filings.toolsItem 1. FINANCIAL STATEMENTS
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Item 1. FINANCIAL STATEMENTS
SERVICENOW, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except number of shares which are reflected in thousands)
| September 30, 2024 | December 31, 2023 | ||||||||||
| Assets | (unaudited) | ||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 1,885 | $ | 1,897 | |||||||
| Short-term investments | 3,410 | 2,980 | |||||||||
| Accounts receivable, net | 1,308 | 2,036 | |||||||||
| Current portion of deferred commissions | 502 | 461 | |||||||||
| Prepaid expenses and other current assets | 591 | 403 | |||||||||
| Total current assets | 7,696 | 7,777 | |||||||||
| Deferred commissions, less current portion | 946 | 919 | |||||||||
| Long-term investments | 3,829 | 3,203 | |||||||||
| Property and equipment, net | 1,718 | 1,358 | |||||||||
| Operating lease right-of-use assets | 661 | 715 | |||||||||
| Intangible assets, net | 214 | 224 | |||||||||
| Goodwill | 1,291 | 1,231 | |||||||||
| Deferred tax assets | 1,444 | 1,508 | |||||||||
| Other assets | 635 | 452 | |||||||||
| Total assets | $ | 18,434 | $ | 17,387 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 165 | $ | 126 | |||||||
| Accrued expenses and other current liabilities | 1,058 | 1,365 | |||||||||
| Current portion of deferred revenue | 5,457 | 5,785 | |||||||||
| Current portion of operating lease liabilities | 106 | 89 | |||||||||
| Total current liabilities | 6,786 | 7,365 | |||||||||
| Deferred revenue, less current portion | 77 | 81 | |||||||||
| Operating lease liabilities, less current portion | 650 | 707 | |||||||||
| Long-term debt, net | 1,489 | 1,488 | |||||||||
| Other long-term liabilities | 142 | 118 | |||||||||
| Total liabilities | 9,144 | 9,759 | |||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock, $0.001 par value; shares authorized: 10,000; no shares issued or outstanding | — | — | |||||||||
| Common stock, $0.001 par value; shares authorized: 600,000; shares issued: 207,693 and 205,619; shares outstanding: 206,317 and 204,724 | — | — | |||||||||
| Treasury stock, at cost (shares held: 1,376 and 895) | (926) | (535) | |||||||||
| Additional paid-in capital | 7,126 | 6,131 | |||||||||
| Accumulated other comprehensive loss | (20) | (37) | |||||||||
| Retained earnings | 3,110 | 2,069 | |||||||||
| Total stockholders’ equity | 9,290 | 7,628 | |||||||||
| Total liabilities and stockholders’ equity | $ | 18,434 | $ | 17,387 |
See accompanying notes to condensed consolidated financial statements
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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Subscription | $ | 2,715 | $ | 2,216 | $ | 7,780 | $ | 6,315 | |||||||||||||||
| Professional services and other | 82 | 72 | 247 | 219 | |||||||||||||||||||
| Total revenues | 2,797 | 2,288 | 8,027 | 6,534 | |||||||||||||||||||
| Cost of revenues(1): | |||||||||||||||||||||||
| Subscription | 496 | 420 | 1,406 | 1,163 | |||||||||||||||||||
| Professional services and other | 88 | 76 | 250 | 242 | |||||||||||||||||||
| Total cost of revenues | 584 | 496 | 1,656 | 1,405 | |||||||||||||||||||
| Gross profit | 2,213 | 1,792 | 6,371 | 5,129 | |||||||||||||||||||
| Operating expenses(1): | |||||||||||||||||||||||
| Sales and marketing | 944 | 799 | 2,827 | 2,454 | |||||||||||||||||||
| Research and development | 626 | 549 | 1,875 | 1,562 | |||||||||||||||||||
| General and administrative | 225 | 213 | 679 | 621 | |||||||||||||||||||
| Total operating expenses | 1,795 | 1,561 | 5,381 | 4,637 | |||||||||||||||||||
| Income from operations | 418 | 231 | 990 | 492 | |||||||||||||||||||
| Interest income | 108 | 82 | 313 | 216 | |||||||||||||||||||
| Other expense, net | (10) | (14) | (28) | (47) | |||||||||||||||||||
| Income before income taxes | 516 | 299 | 1,275 | 661 | |||||||||||||||||||
| Provision for (benefit from) income taxes | 84 | 57 | 234 | (775) | |||||||||||||||||||
| Net income | $ | 432 | $ | 242 | $ | 1,041 | $ | 1,436 | |||||||||||||||
| Net income per share - basic | $ | 2.09 | $ | 1.18 | $ | 5.06 | $ | 7.04 | |||||||||||||||
| Net income per share - diluted | $ | 2.07 | $ | 1.17 | $ | 5.00 | $ | 7.00 | |||||||||||||||
| Weighted-average shares used to compute net income per share - basic | 206,158 | 204,464 | 205,639 | 203,961 | |||||||||||||||||||
| Weighted-average shares used to compute net income per share - diluted | 208,552 | 206,277 | 208,004 | 205,194 | |||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustments | $ | 50 | $ | (64) | $ | 3 | $ | (51) | |||||||||||||||
| Unrealized gain (loss) on investments, net of tax | 60 | (2) | 44 | (4) | |||||||||||||||||||
| Unrealized loss on derivative instruments, net of tax | (52) | — | (30) | — | |||||||||||||||||||
| Other comprehensive income (loss) | 58 | (66) | 17 | (55) | |||||||||||||||||||
| Comprehensive income | $ | 490 | $ | 176 | $ | 1,058 | $ | 1,381 |
(1)Includes stock-based compensation as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Cost of revenues: | |||||||||||||||||||||||
| Subscription | $ | 64 | $ | 52 | $ | 184 | $ | 148 | |||||||||||||||
| Professional services and other | 11 | 11 | 35 | 40 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | 144 | 132 | 419 | 378 | |||||||||||||||||||
| Research and development | 150 | 150 | 479 | 430 | |||||||||||||||||||
| General and administrative | 57 | 68 | 175 | 195 |
See accompanying notes to condensed consolidated financial statements
SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions, except number of shares which are reflected in thousands)
