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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this report.

Overview

Workday is a leading platform that helps organizations manage their most important assets - their people and money. We deliver cloud-based applications for financial management, human capital management, planning, spend management, and analytics. Our diverse customer base includes medium-sized and large, global organizations within numerous industry categories, including professional and business services, financial services, healthcare, education, government, technology, media, retail, and hospitality. With Workday, our customers have a unified platform with AI built into its core that can help them deliver better employee experiences, improve operational efficiencies, and provide insights for faster, data-driven decision-making.

We have achieved significant growth since our inception in 2005, when we pioneered HCM in the cloud. As a result of our innovation and commitment to customer success, today we are a Fortune 500 company with more than 10,500 customers around the world. As we continue to grow, we are focused on driving sustainable, long-term subscription revenue growth by adding new customers and expanding our footprint with existing customers through product add-ons, increased headcount level commitments, and price adjustments. Central to this effort is investing in strategic growth areas including leveraging the power of our platform to drive increased adoption of our full suite of financial management and HCM applications, expanding internationally, innovating with AI, growing our partner ecosystem, deepening our industry verticals, and exploring strategic acquisitions to complement our organic innovation. Our investments across these targeted growth areas may require additional costs, but we remain committed to optimizing resource allocation and realizing a return on our investments. Over time, we believe these investments will support revenue growth and a more scalable business.

We are continuing to focus on expanding our operating margin by driving scale and building efficiencies across the business through investments in people, processes, and systems. We expect our product development, sales and marketing, and general and administrative expenses as a percentage of total revenues will decrease over the longer term as we grow our revenues and invest in a disciplined manner to support our long-term growth objectives.

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Impact of Current Economic Conditions

Recent macroeconomic events including elevated inflation and fluctuating interest rates, as well as geopolitical factors including the Russia-Ukraine and Israel-Hamas conflicts, continue to impact the global economy and create uncertainty, volatility, and disruption of financial markets. Despite this, we are confident in the long-term overall health of our business, the strength of our product offerings, and our ability to continue to execute on our strategy and help our customers on their human capital and finance digital transformation journeys. Demand for our products remains strong, we continue to achieve solid new subscription bookings, and our near-term revenues are relatively predictable as a result of our subscription-based business model.

We have experienced, and may continue to experience, a moderation of revenue growth rates due to deal scrutiny and the lengthening of certain sales cycles, particularly within net new opportunities, and reduced growth in headcount level commitments upon renewals of existing customers. Further, we have provided, and may continue to provide, certain customers with more flexible payment terms. If the economic uncertainty continues, we may also experience additional negative impacts on customer renewals, customer collections, sales and marketing efforts, customer deployments, product development, or other financial metrics. Any of these factors could harm our business, financial condition, and operating results. For further discussion of the potential impacts of recent macroeconomic events on our business, financial condition, and operating results, see “Risk Factors” included in Part II, Item 1A of this report.

Financial Results Overview

The following table provides an overview of our key metrics (in millions, except percentages, basis points, and headcount data):

Three Months Ended October 31,Nine Months Ended October 31,
20242023Change20242023Change
Total revenues$2,160$1,86616%$6,235$5,33717%
Subscription services revenues$1,959$1,69116%$5,678$4,84317%
GAAP operating income (loss)$165$8888%$340$104226%
Non-GAAP operating income (1)$569$46223%$1,602$1,28025%
GAAP operating margin7.6%4.7%294 bps5.5%2.0%350 bps
Non-GAAP operating margin (1)26.3%24.8%154 bps25.7%24.0%171 bps
Operating cash flows$406$451(10)%$1,349$1,15317%
Free cash flows (1)$359$391(8)%$1,166$97020%
As of October 31,
20242023Change
Total subscription revenue backlog$22,191$18,44620%
12-month subscription revenue backlog$6,975$6,04715%
Cash, cash equivalents, and marketable securities$7,157$6,8804%
Headcount20,49318,36912%

(1)See “Non-GAAP Financial Measures” below for further information.

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Components of Results of Operations

Revenues

We derive our revenues from subscription services and professional services. Subscription services revenues primarily consist of fees that give our customers access to our cloud applications, which include related customer support. Professional services revenues include fees for deployment services, optimization services, and training.

Subscription services revenues accounted for approximately 91% of our total revenues for the three and nine months ended October 31, 2024, and represented 96% of our total unearned revenue as of October 31, 2024. Subscription services revenues are driven primarily by the number of customers, the number of workers at each customer, the specific applications subscribed to by each customer, and the price of our applications.

The mix of applications to which each customer subscribes can affect our financial performance due to price differentials in our applications. Pricing for our applications varies based on many factors, including the complexity and maturity of the application and its acceptance in the marketplace. New products or services offerings by competitors in the future could also impact the mix and pricing of our offerings.

Subscription services revenues are recognized over time as services are delivered, beginning on the date our service is made available to the customer. Our subscription contracts typically have a term of three years or longer and are generally noncancelable. We generally invoice our customers annually in advance for subscription services. We may provide certain customers flexible payment terms and the timing of revenue recognition may differ from the timing of invoicing to our customers.

Our professional services consulting engagements are billed on a time and materials or fixed price basis. We generally invoice our customers in arrears for our professional services. For contracts billed on a time and materials basis, revenues are recognized over time as the professional services are performed. For contracts billed on a fixed price basis, revenues are recognized over time based on the proportion of the professional services performed. In some cases, we supplement our consulting teams by subcontracting resources from our service partners and deploying them on customer engagements. As the Workday-related consulting practices of our partner firms continue to develop, we expect these partners to increasingly contract directly with our subscription customers for services engagements.

Subscription Revenue Backlog

Our subscription revenue backlog, which is also referred to as remaining performance obligations for subscription contracts, represents contracted subscription services revenues that have not yet been recognized and includes billed and unbilled amounts. Subscription revenue backlog may fluctuate from period to period due to a number of factors, including the timing of renewals and overall renewal rates, new business growth, average contract duration, business combinations, and seasonality.

Costs and Expenses

Costs of subscription services revenues. Costs of subscription services revenues consist primarily of expenses associated with hosting our applications and providing customer support, including employee-related expenses, expenses related to data center capacity and computing infrastructure operated by third parties, and depreciation of our data center equipment.

Costs of professional services revenues. Costs of professional services revenues consist primarily of employee-related expenses associated with these services, subcontractor expenses, and travel expenses.

Product development expenses. Product development expenses consist primarily of employee-related expenses associated with our efforts to add new features and applications, increase functionality, and enhance the ease of use of our cloud applications, as well as expenses related to data center capacity.

Sales and marketing expenses. Sales and marketing expenses consist primarily of employee-related expenses, sales commissions, marketing programs, and travel expenses. Marketing programs consist of advertising, events, corporate communications, brand awareness, brand ambassador campaigns, and product marketing activities. Sales commissions are considered incremental costs of obtaining a contract with a customer. Sales commissions for new revenue contracts are capitalized and amortized on a straight-line basis over a period of benefit that we have determined to be five years.

General and administrative expenses. General and administrative expenses consist of employee-related expenses for finance and accounting, legal, human resources, information systems personnel, professional fees, and other corporate expenses.

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Results of Operations

Revenues

Our total revenues were as follows (in millions, except percentages):

Three Months Ended October 31,Nine Months Ended October 31,
20242023% Change20242023% Change
Subscription services$1,959$1,69116%$5,678$4,84317%
Professional services20117515%55749413%
Total revenues$2,160$1,86616%$6,235$5,33717%

Total revenues were $2.2 billion for the three months ended October 31, 2024, compared to $1.9 billion for the prior year period, an increase of $294 million, or 16%. Subscription services revenues were $2.0 billion for the three months ended October 31, 2024, compared to $1.7 billion for the prior year period, an increase of $268 million, or 16%. Approximately 60% of the increase in subscription services revenues was attributable to expansion within our customers that existed as of the beginning of the comparable prior year period, and the remaining 40% was attributable to customers added after the beginning of the comparable prior year period. Professional services revenues were $201 million for the three months ended October 31, 2024, compared to $175 million for the prior year period, an increase of $27 million, or 15%. The increase in professional services revenues was driven by increased progress on fixed fee projects of $15 million and higher demand for deployment and integration services of $12 million.

Total revenues were $6.2 billion for the nine months ended October 31, 2024, compared to $5.3 billion for the prior year period, an increase of $898 million, or 17%. Subscription services revenues were $5.7 billion for the nine months ended October 31, 2024, compared to $4.8 billion for the prior year period, an increase of $835 million, or 17%. Approximately 60% of the increase in subscription services revenues was attributable to expansion of our customers that existed as of the beginning of the prior fiscal year, and the remaining 40% was attributable to customers added after the beginning of the prior fiscal year. Professional services revenues were $557 million for the nine months ended October 31, 2024, compared to $494 million for the prior year period, an increase of $63 million, or 13%. The increase in professional services revenues was driven by higher demand for deployment and integration services of $47 million and increased progress on fixed fee projects of $16 million.

Gross Revenue Retention Rate

Our growth in subscription services revenues attributable to existing customers is further reflected by our gross revenue retention rate of 98% as of October 31, 2024. Our gross revenue retention rate measures the percentage of recurring revenue retained from existing customers and is calculated by taking total annual recurring revenue (“ARR”) of our customers as of the corresponding prior period-end and comparing that to ARR from that same set of customers as of the current period-end. The metric takes into account recurring revenues lost to product or customer churn but does not account for additional revenue earned from add-ons or net expansions, which include volume and price adjustments. Our high gross revenue retention rate demonstrates our ability to maintain our existing customer base and drive strong overall customer satisfaction.

Our gross revenue retention rate is based on ARR, which represents the annualized value of active subscription contracts as of the end of each period. Each subscription contract is annualized by dividing the total contract value by the number of days in the contract term and then multiplying by 365. We exclude certain subscription contracts from the calculation, including contracts with terms less than one year that are distinct from our core product offering, such as contracts for tenants which are used for implementation and testing. To the extent that we are negotiating a renewal with a customer after the expiration of the subscription, ARR is only adjusted if the customer churns. We calculate ARR on a constant currency basis using exchange rates set at the beginning of each fiscal year. ARR is a non-GAAP financial measure and should be viewed independently of, and not as a substitute for or combined with, revenue and unearned revenue.

Subscription Revenue Backlog

As of October 31, 2024, our total subscription revenue backlog was $22.2 billion, with $7.0 billion expected to be recognized in revenues over the next 12 months. As of October 31, 2023, our total subscription revenue backlog was $18.4 billion, with $6.0 billion expected to be recognized in revenues over the next 12 months. The increase in subscription revenue backlog was primarily driven by expansion within our existing customer base, sales to new customers, and timing of renewals for existing customers.

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Costs and Expenses

Our costs and expenses were as follows (in millions):

Three Months Ended October 31,Nine Months Ended October 31,
2024202320242023
Costs of subscription services$329$264$924$759
Costs of professional services201181606552
Product development6476191,9521,829
Sales and marketing6205381,8041,581
General and administrative198176609512
Total costs and expenses$1,995$1,778$5,895$5,233

Total costs and expenses were $2.0 billion for the three months ended October 31, 2024, compared to $1.8 billion for the prior year period, an increase of $217 million, or 12%. The increase in operating expenses included increases of $132 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, $20 million in facilities and IT-related expenses, $20 million in data center capacity expenses, $16 million in professional services and subcontractor expenses, $9 million in amortization of deferred sales commissions due to increased sales, and $8 million in depreciation.

Total costs and expenses were $5.9 billion for the nine months ended October 31, 2024, compared to $5.2 billion for the prior year period, an increase of $662 million, or 13%. The increase in operating expenses included increases of $404 million in employee-related expenses, including share-based compensation, primarily due to higher average headcount, $63 million in professional services and subcontractor expenses, $48 million in facilities and IT-related expenses, $37 million in data center capacity expenses, $29 million in amortization of deferred sales commissions due to increased sales, and $25 million in depreciation.

Costs of Subscription Services

Costs of subscription services were $329 million for the three months ended October 31, 2024, compared to $264 million for the prior year period, an increase of $66 million, or 25%. The increase in costs of subscription services included increases of $33 million in employee-related expenses primarily due to higher average headcount, $17 million in data center capacity expenses, and $8 million in depreciation.

Costs of subscription services were $924 million for the nine months ended October 31, 2024, compared to $759 million for the prior year period, an increase of $165 million, or 22%. The increase in costs of subscription services included increases of $100 million in employee-related expenses primarily due to higher average headcount, $29 million in data center capacity expenses, and $20 million in depreciation.

We expect costs of subscription services will continue to increase in absolute dollars as we improve and expand our technical operations infrastructure, including our data centers and computing infrastructure operated by third parties.

Costs of Professional Services

Costs of professional services were $201 million for the three months ended October 31, 2024, compared to $181 million for the prior year period, an increase of $19 million, or 11%. The increase in costs of professional services included an increase of $16 million in subcontractor expenses.

Costs of professional services were $606 million for the nine months ended October 31, 2024, compared to $552 million for the prior year period, an increase of $54 million, or 10%. The increase in costs of professional services included increases of $40 million in subcontractor expenses and $9 million in employee-related expenses.

We expect costs of professional services as a percentage of total revenues to continue to decline as we rely on our service partners to deploy our applications and as our subscription services revenues continue to grow as we expand both our customer base and our footprint within our existing customers.

Product Development

Product development expenses were $647 million for the three months ended October 31, 2024, compared to $619 million for the prior year period, an increase of $28 million, or 5%. The increase in product development expenses included an increase of $32 million in employee-related expenses primarily due to higher average headcount.

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Product development expenses were $2.0 billion for the nine months ended October 31, 2024, compared to $1.8 billion for the prior year period, an increase of $123 million, or 7%. The increase in product development expenses included an increase of $110 million in employee-related expenses primarily due to higher average headcount.

We expect product development expenses will continue to increase in absolute dollars as we improve and extend our applications and develop new technologies, including costs incurred for hardware maintenance, data center capacity, facility costs, and IT-related expenses.

Sales and Marketing

Sales and marketing expenses were $620 million for the three months ended October 31, 2024, compared to $538 million for the prior year period, an increase of $82 million, or 15%. The increase in sales and marketing expenses included increases of $57 million in employee-related expenses primarily due to higher average headcount, $10 million related to marketing programs, $9 million in amortization of deferred sales commissions due to increased sales, and $8 million in facilities and IT-related expenses.

Sales and marketing expenses were $1.8 billion for the nine months ended October 31, 2024, compared to $1.6 billion for the prior year period, an increase of $223 million, or 14%. The increase in sales and marketing expenses included increases of $134 million in employee-related expenses primarily due to higher average headcount, $29 million in amortization of deferred sales commissions due to increased sales, $24 million related to marketing programs, and $20 million in facilities and IT-related expenses.

We expect sales and marketing expenses to increase in absolute dollars as we continue to invest in our domestic and international selling and marketing activities to expand awareness of our brand and product offerings to attract new and existing customers.

General and Administrative

General and administrative expenses were $198 million for the three months ended October 31, 2024, compared to $176 million for the prior year period, an increase of $22 million, or 12%. The increase in general and administrative expenses included increases of $9 million in professional services expenses and $8 million in employee-related expenses primarily due to higher average headcount.

General and administrative expenses were $609 million for the nine months ended October 31, 2024, compared to $512 million for the prior year period, an increase of $97 million, or 19%. The increase in general and administrative expenses included increases of $51 million in employee-related expenses primarily due to higher average headcount, $24 million in professional services expenses, and $9 million in realignment costs.

We expect general and administrative expenses will continue to increase in absolute dollars as we continue to grow our business and invest in our infrastructure, people, and systems to support our global operations.

Share-Based Compensation

Costs and expenses include share-based compensation expenses as follows (in millions):

Three Months Ended October 31,Nine Months Ended October 31,
2024202320242023
Costs of subscription services$35$30$108$90
Costs of professional services28298687
Product development162162498494
Sales and marketing7865226212
General and administrative6563204188
Total share-based compensation expenses$368$349$1,122$1,071
Percentage of total revenues17.0%18.7%18.0%20.1%

Share-based compensation expenses increased by $19 million for the three months ended October 31, 2024, compared to the prior year period, primarily due to additional grants to new and existing employees.

Share-based compensation expenses increased by $51 million for the nine months ended October 31, 2024, compared to the prior year period, primarily due to additional grants to new and existing employees.

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Equity compensation is an important element of our compensation philosophy. While we expect share-based compensation expense to grow in absolute dollars as we expand our global workforce, we expect it to continue to decline as a percentage of total revenues.

Operating Income (Loss) and Operating Margin

GAAP operating income was $165 million, or 7.6% of revenues, for the three months ended October 31, 2024, compared to the prior year GAAP operating income of $88 million, or 4.7% of revenues. The increase was primarily due to our revenue growth outpacing headcount growth and moderation of operating expenses, including share-based compensation.

GAAP operating income was $340 million, or 5.5% of revenues, for the nine months ended October 31, 2024, compared to the prior year GAAP operating income of $104 million, or 2.0% of revenues. The increase was primarily due to our revenue growth outpacing headcount growth and moderation of operating expenses, including share-based compensation.

Non-GAAP operating income was $569 million, or 26.3% of revenues, for the three months ended October 31, 2024, compared to the prior year non-GAAP operating income of $462 million, or 24.8% of revenues. The increase was primarily due to our revenue growth outpacing headcount growth and moderation of operating expenses.

Non-GAAP operating income was $1.6 billion, or 25.7% of revenues, for the nine months ended October 31, 2024, compared to the prior year non-GAAP operating income of $1.3 billion, or 24.0% of revenues. The increase was primarily due to our revenue growth outpacing headcount growth and moderation of operating expenses.

Reconciliations of our GAAP to non-GAAP operating income (loss) and operating margin were as follows (in millions, except percentages). See “Non-GAAP Financial Measures” below for further information.

Three Months Ended October 31,Nine Months Ended October 31,
2024202320242023
Operating income (loss)$165$88$340$104
Share-based compensation expenses3683491,1221,071
Employer payroll tax-related items on employee stock transactions995747
Amortization of acquisition-related intangible assets20165858
Acquisition-related costs70160
Realignment costs0090
Non-GAAP operating income (loss)$569$462$1,602$1,280
Operating margin7.6%4.7%5.5%2.0%
Share-based compensation expenses17.0%18.7%18.0%20.1%
Employer payroll tax-related items on employee stock transactions0.4%0.5%0.9%0.8%
Amortization of acquisition-related intangible assets1.0%0.9%0.9%1.1%
Acquisition-related costs0.3%0.0%0.3%0.0%
Realignment costs0.0%0.0%0.1%0.0%
Non-GAAP operating margin26.3%24.8%25.7%24.0%

Other Income (Expense), Net

Other income (expense), net was as follows (in millions):

Three Months Ended October 31,Nine Months Ended October 31,
2024202320242023
Total other income (expense), net$62$41$178$114

Other income, net increased by $20 million for the three months ended October 31, 2024, primarily due to a favorable change of $17 million on our equity investments.

Other income, net increased by $64 million for the nine months ended October 31, 2024, primarily due to increases of $53 million in interest income earned from higher investment balances and increased interest rates and a favorable change of $15 million on our equity investments.

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Provision For (Benefit From) Income Taxes

The provision for (benefit from) income taxes was as follows (in millions):

Three Months Ended October 31,Nine Months Ended October 31,
2024202320242023
Provision for (benefit from) income taxes$34$15$86$25

The income tax provision for the nine months ended October 31, 2024, was primarily attributable to earnings in the U.S. and profitable foreign jurisdictions, offset by the excess tax benefit from stock-based compensation and increase in research and development credits.

The income tax provision for the nine months ended October 31, 2023, was primarily attributable to earnings in profitable foreign jurisdictions and an increase in U.S. taxes due to capitalized research and development expenditures.

