What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-10-24 compared with 2024-07-25 · 73 added, 84 removed, 272 unchanged (37% of the section changed)

4 unchanged sentences

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 January 25, 2024 and in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings.

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 January 25, 2024 and in Part II, Item 1A of our Quarterly Report on Form 10-Q filed with the SEC on July 25, 2024 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.

19 unchanged sentences

However, if the conflicts continue or worsen, leading to greater global economic disruptions and uncertainty, our business and results of operations could be materially impacted.

Our customers in these regions represented an immaterial portion of our net assets as of June 30, 2024 and December 31, 2023, and of our total consolidated revenues for each of the three and six months ended June 30, 2024 and 2023.

Our customers in these regions represented an immaterial portion of our net assets as of September 30, 2024 and December 31, 2023, and of our total consolidated revenues for each of the three and nine months ended September 30, 2024 and 2023.

Additionally, other macroeconomic events, including higher interest rates, global inflation and bank failures, have led to economic uncertainty in the global economy.

11 unchanged sentences

Current remaining performance obligations (“cRPO”) represents RPO that will be recognized as revenue in the next 12 months.

As of June 30, 2024, our RPO was $18.6 billion, of which 47% represented cRPO.

RPO and cRPO increased by 31% and 22%, respectively, compared to June 30, 2023.

As of September 30, 2024, our RPO was $19.5 billion, of which 48% represented cRPO.

RPO and cRPO increased by 36% and 26%, respectively, compared to September 30, 2023.

Factors that may cause our RPO to vary from period to period include the following:

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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 1,988 and 1,724 customers with ACV greater than $1 million as of June 30, 2024 and 2023, respectively.

We had 2,020 and 1,772 customers with ACV greater than $1 million as of September 30, 2024 and 2023, 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.

14 unchanged sentences

A calculation of free cash flow is provided below:

Six Months Ended June 30, % Change

Nine Months Ended September 30, % Change

(dollars in millions)

4 unchanged sentences

Free cash flow $ 2,055 $ 1,384 48%

NM - Not meaningful

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.

8 unchanged sentences

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% and 99% for the three months ended June 30, 2024 and 2023, respectively, and 98% for each of the six months ended June 30, 2024 and 2023.

Our renewal rate was 98% for each of the three and nine months ended September 30, 2024 and 2023.

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.

16 unchanged sentences

We also generate revenues from certain professional services and from training of customers and partner personnel, through both our direct team and indirect sales channel.

Revenues from our direct sales organization represented 79% and 78% of our total revenues for the three and six months ended June 30, 2024, respectively, and 79% of our total revenues for each of the three and six months ended June 30, 2023.

Revenues from our direct sales organization represented 78% of our total revenues for each of the three and nine months ended September 30, 2024 and 79% of our total revenues for each of the three and nine months ended September 30, 2023.

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.

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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 21% and 18% for the three and six months ended June 30, 2024, respectively, and 9% and 10% for the three and six months ended June 30, 2023, respectively.

Cost of revenues associated with our professional services engagements contracted with third-party partners as a percentage of professional services and other revenues was 27% and 21% for the three and nine months ended September 30, 2024, respectively, and 10% for each of the three and nine months ended September 30, 2023.

Sales and Marketing

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Provision for (benefit from) income taxes consists of federal, state and foreign income taxes.

Our income tax provision for the three and six months ended June 30, 2024 is primarily attributable to the mix of earnings and losses in countries with differing statutory tax rates, offset by excess tax benefits of stock-based compensation.

Our income tax provision for the three and nine months ended September 30, 2024 is primarily attributable to the mix of earnings and losses in countries with differing statutory tax rates, offset by excess tax benefits of stock-based compensation.

We continue to maintain a valuation allowance against our California deferred tax assets due to the uncertainty regarding realizability of these deferred tax assets as they have not met the “more likely than not” realization criteria, particularly as we expect research and development tax credit generation to exceed our ability to use the credits in future years.

Comparison of the Three and Six Months Ended June 30, 2024 and 2023

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

Comparison of the Three and Nine Months Ended September 30, 2024 and 2023

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

2024 2023 2024 2023

7 unchanged sentences

Total 100% 100% 100% 100%

Subscription revenues increased by $467 million and $966 million for the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023, primarily driven by increased purchases by new and existing customers.

Included in subscription revenues is $68 million and $48 million of revenues recognized upfront from the delivery of software associated with self-hosted offerings during the three months ended June 30, 2024 and 2023, respectively, and $194 million and $143 million during the six months ended June 30, 2024 and 2023, respectively.

Subscription revenues increased by $499 million and $1,465 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023, primarily driven by increased purchases by new and existing customers.

Included in subscription revenues is $81 million and $67 million of revenues recognized upfront from the delivery of software associated with self-hosted offerings during the three months ended September 30, 2024 and 2023, respectively, and $275 million and $210 million during the nine months ended September 30, 2024 and 2023, respectively.

We expect subscription revenues for the year ending December 31, 2024 to increase in absolute dollars and remain relatively flat as a percentage of revenue as we continue to add new customers and existing customers increase their usage of our products compared to the year ended December 31, 2023.

Our expectations for revenues, cost of revenues and operating expenses for the remainder of 2024 are based on the 30-day average of foreign exchange rates for June 30, 2024.

Our expectations for revenues, cost of revenues and operating expenses for the remainder of 2024 are based on the 30-day average of foreign exchange rates for September 30, 2024.

Subscription revenues consist of the following:

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

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

2024 2023 2024 2023

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Our remaining product offerings, primarily comprised of our IT Operations Management (“ITOM”) products, are predominantly priced on a subscription unit basis.

Professional services and other revenues increased by $10 million and $18 million during the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023, primarily 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, 2024 to increase in absolute dollars and to remain relatively flat as a percentage of revenue compared to the year ended December 31, 2023.

Professional services and other revenues increased by $10 million and $28 million during the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023, primarily 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, 2024 to increase in absolute dollars and remain relatively flat as a percentage of revenue compared to the year ended December 31, 2023.

Cost of Revenues and Gross Profit Percentage

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

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

2024 2023 2024 2023

9 unchanged sentences

Gross profit $ 2,213 $ 1,792 $ 6,371 $ 5,129

Cost of subscription revenues increased by $80 million and $167 million for the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023, 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 $56 million and $115 million for the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023.

Expenses associated with software, maintenance, and other costs to support the expansion of our data center capacity increased by $21 million and $43 million for the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023.

Cost of subscription revenues increased by $76 million and $243 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023, 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 $57 million and $172 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023.

Expenses associated with software, maintenance, and other costs to support the expansion of our data center capacity increased by $19 million and $62 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023.

We expect our cost of subscription revenues for the year ending December 31, 2024 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 revenue compared to the year ended December 31, 2023.

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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.

Our subscription gross profit percentage was 82% for each of the three and six months ended June 30, 2024 and 81% and 82% for the three and six months ended June 30, 2023, respectively.

Our subscription gross profit percentage was 82% for each of the three and nine months ended September 30, 2024 and 81% and 82% for the three and nine months ended September 30, 2023, respectively.

We expect our subscription gross profit percentage to remain relatively flat for the year ending December 31, 2024 compared to the year ended December 31, 2023.

Cost of professional services and other revenues increased by $1 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

Cost of professional services and other revenues decreased by $4 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 primarily due to decreased internal headcount resulting in a decrease in fixed personnel-related costs including stock-based compensation, partially offset by an increase in variable spending with strategic third-party partners.

Our professional services and other gross profit percentage improved to 2% for each of the three and six months ended June 30, 2024 compared to a gross loss percentage of 9% and 13% for the three and six months ended June 30, 2023, respectively, primarily due to an increase in revenue and a decrease in fixed personnel-related costs including stock-based compensation, as we execute our strategy to shift a portion of professional services to variable spending with strategic third-party partners.

