The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with the (1) unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year endedDecember 31, 2021 included in the Annual Report on Form 10-K filed with theSecurities and Exchange Commission (the "SEC"), onFebruary 3, 2022 . This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue," and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those identified herein, and those discussed in the section titled "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K filed with theSEC onFebruary 3, 2022 and in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our otherSEC filings. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Investors and others should note that we announce material financial information to our investors using our investor relations website (https://www.servicenow.com/company/investor-relations.html),SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our investors and the public about our company, our services and other issues. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the social media channels listed on our investor relations website. Our free cash flow measure included in the section entitled "-Key Business Metrics-Free Cash Flow," is not in accordance withU.S. Generally Accepted Accounting Principles ("GAAP"). This non-GAAP financial measure is not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. This measure may be different from non-GAAP financial measures used by other companies, limiting its usefulness for comparison purposes. We encourage investors to carefully consider our results under GAAP, as well as our supplemental non-GAAP results, to more fully understand our business.
Overview
ServiceNow was founded on a simple premise: a better technology platform will help work flow better. The company's purpose is to make the world work better for everyone. We help global enterprises across industries, universities and governments to digitize their workflows. The Now Platform enables us to connect systems, silos, departments and processes with digital workflows that are simple and easy to use. We categorize the workflows we provide into four primary areas: Technology (formerly known as Information Technology), Employee, Customer and Creator. The Now Platform is uniquely positioned to enable our customers' digital transformation from non-integrated enterprise technology solutions with manual and disconnected processes and activities, to integrated enterprise technology solutions with automation and connected processes and activities. The transformation to digital operations, enabled by the Now Platform, increases our customers' resiliency and security and delivers great experiences and additional value to their employees and consumers. In response to the COVID-19 pandemic, we continue to focus on maintaining business continuity, helping our employees, customers and communities, and preparing for the future and the long-term success of our business. We are continuing to monitor the actual and potential effects of the COVID-19 pandemic across our business. The extent and continued impact of the COVID-19 pandemic on our business will depend on certain developments including the duration and spread of the outbreak and new variant strains of the virus; the availability and distribution of effective vaccines; the severity of the economic decline attributable to the pandemic and timing, nature and sustainability of economic recovery; and government responses, including vaccination or testing mandates, all of which are highly uncertain and unpredictable. Starting late 2021, many employees began to return to our offices for at least part of the week. Our return to work approach may vary among geographies depending on appropriate health protocols, and may change at any time depending on the severity of or spikes in COVID-19. The impact, if any, of these and any additional operational changes we may implement is uncertain but changes we have implemented have not affected and are not expected to affect our ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures. 21 -------------------------------------------------------------------------------- Table of Contents We are closely monitoring the unfolding events of the Russian invasion ofUkraine and its global impacts. While the conflict is still evolving and the outcome remains highly uncertain, we do not believe theRussia -Ukraine conflict will have a material impact on our business and results of operation. However, if theRussia -Ukraine conflict continues or worsens, leading to greater global economic disruptions and uncertainty, our business and results of operations could be materially impacted. Our customers inRussia represented an immaterial portion of our net assets and total consolidated revenues both as of and for the three months endedJune 30, 2022 andDecember 31, 2021 . See the section "Risk Factors" in Part 1, Item 1A of our Annual Report on Form 10-K filed with theSEC onFebruary 3, 2022 and in Part II, Item 1A of this Quarterly Report on Form 10-Q for further discussion of the possible impact of the COVID-19 pandemic andRussia -Ukraine conflict on our business.
Key Business Metrics
Remaining performance obligations. Transaction price allocated to remaining
performance obligations ("RPO") represents contracted revenues that has not yet
been recognized, which includes deferred revenue and non-cancelable amounts that
will be invoiced and recognized as revenue in future periods. RPO excludes
contracts that are billed in arrears, such as certain time and materials
contracts, as we apply the "right to invoice" practical expedient under relevant
accounting guidance. Current remaining performance obligations ("cRPO")
represents RPO that will be recognized as revenue in the next 12 months.
As of June 30, 2022 , our RPO was $11.5 billion , of which 50% represented cRPO.
RPO and cRPO increased by 21% each, compared to June 30, 2021 . Factors that may
cause our RPO to vary from period to period include the following:
•Foreign currency exchange rates. While a majority of our contracts have
historically been in U.S. Dollars, an increasing percentage of our contracts in
recent periods has been in foreign currencies, particularly the Euro and British
Pound Sterling. Fluctuations in foreign currency exchange rates as of the
balance sheet date will cause variability in our RPO.
•Mix of offerings. In a minority of cases, we allow our customers to host our
software by themselves or through a third-party service provider. In self-hosted
offerings, we recognize a portion of the revenue upfront upon the delivery of
the software and as a result, such revenue is excluded from RPO.
•Subscription start date. From time to time, we enter into contracts with a
subscription start date in the future and these amounts are included in RPO if
such contracts are signed by the balance sheet date.
•Timing of contract renewals. While customers typically renew their contracts at
the end of the contract term, from time to time, customers may do so either
before or after the scheduled expiration date. For example, in cases where we
are successful in selling additional products or services to an existing
customer, a customer may decide to renew its existing contract early to ensure
that all its contracts expire on the same date. In other cases, prolonged
negotiations or other factors may result in a contract not being renewed until
after it has expired.
•Contract duration. While we typically enter into multi-year subscription
services, the duration of our contracts varies. Further, we continue to see an
increase in the number of 12-month agreements entered into with the U.S. Federal
government throughout the year, with the highest number of agreements entered
into in the quarter ended September 30 of each year, driven primarily by timing
of their annual budget expenditures. We sometimes also enter into contracts with
durations that have a 12-month or shorter term to enable such contracts to
co-terminate with existing contracts. The contract duration will cause
variability in our RPO.
22
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Number of customers with ACV greater than$1 million . We count the total number of customers with annual contract value ("ACV") greater than$1 million as of the end of the period. We had 1,463 and 1,196 customers with ACV greater than$1 million as ofJune 30, 2022 and 2021, respectively. For purposes of customer count, a customer is defined as an entity that has a unique Dunn & Bradstreet Global Ultimate ("GULT") Data Universal Numbering System ("DUNS") number and an active subscription contract as of the measurement date. The DUNS number is a global standard for business identification and tracking. We make exceptions for holding companies, government entities and other organizations for which the GULT, in our judgment, does not accurately represent theServiceNow customer. For example, while allU.S. government agencies roll up to "Government ofthe United States " under the GULT, we count each government agency that we contract with as a separate customer. Our customer count is subject to adjustments for acquisitions, spin-offs and other market activity; accordingly, we restate previously disclosed number of customers with ACV greater than$1 million calculations to allow for comparability. ACV is calculated based on the foreign exchange rate in effect at the time the contract was signed. Foreign exchange rate fluctuations could cause some variability in the number of customers with ACV greater than$1 million . We believe information regarding the total number of customers with ACV greater than$1 million provides useful information to investors because it is an indicator of our growing customer base and demonstrates the value customers are receiving from the Now Platform. Free cash flow. We define free cash flow, a non-GAAP financial measure, as GAAP net cash provided by operating activities reduced by purchases of property and equipment. Purchases of property and equipment are otherwise included in cash used in investing activities under GAAP. We believe information regarding free cash flow provides useful information to investors because it is an indicator of the strength and performance of our business operations. However, our calculation of free cash flow may not be comparable to similar measures used by other companies. A calculation of free cash flow is provided below: Six Months Ended June 30, 2022 2021 % Change (dollars in millions)
Free cash flow: Net cash provided by operating activities
26 % Purchases of property and equipment (244) (198) 23 % Free cash flow(1)$ 1,052 $ 829 27 % (1)Free cash flow for the six months endedJune 30, 2021 includes the effect of$13 million relating to the repayments of convertible senior notes attributable to debt discount. Refer to Note 10 in the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details. We have historically seen higher collections in the quarter endedMarch 31 due to seasonality in timing of entering into customer contracts, which is significantly higher in the quarter endedDecember 31 . Additionally, we have historically seen higher disbursements in the quarters endedMarch 31 andSeptember 30 due to payouts under our annual commission plans, purchases under our employee stock purchase plan, payouts under our bonus plans and coupon payments related to our 2030 Notes beginning in 2021. Renewal rate. We calculate our renewal rate by subtracting our attrition rate from 100%. Our attrition rate for a period is equal to the ACV from customers lost during the period, divided by the sum of (i) the total ACV from all customers that renewed during the period, excluding changes in price or users, and (ii) the total ACV from all customers lost during the period. Accordingly, our renewal rate is calculated based on ACV and is not based on the number of customers that have renewed. Further, our renewal rate does not reflect increased or decreased purchases from our customers to the extent such customers are not lost customers or lapsed renewal. A lost customer is a customer that did not renew an expiring contract