The Organization for Economic Cooperation and Development (“OECD”) released Pillar Two model rules defining a 15% global minimum tax for large multinational corporations. The OECD continues to release additional guidance and countries are implementing legislation with widespread adoption of the Pillar Two Framework expected in the near future. We are in the process of evaluating the potential impacts of Pillar Two. While we do not currently expect Pillar Two to have a material impact on our effective tax rate, our analysis is ongoing and incomplete, and it is possible that Pillar Two could have a material adverse effect on our tax liability.

For further information, see Note 17, Income Taxes, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

Liquidity and Capital Resources

As of October 31, 2024, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $7.2 billion, which were primarily held for working capital and general corporate purposes. Our cash equivalents and marketable securities are composed of, in order from largest to smallest, corporate bonds, U.S. treasury securities, money market funds, U.S. agency obligations, and commercial paper. We have financed our operations primarily through customer payments, issuance of debt, and sales of our common stock.

We believe our existing cash, cash equivalents, marketable securities, cash provided by operating activities, unbilled amounts related to the remaining term of contracted noncancelable subscription agreements, which are not reflected on the Condensed Consolidated Balance Sheets, and, if necessary, our borrowing capacity under our 2022 Credit Agreement that provides for $1.0 billion of unsecured financing, are sufficient to meet our working capital, capital expenditure, share repurchase, and debt repayment needs over the next 12 months and beyond.

Our long-term future capital requirements depend on many factors, including the effects of macroeconomic trends, customer growth rates, subscription renewal activity, headcount growth, the timing and extent of development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced services offerings, infrastructure development, and our investment and acquisition activities. As part of our strategy, we may choose to seek additional debt or equity financing.

Our cash flows were as follows (in millions):

Three Months Ended October 31,Nine Months Ended October 31,
2024202320242023
Net cash provided by (used in):
Operating activities$406$451$1,349$1,153
Investing activities(450)(172)(1,054)(1,270)
Financing activities(282)(150)(996)(201)
Effect of exchange rate changes0(1)0(1)
Net increase (decrease) in cash, cash equivalents, and restricted cash$(326)$128$(701)$(319)

Operating Activities

Cash provided by operating activities was $406 million and $451 million for the three months ended October 31, 2024, and 2023, respectively. The decline in cash flow provided by operating activities was primarily the result of increased employee-related payments of $119 million primarily due to higher average headcount and increased supplier payments of $62 million to support our strategic growth objectives, offset by higher cash collections of $158 million due to increased sales.

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Cash provided by operating activities was $1.3 billion and $1.2 billion for the nine months ended October 31, 2024, and 2023, respectively. The improvement in cash flow provided by operating activities was primarily the result of higher cash collections of $555 million due to increased sales and additional interest income received of $102 million from marketable debt securities, offset by increased employee-related payments of $288 million primarily due to higher average headcount and increased supplier payments of $139 million to support our strategic growth objectives.

Investing Activities

Cash used in investing activities for the three months ended October 31, 2024, was $450 million, which primarily resulted from cash consideration of $302 million, net of cash acquired, for the acquisition of Evisort, capital expenditures of $47 million for data center and office space projects, and a net cash outflow of $96 million related to marketable debt securities activity.

Cash used in investing activities for the three months ended October 31, 2023, was $172 million, which primarily resulted from a cash outflow of $148 million from the timing of purchases and maturities of marketable securities and capital expenditures of $60 million for data center and office space projects, offset by proceeds of $46 million from sales of marketable securities.

Cash used in investing activities for the nine months ended October 31, 2024, was $1.1 billion, which primarily resulted from cash consideration, net of cash acquired, of $522 million and $302 million for the acquisitions of HiredScore and Evisort, respectively, capital expenditures of $183 million for data center and office space projects, and a net cash outflow of $39 million related to marketable debt securities activity.

Cash used in investing activities for the nine months ended October 31, 2023, was $1.3 billion, which primarily resulted from a cash outflow of $1.2 billion from the timing of purchases and maturities of marketable securities and capital expenditures of $183 million for data center and office space projects, offset by proceeds of $93 million from sales of marketable securities.

We expect capital expenditures will be approximately $300 million in fiscal 2025. This includes investments in our data centers and office facilities to support our continued growth.

Financing Activities

Cash used in financing activities was $282 million for the three months ended October 31, 2024, which was primarily due to repurchases of common stock of $158 million under our share repurchase programs and taxes paid of $124 million related to net share settlement of equity awards.

Cash used in financing activities was $150 million for the three months ended October 31, 2023, which was primarily due to repurchases of common stock of $145 million under our share repurchase programs.

Cash used in financing activities was $996 million for the nine months ended October 31, 2024, which was primarily due to repurchases of common stock of $597 million under our share repurchase programs and taxes paid of $505 million related to net share settlement of equity awards, offset by proceeds of $106 million from the issuance of common stock from employee equity plans.

Cash used in financing activities was $201 million for the nine months ended October 31, 2023, which was primarily due to due to repurchases of common stock of $283 million under our share repurchase programs, offset by proceeds of $95 million from the issuance of common stock from employee equity plans.

Free Cash Flows

In evaluating our performance internally, we focus on long-term, sustainable growth in free cash flows. We define free cash flows, a non-GAAP financial measure, as net cash provided by (used in) operating activities minus capital expenditures. See “Non-GAAP Financial Measures” below for further information.

Free cash flows were $359 million for the three months ended October 31, 2024, compared to $391 million for the prior year period. The decline was primarily the result of increased employee-related payments of $119 million primarily due to higher average headcount and increased supplier payments of $62 million to support our strategic growth objectives, offset by higher cash collections of $158 million due to increased sales and a decrease in capital expenditures of $13 million for data centers.

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Free cash flows were $1.2 billion for the nine months ended October 31, 2024, compared to $970 million for the prior year period. The improvement was primarily the result of higher cash collections of $555 million due to increased sales and additional interest income received of $102 million from marketable debt securities, offset by increased employee-related payments of $288 million primarily due to higher average headcount and increased supplier payments of $139 million to support our strategic growth objectives.

Reconciliation of our GAAP net cash provided by (used in) operating activities to non-GAAP free cash flows is as follows (in millions):

Three Months Ended October 31,Nine Months Ended October 31,
2024202320242023
Net cash provided by (used in) operating activities$406$451$1,349$1,153
Less: Capital expenditures(47)(60)(183)(183)
Free cash flows$359$391$1,166$970

Share Repurchase Programs

In August 2024, our Board of Directors authorized the August 2024 Share Repurchase Program, under which we may repurchase up to $1.0 billion of our outstanding shares of our Class A common stock. Prior to the August 2024 Share Repurchase Program, our Board of Directors authorized a $500 million share repurchase program in February 2024, which we completed in the third quarter of fiscal 2025, and a $500 million share repurchase program in November 2022, which we completed in the first quarter of fiscal 2025. For further information, see Note 14, Stockholders’ Equity, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

Contractual Obligations

Our contractual obligations primarily consist of borrowings under our Senior Notes, agreements for third-party hosted infrastructure platforms for business operations, leases for office space and co-location facilities for data center capacity, and other purchase obligations entered into in the ordinary course of business. There have been no material changes outside the ordinary course of business to our contractual obligations disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2024.

Non-GAAP Financial Measures

Regulation S-K Item 10(e), “Use of non-GAAP financial measures in Commission filings,” defines and prescribes the conditions for use of non-GAAP financial information. Our measures of non-GAAP operating income, non-GAAP operating margin, and free cash flows meet the definition of non-GAAP financial measures.

Change in Non-GAAP Financial Measures

Effective beginning fiscal 2025, we will exclude certain acquisition-related costs and realignment costs from our non-GAAP results as they may vary from period to period independent of the operating performance of our business. There was no impact to prior period amounts presented in this report as a result of this change since no qualifying costs were incurred in the first three quarters of fiscal 2024.

Non-GAAP Operating Income and Non-GAAP Operating Margin

We use the non-GAAP financial measures of non-GAAP operating income and non-GAAP operating margin to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, and to evaluate our financial performance. We believe that these non-GAAP financial measures reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business.

Our non-GAAP operating income and non-GAAP operating margin exclude the components listed below. For the reasons set forth below, we believe that excluding these components provides useful information to investors and others in understanding and evaluating our operating results and prospects in the same manner as management, in comparing financial results across accounting periods and to those of peer companies, and to better understand the long-term performance of our core business.

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  • Share-based compensation expenses. Share-based compensation primarily consists of non-cash expenses for employee RSUs and our ESPP, and includes share-based compensation associated with acquisitions. Although share-based compensation is an important aspect of the compensation of our employees and executives, this expense is determined using a number of factors, including our stock price, volatility, and forfeiture rates, that are beyond our control and generally unrelated to operational decisions and performance in any particular period. Further, share-based compensation expenses are not reflective of the value ultimately received by the grant recipients.

  • Employer payroll tax-related items on employee stock transactions. We exclude the employer payroll tax-related items on employee stock transactions in order to show the full effect that excluding share-based compensation expenses has on our operating results. Similar to share-based compensation expenses, this tax expense is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of our business.

  • Amortization of acquisition-related intangible assets. For business combinations, we generally allocate a portion of the purchase price to intangible assets. The amount of the allocation is based on estimates and assumptions made by management and is subject to amortization. The amount of purchase price allocated to intangible assets and the term of the related amortization can vary significantly and are unique to each acquisition and thus we do not believe it is reflective of our ongoing operations. Although we exclude the amortization of acquisition-related intangible assets from these non-GAAP financial measures, we believe that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation.

*•*Acquisition-related costs. Acquisition-related costs include direct transaction costs, such as due diligence and advisory fees, and certain compensation and integration-related expenses. We exclude the effects of acquisition-related costs as we believe these transaction-specific expenses are inconsistent in amount and frequency and do not correlate to the operation of our business.

*•*Realignment costs. Realignment costs are associated with a formal restructuring plan and are primarily related to employee severance, the closure of facilities, and cancellation of certain contracts. We exclude these expenses because they are not reflective of ongoing business and operating results.

Free Cash Flows

We define free cash flows as net cash provided by (used in) operating activities minus capital expenditures. We use free cash flows as a measure of financial progress in our business, as it balances operating results, cash management, and capital efficiency. We believe information regarding free cash flows provides investors and others with an enhanced view of cash flow generation from the ongoing operations of our business.

Limitations on the Use of Non-GAAP Financial Measures

A limitation of our non-GAAP financial measures of non-GAAP operating income, non-GAAP operating margin, and free cash flows is that they do not have uniform definitions. Our definitions will likely differ from the definitions used by other companies, including peer companies, and therefore comparability may be limited. Further, these non-GAAP financial measures have certain limitations as they do not reflect all items of expense or cash that affect our operations and are reflected in the corresponding GAAP financial measures. In the case of share-based compensation, if we did not pay out a portion of compensation in the form of share-based compensation, the cash salary expense included in operating expenses would be higher, which would affect our cash position.

We compensate for these limitations by reconciling the non-GAAP financial measures to the most comparable GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, measures prepared in accordance with GAAP. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure, and to view our non-GAAP financial measures in conjunction with the most comparable GAAP financial measures.

See “Results of Operations—Operating Income (Loss) and Operating Margin” for reconciliations from the most directly comparable GAAP financial measures of GAAP operating income (loss) and GAAP operating margin, to the non-GAAP financial measures of non-GAAP operating income and non-GAAP operating margin, for the three and nine months ended October 31, 2024, and 2023.

See “Liquidity and Capital Resources—Free Cash Flows” for a reconciliation from the most comparable GAAP financial measure, net cash provided by (used in) operating activities, to the non-GAAP financial measure, free cash flows, for the three and nine months ended October 31, 2024, and 2023.

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Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates, judgments, and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

We believe that the following critical accounting policies involve a high degree of judgment and complexity, and are the most critical to aid in fully understanding and evaluating our financial condition and operating results:

  • Revenue recognition

  • Deferred commissions

  • Income taxes

  • Business combinations, goodwill, and acquisition-related intangible assets

  • Non-marketable equity investments

For a further discussion of our critical accounting policies, refer to our Annual Report on Form 10-K for the fiscal year ended January 31, 2024. During the three and nine months ended October 31, 2024, there were no significant changes to our critical accounting policies and estimates.

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