What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-28 compared with 2020-05-28 · 168 added, 116 removed, 183 unchanged (61% of the section changed)

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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 Quarterly Report on Form 10-Q.

Founded in 2005, Workday delivers financial management, human capital management, planning, and analytics applications designed for the world’s largest companies, educational institutions, and government agencies.

We help organizations better manage their financial and human capital resources with one system that helps enable them to plan, execute, analyze, and extend — all powered by machine learning.

Founded in 2005, Workday delivers financial management, human resources, planning, spend management, and analytics applications designed for the world’s largest companies, educational institutions, and government agencies.

We help organizations better manage their financial and human resources with one system that helps enable them to plan, execute, analyze, and extend — all powered by machine learning.

Our diverse customer base includes medium and large global companies as well as smaller organizations that primarily use our planning product.

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Our current financial focus is on growing our revenues and expanding our customer base.

While we are incurring losses today, we strive to invest in a disciplined manner across all of our functional areas to sustain continued near-term revenue growth and support our long-term initiatives.

While we are incurring net losses today, we strive to invest in a disciplined manner across all of our functional areas to sustain continued near-term revenue growth and support our long-term initiatives.

We offer Workday applications to our customers on an enterprise-wide subscription basis, typically with contract terms of three years or longer and with subscription fees largely based on the size of the customer’s workforce.

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Our operating expenses have increased significantly in absolute dollars in recent periods, primarily due to the significant growth of our employee population.

We had approximately 12,400 and 11,000 employees as of April 30, 2020, and 2019, respectively.

We expect our product development, sales and marketing, and general and administrative expenses as a percentage of total revenues to decrease over time as we grow our revenues, and we anticipate that we will gain economies of scale by increasing our customer base without direct incremental development costs.

Table of Conten t s

We had approximately 12,300 and 11,400 employees as of July 31, 2020, and 2019, respectively.

Excluding the impact of certain COVID-19 factors further described below, we expect our product development, sales and marketing, and general and administrative expenses as a percentage of total revenues to decrease over the longer term as we grow our revenues, and we anticipate that we will gain economies of scale by increasing our customer base without direct incremental development costs.

We intend to continue investing for long-term growth.

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In addition, we plan to continue to expand our ability to sell our applications globally, particularly in Europe and Asia, by investing in product development and customer support to address the business needs of local markets, increasing our sales and marketing organizations, acquiring, building and/or leasing additional office space, and expanding our ecosystem of service partners to support local deployments.

We expect to make further significant investments in our data center capacity as we plan for future growth.

We expect to make further significant investments in our data center capacity and equipment as we plan for future growth.

We are also investing in personnel to service our growing customer base.

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In December 2019, a novel strain of coronavirus disease (“COVID-19”) was reported, and in March 2020, the World Health Organization characterized COVID-19 as a pandemic (“COVID-19 pandemic”).

This pandemic is having widespread, rapidly evolving, and unpredictable impacts on global societies, economies, financial markets, and business practices.

We have temporarily closed the majority of our global offices, required most of our employees to work remotely, implemented travel restrictions, and shifted certain of our customer, industry, analyst, investor, and employee events to virtual-only experiences.

These precautionary measures that have been adopted, particularly if extended for prolonged periods, could have increasingly negative effects on our customer success efforts, sales and marketing efforts, and revenue growth rates or other financial metrics, or create operational or other challenges, any of which could harm our business, operating results, and financial condition.

Going forward, the extent to which the COVID-19 pandemic will impact our business is highly uncertain, but in the near to intermediate term, we may experience an increase in delayed purchasing decisions from prospective customers, reduced customer demand, reduced customer spend, and delayed payments.

Because our near-term revenues are relatively predictable as a result of our subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our operating results and financial condition until future periods.

For example, beginning in March 2020, we began experiencing and continue to experience unfavorable impacts to our new subscription bookings.

Due to the seasonality of the software subscription industry, we sign a significantly higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in the fourth quarter of each year, with the first quarter generating a smaller percentage of our annual new business.

If the economic uncertainty remains for a prolonged period, we may experience a greater impact on our business from the COVID-19 pandemic.

The COVID-19 pandemic is having widespread, rapidly evolving, and unpredictable impacts on global societies, economies, financial markets, and business practices.

In response to COVID-19, we have temporarily closed the majority of our global offices, required most of our employees to work remotely, implemented travel restrictions, and have decided to postpone certain of our customer, industry, implementation partner, analyst, investor, and employee events and convert others to virtual-only experiences.

Despite the economic challenges brought on by the COVID-19 pandemic, we are committed to the long-term overall health of our business, the strength of our product offerings, and our ability to continue to execute on our strategy.

Our software applications support business critical processes of customers.

As many customers have also transitioned their employees to work-from-home arrangements, we believe this transition promotes the long-term shift of human resources and financial applications to the cloud.

During the three months ended July 31, 2020, we experienced a favorable impact to our new subscription bookings as compared to the first quarter of fiscal 2021, as companies are adapting to the COVID-19 uncertain environment and are increasingly realizing the need to move forward with their digital transformation initiatives and the migration to cloud-based solutions.

Our operating margins for the three months ended July 31, 2020, have been favorably impacted by our revenue growth outpacing headcount growth as well as moderation of operating expenses in response to the COVID-19 pandemic, including reduced travel, marketing and event spending.

We do not anticipate the extent of the favorable margin impact experienced for the three months ended July 31, 2020 to continue long-term as we remain committed to investing in our strategic initiatives across all functional areas.

Our near-term revenues are relatively predictable as a result of our subscription-based business model.

However, if the economic uncertainty remains for a prolonged period, we may experience a negative impact on our ability to win new business, renew existing customers, sales and marketing efforts, revenue growth rates, customer deployment, customer solvency, product development, or other financial metrics, any of which could harm our business, operating results, and financial condition.

For further discussion of the potential impacts of the COVID-19 pandemic on our business, operating results, and financial condition, see Risk Factors included in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Table of Conten t s

Components of Results of Operations

We primarily derive our revenues from subscription services and professional services.

Subscription services revenue primarily consists of fees that give our customers access to our cloud applications, which include related customer support.

Subscription services revenue principally consists of fees that give our customers access to our cloud applications, which include related customer support.

Professional services revenue includes fees for deployment services, optimization services, and training.

Subscription services revenue accounted for 87% of our total revenues during the three months ended April 30, 2020, and represented 97% of our total unearned revenue as of April 30, 2020.

Subscription services revenue accounted for 88% and 87% of our total revenues for the three and six months ended July 31, 2020, respectively, and represented 97% of our total unearned revenue as of July 31, 2020.

Subscription services revenue is 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.

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Subscription services revenue is recognized over time as services are delivered and consumed concurrently over the contractual term, 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 non-cancelable.

Our subscription contracts typically have a term of three years or longer and are generally noncancelable.

We generally invoice our customers annually in advance.

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Costs of subscription services revenue.

Costs of subscription services revenue consists primarily of employee-related expenses related to hosting our applications and providing customer support, the costs of data center capacity, and depreciation of computer equipment and software.

Costs of subscription services revenue consists primarily of employee-related expenses related to hosting our applications and providing customer support, data center expenses, and depreciation of computer equipment and software.

Costs of professional services revenue .

Costs of professional services revenue consists primarily of employee-related expenses associated with these services, the costs of subcontractors, and travel expenses.

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

Product development .

Product development expenses consist primarily of employee-related costs.

Product development expenses consist primarily of employee-related expenses.

We continue to focus our product development efforts on adding new features and applications, increasing the functionality, and enhancing the ease of use of our cloud applications.

Sales and marketing.

Sales and marketing expenses consist primarily of employee-related costs, sales commissions, marketing programs, and travel expenses.

Marketing programs consist of advertising, events, corporate communications, brand building, and product marketing activities.

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, and product marketing activities.

Sales commissions are considered incremental costs of obtaining a contract with a customer and are deferred and amortized.

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General and administrative .

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

Table of Conten t s

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.

Results of Operations

Our total revenues for the three months ended April 30, 2020, and 2019, were as follows (in thousands, except percentages):

Three Months Ended April 30,

2020 2019 % Change

Our total revenues for the three and six months ended July 31, 2020, and 2019, were as follows (in thousands, except percentages):

Three Months Ended July 31, Six Months Ended July 31,

2020 2019 % Change 2020 2019 % Change

Subscription services $ 931,698 $ 757,155 23% $ 1,813,654 $ 1,458,179 24%

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Total revenues $ 1,061,967 $ 887,752 20% $ 2,080,352 $ 1,712,807 21%

Total revenues were $1.0 billion for the three months ended April 30, 2020, compared to $825 million during the prior year period, an increase of $193 million, or 23%.

Subscription services revenue was $882 million for the three months ended April 30, 2020, compared to $701 million for the prior year period, an increase of $181 million, or 26%.

Total revenues were $1.1 billion for the three months ended July 31, 2020, compared to $888 million during the prior year period, an increase of $174 million, or 20%.

Subscription services revenue was $932 million for the three months ended July 31, 2020, compared to $757 million for the prior year period, an increase of $175 million, or 23%.

The increase in subscription services revenue was due primarily to an increased number of customer contracts as compared to the prior year period.

Professional services revenue was $136 million for the three months ended April 30, 2020, compared to $124 million for the prior year period, an increase of $12 million, or 10%.

Professional services revenue was $130 million for the three months ended July 31, 2020, compared to $131 million for the prior year period, a slight decrease of less than $1 million due to the timing of deployments as a result of the COVID-19 pandemic.

Total revenues were $2.1 billion for the six months ended July 31, 2020, compared to $1.7 billion during the prior year period, an increase of $0.4 billion, or 21%.

Subscription services revenue was $1.8 billion for the six months ended July 31, 2020, compared to $1.5 billion for the prior year period, an increase of $0.4 billion, or 24%.

The increase in subscription services revenue was due primarily to an increased number of customer contracts as compared to the prior year period.

Professional services revenue was $267 million for the six months ended July 31, 2020, compared to $255 million for the prior year period, an increase of $12 million, or 5%.

The increase in professional services revenue was due primarily to Workday performing deployment and integration services for a greater number of customers than in the prior year period.

Operating Expenses

GAAP operating expenses were $1.2 billion for the three months ended April 30, 2020, compared to $948 million for the prior year period, an increase of $214 million, or 23%.

The increase was primarily due to increases of $123 million in employee-related costs driven by higher headcount and $79 million related to a one-time cash bonus paid to all of our non-executive employees to help accommodate unforeseen costs and needs brought on by the COVID-19 pandemic.

GAAP operating expenses were $1.1 billion for the three months ended July 31, 2020, compared to $1.0 billion for the prior year period, an increase of $0.1 billion, or 7%.

The increase was primarily due to an increase of $80 million in employee-related expense driven by higher headcount, offset by a decrease of $28 million in reduced travel expenses due to the COVID-19 pandemic.

GAAP operating expenses were $2.2 billion for the six months ended July 31, 2020, compared to $2.0 billion for the prior year period, an increase of $0.3 billion, or 14%.

