What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-20 compared with 2020-08-28 · 123 added, 116 removed, 235 unchanged (50% of the section changed)

14 unchanged sentences

We market our applications primarily through our direct sales force.

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

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

We had approximately 12,400 and 11,800 employees as of October 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.

15 unchanged sentences

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.

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, postponed certain of our customer, industry, implementation partner, analyst, investor, and employee events and converted 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.

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.

During the three months ended October 31, 2020, we achieved solid new subscription bookings results as demand for our products remained strong despite the uncertain environment.

Our operating margins for the three months ended October 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.

We do not anticipate the extent of the favorable margin impact experienced for the three months ended October 31, 2020, to continue long-term as we remain committed to investing in our business to drive top line growth and to support our growing base of customers.

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.

However, if the economic uncertainty remains for a prolonged period, we may experience a further negative impact on new business, customer renewals, sales and marketing efforts, revenue growth rates, customer deployments, 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.

3 unchanged sentences

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

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 accounted for 88% and 87% of our total revenues for the three and nine months ended October 31, 2020, respectively, and represented 96% of our total unearned revenue as of October 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.

29 unchanged sentences

Results of Operations

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,

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

Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 % Change 2020 2019 % Change

2 unchanged sentences

Total revenues $ 1,105,960 $ 938,100 18% $ 3,186,312 $ 2,650,907 20%

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%.

Total revenues were $1.1 billion for the three months ended October 31, 2020, compared to $938 million during the prior year period, an increase of $168 million, or 18%.

Subscription services revenue was $969 million for the three months ended October 31, 2020, compared to $799 million for the prior year period, an increase of $170 million, or 21%.

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 $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%.

Professional services revenue was $137 million for the three months ended October 31, 2020, compared to $140 million for the prior year period, a decrease of $3 million, or 2%, which was primarily due to a decrease in training revenue as a result of the COVID-19 pandemic.

Total revenues were $3.2 billion for the nine months ended October 31, 2020, compared to $2.7 billion during the prior year period, an increase of $0.5 billion, or 20%.

Subscription services revenue was $2.8 billion for the nine months ended October 31, 2020, compared to $2.3 billion for the prior year period, an increase of $0.5 billion, 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 $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%.

Professional services revenue was $404 million for the nine months ended October 31, 2020, compared to $394 million for the prior year period, an increase of $10 million, or 3%.

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 $1.1 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.

GAAP operating expenses were $1.1 billion for the three months ended October 31, 2020, compared to $1.0 billion for the prior year period, an increase of $72 million, or 7%.

The increase in GAAP operating expenses included an increase of $83 million in employee-related expense driven by higher headcount, partially offset by a decrease of $26 million in reduced travel expenses due to the COVID-19 pandemic.

GAAP operating expenses were $3.4 billion for the nine months ended October 31, 2020, compared to $3.0 billion for the prior year period, an increase of $355 million, or 12%.

The increase in GAAP operating expenses included increases of $288 million in employee-related expenses driven by higher headcount, $79 million related to a one-time cash bonus paid to non-executive employees in the first quarter of fiscal 2021 to help accommodate unforeseen costs brought on by the COVID-19 pandemic (“COVID-19 one-time employee bonus”), $38 million in facilities and IT related expenses, and $21 million in third-party expenses for hardware maintenance and data center capacity, partially offset by a decrease of $72 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.

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

We believe that non-GAAP operating expenses reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business.

1 unchanged sentence

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 $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.

Non-GAAP operating expenses were $838 million for the three months ended October 31, 2020, compared to $795 million for the prior year period, an increase of $43 million, or 5%.

The increase in Non-GAAP operating expenses included an increase of $52 million in employee-related expenses driven by higher headcount, partially offset by a decrease of $26 million in reduced travel expenses due to the COVID-19 pandemic.

Non-GAAP operating expenses were $2.5 billion for the nine months ended October 31, 2020, compared to $2.3 billion for the prior year period, an increase of $247 million, or 11%.

The increase in Non-GAAP operating expenses included increases of $171 million in employee-related expenses driven by higher headcount, $79 million related to the COVID-19 one-time employee bonus, $38 million in facilities and IT related expenses, and $21 million in third-party expenses for hardware maintenance and data center capacity, partially offset by a decrease of $72 million in reduced travel expenses.

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

Three Months Ended July 31, 2020

Three Months Ended October 31, 2020

GAAP Operating Expenses Share-Based Compensation Expenses (1)

7 unchanged sentences

Total costs and expenses $ 1,120,037 $ (259,832) $ (22,348) $ 837,857

Three Months Ended July 31, 2019

Three Months Ended October 31, 2019

GAAP Operating Expenses Share-Based Compensation Expenses (1)

7 unchanged sentences

Total costs and expenses $ 1,048,350 $ (231,002) $ (21,855) $ 795,493

Six Months Ended July 31, 2020

Nine Months Ended October 31, 2020

GAAP Operating Expenses Share-Based Compensation Expenses (1)

7 unchanged sentences

Total costs and expenses $ 3,361,600 $ (747,740) $ (83,803) $ 2,530,057

Six Months Ended July 31, 2019

Nine Months Ended October 31, 2019

GAAP Operating Expenses Share-Based Compensation Expenses (1)

7 unchanged sentences

Total costs and expenses $ 3,007,040 $ (625,458) $ (98,559) $ 2,283,023

(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.

(1) Share-based compensation expenses were $260 million and $231 million for the three months ended October 31, 2020, and 2019, respectively, and $748 million and $625 million for the nine months ended October 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 $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.

(2) Other operating expenses include employer payroll tax-related items on employee stock transactions of $8 million and $6 million for the three months ended October 31, 2020, and 2019, respectively, and $38 million and $44 million for the nine months ended October 31, 2020, and 2019, respectively.

In addition, other operating expenses include amortization of acquisition-related intangible assets of $14 million and $16 million for the three months ended October 31, 2020, and 2019, respectively and $46 million and $55 million for the nine months ended October 31, 2020, and 2019, respectively.

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

1 unchanged sentence

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 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.

GAAP operating expenses in costs of subscription services were $152 million for the three months ended October 31, 2020, compared to $122 million for the prior year period, an increase of $30 million, or 25%.

The increase in costs of subscription services included increases of $8 million in employee-related expenses driven by higher headcount, $6 million in depreciation expenses related to equipment in our data centers, and $6 million in third-party expenses for hardware maintenance and data center capacity.

GAAP operating expenses in costs of subscription services were $443 million for the nine months ended October 31, 2020, compared to $356 million for the prior year period, an increase of $87 million, or 24%.

The increase in costs of subscription services included increases of $23 million in employee-related expenses driven by higher headcount, $18 million in depreciation expense related to equipment in our data centers, $17 million in third-party expenses for hardware maintenance and data center capacity, and $5 million related to the COVID-19 one-time employee bonus.

Non-GAAP operating expenses in costs of subscription services were $128 million for the three months ended October 31, 2020, compared to $101 million for the prior year period, an increase of $27 million, or 26%.

The increase in costs of subscription services included increases of $6 million in depreciation expenses related to equipment in our data centers, $6 million in third-party expenses for hardware maintenance and data center capacity, and $5 million in employee-related expenses driven by higher headcount.

Non-GAAP operating expenses in costs of subscription services were $371 million for the nine months ended October 31, 2020, compared to $288 million for the prior year period, an increase of $83 million, or 29%.

The increase in costs of subscription services included increases of $18 million in depreciation expense related to equipment in our data centers, $17 million in third-party expenses for hardware maintenance and data center capacity, $14 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.

1 unchanged sentence

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

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.

GAAP operating expenses in costs of professional services were $143 million for the three months ended October 31, 2020, compared to $149 million for the prior year period, a decrease of $6 million, or 4%.

The decrease in costs of professional services included $4 million in reduced travel expenses due to the COVID-19 pandemic and $4 million in reduced subcontractor expenses.

GAAP operating expenses in costs of professional services were $442 million for the nine months ended October 31, 2020, compared to $425 million for the prior year period, an increase of $17 million, or 4%.

The increase in costs of professional services included increases of $21 million in employee-related expenses driven by higher headcount and $12 million related to the COVID-19 one-time employee bonus, partially offset by a decrease of $13 million in reduced travel expenses.

Non-GAAP operating expenses in costs of professional services were $115 million for the three months ended October 31, 2020, compared to $126 million for the prior year period, a decrease of $11 million, or 9%.

The decrease in costs of professional services included decreases of $4 million in reduced travel expenses due to the COVID-19 pandemic and $4 million in reduced subcontractor expenses.

Non-GAAP operating expenses in costs of professional services were $363 million for the nine months ended October 31, 2020, compared to $362 million for the prior year period, an increase of $1 million, or 0.3%.

The increase in costs of professional services included increases of $12 million related to the COVID-19 one-time employee bonus, and $5 million in employee-related expenses driven by higher headcount, partially offset by a decrease of $13 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.

1 unchanged sentence

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

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.

GAAP operating expenses in product development were $420 million for the three months ended October 31, 2020, compared to $402 million for the prior year period, an increase of $18 million, or 5%.

The increase in product development expenses included an increase of $22 million in employee-related expenses driven by higher headcount, partially offset by a decrease of $5 million in reduced travel expenses due to the COVID-19 pandemic.

GAAP operating expenses in product development were $1.3 billion for the nine months ended October 31, 2020, compared to $1.1 billion for the prior year period, an increase of $154 million, or 14%.

The increase in product development included increases of $119 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 $288 million for the three months ended October 31, 2020, compared to $279 million for the prior year period, an increase of $9 million, or 3%.

The increase in product development expenses included an increase of $12 million in employee-related expenses driven by higher headcount, partially offset by a decrease of $5 million in reduced travel expenses.

Non-GAAP operating expenses in product development were $882 million for the nine months ended October 31, 2020, compared to $789 million for the prior year period, an increase of $93 million, or 12%.

The increase in product development expenses included increases of $57 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.

1 unchanged sentence

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

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.

GAAP operating expenses in sales and marketing were $303 million for the three months ended October 31, 2020, compared to $287 million for the prior year period, an increase of $16 million, or 6%.

The increase in sales and marketing expenses included increases of $25 million in employee-related expenses driven by higher headcount and $4 million related to marketing and event spending, partially offset by a decrease of $15 million in reduced travel expenses due to the COVID-19 pandemic.

GAAP operating expenses in sales and marketing were $898 million for the nine months ended October 31, 2020, compared to $840 million for the prior year period, an increase of $58 million, or 7%.

The increase in sales and marketing expenses included increases of $66 million in employee-related expenses driven by higher headcount and $25 million related to the COVID-19 one-time employee bonus, partially offset by a decrease of $40 million in reduced travel expenses.

Non-GAAP operating expenses in sales and marketing were $240 million for the three months ended October 31, 2020, compared to $232 million for the prior year period, an increase of $8 million, or 4%.

The increase in sales and marketing expenses included increases of $16 million in employee-related expenses driven by higher headcount and $4 million related to marketing and event spending, partially offset by a decrease of $15 million in reduced travel expenses.

Non-GAAP operating expenses in sales and marketing were $720 million for the nine months ended October 31, 2020, compared to $680 million for the prior year period, an increase of $40 million, or 6%.

The increase in sales and marketing expenses included increases of $45 million in employee-related expenses driven by higher headcount and $25 million related to the COVID-19 one-time employee bonus, partially offset by a decrease of $40 million in reduced travel expenses.

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.

1 unchanged sentence

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

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.

GAAP operating expenses in general and administrative were $102 million for the three months ended October 31, 2020, compared to $89 million for the prior year period, an increase of $13 million, or 15%.

The increase in general and administrative expenses included increases of $10 million in employee-related expenses driven by higher headcount and $8 million in charitable donations, partially offset by moderation of operating expenses due to the COVID-19 pandemic.

GAAP operating expenses in general and administrative were $296 million for the nine months ended October 31, 2020, compared to $259 million for the prior year period, an increase of $37 million, or 14%.

The increase in general and administrative expenses included increases of $26 million in employee-related expenses driven by higher headcount, $12 million in charitable donations, and $6 million related to the COVID-19 one-time employee bonus, partially offset by a decrease of $5 million in reduced travel expenses.

Non-GAAP operating expenses in general and administrative were $67 million for the three months ended October 31, 2020, compared to $58 million for the prior year period, an increase of $9 million, or 17%.

The increase in general and administrative expenses included increases of $8 million in charitable donations, and $7 million in employee-related expenses driven by higher headcount, partially offset by moderation of operating expenses.

Non-GAAP operating expenses in general and administrative were $193 million for the nine months ended October 31, 2020, compared to $164 million for the prior year period, an increase of $29 million, or 18%.

The increase in general and administrative expenses included increases of $18 million in employee-related expenses driven by higher headcount, $12 million in charitable donations, and $6 million related to the COVID-19 one-time employee bonus, partially offset by a decrease of $5 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 (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.

GAAP operating margins improved from (11.8)% for the three months ended October 31, 2019, to (1.3)% for the three months ended October 31, 2020.

Our GAAP operating margins for the three months ended October 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.

GAAP operating margins improved from (13.4)% for the nine months ended October 31, 2019, to (5.5)% for the nine months ended October 31, 2020.

Our GAAP operating margins for the nine months ended October 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 and 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.

3 unchanged sentences

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

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.

Non-GAAP operating margins improved from 15.2% for the three months ended October 31, 2019, to 24.2% for the three months ended October 31, 2020.

Our non-GAAP operating margins for the three months ended October 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.

Non-GAAP operating margins improved from 13.9% for the nine months ended October 31, 2019, to 20.6% for the nine months ended October 31, 2020.

Our non-GAAP operating margins for the nine months ended October 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 and marketing and event spending.

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

Three Months Ended July 31, 2020

Three Months Ended October 31, 2020

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

Operating margin (1.3)% 23.5% 2.0% 24.2%

Three Months Ended July 31, 2019

Three Months Ended October 31, 2019

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

Operating margin (11.8)% 24.6% 2.4% 15.2%

Six Months Ended July 31, 2020

Nine Months Ended October 31, 2020

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

Operating margin (5.5)% 23.5% 2.6% 20.6%

Six Months Ended July 31, 2019

Nine Months Ended October 31, 2019

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

2 unchanged sentences

Other Income (Expense), Net

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.

Other expense, net was $9 million for the three months ended October 31, 2020, as compared to other expense, net of $4 million for the prior year period.

The increase in other expense, net included a $7 million reduction in interest income on marketable securities as a result of lower prevailing interest rates during the three months ended October 31, 2020, partially offset by a $4 million unrealized gain on an equity investment.

Other expense, net was $31 million for the nine months ended October 31, 2020, as compared to other income, net of $3 million for the prior year period.

During the nine months ended October 31, 2020, there was a $16 million decrease in interest income on marketable securities as a result of lower prevailing interest rates.

Additionally, during the nine months ended October 31, 2019, there was a gain from the sale of a marketable equity investment of $7 million and capitalized interest costs of $6 million, which reduced interest expense.

Liquidity and Capital Resources

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.

As of October 31, 2020, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $2.9 billion, which were primarily held for working capital purposes.

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

5 unchanged sentences

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.

The 2022 Notes are convertible at the option of the holders during the fourth quarter of fiscal 2021, since the trigger for early conversion was met.

Specifically, the last reported sale price of our Class A common stock exceeded 130% of the conversion price of the 2022 Notes for more than 20 trading days during the 30 consecutive trading days ended October 31, 2020.

The 2022 Notes were reclassified to current liabilities on the condensed consolidated balance sheet as of October 31, 2020.

From November 1, 2020, through the date of this filing, the amount of the principal balance of the 2022 Notes that has been converted or for which conversion has been requested was not material.

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.

Our long-term future capital requirements depend on many factors, including customer growth rates, subscription renewal activity, timing and extent of development efforts, expansion of sales and marketing activities, introduction of new and enhanced services offerings, timing of construction or acquisition of additional facilities, investments, 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.

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,

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

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

Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

6 unchanged sentences

Operating Activities

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.

Cash provided by operating activities was $294 million and $258 million for the three months ended October 31, 2020, and 2019, respectively.

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

Cash provided by operating activities was $715 million and $567 million for the nine months ended October 31, 2020, and 2019, respectively.

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

1 unchanged sentence

Investing Activities

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.

Cash used in investing activities for the three months ended October 31, 2020, was $463 million, which was primarily due to a net cash outflow related to purchases and maturities of marketable securities of $379 million and capital expenditures for data center and office space projects of $78 million.

Cash provided by investing activities for the three months ended October 31, 2019, was $33 million, which was primarily due to a net cash inflow related to purchases and maturities of marketable securities of $119 million, partially offset by capital expenditures for data center and office space projects of $55 million, capital expenditures related to owned real estate projects of $22 million, and purchases of non-marketable equity and other investments of $10 million.

Cash used in investing activities for the nine months ended October 31, 2020, was $943 million, which was primarily due to a net cash outflow related to purchases and maturities of marketable securities of $681 million, capital expenditures for data center and office space projects of $205 million, and purchases of non-marketable equity and other investments of $63 million.

Cash used in investing activities for the nine months ended October 31, 2019, was $356 million, which was primarily the result of capital expenditures for data center and office space projects of $196 million, capital expenditures related to owned real estate projects of $96 million, purchases of non-marketable equity and other investments of $17 million, net cash outflows related to purchases net of maturities of marketable securities of $89 million, and acquisition activity of $13 million.

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

We expect capital expenditures, excluding owned real estate projects, will be approximately $280 million for fiscal 2021.

2 unchanged sentences

Financing Activities

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.

Cash used in financing activities was $6 million for the three months ended October 31, 2020, which was primarily due to a payment on the Term Loan of $9 million, partially offset by proceeds of $4 million from the issuance of common stock from employee equity plans.

Cash provided by financing activities was $2 million for the three months ended October 31, 2019, which was primarily due to proceeds from the issuance of common stock from employee equity plans.

Cash provided by financing activities was $564 million for the nine months ended October 31, 2020, which was primarily due to proceeds of $748 million from borrowing on the Term Loan and $78 million from the issuance of common stock from employee equity plans, partially offset by the principal payment of $250 million in connection with the conversion of the 2020 Notes.

Cash provided by financing activities was $63 million for the nine months ended October 31, 2019, which was primarily due to proceeds from the issuance of common stock from employee equity plans.

Non-GAAP Financial Measures

22 unchanged sentences

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 and six months ended July 31, 2020, and 2019.

Contractual Obligations

2 unchanged sentences

Convertible Senior 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 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 second quarter of fiscal 2021.

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

1 unchanged sentence

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.

The 2022 Notes are convertible at the option of the holders during the fourth quarter of fiscal 2021.

From November 1, 2020, through the date of this filing, the amount of the principal balance of the 2022 Notes that has been converted or for which conversion has been requested was not material.

We may receive additional conversion request that require settlement in the fourth quarter of fiscal 2021.

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.

4 unchanged sentences

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 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.

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

There were no outstanding borrowings as of October 31, 2020, under the Revolving Credit Facility.

Payments Due by Period

8 unchanged sentences

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.

As of October 31, 2020, future noncancelable minimum payments under these agreements were approximately $445 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.

As of October 31, 2020, we have entered into noncancelable agreements to purchase $79 million of data center equipment during the remainder of fiscal 2021.

Off-Balance Sheet Arrangements

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.

Through October 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

4 unchanged sentences

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.

During the nine months ended October 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 fiscal 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