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 the artificial intelligence (“AI”) platform to help organizations manage their people, money, and agents. We deliver cloud-based, AI-powered applications for financial management, human capital management (“HCM”), planning, spend management, and analytics. Our diverse customer base includes emerging, medium-sized, and large global organizations within numerous industries, including professional and business services, financial services, healthcare, education, government, technology, media, retail, and hospitality. Workday helps customers deliver better employee experiences, increase productivity, 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 11,000 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 relationships with existing customers through increased adoption of our suite of solutions. Central to this effort is investing in strategic growth areas including developing innovative AI solutions, expanding internationally, growing our partner ecosystem, deepening our presence in industry verticals and the emerging and medium enterprise market, 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 focused on expanding our operating margin by driving scale and building efficiencies across the business through investments in people, processes, and systems. As a result of our focus on expanding operating margin, 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.

In February 2025, we announced a restructuring plan (“Fiscal 2026 Restructuring Plan”), which is intended to prioritize our investments and continue advancing our ongoing focus on durable growth. The plan resulted in the reduction of approximately 7.5% of our workforce. In connection with this plan, we have exited certain owned office space.

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Impact of Current Economic Conditions

Recent macroeconomic events including increased tariffs, elevated inflation, and fluctuating interest rates and foreign currency exchange rates, as well as geopolitical instability, continue to impact the global economy and create uncertainty, volatility, and disruption of financial markets. We remain 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 April 30,
																		2025						2024						Change
Total revenues																		$	2,240					$	1,990					13		%
Subscription services revenues																		$	2,059					$	1,815					13		%
GAAP operating income																		$	39					$	64					(38)		%
Non-GAAP operating income (1)																		$	677					$	515					32		%
GAAP operating margin																		1.8		%				3.2		%				(144 bps)
Non-GAAP operating margin (1)																		30.2		%				25.9		%				437 bps
Operating cash flows																		$	457					$	372					23		%
Free cash flows (1)																		$	421					$	291					45		%
																		As of April 30,
																		2025						2024						Change
Total subscription revenue backlog																		$	24,621					$	20,681					19		%
12-month subscription revenue backlog																		$	7,627					$	6,600					16		%
Cash, cash equivalents, and marketable securities																		$	7,970					$	7,182					11		%
Headcount (2)																		20,515						19,415						6		%

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

(2)Does not reflect the impact of the Fiscal 2026 Restructuring Plan which reduced our workforce by approximately 7.5%.

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.

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Subscription services revenues accounted for approximately 92% of our total revenues for the three months ended April 30, 2025, and represented 96% of our total unearned revenue as of April 30, 2025. 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, providing standard customer support, and delivering our enhanced customer support service, Workday Success Plans. These costs include employee-related expenses, expenses related to data center capacity and third-party hosted infrastructure, 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.

Restructuring expenses. Restructuring expenses are associated with a formal restructuring program and consist of charges related to workforce reductions, including employee transition, severance payments, employee benefits, and share-based compensation, as well as charges associated with the closure of facilities and other exit and disposal activities.

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Results of Operations

Revenues

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

			Three Months Ended April 30,
			2025						2024						% Change
Subscription services			$	2,059					$	1,815					13		%
Professional services			181						175						4		%
Total revenues			$	2,240					$	1,990					13		%

Total revenues were $2.2 billion for the three months ended April 30, 2025, compared to $2.0 billion for the prior year period, an increase of $250 million, or 13%. Subscription services revenues were $2.1 billion for the three months ended April 30, 2025, compared to $1.8 billion for the prior year period, an increase of $244 million, or 13%. 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 $181 million for the three months ended April 30, 2025, compared to $175 million for the prior year period, an increase of $6 million, or 4%. The increase in professional services revenues was driven by higher demand for our deployment and integration services.

Gross Revenue Retention Rate

Our growth in subscription services revenues attributable to existing customers is further reflected by our gross revenue retention rate of approximately 98% as of April 30, 2025. 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 April 30, 2025, our total subscription revenue backlog was $24.6 billion, with $7.6 billion expected to be recognized in revenues over the next 12 months. As of April 30, 2024, our total subscription revenue backlog was $20.7 billion, with $6.6 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 April 30,
			2025						2024
Costs of subscription services			$	350					$	290
Costs of professional services			187						199
Product development			663						656
Sales and marketing			623						573
General and administrative			212						200
Restructuring			166						8
Total costs and expenses			$	2,201					$	1,926

Total costs and expenses were $2.2 billion for the three months ended April 30, 2025, compared to $1.9 billion for the prior year period, an increase of $274 million, or 14%. Included in the increase in operating expenses was $158 million in restructuring expenses primarily related to the Fiscal 2026 Restructuring Plan. Employee-related expenses, including share-based compensation, increased $36 million due to higher average headcount, partially offset by restructuring-related cost savings. Additional increases included $27 million in data center capacity and third-party hosted infrastructure expenses, $25 million in facilities and IT-related expenses, $11 million in professional services expenses, $9 million in amortization of deferred sales commissions, and $9 million in depreciation.

Costs of Subscription Services

Costs of subscription services were $350 million for the three months ended April 30, 2025, compared to $290 million for the prior year period, an increase of $60 million, or 21%. Employee-related expenses, including share-based compensation, increased $19 million due to higher average headcount and the growth of our Workday Success Plan service offering, partially offset by restructuring-related cost savings. Additional increases included $23 million in data center capacity and third-party hosted infrastructure expenses, $10 million in depreciation, and $10 million in facility and IT-related expenses.

We expect costs of subscription services will continue to increase in absolute dollars as we improve and expand our technical operations infrastructure, including third-party hosted infrastructure, and as we grow the Workday Success Plan offering.

Costs of Professional Services

Costs of professional services were $187 million for the three months ended April 30, 2025, compared to $199 million for the prior year period, a decrease of $12 million, or 6%. The decrease in costs of professional services was primarily a result of restructuring-related cost savings that reduced employee-related costs.

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 $663 million for the three months ended April 30, 2025, compared to $656 million for the prior year period, an increase of $7 million, or 1%. Product development expenses remained relatively flat, as increases within employee-related expenses, including share-based compensation, were offset by restructuring-related cost savings.

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 $623 million for the three months ended April 30, 2025, compared to $573 million for the prior year period, an increase of $50 million, or 9%. Employee-related expenses, including share-based compensation, increased $26 million due to higher average headcount, partially offset by restructuring-related cost savings. Additional increases included $9 million in amortization of deferred sales commissions, $7 million in professional services expenses, and $6 million in facilities and IT-related expenses.

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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 $212 million for the three months ended April 30, 2025, compared to $200 million for the prior year period, an increase of $11 million, or 6%. The increase in general and administrative expenses included an increase of $6 million in professional services expenses. Other general and administrative expenses remained relatively flat, as increases within employee-related expenses were offset by restructuring-related cost savings.

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

Restructuring

Restructuring expenses of $166 million for the three months ended April 30, 2025, were related to the Fiscal 2026 Restructuring Plan, and included $132 million for employee transition, severance payments, employee benefits, and share-based compensation, and $34 million for an impairment of office space.

Restructuring expenses of $8 million for the three months ended April 30, 2024, were related to exit charges associated with office space reductions under a separate restructuring plan.

Share-based Compensation

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

			Three Months Ended April 30,
			2025						2024
Costs of subscription services			$	42					$	38
Costs of professional services			30						31
Product development			183						173
Sales and marketing			92						72
General and administrative			70						71
Restructuring			42						0
Total share-based compensation expense			$	459					$	385
Percentage of total revenues			20.5		%				19.3		%

Share-based compensation expense increased by $74 million for the three months ended April 30, 2025, compared to the prior year period, primarily due to the Fiscal 2026 Restructuring Plan and additional grants to new and existing employees.

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 decline as a percentage of total revenues.

Operating Income and Operating Margin

GAAP operating income was $39 million, or 1.8% of revenues, for the three months ended April 30, 2025, compared to the prior year GAAP operating income of $64 million, or 3.2% of revenues. The decline resulted from the Fiscal 2026 Restructuring Plan expenses recognized in the current quarter, offset by improvements due to our revenue growth outpacing headcount growth and moderation of operating expenses, including share-based compensation.

Non-GAAP operating income was $677 million, or 30.2% of revenues, for the three months ended April 30, 2025, compared to the prior year non-GAAP operating income of $515 million, or 25.9% of revenues. The increase was primarily due to our revenue growth outpacing headcount growth and moderation of operating expenses.

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

			Three Months Ended April 30,
			2025						2024
Operating income			$	39					$	64
Share-based compensation expense (1)			417						385
Employer payroll tax-related items on employee stock transactions (1)			27						38
Amortization of acquisition-related intangible assets			21						17
Acquisition-related costs			7						3
Restructuring costs			166						8
Non-GAAP operating income			$	677					$	515
Operating margin			1.8		%				3.2		%
Share-based compensation expense (1)			18.6		%				19.3		%
Employer payroll tax-related items on employee stock transactions (1)			1.2		%				1.9		%
Amortization of acquisition-related intangible assets			0.9		%				0.9		%
Acquisition-related costs			0.3		%				0.2		%
Restructuring costs			7.4		%				0.4		%
Non-GAAP operating margin			30.2		%				25.9		%

(1)For the three months ended April 30, 2025, the Share-based compensation expense and Employer payroll tax-related items on employee stock transactions lines in the GAAP to non-GAAP reconciliation tables above exclude $42 million and $2 million, respectively, related to restructuring initiatives. These expenses are included in the Restructuring costs lines.

Other Income, Net

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

			Three Months Ended April 30,
			2025						2024
Total other income, net			$	64					$	59

Other income, net increased by $5 million for the three months ended April 30, 2025, primarily due to lower losses recognized in the current quarter on our equity investments as compared to the prior year period.

Provision For Income Taxes

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

			Three Months Ended April 30,
			2025						2024
Provision for income taxes			$	35					$	16

The income tax provision for the three months ended April 30, 2025, was primarily attributable to earnings in the U.S. and profitable foreign jurisdictions.

The income tax provision for the three months ended April 30, 2024, was primarily attributable to earnings in U.S. and profitable foreign jurisdictions, offset by the excess tax benefit from share-based compensation.

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. Pillar Two rules are at varying stages of adoption across the jurisdictions where we operate. The specific rules and timeline to implement these rules vary by jurisdiction. The adoption of Pillar Two rules may affect our effective tax rate and current tax obligations and liabilities. While we do not currently anticipate Pillar Two rules to have a material impact on our consolidated financial results, we are monitoring developments from the OECD, governmental bodies, such as the EU, and intergovernmental economic organizations, to evaluate the impact of changing global tax laws.

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For further information, see Note 16, 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 April 30, 2025, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $8.0 billion, which were primarily held for working capital and general corporate purposes. Our cash equivalents and marketable securities are primarily composed of, in order from largest to smallest, corporate bonds, U.S. treasury securities, U.S. agency obligations, money market funds, asset-backed securities, 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 April 30,
			2025						2024
Net cash provided by (used in):
Operating activities			$	457					$	372
Investing activities			(523)						(258)
Financing activities			(501)						(367)
Effect of exchange rate changes			1						0
Net decrease in cash, cash equivalents, and restricted cash			$	(566)					$	(253)

Operating Activities

Cash provided by operating activities was $457 million and $372 million for the three months ended April 30, 2025, and 2024, respectively. The improvement in cash provided by operating activities was primarily the result of higher cash collections of $205 million due to increased sales, offset by increased supplier payments of $79 million to support our continued growth and increased employee-related payments of $32 million primarily due to higher average headcount.

Investing Activities

Cash used in investing activities for the three months ended April 30, 2025, was $523 million, which primarily resulted from net cash outflow of $483 million related to marketable debt securities activity and capital expenditures of $36 million mainly for office space projects.

Cash used in investing activities for the three months ended April 30, 2024, was $258 million, which was primarily related to cash consideration of $512 million for the acquisition of HiredScore, net of cash acquired, and capital expenditures of $81 million for data center and office space projects, offset by net proceeds of $335 million related to marketable debt securities activity.

We expect capital expenditures will be approximately $250 million in fiscal 2026. This primarily includes investments in our office facilities to support our continued growth.

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Financing Activities

Cash used in financing activities was $501 million for the three months ended April 30, 2025, which primarily resulted from repurchases of common stock of $290 million under our share repurchase programs and taxes paid of $211 million related to net share settlement of equity awards.

Cash used in financing activities was $367 million for the three months ended April 30, 2024, which primarily resulted from taxes paid of $239 million related to net share settlement of equity awards and repurchases of common stock of $128 million under our share repurchase programs.

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 operating activities minus capital expenditures. See “Non-GAAP Financial Measures” below for further information.

Free cash flows were $421 million for the three months ended April 30, 2025, compared to $291 million for the prior year period. The improvement in free cash flows was primarily the result of higher cash collections of $205 million due to increased sales and decreased capital expenditures of $44 million, offset by increased supplier payments of $79 million to support our continued growth and increased employee-related payments of $32 million primarily due to higher average headcount.

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

			Three Months Ended April 30,
			2025						2024
Net cash provided by operating activities			$	457					$	372
Less: Capital expenditures			(36)						(81)
Free cash flows			$	421					$	291

Share Repurchase Programs

In August 2024, our Board of Directors authorized the repurchase of up to $1.0 billion of our outstanding shares of Class A common stock (“August 2024 Share Repurchase Program”), and in May 2025, our Board of Directors authorized the repurchase of up to an additional $1.0 billion of our outstanding shares of Class A common stock (“May 2025 Share Repurchase Program”)

Prior to the May 2025 and August 2024 Share Repurchase Programs, 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 13, Stockholders’ Equity, and Note 20, Subsequent Event, 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. Except as discussed in Note 11, Leases, 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, 2025.

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.

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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.

• Share-based compensation expense. Share-based compensation primarily consists of non-cash expenses for employee restricted stock units (“RSUs”) and our employee stock purchase plan (“ESPP”). 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 expense is 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 expense has on our operating results. Similar to share-based compensation expense, 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.

*•*Restructuring costs. Restructuring costs are associated with a formal restructuring plan and are primarily related to workforce reductions, the closure of facilities, and other exit and disposal activities. 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 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.

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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 and Operating Margin” for reconciliations from the most directly comparable GAAP financial measures of GAAP operating income and GAAP operating margin, to the non-GAAP financial measures of non-GAAP operating income and non-GAAP operating margin, for the three months ended April 30, 2025, and 2024.

See “Liquidity and Capital Resources—Free Cash Flows” for a reconciliation from the most comparable GAAP financial measure, net cash provided by operating activities, to the non-GAAP financial measure, free cash flows, for the three months ended April 30, 2025, and 2024.

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

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, 2025. During the three months ended April 30, 2025, there were no significant changes to our critical accounting policies and estimates.

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