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Item 2. Management’s Discussion and Analysis

2022-05-26 compared with 2021-11-18 · 156 added, 237 removed, 121 unchanged (76% of the section changed)

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

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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

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

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

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

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

While we 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.

Workday delivers applications for financial management, spend management, human capital management, planning, and analytics.

Our diverse customer base includes medium-sized and large, global organizations within numerous industry categories, including professional and business services, financial services, healthcare, education, government, technology, media, retail, and hospitality.

We have achieved significant growth since our inception in 2005, with a substantial amount of our growth coming from new customers.

Our current financial focus is on growing our revenues and expanding both our customer base and our footprint within our existing customers.

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

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

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

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

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

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

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

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

We expect to make further significant investments in our data center capacity and equipment and third-party hosted infrastructure platforms as we plan for future growth.

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

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

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

For example, in fiscal 2022, we acquired Peakon ApS, a continuous listening platform that captures real-time employee sentiment, Zimit, a configure, price, quote solution built for services industries, and VNDLY, a cloud-based external workforce and vendor management technology.

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

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

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

Many of these investments will occur in advance of experiencing any direct benefit from them and could make it difficult to determine if we are allocating our resources efficiently.

Since inception, we have also invested heavily in our professional services organization to help ensure that customers successfully deploy and adopt our applications.

Additionally, we continue to expand our professional service partner ecosystem to further support our customers.

Additionally, we continue to expand our professional services partner ecosystem to further support our customers.

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

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

Impact of the COVID-19 Pandemic

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;

Impact of the COVID-19 Pandemic and Current Economic Conditions

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption of financial markets.

In addition, the Russian invasion of Ukraine in early fiscal 2023 has led to further economic disruption.

While we do not operate in Russia and while our extended workforce in Ukraine is not a material part of our workforce, the conflict has increased inflationary cost pressures and supply chain constraints which have negatively impacted the global economy.

In response to the concerns over inflation risk, the U.S.

Federal Reserve began to raise interest rates in March 2022 for the first time in over three years, and signaled they expect additional rate increases throughout the year.

Despite the continuing uncertainty associated with the COVID-19 pandemic, Russia-Ukraine conflict, and other macroeconomic events, 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 and help our customers continue to embark on their human resources and finance digital transformation journeys.

Demand for our products remains strong, and we continue to achieve solid new subscription bookings.

At the beginning of the COVID-19 pandemic, we temporarily closed the majority of our offices;

required most of our employees to work remotely;

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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.

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 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 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.

As of April 30, 2022, most of our offices have reopened and we have begun permitting travel and in-person events in accordance with applicable regional guidance.

We continue to prioritize employee and community health and safety.

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

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.

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 collections, 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.

For further discussion of the potential impacts of the COVID-19 pandemic, Russia-Ukraine conflict, and other macroeconomic events on our business, financial condition, and operating results, see “Risk Factors” included in Part II, Item 1A of this report.

Financial Results Overview

The following table provides an overview of our key metrics (in thousands, except percentages and headcount data):

Three Months Ended April 30,

2022 2021 $ Change % Change

Total revenues $ 1,434,657 $ 1,175,033 $ 259,624 22 %

Subscription services revenues $ 1,272,076 $ 1,032,169 $ 239,907 23 %

GAAP operating income (loss) $ (72,843) $ (38,313) $ (34,530) 90 %

Non-GAAP operating income (1)

$ 288,558 $ 288,513 $ 45 0 %

GAAP operating margin (5.1) % (3.3) % (2) %

Non-GAAP operating margin (1)

20.1 % 24.6 % (5) %

Operating cash flows $ 439,717 $ 452,428 $ (12,711) (3) %

As of April 30,

2022 2021 $ Change % Change

Total subscription revenue backlog $ 12,653,639 $ 10,081,579 $ 2,572,060 26 %

24-month subscription revenue backlog $ 7,968,631 $ 6,592,715 $ 1,375,916 21 %

Cash, cash equivalents, and marketable securities $ 6,255,355 $ 2,994,529 $ 3,260,826 109 %

Headcount 15,932 13,119 2,813 21 %

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

Components of Results of Operations

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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 nine-month periods ended October 31, 2021, and represented 96% of our total unearned revenue as of October 31, 2021.

