approximately three years . Total stock-based compensation expense for the years ended December 31 2023, 2022 and 2021 was $ 1,604 million, $ 1,401 million and $ 1,131 million, respectively. For the year ended December 31, 2023, we recorded $ 296 million of tax benefits on total stock-based compensation expense, which are reflected in the benefit from income taxes in the consolidated statements of comprehensive income. Tax benefits on stock-based compensation for the years ended December 31, 2022 and 2021 were no t material. 74 Table of Contents Valuation Assumption s The following assumptions were used in the Black-Scholes options pricing model and the Monte Carlo simulation model, to estimate our stock-based compensation on the date of grant for ESPP, stock options and PRSUs, respectively, as applicable. Year Ended December 31, 2023 2022 2021 Risk-Free Interest Rate ESPP 2.96 % - 5.39 % 0.06 % - 2.96 % 0.06 % - 0.11 % Stock Options * 2.04 % 1.20 % - 1.45 % PRSU 4.34 % 1.76 % 0.19 % - 0.20 % Expected Term (in years) ESPP 0.5 0.5 0.5 Stock Options * 10 7.5 - 10 Expected Volatility ESPP 33 % - 59 % 35 % - 59 % 35 % - 60 % Stock Options * 40 % 38 % - 41 % PRSU 45 % 42 % 41 % - 42 % * There were no stock option grants in 2023. Expected volatility . The expected volatility is based on the historical volatility of our common stock for a period similar to our expected term. Expected term . We determine the expected term based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. We estimate the expected term for ESPP using the purchase period. Risk-free interest rate . The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the stock-based award. Expected dividend yield . Our expected dividend yield is zero , as we have not and do not currently intend to declare dividends in the foreseeable future. (15) Net Income Per Share Basic net income per share attributable to common stockholders is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, adjusted for the effects of dilutive shares of common stock, which are comprised of outstanding stock options, RSUs, ESPP obligations, the 2022 Notes and the 2022 Warrants. Stock awards with performance or market conditions are included in dilutive shares to the extent all conditions are met. The dilutive potential shares of common stock are computed using the treasury stock method or the as-if converted method, as applicable. The effects of outstanding stock options, RSUs, ESPP obligations, 2022 Notes and 2022 Warrants are excluded from the computation of diluted net income per share in periods in which the effect would be antidilutive. 75 Table of Contents The following table presents the calculation of basic and diluted net income per share attributable to common stockholders (in millions, except for number of shares reflected in thousands and per share data): Year Ended December 31, 2023 2022 2021 Numerator: Net income $ 1,731 $ 325 $ 230 Denominator: Weighted-average shares outstanding - basic 204,137 201,430 198,094 Weighted-average effect of potentially dilutive securities: Common stock options 120 117 293 RSUs 1,332 1,555 3,429 ESPP Obligations 2 — — 2022 Notes — — 535 2022 Notes settlements — 280 116 2022 Warrants — — 649 Settlement of 2022 Warrants — 153 51 Weighted-average shares outstanding - diluted 205,591 203,535 203,167 Net income per share - basic $ 8.48 $ 1.61 $ 1.16 Net income per share - diluted $ 8.42 $ 1.60 $ 1.13 Common stock options, RSUs, and ESPP obligations excluded from diluted net income per share because their effect would have been anti-dilutive 3,191 4,658 1,588 76 Table of Conten t s (16) (Benefit from) Provision for Income Taxes The components of income before income taxes by U.S. and foreign jurisdictions were as follows (in millions): Year Ended December 31, 2023 2022 2021 United States $ 523 $ 173 $ 152 Foreign 485 226 97 Total $ 1,008 $ 399 $ 249 The (benefit from) provision for income taxes consists of the following (in millions): Year Ended December 31, 2023 2022 2021 Current provision: Federal $ 2 $ — $ — State 31 13 1 Foreign 101 46 52 134 59 53 Deferred provision: Federal ( 750 ) ( 1 ) ( 3 ) State ( 135 ) ( 1 ) ( 3 ) Foreign 28 17 ( 28 ) ( 857 ) 15 ( 34 ) (Benefit from) provision for income taxes $ ( 723 ) $ 74 $ 19 The effective income tax rate differs from the federal statutory income tax rate applied to the income before income taxes due to the following (in millions): Year Ended December 31, 2023 2022 2021 Tax computed at U.S. federal statutory rate $ 212 $ 84 $ 53 State taxes, net of federal benefit 47 10 — U.S. tax on foreign earnings 42 96 — Tax rate differential for international subsidiaries 29 18 6 Stock-based compensation 25 7 ( 160 ) Executive compensation 32 22 23 Tax credits ( 93 ) ( 70 ) ( 76 ) Other 15 7 4 Valuation allowance ( 1,032 ) ( 100 ) 169 (Benefit from) provision for income taxes $ ( 723 ) $ 74 $ 19 77 Table of Conten t s Significant components of our deferred tax assets are shown below (in millions). A valuation allowance has been recognized to offset our deferred tax assets, as necessary, by the amount of any tax benefits that, based on evidence, are not expected to be realized. December 31, 2023 2022 Deferred tax assets: Net operating loss carryforwards $ 257 $ 605 Credit carryforwards 476 388 Lease liability 184 178 Capitalized research and development 324 262 Depreciation and amortization 552 553 Other 167 159 Total deferred tax assets 1,960 2,145 Less: valuation allowance ( 196 ) ( 1,228 ) 1,764 917 Deferred tax liabilities: Right of use asset ( 165 ) ( 162 ) Other ( 131 ) ( 129 ) Net deferred tax assets $ 1,468 $ 626 The unremitted earnings of our foreign subsidiaries are not considered indefinitely reinvested, except in certain designated