The increase was primarily due to increases of $204 million in employee-related expenses driven by higher headcount, $79 million related to a one-time cash bonus paid to non-executive employees to help accommodate unforeseen costs brought on by the COVID-19 pandemic (“COVID-19 one-time employee bonus”), and $36 million in facilities and IT related expenses, offset by a decrease of $45 million in reduced travel expenses.

We use the non-GAAP financial measure of non-GAAP operating expenses 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.

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Non-GAAP operating expenses are calculated by excluding share-based compensation expenses, and certain other expenses, which consist of employer payroll tax-related items on employee stock transactions and amortization of acquisition-related intangible assets.

Non-GAAP operating expenses were $888 million for the three months ended April 30, 2020, compared to $717 million for the prior year period, an increase of $171 million, or 24%.

The increase was primarily due to increases of $79 million related to a one-time cash bonus paid to all of our non-executive employees to help accommodate unforeseen costs and needs brought on by the COVID-19 pandemic and $76 million in employee-related costs driven by higher headcount.

Non-GAAP operating expenses were $804 million for the three months ended July 31, 2020, compared to $770 million for the prior year period, an increase of $34 million, or 4%.

The increase was primarily due to an increase of $42 million in employee-related expenses driven by higher headcount, offset by a decrease of $28 million in reduced travel expenses.

Non-GAAP operating expenses were $1.7 billion for the six months ended July 31, 2020, compared to $1.5 billion for the prior year period, an increase of $0.2 billion, or 14%.

The increase was primarily due to increases of $118 million in employee-related expenses driven by higher headcount, $79 million related to the COVID-19 one-time employee bonus, and $36 million in facilities and IT related expenses, offset by a decrease of $45 million in reduced travel expenses.

Reconciliations of our GAAP to non-GAAP operating expenses were as follows (in thousands):

Three Months Ended April 30, 2020

Three Months Ended July 31, 2020

GAAP Operating Expenses Share-Based Compensation Expenses (1)

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Total costs and expenses $ 1,078,721 $ (251,236) $ (23,204) $ 804,281

Table of Conten t s

Three Months Ended April 30, 2019

Three Months Ended July 31, 2019

GAAP Operating Expenses Share-Based Compensation Expenses (1)

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Total costs and expenses $ 1,010,249 $ (209,221) $ (30,822) $ 770,206

(1) Share-based compensation expenses were $237 million and $185 million for the three months ended April 30, 2020, and 2019, respectively.

Six Months Ended July 31, 2020

GAAP Operating Expenses Share-Based Compensation Expenses (1)

Other Operating Expenses (2)

Non-GAAP Operating Expenses (3)

Costs of subscription services $ 290,270 $ (28,717) $ (18,487) $ 243,066

Costs of professional services 299,637 (47,118) (4,019) 248,500

Product development 862,165 (250,527) (16,704) 594,934

Sales and marketing 595,054 (96,804) (18,489) 479,761

General and administrative 194,437 (64,742) (3,756) 125,939

Total costs and expenses $ 2,241,563 $ (487,908) $ (61,455) $ 1,692,200

Six Months Ended July 31, 2019

GAAP Operating Expenses Share-Based Compensation Expenses (1)

Other Operating Expenses (2)

Non-GAAP Operating Expenses (3)

Costs of subscription services $ 233,630 $ (22,416) $ (24,399) $ 186,815

Costs of professional services 275,923 (35,141) (4,692) 236,090

Product development 725,953 (196,995) (19,011) 509,947

Sales and marketing 553,136 (81,544) (23,283) 448,309

General and administrative 170,048 (58,360) (5,319) 106,369

Total costs and expenses $ 1,958,690 $ (394,456) $ (76,704) $ 1,487,530

(1) Share-based compensation expenses were $251 million and $209 million for the three months ended July 31, 2020, and 2019, respectively, and $488 million and $394 million for the six months ended July 31, 2020, and 2019, respectively.

The increase in share-based compensation expenses includes the impact of restricted stock units (“RSUs”) granted to existing and new employees.

(2) Other operating expenses include employer payroll tax-related items on employee stock transactions of $22 million and $27 million for the three months ended April 30, 2020, and 2019, respectively.

In addition, other operating expenses include amortization of acquisition-related intangible assets of $16 million and $19 million for the three months ended April 30, 2020, and 2019, respectively.

(2) Other operating expenses include employer payroll tax-related items on employee stock transactions of $7 million and $11 million for the three months ended July 31, 2020, and 2019, respectively, and $30 million and $38 million for the six months ended July 31, 2020, and 2019, respectively.

In addition, other operating expenses include amortization of acquisition-related intangible assets of $16 million and $20 million for the three months ended July 31, 2020, and 2019, respectively and $32 million and $39 million for the six months ended July 31, 2020, and 2019, respectively.

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

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See the table above for a reconciliation of GAAP to non-GAAP operating expenses.

GAAP operating expenses in costs of subscription services were $145 million for the three months ended April 30, 2020, compared to $112 million for the prior year period, an increase of $33 million, or 29%.

The increase was primarily due to increases of $9 million in employee-related costs driven by higher headcount, $6 million in third-party costs for hardware maintenance and data center capacity, $5 million related to the one-time employee cash bonus in light of the COVID-19 pandemic, and $5 million in depreciation expense related to equipment in our data centers.

Non-GAAP operating expenses in costs of subscription services were $122 million for the three months ended April 30, 2020, compared to $89 million for the prior year period, an increase of $33 million, or 36%.

The increase was primarily due to increases of $6 million in employee-related costs driven by higher headcount, $6 million in third-party costs for hardware maintenance and data center capacity, $5 million related to the one-time employee cash bonus in light of the COVID-19 pandemic, and $5 million in depreciation expense related to equipment in our data centers.

GAAP operating expenses in costs of subscription services were $145 million for the three months ended July 31, 2020, compared to $121 million for the prior year period, an increase of $24 million, or 20%.

The increase was primarily due to increases of $7 million in employee-related expenses driven by higher headcount, $5 million in third-party expenses for hardware maintenance and data center capacity, and $4 million in depreciation expense related to equipment in our data centers.

GAAP operating expenses in costs of subscription services were $290 million for the six months ended July 31, 2020, compared to $234 million for the prior year period, an increase of $56 million, or 24%.

The increase was primarily due to increases of $16 million in employee-related expenses driven by higher headcount, $11 million in third-party expenses for hardware maintenance and data center capacity, $6 million in depreciation expense related to equipment in our data centers, and $5 million related to the COVID-19 one-time employee bonus.

Non-GAAP operating expenses in costs of subscription services were $121 million for the three months ended July 31, 2020, compared to $97 million for the prior year period, an increase of $24 million, or 25%.

The increase was primarily due to increases of $7 million in depreciation expense related to equipment in our data centers, $5 million in third-party expenses for hardware maintenance and data center capacity, and $4 million in employee-related expenses driven by higher headcount.

Non-GAAP operating expenses in costs of subscription services were $243 million for the six months ended July 31, 2020, compared to $187 million for the prior year period, an increase of $56 million, or 30%.

The increase was primarily due to increases of $12 million in depreciation expense related to equipment in our data centers, $11 million in third-party expenses for hardware maintenance and data center capacity, $10 million in employee-related expenses driven by higher headcount, and $5 million related to the COVID-19 one-time employee bonus.

We expect that GAAP and non-GAAP operating expenses in costs of subscription services will continue to increase in absolute dollars as we improve and expand our data center capacity and operations.

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See the table above for a reconciliation of GAAP to non-GAAP operating expenses.

GAAP operating expenses in costs of professional services were $160 million for the three months ended April 30, 2020, compared to $131 million for the prior year period, an increase of $29 million, or 23%.

The increase was primarily due to increases of $23 million to staff our deployment and integration engagements and $12 million related to the one-time employee cash bonus in light of the COVID-19 pandemic.

Non-GAAP operating expenses in costs of professional services were $135 million for the three months ended April 30, 2020, compared to $111 million for the prior year period, an increase of $24 million, or 21%.

The increase was primarily due to increases of $17 million to staff our deployment and integration engagements and $12 million related to the one-time employee cash bonus in light of the COVID-19 pandemic.

Going forward, we expect GAAP and non-GAAP costs of professional services as a percentage of total revenues to continue to decline as we continue to rely on our service partners to deploy our applications and as the number of our customers continues to grow.

For fiscal 2021, we anticipate GAAP and non-GAAP professional services margins to be lower than fiscal 2020, as we invest in programs to ensure ongoing customer success.

Table of Conten t s

GAAP operating expenses in costs of professional services were $139 million for the three months ended July 31, 2020, compared to $145 million for the prior year period, a decrease of $6 million, or 4%.

The decrease was primarily due to decreases of $5 million in reduced travel expenses due to the COVID-19 pandemic and $6 million due to converting an implementation partner event to a virtual-only experience, offset by an increase of $8 million in employee related expenses driven by higher headcount.

GAAP operating expenses in costs of professional services were $300 million for the six months ended July 31, 2020, compared to $276 million for the prior year period, an increase of $24 million, or 9%.

The increase was primarily due to increases of $31 million in employee-related expenses driven by higher headcount and $12 million related to the COVID-19 one-time employee bonus, offset by a decrease of $9 million in reduced travel expenses.

Non-GAAP operating expenses in costs of professional services were $114 million for the three months ended July 31, 2020, compared to $125 million for the prior year period, a decrease of $11 million, or 9%.

The decrease includes $5 million related to reduced travel expenses due to the COVID-19 pandemic, and $6 million due to converting an implementation partner event to a virtual-only experience.

Non-GAAP operating expenses in costs of professional services were $249 million for the six months ended July 31, 2020, compared to $236 million for the prior year period, an increase of $13 million, or 5%.

The increase was primarily due to increases of $20 million in employee-related expenses driven by higher headcount and $12 million related to the COVID-19 one-time employee bonus, offset by a decrease of $9 million in reduced travel expenses.

We expect GAAP and non-GAAP costs of professional services as a percentage of total revenues to continue to decline as we continue to rely on our service partners to deploy our applications and as the number of our customers continues to grow.

Product Development

See the table above for a reconciliation of GAAP to non-GAAP operating expenses.

GAAP operating expenses in product development were $443 million for the three months ended April 30, 2020, compared to $348 million for the prior year period, an increase of $95 million, or 27%.

The increase was primarily due to increases of $58 million in employee-related costs driven by higher headcount and $31 million related to the one-time employee cash bonus in light of the COVID-19 pandemic.

Non-GAAP operating expenses in product development were $309 million for the three months ended April 30, 2020, compared to $243 million for the prior year period, an increase of $66 million, or 27%.

The increase was primarily due to increases of $31 million related to the one-time employee cash bonus in light of the COVID-19 pandemic and $29 million in employee-related costs driven by higher headcount.

GAAP operating expenses in product development were $419 million for the three months ended July 31, 2020, compared to $378 million for the prior year period, an increase of $41 million, or 11%.

The increase was primarily due to an increase of $39 million in employee-related expenses driven by higher headcount.

GAAP operating expenses in product development were $862 million for the six months ended July 31, 2020, compared to $726 million for the prior year period, an increase of $136 million, or 19%.

The increase was primarily due to increases of $97 million in employee-related expenses driven by higher headcount and $31 million related to the COVID-19 one-time employee bonus.

Non-GAAP operating expenses in product development were $286 million for the three months ended July 31, 2020, compared to $267 million for the prior year period, an increase of $19 million, or 7%.

The increase was primarily due to an increase of $17 million in employee-related expenses driven by higher headcount.

Non-GAAP operating expenses in product development were $595 million for the six months ended July 31, 2020, compared to $510 million for the prior year period, an increase of $85 million, or 17%.

The increase was primarily due to increases of $46 million in employee-related expenses driven by higher headcount and $31 million related to the COVID-19 one-time employee bonus.

We expect that GAAP and non-GAAP product development expenses will continue to increase in absolute dollars as we improve and extend our applications and develop new technologies.

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See the table above for a reconciliation of GAAP to non-GAAP operating expenses.

GAAP operating expenses in sales and marketing were $319 million for the three months ended April 30, 2020, compared to $273 million for the prior year period, an increase of $46 million, or 17%.

The increase was primarily due to increases of $27 million in employee-related costs driven by higher headcount and higher commissionable sales volume and $25 million related to the one-time employee cash bonus in light of the COVID-19 pandemic, partially offset by a decrease of $10 million resulting from reduced travel.

Non-GAAP operating expenses in sales and marketing were $261 million for the three months ended April 30, 2020, compared to $221 million for the prior year period, an increase of $40 million, or 18%.

The increase was primarily due to increases of $25 million related to the one-time employee cash bonus in light of the COVID-19 pandemic and $20 million in employee-related costs driven by higher headcount and higher commissionable sales volume, partially offset by a decrease of $10 million resulting from reduced travel.

GAAP operating expenses in sales and marketing were $276 million for the three months ended July 31, 2020, compared to $280 million for the prior year period, a decrease of $4 million, or 1%.

The decrease was primarily due to decreases of $16 million in reduced travel expenses due to the COVID-19 pandemic and $6 million in marketing and event spending, offset by an increase of $15 million in employee-related expenses driven by higher headcount.

GAAP operating expenses in sales and marketing were $595 million for the six months ended July 31, 2020, compared to $553 million for the prior year period, an increase of $42 million, or 8%.

The increase was primarily due to increases of $42 million in employee-related expenses driven by higher headcount and $25 million related to the COVID-19 one-time employee bonus, offset by decreases of $25 million in reduced travel expenses and $7 million in marketing and event spending.

Non-GAAP operating expenses in sales and marketing were $219 million for the three months ended July 31, 2020, compared to $227 million for the prior year period, a decrease of $8 million, or 4%.

The decrease was primarily due to decreases of $16 million in reduced travel expenses and $6 million in marketing and event spending, offset by an increase of $9 million in employee-related expenses driven by higher headcount.

Non-GAAP operating expenses in sales and marketing were $480 million for the six months ended July 31, 2020, compared to $448 million for the prior year period, an increase of $32 million, or 7%.

The increase was primarily due to increases of $29 million in employee-related expenses driven by higher headcount and $25 million related to the COVID-19 one-time employee bonus, offset by decreases of $25 million in reduced travel expenses and $7 million in marketing and event spending.

We expect that GAAP and non-GAAP sales and marketing expenses will increase in absolute dollars as we continue to invest in our domestic and international selling and marketing activities to expand brand awareness and attract new customers.

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See the table above for a reconciliation of GAAP to non-GAAP operating expenses.

GAAP operating expenses in general and administrative were $95 million for the three months ended April 30, 2020, compared to $84 million for the prior year period, an increase of $11 million, or 13%.

The increase was primarily due to increases of $7 million in employee-related costs driven by higher headcount and $6 million related to the one-time employee cash bonus in light of the COVID-19 pandemic.

Non-GAAP operating expenses in general and administrative were $61 million for the three months ended April 30, 2020, compared to $53 million for the prior year period, an increase of $8 million, or 16%.

The increase was primarily due to increases of $6 million related to the one-time employee cash bonus in light of the COVID-19 pandemic and $5 million in employee-related costs driven by higher headcount.

GAAP operating expenses in general and administrative were $99 million for the three months ended July 31, 2020, compared to $86 million for the prior year period, an increase of $13 million, or 16%.

The increase was primarily due to an increase of $12 million in employee-related expenses driven by higher headcount.

GAAP operating expenses in general and administrative were $194 million for the six months ended July 31, 2020, compared to $170 million for the prior year period, an increase of $24 million, or 14%.

The increase was primarily due to increases of $19 million in employee-related expenses driven by higher headcount and $6 million related to the COVID-19 one-time employee bonus, offset by a decrease of $4 million in reduced travel expenses due to the COVID-19 pandemic.

Non-GAAP operating expenses in general and administrative were $65 million for the three months ended July 31, 2020, compared to $54 million for the prior year period, an increase of $11 million, or 20%.

The increase was primarily due to an increase of $9 million in employee-related expenses driven by higher headcount.

Non-GAAP operating expenses in general and administrative were $126 million for the six months ended July 31, 2020, compared to $106 million for the prior year period, an increase of $20 million, or 18%.

The increase was primarily due to increases of $14 million in employee-related expenses driven by higher headcount and $6 million related to the COVID-19 one-time employee bonus, offset by $4 million in reduced travel expenses.

We expect GAAP and non-GAAP general and administrative expenses will continue to increase in absolute dollars as we further invest in our infrastructure and support our global expansion.

Operating Margins

GAAP operating margins improved from (15.0)% for the three months ended April 30, 2019, to (14.2)% for the three months ended April 30, 2020.

The improvement in our GAAP operating margins in the three months ended April 30, 2020, was primarily due to higher revenues, along with reduced employer payroll tax on employee stock transactions and reduced amortization of acquisition-related intangible assets.

The improvement was partially offset by higher operating expenses resulting from higher headcount and the one-time employee cash bonus in light of the COVID-19 pandemic.

Table of Conten t s

GAAP operating margins improved from (13.8)% for the three months ended July 31, 2019, to (1.6)% for the three months ended July 31, 2020.

Our GAAP operating margins for the three months ended July 31, 2020, have been favorably impacted by our revenue growth outpacing headcount growth as well as moderation of operating expenses in response to the COVID-19 pandemic, including reduced travel, marketing and event spending.

GAAP operating margins improved from (14.4)% for the six months ended July 31, 2019, to (7.7)% for the six months ended July 31, 2020.

Our GAAP operating margins for the six months ended July 31, 2020, have been favorably impacted by our revenue growth outpacing headcount growth as well as moderation of operating expenses in response to the COVID-19 pandemic, including reduced travel, marketing and event spending.

We use the non-GAAP financial measure of non-GAAP operating margins 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.

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

Non-GAAP operating margins declined from 13.1% for the three months ended April 30, 2019, to 12.8% for the three months ended April 30, 2020.

The reduction in our non-GAAP operating margins in the three months ended April 30, 2020, was primarily due to higher operating expenses resulting from higher headcount and the one-time employee cash bonus in light of the COVID-19 pandemic, partially offset by higher revenues.

Non-GAAP operating margins improved from 13.2% for the three months ended July 31, 2019, to 24.3% for the three months ended July 31, 2020.

Our non-GAAP operating margins for the three months ended July 31, 2020, have been favorably impacted by our revenue growth outpacing headcount growth as well as moderation of operating expenses in response to the COVID-19 pandemic, including reduced travel, marketing and event spending.

Non-GAAP operating margins improved from 13.2% for the six months ended July 31, 2019, to 18.7% for the six months ended July 31, 2020.

Our non-GAAP operating margins for the six months ended July 31, 2020, have been favorably impacted by our revenue growth outpacing headcount growth as well as moderation of operating expenses in response to the COVID-19 pandemic, including reduced travel, marketing and event spending.

Reconciliations of our GAAP to non-GAAP operating margins were as follows:

Three Months Ended April 30, 2020

Three Months Ended July 31, 2020

GAAP Operating Expenses Share-Based Compensation Expenses Other Operating Expenses Non-GAAP Operating Expenses (1)

Operating margin (1.6)% 23.7% 2.2% 24.3%

Three Months Ended April 30, 2019

Three Months Ended July 31, 2019

GAAP Operating Expenses Share-Based Compensation Expenses Other Operating Expenses Non-GAAP Operating Expenses (1)

Operating margin (13.8)% 23.6% 3.4% 13.2%

Six Months Ended July 31, 2020

GAAP Operating Expenses Share-Based Compensation Expenses Other Operating Expenses Non-GAAP Operating Expenses (1)

Operating margin (7.7)% 23.4% 3.0% 18.7%

Six Months Ended July 31, 2019

GAAP Operating Expenses Share-Based Compensation Expenses Other Operating Expenses Non-GAAP Operating Expenses (1)

Operating margin (14.4)% 23.0% 4.6% 13.2%

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

Other Income (Expense), Net

Other expense, net was $11 million for the three months ended April 30, 2020, as compared to other income, net of $7 million for the prior year period.

The decrease in other income primarily resulted from prior year activity that did not recur during the current fiscal quarter.

During the three months ended April 30, 2019, we recognized a gain from the sale of a marketable equity investment of $7 million and we capitalized interest costs of $4 million, which reduced interest expense.

During the three months ended April 30, 2020, we recognized unrealized losses and impairments on non-marketable equity investments of $4 million.

Other expense, net was $11 million for the three months ended July 31, 2020, as compared to other expense, net of $0.1 million for the prior year period.

The increase in other expense, net was due primarily to a $6 million reduction in interest income on marketable securities as a result of lower prevailing interest rates during the three months ended July 31, 2020.

In addition, interest expense increased by $5 million primarily related to our term loan entered into in April 2020.

Other expense, net was $22 million for the six months ended July 31, 2020, as compared to other income, net of $7 million for the prior year period.

During the six months ended July 31, 2019, we recognized a gain from the sale of marketable equity investment of $7 million gain and we capitalized interest costs of $6 million, which reduced interest expense.

Additionally, during the six months ended July 31, 2020, there was a $9 million decrease in interest income on marketable securities as a result of lower prevailing interest rates, and a $5 million increase in interest expense related to the term loan.

Liquidity and Capital Resources

As of April 30, 2020, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $2.6 billion, which were primarily held for working capital purposes.

As of July 31, 2020, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $2.8 billion, which were primarily held for working capital purposes.

Our cash equivalents and marketable securities are composed primarily of U.S.

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In April 2020, we entered into a credit agreement (“Credit Agreement”) pursuant to which the lenders would extend to Workday a senior unsecured term loan facility in an aggregate principal amount of $750 million (“Term Loan”) and an unsecured revolving credit facility in an aggregate principal amount of $750 million (“Revolving Credit Facility”).

On April 2, 2020, $500 million of the Term Loan was funded.

The remaining $250 million of the Term Loan may be funded until July 15, 2020.

On April 2, 2020, $500 million of the Term Loan was funded, and the remaining $250 million of the Term Loan was funded on July 13, 2020.

We can also borrow up to $750 million under the Revolving Credit Facility until April 2, 2025.

For further information, see Note 10, Debt, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

We have financed our operations primarily through customer payments, sales of equity securities, and issuance of debt.

Our future capital requirements depend on many factors, including our customer growth rate, subscription renewal activity, the timing of construction of facilities in Pleasanton, California, and the acquisition of additional facilities, the timing and extent of development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced services offerings, the continuing market acceptance of our services, and acquisition activities.

We have financed our operations primarily through customer payments, issuance of debt, and sales of equity securities.

Our long-term future capital requirements depend on many factors, including our customer growth rate, subscription renewal activity, the timing and extent of development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced services offerings, the continuing market acceptance of our services, the timing of construction of facilities in Pleasanton, California and the acquisition of additional facilities, and investment and acquisition activities.

We may enter into arrangements to acquire or invest in complementary businesses, services, technologies, or intellectual property rights in the future.

We also may choose to seek additional equity or debt financing.

Table of Conten t s

Our cash flows for the three months ended April 30, 2020, and 2019, were as follows (in thousands):

Three Months Ended April 30,

Our cash flows for the three and six months ended July 31, 2020, and 2019, were as follows (in thousands):

Three Months Ended July 31, Six Months Ended July 31,

2020 2019 2020 2019

Net cash provided by (used in):

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Operating Activities

Cash provided by operating activities was $264 million and $209 million for the three months ended April 30, 2020, and 2019, respectively.

The improvement in cash flow provided by operating activities was primarily due to increases in sales and the related cash collections, partially offset by higher cash operating expenses driven by increased headcount and the one-time employee cash bonus in light of the COVID-19 pandemic.

Cash provided by operating activities was $157 million and $100 million for the three months ended July 31, 2020, and 2019, respectively.

The improvement in cash flow provided by operating activities was primarily due to increases in sales and the related cash collections, moderation of operating expenses in response to the COVID-19 pandemic, including reduced travel, marketing and event spending, partially offset by higher cash operating expenses driven by increased headcount.

Cash provided by operating activities was $421 million and $309 million for the six months ended July 31, 2020, and 2019, respectively.

We expect our business to continue to generate sufficient operating cash flows;

however, if the COVID-19 pandemic worsens or is prolonged, our customers may increasingly delay payments or request price concessions, which could materially impact our operating cash flows in any given period.

however, if the COVID-19 pandemic worsens or is prolonged, our customers may continue to request payment timing concessions, which could materially impact the timing and predictability of our operating cash flows in any given period.

Investing Activities

Cash used in investing activities for the three months ended April 30, 2020, was $277 million, which was primarily the result of capital expenditures for data center and office space projects of $60 million, purchases of non-marketable equity and other investments of $52 million, and the timing of purchases and maturities of marketable securities.

Cash used in investing activities for the three months ended April 30, 2019, was $67 million, which was primarily the result of capital expenditures for data center and office space projects of $66 million, capital expenditures related to the construction of our development center of $34 million, and the timing of purchases and maturities of marketable securities.

Cash used in investing activities for the three months ended July 31, 2020, was $203 million, which was primarily the result of data center and office space projects of $67 million and the timing of purchases and maturities of marketable securities.

Cash used in investing activities for the three months ended July 31, 2019, was $321 million, which was primarily the result of capital expenditures for data center and office space projects of $76 million, capital expenditures related to the construction of our development center of $34 million, a net outflow related to acquisition activity of $13 million, and the timing of purchases and maturities of marketable securities.

Cash used in investing activities for the six months ended July 31, 2020, was $480 million, which was primarily the result of capital expenditures for data center and office space projects of $126 million, purchases of non-marketable equity and other investments of $59 million, and the timing of purchases and maturities of marketable securities.

Cash used in investing activities for the six months ended July 31, 2019, was $388 million, which was primarily the result of capital expenditures for data center and office space projects of $141 million, capital expenditures related to the construction of our development center of $74 million, a net outflow related to acquisition activity of $13 million, and the timing of purchases and maturities of marketable securities.

These payments were partially offset by proceeds of $55 million from sales of marketable equity investments.

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Financing Activities

Cash provided by financing activities was $499 million for the three months ended April 30, 2020, which was primarily due to proceeds of $500 million from borrowings on the Term Loan, net of debt discount and debt issuance costs of $2 million.

In addition, cash flows from financing activities included $4 million of proceeds from the issuance of common stock from employee equity plans.

Cash provided by financing activities was $3 million for the three months ended April 30, 2019, which was primarily due to proceeds from the issuance of common stock from employee equity plans.

In the second quarter of fiscal 2021, our 1.50% convertible senior notes (“2020 Notes”) become due, which will result in a cash outflow of $250 million.

We may use the proceeds of future borrowings under the Credit Agreement to fund the repayment of the 2020 Notes.

Table of Conten t s

Cash provided by financing activities was $71 million for the three months ended July 31, 2020, which was primarily due to proceeds of $250 million from borrowings on the Term Loan and $71 million from the issuance of common stock from employee equity plans, offset by the principal payment of $250 million in connection with the conversion of our 1.50% convertible senior notes (“2020 Notes”) during the quarter.

Cash provided by financing activities was $58 million for the three months ended July 31, 2019, which was primarily due to proceeds from the issuance of common stock from employee equity plans.

Cash provided by financing activities was $570 million for the six months ended July 31, 2020, which was primarily due to proceeds of $748 million from borrowings on the Term Loan and $75 million from the issuance of common stock from employee equity plans, offset by the principal payment of $250 million in connection with the conversion of the 2020 Notes.

Cash provided by financing activities was $61 million for the six months ended July 31, 2019, which was primarily due to proceeds from the issuance of common stock from employee equity plans.

Non-GAAP Financial Measures

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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 Expenses and Results of Operations—Operating Margins” for reconciliations from the most directly comparable GAAP financial measures, GAAP operating expenses and GAAP operating margins, to the non-GAAP financial measures, non-GAAP operating expenses and non-GAAP operating margins, for the three months ended April 30, 2020, and 2019.

Contractual Obligations

Our contractual obligations primarily consist of our convertible senior notes, borrowings under our Credit Agreement, leases for office space and co-location facilities for data center capacity, and third-party hosted infrastructure platforms for business operations.

Our contractual obligations primarily consist of our convertible senior notes, borrowings under our Credit Agreement, leases for office space and co-location facilities for data center capacity, third-party hosted infrastructure platforms for business operations, and agreements to purchase data center equipment.

We do not consider outstanding purchase orders to be contractual obligations as they represent authorizations to purchase rather than binding agreements.

Table of Conten t s

Convertible Senior Notes

In June 2013, we issued $250 million of 1.50% convertible senior notes due July 15, 2020.

In September 2017, we completed an offering of $1.15 billion of 0.25% convertible senior notes due October 1, 2022 (“2022 Notes” and together with the 2020 Notes, referred to as the “Notes”).

In June 2013, we completed an offering of $250 million of 1.50% convertible senior notes due July 15, 2020, which were subsequently converted during the three months ended July 31, 2020.

In September 2017, we completed an offering of $1.15 billion of 0.25% convertible senior notes due October 1, 2022 (“2022 Notes”).

We are not required to make principal payments under the 2022 Notes prior to maturity.

If the Notes are not converted to Class A common stock prior to their maturity dates, we are required to repay $250 million in principal on July 15, 2020, and $1.15 billion in principal on October 1, 2022.

If the 2022 Notes are not converted to Class A common stock prior to their maturity dates, we are required to repay $1.15 billion in principal on October 1, 2022.

We are also required to make interest payments on a semi-annual basis at the interest rates described in Note 10, Debt, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Credit Agreement

In April 2020, we entered into a credit agreement pursuant to which the lenders would extend to Workday a senior unsecured term loan facility in an aggregate principal amount of $ 750 million and an unsecured revolving credit facility in an aggregate principal amount of $ 750 million.

In April 2020, we entered into a credit agreement pursuant to which the lenders extended to Workday a senior unsecured term loan facility in an aggregate principal amount of $ 750 million and an unsecured revolving credit facility in an aggregate principal amount of $ 750 million.

The Term Loan matures on April 2, 2025, and provides for quarterly repayment in installments of the principal amount, beginning October 2020, at a rate of 1.25% of the principal amount per quarter through January 2022, and 2.50% of the principal amount per quarter thereafter.

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The Term Loan and Revolving Credit Facility bear interest at the interest rates described in Note 10, Debt, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The following table summarizes our contractual cash obligations under the Credit Agreement as of April 30, 2020.

The table excludes the $250 million portion of the Term Loan that may be funded prior to July 15, 2020, and assumes interest rates consistent with those in effect for our Term Loan as of April 30, 2020.

The Revolving Credit Facility is excluded as there were no outstanding borrowings as of April 30, 2020.

The following table summarizes our contractual cash obligations under the Credit Agreement as of July 31, 2020, and assumes interest rates consistent with those in effect for our Term Loan as of July 31, 2020.

The Revolving Credit Facility is excluded as there were no outstanding borrowings as of July 31, 2020.

Payments Due by Period

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Total $ 815,327 $ 28,045 $ 142,247 $ 173,826 $ 471,209

During the remainder of fiscal 2021, we anticipate leasing additional office space near our headquarters and in various other locations around the world to support our growth.

In addition, our existing lease agreements often provide us with an option to renew.

We expect our future operating lease obligations will increase as we expand our operations.

We have entered into operating lease agreements for our office space, data centers, and other property and equipment with various expiration dates.

These lease agreements often provide us with an option to renew.

Third-Party Hosted Infrastructure Platforms for Business Operations

We have entered into non-cancelable agreements with third-party hosted infrastructure platform vendors with various expiration dates.

As of April 30, 2020, future non-cancelable minimum payments under these agreements were approximately $ 471 million.

We have entered into noncancelable agreements with third-party hosted infrastructure platform vendors with various expiration dates.

As of July 31, 2020, future noncancelable minimum payments under these agreements were approximately $466 million.

Data Center Equipment

As of July 31, 2020, we have entered into noncancelable agreements to purchase $110 million of data center equipment during the second half of fiscal 2021.

Off-Balance Sheet Arrangements

Through April 30, 2020, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Through July 31, 2020, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

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Our actual results may differ from these estimates under different assumptions or conditions.

During the three months ended April 30, 2020, there were no significant changes to our critical accounting policies and estimates as described in the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended January 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on March 3, 2020.

Table of Conten t s

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets.

We are not aware of any specific event or circumstance that would require further updates to our estimates or judgments or require us to further revise the carrying value of our assets or liabilities as of July 31, 2020.

These estimates may change as new events occur and additional information is obtained.

Actual results could differ materially from these estimates under different assumptions or conditions.

During the six months ended July 31, 2020, there were no significant changes to our critical accounting policies and estimates as described in the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended January 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on March 3, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis