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Item 1. Financial Statements

2024-07-25 compared with 2024-05-06 · 162 added, 122 removed, 459 unchanged (38% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions)

March 31, 2024 December 31, 2023

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

June 30, 2024 December 31, 2023

Assets (unaudited)

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

Three Months Ended March 31,

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

2024 2023 2024 2023

Subscription $ 2,542 $ 2,075 $ 5,065 $ 4,099

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Income before income taxes 334 174 759 362

Provision for income taxes 78 38

Provision for (benefit from) income taxes 72 ( 870 ) 150 ( 832 )

Net income $ 262 $ 1,044 $ 609 $ 1,194

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Foreign currency translation adjustments $ ( 17 ) $ — $ ( 47 ) $ 13

Unrealized (loss) gain on investments, net of tax

Unrealized loss on investments, net of tax

( 3 ) ( 21 ) ( 16 ) ( 2 )

Unrealized gain on derivative instruments, net of tax 10 — 22 —

Other comprehensive (loss) income

( 10 ) ( 21 ) ( 41 ) 11

Comprehensive income

$ 252 $ 1,023 $ 568 $ 1,205

(1) Includes stock-based compensation as follows:

Three Months Ended March 31,

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

2024 2023 2024 2023

Cost of revenues:

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

Three Months Ended March 31, 2024

Three Months Ended June 30, 2024 Three Months Ended June 30, 2023

Common Stock Treasury Stock Additional

2 unchanged sentences

Stockholders’

Shares Amount Shares Amount

Balance at December 31, 2023 205,619 $ — ( 895 ) $ ( 535 ) $ 6,131 $ 2,069 $ ( 37 ) $ 7,628

Equity Common Stock Additional

Capital Retained Earnings Accumulated

Comprehensive Loss Total

Stockholders’

Shares Amount Shares Amount Shares Amount

Balance at beginning of the period 206,497 $ — ( 1,115 ) $ ( 707 ) $ 6,466 $ 2,416 $ ( 68 ) $ 8,107 203,740 $ — $ 5,182 $ 488 $ ( 70 ) $ 5,600

Common stock and Treasury stock issued under employee stock plans 470 — 5 3 ( 3 ) — — — 527 — — — — —

Common stock repurchased — — ( 225 ) ( 175 ) — — — ( 175 )

Taxes paid related to net share settlement of equity awards — — — — ( 137 ) — — ( 137 ) — — ( 94 ) — — ( 94 )

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Net income — — — — — 262 — 262 — — — 1,044 — 1,044

Balance at March 31, 2024 206,497 $ — ( 1,115 ) $ ( 707 ) $ 6,466 $ 2,416 $ ( 68 ) $ 8,107

Three Months Ended March 31, 2023

Common Stock Additional

Balance at end of the period 206,967 $ — ( 1,110 ) $ ( 704 ) $ 6,770 $ 2,678 $ ( 78 ) $ 8,666 204,267 $ — $ 5,485 $ 1,532 $ ( 91 ) $ 6,926

Six Months Ended June 30, 2024 Six Months Ended June 30, 2023

Common Stock Treasury Stock

Capital Retained Earnings Accumulated

1 unchanged sentence

Stockholders’

Shares Amount

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

Common stock issued under employee stock plans 858 — 117 — — 117

Equity Common Stock Additional

Capital Retained Earnings

Comprehensive Loss

Stockholders’

Shares Amount Shares Amount Shares Amount

Balance at beginning of the period 205,619 $ — ( 895 ) $ ( 535 ) $ 6,131 $ 2,069 $ ( 37 ) $ 7,628 202,882 $ — $ 4,796 $ 338 $ ( 102 ) $ 5,032

Common stock and Treasury Stock issued under employee stock plans 1,348 — 10 6 125 — — 131 1,385 — 117 — — 117

Common stock repurchased — — ( 225 ) ( 175 ) — — — ( 175 ) — — — — — —

Taxes paid related to net share settlement of equity awards — — — — ( 352 ) — — ( 352 ) — — ( 206 ) — — ( 206 )

Stock-based compensation — — — — 866 — — 866 — — 778 — — 778

Other comprehensive income, net of tax

— — — — 32 32

Other comprehensive (loss) income, net of tax — — — — — — ( 41 ) ( 41 ) — — — — 11 11

Net income — — — — — 609 — 609 — — — 1,194 — 1,194

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

Balance at end of the period 206,967 $ — ( 1,110 ) $ ( 704 ) $ 6,770 $ 2,678 $ ( 78 ) $ 8,666 204,267 $ — $ 5,485 $ 1,532 $ ( 91 ) $ 6,926

See accompanying notes to condensed consolidated financial statements

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(in millions)

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from operating activities:

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Sales and maturities of investments 2,113 1,953

Other ( 2 ) 13

Net cash used in investing activities $ ( 1,105 ) $ ( 1,198 )

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Taxes paid related to net share settlement of equity awards ( 352 ) ( 206 )

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

Business combination ( 184 ) —

Net cash used in financing activities $ ( 580 ) $ ( 89 )

Foreign currency effect on cash, cash equivalents and restricted cash ( 13 ) —

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

The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024 or for other interim periods or future years.

The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024 or for other interim periods or future years.

The condensed consolidated balance sheet as of December 31, 2023 is derived from audited consolidated financial statements;

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This change in accounting estimate was effective beginning fiscal year 2024.

Based on the carrying amount of data center equipment included in property and equipment, net as of December 31, 2023, the effect of this change in estimate for the three months ended March 31, 2024, was a reduction in depreciation expense of $ 29 million and an increase in net income of $ 23 million, or $ 0.11 per share basic and diluted.

Based on the carrying amount of data center equipment included in property and equipment, net as of December 31, 2023, the effect of this change in estimate for the three and six months ended June 30, 2024, was a reduction in depreciation expense of $ 28 million and $ 57 million, respectively, and an increase in net income of $ 21 million and $ 44 million, or $ 0.11 and $ 0.22 per share basic and $ 0.10 and $ 0.21 per share diluted, respectively.

Significant Accounting Policies

We have incorporated two updates to our significant accounting policies during the quarter ended March 31, 2024.

The first is the change in useful life of our data center equipment discussed above and the second is related to our cash flow hedging program initiated to hedge a portion of our forecasted foreign currency denominated revenues as discussed below.

We have incorporated two updates to our significant accounting policies during the six months ended June 30, 2024.

The first is the change in useful life of our data center equipment discussed above and the second is related to our cash flow hedging program initiated during the quarter ended March 31, 2024 to hedge a portion of our forecasted foreign currency denominated revenues as discussed below.

There were no other updates to our significant accounting policies disclosed in “Note 2 – Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended December 31, 2023.

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We had one customer, a U.S.

federal channel partner and systems integrator, that represented 11 % of our accounts receivable balance as of March 31, 2024 and 11 % of our total revenues for the three months ended March 31, 2024.

federal channel partner and systems integrator, that represented 17 % of our accounts receivable balance as of June 30, 2024 and 10 % of our total revenues for each of the three and six months ended June 30, 2024.

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

There were no customers that individually exceeded 10% of our accounts receivable balance as of December 31, 2023 or our total revenues for the three months ended March 31, 2023.

There were no customers that individually exceeded 10% of our accounts receivable balance as of December 31, 2023 or our total revenues for each of the three and six months ended June 30, 2023.

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.

Revision of Prior Period Financial Statements

During the quarter ended June 30, 2024, the Company identified an immaterial error in the condensed consolidated statements of cash flows for the period ended March 31, 2024 relating to a misclassification between investing cash outflows and financing cash outflows.

The second installment payment for a business combination completed during the quarter ended September 30, 2023, totaling $ 184 million, was incorrectly classified as an investing cash outflow instead of a financing cash outflow.

The Company determined that the error was not material to any previously issued financial statements and will revise such error in its Quarterly Report on Form 10-Q for the three months ending March 31, 2025.