jurisdictions in which the resident entity is a service provider that is not expected to generate substantial amounts of cash in excess of what may be reinvested by the local entity. We have not provided for state income or withholding taxes on the undistributed earnings of foreign subsidiaries, which are considered indefinitely invested outside of the U.S. The amount of unrecognized deferred tax liability on these undistributed earnings is not material as of December 31, 2023. As of December 31, 2023, we had U.S. federal net operating loss and federal tax credit carryforwards of $ 470 million and $ 404 million, respectively. The federal tax credits will begin to expire in 2033 if not utilized. In addition, as of December 31, 2023, we had state net operating loss and state tax credit carryforwards of approximately $ 1.0 billion and $ 272 million, respectively. The state net operating loss will begin to expire in 2024 if not utilized; however, the tax-effected amount due to expire in 2024 is immaterial. State tax credits and a portion of the federal net operating loss carryforwards can be carried forward indefinitely. Utilization of our net operating loss and credit carryforwards may be subject to annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carryforwards before utilization. As of December 31, 2023, we had Canada net operating loss and tax credit carryforwards of $ 170 million and $ 11 million, respectively. The Canada net operating loss and tax credits will begin to expire in 2039 and 2037, respectively, if not utilized. In addition, as of December 31, 2023, we had United Kingdom net operating loss carryforwards of $ 145 million. The United Kingdom net operating loss can be carried forward indefinitely. 78 Table of Conten t s The income tax benefit was $ 723 million for the year ended December 31, 2023. The income tax benefit was primarily attributable to the release of the valuation allowance of certain U.S. federal and state deferred tax assets. We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. 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 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. Of the $ 1.2 billion valuation allowance as of December 31, 2022, we released $ 1.05 billion of our valuation allowance during the year ended December 31, 2023. We maintained a valuation allowance of $ 196 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. The decrease in the 2023 valuation allowance of $ 1.03 billion was primarily attributable to the $ 1.05 billion release of certain U.S. federal and state valuation allowance offset by approximately a $ 20 million increase in the California valuation allowance. The $ 98 million decrease in the 2022 valuation allowance was primarily attributable to a decrease in deferred tax assets related to the utilization of net operating losses. The $ 197 million increase in the 2021 valuation allowance was primarily attributable to an increase in deferred tax assets related to net operating losses and research and development tax credits partially offset by a valuation allowance release related to Lightstep, Inc. acquired deferred tax liabilities. A reconciliation of the beginning and ending balance of total unrecognized tax benefits is as follows (in millions): Year Ended December 31, 2023 2022 2021 Balance, beginning period $ 159 $ 124 $ 81 Tax positions taken in prior period: Gross increases — — 5 Gross decreases — ( 1 ) — Tax positions taken in current period: Gross increases 63 38 38 Settlements ( 1 ) ( 2 ) — Balance, end of period $ 221 $ 159 $ 124 As of December 31, 2023, we had gross unrecognized tax benefits of approximately $ 221 million, of which $ 51 million would impact the effective tax rate, if recognized. We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense. Accrued interest and penalties included in our liability related to unrecognized tax benefits were $ 6 million and $ 5 million as of December 31, 2023 and 2022, respectively. The amount of unrecognized tax benefits could be reduced upon expiration of the applicable statutes of limitations. The potential reduction in unrecognized tax benefits during the next 12 months is not expected to be material. Interest and penalties accrued on these uncertain tax positions are recognized as income tax expense and will be released upon the expiration of the statutes of limitations. These amounts are also not material for any periods presented. Further, $ 51 million and $ 31 million of unrecognized tax benefits have been recorded as liabilities as of December 31, 2023 and 2022, respectively. We are subject to taxation in the United States and foreign jurisdictions. As of December 31, 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. We periodically evaluate our exposures associated with our tax filing positions and believe that adequate amounts have been reserved for adjustments that may result from tax examinations. 79 Table of Conten t s (17) Commitments and Contingencies 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 was $ 129 million, $ 112 million and $ 100 million, excluding short-term lease costs, variable lease costs and sublease income each of which were immaterial, for each of the years ended December 31, 2023, 2022 and 2021, respectively. Total cash paid for amounts included in the measurement of operating lease liabilities was $ 82 million and $ 75 million for the years ended December 31, 2023 and 2022, respectively. Operating lease liabilities arising from obtaining operating right-of-use assets was $ 130 million and $ 192 million for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, the weighted-average remaining lease term is approximately nine years and the weighted-average discount rate is 3.8 %. Maturities of operating lease liabilities as of December 31, 2023 are presented in the table below (in millions): Years Ending December 31, 2024 $ 109 2025 127 2026 105 2027 89 2028 85 Thereafter 422 Total operating lease payments 937 Less: imputed interest ( 141 ) Present value of operating lease liabilities $ 796 In addition to the amounts above, as of December 31, 2023, we have operating leases, primarily for offices, that have not yet commenced with undiscounted cash flows of $ 61 million. These operating leases are expected to commence between 2024 and 2025 with lease terms of three to ten years . 80 Table of Conten t s Other Commitments Other commitments consist of data center and IT operations and sales and marketing activities related to our daily business operations. Future minimum payments under our non-cancellable purchase commitments as of December 31, 2023 are presented in the table below (in millions): Purchase Obligations (1) Years Ending December 31, 2024 $ 365 2025 281 2026 266 2027 530 2028 65 Thereafter 93 Total $ 1,600 (1) Not included in the table above are certain purchase commitments related to our future annual Knowledge user conferences and other customer or sales conferences to be held in 2024 and future years. If we had canceled these contractual commitments as of December 31, 2023, we would have been obligated to pay cancellation penalties of approximately $ 51 million in aggregate. During 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. The unutilized consumption is included within the table above. In addition to the amounts above, the repayment of our 2030 Notes with an aggregate principal amount of $ 1.5 billion is due on September 1, 2030. Refer to Note 11 for further information regarding our 2030 Notes. Legal Proceedings We are party to certain litigation and other legal proceedings. While legal proceedings are inherently unpredictable and subject to uncertainties, we do not believe the ultimate resolution of any such proceedings is likely to result in a material loss. We accrue for loss contingencies when it is both probable that we will incur the loss and when we can reasonably estimate the amount of the loss or range of loss. On July 5, 2022, InQuisient Inc. (“Plaintiff”) filed a complaint against ServiceNow, Inc. in the U.S. District Court for the District of Delaware, alleging the Now Platform’s use of relational databases infringes three of Plaintiff’s patents. Plaintiff is seeking injunctive relief and unspecified damages. ServiceNow filed an answer denying Plaintiff’s allegations and asserts Plaintiff’s patents are, among other things, invalid, not infringed and otherwise unenforceable. A trial date has been set for October 7, 2024. While ServiceNow continues to vigorously defend this matter, we cannot predict the outcome with any degree of certainty. We also cannot provide an estimate of the possible loss or range of loss. Any adverse determination related to intellectual property claims or other litigation could prevent us from offering our services and adversely affect our financial condition and results of operations. For additional information regarding intellectual property litigation, see “Risk Factors—Lawsuits by third parties that allege we infringe their intellectual property rights could harm our business and operating results” and “Risk Factors—Our intellectual property protections may not provide us with a competitive advantage, and defending our intellectual property may result in substantial expenses that harm our operating results.” Indemnification Provisions Our agreements include provisions indemnifying customers against intellectual property and other third-party claims. In addition, we have entered into indemnification agreements with our directors, executive officers and certain other officers that will require us, among other things, to indemnify them against certain liabilities that may arise as a result of their affiliation with us. We have not incurred any costs as a result of such indemnification obligations and have not recorded any liabilities related to such obligations in the consolidated financial statements. 81 Table of Conten t s (18) Information about Geographic Areas and Products Revenues by geographic area, based on the location of our users, were as follows for the periods presented (in millions): Year Ended December 31, 2023 2022 2021 North America (1) $ 5,702 $ 4,723 $ 3,752 EMEA (2) 2,298 1,778 1,551 Asia Pacific and other 971 744 593 Total revenues $ 8,971 $ 7,245 $ 5,896 Property and equipment, net by geographic area were as follows (in millions): December 31, 2023 2022 Property and equipment, net: North America (3) $ 871 $ 664 EMEA (2) 312 221 Asia Pacific and other 175 168 Total property and equipment, net $ 1,358 $ 1,053 (1) Revenues attributed to the United States were 94 % of North America revenues for each of the years ended December 31, 2023, 2022 and 2021. (2) Europe, the Middle East and Africa (“EMEA”) (3) Property and equipment, net attributed to the United States were 79 % and 85 % of property and equipment, net attributable to North America as of December 31, 2023 and 2022, respectively. Subscription revenues consist of the following (in millions): Year Ended December 31, 2023 2022 2021 Digital workflow products $ 7,679 $ 6,077 $ 4,882 ITOM products 1,001 814 691 Total subscription revenues $ 8,680 $ 6,891 $ 5,573 Our digital workflow products include most of our product offerings and are generally priced on a per user basis. Our remaining product offerings, primarily comprised of our ITOM products are predominantly priced on a subscription unit basis. 82 Table of Conten t s ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.