What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-18 compared with 2021-08-26 · 101 added, 101 removed, 257 unchanged (44% 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 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.

While we have incurred operating losses on a GAAP basis in each fiscal year 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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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, Scout in fiscal 2020, and Peakon in fiscal 2022.

For example, we acquired Adaptive Insights in fiscal 2019, Scout in fiscal 2020, and Peakon and Zimit in fiscal 2022.

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

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Impact of the COVID-19 Pandemic

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

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

In response to the COVID-19 pandemic, we temporarily closed the majority of our offices;

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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.

While the majority of our employees continue to work remotely, in the second and third quarters 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.

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

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

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.

Despite the increased uncertainty, 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.

We continue to achieve solid new subscription bookings as demand for our products remains strong.

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

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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 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 accounted for 88% of our total revenues for each of the three and nine-month periods ended October 31, 2021, and represented 96% of our total unearned revenue as of October 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 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,

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

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

2021 2020 % Change 2021 2020 % Change

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Total revenues $ 1,327,263 $ 1,105,960 20% $ 3,762,657 $ 3,186,312 18%

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%.

Total revenues were $1.3 billion for the three months ended October 31, 2021, compared to $1.1 billion during the prior year period, an increase of $221 million, or 20%.

Subscription services revenues were $1.2 billion for the three months ended October 31, 2021, compared to $969 million for the prior year period, an increase of $203 million, or 21%.

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 $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%.

Professional services revenues were $156 million for the three months ended October 31, 2021, compared to $137 million for the prior year period, an increase of $18 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%.

Total revenues were $3.8 billion for the nine months ended October 31, 2021, compared to $3.2 billion during the prior year period, an increase of $576 million, or 18%.

Subscription services revenues were $3.3 billion for the nine months ended October 31, 2021, compared to $2.8 billion for the prior year period, an increase of $535 million, or 19%.

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%.

Professional services revenues were $446 million for the nine months ended October 31, 2021, compared to $404 million for the prior year period, an increase of $41 million, or 10%.

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 $1.3 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.

GAAP operating expenses were $1.3 billion for the three months ended October 31, 2021, compared to $1.1 billion for the prior year period, an increase of $183 million, or 16%.

The increase in GAAP operating expenses included increases of $97 million in employee-related expenses including share-based compensation, $21 million in facilities and IT-related expenses, $20 million related to marketing programs, $13 million in third-party expenses for hardware maintenance and data center capacity, $10 million in professional services and subcontractor expenses, and $9 million in depreciation expense related to equipment in our data centers.

GAAP operating expenses were $3.8 billion for the nine months ended October 31, 2021, compared to $3.4 billion for the prior year period, an increase of $417 million, or 12%.

The increase in GAAP operating expenses included increases of $310 million in employee-related expenses including share-based compensation, $59 million related to marketing programs, $35 million in professional services and subcontractor expenses, $32 million in facilities and IT-related expenses, $31 million in third-party expenses for hardware maintenance and data center capacity, and $28 million in depreciation expense 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 $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.

Non-GAAP operating expenses were $995 million for the three months ended October 31, 2021, compared to $838 million for the prior year period, an increase of $157 million, or 19%.

The increase in non-GAAP operating expenses included increases of $77 million in employee-related expenses, $21 million in facilities and IT-related expenses, $20 million related to marketing programs, $13 million in third-party expenses for hardware maintenance and data center capacity, $10 million in professional services and subcontractor expenses, and $9 million in depreciation expense related to equipment in our data centers.

Non-GAAP operating expenses were $2.9 billion for the nine months ended October 31, 2021, compared to $2.5 billion for the prior year period, an increase of $320 million, or 13%.

