What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-06 compared with 2023-10-26 · 125 added, 141 removed, 215 unchanged (55% of the section changed)

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ServiceNow was founded on a simple premise:

a better technology platform will help work flow better.

to make work flow better.

Our purpose is to make the world work better for everyone.

We help global enterprises across industries, universities and governments to digitize their workflows.

The Now Platform, seamlessly connects workflows across siloed organizations and systems in a way that unlocks productivity, improves experiences for both employees and customers and delivers real business outcomes.

We organize our workflow applications along four primary areas:

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 Now Platform enables our customers’ digital transformation from non-integrated enterprise technology solutions with manual and disconnected processes and activities, to integrated enterprise technology solutions with automation and connected processes and activities.

The transformation to digital operations, enabled by the Now Platform, increases our customers’ resiliency and security and delivers great experiences and additional value to their employees and consumers.

We are closely monitoring the unfolding events of the Russian invasion of Ukraine 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.

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

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

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

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

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

Our customers in these regions represented an immaterial portion of our net assets as of March 31, 2024 and December 31, 2023, and of our total consolidated revenues for each of the three months ended March 31, 2024 and 2023.

Additionally, other macroeconomic events, including higher 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.

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

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

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 our Annual Report on Form 10-K filed with the SEC on January 31, 2023 and in Part II, Item 1A of this Quarterly Report on Form 10-Q for further discussion of the possible impact of the Russia-Ukraine conflict and the macroeconomic conditions on our business.

See the “Risk Factors” section in Part I, Item 1A of our Annual Report on Form 10-K filed with the SEC on January 25, 2024 for further discussion of the possible impact of conflicts and macroeconomic events on our business and financial results.

Key Business Metrics

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

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

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

As of March 31, 2024, our RPO was $17.7 billion, of which 48% represented cRPO.

RPO and cRPO increased by 26% and 21%, respectively, compared to March 31, 2023.

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

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

We had 1,933 and 1,687 customers with ACV greater than $1 million as of March 31, 2024 and 2023, 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.

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Free cash flow.

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

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

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.

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A calculation of free cash flow is provided below:

Nine Months Ended September 30, % Change

Three Months Ended March 31, % Change

(dollars in millions)

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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.

Renewal rate.

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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 three and nine months ended September 30, 2023 and 2022.

Our renewal rate was 98% for each of the three months ended March 31, 2024 and 2023.

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.

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We also generate revenues from certain professional services and from training of customers and partner personnel, through both our direct team and indirect channel sales.

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

Revenues from our direct sales organization represented 78% and 79% of our total revenues for the three months ended March 31, 2024 and 2023, respectively.

For purposes of calculating revenues from our direct sales organization, revenues from systems integrators and managed services providers are included as part of the direct sales organization.

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Furthermore, we usually sign a significant portion of these agreements during the last month, and often the last two weeks, of each quarter.

This seasonality of entering into customer agreements is sometimes not immediately apparent in our revenues, due to the fact that we recognize subscription revenues from our cloud offering contracts over the term of the subscription agreement, which is generally 12 to 36 months, leading to a higher RPO in the fourth quarter.

Although these seasonal factors are common in the technology industry, historical patterns should not be considered a reliable indicator of our future sales activity or performance.

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.

Cost of Revenues

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Fees paid by us to third-party partners are primarily recognized as cost of revenues as the professional services are delivered.

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

Cost of revenues associated with our professional services engagements contracted with third-party partners as a percentage of professional services and other revenues was 15% and 11% for the three months ended March 31, 2024 and 2023, respectively.

Sales and Marketing

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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, costs associated with purchasing advertising and marketing data, software and subscription services dedicated for sales and marketing use and allocated overhead.

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 (“R&D”) expenses consist primarily of personnel-related expenses directly associated with our research and development staff, including salaries, benefits, bonuses, stock-based compensation and allocated overhead.

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

Provision for (Benefit from) Income Taxes

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

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

federal and state deferred tax assets, excluding California.

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

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

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

2023 2022 2023 2022

(dollars in millions) (dollars in millions)

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, stock-based compensation, external legal, accounting and other professional services fees, other corporate expenses, amortization of intangible assets and allocated overhead.

Provision for Income Taxes

Provision for income taxes consists of federal, state and foreign income taxes.

