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2022 Business Combinations

During the year ended December 31, 2022, we completed certain acquisitions for total purchase consideration of $92 million primarily to enhance our products with the acquired technology and engineering workforce. The acquisitions were not material to our consolidated financial statements, either individually or in the aggregate.

2021 Business Combinations

On June 15, 2021, we acquired Lightstep, Inc., a leading observability solution provider, for $512 million in a cash transaction. The purchase price was allocated based on the estimated fair value of developed technology intangible asset of $85 million (five-year estimated useful life), customer-related and brand assets of $11 million, net tangible assets of $8 million, deferred tax liabilities of $6 million and goodwill of $413 million, which is not deductible for income tax purposes.

On January 8, 2021, we acquired all outstanding stock of Element AI Inc., a leading enterprise artificial intelligence solution provider, for $228 million in an all-cash transaction. The purchase price was allocated based on the estimated fair value of developed technology intangible asset of $85 million (five-year estimated useful life), net tangible assets of $16 million and goodwill of $81 million, which is partially deductible for income tax purposes. At time of acquisition, we established an unrecognized tax benefit of $43 million on pre-acquisition net operating loss carryforwards and other tax attributes which was subsequently released resulting in establishment of deferred tax asset based on completion of valuation and filing certain tax returns in the third quarter of 2021.

Goodwill is primarily attributed to the value expected from synergies resulting from the business combinations. The fair values assigned to tangible and intangible assets acquired, liabilities assumed and income taxes payable and deferred taxes are based on management’s estimates and assumptions. The Company finalized the fair value measurements within one year from the acquisition date.

During the year ended December 31, 2021, we also completed certain acquisitions for total purchase consideration of $66 million primarily to enhance our products with the acquired technology and engineering workforce. These acquisitions were not material to our consolidated financial statements, either individually or in the aggregate.

We have included the financial results of business combinations in the consolidated financial statements from the respective dates of acquisition, which were not material. Pro forma revenue and earnings amounts on a combined basis have not been presented as it is impracticable due to the lack of availability of historical financial statements that comply with GAAP. Aggregate acquisition-related costs associated with business combinations are [not material] for the three months ended March 31, 2023 and 2022, respectively, and are included in general and administrative expenses in our condensed consolidated statements of comprehensive income as incurred.
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 

FORM 10-Q
(Mark One)
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2023
OR
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-35580

ServiceNow_logo.jpg
SERVICENOW, INC.
(Exact name of Registrant as specified in its charter) 
Delaware20-2056195
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
ServiceNow, Inc.
2225 Lawson Lane
Santa Clara, California 95054
(Address, including zip code, of Registrant’s principal executive offices)

(408) 501-8550
(Registrant’s telephone number, including area code) 

Not Applicable
(Former name, former address and formal fiscal year, if changed since last report.)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common stock, par value $0.001 per shareNOWThe New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes No  
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes No  


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Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No
As of March 31, 2023, there were approximately 204 million shares of the Registrant’s Common Stock outstanding.



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Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
   
 
 
i

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PART I

ITEM 1.     FINANCIAL STATEMENTS

SERVICENOW, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)

March 31, 2023December 31, 2022
Assets(unaudited)
Current assets:
Cash and cash equivalents$1,852 $1,470 
Short-term investments3,062 2,810 
Accounts receivable, net1,109 1,725 
Current portion of deferred commissions392 369 
Prepaid expenses and other current assets319 280 
Total current assets6,734 6,654 
Deferred commissions, less current portion777 742 
Long-term investments2,239 2,117 
Property and equipment, net1,117 1,053 
Operating lease right-of-use assets682 682 
Intangible assets, net212 232 
Goodwill823 824 
Deferred tax assets640 636 
Other assets390 359 
Total assets$13,614 $13,299 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$228 $274 
Accrued expenses and other current liabilities694 975 
Current portion of deferred revenue4,742 4,660 
Current portion of operating lease liabilities97 96 
Total current liabilities5,761 6,005 
Deferred revenue, less current portion53 70 
Operating lease liabilities, less current portion655 650 
Long-term debt, net1,486 1,486 
Other long-term liabilities59 56 
Total liabilities8,014 8,267 
Commitments and contingencies
Stockholders’ equity:
Common stock  
Additional paid-in capital5,182 4,796 
Accumulated other comprehensive loss(70)(102)
Retained earnings488 338 
Total stockholders’ equity5,600 5,032 
Total liabilities and stockholders’ equity$13,614 $13,299 