The increase in non-GAAP operating expenses included increases of $225 million in employee-related expenses, $59 million related to marketing programs, $35 million in professional services and subcontractor expenses, $32 million in facilities and IT-related expenses, $31 million in third-party expenses for hardware maintenance and data center capacity, and $28 million in depreciation expense 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 July 31, 2021

Three Months Ended October 31, 2021

GAAP Operating Expenses Share-Based Compensation Expenses (1)

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Total costs and expenses $ 1,303,318 $ (281,118) $ (27,186) $ 995,014

Three Months Ended July 31, 2020

Three Months Ended October 31, 2020

GAAP Operating Expenses Share-Based Compensation Expenses (1)

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

Six Months Ended July 31, 2021

Nine Months Ended October 31, 2021

GAAP Operating Expenses Share-Based Compensation Expenses (1)

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Total costs and expenses $ 3,778,145 $ (810,472) $ (117,582) $ 2,850,091

Six Months Ended July 31, 2020

Nine Months Ended October 31, 2020

GAAP Operating Expenses Share-Based Compensation Expenses (1)

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

(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.

(1) Share-based compensation expenses were $281 million and $260 million for the three months ended October 31, 2021, and 2020, respectively, and $810 million and $748 million for the nine months ended October 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 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.

(2) Other operating expenses include amortization of acquisition-related intangible assets of $20 million and $14 million for the three months ended October 31, 2021, and 2020, respectively, and $57 million and $46 million for the nine months ended October 31, 2021, and 2020, respectively.

In addition, other operating expenses include employer payroll tax-related items on employee stock transactions of $7 million and $8 million for the three months ended October 31, 2021, and 2020, respectively, and $60 million and $38 million for the nine months ended October 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 $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%.

GAAP operating expenses in costs of subscription services were $201 million for the three months ended October 31, 2021, compared to $152 million for the prior year period, an increase of $48 million, or 32%.

The increase in costs of subscription services included increases of $20 million in employee-related expenses including share-based compensation, $9 million in depreciation expense related to equipment in our data centers, and $8 million in third-party expenses for hardware maintenance and data center capacity.

GAAP operating expenses in costs of subscription services were $576 million for the nine months ended October 31, 2021, compared to $443 million for the prior year period, an increase of $133 million, or 30%.

The increase in costs of subscription services included increases of $64 million in employee-related expenses including share-based compensation, $28 million in depreciation expense related to equipment in our data centers, and $20 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%.

Non-GAAP operating expenses in costs of subscription services were $167 million for the three months ended October 31, 2021, compared to $128 million for the prior year period, an increase of $39 million, or 30%.

The increase in costs of subscription services included increases of $15 million in employee-related expenses, $9 million in depreciation expense related to equipment in our data centers, and $8 million in third-party expenses for hardware maintenance and data center capacity.

Non-GAAP operating expenses in costs of subscription services were $473 million for the nine months ended October 31, 2021, compared to $371 million for the prior year period, an increase of $102 million, or 28%.

The increase in costs of subscription services included increases of $45 million in employee-related expenses, $28 million in depreciation expense related to equipment in our data centers, and $20 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.

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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 $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%.

GAAP operating expenses in costs of professional services were $159 million for the three months ended October 31, 2021, compared to $143 million for the prior year period, an increase of $16 million, or 11%.

The increase in costs of professional services was primarily due to an increase of $11 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%.

GAAP operating expenses in costs of professional services were $463 million for the nine months ended October 31, 2021, compared to $442 million for the prior year period, an increase of $20 million, or 5%.

The increase in costs of professional services included an increase of $34 million in employee-related expenses including share-based compensation, offset by decreases of $12 million related to the COVID-19 one-time employee bonus and $7 million in subcontractor expenses.

Non-GAAP operating expenses in costs of professional services were $129 million for the three months ended October 31, 2021, compared to $115 million for the prior year period, an increase of $14 million, or 12%.

The increase in costs of professional services was primarily due to an increase of $9 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.

Non-GAAP operating expenses in costs of professional services were $370 million for the nine months ended October 31, 2021, compared to $363 million for the prior year period, an increase of $7 million, or 2%.

The increase in costs of professional services included an increase of $21 million in employee-related expenses, offset by decreases of $12 million related to the COVID-19 one-time employee bonus and $7 million in subcontractor 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 $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%.

GAAP operating expenses in product development were $456 million for the three months ended October 31, 2021, compared to $420 million for the prior year period, an increase of $36 million, or 8%.

The increase in product development expenses was primarily due to an increase of $30 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%.

GAAP operating expenses in product development were $1.3 billion for the nine months ended October 31, 2021, compared to $1.3 billion for the prior year period, an increase of $59 million, or 5%.

The increase in product development expenses included an increase of $84 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%.

Non-GAAP operating expenses in product development were $317 million for the three months ended October 31, 2021, compared to $288 million for the prior year period, an increase of $30 million, or 10%.

The increase in product development expenses was primarily due to an increase of $23 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%.

Non-GAAP operating expenses in product development were $921 million for the nine months ended October 31, 2021, compared to $882 million for the prior year period, an increase of $38 million, or 4%.

The increase in product development expenses included an increase of $58 million in employee-related expenses, offset by a decrease of $31 million related to the COVID-19 one-time employee bonus.

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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 $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%.

GAAP operating expenses in sales and marketing were $366 million for the three months ended October 31, 2021, compared to $303 million for the prior year period, an increase of $63 million, or 21%.

The increase in sales and marketing expenses included increases of $29 million in employee-related expenses including share-based compensation and $20 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%.

GAAP operating expenses in sales and marketing were $1.1 billion for the nine months ended October 31, 2021, compared to $898 million for the prior year period, an increase of $153 million, or 17%.

The increase in sales and marketing expenses included increases of $91 million in employee-related expenses including share-based compensation and $59 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%.

Non-GAAP operating expenses in sales and marketing were $301 million for the three months ended October 31, 2021, compared to $240 million for the prior year period, an increase of $61 million, or 25%.

The increase in sales and marketing expenses included increases of $27 million in employee-related expenses and $20 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%.

Non-GAAP operating expenses in sales and marketing were $856 million for the nine months ended October 31, 2021, compared to $720 million for the prior year period, an increase of $136 million, or 19%.

The increase in sales and marketing expenses included increases of $78 million in employee-related expenses and $59 million related to marketing programs, offset by decrease of $25 million related to the COVID-19 one-time employee bonus.

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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 $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%.

GAAP operating expenses in general and administrative were $122 million for the three months ended October 31, 2021, compared to $102 million for the prior year period, an increase of $20 million, or 19%.

The increase in general and administrative expenses included increases of $8 million in employee-related expenses including share-based compensation and $4 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%.

GAAP operating expenses in general and administrative were $347 million for the nine months ended October 31, 2021, compared to $296 million for the prior year period, an increase of $51 million, or 17%.

The increase in general and administrative expenses included increases of $37 million in employee-related expenses including share-based compensation and $22 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%.

Non-GAAP operating expenses in general and administrative were $81 million for the three months ended October 31, 2021, compared to $67 million for the prior year period, an increase of $14 million, or 21%.

The increase in general and administrative expenses included increases of $4 million in professional services expenses and $2 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%.

Non-GAAP operating expenses in general and administrative were $230 million for the nine months ended October 31, 2021, compared to $193 million for the prior year period, an increase of $37 million, or 19%.

The increase in general and administrative expenses included increases of $23 million in employee-related expenses and $22 million in professional services expenses, offset by a decrease of $6 million related to the COVID-19 one-time employee bonus.

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Operating Margins

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.

GAAP operating margins improved from (1.3)% for the three months ended October 31, 2020, to 1.8% for the three months ended October 31, 2021.

Our GAAP operating margins for the three months ended October 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 (5.5)% for the nine months ended October 31, 2020, to (0.4)% for the nine months ended October 31, 2021.

Our GAAP operating margins for the nine months ended October 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 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.

Non-GAAP operating margins improved from 24.2% for the three months ended October 31, 2020, to 25.0% for the three months ended October 31, 2021.

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

Non-GAAP operating margins improved from 20.6% for the nine months ended October 31, 2020, to 24.3% for the nine months ended October 31, 2021.

Our non-GAAP operating margins for the nine months ended October 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 July 31, 2021

Three Months Ended October 31, 2021

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

Operating margin 1.8% 21.2% 2.0% 25.0%

Three Months Ended July 31, 2020

Three Months Ended October 31, 2020

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

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

Six Months Ended July 31, 2021

Nine Months Ended October 31, 2021

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

Operating margin (0.4)% 21.5% 3.2% 24.3%

Six Months Ended July 31, 2020

Nine Months Ended October 31, 2020

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

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Other Income (Expense), Net

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.

We had other income, net of $22 million for the three months ended October 31, 2021, as compared to other expense, net of $9 million for the prior year period.

This increase in other income was primarily related to net gains of $21 million recognized on our equity investments, of which $12 million was due to the remeasurement of our prior equity interest in Zimit upon acquisition, and a decrease in interest expense of $11 million due to the adoption of ASU No.

We had other income, net of $115 million for the nine months ended October 31, 2021, as compared to other expense, net of $31 million for the prior year period.

This increase in other income was primarily related to net gains of $122 million recognized on our equity investments, of which $94 million was due to an equity investment that completed its IPO during the prior quarter and $12 million was due to the remeasurement of our prior equity interest in Zimit upon acquisition.

Additionally, there was a decrease in interest expense of $41 million from 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 $12 million in interest income on marketable securities resulting from 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 and six months ended July 31, 2021, and 2020.

Liquidity and Capital Resources

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.

As of October 31, 2021, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $3.6 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, money market funds, corporate bonds, U.S.

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

agency obligations, and marketable equity investments.

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

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,

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

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

2021 2020 2021 2020

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Operating Activities

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

Cash provided by operating activities was $385 million and $294 million for the three months ended October 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.

Cash provided by operating activities was $1.0 billion and $715 million for the nine months ended October 31, 2021, and 2020, respectively.

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

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

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

Investing Activities

Cash used in investing activities for the three months ended 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.

Cash used in investing activities for the three months ended October 31, 2021, was $167 million, which was primarily comprised of a net cash outflow related to acquisition activity of $61 million, capital expenditures for data center and office space projects of $33 million, purchases of non-marketable equity and other investments of $27 million, and the timing of purchases and maturities of marketable securities.

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

Cash used in investing activities for the nine months ended October 31, 2021, was $1.2 billion, which was primarily comprised of net cash outflows related to acquisition activity of $740 million, capital expenditures mainly for data center projects of $191 million, the purchase of leased office space within our corporate headquarters of $171 million, purchases of non-marketable equity and other investments of $85 million, and the timing of purchases and maturities of marketable securities.

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

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

Cash used in financing activities was $8 million for the three months ended October 31, 2021, which was primarily due to a payment on the Term Loan of $9 million, partially offset by proceeds of $2 million from the issuance of common stock from employee equity plans.

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

Cash provided by financing activities was $48 million for the nine months ended October 31, 2021, which was primarily due to proceeds of $76 million from the issuance of common stock from employee equity plans, offset by payments of $28 million on the Term Loan.

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

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

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

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

We may receive additional conversion requests that require settlement in the fourth 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 July 31, 2021, future contractual lease payments, excluding imputed interest, were $318 million.

As of October 31, 2021, future contractual lease payments, excluding imputed interest, were $313 million.

Third-Party Hosted Infrastructure Platforms for Business Operation

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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.

As of October 31, 2021, future noncancelable minimum payments under these agreements were approximately $761 million.

Purchase Obligations

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

As of October 31, 2021, we have entered into noncancelable agreements to purchase $162 million of data center equipment during the remainder of fiscal 2022 and fiscal 2023.

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

Off-Balance Sheet Arrangements

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.

Through October 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 July 31, 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 six months ended July 31, 2021.

There were no other significant changes to our critical accounting policies and estimates during the nine months ended October 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