(3) Investments

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

March 31, 2024

June 30, 2024

Losses Estimated

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Total available-for-sale debt securities $ 6,205 $ 13 $ ( 35 ) $ 6,183

As of March 31, 2024, the contractual maturities of our available-for-sale debt securities, excluding those securities classified within cash and cash equivalents on the condensed consolidated balance sheet and mortgage-backed and asset-backed securities that do not have a single maturity, did not exceed 37 months.

As of June 30, 2024, the contractual maturities of our available-for-sale debt securities, excluding those securities classified within cash and cash equivalents on the condensed consolidated balance sheet and mortgage-backed and asset-backed securities that do not have a single maturity, did not exceed 37 months.

The fair values of available-for-sale debt securities, by remaining contractual maturity, are as follows (in millions):

March 31, 2024

June 30, 2024

Due within 1 year $ 3,254

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Total $ 6,726

As of March 31, 2024 and December 31, 2023, the fair value of available-for-sale debt securities in a continuous unrealized loss position totaled $ 4,821 million and $ 3,731 million, respectively, the majority of which has been in a continuous unrealized loss position for less than 12 months.

As of March 31, 2024, unrealized losses of $ 26 million from available-for-sale debt securities are from securities in a continuous unrealized loss position greater than 12 months.

As of June 30, 2024 and December 31, 2023, the fair value of available-for-sale debt securities in a continuous unrealized loss position totaled $ 5,287 million and $ 3,731 million, respectively, the majority of which has been in a continuous unrealized loss position for less than 12 months.

As of June 30, 2024, unrealized losses of $ 32 million from available-for-sale debt securities are from securities in a continuous unrealized loss position greater than 12 months.

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

Unrealized losses on available-for-sale debt securities were due primarily to changes in market interest rates, and credit-related impairment losses were not material as of March 31, 2024.

Unrealized losses on available-for-sale debt securities were due primarily to changes in market interest rates, and credit-related impairment losses were immaterial as of June 30, 2024.

Non-Marketable Equity Investments

As of March 31, 2024 and December 31, 2023, the total amount of non-marketable equity investments in privately held companies included in other assets on our condensed consolidated balance sheets was $ 288 million and $ 268 million, respectively.

As of June 30, 2024 and December 31, 2023, the total amount of non-marketable equity investments in privately held companies included in other assets on our condensed consolidated balance sheets was $ 346 million and $ 268 million, respectively.

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.

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Recording upward and downward adjustments to the carrying value of our non-marketable equity investments as a result of observable price changes requires quantitative assessments of the fair value of our non-marketable equity investments using various valuation methodologies and involves the use of estimates.

The adjustments made during the three months ended March 31, 2024 and 2023 were immaterial.

The adjustments made during the three and six months ended June 30, 2024 and 2023 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 March 31, 2024 (in millions):

The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis as of June 30, 2024 (in millions):

Level 1 Level 2 Total

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See Note 8 for the fair value measurement of our derivative contracts and Note 10 for the fair value measurement of our long-term debt, which are also not included in the table above.

Our marketable equity investments are classified within Level 1 and are immaterial as of March 31, 2024 and December 31, 2023.

Our marketable equity investments are classified within Level 1 and are immaterial as of June 30, 2024 and December 31, 2023.

(5) Business Combinations

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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.

The purchase price was 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 $ 414 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 may be subject to change as additional information is received.

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

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

We have included the financial results of the business combination in the condensed consolidated financial statements from the date of acquisition, which were immaterial.

(6) Intangible Assets

Intangible assets, net consists of the following (in millions):

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

Developed technology $ 557 $ 516

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Intangible assets, net $ 220 $ 224

The weighted-average useful life of the acquired developed technology for the three months ended March 31, 2024 and 2023 was approximately five years .

Amortization expense for intangible assets for the three months ended March 31, 2024 and 2023 was $ 24 million and $ 20 million, respectively.

The following table presents the estimated future amortization expense related to intangible assets held at March 31, 2024 (in millions):

The weighted-average useful life of the acquired developed technology for the six months ended June 30, 2024 and 2023 was approximately five years .

Amortization expense for intangible assets for the three months ended June 30, 2024 and 2023 was $ 24 million and $ 22 million, respectively, and for the six months ended June 30, 2024 and 2023 was $ 48 million and $ 42 million, respectively.

The following table presents the estimated future amortization expense related to intangible assets held at June 30, 2024 (in millions):

Years Ending December 31,

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

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

Computer equipment $ 2,449 $ 2,136

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

Depreciation expense for the three months ended March 31, 2024 and 2023 was $ 80 million and $ 81 million, respectively.

Depreciation expense for each of the three months ended June 30, 2024 and 2023 was $ 88 million, and for the six months ended June 30, 2024 and 2023 was $ 168 million and $ 169 million, respectively.

(8) Derivative Contracts

Derivatives Designated as Hedging Instruments

We entered into forward contracts to hedge a portion of our forecasted foreign currency denominated revenues during the three months ended March 31, 2024.

We entered into forward contracts to hedge a portion of our forecasted foreign currency denominated revenues during the three and six months ended June 30, 2024.

These forward contracts are recorded at fair value and have maturities of up to 34 months.

As of March 31, 2024, we had outstanding cash flow hedges with total notional values of $ 1.5 billion.

As of June 30, 2024, we had outstanding cash flow hedges with total notional values of $ 1.6 billion.

We classify cash flows related to our cash flow hedges as operating activities in our condensed consolidated statements of cash flows.

The total gross fair values of derivatives designated as hedging instruments recorded within the condensed consolidated balance sheets were as follows (in millions):

March 31, 2024

June 30, 2024

Condensed Consolidated Balance Sheets Location

Prepaid expenses and other current assets

As of March 31, 2024, we had net derivative gains on our forward contracts of $ 16 million in accumulated other comprehensive income, of which $ 11 million is expected to be recognized in subscription revenues within the next 12 months.

As of March 31, 2024, there were no net gains or losses recognized in subscription revenues.

As of June 30, 2024, we had net derivative gains on our forward contracts of $ 28 million in accumulated other comprehensive income (loss), of which approximately $ 19 million is expected to be recognized in subscription revenues within the next 12 months.

To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions.

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We report changes in fair value of these cash flow hedges as a component of accumulated other comprehensive income (loss) and subsequently reclassify into earnings in the same period the forecasted transaction affects earnings.

There was no ineffectiveness in the Company’s cash flow hedging program for the three months ended March 31, 2024.

Amounts reclassified to subscription revenues totaled $ 5 million for the three and six months ended June 30, 2024.

There was no ineffectiveness in the Company’s cash flow hedging program for the three and six months ended June 30, 2024.

Derivatives not Designated as Hedging Instruments

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The changes in the fair value of these contracts are recorded in other expense, net on the condensed consolidated statements of comprehensive income.

As of March 31, 2024 and December 31, 2023, we had foreign currency forward contracts with total notional values of $ 2.1 billion and $ 1.7 billion, respectively, which were not designated as hedging instruments.

The gross fair value of these foreign currency forward contracts was immaterial as of March 31, 2024 and December 31, 2023.

The gains (losses) recognized for these foreign currency forward contracts from derivatives not designated as hedging instruments were immaterial for each of the three months ended March 31, 2024 and 2023.

As of June 30, 2024 and December 31, 2023, we had foreign currency forward contracts with total notional values of $ 2.2 billion and $ 1.7 billion, respectively, which were not designated as hedging instruments.

The gross fair value of these foreign currency forward contracts was immaterial as of June 30, 2024 and December 31, 2023.

The gains (losses) recognized for these foreign currency forward contracts from derivatives not designated as hedging instruments were immaterial for each of the three and six months ended June 30, 2024 and 2023.

All of our foreign currency forward contracts, both designated and not designated as hedging instruments, 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.

(9) Deferred Revenue and Performance Obligations

Revenues recognized during the three months ended March 31, 2024 and 2023 from amounts included in deferred revenue as of December 31, 2023 and 2022 were $ 2.2 billion and $ 1.8 billion, respectively.

Revenues recognized from beginning period deferred revenue during the three months ended June 30, 2024 and 2023 were $ 2.4 billion and $ 1.9 billion, respectively, and $ 3.9 billion and $ 3.2 billion for the six months ended June 30, 2024 and 2023, respectively.

Remaining Performance Obligations

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

As of March 31, 2024, the total non-cancellable RPO under our contracts with customers was $ 17.7 billion and we expect to recognize revenues on approximately 48 % of these RPO over the following 12 months.

As of June 30, 2024, the total non-cancellable RPO under our contracts with customers was $ 18.6 billion and we expect to recognize revenues on approximately 47 % of these RPO over the following 12 months.

The majority of the non-current RPO will be recognized over the next 13 to 36 months.

For each of the periods ended March 31, 2024 and December 31, 2023, the carrying value of our outstanding debt was $ 1,488 million, net of unamortized debt discount and issuance costs of $ 12 million.

We consider the fair value of the 2030 Notes at March 31, 2024 and December 31, 2023 to be a Level 2 measurement.

The estimated fair value of the 2030 Notes based on the closing trading price per $ 100 , was $ 1,216 million and $ 1,236 million at March 31, 2024 and December 31, 2023, respectively.

For each of the periods ended June 30, 2024 and December 31, 2023, the carrying value of our outstanding debt was $ 1,488 million, net of unamortized debt discount and issuance costs of $ 12 million.

We consider the fair value of the 2030 Notes at June 30, 2024 and December 31, 2023 to be a Level 2 measurement.

The estimated fair value of the 2030 Notes based on the closing trading price per $ 100 , was $ 1,219 million and $ 1,236 million at June 30, 2024 and December 31, 2023, respectively.

In August 2020, we issued 1.40 % fixed rate ten-year notes with an aggregate principal amount of $ 1.5 billion due on September 1, 2030 (the “2030 Notes”).

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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.

(11) Accumulated Other Comprehensive Loss

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

(11) Accumulated Other Comprehensive Income (Loss)

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

Unrealized Gains (Losses) on Derivative Instruments

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Other comprehensive income (loss) before reclassifications 27 ( 16 ) ( 47 ) ( 36 )

12 ( 13 ) ( 30 ) ( 31 )

Amounts reclassified from accumulated other comprehensive income (loss)

Amounts reclassified from accumulated other comprehensive loss

Net current period other comprehensive income (loss)

22 ( 16 ) ( 47 ) ( 41 )

Balance as of March 31, 2024

Balance as of June 30, 2024

$ 22 $ ( 55 ) $ ( 45 ) $ ( 78 )

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$ — $ ( 77 ) $ ( 25 ) $ ( 102 )

Other comprehensive income before reclassifications

Amounts reclassified from accumulated other comprehensive income (loss)

Net current period other comprehensive income

Balance as of March 31, 2023

Other comprehensive income (loss) before reclassifications

— ( 2 ) 13 11

Amounts reclassified from accumulated other comprehensive loss

Net current period other comprehensive income (loss)

— ( 2 ) 13 11

Balance as of June 30, 2023

$ — $ ( 79 ) $ ( 12 ) $ ( 91 )

(12) Stockholders' Equity

We are authorized to issue a total of 600 million shares of common stock as of March 31, 2024.

We are authorized to issue a total of 600 million shares of common stock as of June 30, 2024.

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

As of March 31, 2024, we had 205.4 million shares of common stock, net of treasury stock, outstanding and had reserved shares of common stock for future issuance as follows (in thousands):

March 31, 2024

As of June 30, 2024, we had 205.9 million shares of common stock, net of treasury stock, outstanding and had reserved shares of common stock for future issuance as follows (in thousands):

June 30, 2024

Options outstanding 1,144

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

During each of the three months ended March 31, 2024 and 2023, we issued a total of 0.9 million shares from stock option exercises, vesting of RSUs, net of employee payroll taxes, and purchases from the employee stock purchase plan (“ESPP”).

We issued a total of 1.4 million shares for each of the six months ended June 30, 2024 and 2023 from stock option exercises, vesting of RSUs, net of employee payroll taxes, and purchases from the employee stock purchase plan (“ESPP”).

Treasury Stock

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

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

During the six months ended June 30, 2024, the Company repurchased 0.2 million shares of its common stock for $ 175 million.

There were no share repurchases during the three months ended June 30, 2024.

All repurchases were made in open market transactions.

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

As of March 31, 2024, approximately $ 787 million of the originally authorized amount under the Share Repurchase Program remained available for future repurchases.

As of June 30, 2024, approximately $ 787 million of the originally authorized amount under the Share Repurchase Program remained available for future repurchases.

(13) Equity Awards

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Stock Options

A summary of stock option activity for the three months ended March 31, 2024 was as follows:

A summary of stock option activity for the six months ended June 30, 2024 was as follows:

Shares Weighted-

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Exercised ( 6 ) $ 80.09 $ 3

Forfeited — $ 84.97

Outstanding at March 31, 2024 1,146 $ 605.06 7.2 $ 180

Vested and expected to vest as of March 31, 2024 964 $ 591.47 7.1 $ 165

Vested and exercisable as of March 31, 2024 173 $ 247.92 5.1 $ 89

Outstanding at June 30, 2024 1,144 $ 605.75 7.0 $ 207

Vested and expected to vest as of June 30, 2024 999 $ 595.23 6.9 $ 191

Vested and exercisable as of June 30, 2024 297 $ 418.38 5.9 $ 109

Aggregate intrinsic value represents the difference between the estimated fair value of our common stock and the exercise price of outstanding, in-the-money options.

The total fair value of stock options vested during the three months ended March 31, 2024 was $ 6 million.

No stock options were granted during the three months ended March 31, 2024.

As of March 31, 2024, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options was $ 21 million.

The weighted-average remaining vesting period of unvested stock options at March 31, 2024 was approximately one year .

A summary of RSU activity for the three months ended March 31, 2024 was as follows:

The total fair value of stock options vested during the six months ended June 30, 2024 was $ 40 million.

No stock options were granted during the six months ended June 30, 2024.

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 conditions 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 from date of grant.

The performance and market conditions 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 June 30, 2024, the first tranche was vested based on the achievement of both the performance and market conditions.

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 projections.

As of June 30, 2024, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options was $ 15 million.

The weighted-average remaining vesting period of unvested stock options at June 30, 2024 was approximately one year .

A summary of RSU activity for the six months ended June 30, 2024 was as follows:

Shares Weighted-Average Grant-Date Fair Value

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Forfeited ( 286 ) $ 538.14

Outstanding at March 31, 2024 7,615 $ 591.99

Expected to vest as of March 31, 2024 6,652

RSUs outstanding as of March 31, 2024 were comprised of 7.1 million RSUs with only service conditions and 0.5 million RSUs with both service and performance conditions, including certain RSUs with additional market conditions.

The total intrinsic value of the RSUs vested was $ 0.7 billion for the three months ended March 31, 2024.

As of March 31, 2024, the aggregate intrinsic value of RSUs outstanding was $ 5.8 billion and RSUs expected to vest was $ 5.1 billion.

PRSUs with service, performance and market vesting criteria are considered as eligible to vest when approved by the compensation committee of our board of directors in January of the year following the performance period.

The ultimate number of shares eligible to vest for PRSUs range from 0 % to 200 % of the target number of shares depending on achievement relative to the performance metrics and, for certain PRSUs, depend on our total shareholder return relative to that of the S&P 500 index over the applicable measurement period.

The eligible shares subject to PRSUs granted during the three months ended March 31, 2024 will vest in one to three years contingent on each holder’s continuous status as a service provider on the applicable vesting dates.

Outstanding at June 30, 2024 7,024 $ 600.75

Expected to vest as of June 30, 2024 6,185

RSUs outstanding as of June 30, 2024 were comprised of 6.5 million RSUs with only service conditions and 0.5 million RSUs with both service and performance conditions, including certain RSUs with additional market conditions.

The total intrinsic value of the RSUs vested was $ 1.2 billion for the six months ended June 30, 2024.

As of June 30, 2024, the aggregate intrinsic value of RSUs outstanding was $ 5.5 billion and RSUs expected to vest was $ 4.9 billion.

PRSUs have service, performance and market vesting criteria.

The ultimate number of shares eligible to vest range from 0 % to 200 %, subject to our board of directors compensation committee’s approval of performance metrics achievement and, for certain PRSUs, total shareholder return relative to that of the S&P 500 index.

The eligible shares subject to PRSUs granted during the six months ended June 30, 2024 will vest in one to three years contingent on each holder’s continuous status as an employee 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 $ 39 million and $ 35 million of stock-based compensation, net of actual and estimated forfeitures, associated with PRSUs on a graded vesting basis during the three months ended March 31, 2024 and 2023, respectively.

As of March 31, 2024, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs was $ 3.6 billion, and the weighted-average remaining vesting period was approximately three years .

We recognized $ 79 million and $ 70 million of stock-based compensation, net of actual and estimated forfeitures, associated with PRSUs on a graded vesting basis during the six months ended June 30, 2024 and 2023, respectively.

As of June 30, 2024, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs was $ 3.3 billion, and the weighted-average remaining vesting period was approximately three years .

(14) Net Income Per Share

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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):

Three Months Ended March 31,

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

2024 2023 2024 2023

Net income $ 262 $ 1,044 $ 609 $ 1,194

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

(15) Provision for Income Taxes

2,878 3,446 2,906 3,890

(15) Provision for (Benefit from) Income Taxes

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

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

Our income tax provision was $ 72 million and $ 150 million for the three and six months ended June 30, 2024, respectively.

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.

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

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

federal and state deferred tax assets.

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

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

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 released $ 965 million of our valuation allowance during the three months ended June 30, 2023.

As of June 30, 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.

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

As of March 31, 2024, our tax years 2004 to 2023 remain subject to examination in most jurisdictions.

As of June 30, 2024, our tax years 2004 to 2023 remain subject to examination in most jurisdictions.

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

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Certain lease agreements include options to renew or terminate the lease, which are not reasonably certain to be exercised and therefore are not factored into our determination of lease payments.

Total operating lease costs were $ 33 million and $ 31 million, excluding short-term lease costs, variable lease costs and sublease income, each of which were immaterial, for the three months ended March 31, 2024 and 2023, respectively.

For each of the three months ended March 31, 2024 and 2023, total cash paid for amounts included in the measurement of operating lease liabilities was $ 19 million.

Operating lease liabilities arising from obtaining operating right-of-use assets totaled $ 11 million and $ 24 million for the three months ended March 31, 2024 and 2023, respectively.

As of March 31, 2024, the weighted-average remaining lease term is approximately nine years , and the weighted-average discount rate is 4 %.

Maturities of operating lease liabilities as of March 31, 2024 are presented in the table below (in millions):

Total operating lease costs were $ 32 million and $ 65 million for the three and six months ended June 30, 2024, respectively, and $ 32 million and $ 63 million for the three and six months ended June 30, 2023, respectively.

For the six months ended June 30, 2024 and 2023, total cash paid for amounts included in the measurement of operating lease liabilities was $ 41 million and $ 40 million, respectively.

Operating lease liabilities arising from obtaining operating right-of-use assets totaled $ 14 million and $ 24 million for the six months ended June 30, 2024 and 2023, respectively.

As of June 30, 2024, the weighted-average remaining lease term is approximately nine years , and the weighted-average discount rate is 4 %.

Maturities of operating lease liabilities as of June 30, 2024 are presented in the table below (in millions):

Remainder of 2024 $ 57

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Present value of operating lease liabilities $ 767

In addition to the amounts above, as of March 31, 2024, we have operating leases, primarily for offices, that have not yet commenced with undiscounted cash flows of $ 60 million.

These operating leases are expected to commence between 2024 and 2025 with lease terms of two to ten years .

In addition to the amounts above, as of June 30, 2024, we have operating leases, primarily for offices, that have not yet commenced with undiscounted cash flows of $ 54 million.

These operating leases are expected to commence between 2024 and 2025 with lease terms of four to ten years .

Other Commitments

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

There were no material contractual obligations that were entered into during the three months ended March 31, 2024 that were outside the ordinary course of business.

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.

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

There were no material contractual obligations that were entered into during the six months ended June 30, 2024 that were outside the ordinary course of business.

We have entered into various non-cancellable agreements with cloud service providers, under which we have committed to spend an aggregate of $ 805 million through 2029 on cloud services.

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 10 for further information regarding our 2030 Notes.

Further, $ 57 million of unrecognized tax benefits have been recorded as liabilities as of March 31, 2024.

Further, $ 56 million of unrecognized tax benefits have been recorded as liabilities as of June 30, 2024.

Legal Proceedings

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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” included in our Annual Report on Form 10-K for the year ended December 31, 2023.

Through its internal processes, the Company received a complaint that raised potential compliance issues during the procurement process related to one of its government contracts.

In response, the Company initiated an internal investigation, with the assistance of outside legal counsel, into the validity of these claims.

The investigation is ongoing, and the Company cannot predict the timing, outcome or possible impact of the investigation.

As previously referenced in the Company’s Form 10-Q for the quarter ended March 31, 2024, through its internal processes, the Company received a complaint that raised potential compliance issues related to one of its government contracts.

The Company initiated an internal investigation, with the assistance of outside legal counsel, into the validity of these claims that concern the hiring of the Chief Information Officer of the U.S.

Army as the Company’s Head of Global Public Sector in March 2023.

As a result of the investigation, the Company’s Board of Directors determined that the Company’s President and Chief Operating Officer and the hired individual violated Company policy regarding a possible conflict relating to such individual’s hiring.

On July 24, 2024, the Company and its President and Chief Operating Officer came to a mutual agreement that he would resign from all positions with the Company, effective immediately.

The other individual also has departed the Company.

The Company has informed the Department of Justice, the Department of Defense Office of Inspector General and the Army Suspension and Debarment Office of the investigation and is continuing to cooperate with the Department of Justice, which has commenced its own investigation into these matters.

The Company cannot predict the timing, outcome or possible impact of the investigation.

Indemnification Provisions

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

Three Months Ended March 31,

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

2024 2023 2024 2023

North America (1)

$ 1,665 $ 1,369 $ 3,302 $ 2,713

661 547 1,337 1,079

Asia Pacific and other 301 234 591 454

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

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

North America (3)

$ 1,025 $ 871

Asia Pacific and other 191 175

Total property and equipment, net $ 1,606 $ 1,358

(1) Revenues attributed to the United States were 94 % of North America revenues for each of the three months ended March 31, 2024 and 2023.

(1) Revenues attributed to the United States were 94 % of North America revenues for each of the three and six months ended June 30, 2024 and 2023.

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

(3) Property and equipment, net attributed to the United States were 78 % and 79 % of property and equipment, net attributable to North America as of March 31, 2024 and December 31, 2023, respectively.

(3) Property and equipment, net attributed to the United States were 76 % and 79 % of property and equipment, net attributable to North America as of June 30, 2024 and December 31, 2023, respectively.

Subscription revenues consist of the following (in millions):

Three Months Ended March 31,

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

2024 2023 2024 2023

Digital workflow products $ 2,248 $ 1,836 $ 4,479 $ 3,626

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

What changed 10-Q

Item 1. Financial Statements