Our income tax provision for the three months ended March 31, 2024 is primarily attributable to the mix of earnings and losses in countries with differing statutory tax rates, offset by excess tax benefits of stock-based compensation.

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.

Comparison of the Three Months Ended March 31, 2024 and 2023

Three Months Ended March 31, % Change

(dollars in millions)

Subscription $ 2,523 $ 2,024 25%

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Total 100% 100%

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

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

We expect subscription revenues for the year ending December 31, 2023 to increase in absolute dollars and increase slightly as a percentage of revenue as we continue to add new customers and existing customers increase their usage of our products compared to the year ended December 31, 2022.

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

Subscription revenues increased by $499 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily driven by increased purchases by new and existing customers.

Included in subscription revenues is $126 million and $95 million of revenues recognized upfront from the delivery of software associated with self-hosted offerings during the three months ended March 31, 2024 and 2023, 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 remainder of 2024 are based on the 31-day average of foreign exchange rates for March 31, 2024.

Subscription revenues consist of the following:

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

2023 2022 2023 2022

(dollars in millions) (dollars in millions)

Three Months Ended March 31, % Change

(dollars in millions)

Digital workflow products $ 2,231 $ 1,790 25%

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Total subscription revenues $ 2,523 $ 2,024 25%

Our digital workflow products are generally priced on a per user basis and include the Now Platform, IT Service Management, Strategic Portfolio Management (formerly known as IT Business Management), IT Asset Management and Enterprise Asset Management, Security Operations, Integrated Risk Management (formerly known as Governance, Risk and Compliance), ESG Management, HR Service Delivery, Workplace Service Delivery, Legal Service Delivery, Customer Service Management, Field Service Management, Industry Solutions, App Engine, Automation Engine, Platform Privacy and Security, Source-to-Pay Operations (formerly known as Procurement Operations Management), Supplier Lifecycle Operations, Accounts Payable Operations and Impact.

Our IT Operations Management (“ITOM”) products are generally priced on a subscription unit basis, which allows us to measure customers’ management of various IT resources, and decreasingly on a per node (physical or virtual server) basis.

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

We expect professional services and other revenues for the year ending December 31, 2023 to decrease in absolute dollars and to decrease slightly as a percentage of revenue compared to the year ended December 31, 2022.

We continue to be focused on deploying our internal professional services organization as a strategic resource and working with our partner ecosystem to contract directly with customers for implementation services delivery.

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 increased by $8 million during the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily due to an increase in services and trainings provided to new and existing customers.

We expect professional services and other revenues for the year ending December 31, 2024 to increase in absolute dollars and to remain relatively flat as a percentage of revenue compared to the year ended December 31, 2023.

Cost of Revenues and Gross Profit Percentage

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

2023 2022 2023 2022

(dollars in millions) (dollars in millions)

Three Months Ended March 31, % Change

(dollars in millions)

Cost of revenues:

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Gross profit $ 2,083 $ 1,658

Cost of subscription revenues increased by $119 million and $300 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022, primarily due to increased headcount and increased costs to support the growth of our subscription offerings including costs to support customers in regulated markets.

Personnel-related costs including stock-based compensation and overhead expenses increased by $59 million and $164 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022.

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

We expect our cost of subscription revenues for the year ending December 31, 2023 to increase in absolute dollars as we provide subscription services to more customers and increase usage within our customer instances and to increase slightly as a percentage of revenue compared to the year ended December 31, 2022.

Cost of subscription revenues increased by $87 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily due to increased headcount and increased costs to support the growth of our subscription offerings including costs to support customers in regulated markets.

Personnel-related costs including stock-based compensation and overhead expenses increased by $59 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Expenses associated with software, maintenance, and other costs to support the expansion of our data center capacity increased by $22 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

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

We expect our subscription gross profit percentage to decrease slightly for the year ending December 31, 2023 compared to the year ended December 31, 2022.

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

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

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

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

Our subscription gross profit percentage was 83% for each of the three months ended March 31, 2024 and 2023.

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 $5 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily due to decreased internal headcount resulting in a decrease in fixed personnel-related costs including stock-based compensation, partially offset by an increase in variable contracted third-party partner spend.

Our professional services and other gross profit percentage improved to 1% for the three months ended March 31, 2024 compared to a gross loss percentage of 17% for the three months ended March 31, 2023, primarily due to an increase in revenue and a decrease in fixed personnel-related costs including stock-based compensation, as we execute our strategy to shift a portion of professional services to variable spending with strategic partners.

We expect our professional services and other gross profit percentage to improve for the year ending December 31, 2024 compared to the year ended December 31, 2023.

Sales and Marketing

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

2023 2022 2023 2022

(dollars in millions) (dollars in millions)

Three Months Ended March 31, % Change

(dollars in millions)

Sales and marketing $ 923 $ 823 12%

Percentage of revenues 35% 39%

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

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

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

We expect sales and marketing expenses for the year ending December 31, 2023 to increase in absolute dollars and to decrease slightly as a percentage of revenue compared to the year ended December 31, 2022, as we continue to see leverage from increased sales productivity and marketing efficiencies offset by growth in our international operations in 2023.

Sales and marketing expenses increased by $100 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily due to increased headcount resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of $61 million.

Amortization expenses associated with deferred commissions increased $22 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily 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 $11 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.

Research and Development

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

2023 2022 2023 2022

(dollars in millions) (dollars in millions)

Three Months Ended March 31, % Change

(dollars in millions)

Research and development $ 606 $ 492 23%

Percentage of revenues 23% 23%

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

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

Research and development (“R&D”) expenses increased by $114 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily due to increased headcount, resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of $98 million.

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 $7 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

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

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

2023 2022 2023 2022

(dollars in millions) (dollars in millions)

Three Months Ended March 31, % Change

(dollars in millions)

General and administrative $ 222 $ 199 12%

Percentage of revenues 9% 9%

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

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

We expect G&A expenses for the year ending December 31, 2023 to increase in absolute dollars but remain relatively flat as a percentage of revenue compared to the year ended December 31, 2022, as we continue to see leverage from continued G&A productivity.

General and administrative (“G&A”) expenses increased by $23 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily due to an increase in non personnel-related costs and outside services of $15 million.

The remaining increase was primarily due to increased headcount, resulting in an increase in personnel-related costs including stock-based compensation of $5 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

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

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

2023 2022 2023 2022

(dollars in millions) (dollars in millions)

Three Months Ended March 31, % Change

(dollars in millions)

Cost of revenues:

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Percentage of revenues 16% 18%

Stock-based compensation increased by $52 million and $153 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022, primarily due to additional grants to current and new employees.

Stock-based compensation increased by $41 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, 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 September 30, 2023, we expect stock-based compensation to continue to increase in absolute dollars for the year ending December 31, 2023 as we continue to issue stock-based awards to our employees, but decrease slightly as a percentage of revenue compared to the year ended December 31, 2022.

Based upon our stock price as of March 31, 2024, 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.

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

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

Revenues outside North America represented 37% and 36% of total revenues for the three months ended March 31, 2024 and 2023, respectively.

We primarily transact in certain 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) had a favorable impact on our revenues for the three months ended September 30, 2023.

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

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

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

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

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

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

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

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

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

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

Dollar relative to certain major foreign currencies (primarily the Euro and British Pound Sterling) had an immaterial favorable impact on our revenues for the three months ended March 31, 2024.

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

Dollar relative to certain major foreign currencies had an immaterial unfavorable impact on our expenses for the three months ended March 31, 2024.

Interest Income

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

2023 2022 2023 2022

(dollars in millions) (dollars in millions)

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

Three Months Ended March 31, % Change

(dollars in millions)

Interest income $ 101 $ 60 68%

Percentage of revenues 4 % 3%

NM - Not meaningful

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

Interest income increased by $41 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily driven by an increase in investment income from our managed portfolio resulting from higher portfolio balances and an increase in interest rates.

Other Expense, net

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

2023 2022 2023 2022

(dollars in millions) (dollars in millions)

Three Months Ended March 31, % Change

(dollars in millions)

Interest expense $ (6) $ (6) —%

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Percentage of revenues —% (1%)

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

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

Other expense, net decreased by $8 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily due to lower losses on equity investments.

To mitigate our risks associated with fluctuations in foreign currency exchange rates, we enter into foreign currency forward contracts with maturities of 12 months or less to hedge a portion of our net outstanding monetary assets and liabilities.

These hedging contracts may reduce, but cannot entirely eliminate, the impact of adverse currency exchange rate movements.

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

Provision for (benefit from) Income Taxes

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

2023 2022 2023 2022

(dollars in millions) (dollars in millions)

The gains (losses) recognized for these foreign currency forward contracts in other expense, net were immaterial for the three months ended March 31, 2024 and 2023.

Provision for Income Taxes

Three Months Ended March 31, % Change

(dollars in millions)

Income before income taxes $ 425 $ 188 126%

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

Provision for income taxes

$ 78 $ 38 105%

Effective tax rate 18% 20%

NM - Not meaningful

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

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

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

federal and state deferred tax assets.

The income tax provision was $78 million for the three months ended March 31, 2024.

The income tax provision was primarily attributable to the mix of earnings and losses in countries with differing statutory tax rates, offset by excess tax benefits of stock-based compensation.

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

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

We regularly assess the need for a valuation allowance against our deferred tax assets.

4 unchanged sentences

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

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

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

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

As of March 31, 2024, 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.

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

Our income tax provision was $22 million and $41 million for the three and nine months ended September 30, 2022, respectively.

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

Liquidity and Capital Resources

1 unchanged sentence

Subscription services arrangements typically have a three-year duration, and we have experienced a renewal rate of 98% over the last three years.

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;

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 $7 billion as of September 30, 2023.

When assessing sources of liquidity, we also include cash and cash equivalents, short-term investments and long-term investments totaling $8.8 billion as of March 31, 2024.

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.

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

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

During the quarter ended March 31, 2024, the Company repurchased 0.2 million shares of its common stock for $175 million.

All repurchases were made in open market transactions.

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

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

As of March 31, 2024, approximately $787 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.

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

Nine Months Ended September 30,

Three Months Ended March 31,

(dollars in millions)

1 unchanged sentence

Net cash used in investing activities $ (918) $ (524)

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

Net decrease in cash, cash equivalents and restricted cash

$ (356) $ (478)

Net cash (used in) provided by financing activities $ (259) $ 5

Net increase in cash, cash equivalents and restricted cash

Operating Activities

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

Net cash provided by operating activities was $1,341 million for the three months ended March 31, 2024 compared to $902 million for the three months ended March 31, 2023.

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

Investing Activities

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

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

Net cash used in investing activities for the three months ended March 31, 2024 was $918 million compared to $524 million for the three months ended March 31, 2023.

The net increase in cash used in investing activities was primarily due to a $194 million increase in business combinations, a $190 million increase in net purchases of investments and a $21 million increase in purchases of other intangible assets, partially offset by a $30 million decrease in purchases of property and equipment.

Financing Activities

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

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

Net cash used in financing activities was $259 million for the three months ended March 31, 2024 compared to net cash provided by financing activities of $5 million for the three months ended March 31, 2023.

The increase in cash used in financing activities was due to repurchases of common stock of $175 million and a $103 million increase in taxes paid related to net share settlement of equity awards, partially offset by a $14 million increase in proceeds from employee stock plans.

Critical Accounting Policies and Significant Judgments and Estimates

1 unchanged sentence

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk compared to the disclosures in Part II, Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on January 31, 2023.

Except for the cash flow hedging program initiated during the three months ended March 31, 2024 discussed below, there have been no other changes to our quantitative and qualitative disclosure set forth in Part II, Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on January 25, 2024.

Foreign Currency Exchange Risk

To mitigate our risks associated with fluctuations in foreign currency exchange rates, we enter into foreign currency forward contracts to hedge a portion of our net outstanding monetary assets, liabilities and forecasted foreign currency denominated revenues.

These foreign currency forward contracts are intended to offset gains or losses related to remeasuring monetary assets and liabilities and to reduce foreign exchange impact on our forecasted revenues.

Derivative contracts related to hedging of forecasted revenues are designated as cash flow hedges for accounting purposes.

For contracts qualifying as cash flow hedges, the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings in the same period the forecasted transaction affects earnings.

For contracts not designated as cash flow hedges for accounting purposes, the derivative’s gain or loss is recognized immediately in earnings within our condensed consolidated statements of comprehensive income.

These foreign currency forward contracts expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement.

We mitigate this credit risk by transacting with major financial institutions with high credit ratings.

While the contract or notional amount is often used to express the volume of foreign currency forward 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 foreign currency forward contracts for trading or speculative purposes.

Refer to Note 8 in the notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis