SERVICENOW, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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 ended
December 31, 2021 included in the Annual Report on Form 10-K filed with the
Securities and Exchange Commission (the "SEC"), on February 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.
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 the SEC on February 3, 2022 and in Part II, Item 1A of this
Quarterly Report on Form 10-Q and in our other SEC 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 with U.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. Our purpose is to make the world work better for
everyone. We help global enterprises across industries, universities and
governments to digitize their workflows. The Now Platform 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.
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We are closely monitoring the unfolding events of the Russian invasion of
Ukraine and its global impacts. While the conflict is still evolving and the
outcome remains highly uncertain, we do not believe the Russia-Ukraine conflict
will have a material impact on our business and results of operation. However,
if the Russia-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 in Russia represented an immaterial
portion of our net assets and total consolidated revenues both as of and for the
three months ended September 30, 2022 and December 31, 2021.

See the "Risk Factors" section in Part I, Item 1A of our Annual Report on Form
10-K filed with the SEC on February 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 and Russia-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 September 30, 2022, our RPO was $11.4 billion, of which 52% represented
cRPO. RPO and cRPO increased by 17% and 18%, respectively, compared to September
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.
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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 1,530 and 1,252 customers with ACV greater than $1
million as of September 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 the
ServiceNow customer. For example, while all U.S. government agencies roll up to
"Government of the 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:

                                                   Nine Months Ended September 30,
                                                      2022                    2021                  % Change

                                                        (dollars in millions)
Free cash flow:
Net cash provided by operating activities     $           1,561          $     1,347                         16  %
Purchases of property and equipment                        (406)                (292)                        39  %
Free cash flow(1)                             $           1,155          $     1,055                          9  %


(1)Free cash flow for the nine months ended September 30, 2021 includes the
effect of $15 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 ended March 31 due
to seasonality in timing of entering into customer contracts, which is
significantly higher in the quarter ended December 31. Additionally, we have
historically seen higher disbursements in the quarters ended March 31 and
September 30 due to payouts under our annual commission plans, purchases under
our employee stock purchase plan, payouts under our bonus plans and coupon
payments related to our 2030 Notes 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 renewals. 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 98% for each of
the three and nine months ended September 30, 2022 and 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.

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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 nine months ended September
30, 2022, and 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 by December 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.

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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 14% and 13% for the three and nine months ended
September 30, 2022, respectively, and 15% and 13% for the three and nine months
ended September 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 Income Taxes

Provision for income taxes consists of federal, state and foreign income taxes.
Due to cumulative losses, we maintain a valuation allowance against our U.S.
deferred tax assets as of September 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 our U.S. and foreign deferred tax assets.

Comparison of Three and Nine Months Completed September 30, 2022 and 2021

Revenues

                                         Three Months Ended September                               Nine Months Ended September
                                                      30,                                                       30,
                                             2022              2021             % Change               2022              2021             % Change

                                             (dollars in millions)                                     (dollars in millions)
Revenues:
Subscription                             $   1,742          $ 1,427                    22  %       $   5,031          $ 4,050                    24  %
Professional services and other                 89               85                     5  %             274              232                    18  %
Total revenues                           $   1,831          $ 1,512                    21  %       $   5,305          $ 4,282                    24  %
Percentage of revenues:
Subscription                                      95%              94%                                      95%              95%
Professional services and other                    5%               6%                                       5%               5%
Total                                            100%             100%                                     100%             100%



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Subscription revenues increased by $315 million and $981 million for the three
and nine months ended September 30, 2022, respectively, compared to the three
and nine months ended September 30, 2021, primarily driven by increased
purchases by new and existing customers. Included in subscription revenues is
$53 million and $54 million of revenues recognized upfront from the delivery of
software associated with self-hosted offerings during the three months ended
September 30, 2022 and 2021, respectively, and $179 million and $168 million
during the nine months ended September 30, 2022 and 2021, respectively.

We expect subscription revenues for the year ending December 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 ended December 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 for
September 2022.

Subscription revenues consist of the following:

                                              Three Months Ended September                               Nine Months Ended September
                                                           30,                                                       30,
                                                  2022              2021             % Change               2022              2021             % Change

                                                  (dollars in millions)                                     (dollars in millions)
Digital workflow products                     $   1,534          $ 1,253                    22  %       $   4,437          $ 3,548                    25  %
ITOM products                                       208              174                    20  %             594              502                    18  %
Total subscription revenues                   $   1,742          $ 1,427                    22  %       $   5,031          $ 4,050                    24  %



Our digital workflow products include the Now Platform, IT Service Management,
Strategic Portfolio Management (formerly known as 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 $4 million and $42 million
during the three and nine months ended September 30, 2022 compared to the three
and nine months ended September 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.

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Cost of Revenues and Gross Profit Percentage

                                         Three Months Ended September                               Nine Months Ended September
                                                      30,                                                       30,
                                             2022              2021             % Change               2022              2021             % Change

                                             (dollars in millions)                                     (dollars in millions)
Cost of revenues:
Subscription                             $     301          $   264                    14  %       $     863          $   740                    17  %
Professional services and other                 99               86                    15  %             295              239                    23  %
Total cost of revenues                   $     400          $   350                    14  %       $   1,158          $   979                    18  %
Gross profit (loss) percentage:
Subscription                                      83%              81%                                      83%              82%
Professional services and other                 (11%)             (1%)                                     (8%)             (3%)
Total gross profit percentage                     78%              77%                                      78%              77%
Gross profit                             $   1,431          $ 1,162                                $   4,147          $ 3,303



Cost of subscription revenues increased by $37 million and $123 million for the
three and nine months ended September 30, 2022, respectively compared to the
three and nine months ended September 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 $38 million and $106 million for the three and nine months ended
September 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 $9 million and $39 million
for the three and nine months ended September 30, 2022, respectively, compared
to the same periods in the prior year. Amortization of intangible assets
remained relatively flat for the three months ended September 30, 2022 and
increased by $11 million for the nine months ended September 30, 2022, compared
to the same periods in the prior year. Depreciation expense related to data
center hardware and software decreased by $16 million and $42 million, primarily
due to the change in estimated useful life of data center equipment from three
years to four years, for the three and nine months ended September 30, 2022,
respectively, compared to the same periods in the prior year.

We expect our cost of subscription revenues for the year ending December 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 ended December 31, 2021.
Our subscription gross profit percentage was 83% for each of the three and nine
months ended September 30, 2022, compared to 81% and 82% for the three and nine
months ended September 30, 2021, respectively. We expect our subscription gross
profit percentage to increase slightly for the year ending December 31, 2022
compared to the year ended December 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 $13 million and
$56 million for the three and nine months ended September 30, 2022,
respectively, compared to the three and nine months ended September 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 11% and
8% for the three and nine months ended September 30, 2022, respectively, from a
loss of 1% and 3% for the three and nine months ended September 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 ending December 31, 2022 as we expect additional costs to support
business growth and increases in travel expenses compared to the year ended
December 31, 2021.

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Sales and Marketing

                                       Three Months Ended September                              Nine Months Ended September
                                                   30,                                                       30,
                                           2022             2021             % Change               2022              2021             % Change

                                          (dollars in millions)                                     (dollars in millions)
Sales and marketing                    $     697          $  579                    20  %       $   2,092          $ 1,660                    26  %
Percentage of revenues                          38%             38%                                      39%              39%



Sales and marketing expenses increased by $118 million and $432 million for the
three and nine months ended September 30, 2022, respectively, compared to the
three and nine months ended September 30, 2021, primarily due to increased
headcount, resulting in an increase in personnel-related costs including
stock-based compensation and overhead expenses of $101 million and $304 million
for the three and nine months ended September 30, 2022, respectively, compared
to the same periods in the prior year. Amortization expenses associated with
deferred commissions increased by $19 million and $54 million for the three and
nine months ended September 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 $63 million during the nine months ended
September 30, 2022, 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 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, 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.

Research and Development

                                        Three Months Ended September                              Nine Months Ended September
                                                    30,                                                       30,
                                            2022             2021             % Change               2022              2021             % Change

                                           (dollars in millions)                                     (dollars in millions)
Research and development                $     456          $  358                    27  %       $   1,314          $ 1,005                    31  %
Percentage of revenues                           25%             24%                                      25%              23%



Research and development expenses increased by $98 million and $309 million for
the three and nine months ended September 30, 2022, respectively, compared to
the three and nine months ended September 30, 2021, primarily due to increased
headcount, resulting in an increase in personnel-related costs including
stock-based compensation and overhead expenses of $92 million and $289 million
for the three and nine months ended September 30, 2022, respectively, compared
to the same periods in the prior year.

We expect research and development expenses 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 as we continue to
improve the existing functionality of our services, develop new applications to
fill market needs and enhance our core platform.

General and Administrative

                                           Three Months Ended September                             Nine Months Ended September
                                                       30,                                                      30,
                                               2022             2021             % Change               2022             2021             % Change

                                              (dollars in millions)                                    (dollars in millions)
General and administrative                 $     187          $  151                    24  %       $     541          $  416                    30  %
Percentage of revenues                              10%             10%                                      10%             10%



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General and administrative expenses ("G&A") increased by $36 million and $125
million for the three and nine months ended September 30, 2022, respectively,
compared to the three and nine months ended September 30, 2021, primarily due to
increased headcount, resulting in an increase in personnel-related costs
including stock-based compensation of $35 million and $123 million for the three
and nine months ended September 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 ending
December 31, 2022 but remain relatively flat as a percentage of revenues
compared to the year ended December 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").

Stock-based Compensation

                                           Three Months Ended September                             Nine Months Ended September
                                                       30,                                                      30,
                                               2022             2021             % Change               2022             2021             % Change

                                              (dollars in millions)                                    (dollars in millions)
Cost of revenues:
Subscription                               $      41          $   33                    24  %       $     116          $   95                    22  %
Professional services and other                   17              15                    13  %              51              43                    19  %
Operating expenses:
Sales and marketing                              119             101                    18  %             337             293                    15  %
Research and development                         127             102                    25  %             368             288                    28  %
General and administrative                        57              40                    43  %             166             110                    51  %
Total stock-based compensation             $     361          $  291                    24  %       $   1,038          $  829                    25  %
Percentage of revenues                              20%             19%                                      20%             19%



Stock-based compensation increased by $70 million and $209 million for the three
and nine months ended September 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 of September 30, 2022, we
expect stock-based compensation to continue to increase in absolute dollars for
the year ending December 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 ended December 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 revenue. Outside earnings North America
representing 34% and 35% of total revenue for the three and nine months ended
September 30, 2022respectively, and 37% and 36% of total revenue for the three and nine months ended September 30, 2021respectively.

Because we primarily transact in foreign currencies for sales outside of the
United States, the general strengthening of the U.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 nine months ended September
30, 2022. For entities reporting in currencies other than the U.S. Dollar, if we
had translated our results for the three and nine months ended September 30,
2022 at the exchange rates in effect for the three and nine months ended
September 30, 2021 rather than the actual exchange rates in effect during the
period, our reported subscription revenues would have been $92 million and $193
million higher, respectively. We expect to see an incremental strengthening of
the U.S. dollar resulting in further foreign currency impact to subscription
revenue for the fourth quarter of fiscal 2022. The impact from the foreign
currency movements from the three and nine months ended September 30, 2021 to
the three and nine months ended September 30, 2022 was not material for
professional services and other revenues.

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In addition, because we primarily transact in foreign currencies for cost of
revenues and operating expenses outside of the United States, the general
strengthening of the U.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 nine months ended September 30, 2022. For entities
reporting in currencies other than the U.S. Dollar, if we had translated our
results for the three and nine months ended September 30, 2022 at the exchange
rates in effect for the three and nine months ended September 30, 2021 rather
than the actual exchange rates in effect during the period, our reported cost of
revenues would have been $13 million and $32 million higher, respectively and
sales and marketing expenses would have been $25 million and $54 million higher
for the three and nine months ended September 30, 2022, respectively. The impact
from the foreign currency movements from the three and nine months ended
September 30, 2021 to the three and nine months ended September 30, 2022 was not
material to research and development and G&A expenses.

Interest Expense

                                           Three Months Ended September                                Nine Months Ended September
                                                        30,                                                        30,
                                               2022               2021             % Change               2022              2021             % Change

                                               (dollars in millions)                                      (dollars in millions)
Interest expense                          $      (8)            $   (7)                   14  %       $    (20)           $  (21)                  (5  %)
Percentage of revenues                            -  %                 -%                                    -  %              -  %



Interest expense remained relatively flat for each of the three and nine months
ended September 30, 2022, compared to the same periods in the prior year. We
expect to incur approximately $6 million of interest expense related to the 2030
Notes in the fourth quarter of fiscal 2022.

Other Income (Expense), net

                                        Three Months Ended September                            Nine Months Ended September
                                                    30,                                                     30,
                                           2022               2021            % Change              2022             2021            % Change
                                           (dollars in millions)                                   (dollars in millions)
Interest income                        $       26          $     5               NM             $      43          $   15              187%

Other                                          (7)              (4)              75%                   (7)              1               NM
 Other income (expense), net           $       19          $     1               NM             $      36          $   16              125%
Percentage of revenues                            1%               -%                                     1%              -%


NM - Not meaningful


Other income (expense), net, increased by $18 million and $20 million for the
three and nine months ended September 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.

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Provision for Income Taxes
                                      Three Months Ended September                             Nine Months Ended September
                                                  30,                                                      30,
                                          2022             2021             % Change               2022             2021             % Change

                                         (dollars in millions)                                    (dollars in millions)
Income before income taxes            $     102          $   68                    50  %       $     216          $  217                     -  %
Provision for income taxes            $      22          $    5                   340  %              41              13                   215  %
Effective tax rate                             22%              7%                                      19%              6%



Our income tax provision is $22 million and $41 million for three and nine months ended September 30, 2022, respectively. The income tax provision is primarily attributable to the mix of profits and losses in countries with different statutory tax rates and the valuation allowance on The united state.

Our income tax provision was $5 million and $13 million for the three and nine
months ended September 30, 2021, respectively. The income tax 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, a valuation allowance release
resulting from an acquisition and excess tax benefits of stock-based
compensation.

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 $5.5 billion as of
September 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 nine months ended September 30, 2022. Operating lease obligations
totaling $746 million are principally associated with leased facilities and have
varying maturities with $414 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. 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"). In May and June 2017, we issued the 2022 Notes with an aggregate
principal amount of $782.5 million. During the nine months ended September 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 on June 1, 2022, the maturity date of our 2022
Notes.

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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.

                                                                     Nine Months Ended September 30,
                                                                       2022                    2021

                                                                          (dollars in millions)
Net cash provided by operating activities                       $          1,561          $      1,347
Net cash used in investing activities                           $         (1,709)         $     (1,248)
Net cash used in financing activities                           $           

(269) $ (351)
Net change in cash, cash equivalents and restricted cash $ (478) $ (273)



Operating Activities

Net cash provided by operating activities was $1,561 million for the nine months
ended September 30, 2022 compared to $1,347 million for the nine months ended
September 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 nine months ended September 30,
2022 was $1,709 million compared to $1,248 million for the nine months ended
September 30, 2021. The increase in cash used in investing activities was
primarily due to a $949 million increase in net purchases of investments, a $110
million increase in non-marketable investments mainly in Celonis SE, and a $114
million increase in purchases of property and equipment, offset by a $721
million decrease in business combinations.

Funding Activities

Net cash used in financing activities was $269 million for the nine months ended
September 30, 2022 compared to $351 million for the nine months ended September
30, 2021. The decrease in cash used in financing activities is primarily due to
a $105 million decrease in taxes paid related to net share settlement of equity
awards, a $12 million increase in proceeds from employee stock plans, offset by
a $35 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
ended December 31, 2021, which was filed with the SEC on February 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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