What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-26 compared with 2021-05-26 · 148 added, 75 removed, 210 unchanged (52% of the section changed)

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

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.

While we have incurred operating 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.

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and postponed certain of our customer, industry, implementation partner, analyst, investor, and employee events and converted others to virtual-only experiences.

These operational changes remain in effect as of the date of this filing and could extend into future quarters.

Most of these operational changes remain in effect and we continue to prioritize the health and safety of our employees, customers, and partners.

While the majority of our employees continue to work remotely, in the second quarter of fiscal 2022, we began to reopen our offices and are allowing employees to return to the office on a voluntary basis with enhanced safety protocols in place.

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.

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Despite this, we continue to achieve solid new subscription bookings as demand for our products remains strong.

Our operating margins for the three months ended April 30, 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 in the three months ended April 30, 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 operating margins for the six months ended July 31, 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 in the three and six months ended July 31, 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 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, financial condition, and operating results.

However, if the economic uncertainty increases, we may 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, similar to what we experienced at the onset of the pandemic.

Any of these factors could harm our business, financial condition, and operating results.

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

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

Subscription services revenues accounted for 88% of our total revenues for the three months ended April 30, 2021, and represented 96% of our total unearned revenue as of April 30, 2021.

Subscription services revenues accounted for 88% of our total revenues for each of the three and six-month periods ended July 31, 2021, and represented 96% of our total unearned revenue as of July 31, 2021.

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.

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Results of Operations

Our total revenues for the three months ended April 30, 2021, and 2020, were as follows (in thousands, except percentages):

Three Months Ended April 30,

2021 2020 % Change

Our total revenues for the three and six months ended July 31, 2021, and 2020, were as follows (in thousands, except percentages):

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

2021 2020 % Change 2021 2020 % Change

Subscription services $ 1,113,454 $ 931,698 20% $ 2,145,623 $ 1,813,654 18%

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Total revenues $ 1,260,361 $ 1,061,967 19% $ 2,435,394 $ 2,080,352 17%

Total revenues were $1.2 billion for the three months ended April 30, 2021, compared to $1.0 billion during the prior year period, an increase of $157 million, or 15%.

Subscription services revenues were $1.0 billion for the three months ended April 30, 2021, compared to $882 million for the prior year period, an increase of $150 million, or 17%.

Total revenues were $1.3 billion for the three months ended July 31, 2021, compared to $1.1 billion during the prior year period, an increase of $198 million, or 19%.

Subscription services revenues were $1.1 billion for the three months ended July 31, 2021, compared to $932 million for the prior year period, an increase of $182 million, or 20%.

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

Professional services revenues were $143 million for the three months ended April 30, 2021, compared to $136 million for the prior year period, an increase of $6 million, or 5%.

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

Professional services revenues were $147 million for the three months ended July 31, 2021, compared to $130 million for the prior year period, an increase of $17 million, or 13%.

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

Total revenues were $2.4 billion for the six months ended July 31, 2021, compared to $2.1 billion during the prior year period, an increase of $355 million, or 17%.

Subscription services revenues were $2.1 billion for the six months ended July 31, 2021, compared to $1.8 billion for the prior year period, an increase of $332 million, or 18%.

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

Professional services revenues were $290 million for the six months ended July 31, 2021, compared to $267 million for the prior year period, an increase of $23 million, or 9%.

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

Operating Expenses

GAAP operating expenses were $1.2 billion for the three months ended April 30, 2021, an increase of $51 million, or 4%, over the prior year period.

The increase in GAAP operating expenses included increases of $103 million in employee-related expenses driven by higher average headcount and share-based compensation expenses, $10 million in depreciation expense related to equipment in our data centers, and $10 million in professional services expenses, offset by decreases of $79 million related to a 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 that was not paid in fiscal 2022 (“COVID-19 one-time employee bonus”) and $9 million in reduced travel.

GAAP operating expenses were $1.3 billion for the three months ended July 31, 2021, compared to $1.1 billion for the prior year period, an increase of $183 million, or 17%.

The increase in GAAP operating expenses included increases of $109 million in employee-related expenses including share-based compensation, $31 million related to marketing programs, $14 million in professional services expenses, $11 million in third-party expenses for hardware maintenance and data center capacity, and $9 million in depreciation expense related to equipment in our data centers.

GAAP operating expenses were $2.5 billion for the six months ended July 31, 2021, compared to $2.2 billion for the prior year period, an increase of $233 million, or 10%.

The increase in GAAP operating expenses included increases of $212 million in employee-related expenses including share-based compensation, $38 million related to marketing programs, $25 million in professional services expenses, $19 million in third-party expenses for hardware maintenance and data center capacity, and $19 million in depreciation expense primarily related to equipment in our data centers, offset by a decrease of $79 million related to a 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”) that was not paid in fiscal 2022.

We use the non-GAAP financial measure of non-GAAP operating expenses to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, and to evaluate our financial performance.

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

Non-GAAP operating expenses were $887 million for the three months ended April 30, 2021, a decrease of $1 million, or 0.2%, over the prior year period.

The decrease in non-GAAP operating expenses included decreases of $79 million related to the COVID-19 one-time employee bonus and $9 million in reduced travel, offset by increases of $53 million in employee-related expenses driven by higher average headcount, $10 million in depreciation expense related to equipment in our data centers, and $10 million in professional services expenses.

Non-GAAP operating expenses were $969 million for the three months ended July 31, 2021, compared to $804 million for the prior year period, an increase of $164 million, or 20%.

The increase in non-GAAP operating expenses included increases of $95 million in employee-related expenses, $31 million related to marketing programs, $14 million in professional services expenses, $11 million in third-party expenses for hardware maintenance and data center capacity, and $9 million in depreciation expense related to equipment in our data centers.

Non-GAAP operating expenses were $1.9 billion for the six months ended July 31, 2021, compared to $1.7 billion for the prior year period, an increase of $163 million, or 10%.

The increase in non-GAAP operating expenses included increases of $148 million in employee-related expenses, $38 million related to marketing programs, $25 million in professional services expenses, $19 million in third-party expenses for hardware maintenance and data center capacity, and $19 million in depreciation expense primarily related to equipment in our data centers, offset by a decrease of $79 million related to related to the COVID-19 one-time employee bonus.

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

Three Months Ended April 30, 2021

Three Months Ended July 31, 2021

GAAP Operating Expenses Share-Based Compensation Expenses (1)

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Total costs and expenses $ 1,261,481 $ (264,719) $ (28,205) $ 968,557

Three Months Ended April 30, 2020

Three Months Ended July 31, 2020

GAAP Operating Expenses Share-Based Compensation Expenses (1)

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

(1) Share-based compensation expenses were $265 million and $237 million for the three months ended April 30, 2021, and 2020, respectively.

Six Months Ended July 31, 2021

GAAP Operating Expenses Share-Based Compensation Expenses (1)

Other Operating Expenses (2)

Non-GAAP Operating Expenses (3)

Costs of subscription services $ 374,946 $ (41,138) $ (27,336) $ 306,472

Costs of professional services 303,628 (54,226) (8,168) 241,234

Product development 885,867 (259,754) (22,703) 603,410

Sales and marketing 684,651 (102,476) (26,870) 555,305

General and administrative 225,735 (71,760) (5,319) 148,656

Total costs and expenses $ 2,474,827 $ (529,354) $ (90,396) $ 1,855,077

Six Months Ended July 31, 2020

GAAP Operating Expenses Share-Based Compensation Expenses (1)

Other Operating Expenses (2)

Non-GAAP Operating Expenses (3)

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

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

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

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

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

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

(1) Share-based compensation expenses were $265 million and $251 million for the three months ended July 31, 2021, and 2020, respectively, and $529 million and $488 million for the six months ended July 31, 2021, and 2020, respectively.

The increase in share-based compensation expenses includes the impact of RSUs granted to existing and new employees.

(2) Other operating expenses include employer payroll tax-related items on employee stock transactions of $44 million and $22 million for the three months ended April 30, 2021, and 2020, respectively.

In addition, other operating expenses include amortization of acquisition-related intangible assets of $18 million and $16 million for the three months ended April 30, 2021, and 2020, respectively.

(2) Other operating expenses include amortization of acquisition-related intangible assets of $20 million and $16 million for the three months ended July 31, 2021, and 2020, respectively, and $38 million and $32 million for the six months ended July 31, 2021, and 2020, respectively.

In addition, other operating expenses include employer payroll tax-related items on employee stock transactions of $8 million and $7 million for the three months ended July 31, 2021, and 2020, respectively, and $53 million and $30 million for the six months ended July 31, 2021, and 2020, respectively.

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

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

GAAP operating expenses in costs of subscription services were $182 million for the three months ended April 30, 2021, compared to $145 million for the prior year period, an increase of $37 million, or 25%.

The increase in costs of subscription services included increases of $22 million in employee-related expenses driven by higher average headcount and share-based compensation expenses as well as $10 million in depreciation expense related to equipment in our data centers, offset by a decrease of $5 million related to the COVID-19 one-time employee bonus.

Non-GAAP operating expenses in costs of subscription services were $147 million for the three months ended April 30, 2021, compared to $122 million for the prior year period, an increase of $26 million, or 21%.

The increase in costs of subscription services included increases of $13 million in employee-related expenses driven by higher average headcount and $10 million in depreciation expense related to equipment in our data centers, offset by a decrease of $5 million related to the COVID-19 one-time employee bonus.

GAAP operating expenses in costs of subscription services were $193 million for the three months ended July 31, 2021, compared to $145 million for the prior year period, an increase of $48 million, or 33%.

The increase in costs of subscription services included increases of $22 million in employee-related expenses including share-based compensation, $9 million in depreciation expense related to equipment in our data center, and $7 million in third-party expenses for hardware maintenance and data center capacity.

GAAP operating expenses in costs of subscription services were $375 million for the six months ended July 31, 2021, compared to $290 million for the prior year period, an increase of $85 million, or 29%.

The increase in costs of subscription services included increases of $44 million in employee-related expenses including share-based compensation, $19 million in depreciation expense related to equipment in our data centers, and $11 million in third-party expenses for hardware maintenance and data center capacity, offset by a decrease of $5 million related to the COVID-19 one-time employee bonus.

Non-GAAP operating expenses in costs of subscription services were $159 million for the three months ended July 31, 2021, compared to $121 million for the prior year period, an increase of $38 million, or 31%.

The increase in costs of subscription services included increases of $16 million in employee-related expenses, $9 million in depreciation expense related to equipment in our data center, and $7 million in third-party expenses for hardware maintenance and data center capacity.

Non-GAAP operating expenses in costs of subscription services were $306 million for the six months ended July 31, 2021, compared to $243 million for the prior year period, an increase of $63 million, or 26%.

The increase in costs of subscription services included increases of $30 million in employee-related expenses, $19 million in depreciation expense related to equipment in our data centers, and $11 million in third-party expenses for hardware maintenance and data center capacity, offset by a decrease of $5 million related to the COVID-19 one-time employee bonus.

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.

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

GAAP operating expenses in costs of professional services were $151 million for the three months ended April 30, 2021, compared to $160 million for the prior year period, a decrease of $10 million, or 6%.

The decrease in costs of professional services included decreases of $12 million related to the COVID-19 one-time employee bonus and $5 million in reduced subcontractor expenses, offset by an increase of $9 million in employee-related expenses driven by higher average headcount and share-based compensation expenses.

Non-GAAP operating expenses in costs of professional services were $116 million for the three months ended April 30, 2021, compared to $135 million for the prior year period, a decrease of $19 million, or 14%.

The decrease in costs of professional services included decreases of $12 million related to the COVID-19 one-time employee bonus and $5 million in reduced subcontractor expenses.

GAAP operating expenses in costs of professional services were $153 million for the three months ended July 31, 2021, compared to $139 million for the prior year period, an increase of $14 million, or 10%.

The increase in costs of professional services was primarily due to an increase of $14 million in employee-related expenses including share-based compensation.

GAAP operating expenses in costs of professional services were $304 million for the six months ended July 31, 2021, compared to $300 million for the prior year period, an increase of $4 million, or 1%.

The increase in costs of professional services included an increase of $23 million in employee-related expenses including share-based compensation, offset by a decrease of $12 million related to the COVID-19 one-time employee bonus and $8 million in reduced subcontractor expenses.

Non-GAAP operating expenses in costs of professional services were $125 million for the three months ended July 31, 2021, compared to $114 million for the prior year period, an increase of $11 million, or 10%.

The increase in costs of professional services was primarily due to an increase of $12 million in employee-related expenses.

Non-GAAP operating expenses in costs of professional services were $241 million for the six months ended July 31, 2021, compared to $249 million for the prior year period, a decrease of $7 million, or 3%.

The decrease in costs of professional services included decreases of $12 million related to the COVID-19 one-time employee bonus and $8 million in reduced subcontractor expense, offset by an increase of $12 million in employee-related 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.

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

GAAP operating expenses in product development were $442 million for the three months ended April 30, 2021, compared to $443 million for the prior year period, a decrease of $2 million, or 0.4%.

The decrease in product development expenses included a decrease of $31 million related to the COVID-19 one-time employee bonus, offset by an increase of $31 million in employee-related expenses driven by higher average headcount and share-based compensation expenses.

Non-GAAP operating expenses in product development were $292 million for the three months ended April 30, 2021, compared to $309 million for the prior year period, a decrease of $17 million, or 6%.

The decrease in product development expenses included a decrease of $31 million related to the COVID-19 one-time employee bonus, offset by an increase of $14 million in employee-related expenses driven by higher average headcount.

GAAP operating expenses in product development were $444 million for the three months ended July 31, 2021, compared to $419 million for the prior year period, an increase of $26 million, or 6%.

The increase in product development expenses was primarily due to an increase of $22 million in employee-related expenses including share-based compensation.

GAAP operating expenses in product development were $886 million for the six months ended July 31, 2021, compared to $862 million for the prior year period, an increase of $24 million, or 3%.

The increase in product development expenses included an increase of $53 million in employee-related expenses including share-based compensation, offset by a decrease of $31 million related to the COVID-19 one-time employee bonus.

Non-GAAP operating expenses in product development were $311 million for the three months ended July 31, 2021, compared to $286 million for the prior year period, an increase of $26 million, or 9%.

The increase in product development expenses was primarily due to an increase of $21 million in employee-related expenses.

Non-GAAP operating expenses in product development were $603 million for the six months ended July 31, 2021, compared to $595 million for the prior year period, an increase of $8 million, or 1%.

The increase in product development expenses included an increase of $35 million in employee-related expenses, offset by a decrease of $31 million related to the COVID-19 one-time employee bonus.

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.

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

GAAP operating expenses in sales and marketing were $326 million for the three months ended April 30, 2021, compared to $319 million for the prior year period, an increase of $8 million, or 2%.

The increase in sales and marketing expenses included increases of $23 million in employee-related expenses driven by higher average headcount and share-based compensation expenses, $8 million related to marketing programs, and $7 million in professional services expenses, offset by decreases of $25 million related to the COVID-19 one-time employee bonus and $5 million in reduced travel.

Non-GAAP operating expenses in sales and marketing were $259 million for the three months ended April 30, 2021, compared to $261 million for the prior year period, a decrease of $2 million, or 1%.

The decrease in sales and marketing expenses included decreases of $25 million related to the COVID-19 one-time employee bonus and $5 million in reduced travel, offset by increases of $14 million in employee-related expenses driven by higher average headcount, $8 million related to marketing programs, and $7 million in professional services expenses.

GAAP operating expenses in sales and marketing were $358 million for the three months ended July 31, 2021, compared to $276 million for the prior year period, an increase of $82 million, or 30%.

The increase in sales and marketing expenses included increases of $40 million in employee-related expenses including share-based compensation and $31 million related to marketing programs.

GAAP operating expenses in sales and marketing were $685 million for the six months ended July 31, 2021, compared to $595 million for the prior year period, an increase of $90 million, or 15%.

The increase in sales and marketing expenses included increases of $63 million in employee-related expenses including share-based compensation and $38 million related to marketing programs, offset by decrease of $25 million related to the COVID-19 one-time employee bonus.

Non-GAAP operating expenses in sales and marketing were $296 million for the three months ended July 31, 2021, compared to $219 million for the prior year period, an increase of $77 million, or 35%.

The increase in sales and marketing expenses included increases of $37 million in employee-related expenses and $31 million related to marketing programs.

Non-GAAP operating expenses in sales and marketing were $555 million for the six months ended July 31, 2021, compared to $480 million for the prior year period, an increase of $76 million, or 16%.

The increase in sales and marketing expenses included increases of $51 million in employee-related expenses and $38 million related to marketing programs, offset by decrease of $25 million related to the COVID-19 one-time employee bonus.

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.

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

GAAP operating expenses in general and administrative were $112 million for the three months ended April 30, 2021, compared to $95 million for the prior year period, an increase of $17 million, or 18%.

The increase in general and administrative expenses included increases of $18 million in employee-related expenses driven by higher average headcount and share-based compensation expenses as well as $7 million in professional services expenses, offset by a decrease of $6 million related to the COVID-19 one-time employee bonus.

Non-GAAP operating expenses in general and administrative were $72 million for the three months ended April 30, 2021, compared to $61 million for the prior year period, an increase of $11 million, or 17%.

The increase in general and administrative expenses included increases of $12 million in employee-related expenses driven by higher average headcount and $7 million in professional services expenses, offset by a decrease of $6 million related to the COVID-19 one-time employee bonus.

GAAP operating expenses in general and administrative were $114 million for the three months ended July 31, 2021, compared to $99 million for the prior year period, an increase of $14 million, or 14%.

The increase in general and administrative expenses included increases of $10 million in employee-related expenses including share-based compensation and $10 million in professional services expenses.

GAAP operating expenses in general and administrative were $226 million for the six months ended July 31, 2021, compared to $194 million for the prior year period, an increase of $31 million, or 16%.

The increase in general and administrative expenses included increases of $29 million in employee-related expenses including share-based compensation and $17 million in professional services expenses, offset by a decrease of $6 million related to the COVID-19 one-time employee bonus.

Non-GAAP operating expenses in general and administrative were $77 million for the three months ended July 31, 2021, compared to $65 million for the prior year period, an increase of $12 million, or 19%.

The increase in general and administrative expenses included increases of $10 million in professional services expenses and $8 million in employee-related expenses.

Non-GAAP operating expenses in general and administrative were $149 million for the six months ended July 31, 2021, compared to $126 million for the prior year period, an increase of $23 million, or 18%.

The increase in general and administrative expenses included increases of $20 million in employee-related expenses and $17 million in professional services expenses, offset by a decrease of $6 million related to the COVID-19 one-time employee bonus.

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 (14.2)% for the three months ended April 30, 2020, to (3.3)% for the three months ended April 30, 2021.

Our GAAP operating margins for the three months ended April 30, 2021, have been favorably impacted by our revenue growth outpacing headcount growth, moderation of operating expenses in response to the COVID-19 pandemic, and the COVID-19 one-time employee bonus paid in the prior fiscal year.

GAAP operating margins improved from (1.6)% for the three months ended July 31, 2020, to (0.1)% for the three months ended July 31, 2021.

Our GAAP operating margins for the three months ended July 31, 2021, have been favorably impacted by our revenue growth outpacing headcount growth and moderation of operating expenses in response to the COVID-19 pandemic.

GAAP operating margins improved from (7.7)% for the six months ended July 31, 2020, to (1.6)% for the six months ended July 31, 2021.

Our GAAP operating margins for the six months ended July 31, 2021, have been favorably impacted by our revenue growth outpacing headcount growth, moderation of operating expenses in response to the COVID-19 pandemic, and the COVID-19 one-time employee bonus paid in the prior fiscal year.

We use the non-GAAP financial measure of non-GAAP operating margins to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, and to evaluate our financial performance.

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

Non-GAAP operating margins improved from 12.8% for the three months ended April 30, 2020, to 24.6% for the three months ended April 30, 2021.

Our non-GAAP operating margins for the three months ended April 30, 2021, have been favorably impacted by our revenue growth outpacing headcount growth, moderation of operating expenses in response to the COVID-19 pandemic, and the COVID-19 one-time employee bonus paid in the prior fiscal year.

Non-GAAP operating margins declined from 24.3% for the three months ended July 31, 2020, to 23.2% for the three months ended July 31, 2021.

The decline in non-GAAP operating margins for the three months ended July 31, 2021, was primarily due to higher operating expenses resulting from higher headcount and timing of marketing programs, partially offset by higher revenues.

Non-GAAP operating margins improved from 18.7% for the six months ended July 31, 2020, to 23.8% for the six months ended July 31, 2021.

Our non-GAAP operating margins for the six months ended July 31, 2021, have been favorably impacted by our revenue growth outpacing headcount growth, moderation of operating expenses in response to the COVID-19 pandemic, and the COVID-19 one-time employee bonus paid in the prior fiscal year.

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

Three Months Ended April 30, 2021

Three Months Ended July 31, 2021

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

Operating margin (0.1)% 21.0% 2.3% 23.2%

Three Months Ended April 30, 2020

Three Months Ended July 31, 2020

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

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

Six Months Ended July 31, 2021

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

Operating margin (1.6)% 21.7% 3.7% 23.8%

Six Months Ended July 31, 2020

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

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

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

Other Income (Expense), Net

We had other expense, net of $9 million for the three months ended April 30, 2021, as compared to other expense, net of $11 million for the prior year period.

This decrease was comprised of a decrease in interest expense of $15 million due to the adoption of ASU No.

2020-06 and the conversion of the 2020 Notes in the second quarter of fiscal 2021, offset by net losses recorded on our equity securities of $6 million and reduced interest income on marketable securities of $6 million due to lower prevailing interest rates.

We had other income, net of $103 million for the three months ended July 31, 2021, as compared to other expense, net of $11 million for the prior year period.

This increase in other income was related to net gains of $106 million on our equity securities, of which $100 million of gains were related to an equity investment that completed its IPO during the quarter, and a decrease in interest expense of $15 million due to the adoption of ASU No.

2020-06 and the conversion of the 2020 Notes in the second quarter of fiscal 2021.

We had other income, net of $94 million for the six months ended July 31, 2021, as compared to other expense, net of $22 million for the prior year period.

This increase in other income was related to net gains of $100 million on our equity securities, which was primarily due to an equity investment that completed its IPO during the quarter, and a decrease in interest expense of $28 million due to the adoption of ASU No.

2020-06 and the conversion of the 2020 Notes in the second quarter of fiscal 2021, offset by a decrease of $10 million in interest income on marketable securities as a result of lower prevailing interest rates.

Non-GAAP Financial Measures

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We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure, and to view our non-GAAP financial measures in conjunction with the most comparable GAAP financial measures.

See “Results of Operations—Operating Expenses” and “Results of Operations—Operating Margins” for reconciliations from the most directly comparable GAAP financial measures, GAAP operating expenses and GAAP operating margins, to the non-GAAP financial measures, non-GAAP operating expenses and non-GAAP operating margins, for the three months ended April 30, 2021, and 2020.

Liquidity and Capital Resources

As of April 30, 2021, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $3.0 billion, which were primarily held for working capital purposes.

As of July 31, 2021, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $3.3 billion, which were primarily held for working capital purposes.

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

treasury securities, commercial paper, U.S.

agency obligations, corporate bonds, and money market funds.

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

agency obligations, and marketable equity investments.

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

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

Our cash flows for the three months ended April 30, 2021, and 2020, were as follows (in thousands):

Three Months Ended April 30,

Our cash flows for the three and six months ended July 31, 2021, and 2020, were as follows (in thousands):

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

2021 2020 2021 2020

Net cash provided by (used in):

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Operating Activities

Cash provided by operating activities was $452 million and $264 million for the three months ended April 30, 2021, and 2020, respectively.

The improvement in cash flow provided by operating activities was primarily due to increases in sales and related cash collections, moderation of operating expenses in response to the COVID-19 pandemic, and the COVID-19 one-time employee bonus paid in the prior fiscal year.

These cash flow improvements were partially offset by the timing of prepayments.

Cash provided by operating activities was $198 million and $157 million for the three months ended July 31, 2021, and 2020, 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.

Cash provided by operating activities was $651 million and $421 million for the six months ended July 31, 2021, and 2020, respectively.

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

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Investing Activities

Cash used in investing activities for the three months ended April 30, 2021, was $862 million, which was primarily related to cash consideration for the acquisition of Peakon, net of cash acquired, of $679 million, the purchase of leased office space within our corporate headquarters of $171 million, capital expenditures primarily for data center projects of $70 million, purchases of non-marketable equity and other investments of $46 million, and the timing of purchases and maturities of marketable securities.

Cash used in investing activities for the three months ended July 31, 2021, was $139 million, which was primarily related to capital expenditures for data center projects of $88 million, purchases of non-marketable equity and other investments of $12 million, and the timing of purchases and maturities of marketable securities.

These payments were partially offset by proceeds of $15 million from sales of marketable securities.

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

Cash used in investing activities for the three months ended 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 six months ended July 31, 2021, was $1.0 billion, which was primarily related to cash consideration for the acquisition of Peakon, net of cash acquired, of $679 million, the purchase of leased office space within our corporate headquarters of $171 million, capital expenditures primarily for data center projects of $158 million, and purchases of non-marketable equity and other investments of $58 million.

These payments were partially offset by proceeds of $27 million from sales of marketable securities 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.

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

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Financing Activities

Cash used in financing activities was $11 million for the three months ended April 30, 2021, which was primarily due to a payment on the Term Loan of $9 million.

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

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

Our 2022 Notes are convertible at the option of the holders during the second quarter of fiscal 2022 since the trigger for early conversion was met.

Cash provided by financing activities was $66 million for the three months ended July 31, 2021, which was primarily due to proceeds of $76 million from the issuance of common stock from employee equity plans, offset by a payment of $9 million on the Term Loan.

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 $55 million for the six months ended July 31, 2021, which was primarily due to proceeds of $74 million from the issuance of common stock from employee equity plans, offset by a payment of $19 million on the Term Loan.

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.

Our 2022 Notes are convertible at the option of the holders during the third 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 in the second quarter of fiscal 2022.

We may receive additional conversion requests that require settlement in the third quarter of fiscal 2022.

For further information, see Note 11, Debt, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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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 second quarter of fiscal 2022.

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

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 in the second quarter of fiscal 2022.

We may receive additional conversion requests that require settlement in the third quarter of fiscal 2022.

We are also required to make interest payments on a semi-annual basis at the interest rates described in Note 11, Debt, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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

As of April 30, 2021, future contractual lease payments, excluding imputed interest, were $323 million.

Third-Party Hosted Infrastructure Platforms for Business Operations

As of July 31, 2021, future contractual lease payments, excluding imputed interest, were $318 million.

Third-Party Hosted Infrastructure Platforms for Business Operation

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

As of April 30, 2021, future noncancelable minimum payments under these agreements were approximately $401 million.

During the second quarter of fiscal 2022, we entered into a six-year, $420 million agreement for the use of cloud services.

As of July 31, 2021, future noncancelable minimum payments under these agreements were approximately $790 million.

Purchase Obligations

We entered into a ten-year sporting event sponsorship agreement with future noncancelable minimum payments of approximately $144 million.

Off-Balance Sheet Arrangements

Through April 30, 2021, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Through July 31, 2021, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

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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 April 30, 2021.

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

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2020-06 effective February 1, 2021, which simplified the accounting for convertible instruments.

There were no other significant changes to our critical accounting policies and estimates during the three months ended April 30, 2021.

There were no other significant changes to our critical accounting policies and estimates during the six months ended July 31, 2021.

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