See accompanying notes to condensed consolidated financial statements
1

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SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions, except number of shares which are reflected in thousands and per share data)
(unaudited) 
Three Months Ended March 31,
20232022
Revenues:
Subscription$2,024 $1,631 
Professional services and other72 91 
Total revenues2,096 1,722 
Cost of revenues(1):
Subscription354 275 
Professional services and other84 94 
Total cost of revenues438 369 
Gross profit1,658 1,353 
Operating expenses(1):
Sales and marketing823 673 
Research and development492 414 
General and administrative199 179 
Total operating expenses1,514 1,266 
Income from operations144 87 
Interest income60 6 
Other expense, net(16)(8)
Income before income taxes188 85 
Provision for income taxes38 10 
Net income$150 $75 
Net income per share - basic$0.74 $0.38 
Net income per share - diluted$0.73 $0.37 
Weighted-average shares used to compute net income per share - basic203,385 200,088 
Weighted-average shares used to compute net income per share - diluted204,263 202,800 
Other comprehensive income (loss):
Foreign currency translation adjustments$13 $(12)
Unrealized gain (loss) on investments, net of tax19 (38)
Other comprehensive income (loss)32 (50)
Comprehensive income$182 $25 
(1)Includes stock-based compensation as follows:
 Three Months Ended March 31,
20232022
Cost of revenues:
Subscription$46 $36 
Professional services and other$14 $16 
Operating expenses:
Sales and marketing$126 $105 
Research and development$135 $115 
General and administrative$60 $53 
See accompanying notes to condensed consolidated financial statements
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SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions, except number of shares which are reflected in thousands)
(unaudited)
Three Months Ended March 31, 2023
Common StockAdditional
Paid-in
Capital
Retained EarningsAccumulated
Other
Comprehensive Loss
Total
Stockholders’
Equity
 SharesAmount
Balance at December 31, 2022202,882 $ $4,796 $338 $(102)$5,032 
Common stock issued under employee stock plans858 — 117 — — 117 
Taxes paid related to net share settlement of equity awards— — (112)— — (112)
Stock-based compensation— — 381 — — 381 
Other comprehensive income, net of tax— — — — 32 32 
Net income— — — 150 — 150 
Balance at March 31, 2023203,740 $ $5,182 $488 $(70)$5,600 
Three Months Ended March 31, 2022
Common StockAdditional
Paid-in
Capital
Retained Earnings (Accumulated Deficit)Accumulated
Other
Comprehensive Income (Loss)
Total
Stockholders’
Equity
 SharesAmount
Balance at December 31, 2021199,608 $ $3,665 $(4)$34 $3,695 
Cumulative-effect adjustment from adoption of Accounting Standards Update (ASU) 2020-06— — (19)17 — (2)
Common stock issued under employee stock plans849 — 105 — — 105 
Taxes paid related to net share settlement of equity awards— — (150)— — (150)
Stock-based compensation— — 324 — — 324 
Settlement of 2022 Notes conversion feature— — (21)— — (21)
Benefit from exercise of 2022 Note Hedge— — 21 — — 21 
Other comprehensive loss, net of tax— — — — (50)(50)
Net income— — — 75 — 75 
Balance at March 31, 2022200,457 $ $3,925 $88 $(16)$3,997 

See accompanying notes to condensed consolidated financial statements
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SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 Three Months Ended March 31,
20232022
Cash flows from operating activities:
Net income$150 $75 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization126 101 
Amortization of deferred commissions106 83 
Stock-based compensation381 325 
Deferred income taxes7 (2)
Other1 15 
Changes in operating assets and liabilities, net of effect of business combinations:
Accounts receivable619 562 
Deferred commissions(159)(137)
Prepaid expenses and other assets(64)(46)
Accounts payable(46)69 
Deferred revenue40 21 
Accrued expenses and other liabilities(259)(203)
Net cash provided by operating activities$902 $863 
Cash flows from investing activities:
Purchases of property and equipment(165)(93)
Purchases of investments(1,222)(662)
Purchases of non-marketable investments(30)(101)
Sales and maturities of investments880 577 
Other 13 (1)
Net cash used in investing activities$(524)$(280)
Cash flows from financing activities:
Repayments of convertible senior notes attributable to principal (6)
Proceeds from employee stock plans117 105 
Taxes paid related to net share settlement of equity awards(112)(150)
Net cash provided by (used in) financing activities$5 $(51)
Foreign currency effect on cash, cash equivalents and restricted cash1 (5)
Net change in cash, cash equivalents and restricted cash384 527 
Cash, cash equivalents and restricted cash at beginning of period1,475 1,732 
Cash, cash equivalents and restricted cash at end of period$1,859 $2,259 
Cash, cash equivalents and restricted cash at end of period:
Cash and cash equivalents$1,852 $2,252 
Restricted cash included in prepaid expenses and other current assets7 7 
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows$1,859 $2,259 
Supplemental disclosures of other cash flow information:
Interest paid$11 $11 
Income taxes paid, net of refunds$22 $9 
Non-cash investing and financing activities:
Settlement of 2022 Notes conversion feature$ $21 
Benefit from exercise of 2022 Note Hedge$ $21 
Property and equipment included in accounts payable, accrued expenses and other liabilities$47 $73 

See accompanying notes to condensed consolidated financial statements
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SERVICENOW, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
Unless the context requires otherwise, references in this report to “ServiceNow,” the “Company,” “we,” “us,” and “our” refer to ServiceNow, Inc. and its consolidated subsidiaries.

(1) Description of the Business

ServiceNow was founded on a simple premise: a better technology platform will help work flow better. We help global enterprises across industries, universities and governments to digitize their workflows. We organize our workflow applications along four primary areas: Technology, Customer and Industry, Employee and Creator. The products under each of our workflows help customers connect, automate and empower work across systems and silos to enable great outcomes for businesses and great experiences for people. The Now Platform integrates with our customers’ cloud platforms and systems of choice, allowing our customers to deliver workflows across their current and future preferred systems of record and collaboration platforms.

(2) Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and condensed footnotes have been prepared in accordance with the applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements due to the permitted exclusion of certain disclosures for interim reporting. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary under GAAP for fair statement of results for the interim periods presented have been included. 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, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023 or for other interim periods or future years. The condensed consolidated balance sheet as of December 31, 2022 is derived from audited consolidated financial statements; however, it does not include all of the information and footnotes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included 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.

Principles of Consolidation

The accompanying condensed consolidated financial statements have been prepared in conformity with GAAP, and include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as reported amounts of revenues and expenses during the reporting period. Such management estimates and assumptions include, but are not limited to, standalone selling price for each distinct performance obligation included in customer contracts with multiple performance obligations, the period of benefit for deferred commissions, valuation of intangible assets, the useful life of property and equipment and identifiable intangible assets, stock-based compensation expense and income taxes. Actual results could differ from those estimates.

Significant Accounting Policies

There were no significant changes 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, 2022, which was filed with the SEC on January 31, 2023.

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Concentration of Credit Risk and Significant Customers

Credit risk arising from accounts receivable is mitigated to a certain extent due to our large number of customers and their dispersion across various industries and geographies. As of March 31, 2023 and December 31, 2022, there were no customers that represented more than 10% of our accounts receivable balance. There were no customers that individually exceeded 10% of our total revenues in any of the periods presented. For purposes of assessing concentration of credit risk and significant customers, a group of customers under common control or customers that are affiliates of each other are regarded as a single customer.

Prior Period Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications did not result in a restatement of prior period condensed consolidated financial statements.

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(3) Investments
 
Marketable Debt Securities

The following is a summary of our available-for-sale debt securities recorded within short-term and long-term investments on the condensed consolidated balance sheets (in millions):
 March 31, 2023
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Available-for-sale securities:
Commercial paper$647 $ $(1)$646 
Corporate notes and bonds3,332 3 (41)3,294 
Certificates of deposit169   169 
U.S. government and agency securities1,105 2 (1)1,106 
Mortgage-backed and asset-backed securities102  (16)86 
Total available-for-sale securities$5,355 $5 $(59)$5,301 

December 31, 2022
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Available-for-sale securities:
Commercial paper$558 $ $(2)$556 
Corporate notes and bonds3,414  (52)3,362 
Certificates of deposit162   162 
U.S. government and agency securities768  (2)766 
Mortgage-backed and asset-backed securities98  (17)81 
Total available-for-sale securities$5,000 $ $(73)$4,927 

As of March 31, 2023, the contractual maturities of our available-for-sale debt securities, excluding those securities classified within cash and cash equivalents on the condensed consolidated balance sheet and mortgage-backed and asset-backed securities that do not have a single maturity, did not exceed 36 months. The fair values of available-for-sale securities, by remaining contractual maturity, are as follows (in millions):
March 31, 2023
Due within 1 year$3,062 
Due in 1 year through 5 years2,153 
Instruments not due in single maturity86 
Total$5,301 

As of March 31, 2023 and December 31, 2022, the fair value of available-for-sale securities in a continuous unrealized loss position totaled $3,841 million and $4,232 million, respectively, the majority of which has been in a continuous unrealized loss position for greater than 12 months.

The decline in fair value below amortized cost basis was not considered other than temporary as it is more likely than not we will hold the securities until maturity or a recovery of the cost basis, and credit-related impairment losses were not material as of March 31, 2023.

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Non-Marketable Equity Investments

As of March 31, 2023 and December 31, 2022, the total amount of non-marketable equity investments in privately held companies included in other assets on our condensed consolidated balance sheets was $277 million and $252 million, respectively. These balances include a $100 million investment in the common and preferred shares of Celonis SE, a privately held company that develops and sells process mining software. Our non-marketable equity investments are accounted for using the measurement alternative, which measures the investments at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes resulting from the issuance of similar or identical securities in an orderly transaction by the same issuer. Determining whether an observed transaction is similar to a security within our portfolio requires judgment based on the rights and preferences of the securities. Recording upward and downward adjustments to the carrying value of our non-marketable equity investments as a result of observable price changes requires quantitative assessments of the fair value of our non-marketable equity investments using various valuation methodologies and involves the use of estimates. 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, 2023 (in millions): 
Level 1Level 2Total
Cash equivalents:
Money market funds$1,176 $ $1,176 
Commercial paper 88 88 
Corporate notes and bonds 8 8 
Deposits125  125 
Marketable securities:
Commercial paper 646 646 
Corporate notes and bonds 3,294 3,294 
Certificates of deposit 169 169 
U.S. government and agency securities 1,106 1,106 
Mortgage-backed and asset-backed securities 86 86 
Total$1,301 $5,397 $6,698 
 
The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis as of December 31, 2022 (in millions): 
Level 1Level 2Total
Cash equivalents:
Money market funds$738 $ $738 
Commercial paper 36 36 
Corporate notes and bonds 10 10 
Certificates of deposit 2 2 
Deposits124  124 
U.S. government and agency securities 8 8 
Marketable securities:
Commercial paper 556 556 
Corporate notes and bonds 3,362 3,362 
Certificates of deposit 162 162 
U.S. government and agency securities 766 766 
Mortgage-backed and asset-backed securities 81 81 
Total$862 $4,983 $5,845 
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We determine the fair value of our security holdings based on pricing from our service providers and market prices from industry-standard independent data providers. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs), pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) or using unobservable inputs that are supported by little or no market activity (Level 3 inputs). Our non-marketable equity investments are not included in the table above and are discussed in Note 3. See Note 7 for the fair value measurement of our derivative contracts and Note 9 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, 2023 and December 31, 2022.

(5) Intangible Assets
Intangible assets consist of the following (in millions):
 March 31, 2023December 31, 2022
Developed technology$436 $434 
Patents72 72 
Other15 15 
Intangible assets, gross523 521 
Less: accumulated amortization(311)(289)
Intangible assets, net$212 $232 

The weighted-average useful life of the acquired developed technology for the three months ended March 31, 2023 and 2022 was approximately five years. Amortization expense for intangible assets for each of the three months ended March 31, 2023 and 2022 was $20 million.

The following table presents the estimated future amortization expense related to intangible assets held at March 31, 2023 (in millions):
Years Ending December 31,
Remainder of 2023$58 
202472 
202551 
202620 
20276 
Thereafter5 
Total future amortization expense$212 

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(6) Property and Equipment
 
Property and equipment, net consists of the following (in millions):
 March 31, 2023December 31, 2022
Computer equipment$1,714 $1,606 
Computer software89 82 
Leasehold and other improvements226 226 
Furniture and fixtures80 81 
Construction in progress69 53 
Property and equipment, gross2,178 2,048 
Less: Accumulated depreciation(1,061)(995)
Property and equipment, net$1,117 $1,053 

Construction in progress consists of costs related to leasehold and other improvements. Depreciation expense for the three months ended March 31, 2023 and 2022 was $81 million and $58 million, respectively.

(7) Derivative Contracts

As of March 31, 2023 and December 31, 2022, we had foreign currency forward contracts with total notional values of $1,556 million and $1,360 million, respectively, which are not designated as hedging instruments. Our foreign currency forward contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets, such as currency spot and forward rates. Outstanding foreign currency forward contracts are recorded at gross fair value as prepaid expenses and other current assets as well as accrued expenses and other current liabilities on the condensed consolidated balance sheets. The gross fair value of these foreign currency forward contracts was immaterial as of March 31, 2023 and December 31, 2022. The gains (losses) recognized for these foreign currency forward contracts were immaterial for each of the three months ended March 31, 2023 and 2022.

(8) Deferred Revenue and Performance Obligations

Revenues recognized during the three months ended March 31, 2023 from amounts included in deferred revenue as of December 31, 2022 were $1.8 billion. Revenues recognized during the three months ended March 31, 2022 from amounts included in deferred revenue as of December 31, 2021 were $1.4 billion.

Remaining Performance Obligations

Transaction price allocated to remaining performance obligations (“RPO”) represents contracted revenue that has not yet been recognized, which includes deferred revenue and non-cancellable amounts that will be invoiced and recognized as revenues in future periods. RPO excludes contracts that are billed in arrears, such as certain time and materials contracts, as we apply the “right to invoice” practical expedient under relevant accounting guidance.

As of March 31, 2023, the total non-cancellable RPO under our contracts with customers was $14.0 billion and we expect to recognize revenues on approximately 50% 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.

(9) Debt

The carrying value of our outstanding debt, net of unamortized debt discount and issuance costs of $14 million, was $1,486 million for each of the periods ended March 31, 2023 and December 31, 2022.

We consider the fair value of the 2030 Notes at March 31, 2023 and December 31, 2022 to be a Level 2 measurement. The estimated fair value of the 2030 Notes based on the closing trading price per $100, was $1,211 million and $1,144 million at March 31, 2023 and December 31, 2022, respectively.

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2030 Notes

In August 2020, we issued 1.40% fixed rate ten-year notes with an aggregate principal amount of $1.5 billion due on September 1, 2030 (the “2030 Notes”). The 2030 Notes were issued at 99.63% of principal and we incurred approximately $13 million for debt issuance costs. The effective interest rate for the 2030 Notes was 1.53% and included interest payable, amortization of debt issuance cost and amortization of debt discount, as applicable. Interest is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2021, and the entire outstanding principal amount is due at maturity on September 1, 2030. The 2030 Notes are unsecured obligations and the indentures governing the 2030 Notes contain customary events of default and covenants that, among others and subject to exceptions, restrict the Company’s ability to incur or guarantee debt secured by liens on specified assets or enter into sale and lease-back transactions with respect to specified properties.

2022 Notes, Note Hedge and Warrants

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

Convertible DateInitial Conversion Price per ShareInitial Conversion Rate per $1,000 Par ValueInitial Number of Shares (in millions)
2022 NotesFebruary 1, 2022$134.75 7.42 shares6 


To minimize the impact of potential economic dilution upon conversion of the 2022 Notes, we entered into convertible note hedge transactions (the “2022 Note Hedge”) with certain investment banks, with respect to our common stock concurrently with the issuance of the 2022 Notes. The 2022 Note Hedge offset the dilution and cash payments in excess of the principal amount of the converted 2022 Notes and expired upon the maturity date of the 2022 Notes, which was on June 1, 2022.
PurchaseInitial SharesShares as of March 31, 2023
(in millions)
2022 Note Hedge$128 6  

Separately, we entered into warrant transactions with certain investment banks, whereby we sold warrants to acquire 6 million shares of our common stock with aggregate proceeds of $54 million (the “2022 Warrants”). The 2022 Warrants were separate transactions and were not remeasured through earnings each reporting period. The 2022 Warrants were not part of the 2022 Notes or 2022 Note Hedge.

During the quarter ended June 30, 2022, we entered into unwind agreements to settle the remaining portion of the 2022 Warrants by delivering an aggregate of 0.6 million shares of our common stock. Accordingly, the 2022 Warrants were no longer outstanding as of June 30, 2022.

(10) Accumulated Other Comprehensive Loss

The following table shows the components of accumulated other comprehensive loss, net of tax, in the stockholders’ equity section of our condensed consolidated balance sheets (in millions):
 March 31, 2023December 31, 2022
Foreign currency translation adjustment$(12)$(25)
Net unrealized loss on investments(58)(77)
        Accumulated other comprehensive loss$(70)$(102)

Reclassification adjustments out of accumulated other comprehensive loss into net income were not material for all periods presented.

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(11) Stockholders' Equity

Common Stock

We are authorized to issue a total of 600 million shares of common stock as of March 31, 2023. Holders of our common stock are not entitled to receive dividends unless declared by our board of directors. As of March 31, 2023, we had 203.7 million shares of common stock outstanding and had reserved shares of common stock for future issuance as follows (in thousands): 
 March 31, 2023
Stock plans:
Options outstanding1,233 
RSUs(1)
8,421 
Shares of common stock available for future grants:
2021 Equity Incentive Plan(2)
1,966 
Amended and Restated 2012 Employee Stock Purchase Plan(2)
8,693 
2022 New-Hire Equity Incentive Plan(2)
869 
Total shares of common stock reserved for future issuance21,182 
(1)Represents the number of shares issuable upon settlement of outstanding restricted stock units (“RSUs”) and performance-based RSUs (“PRSUs”), as discussed in Note 12.
(2)Refer to Note 12 for a description of these plans.

During the three months ended March 31, 2023 and 2022, we issued a total of 0.9 million shares and 0.8 million shares, respectively, from stock option exercises, vesting of RSUs, net of employee payroll taxes, and purchases from the employee stock purchase plan (“ESPP”).

(12)  Equity Awards

We currently have three equity incentive plans: 2012 Equity Incentive Plan (the “2012 Plan”), 2021 Equity Incentive Plan (the “2021 Plan”) and 2022 New-Hire Equity Incentive Plan (the “2022 Plan”). The 2012 Plan was terminated in connection with the approval of the 2021 Plan on June 7, 2021 but continues to govern the terms of outstanding equity awards that were granted prior to the termination of the 2012 Plan. As of June 7, 2021, we no longer grant equity awards pursuant to the 2012 Plan. On November 7, 2022, the 2022 Plan was approved for newly hired employees prospectively.

The 2021 Plan and the 2012 Plan provide for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, RSUs, performance-based stock awards and other forms of equity compensation (collectively, “equity awards”). The 2022 Plan permits the grant of any of the foregoing awards with the exception of incentive stock options. In addition, the 2022 Plan, the 2021 Plan and the 2012 Plan provide for the grant of performance cash awards. Incentive stock options may be granted only to employees. All other equity awards may be granted to employees, including officers, as well as directors and consultants.

Our Amended and Restated 2012 Employee Stock Purchase Plan (the “2012 ESPP”) authorizes the issuance of shares of common stock pursuant to purchase rights granted to our employees. The price at which common stock is purchased under the 2012 ESPP is equal to 85% of the fair market value of our common stock on the first or last day of the offering period, whichever is lower. Offering periods are six months long and begin on February 1 and August 1 of each year. The number of shares of common stock reserved for issuance will not be increased without shareholder approval.
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Stock Options

A summary of stock option activity for the three months ended March 31, 2023 was as follows:
Number of
Shares
Weighted-
Average
Exercise
Price Per Share
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic Value
(in thousands)(in years)(in millions)
Outstanding at December 31, 20221,237 $590.36 
Exercised(4)$71.26 $1 
Forfeited $84.97 
Outstanding at March 31, 20231,233 $591.98 8.1$58 
Vested and expected to vest as of March 31, 2023965 $572.11 8.0$56 
Vested and exercisable as of March 31, 2023149 $171.79 5.1$44 

Aggregate intrinsic value represents the difference between the estimated fair value of our common stock and the exercise price of outstanding, in-the-money options. The total intrinsic value for stock options exercised for the three months ended March 31, 2023 and 2022 was $1 million and $22 million, respectively.

The total fair value of stock options vested during the three months ended March 31, 2023 and 2022 was $2 million and $3 million, respectively. The weighted-average grant-date fair value of stock options granted during the three months ended March 31, 2022 was $273.63 per share. No stock options were granted during the three months ended March 31, 2023.

As of March 31, 2023, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options was approximately $66 million. The weighted-average remaining vesting period of unvested stock options at March 31, 2023 was approximately one year.

RSUs

A summary of RSU activity for the three months ended March 31, 2023 was as follows:
Number of
Shares
Weighted-Average Grant-Date Fair Value
Per Share
(in thousands)
Outstanding at December 31, 20225,737 $505.79 
Granted 3,590 $465.57 
Vested(797)$448.61 
Forfeited(109)$504.48 
Outstanding at March 31, 20238,421 $494.49 
Expected to vest as of March 31, 20237,210 
    
RSUs outstanding as of March 31, 2023 were comprised of 7.8 million RSUs with only service conditions and 0.6 million RSUs with both service and performance conditions, including certain RSUs with additional market conditions. The total intrinsic value of the RSUs vested was $362 million and $494 million for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, the aggregate intrinsic value of RSUs outstanding was $3.9 billion and RSUs expected to vest was $3.4 billion. The weighted-average grant-date fair value of RSUs granted was $465.57 and $589.15 per share for the three months ended March 31, 2023 and 2022, respectively.

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PRSUs with service, performance and market vesting criteria are considered as eligible to vest when approved by the compensation committee of our board of directors in January of the year following the grant. The ultimate number of shares eligible to vest for PRSUs range from 0% to 200% of the target number of shares depending on achievement relative to the performance metrics and, for certain PRSUs, depend on our total shareholder return relative to that of the S&P 500 index over the applicable measurement period. The eligible shares subject to PRSUs granted during the three months ended March 31, 2023 will vest in February of the following year and semi-annually for the remaining two years contingent on each holder’s continuous status as a service provider on the applicable vesting dates. The number of PRSUs granted included in the table above reflects the shares that could be eligible to vest at 100% of target for PRSUs and includes adjustments for over or under achievement for PRSUs granted in the prior year. We recognized $35 million and $29 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, 2023 and 2022, respectively.

As of March 31, 2023, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs was approximately $3.2 billion, and the weighted-average remaining vesting period was approximately three years.

(13) Net Income Per Share
 
Basic net income per share attributable to common stockholders is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, adjusted for the effects of dilutive shares of common stock, which are comprised of outstanding stock options, RSUs, ESPP obligations, the 2022 Notes and the 2022 Warrants. Stock awards with performance or market conditions are included in dilutive shares to the extent all conditions are met. The potentially dilutive shares of common stock are computed using the treasury stock method or the as-if converted method, as applicable. The effects of outstanding stock options, RSUs, ESPP obligations, 2022 Notes and 2022 Warrants are excluded from the computation of diluted net income per share in periods in which the effect would be antidilutive.

The following tables present the calculation of basic and diluted net income per share attributable to common stockholders (in millions, except for number of shares reflected in thousands and per share data):
 Three Months Ended March 31,
20232022
Numerator:
Net income$150 $75 
Denominator:
Weighted-average shares outstanding - basic203,385 200,088 
Weighted-average effect of potentially dilutive securities:
Common stock options109 180 
RSUs769 1,892 
2022 Warrants 640 
Weighted-average shares outstanding - diluted204,263 202,800 
Net income per share - basic$0.74 $0.38 
Net income per share - diluted$0.73 $0.37 

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Potentially dilutive securities that are not included in the calculation of diluted net income per share because doing so would be antidilutive are as follows (in thousands):
 Three Months Ended March 31,
 20232022
Common stock options1,028 1,022 
RSUs6,509 3,766 
ESPP obligations194 159 
2022 Notes 689 
Total potentially dilutive securities7,731 5,636 

(14)  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 $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.

Our income tax provision was $10 million for the three months ended March 31, 2022. 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 maintain a full valuation allowance against our U.S. federal and state deferred tax assets. We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. As of December 31, 2022, the three-year cumulative U.S. pre-tax income of $338 million was offset by the three-year total U.S. permanent differences and other comprehensive losses of approximately $720 million, resulting in a three-year cumulative U.S. loss of approximately $380 million. Due to the cumulative U.S. losses during the prior twelve quarters, including permanent differences and other comprehensive losses, and based on all available positive and negative evidence, as of March 31, 2023 and December 31, 2022, we have determined that it is more likely than not that our U.S. deferred tax assets will not be realized. However, given our current U.S. earnings and anticipated future earnings, we believe there is a reasonable possibility that prior to the fourth quarter of 2023 sufficient positive evidence of sustained U.S. profitability may become available to allow us to reach a conclusion that the U.S. valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of material U.S. federal and state deferred tax assets and a corresponding decrease to income tax expense estimated to be $1.0 billion to $1.2 billion in the fiscal year the release is recorded. The exact timing and amount of the valuation allowance release are subject to change based on the level of sustained U.S. profitability the Company is able to actually achieve.

We are subject to taxation in the United States and foreign jurisdictions. As of March 31, 2023, our tax years 2004 to 2022 remain subject to examination in most jurisdictions.

Due to differing interpretations of tax laws and regulations, tax authorities may dispute our tax filing positions. We periodically evaluate our exposures associated with our tax filing positions and believe that adequate amounts have been reserved for adjustments that may result from tax examinations.

(15) Commitments and Contingencies

Operating Leases

For some of our offices and data centers, we have entered into non-cancellable operating lease agreements with various expiration dates through 2035. Certain lease agreements include options to renew or terminate the lease, which are not reasonably certain to be exercised and therefore are not factored into our determination of lease payments.

Total operating lease costs were $31 million and $27 million, excluding short-term lease costs, variable lease costs and sublease income, each of which were immaterial, for the three months ended March 31, 2023 and 2022, respectively.
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For each of the three months ended March 31, 2023 and 2022, 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 $24 million and $15 million for the three months ended March 31, 2023 and 2022, respectively.

As of March 31, 2023, the weighted-average remaining lease term is approximately nine years, and the weighted-average discount rate is 4%.

Maturities of operating lease liabilities as of March 31, 2023 are presented in the table below (in millions):
Remainder of 2023$89 
2024100 
2025104 
202685 
202775 
Thereafter448 
Total operating lease payments901 
Less: imputed interest(149)
Present value of operating lease liabilities$752 

In addition to the amounts above, as of March 31, 2023, we have operating leases, primarily for offices, that have not yet commenced with undiscounted cash flows of $70 million. These operating leases are expected to commence in 2023 with lease terms of twelve 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, 2023 that were outside the ordinary course of business. During the three months ended September 30, 2022, we entered into a non-cancellable, $500 million agreement with Microsoft to purchase cloud services over five years, as we accelerate Azure adoption for mutual customers.

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 9 for further information regarding our 2030 Notes.

Further, $33 million of unrecognized tax benefits have been recorded as liabilities as of March 31, 2023.

Legal Proceedings

From time to time, we are party to litigation and other legal proceedings in the ordinary course of business. While the results of any litigation or other legal proceedings are uncertain, management does not believe the ultimate resolution of any pending legal matters is likely to have a material adverse effect on our financial position, results of operations or cash flows, except for those matters for which we have recorded a loss contingency. We accrue for loss contingencies when it is both probable that we will incur the loss and when we can reasonably estimate the amount of the loss or range of loss.

Generally, our subscription agreements require us to defend our customers for third-party intellectual property infringement and other claims. Any adverse determination related to intellectual property claims or other litigation could prevent us from offering our services and adversely affect our financial condition and results of operations.

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Indemnification Provisions

Our agreements include provisions indemnifying customers against intellectual property and other third-party claims. In addition, we have entered into indemnification agreements with our directors, executive officers and certain other officers that will require us, among other things, to indemnify them against certain liabilities that may arise as a result of their affiliation with us. We have not incurred any costs as a result of such indemnification obligations and have not recorded any liabilities related to such obligations in the condensed consolidated financial statements.

(16)  Information about Geographic Areas and Products

Revenues by geographic area, based on the location of our users, were as follows for the periods presented (in millions):
 Three Months Ended March 31,
20232022
North America(1)
$1,344 $1,116 
EMEA(2)
532 434 
Asia Pacific and other220 172 
Total revenues$2,096 $1,722 
    
Property and equipment, net by geographic area were as follows (in millions):
 March 31, 2023December 31, 2022
North America(3)
$720 $664 
EMEA(2)
220 221 
Asia Pacific and other$177 $168 
Total property and equipment, net$1,117 $1,053 

(1)Revenues attributed to the United States were 94% of North America revenues for each of the three months ended March 31, 2023 and 2022.
(2)Europe, the Middle East and Africa (“EMEA”).
(3)Property and equipment, net attributed to the United States were approximately 83% and 85% of property and equipment, net attributable to North America as of March 31, 2023 and December 31, 2022, respectively.
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