and that, in our judgment, will not be renewed. Typically, a customer that reduces its subscription upon renewal is not considered a lost customer. However, in instances where the subscription decrease represents the majority of the customer's ACV, we may deem the renewal as a lost customer. For our renewal rate calculation, we define a customer as an entity with a separate production instance of our service and an active subscription contract as of the measurement date, instead of an entity with a unique GULT or DUNS number. We adjust our renewal rate for acquisitions, consolidations and other customer events that cause the merging of two or more accounts occurring at the time of renewal. Our renewal rate was 99% and 98% for the three and six months endedJune 30, 2022 , respectively, and 97% for each of the three and six months endedJune 30, 2021 . As our renewal rate is impacted by the timing of renewals, which could occur in advance of, or subsequent to the original contract end date, period-to-period comparison of renewal rates may not be meaningful. 23 -------------------------------------------------------------------------------- Table of Contents Components of Results of Operations
Incomes
Subscription revenues. Subscription revenues are primarily comprised of fees that give customers access to the ordered subscription service for both self-hosted offerings and cloud-based subscription offerings, and related standard and enhanced support and updates, if any, to the subscription service during the subscription term. For our cloud-based offerings, we recognize revenue ratably over the subscription term. For self-hosted offerings, a substantial portion of the sales price is recognized upon delivery of the software, which may cause greater variability in our subscription revenues and subscription gross margin. Pricing includes multiple instances, hosting and support services, data backup and disaster recovery services, as well as future updates, when and if available, offered during the subscription term. We typically invoice our customers for subscription fees in annual increments upon execution of the initial contract or subsequent renewal. Our contracts are generally non-cancelable during the subscription term, though a customer can terminate for breach if we materially fail to perform. Professional services and other revenues. Our arrangements for professional services are primarily on a time-and-materials basis and we generally invoice our customers monthly in arrears for the professional services based on actual hours and expenses incurred. Some of our professional services arrangements are on a fixed fee or subscription basis. Professional services revenues are recognized as services are delivered. Other revenues primarily consist of fees from customer training delivered on-site or through publicly available classes. Typical payment terms require our customers to pay us within 30 days of invoice. We sell our subscription services primarily through our direct sales organization. We also sell services through managed service providers and resale partners. We also generate revenues from certain professional services and from training of customers and partner personnel, through both our direct team and indirect channel sales. Revenues from our direct sales organization represented 79% of our total revenues for each of the three and six months endedJune 30, 2022 and 80% of our total revenues for each of the three and six months endedJune 30, 2021 . For purposes of calculating revenues from our direct sales organization, revenues from systems integrators and managed services providers are included as part of the direct sales organization. Seasonality. We have historically experienced seasonality in terms of when we enter into customer agreements. We sign a significantly higher percentage of agreements with new customers, as well as expansion with existing customers, in the fourth quarter of each year. The increase in customer agreements for the fourth quarter is primarily a result of both large enterprise account buying patterns typical in the software industry, which are driven primarily by the expiration of annual authorized budgeted expenditures, and the terms of our commission plans, which incentivize our direct sales organization to meet their annual quotas byDecember 31 . Furthermore, we usually sign a significant portion of these agreements during the last month, and often the last two weeks, of each quarter. This seasonality of entering into customer contracts is sometimes not immediately apparent in our revenues, due to the fact that we recognize subscription revenues from our cloud offering contracts over the term of the subscription agreement, which is generally 12 to 36 months, leading to a higher RPO in the fourth quarter and thereafter. Although these seasonal factors are common in the technology industry, historical patterns should not be considered a reliable indicator of our future sales activity or performance.
Amount of Income
Cost of subscription revenues. Cost of subscription revenues consists primarily
of expenses related to hosting our services and providing support to our
customers. These expenses are comprised of data center capacity costs, which
include colocation costs associated with our data centers as well as
interconnectivity between data centers, depreciation related to our
infrastructure hardware equipment dedicated for customer use, amortization of
intangible assets, expenses associated with software, public cloud service
costs. IT services and dedicated customer support, personnel-related costs
directly associated with data center operations and customer support, including
salaries, benefits, bonuses and stock-based compensation and allocated overhead.
Cost of professional services and other revenues. Cost of professional services
and other revenues consists primarily of personnel-related costs directly
associated with our professional services and training departments, including
salaries, benefits, bonuses and stock-based compensation, the costs of
contracted third-party partners, travel expenses and allocated overhead.
24
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Professional services are performed directly by our services team, as well as by
contracted third-party partners. Fees paid by us to third-party partners are
primarily recognized as cost of revenues as the professional services are
delivered. Cost of revenues associated with our professional services
engagements contracted with third-party partners as a percentage of professional
services and other revenues was 13% and 12% for the three and six months ended
June 30, 2022 , respectively, and 14% and 12% for the three and six months ended
June 30, 2021 , respectively.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related expenses
directly associated with our sales and marketing staff, including salaries,
benefits and bonuses and stock-based compensation. Sales and marketing expenses
also include the amortization of commissions paid to our sales employees,
including related payroll taxes and fringe benefits. In addition, sales and
marketing expenses include branding expenses, marketing program expenses, which
include events such as Knowledge, and costs associated with purchasing
advertising and marketing data, software and subscription services dedicated for
sales and marketing use and allocated overhead.
Research and development
Research and development expenses consist primarily of personnel-related expenses directly associated with our research and development staff, including salaries, benefits, bonuses and stock-based compensation and allocated overhead. Research and development expenses also include data center capacity costs, costs associated with outside services contracted for research and development purposes and depreciation of infrastructure hardware equipment that is used solely for research and development purposes.
General and Administrative
General and administrative expenses consist primarily of personnel-related expenses for our executive, finance, legal, human resources, facilities and administrative personnel, including salaries, benefits, bonuses and stock-based compensation, external legal, accounting and other professional services fees, other corporate expenses, amortization of intangible assets and allocated overhead.
Provision for (Benefit from) Income Taxes
Provision for (benefit from) income taxes consists of federal, state and foreign income taxes. Due to cumulative losses, we maintain a valuation allowance against ourU.S. deferred tax assets as ofJune 30, 2022 . We consider all available evidence, both positive and negative, including but not limited to earnings history, projected future outcomes, industry and market trends and the nature of each of the deferred tax assets in assessing the extent to which a valuation allowance should be applied against ourU.S. and foreign deferred tax assets.
Comparison of Last Three Months
Revenues
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
(dollars in millions) (dollars in millions)
Revenues:
Subscription $ 1,658 $ 1,330 25 % $ 3,289 $ 2,623 25 %
Professional services and other 94 79 19 % 185 146 27 %
Total revenues $ 1,752 $ 1,409 24 % $ 3,474 $ 2,769 25 %
Percentage of revenues:
Subscription 95% 94% 95% 95%
Professional services and other 5% 6% 5% 5%
Total 100% 100% 100% 100%
25
-------------------------------------------------------------------------------- Table of Contents Subscription revenues increased by$328 million and$666 million for the three and six months endedJune 30, 2022 , respectively, compared to the three and six months endedJune 30, 2021 , primarily driven by increased purchases by new and existing customers. Included in subscription revenues is$49 million and$41 million of revenues recognized upfront from the delivery of software associated with self-hosted offerings during the three months endedJune 30, 2022 and 2021, respectively, and$126 million and$114 million during the six months endedJune 30, 2022 and 2021, respectively. We expect subscription revenues for the year endingDecember 31, 2022 to increase in absolute dollars as we continue to add new customers and existing customers increase their usage of our products, but remain relatively flat as a percentage of revenues compared to the year endedDecember 31, 2021 . Our expectations for revenues, cost of revenues and operating expenses for the remainder of 2022 are based on the 30-day average of foreign exchange rates forJune 2022 .
Subscription revenues consist of the following:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
(dollars in millions) (dollars in millions)
Digital workflow products $ 1,463 $ 1,164 26 % $ 2,903 $ 2,295 26 %
ITOM products 195 166 17 % 386 328 18 %
Total subscription revenues $ 1,658 $ 1,330 25 % $ 3,289 $ 2,623 25 %
Our digital workflow products include the Now Platform, IT Service Management,
IT Business Management, IT Asset Management, Security Operations, Governance,
Risk and Compliance, HR Service Delivery, Safe Workplace Suite of applications,
Workplace Service Delivery, Legal Service Delivery, Customer Service Management,
Field Service Management, Industry Solutions, App Engine and IntegrationHub, and
are generally priced on a per user basis. Our IT Operations Management ("ITOM")
products are generally priced on a subscription unit basis which allows us to
measure customers' management of various IT resources, and decreasingly on a per
node (physical or virtual server) basis.
Professional services and other revenues increased by $15 million and $39
million during the three and six months ended June 30, 2022 compared to the
three and six months ended June 30, 2021 , respectively, due to an increase in
services and trainings provided to new and existing customers. We expect
professional services and other revenues for the year ending December 31, 2022
to increase in absolute dollars but remain relatively flat as a percentage of
revenues compared to the year ended December 31, 2021 . We are increasingly
focused on deploying our internal professional services organization as a
strategic resource and relying on our partner ecosystem to contract directly
with customers for implementation services delivery.
Amount of Revenues and Percentage of Gross Profit
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
(dollars in millions) (dollars in millions)
Cost of revenues:
Subscription $ 287 $ 248 16 % $ 562 $ 476 18 %
Professional services and other 102 81 26 % 196 152 29 %
Total cost of revenues $ 389 $ 329 18 % $ 758 $ 628 21 %
Gross profit percentage:
Subscription 83% 81% 83% 82%
Professional services and other (9%) (3%) (6%) (4%)
Total gross profit percentage 78% 77% 78% 77%
Gross profit $ 1,363 $ 1,080 $ 2,716 $ 2,141
26
-------------------------------------------------------------------------------- Table of Contents Cost of subscription revenues increased by$39 million and$86 million for the three and six months endedJune 30, 2022 , respectively compared to the three and six months endedJune 30, 2021 , primarily due to increased headcount and increased costs to support the growth of our subscription offerings including costs to support customers in regulated markets. Personnel-related costs including stock-based compensation and overhead expenses increased by$33 million and$68 million for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in the prior year. Maintenance costs to support the expansion of our data center capacity, including public cloud service costs, increased by$15 million and$30 million for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in the prior year. Amortization of intangible assets increased by$4 million and$10 million for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in the prior year. Depreciation expense related to data center hardware and software decreased by$15 million and$27 million , primarily due to the change in estimated useful life of data center equipment from three years to four years, for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in the prior year. We expect our cost of subscription revenues for the year endingDecember 31, 2022 to increase in absolute dollars as we provide subscription services to more customers and increase usage within our customer instances but remain relatively flat as a percentage of revenues compared to the year endedDecember 31, 2021 . Our subscription gross profit percentage was 83% for each of the three and six months endedJune 30, 2022 , compared to 81% and 82% for the three and six months endedJune 30, 2021 , respectively. We expect our subscription gross profit percentage to remain relatively flat for the year endingDecember 31, 2022 compared to the year endedDecember 31, 2021 . We will continue to incur incremental costs to attract customers in regulated markets by adopting public cloud offerings as well as increased support for customers impacted by new and evolving data residency requirements. To the extent future acquisitions are consummated, our cost of subscription revenues may increase due to additional non-cash charges associated with the amortization of intangible assets acquired. Cost of professional services and other revenues increased by$21 million and$44 million for the three and six months endedJune 30, 2022 , respectively, compared to the three and six months endedJune 30, 2021 , primarily due to increased headcount to support growth resulting in an increase in personnel-related costs including stock-based compensation, travel and overhead expenses. Our professional services and other gross loss percentage increased to 9% and 6% for the three and six months endedJune 30, 2022 , respectively, from a loss of 3% and 4% for the three and six months endedJune 30, 2021 , respectively, primarily driven by planned increase in headcount costs to support the business growth and increase in travel expense for customer implementations. We expect our professional services and other gross loss percentage to worsen for the year endingDecember 31, 2022 as we expect additional costs to support business growth and increases in travel expenses compared to the year endedDecember 31, 2021 . Sales and Marketing Three Months Ended June 30, Six Months Ended June 30, 2022 2021 % Change 2022 2021 % Change (dollars in millions) (dollars in millions) Sales and marketing$ 722 $ 557 30 %$ 1,395 $ 1,081 29 % Percentage of revenues 41% 40% 40% 39% Sales and marketing expenses increased by$165 million and$314 million for the three and six months endedJune 30, 2022 , respectively, compared to the three and six months endedJune 30, 2021 , primarily due to increased headcount, resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of$110 million and$202 million for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in the prior year. Amortization expenses associated with deferred commissions increased by$17 million and$35 million for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in the prior year, due to an increase in contracts with new customers, expansion and renewal contracts. Other sales and marketing program expenses, which includes branding, costs associated with purchasing advertising, marketing events and market data, increased by$32 million and$68 million during the three and six months endedJune 30, 2022 , respectively, compared to the same periods in the prior year, primarily due to increased program costs and travel for our annual Knowledge user conference. We expect sales and marketing expenses for the year endingDecember 31, 2022 to increase in absolute dollars, but remain relatively flat as a percentage of revenues compared to the year endedDecember 31, 2021 , as we continue to see leverage from increased sales productivity and marketing efficiencies offset by growth in our international operations and increases in travel expenses in 2022. 27
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Research and Development
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
(dollars in millions) (dollars in millions)
Research and development$ 444 $ 333 33 % $ 858$ 647 33 % Percentage of revenues 25% 24% 25% 23% Research and development expenses increased by$111 million and$211 million for the three and six months endedJune 30, 2022 , respectively, compared to the three and six months endedJune 30, 2021 , primarily due to increased headcount, resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of$103 million and$197 million for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in the prior year. We expect research and development expenses for the year endingDecember 31, 2022 to increase in absolute dollars but remain relatively flat as a percentage of revenues compared to the year endedDecember 31, 2021 as we continue to improve the existing functionality of our services, develop new applications to fill market needs and enhance our core platform.
General and Administrative
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
(dollars in millions) (dollars in millions)
General and administrative$ 175 $ 139 26 % $ 354$ 265 34 % Percentage of revenues 10% 10% 10% 10% General and administrative expenses ("G&A") increased by$36 million and$89 million for the three and six months endedJune 30, 2022 , respectively, compared to the three and six months endedJune 30, 2021 , primarily due to increased headcount, resulting in an increase in personnel-related costs including stock-based compensation of$37 million and$82 million for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in the prior year. We expect G&A expenses to increase in absolute dollars for the year endingDecember 31, 2022 but remain relatively flat as a percentage of revenues compared to the year endedDecember 31, 2021 , as we continue to see leverage from continued G&A productivity, offset by higher stock-based compensation related to one-time long-term performance-based options granted to the Chief Executive Officer ("2021 CEO Performance Award") and to certain executives (collectively "2021 Performance Awards"). 28 -------------------------------------------------------------------------------- Table of Contents Stock-based Compensation Three Months Ended June 30, Six Months Ended June 30, 2022 2021 % Change 2022 2021 % Change (dollars in millions) (dollars in millions) Cost of revenues: Subscription$ 39 $ 33 18 % $ 75$ 62 21 % Professional services and other 18 15 20 % 34 28 21 % Operating expenses: Sales and marketing 113 99 14 % 218 192 14 % Research and development 126 98 29 % 241 186 30 % General and administrative 56 37 51 % 109 70 56 % Total stock-based compensation$ 352 $ 282 25 % $ 677$ 538 26 % Percentage of revenues 20% 20% 19% 19% Stock-based compensation increased by$70 million and$139 million for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in the prior year, primarily due to additional grants to current and new employees. Stock-based compensation is inherently difficult to forecast due to fluctuations in our stock price. Based upon our stock price as ofJune 30, 2022 , we expect stock-based compensation to continue to increase in absolute dollars for the year endingDecember 31, 2022 as we continue to issue stock-based awards to our employees, but remain relatively flat as a percentage of revenues compared to the year endedDecember 31, 2021 . We expect stock-based compensation as a percentage of revenues to decline over time as we continue to grow.
Exchange Foreign Currency
Our international operations have provided and will continue to provide a significant portion of our total revenues. Revenues outsideNorth America represented 35% of total revenues for each of the three and six months endedJune 30, 2022 , and 37% and 36% of total revenues for the three and six months endedJune 30, 2021 , respectively. Because we primarily transact in foreign currencies for sales outside ofthe United States , the general strengthening of theU.S. Dollar relative to other major foreign currencies (primarily the Euro and British Pound Sterling) had an unfavorable impact on our revenues for the three and six months endedJune 30, 2022 . For entities reporting in currencies other than theU.S. Dollar, if we had translated our results for the three and six months endedJune 30, 2022 at the exchange rates in effect for the three and six months endedJune 30, 2021 rather than the actual exchange rates in effect during the period, our reported subscription revenues would have been$66 million and$101 million higher, respectively. We expect to see an incremental strengthening of the US dollar resulting in further foreign currency impact to subscription revenue for the second half of fiscal 2022. The impact from the foreign currency movements from the three and six months endedJune 30, 2021 to the three and six months endedJune 30, 2022 was not material for professional services and other revenues. In addition, because we primarily transact in foreign currencies for cost of revenues and operating expenses outside ofthe United States , the general strengthening of theU.S. Dollar relative to other major foreign currencies had a favorable impact on our cost of revenues and sales and marketing expenses for each of the three and six months endedJune 30, 2022 . For entities reporting in currencies other than theU.S. Dollar, if we had translated our results for the three and six months endedJune 30, 2022 at the exchange rates in effect for the three and six months endedJune 30, 2021 rather than the actual exchange rates in effect during the period, our reported cost of revenues would have been$12 million and$18 million higher, respectively and sales and marketing expenses would have been$21 million and$30 million higher for the three and six months endedJune 30, 2022 , respectively. The impact from the foreign currency movements from the three and six months endedJune 30, 2021 to the three and six months endedJune 30, 2022 was not material to research and development and general and administrative expenses. 29 --------------------------------------------------------------------------------
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Interest Expense
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
(dollars in millions) (dollars in millions)
Interest expense $ (6) $ (7) (14 %) $ (12) $ (14) (14 %)
Percentage of revenues - % -% - % (1%)
Interest expense decreased for the three and six months ended June 30, 2022
compared to the same periods in the prior year, due to a decrease in
amortization expense of the debt discount and issuance costs as a result of
settlement of the outstanding principal balance of the 2022 Notes and due to the
adoption of the new accounting standard for debt with conversion options. We
expect to incur approximately $11 million of interest expense related to the
2030 Notes in the second half of fiscal 2022.
Other Income, net
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
(dollars in millions) (dollars in millions)
Interest income $ 12 $ 5 140 % $ 17 $ 11 55 %
Other 1 1 - % - 4 (100 %)
Other income, net $ 13 $ 6 117 % $ 17 $ 15 13 %
Percentage of revenues 1% -% -% 1%
Other income, net, increased by $7 million and $2 million for the three and six
months ended June 30, 2022 , respectively, compared to the same periods in the
prior year, primarily driven by an increase in investment income from our
managed portfolio.
To mitigate our risks associated with fluctuations in foreign currency exchange
rates, we enter into foreign currency derivative contracts with maturities of 12
months or less to hedge a portion of our net outstanding monetary assets and
liabilities. These hedging contracts may reduce, but cannot entirely eliminate,
the impact of adverse currency exchange rate movements.
Provision for (Benefit from) Income Taxes
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
(dollars in millions) (dollars in millions)
Income before income taxes $ 29 $ 50 (42 %) $ 114 $ 149 (23 %)
Provision for (benefit from) income
taxes $ 9 $ (9) (200 %) 19 8 138 %
Effective tax rate 31% (18%) 17% 5%
Our income tax provision was $9 million and $19 million for the three and six
months ended June 30, 2022 , respectively. The income tax provision was primarily
attributable to the mix of earnings and losses in countries with differing
statutory tax rates and the valuation allowance in the United States .
Our income tax (benefit) provision was $(9) million and $8 million for the three
and six months ended June 30, 2021 , respectively. The income tax (benefit)
provision was primarily attributable to the mix of earnings and losses in
countries with differing statutory tax rates, the valuation allowance in the
United States , a tax rate change in a foreign jurisdiction and a valuation
allowance release resulting from an acquisition.
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We continue to maintain a full valuation allowance on our U.S. federal and state
deferred tax assets and the significant components of the tax expense recorded
are current cash taxes payable in various jurisdictions. The cash tax expenses
are impacted by each jurisdiction's individual tax rates, laws on timing of
recognition of income and deductions, and availability of net operating losses
and tax credits. Given the full valuation allowance on our U.S. federal and
state deferred tax assets, sensitivity of current cash taxes to local rules and
our foreign structuring, we expect that our effective tax rate could fluctuate
significantly on a quarterly basis and could be adversely affected to the extent
earnings are lower than anticipated in countries that have lower statutory rates
and higher than anticipated in countries that have higher statutory rates. To
the extent sufficient positive evidence becomes available, we may release all or
a portion of our valuation allowance in one or more future periods. A release of
the valuation allowance, if any, would result in the recognition of certain
deferred tax assets and a material income tax benefit for the period in which
such release is recorded.
Liquidity and Capital Resources
We generate cash inflows from operations primarily from selling subscription services which are generally paid in advance of provisioning services, and cash outflows to develop new services and core technologies that further enhance the Now Platform, engage our customer and enhance their experience, and enable and transform our business operations. Subscription services arrangements typically have a three-year duration, and we have experienced a renewal rate of 98% over the last three years. Cash outflows from operations are principally comprised of the salaries, bonuses, commissions, and benefits for our workforce; licenses and services arrangements that are integral to our business operations and data centers; and operating lease arrangements that underlie our facilities. We have generated positive operating cash flows over the last ten years as we continue to grow our business in pursuit of our business strategy, and we expect to grow our business and generate positive cash flows from operations during 2022. When assessing sources of liquidity, we also include cash and cash equivalents, short-term investments and long-term investments totaling$5.4 billion as ofJune 30, 2022 . Our working capital requirements are principally comprised of non-contract workforce salaries, bonuses, commissions, and benefits and, to a lesser extent, cancelable and non-cancelable licenses and services arrangements that are integral to our business operations, and operating lease obligations. In addition, we made the payment for the investment in Celonis SE of$100 million during the six months endedJune 30, 2022 . Operating lease obligations totaling$769 million are principally associated with leased facilities and have varying maturities with$425 million due over the next five years. To grow our business, we also invest in capital and other resources to expand our data centers and enable our workforce, and we acquire technology and businesses to supplement our technology portfolio. Our capital expenditures are typically under cancelable arrangements primarily used to support the installed base and growth of our hosted business. We have also issued long-term debt to finance our business. InAugust 2020 , we issued 1.40% fixed rate ten-year notes with an aggregate principal amount of$1.5 billion due onSeptember 1, 2030 (the "2030 Notes"). In May andJune 2017 , we issued the 2022 Notes with an aggregate principal amount of$782.5 million . During the six months endedJune 30, 2022 , we paid cash to settle$94 million in principal of the 2022 Notes, which was comprised of early conversions of$6 million and remaining principal of$88 million for final settlement onJune 1, 2022 , the maturity date of our 2022 Notes. Our free cash flows, together with our other sources of liquidity, are available to service our liabilities as well as our cancelable and non-cancelable arrangements. We anticipate cash flows generated from operations, cash, cash equivalents and investments will be sufficient to meet our liquidity needs for at least the next 12 months. As we look beyond the next 12 months, we seek to continue to grow free cash flows necessary to fund our operations and grow our business. If we require additional capital resources, we may seek to finance our operations from the current funds available or additional equity or debt financing. Six Months Ended June 30, 2022 2021 (dollars in millions) Net cash provided by operating activities$ 1,296 $ 1,027 Net cash used in investing activities$ (1,080) $ (1,051) Net cash used in financing activities $
(229)
Net change in cash, cash equivalents and restricted cash $ (62)
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Operating Activities
Net cash provided by operating activities was $1,296 million for the six months
ended June 30, 2022 compared to $1,027 million for the six months ended June 30,
2021 . The net increase in operating cash flow was primarily due to higher
collections driven by revenue growth.
Investment Activities
Net cash used in investing activities for the six months endedJune 30, 2022 was$1,080 million compared to$1,051 million for the six months endedJune 30, 2021 . The increase in cash used in investing activities was primarily due to a$534 million increase in net purchases of investments, a$129 million increase in non-marketable investments mainly in Celonis SE, and a$46 million increase in purchases of property and equipment, offset by a$681 million decrease in business combinations. Financing Activities Net cash used in financing activities was$229 million for the six months endedJune 30, 2022 compared to$273 million for the six months endedJune 30, 2021 . The decrease in cash used in financing activities is primarily due to a$74 million decrease in taxes paid related to net share settlement of equity awards, a$11 million increase in proceeds from employee stock plans, offset by a$41 million increase in repayments of convertible senior notes attributable to principal.
Critical Accounting Policies and Significant Judgments and Estimates
There have been no significant changes to our critical accounting policies and estimates as described in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was filed with theSEC onFebruary 3, 2022 , other than the change in useful life of our data center equipment, discussed in Note 2.
New Accounting Pronouncements Pending Adoption
The impact of recently issued accounting standards is set forth in Note 2, Summary of Significant Accounting Policies, of the notes to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q .
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