Subscription services revenues accounted for 89% of our total revenues for the three months ended April 30, 2022, and represented 96% of our total unearned revenue as of April 30, 2022.

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

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

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

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

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

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

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

Subscription Revenue Backlog

Our subscription revenue backlog, which is also referred to as remaining performance obligations for subscription contracts, represents contracted subscription services revenues that have not yet been recognized and includes billed and unbilled amounts.

Subscription revenue backlog may fluctuate from period to period due to a number of factors, including the timing of renewals and overall renewal rates, new business growth, average contract duration, and seasonality.

Costs and Expenses

Costs of subscription services revenues.

Costs of subscription services revenues consist primarily of employee-related expenses associated with hosting our applications and providing customer support, data center expenses, and depreciation of computer equipment and software.

Costs of subscription services revenues consist primarily of employee-related expenses associated with hosting our applications and providing customer support, expenses related to data centers and computing infrastructure operated by third parties, and depreciation of computer equipment and software.

Costs of professional services revenues .

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

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

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

Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be five years.

Sales commissions for renewal contracts are deferred and then amortized on a straight-line basis over the related contractual renewal period.

Marketing programs consist of advertising, events, corporate communications, brand awareness, brand ambassador campaigns, and product marketing activities.

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

Sales commissions for new revenue contracts are capitalized and amortized on a straight-line basis over a period of benefit that we have determined to be five years.

General and administrative .

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Results of Operations

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

Our total revenues for the three months ended April 30, 2022, and 2021, were as follows (in thousands, except percentages):

Three Months Ended April 30,

2022 2021 % Change

Subscription services $ 1,272,076 $ 1,032,169 23 %

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Total revenues $ 1,434,657 $ 1,175,033 22 %

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 $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 $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 $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.

T otal revenues were $1.4 billion for the three months ended April 30, 2022, compared to $1.2 billion for the prior year period, an increase of $260 million, or 22%.

Subscription services revenues were $1.3 billion for the three months ended April 30, 2022, compared to $1.0 billion for the prior year period, an increase of $240 million, or 23%.

The increase in subscription services revenues was primarily due to an increased number of customer contracts and strong customer renewals, with gross retention over 95%.

Professional services revenues were $163 million for the three months ended April 30, 2022, compared to $143 million for the prior year period, an increase of $20 million, or 14%.

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

Subscription Revenue Backlog

Our total subscription revenue backlog for the three months ended April 30, 2022, was $12.7 billion, with $8.0 billion expected to be recognized in revenues over the next 24 mo nths.

For the three months ended April 30, 2021, our total subscription revenue backlog was $10.1 billion, with $6.6 billion expected to be recognized in revenues over the next 24 months.

The increase in subscription revenue backlog was primarily driven by the addition of new customers, expansion of our product offerings with existing customers, and the timing of renewals.

Operating Expenses

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.

GAAP operating expenses were $1.5 billion for the three months ended April 30, 2022, compared to $1.2 billion for the prior year period, an increase of $294 million, or 24%.

The increase in GAAP operating expenses included $208 million in employee-related expenses due to higher headcount, additional share-based compensation, and a new performance-based cash bonus program for all employees not covered under an existing incentive plan of $32 million.

Additionally, there were increases of $22 million in facilities and IT-related expenses, $16 million in third-party expenses for hardware maintenance and data center capacity, $15 million in travel expenses, and $14 million related to marketing programs.

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

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

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

We also believe that non-GAAP operating expenses provide useful information to investors and others in understanding and evaluating our operating results and prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies.

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 $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.

Non-GAAP operating expenses were 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.

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

Non-GAAP operating expenses were $1.1 billion for the three months ended April 30, 2022, compared to $887 million for the prior year period, an increase of $260 million, or 29%.

The increase in non-GAAP operating expenses included $177 million in employee-related expenses due to higher headcount and a new performance-based cash bonus program for all employees not covered under an existing incentive plan of $32 million.

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

Three Months Ended October 31, 2021

GAAP Operating Expenses Share-Based Compensation Expenses (1)

Other Operating Expenses (2)

Non-GAAP Operating Expenses (3)

Costs of subscription services $ 200,700 $ (21,340) $ (12,859) $ 166,501

Costs of professional services 159,024 (29,105) (1,043) 128,876

Product development 455,615 (135,591) (2,870) 317,154

Sales and marketing 366,323 (55,645) (9,642) 301,036

General and administrative 121,656 (39,437) (772) 81,447

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

Three Months Ended October 31, 2020

GAAP Operating Expenses Share-Based Compensation Expenses (1)

Other Operating Expenses (2)

Non-GAAP Operating Expenses (3)

Costs of subscription services $ 152,396 $ (16,767) $ (7,811) $ 127,818

Costs of professional services 142,785 (27,349) (824) 114,612

Product development 419,962 (128,423) (4,006) 287,533

Sales and marketing 302,870 (54,077) (8,352) 240,441

General and administrative 102,024 (33,216) (1,355) 67,453

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

Nine Months Ended October 31, 2021

GAAP Operating Expenses Share-Based Compensation Expenses (1)

Other Operating Expenses (2)

Three Months Ended April 30, 2022

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

Non-GAAP Operating Expenses (2)

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Total costs and expenses $ 1,507,500 $ (311,506) $ (49,895) $ 1,146,099

Nine Months Ended October 31, 2020

GAAP Operating Expenses Share-Based Compensation Expenses (1)

Other Operating Expenses (2)

Three Months Ended April 30, 2021

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

Non-GAAP Operating Expenses (2)

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Total costs and expenses $ 1,213,346 $ (264,635) $ (62,191) $ 886,520

(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 $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.

(1) Other operating expenses include employer payroll tax-related items on employee stock transactions of $28 million and $44 million for the three months ended April 30, 2022, and 2021, respectively.

In addition, other operating expenses include amortization of acquisition-related intangible assets of $22 million and $18 million for the three months ended April 30, 2022, and 2021, respectively.

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

Costs of Subscription Services

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

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 $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.

GAAP operating expenses in costs of subscription services were $233 million for the three months ended April 30, 2022, compared to $182 million for the prior year period, an increase of $51 million, or 28%.

The increase in costs of subscription services included increases of $26 million in employee-related expenses, including share-based compensation, due to higher headcount, $12 million in third-party expenses for hardware maintenance and data center capacity, and $4 million in depreciation expense related to equipment in our data centers.

Non-GAAP operating expenses in costs of subscription services were $190 million for the three months ended April 30, 2022, compared to $147 million for the prior year period, an increase of $43 million, or 29%.

The increase in costs of subscription services included increases of $21 million in employee-related expenses due to higher headcount, $12 million in third-party expenses for hardware maintenance and data center capacity, and $4 million in depreciation expense related to equipment in our data centers.

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

Costs of Professional Services

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

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 $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 $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.

GAAP operating expenses in costs of professional services were $170 million for the three months ended April 30, 2022, compared to $151 million for the prior year period, an increase of $19 million, or 13%.

The increase in costs of professional services included increases of $12 million in employee-related expenses, including share-based compensation, due to higher headcount and $4 million in professional services and subcontractor expenses.

Non-GAAP operating expenses in costs of professional services were $138 million for the three months ended April 30, 2022, compared to $116 million for the prior year period, an increase of $22 million, or 19%.

The increase in costs of professional services included increases of $15 million in employee-related expenses due to higher headcount and $4 million in professional services and 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.

Product Development

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

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 $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 $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 $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.

GAAP operating expenses in product development were $542 million for the three months ended April 30, 2022, compared to $442 million for the prior year period, an increase of $100 million, or 23%.

The increase in product development expenses was primarily due to an increase of $86 million in employee-related expenses, including share-based compensation, due to higher headcount.

Non-GAAP operating expenses in product development were $375 million for the three months ended April 30, 2022, compared to $292 million for the prior year period, an increase of $83 million, or 28%.

The increase in product development expenses was primarily due to an increase of $69 million in employee-related expenses due to higher headcount.

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

Sales and Marketing

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

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 $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 $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 $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.

GAAP operating expenses in sales and marketing were $429 million for the three months ended April 30, 2022, compared to $326 million for the prior year period, an increase of $103 million, or 31%.

The increase in sales and marketing expenses included increases of $69 million in employee-related expenses, including share-based compensation, due to higher headcount, $14 million related to marketing programs, and $10 million in travel expenses.

Non-GAAP operating expenses in sales and marketing were $356 million for the three months ended April 30, 2022, compared to $259 million for the prior year period, an increase of $97 million, or 37%.

The increase in sales and marketing expenses included increases of $64 million in employee-related expenses due to higher headcount, $14 million related to marketing programs, and $10 million in travel expenses.

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

General and Administrative

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

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 $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 $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 $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.

GAAP operating expenses in general and administrative were $134 million for the three months ended April 30, 2022, compared to $112 million for the prior year period, an increase of $22 million, or 19%.

The increase in general and administrative expenses included increases of $15 million in employee-related expenses, including share-based compensation, due to higher headcount and $2 million in travel expenses.

Non-GAAP operating expenses in general and administrative were $86 million for the three months ended April 30, 2022, compared to $72 million for the prior year period, an increase of $14 million, or 20%.

The increase in general and administrative expenses included increases of $8 million in employee-related expenses due to higher headcount and $2 million in travel expenses.

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

Operating Margins

GAAP operating margins improved from (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.

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

We also believe that non-GAAP operating margins provide useful information to investors and others in understanding and evaluating our operating results and prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies.

Non-GAAP operating margins are calculated using GAAP revenues and non-GAAP operating expenses.

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

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 October 31, 2021

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

Operating Margin

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%

Nine Months Ended October 31, 2021

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

GAAP operating margin declined from (3.3)% for the three months ended April 30, 2021, to (5.1)% for the three months ended April 30, 2022, primarily due to increases in higher headcount, the rollout of a performance-based cash bonus program to all employees not covered under an existing incentive plan, a return to travel and in-person events, and other growth investments made across the business, offset by higher revenues.

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

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

We also believe that non-GAAP operating margin provides useful information to investors and others in understanding and evaluating our operating results and prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies.

Non-GAAP operating margin was calculated using GAAP revenues and non-GAAP operating expenses.

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

Non-GAAP operating margin declined from 24.6% for the three months ended April 30, 2021, to 20.1% for the three months ended April 30, 2022, primarily due to increases in higher headcount, the rollout of a performance-based cash bonus program to all employees not covered under an existing incentive plan, a return to travel and in-person events, and other growth investments made across the business, offset by higher revenues.

Reconciliations of our GAAP to non-GAAP operating income (loss) and operating margin were as follows (in thousands, except percentages):

Three Months Ended April 30, 2022

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

Operating income (loss) $ (72,843) $ 311,506 $ 49,895 $ 288,558

Operating margin (5.1) % 21.7 % 3.5 % 20.1 %

Nine Months Ended October 31, 2020

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

Three Months Ended April 30, 2021

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

Operating income (loss) $ (38,313) $ 264,635 $ 62,191 $ 288,513

Operating margin (3.3) % 22.5 % 5.4 % 24.6 %

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Other Income (Expense), Net

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.

We had other expense, net of $20 million for the three months ended April 30, 2022, as compared to other expense, net of $9 million for the three months ended April 30, 2021.

The increase in other expense, net was primarily related to additional contractual interest expense of $9 million for our Senior Notes issued in the current quarter.

Non-GAAP Financial Measures

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

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

Non-GAAP Operating Expenses and Non-GAAP Operating Margins

Our non-GAAP operating expenses and non-GAAP operating margins exclude the components listed below.

For the reasons set forth below, management believes that excluding the component provides useful information to investors and others in understanding and evaluating our operating results and prospects in the same manner as management, in comparing financial results across accounting periods and to those of peer companies, and to better understand the long-term performance of our core business.

Our measures of non-GAAP operating expenses, non-GAAP operating income (loss), and non-GAAP operating margin meet the definition of non-GAAP financial measures.

Non-GAAP Operating Expenses, Non-GAAP Operating Income (Loss), and Non-GAAP Operating Margin

Our non-GAAP operating expenses, non-GAAP operating income (loss), and non-GAAP operating margin exclude the components listed below.

For the reasons set forth below, management believes that excluding these components provides useful information to investors and others in understanding and evaluating our operating results and prospects in the same manner as management, in comparing financial results across accounting periods and to those of peer companies, and to better understand the long-term performance of our core business.

• Share-Based Compensation Expenses.

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The amount of purchase price allocated to intangible assets and the term of its related amortization can vary significantly and are unique to each acquisition and thus we do not believe it is reflective of ongoing operations.

Although we exclude the amortization of acquisition-related intangible assets from these non-GAAP measures, management believes that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation.

Limitations on the Use of Non-GAAP Financial Measures

A limitation of our non-GAAP financial measures of non-GAAP operating expenses and non-GAAP operating margins is that they do not have uniform definitions.

A limitation of our non-GAAP financial measures of non-GAAP operating expenses, non-GAAP operating income (loss), and non-GAAP operating margin is that they do not have uniform definitions.

Our definitions will likely differ from the definitions used by other companies, including peer companies, and therefore comparability may be limited.

Further, the non-GAAP financial measure of non-GAAP operating expenses has certain limitations because it does not reflect all items of expense that affect our operations and are reflected in the GAAP financial measure of total operating expenses.

In the case of share-based compensation, if we did not pay out a portion of compensation in the form of share-based compensation and related employer payroll tax-related items, the cash salary expense included in costs of revenues and operating expenses would be higher, which would affect our cash position.

In the case of share-based compensation, if we did not pay out a portion of compensation in the form of share-based compensation and related employer payroll tax-related items, the cash salary expense included in operating expenses would be higher, which would affect our cash position.

We compensate for these limitations by reconciling the non-GAAP financial measures to the most comparable 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 nine months ended October 31, 2021, and 2020.

See “Results of Operations—Operating Expenses” and “Results of Operations—Operating Margin” for reconciliations from the most directly comparable GAAP financial measures, GAAP operating expenses, GAAP operating income (loss), and GAAP operating margin, to the non-GAAP financial measures, non-GAAP operating expenses, non-GAAP operating income (loss), and non-GAAP operating margin, for the three months ended April 30, 2022, and 2021.

Liquidity and Capital Resources

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.

As of April 30, 2022, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $6.3 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, corporate bonds, money market funds, U.S.

agency obligations, and marketable equity investments.

treasury securities, commercial paper, U.S.

agency obligations, money market funds, corporate bonds, and marketable equity investments.

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

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

Our long-term future capital requirements depend on many factors, including the effects of the COVID-19 pandemic, customer growth rates, subscription renewal activity, headcount growth, timing and extent of development efforts, expansion of sales and marketing activities, introduction of new and enhanced services offerings, timing of construction or acquisition of additional facilities, investments, and acquisition activities.

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

We believe our existing cash, cash equivalents, marketable securities, cash provided by operating activities, unbilled amounts related to the remaining term of contracted noncancelable subscription agreements, which are not reflected on the Condensed Consolidated Balance Sheets, and, if necessary, our borrowing capacity under our 2022 Credit Agreement that provides for $1.0 billion of unsecured financing, are sufficient to meet our working capital, capital expenditure, and debt repayment needs over the next 12 months.

As part of our strategy, we may enter into arrangements to acquire or invest in complementary businesses, services, technologies, or intellectual property rights in the future.

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

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

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

Our cash flows for the three months ended April 30, 2022, and 2021, were as follows (in thousands):

Three Months Ended April 30,

Net cash provided by (used in):

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Operating Activities

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 $1.0 billion and $715 million for the nine months ended October 31, 2021, and 2020, respectively.

Cash provided by operating activities was $440 million and $452 million for the three months ended April 30, 2022, and 2021, respectively.

The decline in cash provided by operating activities resulted from increased payments made to support the return to office and in-person events, the new employee performance-based cash bonus program for all employees not covered under an exi sting incentive plan, and other growth investments across the business, offset by increases in sales and related cash collections.

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 request payment timing concessions, which could materially impact the timing and predictability of our operating cash flows in any given period.

however, if the economic uncertainty caused by the COVID-19 pandemic and Russia-Ukraine conflict 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 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.

C ash used in investing activities for the three months ended April 30, 2022, was $1.5 billion, which was primarily related to purchases of marketable securities of $2.0 billion using the proceeds from the Senior Notes offering, capital expenditures for data center and office space projects of $59 million, and purchases of non-marketable equity and other investments of $15 million.

These payments were partially offset by proceeds of $607 million from sales and maturities of marketable securities and proceeds of $7 million from sales and maturities of non-marketable securities.

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 from an affiliate of our Co-Founder and CEO Emeritus, David Duffield, 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.

These payments were partially offset by proceeds of $12 million from sales 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.

These capital outlays will largely be used to support our customer growth and continued business expansion.

We do not expect to make additional investments in owned real estate projects during fiscal 2022.

We expect capital expenditures will be approximately $475 million in fiscal 2023.

This includes investments in our office facilities, corporate IT infrastructure, and customer data centers to support our continued growth.

Financing Activities

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.

Cash provided by financing activities was $2.3 billion for the three months ended April 30, 2022, which was primarily due to proceeds of $3.0 billion from borrowings on the Senior Notes, net of debt discount of $22 million, offset by the repayment of the term loan under the 2020 Credit Agreement of $694 million and payments for debt issuance costs of $7 million.

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 under the 2020 Credit Agreement of $9 million.

Our 2022 Notes are convertible at the option of the holders during the second quarter of fiscal 2023 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 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.

We may receive additional conversion requests that require settlement in the second quarter of fiscal 2023.

Additionally, the 2022 Notes will become due in the third quarter of fiscal 2023, which will result in a cash outflow of approximately $1.15 billion.

For further information, see Note 10, Debt, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

Contractual Obligations

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

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

Except for those disclosed below, there have been no material changes outside the ordinary course of business to our contractual obligations disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021, filed with the SEC on March 2, 2021.

Credit Agreement

In April 2020, we entered into a Credit Agreement pursuant to which the lenders extended to Workday a senior unsecured Term Loan in an aggregate principal amount of $750 million and an unsecured Revolving Credit Facility in an aggregate principal amount of $750 million.

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

The Revolving Credit Facility may be borrowed, repaid, and reborrowed until April 2, 2025, at which time all amounts borrowed must be repaid.

The Term Loan and Revolving Credit Facility bear interest 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.

Convertible Senior Notes

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

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

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

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

Operating Leases

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

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

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

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

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

Purchase Obligations

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 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.

Except for the debt transactions discussed in Note 10, Debt, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report, which include the issuance of $3.0 billion of Senior Notes, the modification to our revolving credit facility, and the extinguishment of the term loan under the 2020 Credit Agreement, there were no material changes outside the ordinary course of business to our contractual obligations disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States.

The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures.

On an ongoing basis, we evaluate our estimates and assumptions.

Our condensed consolidated financial statements are prepared in accordance with GAAP.

The preparation of these condensed consolidated financial statements requires us to make estimates, judgements, and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures.

On an ongoing basis, we evaluate our estimates, judgements, and assumptions.

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

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 October 31, 2021.

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

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

We believe that the following critical accounting policies involve a high degree of judgment and complexity, and are the most critical to aid in fully understanding and evaluating our financial condition and operating results:

We believe that the following critical accounting policies involve a high degree of judgement and complexity, and are the most critical to aid in fully understanding and evaluating our financial condition and operating results:

• Revenue recognition

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• Business combinations, goodwill, and acquisition-related intangible assets

For a further discussion of our critical accounting policies, refer to our Annual Report on Form 10-K for the fiscal year ended January 31, 2021, filed with the SEC on March 2, 2021.

We no longer consider estimates related to our convertible senior notes to be a critical accounting policy due to the adoption of ASU No.

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 nine months ended October 31, 2021.

• Non-marketable equity investments

For a further discussion of our critical accounting policies, refer to our Annual Report on Form 10-K for the fiscal year ended January 31, 2022.

There were no significant changes to our critical accounting policies and estimates during the three months ended April 30, 2022.

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