We expect our professional services and other gross profit percentage to improve for the year ending December 31, 2024 compared to the year ended December 31, 2023.

Cost of professional services and other revenues increased by $12 million and $8 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023, primarily due to an increase in partner ecosystem investments to further accelerate customer value realization, partially offset by a decrease in fixed personnel-related costs including stock-based compensation due to decreased internal headcount.

Our professional services and other gross loss percentage increased to 7% for the three months ended September 30, 2024 compared to 6% for the three months ended September 30, 2023 primarily driven by an increase in partner ecosystem investments to further accelerate customer value realization.

Professional services and other gross loss percentage improved to 1% for the nine months ended September 30, 2024 compared to 11% for the nine months ended September 30, 2023, primarily due to an increase in revenue and a decrease in fixed personnel-related costs including stock-based compensation, as we execute our strategy to shift a portion of professional services to variable spending with strategic third-party partners.

We expect our professional services and other gross loss percentage to improve for the year ending December 31, 2024 compared to the year ended December 31, 2023.

Sales and Marketing

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

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

2024 2023 2024 2023

2 unchanged sentences

Percentage of revenues 34% 35% 35% 38%

Sales and marketing expenses increased by $128 million and $228 million for the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023, primarily due to increased headcount resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of $80 million and $141 million for the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023.

Amortization expenses associated with deferred commissions increased $20 million and $42 million for the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023, primarily due to an increase in contracts with new customers, expansion and renewal contracts.

Other sales and marketing program expenses, which include branding, costs associated with purchasing advertising, marketing events and market data, increased by $19 million and $30 million for the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023, primarily due to increased program costs and travel for our annual Sales Kickoff and Knowledge user conference.

Sales and marketing expenses increased by $145 million and $373 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023, primarily due to increased headcount resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of $89 million and $230 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023.

Amortization expenses associated with deferred commissions increased $26 million and $68 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023, primarily due to an increase in contracts with new customers, expansion and renewal contracts.

Other sales and marketing program expenses, which include branding, costs associated with purchasing advertising, marketing events and market data, increased by $21 million and $51 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023, primarily due to increased program costs and travel for our annual Sales Kickoff and Knowledge user conference.

We expect sales and marketing expenses for the year ending December 31, 2024 to increase in absolute dollars and to decrease as a percentage of revenue compared to the year ended December 31, 2023, as we continue to see leverage from increased sales productivity and marketing efficiencies.

Research and Development

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

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

2024 2023 2024 2023

2 unchanged sentences

Percentage of revenues 22% 24% 23% 24%

Research and development (“R&D”) expenses increased by $122 million and $236 million for the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023, primarily due to increased headcount, resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of $100 million and $198 million for the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023.

Outside services increased $15 million and $21 million for the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023.

The remaining increase was primarily due to expenses associated with software, maintenance and other costs to support the expansion of our data center capacity of $7 million and $16 million for the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023.

Research and development (“R&D”) expenses increased by $77 million and $313 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023, primarily due to increased headcount, resulting in an increase in personnel-related costs including stock-based compensation and overhead expenses of $68 million and $266 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023.

Outside services increased $12 million and $33 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023.

The remaining increase was primarily due to expenses associated with software, maintenance and other costs to support the expansion of our data center capacity of $5 million and $21 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023.

These costs were partially offset by a decrease in program spend of $9 million and $11 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023.

We expect R&D expenses for the year ending December 31, 2024 to increase in absolute dollars but remain relatively flat as a percentage of revenue compared to the year ended December 31, 2023, as we continue to improve the existing functionality of our services, develop new applications to fill market needs and enhance our core platform.

General and Administrative

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

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

2024 2023 2024 2023

2 unchanged sentences

Percentage of revenues 8% 9% 8% 10%

General and administrative (“G&A”) expenses increased by $23 million and $46 million for the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023, primarily due to an increase in non personnel-related costs and outside services of $18 million and $33 million for the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023.

The remaining increase was primarily due to increased headcount, resulting in an increase in personnel-related costs including stock-based compensation of $3 million and $8 million for the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023.

General and administrative (“G&A”) expenses increased by $12 million and $58 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023, primarily due to increased headcount, resulting in an increase in personnel-related costs, excluding stock-based compensation, of $9 million and $27 million.

The remaining increase was primarily due to an increase in other corporate expenses and outside services of $13 million and $50 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023.

These costs were partially offset by a decrease in stock-based compensation of $11 million and $20 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023, primarily due to the requisite service period of certain performance awards being met.

We expect G&A expenses for the year ending December 31, 2024 to increase in absolute dollars but decrease slightly as a percentage of revenue compared to the year ended December 31, 2023, as we continue to see leverage from continued G&A productivity.

Stock-based Compensation

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

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

2024 2023 2024 2023

9 unchanged sentences

Percentage of revenues 15% 18% 16% 18%

Stock-based compensation increased by $47 million and $88 million for the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023, primarily due to additional grants to current and new employees.

Stock-based compensation increased by $13 million and $101 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023, primarily due to additional grants to current and new employees, partially offset by the forfeiture of unvested stock-based awards of the Company’s former President and Chief Operating Officer and the requisite service period of certain performance awards being met.

Stock-based compensation is inherently difficult to forecast due to fluctuations in our stock price.

Based upon our stock price as of June 30, 2024, we expect stock-based compensation to continue to increase in absolute dollars for the year ending December 31, 2024 as we continue to issue stock-based awards to our employees, but decrease slightly as a percentage of revenue compared to the year ended December 31, 2023.

Based upon our stock price as of September 30, 2024, we expect stock-based compensation to continue to increase in absolute dollars for the year ending December 31, 2024 as we continue to issue stock-based awards to our employees, but decrease as a percentage of revenue compared to the year ended December 31, 2023.

We expect stock-based compensation as a percentage of revenue to decline over time as we continue to grow.

1 unchanged sentence

Our international operations have provided and will continue to provide a significant portion of our total revenues.

Revenues outside North America represented 37% of total revenues for each of the three and six months ended June 30, 2024, and 36% for each of the three and six months ended June 30, 2023.

Revenues outside North America represented 36% and 37% of total revenues for the three and nine months ended September 30, 2024, respectively, and 37% and 36% for the three and nine months ended September 30, 2023, respectively.

We primarily transact in certain foreign currencies for sales outside of the United States.

The general strengthening of the U.S.

Dollar relative to certain major foreign currencies had an immaterial unfavorable impact on our revenues for the three and six months ended June 30, 2024.

In addition, because we primarily transact in several foreign currencies for cost of revenues and operating expenses outside of the United States, the general strengthening of the U.S.

Dollar relative to certain major foreign currencies had an immaterial favorable impact on our expenses for the three and six months ended June 30, 2024.

The general weakening of the U.S.

Dollar relative to certain major foreign currencies had an immaterial favorable impact on our revenues for the three and nine months ended September 30, 2024.

In addition, we primarily transact in several foreign currencies for cost of revenues and operating expenses outside of the United States.

The movement of the U.S.

Dollar had an immaterial impact on our expenses for the three and nine months ended September 30, 2024.

Interest Income

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

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

2024 2023 2024 2023

2 unchanged sentences

Percentage of revenues 4 % 4% 4 % 3%

Interest income increased by $30 million and $71 million for the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023, primarily driven by an increase in investment income from our managed portfolio resulting from higher portfolio balances and an increase in interest rates.

Interest income increased by $26 million and $97 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023, primarily driven by an increase in investment income from our managed portfolio resulting from higher portfolio balances and an increase in interest rates.

Other Expense, net

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

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

2024 2023 2024 2023

4 unchanged sentences

Percentage of revenues —% (1%) —% (1)%

Other expense, net decreased by $7 million and $15 million for the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023 primarily due to gains on equity investments.

Other expense, net decreased by $4 million and $19 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023 primarily due to gains on equity investments.

To mitigate our risks associated with fluctuations in foreign currency exchange rates, we enter into foreign currency forward 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.

The gains (losses) recognized for these foreign currency forward contracts in other expense, net were immaterial for the three and six months ended June 30, 2024 and 2023.

The gains (losses) recognized for these foreign currency forward contracts in other expense, net were immaterial for the three and nine months ended September 30, 2024 and 2023.

Provision for (Benefit from) Income Taxes

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

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

2024 2023 2024 2023

2 unchanged sentences

Provision for (benefit from) income taxes

$ 72 $ (870) NM $ 150 $ (832) NM

$ 84 $ 57 47% $ 234 $ (775) NM

Effective tax rate 16% 19% 18% (117%)

NM - Not meaningful

The income tax provision was $72 million and $150 million for the three and six months ended June 30, 2024, respectively.

The income tax provision was $84 million and $234 million for the three and nine months ended September 30, 2024, respectively.

The income tax provision was primarily attributable to the mix of earnings and losses in countries with differing statutory tax rates, offset by excess tax benefits of stock-based compensation.

The income tax benefit was $870 million and $832 million for the three and six months ended June 30, 2023, respectively.

The income tax provision was $57 million for the three months ended September 30, 2023 and our income tax benefit was $775 million for the nine months ended September 30, 2023.

The income tax provision was primarily attributable to the mix of earnings and losses in countries with differing statutory tax rates, tax deductible R&D costs and the valuation allowance release through the effective tax rate.

The income tax benefit was primarily attributable to the release of the valuation allowance of certain U.S.

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federal and state deferred tax assets will be realizable, with the exception of California.

We released $965 million of our valuation allowance during the three months ended June 30, 2023.

As of June 30, 2024, we continue to maintain a valuation allowance against our California deferred tax assets due to the uncertainty regarding realizability of these deferred tax assets as they have not met the “more likely than not” realization criteria, particularly as we expect R&D tax credit generation to exceed our ability to use the credits in future years.

We released $985 million of our valuation allowance during the nine months ended September 30, 2023.

As of September 30, 2024, we continue to maintain a valuation allowance against our California deferred tax assets due to the uncertainty regarding realizability of these deferred tax assets as they have not met the “more likely than not” realization criteria, particularly as we expect R&D tax credit generation to exceed our ability to use the credits in future years.

We will continue to monitor the need for a valuation allowance against our deferred tax assets on a quarterly basis.

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We have generated positive operating cash flows for more than 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 2024.

When assessing sources of liquidity, we also include cash and cash equivalents, short-term investments and long-term investments totaling $8.9 billion as of June 30, 2024.

When assessing sources of liquidity, we also include cash and cash equivalents, short-term investments and long-term investments totaling $9.1 billion as of September 30, 2024.

Our working capital requirements are principally comprised of non-contract workforce salaries, bonuses, commissions and benefits and, to a lesser extent, cancellable and non-cancellable licenses and services arrangements that are integral to our business operations and operating lease obligations.

2 unchanged sentences

In May 2023, our board of directors authorized a program to repurchase up to $1.5 billion of our common stock.

During the six months ended June 30, 2024, the Company repurchased 0.2 million shares of its common stock for $175 million.

There were no share repurchases during the three months ended June 30, 2024.

During the nine months ended September 30, 2024, the Company repurchased 0.5 million shares of its common stock for $400 million.

All repurchases were made in open market transactions.

Repurchases of common stock are recognized as treasury stock and held for future issuance.

As of June 30, 2024, approximately $787 million of the originally authorized amount under the Share Repurchase Program remained available for future repurchases.

As of September 30, 2024, approximately $562 million of the originally authorized amount under the Share Repurchase Program remained available for future repurchases.

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.

6 unchanged sentences

If we require additional capital resources, we may seek to finance our operations from the current funds available or additional equity or debt financing.

Six Months Ended June 30,

Nine Months Ended September 30,

(dollars in millions)

2 unchanged sentences

Net cash used in financing activities $ (872) $ (422)

Net increase in cash, cash equivalents and restricted cash

Net decrease in cash, cash equivalents and restricted cash

$ (11) $ (356)

Operating Activities

Net cash provided by operating activities was $1,961 million for the six months ended June 30, 2024 compared to $1,482 million for the six months ended June 30, 2023.

Net cash provided by operating activities was $2,632 million for the nine months ended September 30, 2024 compared to $1,793 million for the nine months ended September 30, 2023.

The net increase in operating cash flows was primarily due to higher collections driven by revenue growth.

Investing Activities

Net cash used in investing activities was $1,105 million for the six months ended June 30, 2024 compared to $1,198 million for the six months ended June 30, 2023.

The net decrease in cash used in investing activities was primarily due to a $321 million decrease in net purchases of investments, partially offset by a $100 million increase in purchases of property and equipment, a $42 million increase in purchases of non-marketable investments, a $41 million increase in business combinations and a $30 million increase in purchases of other intangible assets.

Net cash used in investing activities was $1,763 million for the nine months ended September 30, 2024 compared to $1,723 million for the nine months ended September 30, 2023.

The net increase in cash used in investing activities was primarily due to a $166 million increase in purchases of property and equipment, a $93 million increase in purchases of non-marketable investments and a $27 million increase in purchases of other intangible assets, partially offset by a $197 million decrease in business combinations and a $9 million decrease in net purchases of investments.

Financing Activities

Net cash used in financing activities was $580 million for the six months ended June 30, 2024 compared to $89 million for the six months ended June 30, 2023.

The increase in cash used in financing activities was due to a $184 million increase in business combination related to the second installment payment in the acquisition of G2K Group GmbH, repurchases of common stock of $175 million and a $146 million increase in taxes paid related to net share settlement of equity awards, partially offset by a $14 million increase in proceeds from employee stock plans.

Net cash used in financing activities was $872 million for the nine months ended September 30, 2024 compared to $422 million for the nine months ended September 30, 2023.

The net increase in cash used in financing activities was due to a $192 million increase in taxes paid related to net share settlement of equity awards, a $184 million increase in business combination related to the second installment payment in the acquisition of G2K Group GmbH and an increase in repurchases of common stock of $118 million, partially offset by a $44 million increase in proceeds from employee stock plans.

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, 2023, which was filed with the SEC on January 25, 2024.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Except for the cash flow hedging program initiated during the three months ended March 31, 2024 discussed below, there have been no other changes to our quantitative and qualitative disclosures set forth in Part II, Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on January 25, 2024.

Foreign Currency Exchange Risk

To mitigate our risks associated with fluctuations in foreign currency exchange rates, we enter into foreign currency forward contracts to hedge a portion of our net outstanding monetary assets, liabilities and forecasted foreign currency denominated revenues.

These foreign currency forward contracts are intended to offset gains or losses related to remeasuring monetary assets and liabilities and to reduce foreign exchange impact on our forecasted revenues.

Derivative contracts related to hedging of forecasted revenues are designated as cash flow hedges for accounting purposes.

For contracts qualifying as cash flow hedges, the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings in the same period the forecasted transaction affects earnings.

For contracts not designated as cash flow hedges for accounting purposes, the derivative’s gain or loss is recognized immediately in earnings within our condensed consolidated statements of comprehensive income.

These foreign currency forward contracts expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement.

We mitigate this credit risk by transacting with major financial institutions with high credit ratings.

While the contract or notional amount is often used to express the volume of foreign currency forward contracts, the amounts potentially subject to credit risk are generally limited to the amounts, if any, by which the counterparties’ obligations under the agreements exceed our obligations to the counterparties.

We are not required to pledge, and are not entitled to receive, cash collateral related to these derivative instruments.

We do not enter into foreign currency forward contracts for trading or speculative purposes.

Refer to Note 8 in the notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis