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Item 7. Management’s Discussion and Analysis

2021-03-02 compared with 2020-03-03 · 131 added, 127 removed, 211 unchanged (55% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report.

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report.

The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs.

Our actual results could differ materially from those discussed in the forward-looking statements.

Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in “ Risk Factors.

Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K.

The following discussion of our financial condition and results of operations covers fiscal 2021 and 2020 items and year-over-year comparisons between fiscal 2021 and 2020.

Discussions of fiscal 2019 items and year-over-year comparisons between fiscal 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2020, that was filed with the SEC on March 3, 2020.

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.

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

Our cycle of frequent updates has facilitated rapid innovation and the introduction of new applications throughout our history.

We began offering our HCM application in 2006 and our Financial Management application in 2007.

Since then we have continued to invest in innovation and have consistently introduced new services to our customers, including through the acquisition of Adaptive Insights in fiscal 2019, and Scout RFP in fiscal 2020.

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

With Workday, our customers have a unified system that can help them plan, execute, analyze, and extend to other applications and environments, thereby helping them continuously adapt how they manage their businesses and operations.

Our diverse customer base includes medium-sized and large, global companies within numerous industry categories, including technology, financial services, business and professional services, healthcare and life sciences, manufacturing, retail, and hospitality, as well as educational institutions, government agencies, and nonprofit organizations.

We have achieved significant growth in a relatively short period of time, with a substantial amount of our growth coming from new customers.

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.

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.

We generally recognize revenues from subscription fees ratably over the term of the contract.

We currently derive a substantial majority of our subscription services revenues from subscriptions to our HCM application.

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 12,200 and approximately 10,500 employees as of January 31, 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.

We intend to continue investing for long-term growth.

While we have incurred net losses on a GAAP basis in each period since our inception in 2005, 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 expect our product development, sales and marketing, and general and administrative expenses as a percentage of total revenues will decrease over the longer term as we grow our revenues, and we anticipate that we will gain economies of scale by increasing our customer base without direct incremental development costs.

We plan to reinvest a significant portion of our incremental revenues in future periods to grow our business.

We have invested and expect to continue to invest heavily in our product development efforts to deliver additional compelling applications and to address customers’ evolving needs.

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

We also regularly evaluate acquisitions and investment opportunities in complementary businesses, employee teams, services, technologies, and intellectual property rights in an effort to expand our product and service offerings.

We expect to continue making such acquisitions and investments in the future, and we plan to reinvest a significant portion of our incremental revenue in future periods to grow our business and continue our leadership role in the industry.

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 and 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 and equipment as we plan for future growth.

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

We regularly evaluate acquisition and investment opportunities in complementary businesses, employee teams, services, technologies, and intellectual property rights in an effort to expand our product and service offerings.

For example, we acquired Adaptive Insights in fiscal 2019 and Scout in fiscal 2020, and we recently announced our intent to acquire Peakon in fiscal 2022.

We expect to continue making such acquisitions and investments in the future.

While we remain focused on improving operating margins, these acquisitions and investments will increase our costs on an absolute basis in the near term.

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We believe our investment in professional services, as well as partners building consulting practices around Workday, will drive additional customer subscriptions and continued growth in revenues.

Due to our ability to leverage the expanding partner ecosystem, we expect that the rate of professional services revenue growth will decline over time and continue to be lower than subscription revenue growth.

Due to our ability to leverage the expanding partner ecosystem, we expect the rate of professional services revenue growth to decline over time and continue to be lower than subscription revenue growth.

Impact of the COVID-19 Pandemic

In December 2019, a novel strain of coronavirus disease was reported, and in March 2020, the World Health Organization characterized COVID-19 as a 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 offices;

required most of our employees to work remotely;

implemented travel restrictions;

and 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 confident in the long-term overall health of our business, the strength of our product offerings, and our ability to continue to execute on our strategy.

The COVID-19 pandemic created uncertainty in most industries and impacted our ability to generate new business during fiscal 2021.

Despite this, we achieved solid new subscription bookings as demand for our products remained strong.

Our operating margins for fiscal 2021 have been favorably impacted by our revenue growth outpacing headcount growth as well as the moderation of operating expenses in response to the COVID-19 pandemic.

We do not anticipate the extent of the favorable margin impact experienced during fiscal 2021 to continue long-term as we remain committed to investing in our business to drive top line growth and to support our customer base.

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

However, if the economic uncertainty persists, we may continue to experience a 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 I, Item 1A of this Annual Report on Form 10-K.

Components of Results of Operations

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

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

Professional services fees include deployment services, optimization services, and training.

Subscription services revenues accounted for 85% of our total revenues during fiscal 2020, and represented 96% of our total unearned revenue as of January 31, 2020.

Subscription services revenues are driven primarily by the number of customers, the number of workers at each customer, the specific applications subscribed to by each customer, and the price of our applications.

We 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.

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

Subscription services revenue accounted for 88% of our total revenues during fiscal 2021, and represented 96% of our total unearned revenue as of January 31, 2021.

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.

The mix of the applications to which a customer subscribes can affect our financial performance due to price differentials in our applications.

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New products or services offerings by competitors in the future could also impact the mix and pricing of our offerings.

Subscription services revenues are recognized over time as they 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.

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 noncancelable.

We generally invoice our customers annually in advance.

Amounts that have been invoiced are initially recorded as unearned revenue.

Our consulting engagements are generally billed on a time and materials basis or fixed price basis.

Our consulting engagements are generally billed on a time and materials basis or a fixed price basis.

For contracts billed on a time and materials basis, revenue is recognized over time as the professional services are performed.

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As our professional services organization and the Workday-related consulting practices of our partner firms continue to develop, we expect these partners to increasingly contract directly with our subscription customers.

As a result of this trend, and the increase of our subscription services revenues, we expect our professional services revenues as a percentage of total revenues to decline over time.

As a result of this trend, and the increase of our subscription services revenue, we expect our professional services revenue as a percentage of total revenues to decline over time.

Costs and Expenses

Costs of subscription services revenues.

Costs of subscription services revenues consist 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 professional services revenues .

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

Costs of subscription services revenue.

Costs of subscription services revenue consist primarily of employee-related expenses associated with 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 consist 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.

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.

Product development expenses consist primarily of employee-related expenses.

We continue to focus our product development efforts on adding new features and applications, increasing 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.

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

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Total revenues $ 4,317,996 $ 3,627,206 $ 2,822,180

Total revenues were $3.6 billion for fiscal 2020, compared to $2.8 billion for fiscal 2019, an increase of $0.8 billion, or 29%.

Subscription services revenues were $3.1 billion for fiscal 2020, compared to $2.4 billion for fiscal 2019, an increase of $0.7 billion, or 30%.

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

Professional services revenues were $531 million for fiscal 2020, compared to $436 million for fiscal 2019, an increase of $95 million, or 22%.

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

Total revenues were $4.3 billion for fiscal 2021, compared to $3.6 billion for fiscal 2020, an increase of $691 million, or 19%.

Subscription services revenue was $3.8 billion for fiscal 2021, compared to $3.1 billion for fiscal 2020, an increase of $692 million, or 22%.

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

Professional services revenue was $530 million for fiscal 2021, compared to $531 million for fiscal 2020, a decrease of $1 million, or 0.2%.

The decrease in professional services revenue was primarily due to decreases in training revenue and reimbursable travel expenses as a result of the COVID-19 pandemic, offset by increased professional services revenue due to Workday performing deployment and integration services for a greater number of customers.

Operating Expenses

GAAP operating expenses were $4.1 billion for fiscal 2020, compared to $3.3 billion for fiscal 2019, an increase of $0.8 billion, or 26%.

The increase was primarily due to an increase in employee-related costs driven by higher headcount.

GAAP operating expenses were $4.6 billion for fiscal 2021, compared to $4.1 billion for fiscal 2020, an increase of $437 million, or 11%.

The increase in GAAP operating expenses included increases of $329 million in employee-related expenses driven by higher average 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”), $46 million in facilities and IT related expenses, $31 million in third-party expenses for hardware maintenance and data center capacity, and $21 million in charitable donations, partially offset by a decrease of $92 million from reduced travel.

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.

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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 $3.1 billion for fiscal 2020, compared to $2.5 billion for fiscal 2019, an increase of $0.6 billion, or 24%.

The increase was primarily due to an increase in employee-related costs driven by higher headcount.

Non-GAAP operating expenses were $3.5 billion for fiscal 2021, compared to $3.1 billion for fiscal 2020, an increase of $308 million, or 10%.

The increase in non-GAAP operating expenses included increases of $187 million in employee-related expenses driven by higher average headcount, $79 million related to the COVID-19 one-time employee bonus, $46 million in facilities and IT related expenses, $31 million in third-party expenses for hardware maintenance and data center capacity, and $21 million in charitable donations, partially offset by a decrease of $92 million from reduced travel.

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

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Total costs and expenses $ 3,285,464 $ (673,418) $ (81,123) $ 2,530,923

(1) Share-based compensation expenses were $860 million, $673 million, and $478 million for fiscal 2020, 2019, and 2018, respectively.

The increase in share-based compensation expenses includes the impact of restricted stock units granted to existing and new employees and assumed Adaptive Insights awards.

(2) Other operating expenses include employer payroll tax-related items on employee stock transactions of $55 million, $32 million, and $21 million for fiscal 2020, 2019, and 2018, respectively.

In addition, other operating expenses include amortization of acquisition-related intangible assets of $72 million, $49 million, and $19 million for fiscal 2020, 2019, and 2018, respectively.

(1) Other operating expenses include amortization of acquisition-related intangible assets of $60 million, $72 million, and $49 million for fiscal 2021, 2020, and 2019, respectively.

In addition, other operating expenses include employer payroll tax-related items on employee stock transactions of $51 million, $55 million, and $32 million for fiscal 2021, 2020, and 2019, respectively.

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

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GAAP operating expenses in costs of subscription services were $612 million for fiscal 2021, compared to $489 million for fiscal 2020, an increase of $123 million, or 25%.

The increase was primarily due to increases of $34 million in employee-related costs driven by higher headcount, $31 million in depreciation and amortization expense including amortization of acquisition-related intangible assets, and $25 million in third-party costs for hardware maintenance and data center capacity.

The increase in costs of subscription services included increases of $54 million in employee-related expenses driven by higher average headcount, $26 million in depreciation expense related to equipment in our data centers, $20 million in third-party expenses for hardware maintenance and data center capacity, and $18 million in facilities and IT related expenses.

Non-GAAP operating expenses in costs of subscription services were $514 million for fiscal 2021, compared to $398 million for fiscal 2020, an increase of $116 million, or 29%.

The increase was primarily due to increases of $25 million in third-party costs for hardware maintenance and data center capacity, $23 million in depreciation expense related to equipment in our data centers, and $20 million in employee-related costs driven by higher headcount.

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.

The increase in costs of subscription services included increases of $41 million in employee-related expenses driven by higher average headcount, $26 million in depreciation expense related to equipment in our data centers, $20 million in third-party expenses for hardware maintenance and data center capacity, and $18 million in facilities and IT related expenses.

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

Costs of Professional Services

GAAP operating expenses in costs of professional services were $586 million for fiscal 2021, compared to $577 million for fiscal 2020, an increase of $9 million, or 2%.

The increase was primarily due to additional costs to staff deployment and integration engagements.

Non-GAAP operating expenses in costs of professional services were $490 million for fiscal 2020, compared to $396 million for fiscal 2019, an increase of $94 million, or 24%.

The increase was primarily due to additional costs to staff deployment and integration engagements.

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.

The increase in costs of professional services included increases of $28 million in employee-related expenses driven by higher average headcount and $12 million related to the COVID-19 one-time employee bonus, offset by decreases of $16 million from reduced travel and $14 million in reduced subcontractor expenses.

Non-GAAP operating expenses in costs of professional services were $478 million for fiscal 2021, compared to $490 million for fiscal 2020, a decrease of $12 million, or 2%.

The decrease in costs of professional services included decreases of $16 million from reduced travel and $14 million in reduced subcontractor expenses, offset by an increase of $12 million related to the COVID-19 one-time employee bonus.

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

GAAP operating expenses in product development were $1.5 billion for fiscal 2020, compared to $1.2 billion for fiscal 2019, an increase of $0.3 billion, or 28%.

The increase was primarily due to an increase in employee-related costs driven by higher headcount.

Non-GAAP operating expenses in product development were $1.1 billion for fiscal 2020, compared to $0.9 billion for fiscal 2019, an increase of $0.2 billion, or 25%.

The increase was primarily due to an increase in employee-related costs driven by higher headcount.

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.

GAAP operating expenses in product development were $1.7 billion for fiscal 2021, compared to $1.5 billion for fiscal 2020, an increase of $171 million, or 11%.

The increase in product development expenses included increases of $134 million in employee-related expenses driven by higher average headcount and $31 million related to the COVID-19 one-time employee bonus, partially offset by a decrease of $15 million from reduced travel.

Non-GAAP operating expenses in product development were $1.2 billion for fiscal 2021, compared to $1.1 billion for fiscal 2020, an increase of $103 million, or 10%.

The increase in product development expenses included increases of $64 million in employee-related expenses driven by higher average headcount and $31 million related to the COVID-19 one-time employee bonus, partially offset by a decrease of $15 million from reduced travel.

We expect 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.

Sales and Marketing

GAAP operating expenses in sales and marketing were $1.1 billion for fiscal 2020, compared to $0.9 billion for fiscal 2019, an increase of $0.2 billion, or 29%.

The increase was primarily due to an increase in employee-related costs driven by higher headcount and higher commissionable sales volume.

GAAP operating expenses in sales and marketing were $1.2 billion for fiscal 2021, compared to $1.1 billion for fiscal 2020, an increase of $87 million, or 8%.

The increase in sales and marketing expenses included increases of $88 million in employee-related expenses driven by higher average headcount, $25 million related to the COVID-19 one-time employee bonus, and $14 million related to marketing programs, partially offset by a decrease of $54 million from reduced travel.

Non-GAAP operating expenses in sales and marketing were $995 million for fiscal 2021, compared to $929 million for fiscal 2020, an increase of $66 million, or 7%.

The increase was primarily due to an increase in employee-related costs driven by higher headcount and higher commissionable sales volume.

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

The increase in sales and marketing expenses included increases of $62 million in employee-related expenses driven by higher average headcount, $25 million related to the COVID-19 one-time employee bonus, and $14 million related to marketing programs, partially offset by a decrease of $54 million from reduced travel.

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

General and Administrative

GAAP operating expenses in general and administrative were $414 million for fiscal 2021, compared to $368 million for fiscal 2020, an increase of $46 million, or 13%.

The increase was primarily due to increases of $23 million in employee-related costs driven by higher headcount and $9 million in facility and IT-related expenses, partially offset by one-time transaction and integration-related costs related to the Adaptive Insights acquisition incurred in the prior year that did not recur in the current year.

The increase in general and administrative expenses included increases of $24 million in employee-related expenses driven by higher average headcount, $21 million in charitable donations, and $6 million related to the COVID-19 one-time employee bonus, partially offset by a decrease of $6 million from reduced travel.

Non-GAAP operating expenses in general and administrative were $276 million for fiscal 2021, compared to $241 million for fiscal 2020, an increase of $36 million, or 15%.

The increase was primarily due to increases of $28 million in employee-related costs driven by higher headcount and $9 million in facility and IT-related expenses, partially offset by one-time transaction and integration-related costs related to the Adaptive Insights acquisition incurred in the prior year that did not recur in the current year.

The increase in general and administrative expenses included increases of $21 million in charitable donations, $13 million in employee-related expenses driven by higher average headcount, and $6 million related to the COVID-19 one-time employee bonus, partially offset by a decrease of $6 million from reduced travel.

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.

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GAAP operating margins improved from (13.8)% for fiscal 2020 to (5.8)% for fiscal 2021.

The improvement in our GAAP operating margin was primarily due to higher subscription and professional services revenues and the absence of prior year costs attributable to the Adaptive Insights acquisition that did not recur in the current year.

Our GAAP operating margins for fiscal 2021 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.

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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Non-GAAP operating margins improved from 13.4% for fiscal 2020 to 20.1% for fiscal 2021.

The improvement in our non-GAAP operating margin was primarily due to higher subscription and professional services revenues and the absence of prior year costs attributable to the Adaptive Insights acquisition that did not recur in the current year.

Our non-GAAP operating margins for fiscal 2021 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.

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

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Other Income (Expense), Net

We had other income, net of $20 million and $40 million in fiscal 2020 and 2019, respectively, and $12 million of other expense, net in 2018.

The decrease in other income, net for fiscal 2020 compared to fiscal 2019, was primarily due to a decrease in foreign currency gains associated with our foreign currency forward contracts that was attributable to the adoption of ASU No.

2017-12, Derivatives and Hedging in the first quarter of fiscal 2020, and the decrease in net gains from our equity investments of $8 million.

Refer to Note 10, Derivatives for further information regarding the impact of adopting ASU No.

2017-12 and to Note 3, Investments for further information regarding equity investments.

We had other expense, net of $27 million during fiscal 2021, as compared to other income, net of $20 million and $40 million during fiscal 2020 and 2019, respectively.

The decrease of $46 million in other income, net for fiscal 2021 compared to fiscal 2020 was primarily due to a decrease of $22 million in interest income on marketable securities from lower prevailing interest rates, a $20 million non-cash gain on our existing Scout investment recorded in prior year as part of the Scout acquisition, and an increase of $10 million in interest expense related to debt.

The decrease was offset by an unrealized gain of $14 million on marketable equity investments in the current fiscal year.

Non-GAAP Financial Measures

Regulation S-K Item 10(e), “Use of non-GAAP financial measures in Commission filings,” defines and prescribes the conditions for use of non-GAAP financial information.

Our measures of non-GAAP operating expenses and non-GAAP operating margins meet the definition of non-GAAP financial measures.

Our measures of non-GAAP operating expenses and non-GAAP operating margins meet the definition of a non-GAAP financial measure.

Non-GAAP Operating Expenses and Non-GAAP Operating Margins

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As of January 31, 2021, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $3.5 billion, which were primarily held for working capital purposes.

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

treasury securities, U.S.

agency obligations, corporate bonds, commercial paper, and money market funds.

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

Our future capital requirements will 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 and investment activities.

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

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

Our cash equivalents and marketable securities are composed primarily of, in order from largest to smallest, U.S.

treasury securities, commercial paper, money market funds, U.S.

agency obligations, and corporate bonds.

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

We believe our existing cash, cash equivalents, marketable securities, cash provided by operating activities, unbilled amounts related to the remaining term of contracted noncancelable subscription agreements, which are not reflected on the balance sheet, and, if necessary, our borrowing capacity under our Revolving Credit Facility that provides for $750 million of unsecured financing, will be sufficient to meet our working capital, capital expenditure, and debt repayment needs over the next 12 months.

Our long-term future capital requirements depend on many factors, including the effects of the COVID-19 pandemic, 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 debt or equity financing.

Our cash flows for fiscal 2021, 2020, and 2019, were as follows (in thousands):

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Operating Activities

Cash provided by operating activities was $865 million, $607 million, and $466 million for fiscal 2020, 2019, and 2018, respectively.

The improvement in cash flows provided by operating activities in fiscal 2020, compared to the prior fiscal year, was primarily the result of increased sales and the related cash collections, partially offset by higher operating expenses driven by increased headcount.

Cash provided by operating activities was $1.3 billion, $865 million, and $607 million for fiscal 2021, 2020, and 2019, respectively.

The improvement in cash flows provided by operating activities during fiscal 2021, compared to the prior fiscal year, was primarily due to increases in sales and related cash collections as well as moderation of operating expenses related to our response to the COVID-19 pandemic, partially offset by higher cash operating expenses driven by higher average headcount.

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 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 fiscal 2020, was $897 million, which was primarily the result of a net cash outflow related to acquisition activity of $474 million, capital expenditures for data center and office space projects of $244 million, capital expenditures related to owned real estate projects of $99 million, purchases of non-marketable equity and other investments of $25 million, and the timing of purchases and maturities of marketable securities.

Cash used in investing activities for fiscal 2021 was $1.2 billion, which was primarily comprised of a net cash outflow related to purchases and maturities of marketable securities of $930 million, capital expenditures for data center and office space projects of $253 million, and purchases of non-marketable investments of $67 million.

Cash used in investing activities for fiscal 2020 was $897 million, which was primarily comprised of a net cash outflow related to acquisition activity of $474 million, capital expenditures for data center and office space projects of $244 million, capital expenditures related to owned real estate projects of $99 million, purchases of non-marketable investments of $25 million, and the timing of purchases and maturities of marketable securities.

These payments were partially offset by proceeds of $57 million from sales of marketable securities.

Cash used in investing activities for fiscal 2019, was $843 million, which was primarily the result of a net cash outflow of $1.4 billion related to acquisition activity, capital expenditures for data center and office space projects of $203 million, capital expenditures related to the construction of our development center of $160 million, and purchases of non-marketable equity and other investments of $43 million.

These payments were partially offset by the timing of purchases and maturities of marketable securities, proceeds of $950 million from the sale of marketable securities, and proceeds of $18 million from the sales and maturities of non-marketable equity and other investments.

The sale of marketable securities during fiscal 2019, was primarily to fund the Adaptive Insights acquisition.

We expect capital expenditures related to owned real estate projects will be approximately $230 million for fiscal 2021.

We expect capital expenditures, excluding owned real estate projects, will be approximately $350 million for fiscal 2021.

We expect capital expenditures for owned real estate projects to be approximately $170 million for fiscal 2022.

This capital outlay is related to the purchase of the leased properties discussed in Note 12, Leases, and Note 22, Subsequent Events, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

We expect capital expenditures, excluding owned real estate projects, to be approximately $270 million for fiscal 2022.

These capital outlays will largely be used to expand the infrastructure of our data centers and to build out additional office space to support our growth.

Financing Activities

For fiscal 2020, cash provided by financing activities was $125 million, which was primarily due to proceeds from the issuance of common stock from employee equity plans.

For fiscal 2019, cash used in financing activities was $257 million, which was primarily due to the principal payment of $350 million of 0.75% convertible senior notes, offset by $94 million of proceeds from the issuance of common stock from employee equity plans.

For fiscal 2021, cash provided by financing activities was $625 million, which was primarily comprised of net proceeds of $748 million from borrowing on the Term Loan and $149 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.

For fiscal 2020, cash provided by financing activities was $125 million, which was primarily comprised of proceeds from the issuance of common stock from employee equity plans.

Our 2022 Notes became convertible at the option of the holders during the fourth quarter of fiscal 2021, and they continue to be convertible in the first quarter of fiscal 2022 since the trigger for early conversion was met.

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 requests that require settlement during fiscal 2022.

For further information, see Note 11, Debt, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Contractual Obligations

The following table summarizes our consolidated principal contractual cash obligations as of January 31, 2020 (in thousands):

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

As of January 31, 2021, our principal contractual cash obligations consisted of the following (in thousands):

Payments Due by Period

Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years

1.50% Convertible Senior Notes due 2020 (1)

Term Loan (1)

$ 768,608 $ 48,365 $ 167,631 $ 552,612 $ —

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1,154,734 2,875 1,151,859 — —

Aggregate interest obligation (2)

9,380 4,580 4,800 — —

Operating leases (3)

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Third-party hosted infrastructure platform obligations 423,730 41,000 91,000 291,730 —

Contractual commitments (4)

Purchase obligations (4)

323,144 194,892 86,284 41,968 —

Total $ 3,152,655 $ 387,810 $ 1,667,373 $ 1,001,794 $ 95,678

(1) Represents the aggregate principal amount of these notes, without the effect of associated discounts.

(2) Represents estimated aggregate interest obligations for our outstanding Notes that are payable in cash.

(3) Represents total lease payments based on contractual terms, excluding total imputed interest of $40 million.

(4) Includes a $50 million commitment as of January 31, 2020, to fund an ownership interest in a limited partnership, which was paid in February 2020.

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

We are not required to make principal payments under the 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.

We are also required to make interest payments on a semi-annual basis at the interest rates described in Note 11, Convertible Senior Notes, Net, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

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 to increase as we expand our operations.

Purchase orders are not included in the table above.

Our purchase orders represent authorizations to purchase rather than binding agreements.

The contractual obligation amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the transaction.

(1) Consists of principal and interest payments on the Term Loan.

The interest obligation on the Term Loan included in the table above assumes interest rates consistent with those in effect for our Term Loan as of January 31, 2021.

For further information, see Note 11, Debt, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

(2) Consists of principal and interest payments on the 2022 Notes.

For further information, see Note 11, Debt, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

(3) 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.

The amounts in the table above represent total lease payments based on contractual terms, excluding total imputed interest of $39 million.

(4) The purchase obligations in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the transaction.

Obligations under contracts that we can cancel without a significant penalty are not included in the table above.

Additionally, purchase orders are not included in the table above since they represent authorizations to purchase rather than binding agreements.

Off-Balance Sheet Arrangements

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Revenue Recognition

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

Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

We derive our revenues from subscription services and professional services.

Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for services rendered.

We determine revenue recognition through the following steps:

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• Recognition of revenue when, or as, we satisfy a performance obligation.

Subscription Services Revenues

Subscription services revenues primarily consist of fees that provide customers access to one or more of our cloud applications for finance, human resources, planning, and analytics, with routine customer support.

Subscription Services Revenue

Subscription services revenue primarily consists of fees that provide customers access to one or more of our cloud applications for financial management, spend management, human capital management, planning, and analytics, with routine customer support.

Revenue is generally recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer.

Our subscription contracts are generally three years or longer in length, billed annually in advance, and non-cancelable.

Professional Services Revenues

Professional services revenues primarily consist of consulting fees for deployment and optimization services, as well as training.

Our subscription contracts are generally three years or longer in length, billed annually in advance, and are generally noncancelable.

Professional Services Revenue

Professional services revenue primarily consists of consulting fees for deployment and optimization services, as well as training.

Our consulting contracts are billed on a time and materials basis or a fixed price basis.

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In June 2013, we issued 0.75% convertible senior notes due July 15, 2018 (“2018 Notes”), with a principal amount of $350 million, which were subsequently converted by note holders during the second quarter of fiscal 2019.

Concurrently in June 2013, we issued 1.50% convertible senior notes due July 15, 2020 (“2020 Notes”), with a principal amount of $250 million.

In September 2017, we issued 0.25% convertible senior notes due October 1, 2022 (“2022 Notes”), with a principal amount of $1.15 billion (together with the 2018 Notes and 2020 Notes, referred to as the “Notes”).

Concurrently, in June 2013, we issued 1.50% convertible senior notes due July 15, 2020, with a principal amount of $250 million, which were subsequently converted by note holders during the second quarter of fiscal 2021.

In September 2017, we issued 0.25% convertible senior notes due October 1, 2022, with a principal amount of $1.15 billion (together with the 2018 Notes and 2020 Notes, referred to as the “Notes”).

In accounting for the issuance of the Notes, we separated each of the Notes into liability and equity components.

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We allocate the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values, with the excess recorded to goodwill.

Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows, expected asset lives, royalty rates, and discount rates.

Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows, expected asset useful lives, royalty rates, and discount rates.

The amounts and useful lives assigned to acquisition-related intangible assets impact the amount and timing of future amortization expense.

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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-K

Item 7. Management’s Discussion and Analysis