(unaudited)
| Three Months Ended September 30, 2024 | Three Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at beginning of the period | 206,967 | $ | — | (1,110) | $ | (704) | $ | 6,770 | $ | 2,678 | $ | (78) | $ | 8,666 | 204,267 | $ | — | — | $ | — | $ | 5,485 | $ | 1,532 | $ | (91) | $ | 6,926 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock and Treasury stock issued under employee stock plans | 726 | — | 6 | 3 | 103 | — | — | 106 | 788 | — | — | — | 76 | — | — | 76 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchased | — | — | (272) | (225) | — | — | — | (225) | — | — | (500) | (282) | — | — | — | (282) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Taxes paid related to net share settlement of equity awards | — | — | — | — | (173) | — | — | (173) | — | — | — | — | (127) | — | — | (127) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 426 | — | — | 426 | — | — | — | — | 413 | — | — | 413 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | — | 58 | 58 | — | — | — | — | — | — | (66) | (66) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 432 | — | 432 | — | — | — | — | — | 242 | — | 242 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at end of the period | 207,693 | $ | — | (1,376) | $ | (926) | $ | 7,126 | $ | 3,110 | $ | (20) | $ | 9,290 | 205,055 | $ | — | (500) | $ | (282) | $ | 5,847 | $ | 1,774 | $ | (157) | $ | 7,182 |
| Nine Months Ended September 30, 2024 | Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | 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 | 2,074 | — | 16 | 9 | 228 | — | — | 237 | 2,173 | — | — | — | 193 | — | — | 193 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchased | — | — | (497) | (400) | — | — | — | (400) | — | — | (500) | (282) | — | — | — | (282) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Taxes paid related to net share settlement of equity awards | — | — | — | — | (525) | — | — | (525) | — | — | — | — | (333) | — | — | (333) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 1,292 | — | — | 1,292 | — | — | — | — | 1,191 | — | — | 1,191 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | — | 17 | 17 | — | — | — | — | — | — | (55) | (55) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 1,041 | — | 1,041 | — | — | — | — | — | 1,436 | — | 1,436 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at end of the period | 207,693 | $ | — | (1,376) | $ | (926) | $ | 7,126 | $ | 3,110 | $ | (20) | $ | 9,290 | 205,055 | $ | — | (500) | $ | (282) | $ | 5,847 | $ | 1,774 | $ | (157) | $ | 7,182 |
See accompanying notes to condensed consolidated financial statements
SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 1,041 | $ | 1,436 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 410 | 408 | |||||||||
| Amortization of deferred commissions | 403 | 333 | |||||||||
| Stock-based compensation | 1,292 | 1,191 | |||||||||
| Deferred income taxes | 47 | (874) | |||||||||
| Other | (31) | (13) | |||||||||
| Changes in operating assets and liabilities, net of effect of business combinations: | |||||||||||
| Accounts receivable | 727 | 552 | |||||||||
| Deferred commissions | (461) | (453) | |||||||||
| Prepaid expenses and other assets | (267) | (183) | |||||||||
| Accounts payable | 42 | (188) | |||||||||
| Deferred revenue | (355) | (217) | |||||||||
| Accrued expenses and other liabilities | (216) | (199) | |||||||||
| Net cash provided by operating activities | $ | 2,632 | $ | 1,793 | |||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | (599) | (433) | |||||||||
| Business combinations, net of cash acquired | (82) | (279) | |||||||||
| Purchases of other intangibles | (30) | (3) | |||||||||
| Purchases of investments | (3,952) | (3,805) | |||||||||
| Purchases of non-marketable investments | (149) | (56) | |||||||||
| Sales and maturities of investments | 3,024 | 2,868 | |||||||||
| Other | 25 | (15) | |||||||||
| Net cash used in investing activities | $ | (1,763) | $ | (1,723) | |||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from employee stock plans | 237 | 193 | |||||||||
| Repurchases of common stock | (400) | (282) | |||||||||
| Taxes paid related to net share settlement of equity awards | (525) | (333) | |||||||||
| Business combination | (184) | — | |||||||||
| Net cash used in financing activities | $ | (872) | $ | (422) | |||||||
| Foreign currency effect on cash, cash equivalents and restricted cash | (8) | (4) | |||||||||
| Net change in cash, cash equivalents and restricted cash | (11) | (356) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 1,904 | 1,475 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 1,893 | $ | 1,119 | |||||||
| Cash, cash equivalents and restricted cash at end of period: | |||||||||||
| Cash and cash equivalents | $ | 1,885 | $ | 1,112 | |||||||
| Restricted cash included in prepaid expenses and other current assets | 8 | 7 | |||||||||
| Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows | $ | 1,893 | $ | 1,119 | |||||||
| Supplemental disclosures of other cash flow information: | |||||||||||
| Interest paid | $ | 23 | $ | 23 | |||||||
| Income taxes paid, net of refunds | 183 | 103 | |||||||||
| Non-cash investing and financing activities: | |||||||||||
| Property and equipment included in accounts payable, accrued expenses and other liabilities | 49 | 63 | |||||||||
See accompanying notes to condensed consolidated financial statements
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: to make work flow better. Our intelligent platform, the Now Platform, is a cloud-based solution with embedded artificial intelligence and machine learning capabilities that helps global enterprises across industries, universities and governments unify and digitize their workflows. Our workflow applications built on the Now Platform are organized along four primary areas: Technology, Customer and Industry, Employee and Creator. The products under each of our workflows help customers connect, automate and empower work across systems and silos to enable great outcomes for businesses and great experiences for people. The Now Platform orchestrates work across our customers’ cloud platforms and systems of choice, allowing our customers to get work done regardless of their current and future preferred systems of record and collaboration platforms.
(2) Summary of Significant Accounting Policies
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 United States (“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 and nine months ended September 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; 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, 2023, which was filed with the SEC on January 25, 2024.
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.
In January 2024, we completed an assessment of the useful life of our data center equipment and determined we should increase the estimated useful life of data center equipment from four years to five years. 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 and nine months ended September 30, 2024, was a reduction in depreciation expense of $24 million and $81 million, respectively, and an increase in net income of $21 million and $65 million, or $0.10 and $0.31 per share basic and $0.10 and $0.31 per share diluted, respectively.
Significant Accounting Policies
We have incorporated two updates to our significant accounting policies during the nine months ended September 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.
Derivative Financial Instruments
Cash flow hedging
We record derivatives at fair value as either assets or liabilities on our condensed consolidated balance sheets. For derivative contracts entered into to hedge a portion of our forecasted foreign currency denominated revenues that are designated and qualify as cash flow hedges, the unrealized gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings as subscription revenues when the hedged transaction affects earnings. Derivatives not designated as hedging instruments are adjusted to fair value through earnings as other expense, net in the period during which changes in fair value occur.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. We also formally assess, both at the inception of the hedge, and on an ongoing basis, whether each derivative is highly effective in offsetting changes in cash flows of the hedged item. Fluctuations in the value of the derivative instruments are generally offset by changes in the hedged item; however, if it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively for the affected derivative.
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. We had one customer, a U.S. federal channel partner and systems integrator, that represented 27% of our accounts receivable balance as of September 30, 2024 and 11% of our total revenues for each of the three and nine months ended September 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 each of the three and nine months ended September 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
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):
| September 30, 2024 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||
| Available-for-sale debt securities: | |||||||||||||||||||||||
| Commercial paper | $ | 297 | $ | 1 | $ | — | $ | 298 | |||||||||||||||
| Corporate notes and bonds | 4,566 | 41 | (1) | 4,606 | |||||||||||||||||||
| Certificates of deposit | 42 | — | — | 42 | |||||||||||||||||||
| U.S. government and agency securities | 2,196 | 9 | (1) | 2,204 | |||||||||||||||||||
| Mortgage-backed and asset-backed securities | 103 | — | (14) | 89 | |||||||||||||||||||
| Total available-for-sale debt securities | $ | 7,204 | $ | 51 | $ | (16) | $ | 7,239 |
| December 31, 2023 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||
| Available-for-sale debt securities: | |||||||||||||||||||||||
| Commercial paper | $ | 349 | $ | — | $ | — | $ | 349 | |||||||||||||||
| Corporate notes and bonds | 3,579 | 10 | (13) | 3,576 | |||||||||||||||||||
| Certificates of deposit | 94 | — | — | 94 | |||||||||||||||||||
| U.S. government and agency securities | 2,081 | 3 | (6) | 2,078 | |||||||||||||||||||
| Mortgage-backed and asset-backed securities | 102 | — | (16) | 86 | |||||||||||||||||||
| Total available-for-sale debt securities | $ | 6,205 | $ | 13 | $ | (35) | $ | 6,183 |
As of September 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):
| September 30, 2024 | |||||
| Due within 1 year | $ | 3,410 | |||
| Due in 1 year through 5 years | 3,740 | ||||
| Instruments not due in single maturity | 89 | ||||
| Total | $ | 7,239 |
As of September 30, 2024, unrealized losses of $16 million from available-for-sale debt securities are from securities in a continuous unrealized loss position greater than 12 months. As of September 30, 2024, the fair value of available-for-sale debt securities in a continuous unrealized loss position totaled $1,419 million, the majority of which has been in a continuous unrealized loss position for greater than 12 months. As of December 31, 2023, the fair value of available-for-sale debt securities in a continuous unrealized loss position totaled $3,731 million.
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 immaterial as of September 30, 2024.
Non-Marketable Equity Investments
As of September 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 $396 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. Determining whether an observed transaction is similar to a security within our portfolio requires judgment based on the rights and preferences of the securities. Recording upward and downward adjustments to the carrying value of our non-marketable equity investments as a result of observable price changes requires quantitative assessments of the fair value of our non-marketable equity investments using various valuation methodologies and involves the use of estimates. The adjustments made during the three and nine months ended September 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 September 30, 2024 (in millions):
| Level 1 | Level 2 | Total | ||||||||||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||||||||
| Money market funds | $ | 1,162 | $ | — | $ | 1,162 | ||||||||||||||||||||
| Commercial paper | — | 44 | 44 | |||||||||||||||||||||||
| Deposits | 238 | — | 238 | |||||||||||||||||||||||
| U.S. government and agency securities | — | 4 | 4 | |||||||||||||||||||||||
| Marketable securities: | ||||||||||||||||||||||||||
| Commercial paper | — | 298 | 298 | |||||||||||||||||||||||
| Corporate notes and bonds | — | 4,606 | 4,606 | |||||||||||||||||||||||
| Certificates of deposit | — | 42 | 42 | |||||||||||||||||||||||
| U.S. government and agency securities | — | 2,204 | 2,204 | |||||||||||||||||||||||
| Mortgage-backed and asset-backed securities | — | 89 | 89 | |||||||||||||||||||||||
| Total | $ | 1,400 | $ | 7,287 | $ | 8,687 |
The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis as of December 31, 2023 (in millions):
| Level 1 | Level 2 | Total | |||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | $ | 1,215 | $ | — | $ | 1,215 | |||||||||||||||||
| Commercial paper | — | 79 | 79 | ||||||||||||||||||||
| Corporate notes and bonds | — | 2 | 2 | ||||||||||||||||||||
| Deposits | 295 | — | 295 | ||||||||||||||||||||
| U.S. government and agency securities | — | 4 | 4 | ||||||||||||||||||||
| Marketable securities: | |||||||||||||||||||||||
| Commercial paper | — | 349 | 349 | ||||||||||||||||||||
| Corporate notes and bonds | — | 3,576 | 3,576 | ||||||||||||||||||||
| Certificates of deposit | — | 94 | 94 | ||||||||||||||||||||
| U.S. government and agency securities | — | 2,078 | 2,078 | ||||||||||||||||||||
| Mortgage-backed and asset-backed securities | — | 86 | 86 | ||||||||||||||||||||
| Total | $ | 1,510 | $ | 6,268 | $ | 7,778 |
We determine the fair value of our security holdings based on pricing from our service providers and market prices from industry-standard independent data providers. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs), pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) or using unobservable inputs that are supported by little or no market activity (Level 3 inputs). Our non-marketable equity investments are not included in the table above and are discussed in Note 3. See Note 8 for the fair value measurement of our derivative contracts and Note 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 were immaterial as of September 30, 2024 and December 31, 2023.
(5) Business Combinations
During the nine months ended September 30, 2024, we completed certain acquisitions for total purchase consideration of $81 million primarily to enhance our products with the acquired technology and engineering workforce. The acquisitions were not material to our condensed consolidated financial statements, either individually or in the aggregate.
On July 17, 2023, we acquired all outstanding shares of G2K Group GmbH, an artificial intelligence powered platform, for $465 million in a cash transaction. The consideration was paid in two installments, with the first payment made in July 2023 and the second payment made in February 2024. 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 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.
We have included the financial results of these business combinations in the condensed consolidated financial statements from the date of acquisition, which were immaterial.
(6) Goodwill and Intangible Assets
The changes in the carrying amounts of goodwill were as follows (in millions):
| Carrying Amount | |||||
| Balance as of December 31, 2023 | $ | 1,231 | |||
| Goodwill acquired | 58 | ||||
| Foreign currency translation adjustments | 2 | ||||
| Balance as of September 30, 2024 | $ | 1,291 |
Intangible assets, net consists of the following (in millions):
| September 30, 2024 | December 31, 2023 | ||||||||||
| Developed technology | $ | 575 | $ | 516 | |||||||
| Patents | 73 | 72 | |||||||||
| Other | 11 | 11 | |||||||||
| Intangible assets, gross | 659 | 599 | |||||||||
| Less: accumulated amortization | (445) | (375) | |||||||||
| Intangible assets, net | $ | 214 | $ | 224 |
The weighted-average useful life of the acquired developed technology for the nine months ended September 30, 2024 and 2023 was approximately five years. Amortization expense for intangible assets for the three months ended September 30, 2024 and 2023 was $23 million and $21 million, respectively, and for the nine months ended September 30, 2024 and 2023 was $71 million and $63 million, respectively.
The following table presents the estimated future amortization expense related to intangible assets held at September 30, 2024 (in millions):
| Years Ending December 31, | |||||||||||||||||
| Remainder of 2024 | $ | 22 | |||||||||||||||
| 2025 | 76 | ||||||||||||||||
| 2026 | 45 | ||||||||||||||||
| 2027 | 31 | ||||||||||||||||
| 2028 | 26 | ||||||||||||||||
| Thereafter | 14 | ||||||||||||||||
| Total future amortization expense | $ | 214 |
(7) Property and Equipment
Property and equipment, net consists of the following (in millions):
| September 30, 2024 | December 31, 2023 | ||||||||||
| Computer equipment | $ | 2,642 | $ | 2,136 | |||||||
| Computer software | 107 | 96 | |||||||||
| Leasehold and other improvements | 316 | 292 | |||||||||
| Furniture and fixtures | 88 | 86 | |||||||||
| Construction in progress | 43 | 33 | |||||||||
| Property and equipment, gross | 3,196 | 2,643 | |||||||||
| Less: Accumulated depreciation | (1,478) | (1,285) | |||||||||
| Property and equipment, net | $ | 1,718 | $ | 1,358 |
Construction in progress consists of costs primarily related to leasehold and other improvements. Depreciation expense for the three months ended September 30, 2024 and 2023 was $96 million and $98 million, respectively, and for the nine months ended September 30, 2024 and 2023 was $264 million and $267 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 and nine months ended September 30, 2024. These forward contracts are recorded at fair value and have maturities of up to 34 months. As of September 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):
| Condensed Consolidated Balance Sheets Location | September 30, 2024 | ||||||||||
| Accrued expenses and other current liabilities | $ | 25 | |||||||||
| Other long-term liabilities | $ | 10 |
As of September 30, 2024, approximately $25 million of the pre-tax derivative loss from accumulated other comprehensive income (loss) 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. We evaluate hedge effectiveness at the inception of the hedge prospectively, and on an ongoing basis both retrospectively and prospectively. 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. Amounts reclassified to subscription revenues were a loss of $2 million for the three months ended September 30, 2024 and a gain of $3 million for the nine months ended September 30, 2024. There was no ineffectiveness in the Company’s cash flow hedging program for each of the three and nine months ended September 30, 2024.
Derivatives not Designated as Hedging Instruments
Our derivatives not designated as hedging instruments consist of foreign currency forward contracts that we primarily use to hedge monetary assets and liabilities denominated in non-functional currencies. These foreign currency forward contracts are recorded at fair value and have maturities of 12 months or less. 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 September 30, 2024 and December 31, 2023, we had foreign currency forward contracts with total notional values of $2.3 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 September 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 nine months ended September 30, 2024 and 2023.
All 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 from beginning period deferred revenue during the three months ended September 30, 2024 and 2023 were $2.5 billion and $2.0 billion, respectively, and $5.1 billion and $4.1 billion for the nine months ended September 30, 2024 and 2023, respectively.
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 September 30, 2024, the total non-cancellable RPO under our contracts with customers was $19.5 billion and we expect to recognize revenues on approximately 48% of these RPO over the following 12 months. The majority of the non-current RPO will be recognized over the next 13 to 36 months.
(10) Debt
For the periods ended September 30, 2024 and December 31, 2023, the carrying value of our outstanding debt was $1,489 and $1,488 million, respectively, net of unamortized debt discount and issuance costs of $11 million and $12 million, respectively.
We consider the fair value of the 2030 Notes at September 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 $1,290 million and $1,236 million at September 30, 2024 and December 31, 2023, respectively.
2030 Notes
In August 2020, we issued 1.40% fixed rate ten-year notes with an aggregate principal amount of $1.5 billion due on September 1, 2030 (the “2030 Notes”). The 2030 Notes were issued at 99.63% of principal and we incurred $13 million for debt issuance costs. The effective interest rate for the 2030 Notes was 1.53% and included interest payable, amortization of debt issuance cost and amortization of debt discount. Interest is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2021, and the entire outstanding principal amount is due at maturity on September 1, 2030. The 2030 Notes are unsecured obligations and the indentures governing the 2030 Notes contain customary events of default and covenants that, among others and subject to exceptions, restrict our ability to incur or guarantee debt secured by liens on specified assets or enter into sale and lease-back transactions with respect to specified properties.
(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 | Unrealized Gains (Losses) on Investments | Foreign Currency Translation Adjustment | Total | |||||||||||||||||||||||
| Balance as of December 31, 2023 | $ | — | $ | (39) | $ | 2 | $ | (37) | ||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | (27) | 44 | 3 | 20 | ||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | (3) | — | — | (3) | ||||||||||||||||||||||
| Net current period other comprehensive (loss) income | (30) | 44 | 3 | 17 | ||||||||||||||||||||||
| Balance as of September 30, 2024 | $ | (30) | $ | 5 | $ | 5 | $ | (20) |
| Unrealized Gains (Losses) on Derivative Instruments | Unrealized Gains (Losses) on Investments | Foreign Currency Translation Adjustment | Total | |||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | — | $ | (77) | $ | (25) | $ | (102) | ||||||||||||||||||
| Other comprehensive loss before reclassifications | — | (4) | (51) | (55) | ||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | — | — | — | ||||||||||||||||||||||
| Net current period other comprehensive loss | — | (4) | (51) | (55) | ||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | — | $ | (81) | $ | (76) | $ | (157) |
(12) Stockholders' Equity
Common Stock
We are authorized to issue a total of 600 million shares of common stock as of September 30, 2024. Holders of our common stock are not entitled to receive dividends unless declared by our board of directors. As of September 30, 2024, we had 206.3 million shares of common stock, net of treasury stock, outstanding and had reserved shares of common stock for future issuance as follows (in thousands):
| September 30, 2024 | |||||
| Stock plans: | |||||
| Options outstanding | 948 | ||||
| RSUs(1) | 6,354 | ||||
| Shares of common stock available for future grants: | |||||
| Amended and Restated 2021 Equity Incentive Plan(2) | 9,579 | ||||
| Amended and Restated 2012 Employee Stock Purchase Plan(2) | 8,119 | ||||
| Total shares of common stock reserved for future issuance | 25,000 |
(1)Represents the number of shares issuable upon settlement of outstanding restricted stock units (“RSUs”) and performance-based RSUs (“PRSUs”), as discussed in Note 13.
(2)Refer to Note 13 for a description of these plans.
We issued a total of 2.1 million and 2.2 million shares for the nine months ended September 30, 2024 and 2023, respectively, from stock option exercises, vesting of RSUs, net of employee payroll taxes, and purchases from the employee stock purchase plan (“ESPP”).
Treasury Stock
In May 2023, our board of directors authorized a program to repurchase up to $1.5 billion of our common stock (the “Share Repurchase Program”). Under this new program, we may repurchase our common stock from time to time through open market purchases, in privately negotiated transactions, or by other means, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, in accordance with applicable securities laws and other restrictions. The Share Repurchase Program does not have a fixed expiration date, may be suspended or discontinued at any time, and does not obligate us to acquire any amount of common stock. The timing, manner, price, and amount of any repurchases will be determined by us at our discretion and will depend on a variety of factors, including business, economic and market conditions, prevailing stock prices, corporate and regulatory requirements, and other considerations.
During the three and nine months ended September 30, 2024, the Company repurchased 0.3 million and 0.5 million shares of its common stock for $225 million and $400 million, respectively. During the three and nine months ended September 30, 2023, the Company repurchased 0.5 million shares of its common stock for $282 million. All repurchases were made in open market transactions. Repurchases of common stock are recognized as treasury stock and held for future issuance. As of September 30, 2024, approximately $562 million of the originally authorized amount under the Share Repurchase Program remained available for future repurchases.
(13) Equity Awards
We currently have three equity incentive plans: 2012 Equity Incentive Plan (the “2012 Plan”), amended and restated 2021 Equity Incentive Plan (the “2021 Plan”) and 2022 New-Hire Equity Incentive Plan (the “2022 Plan”). The 2012 Plan was terminated in connection with the initial approval of the 2021 Plan on June 7, 2021 but continues to govern the terms of outstanding equity awards that were granted prior to the termination of the 2012 Plan. As of June 7, 2021, we no longer grant equity awards pursuant to the 2012 Plan. The 2021 Plan, as amended and restated, was approved by the shareholders on June 1, 2023 to increase shares available for future grants by approximately 10 million shares. Upon effectiveness of the 2021 Plan, as amended and restated, the 2022 Plan was terminated, and no additional awards under the 2022 Plan have been made since the amendment and restatement of the 2021 Plan. Outstanding equity awards under the 2022 Plan continue to be subject to the terms and conditions of the 2022 Plan.
The 2021 Plan and the 2012 Plan provide for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, RSUs, performance-based stock awards and other forms of equity compensation (collectively, “equity awards”). The 2022 Plan permits the grant of any of the foregoing awards with the exception of incentive stock options. In addition, the 2022 Plan, the 2021 Plan and the 2012 Plan provide for the grant of performance cash awards. Incentive stock options may be granted only to employees. All other equity awards may be granted to employees, including officers, as well as directors and consultants.
Our Amended and Restated 2012 Employee Stock Purchase Plan (the “2012 ESPP”) authorizes the issuance of shares of common stock pursuant to purchase rights granted to our employees. The price at which common stock is purchased under the 2012 ESPP is equal to 85% of the fair market value of our common stock on the first or last day of the offering period, whichever is lower. Offering periods are six months long and begin on February 1 and August 1 of each year. The number of shares of common stock reserved for issuance will not be increased without shareholder approval.
Stock Options
A summary of stock option activity for the nine months ended September 30, 2024 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, 2023 | 1,150 | $ | 603.30 | ||||||||||||||||||||
| Exercised | (74) | $ | 327.00 | $ | 34 | ||||||||||||||||||
| Forfeited | (128) | $ | 645.02 | ||||||||||||||||||||
| Outstanding at September 30, 2024 | 948 | $ | 619.04 | 6.8 | $ | 261 | |||||||||||||||||
| Vested and expected to vest as of September 30, 2024 | 837 | $ | 610.33 | 6.8 | $ | 238 | |||||||||||||||||
| Vested and exercisable as of September 30, 2024 | 238 | $ | 433.25 | 5.9 | $ | 110 |
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 nine months ended September 30, 2024 was $41 million. No stock options were granted during the nine months ended September 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. During the nine months ended September 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 September 30, 2024, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options was $10 million. The weighted-average remaining vesting period of unvested stock options at September 30, 2024 was approximately one year.
RSUs
A summary of RSU activity for the nine months ended September 30, 2024 was as follows:
| Number of Shares | Weighted-Average Grant-Date Fair Value Per Share | ||||||||||||||||
| (in thousands) | |||||||||||||||||
| Outstanding at December 31, 2023 | 6,262 | $ | 506.77 | ||||||||||||||
| Granted | 2,866 | $ | 778.65 | ||||||||||||||
| Vested | (2,309) | $ | 537.32 | ||||||||||||||
| Forfeited | (465) | $ | 562.17 | ||||||||||||||
| Outstanding at September 30, 2024 | 6,354 | $ | 614.27 | ||||||||||||||
| Expected to vest as of September 30, 2024 | 5,698 |
RSUs outstanding as of September 30, 2024 were comprised of 5.9 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 $1.8 billion for the nine months ended September 30, 2024. As of September 30, 2024, the aggregate intrinsic value of RSUs outstanding was $5.7 billion and RSUs expected to vest was $5.1 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 nine months ended September 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 $106 million and $111 million of stock-based compensation, net of actual and estimated forfeitures, associated with PRSUs on a graded vesting basis during the nine months ended September 30, 2024 and 2023, respectively.
As of September 30, 2024, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs was $3.1 billion, and the weighted-average remaining vesting period was approximately three years.
(14) 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 and ESPP obligations. 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 and ESPP obligations are excluded from the computation of diluted net income per share in periods in which the effect would be antidilutive.
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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income | $ | 432 | $ | 242 | $ | 1,041 | $ | 1,436 | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average shares outstanding - basic | 206,158 | 204,464 | 205,639 | 203,961 | |||||||||||||||||||
| Weighted-average effect of potentially dilutive securities: | |||||||||||||||||||||||
| Common stock options | 131 | 122 | 138 | 118 | |||||||||||||||||||
| RSUs | 2,258 | 1,674 | 2,218 | 1,113 | |||||||||||||||||||
| ESPP obligations | 5 | 17 | 9 | 2 | |||||||||||||||||||
| Weighted-average shares outstanding - diluted | 208,552 | 206,277 | 208,004 | 205,194 | |||||||||||||||||||
| Net income per share - basic | $ | 2.09 | $ | 1.18 | $ | 5.06 | $ | 7.04 | |||||||||||||||
| Net income per share - diluted | $ | 2.07 | $ | 1.17 | $ | 5.00 | $ | 7.00 | |||||||||||||||
| Common stock options, RSUs and ESPP obligations excluded from diluted net income per share because their effect would have been anti-dilutive | 1,082 | 3,068 | 2,715 | 3,647 |
(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 $84 million and $234 million for the three and nine months ended September 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.
The income tax provision was $57 million for the three months ended September 30, 2023, and our income tax benefit was $775 million for the nine months ended September 30, 2023. The income tax provision was primarily attributable to the mix of earnings and losses in countries with differing statutory tax rates, tax deductible research and development costs and the valuation allowance release through the effective tax rate. The income tax benefit was primarily attributable to the release of the valuation allowance of certain U.S. federal and state deferred tax assets.
We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. As of June 30, 2023, we achieved cumulative U.S. income during the prior twelve quarters when considering pre-tax income adjusted for permanent differences and other comprehensive losses. Based on all available positive and negative evidence, having demonstrated sustained profitability which is objective and verifiable, and taking into account anticipated future earnings, we concluded it is more likely than not that our U.S. federal and state deferred tax assets will be realizable, with the exception of California. We released $985 million of our valuation allowance during the nine months ended September 30, 2023. As of September 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 September 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. 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.
(16) 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 $33 million and $98 million for the three and nine months ended September 30, 2024, respectively, and $33 million and $96 million for the three and nine months ended September 30, 2023, respectively.
For each of the nine months ended September 30, 2024 and 2023, total cash paid for amounts included in the measurement of operating lease liabilities was $61 million. Operating lease liabilities arising from obtaining operating right-of-use assets totaled $21 million and $93 million for the nine months ended September 30, 2024 and 2023, respectively.
As of September 30, 2024, the weighted-average remaining lease term is approximately eight years, and the weighted-average discount rate is 4%.
Maturities of operating lease liabilities as of September 30, 2024 are presented in the table below (in millions):
| Remainder of 2024 | $ | 31 | |||
| 2025 | 135 | ||||
| 2026 | 112 | ||||
| 2027 | 97 | ||||
| 2028 | 91 | ||||
| Thereafter | 428 | ||||
| Total operating lease payments | 894 | ||||
| Less: imputed interest | (138) | ||||
| Present value of operating lease liabilities | $ | 756 |
In addition to the amounts above, as of September 30, 2024, we have one operating lease for office space that has not yet commenced with undiscounted cash flows of $50 million. This operating lease is expected to commence during 2025 with a lease term of ten years.
Other Commitments
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 nine months ended September 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, $60 million of unrecognized tax benefits have been recorded as liabilities as of September 30, 2024.
Legal Proceedings
We are party to certain litigation and other legal proceedings. While legal proceedings are inherently unpredictable and subject to uncertainties, we do not believe the ultimate resolution of any such proceedings is likely to result in a material loss. We accrue for loss contingencies when it is both probable that we will incur the loss and when we can reasonably estimate the amount of the loss or range of loss.
On July 5, 2022, InQuisient Inc. (“Plaintiff”) filed a complaint against ServiceNow, Inc. in the U.S. District Court for the District of Delaware, alleging the Now Platform’s use of relational databases infringes three of Plaintiff’s patents. Plaintiff is seeking injunctive relief and unspecified damages. The Company filed an answer denying Plaintiff’s allegations and asserts Plaintiff’s patents are, among other things, invalid, not infringed and otherwise unenforceable. A trial date has been set for January 27, 2025. While the Company continues to vigorously defend this matter, we cannot predict the outcome with any degree of certainty. We are unable to reasonably estimate the possible loss or range of loss, if any.
Any adverse determination related to intellectual property claims or other litigation could prevent us from offering our services and adversely affect our financial condition and results of operations. For additional information regarding intellectual property litigation, see “Risk Factors—Lawsuits by third parties that allege we infringe their intellectual property rights could harm our business and operating results” and “Risk Factors—Our intellectual property protections may not provide us with a competitive advantage, and defending our intellectual property may result in substantial expenses that harm our operating results” included in our Annual Report on Form 10-K for the year ended December 31, 2023.
Other
As previously disclosed, 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
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.
(17) 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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| North America(1) | $ | 1,778 | $ | 1,452 | $ | 5,080 | $ | 4,165 | |||||||||||||||
| EMEA(2) | 700 | 585 | 2,037 | 1,664 | |||||||||||||||||||
| Asia Pacific and other | 319 | 251 | 910 | 705 | |||||||||||||||||||
| Total revenues | $ | 2,797 | $ | 2,288 | $ | 8,027 | $ | 6,534 |
Property and equipment, net by geographic area were as follows (in millions):
| September 30, 2024 | December 31, 2023 | ||||||||||
| North America(3) | $ | 1,080 | $ | 871 | |||||||
| EMEA(2) | 426 | 312 | |||||||||
| Asia Pacific and other | 212 | 175 | |||||||||
| Total property and equipment, net | $ | 1,718 | $ | 1,358 |
(1)Revenues attributed to the United States were 94% of North America revenues for each of the three and nine months ended September 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 September 30, 2024 and December 31, 2023, respectively.
Subscription revenues consist of the following (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Digital workflow products | $ | 2,398 | $ | 1,961 | $ | 6,877 | $ | 5,587 | |||||||||||||||
| ITOM products | 317 | 255 | 903 | 728 | |||||||||||||||||||
| Total subscription revenues | $ | 2,715 | $ | 2,216 | $ | 7,780 | $ | 6,315 |
Our digital workflow products include most of our product offerings and are generally priced on a per user basis. Our remaining product offerings, primarily comprised of our IT Operations Management (“ITOM”) products, are predominantly priced on a subscription unit basis.
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