What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-29 compared with 2022-08-25 · 107 added, 112 removed, 233 unchanged (48% of the section changed)

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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 and Current Economic Conditions

Impact of Current Economic Conditions and the COVID-19 Pandemic

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

Additionally, other recent macroeconomic events including rising inflation, the U.S.

Federal Reserve raising interest rates, and the Russian invasion of Ukraine have led to further economic uncertainty.

Despite the continuing uncertainty associated with these 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.

Federal Reserve raising interest rates, and the Russian invasion of Ukraine have led to further economic uncertainty and volatility.

Despite the continuing uncertainty associated with these 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 on their human resources and finance digital transformation journeys.

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

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implemented travel restrictions;

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

As of July 31, 2022, we have welcomed back our employees to our offices and resumed travel and in-person events in accordance with applicable regional guidance.

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

During fiscal 2023, we have welcomed back our employees to our offices and resumed 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 collections, product development, or other financial metrics, similar to what we experienced at the onset of the pandemic.

Recently, we have started to experience, and may continue to experience, the lengthening of certain sales cycles, particularly within net new opportunities.

If the economic uncertainty continues, we may also experience a negative impact on customer renewals, sales and marketing efforts, revenue growth rates, customer deployments, customer collections, product development, or other financial metrics.

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

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

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

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

2022 2021 Change 2022 2021 Change

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Operating cash flows $ 408,668 $ 384,654 6 % $ 962,743 $ 1,035,555 (7) %

As of July 31,

As of October 31,

2022 2021 % Change

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

Subscription services revenues accounted for 89% of our total revenues for each of the three and six-month periods ended July 31, 2022, and represented 96% of our total unearned revenue as of July 31, 2022.

Subscription services revenues accounted for approximately 90% of our total revenues for the three and nine months ended October 31, 2022, and represented 96% of our total unearned revenue as of October 31, 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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Results of Operations

Our total revenues for the three and six months ended July 31, 2022, and 2021, 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, 2022, and 2021, were as follows (in thousands, except percentages):

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

2022 2021 % Change 2022 2021 % Change

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Total revenues $ 1,599,103 $ 1,327,263 20 % $ 4,569,558 $ 3,762,657 21 %

Total revenues were $1.5 billion for the three months ended July 31, 2022, compared to $1.3 billion for the prior year period, an increase of $275 million, or 22%.

Subscription services revenues were $1.4 billion for the three months ended July 31, 2022, compared to $1.1 billion for the prior year period, an increase of $254 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 $168 million for the three months ended July 31, 2022, compared to $147 million for the prior year period, an increase of $22 million, or 15%.

Total revenues were $1.6 billion for the three months ended October 31, 2022, compared to $1.3 billion for the prior year period, an increase of $272 million, or 20%.

Subscription services revenues were $1.4 billion for the three months ended October 31, 2022, compared to $1.2 billion for the prior year period, an increase of $261 million, or 22%.

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

Professional services revenues were $167 million for the three months ended October 31, 2022, compared to $156 million for the prior year period, an increase of $11 million, or 7%.

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

Total revenues were $3.0 billion for the six months ended July 31, 2022, compared to $2.4 billion for the prior year period, increase of $535 million, or 22%.

Subscription services revenues were $2.6 billion for the six months ended July 31, 2022, compared to $2.1 billion for the prior year period, an increase of $494 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 $331 million for the six months ended July 31, 2022, compared to $290 million for the prior year period, an increase of $41 million, or 14%.

Total revenues were $4.6 billion for the nine months ended October 31, 2022, compared to $3.8 billion for the prior year period, an increase of $807 million, or 21%.

Subscription services revenues were $4.1 billion for the nine months ended October 31, 2022, compared to $3.3 billion for the prior year period, an increase of $755 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 revenue retention over 95%.

Professional services revenues were $498 million for the nine months ended October 31, 2022, compared to $446 million for the prior year period, an increase of $52 million, or 12%.

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 reven ue backlog as of July 31, 2022, was $13.5 billion, with $8.4 billion expected to b e recognized in revenues over the next 24 mo nths.

As of July 31, 2021, our total subscription revenue backlog was $10.6 billion, with $6.9 billion expected to be recognized in revenues over the next 24 months.

Our total subscription revenue backlog as of October 31, 2022, was $14.1 billion, with $8.6 billion expected to be recognized in revenues over the next 24 months.

As of October 31, 2021, our total subscription revenue backlog was $11.0 billion, with $7.1 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 $1.6 billion for the three months ended July 31, 2022, compared to $1.3 billion for the prior year period, an increase of $308 million, or 24%.

The increase in GAAP operating expenses included $219 million in employee-related expenses due to higher headcount, additional share-based compensation, and a performance-based cash bonus program introduced in the fourth quarter of fiscal 2022 for all employees not covered under an existing incentive plan (“performance-based cash bonus program”) of $34 million.

Additionally, there were increases of $22 million in facilities and IT-related expenses, $19 million in travel expenses, $17 million related to marketing programs, and $16 million in third-party expenses for hardware maintenance and data center capacity.

GAAP operating expenses were $3.1 billion for the six months ended July 31, 2022, compared to $2.5 billion for the prior year period, an increase of $603 million, or 24%.

The increase in GAAP operating expenses included $427 million in employee-related expenses due to higher headcount, additional share-based compensation, and expense related to the performance-based cash bonus program of $69 million.

Additionally, there were increases of $44 million in facilities and IT-related expenses, $34 million in travel expenses, $32 million in third-party expenses for hardware maintenance and data center capacity, and $31 million related to marketing programs.

GAAP operating expenses were $1.6 billion for the three months ended October 31, 2022, compared to $1.3 billion for the prior year period, an increase of $322 million, or 25%.

The increase in GAAP operating expenses included $228 million in employee-related expenses, including share-based compensation, primarily due to higher headcount, $34 million in facilities and IT-related expenses, $20 million in third-party expenses for hardware maintenance and data center capacity, $9 million in travel expenses, and $8 million related to marketing programs.

Included in employee-related expenses is a performance-based cash bonus program that we introduced in the fourth quarter of fiscal 2022 for all employees not covered under an existing incentive plan (“performance-based cash bonus program”).

This program replaced our equity-based PRSU bonus program, resulting in a net increase to GAAP operating expenses of $7 million.

GAAP operating expenses were $4.7 billion for the nine months ended October 31, 2022, compared to $3.8 billion for the prior year period, an increase of $925 million, or 24%.

The increase in GAAP operating expenses included $654 million in employee-related expenses, including share-based compensation, primarily due to higher headcount, $78 million in facilities and IT-related expenses, $52 million in third-party expenses for hardware maintenance and data center capacity, $43 million in travel expenses, and $39 million related to marketing programs.

Included in employee-related expenses is the performance-based cash bonus program which replaced our equity-based PRSU bonus program, resulting in a net increase to GAAP operating expenses of $48 million.

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

Non-GAAP operating expenses were $1.2 billion for the three months ended July 31, 2022, compared to $969 million for the prior year period, an increase of $266 million, or 27%.

Non-GAAP operating expenses were $1.3 billion for the three months ended October 31, 2022, compared to $995 million for the prior year period, an increase of $290 million, or 29%.

The increase in non-GAAP operating expenses included $197 million in employee-related expenses due to higher headcount and expense related to the performance-based cash bonus program of $31 million.

Non-GAAP operating expenses were $2.4 billion for the six months ended July 31, 2022, compared to $1.9 billion for the prior year period, an increase of $525 million, or 28%.

Additionally, there were increases of $34 million in facilities and IT-related expenses, $20 million in third-party expenses for hardware maintenance and data center capacity, $9 million in travel expenses, and $8 million related to marketing programs.

Non-GAAP operating expenses were $3.7 billion for the nine months ended October 31, 2022, compared to $2.9 billion for the prior year period, an increase of $815 million, or 29%.

The increase in non-GAAP operating expenses included $552 million in employee-related expenses due to higher headcount and expense related to the performance-based cash bonus program of $100 million.

Additionally, there were increases of $78 million in facilities and IT-related expenses, $52 million in third-party expenses for hardware maintenance and data center capacity, $43 million in travel expenses, and $39 million related to marketing programs.

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

Three Months Ended July 31, 2022

Three Months Ended October 31, 2022

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

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Total costs and expenses $ 1,625,424 $ (314,196) $ (26,359) $ 1,284,869

Three Months Ended July 31, 2021

Three Months Ended October 31, 2021

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

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

Six Months Ended July 31, 2022

Nine Months Ended October 31, 2022

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

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Total costs and expenses $ 4,702,800 $ (933,709) $ (103,877) $ 3,665,214

Six Months Ended July 31, 2021

Nine Months Ended October 31, 2021

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

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

(1) Other operating expenses include amortization of acquisition-related intangible assets of $22 million and $20 million for the three months ended July 31, 2022, and 2021, respectively, and $43 million and $38 million for the six months ended July 31, 2022, and 2021, respectively.

In addition, other operating expenses include employer payroll tax-related items on employee stock transactions of $6 million and $8 million for the three months ended July 31, 2022, and 2021, respectively, and $34 million and $53 million for the six months ended July 31, 2022, and 2021, respectively.

(1) Other operating expenses include amortization of acquisition-related intangible assets of $21 million and $20 million for the three months ended October 31, 2022, and 2021, respectively, and $64 million and $57 million for the nine months ended October 31, 2022, and 2021, respectively.

In addition, other operating expenses include employer payroll tax-related items on employee stock transactions of $5 million and $7 million for the three months ended October 31, 2022, and 2021, respectively, and $40 million and $60 million for the nine months ended October 31, 2022, and 2021, respectively.

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

Costs of Subscription Services

GAAP operating expenses in costs of subscription services were $245 million for the three months ended July 31, 2022, compared to $193 million for the prior year period, an increase of $52 million, or 27%.

GAAP operating expenses in costs of subscription services were $259 million for the three months ended October 31, 2022, compared to $201 million for the prior year period, an increase of $59 million, or 29%.

The increase in costs of subscription services included increases of $26 million in employee-related expenses, including share-based compensation, primarily due to higher headcount, $15 million in third-party expenses for hardware maintenance and data center capacity, $7 million in facilities and IT-related expenses, and $2 million in depreciation expense related to equipment in our data centers.

GAAP operating expenses in costs of subscription services were $478 million for the six months ended July 31, 2022, compared to $375 million for the prior year period, an increase of $103 million, or 27%.

GAAP operating expenses in costs of subscription services were $737 million for the nine months ended October 31, 2022, compared to $576 million for the prior year period, an increase of $162 million, or 28%.

The increase in costs of subscription services included increases of $77 million in employee-related expenses, including share-based compensation, primarily due to higher headcount, $38 million in third-party expenses for hardware maintenance and data center capacity, $20 million in facilities and IT-related expenses, and $10 million in depreciation expense related to equipment in our data centers.

Non-GAAP operating expenses in costs of subscription services were $205 million for the three months ended July 31, 2022, compared to $159 million for the prior year period, an increase of $46 million, or 29%.

Non-GAAP operating expenses in costs of subscription services were $220 million for the three months ended October 31, 2022, compared to $167 million for the prior year period, an increase of $53 million, or 32%.

The increase in costs of subscription services included increases of $22 million in employee-related expenses primarily due to higher headcount, $15 million in third-party expenses for hardware maintenance and data center capacity, $7 million in facilities and IT-related expenses, and $2 million in depreciation expense related to equipment in our data centers.

Non-GAAP operating expenses in costs of subscription services were $396 million for the six months ended July 31, 2022, compared to $306 million for the prior year period, an increase of $89 million, or 29%.

Non-GAAP operating expenses in costs of subscription services were $615 million for the nine months ended October 31, 2022, compared to $473 million for the prior year period, an increase of $142 million, or 30%.

The increase in costs of subscription services included increases of $64 million in employee-related expenses primarily due to higher headcount, $38 million in third-party expenses for hardware maintenance and data center capacity, $20 million in facilities and IT-related expenses, and $10 million in depreciation expense related to equipment in our data centers.

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Costs of Professional Services

GAAP operating expenses in costs of professional services were $178 million for the three months ended July 31, 2022, compared to $153 million for the prior year period, an increase of $25 million, or 17%.

The increase in costs of professional services included increases of $15 million in employee-related expenses, including share-based compensation, primarily due to higher headcount, $5 million in travel expenses, and $4 million in professional services and subcontractor expenses.

GAAP operating expenses in costs of professional services were $348 million for the six months ended July 31, 2022, compared to $304 million for the prior year period, an increase of $44 million, or 15%.

GAAP operating expenses in costs of professional services were $176 million for the three months ended October 31, 2022, compared to $159 million for the prior year period, an increase of $17 million, or 11%.

The increase in costs of professional services was primarily due to an increase of $12 million in employee-related expenses, including share-based compensation, primarily due to higher headcount.

GAAP operating expenses in costs of professional services were $524 million for the nine months ended October 31, 2022, compared to $463 million for the prior year period, an increase of $62 million, or 13%.

The increase in costs of professional services included increases of $39 million in employee-related expenses, including share-based compensation, primarily due to higher headcount, $9 million in professional services and subcontractor expenses, and $7 million in travel expenses.

Non-GAAP operating expenses in costs of professional services were $151 million for the three months ended July 31, 2022, compared to $125 million for the prior year period, an increase of $26 million, or 21%.

The increase in costs of professional services included increases of $16 million in employee-related expenses primarily due to higher headcount, $5 million in travel expenses, and $4 million in professional services and subcontractor expenses.

Non-GAAP operating expenses in costs of professional services were $290 million for the six months ended July 31, 2022, compared to $241 million for the prior year period, an increase of $49 million, or 20%.

Non-GAAP operating expenses in costs of professional services were $149 million for the three months ended October 31, 2022, compared to $129 million for the prior year period, an increase of $20 million, or 16%.

The increase in costs of professional services was primarily due to an increase of $15 million in employee-related expenses primarily due to higher headcount.

Non-GAAP operating expenses in costs of professional services were $439 million for the nine months ended October 31, 2022, compared to $370 million for the prior year period, an increase of $69 million, or 19%.

The increase in costs of professional services included increases of $46 million in employee-related expenses primarily due to higher headcount, $9 million in professional services and subcontractor expenses, and $7 million in travel expenses.

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Product Development

GAAP operating expenses in product development were $548 million for the three months ended July 31, 2022, compared to $444 million for the prior year period, an increase of $104 million, or 23%.

The increase in product development expenses was primarily due to an increase of $95 million in employee-related expenses, including share-based compensation, primarily due to higher headcount.

GAAP operating expenses in product development were $1.1 billion for the six months ended July 31, 2022, compared to $886 million for the prior year period, an increase of $203 million, or 23%.

The increase in product development expenses was primarily due to an increase of $181 million in employee-related expenses, including share-based compensation, primarily due to higher headcount.

Non-GAAP operating expenses in product development were $398 million for the three months ended July 31, 2022, compared to $311 million for the prior year period, an increase of $87 million, or 28%.

The increase in product development expenses was primarily due to an increase of $79 million in employee-related expenses primarily due to higher headcount.

Non-GAAP operating expenses in product development were $774 million for the six months ended July 31, 2022, compared to $603 million for the prior year period, an increase of $170 million, or 28%.

The increase in product development expenses was primarily due to an increase of $148 million in employee-related expenses primarily due to higher headcount.

GAAP operating expenses in product development were $566 million for the three months ended October 31, 2022, compared to $456 million for the prior year period, an increase of $110 million, or 24%.

The increase in product development expenses included increases of $91 million in employee-related expenses, including share-based compensation, primarily due to higher headcount and $13 million in facilities and IT-related expenses.

GAAP operating expenses in product development were $1.7 billion for the nine months ended October 31, 2022, compared to $1.3 billion for the prior year period, an increase of $314 million, or 23%.

The increase in product development expenses included increases of $272 million in employee-related expenses, including share-based compensation, primarily due to higher headcount and $27 million in facilities and IT-related expenses.

Non-GAAP operating expenses in product development were $415 million for the three months ended October 31, 2022, compared to $317 million for the prior year period, an increase of $97 million, or 31%.

The increase in product development expenses included increases of $78 million in employee-related expenses primarily due to higher headcount and $13 million in facilities and IT-related expenses.

Non-GAAP operating expenses in product development were $1.2 billion for the nine months ended October 31, 2022, compared to $921 million for the prior year period, an increase of $268 million, or 29%.

The increase in product development expenses included increases of $226 million in employee-related expenses primarily due to higher headcount and $27 million in facilities and IT-related expenses.

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

Sales and Marketing

GAAP operating expenses in sales and marketing were $459 million for the three months ended July 31, 2022, compared to $358 million for the prior year period, an increase of $101 million, or 28%.

The increase in sales and marketing expenses included increases of $60 million in employee-related expenses, including share-based compensation, primarily due to higher headcount, $17 million related to marketing programs, and $8 million in travel expenses.

GAAP operating expenses in sales and marketing were $888 million for the six months ended July 31, 2022, compared to $685 million for the prior year period, an increase of $203 million, or 30%.

The increase in sales and marketing expenses included increases of $129 million in employee-related expenses, including share-based compensation, primarily due to higher headcount, $31 million related to marketing programs, and $19 million in travel expenses.

Non-GAAP operating expenses in sales and marketing were $389 million for the three months ended July 31, 2022, compared to $296 million for the prior year period, an increase of $93 million, or 31%.

The increase in sales and marketing expenses included increases of $53 million in employee-related expenses primarily due to higher headcount, $17 million related to marketing programs, and $8 million in travel expenses.

Non-GAAP operating expenses in sales and marketing were $746 million for the six months ended July 31, 2022, compared to $555 million for the prior year period, an increase of $190 million, or 34%.

The increase in sales and marketing expenses included increases of $117 million in employee-related expenses primarily due to higher headcount, $31 million related to marketing programs, and $19 million in travel expenses.

GAAP operating expenses in sales and marketing were $470 million for the three months ended October 31, 2022, compared to $366 million for the prior year period, an increase of $104 million, or 28%.

The increase in sales and marketing expenses included increases of $74 million in employee-related expenses, including share-based compensation, primarily due to higher headcount, $9 million in facilities and IT-related expenses, $7 million in travel expenses, and $6 million related to marketing programs.

GAAP operating expenses in sales and marketing were $1.4 billion for the nine months ended October 31, 2022, compared to $1.1 billion for the prior year period, an increase of $307 million, or 29%.

The increase in sales and marketing expenses included increases of $204 million in employee-related expenses, including share-based compensation, primarily due to higher headcount, $36 million related to marketing programs, $25 million in travel expenses, and $21 million in facilities and IT-related expenses.

Non-GAAP operating expenses in sales and marketing were $400 million for the three months ended October 31, 2022, compared to $301 million for the prior year period, an increase of $99 million, or 33%.

The increase in sales and marketing expenses included increases of $69 million in employee-related expenses primarily due to higher headcount, $9 million in facilities and IT-related expenses, $7 million in travel expenses, and $6 million related to marketing programs.

Non-GAAP operating expenses in sales and marketing were $1.1 billion for the nine months ended October 31, 2022, compared to $856 million for the prior year period, an increase of $289 million, or 34%.

The increase in sales and marketing expenses included increases of $186 million in employee-related expenses primarily due to higher headcount, $36 million related to marketing programs, $25 million in travel expenses, and $21 million in facilities and IT-related 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

G AAP operating expenses in general and administrative were $140 million for the three months ended July 31, 2022, compared to $114 million for the prior year period, an increase of $27 million, or 24%.

The increase in general and administrative expenses included increases of $23 million in employee-related expenses, including share-based compensation, primarily due to higher headcount and $2 million in travel expenses.

GAAP operating expenses in general and administrative were $274 million for the six months ended July 31, 2022, compared to $226 million for the prior year period, an increase of $48 million, or 21%.

The increase in general and administrative expenses included increases of $38 million in employee-related expenses, including share-based compensation, primarily due to higher headcount and $4 million in travel expenses.

Non-GAAP operating expenses in general and administrative were $90 million for the three months ended July 31, 2022, compared to $77 million for the prior year period, an increase of $13 million, or 17%.

The increase in general and administrative expenses included increases of $9 million in employee-related expenses primarily due to higher headcount and $2 million in travel expenses.

Non-GAAP operating expenses in general and administrative were $176 million for the six months ended July 31, 2022, compared to $149 million for the prior year period, an increase of $27 million, or 18%.

The increase in general and administrative expenses included increases of $17 million in employee-related expenses primarily due to higher headcount and $4 million in travel expenses.

GAAP operating expenses in general and administrative were $154 million for the three months ended October 31, 2022, compared to $122 million for the prior year period, an increase of $32 million, or 26%.

The increase in general and administrative expenses included increases of $24 million in employee-related expenses, including share-based compensation, primarily due to higher headcount and $3 million in facilities and IT-related expenses.

GAAP operating expenses in general and administrative were $428 million for the nine months ended October 31, 2022, compared to $347 million for the prior year period, an increase of $80 million, or 23%.

The increase in general and administrative expenses included increases of $63 million in employee-related expenses, including share-based compensation, primarily due to higher headcount and $6 million in facilities and IT-related expenses.

Non-GAAP operating expenses in general and administrative were $102 million for the three months ended October 31, 2022, compared to $81 million for the prior year period, an increase of $20 million, or 25%.

The increase in general and administrative expenses included increases of $13 million in employee-related expenses primarily due to higher headcount and $3 million in facilities and IT-related expenses.

Non-GAAP operating expenses in general and administrative were $277 million for the nine months ended October 31, 2022, compared to $230 million for the prior year period, an increase of $47 million, or 20%.

The increase in general and administrative expenses included increases of $29 million in employee-related expenses primarily due to higher headcount and $6 million in facilities and IT-related 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 Margin

GAAP operatin g margin declined from (0.1)% for the three months ended July 31, 2021, to (2.2)% for the three months ended July 31, 2022, primarily related to increases in expenses due to higher headcount, the rollout of the 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.

GAAP operating margin declined from (1.6)% for the six months ended July 31, 2021, to (3.6)% for the six months ended July 31, 2022, primarily related to increases in expenses due to higher headcount, the rollout of the 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.

GAAP operating margin declined from 1.8% for the three months ended October 31, 2021, to (1.6)% for the three months ended October 31, 2022, primarily related to increases in expenses due to higher headcount, the rollout of the performance-based cash bonus program, a return to travel and in-person events, and other growth investments made across the business, offset by higher revenues.

GAAP operating margin declined from (0.4)% for the nine months ended October 31, 2021, to (2.9)% for the nine months ended October 31, 2022, primarily related to increases in expenses due to higher headcount, the rollout of the performance-based cash bonus program, 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.

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

Non-GAAP operating margin declined from 23.2% for the three months ended July 31, 2021, to 19.6% for the three months ended July 31, 2022, primarily related to increases in expenses due to higher headcount, the rollout of the 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.

Non-GAAP operating margin declined from 23.8% for the six months ended July 31, 2021, to 19.9% for the six months ended July 31, 2022, primarily related to increases in expenses due to higher headcount, the rollout of the 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.

Non-GAAP operating margin declined from 25.0% for the three months ended October 31, 2021, to 19.7% for the three months ended October 31, 2022, primarily related to increases in expenses due to higher headcount, the rollout of the performance-based cash bonus program, a return to travel and in-person events, and other growth investments made across the business, offset by higher revenues.

Non-GAAP operating margin declined from 24.3% for the nine months ended October 31, 2021, to 19.8% for the nine months ended October 31, 2022, primarily related to increases in expenses due to higher headcount, the rollout of the performance-based cash bonus program, 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 July 31, 2022

Three Months Ended October 31, 2022

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

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Operating margin (1.6) % 19.6 % 1.7 % 19.7 %

Three Months Ended July 31, 2021

Three Months Ended October 31, 2021

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

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Operating margin 1.8 % 21.2 % 2.0 % 25.0 %

Six Months Ended July 31, 2022

Nine Months Ended October 31, 2022

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

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Operating margin (2.9) % 20.4 % 2.3 % 19.8 %

Six Months Ended July 31, 2021

Nine Months Ended October 31, 2021

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

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Other Income (Expense), Net

We had other expense, net of $33 million for the three months ended July 31, 2022, as compared to other income, net of $103 million for the three months ended July 31, 2021.

The increase in other expense, net was primarily due to a net reduction in equity investment gains of $123 million, the majority of which related to an equity investment that completed its initial public offering (“IPO”) in the prior fiscal year.

Additionally, other expense, net increased due to interest expense of $29 million for our Senior Notes issued in the first quarter of the current fiscal year.

Increases were offset by additional interest income of $14 million on marketable debt securities as a result of higher investment balances and increased interest rates.

We had other expense, net of $53 million for the six months ended July 31, 2022, as compared to other income, net of $94 million for the six months ended July 31, 2021.

The increase in other expense, net was primarily due to a net reduction in equity investment gains of $124 million, the majority of which related to an equity investment that completed its IPO in the prior fiscal year.

Additionally, other expense, net increased due to interest expense of $38 million for our Senior Notes issued during the current fiscal year.

Increases were offset by additional interest income of $16 million on marketable debt securities as a result of higher investment balances and increased interest rates.

Other income, net was $4 million for the three months ended October 31, 2022, which was primarily due to interest income of $31 million on our marketable debt securities from higher investment balances and rising interest rates, offset by interest expense of $30 million on our debt primarily related to the Senior Notes entered into during the fiscal year.

Other income, net was $22 million for the three months ended October 31, 2021, which was primarily due to gains of $25 million on our equity investments, of which $12 million related to a non-cash gain related to our acquisition of Zimit.

Other expense, net was $49 million for the nine months ended October 31, 2022, which was primarily due to interest expense of $74 million on our debt primarily related to the Senior Notes and losses of $19 million on our equity investments.

Expenses were offset by interest income of $50 million on our marketable securities from higher investment balances and rising interest rates.

Other income, net was $115 million for the nine months ended October 31, 2021, which was primarily due to gains of $125 million on our equity investments, the majority of which related to an equity investment that completed its initial public offering (“IPO”), offset by interest expense of $12 million on our debt.

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 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 and six months ended July 31, 2022, and 2021.

Liquidity and Capital Resources

As of July 31, 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.

As of October 31, 2022, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $5.5 billion, which were primarily held for working capital purposes.

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

treasury securities, commercial paper, U.S.

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

treasury securities, commercial paper, corporate bonds, U.S.

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

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

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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 and six months ended July 31, 2022, and 2021, 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, 2022, and 2021, were as follows (in thousands):

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

2022 2021 2022 2021

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Operating Activities

Cash provided by operating activities was $114 million and $198 million for the three months ended July 31, 2022, and 2021, respectively.

Cash provided by operating activities was $554 million and $651 million for the six months ended July 31, 2022, and 2021, respectively.

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

Cash provided by operating activities was $409 million and $385 million for the three months ended October 31, 2022, and 2021, respectively.

The increase in cash provided by operating activities resulted from increases in sales and related cash collections, offset by increased payments made to support return to office and in-person events and other growth investments across the business, and an interest payment on our Senior Notes.

Cash provided by operating activities was $963 million and $1.0 billion for the nine months ended October 31, 2022, and 2021, respectively.

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

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

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Investing Activities

Cash used in investing activities for the three months ended July 31, 2022, was $487 million, which primarily resulted from a cash outflow from the timing of purchases and maturities of marketable securities of $345 million and capital expenditures for data center and office space projects of $169 million, offset by proceeds of $28 million from sales of marketable securities.

Cash used in investing activities for the three months ended July 31, 2021, was $139 million, which primarily resulted from capital expenditures for data center projects of $88 million, a cash outflow due to the timing of purchases and maturities of marketable securities of $58 million, and purchases of non-marketable equity and other investments of $12 million.

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

Cash used in investing activities for the six months ended July 31, 2022, was $2.0 billion, which primarily resulted from purchases of marketable securities, net of maturities, of $1.8 billion using the proceeds from the Senior Notes offering, capital expenditures for data center and office space projects of $227 million, and purchases of non-marketable equity and other investments of $17 million.

Cash used in investing activities for the three months ended October 31, 2022, was $168 million, which primarily resulted from a cash outflow from the timing of purchases and maturities of marketable securities of $130 million and capital expenditures for data center and office space projects of $59 million, offset by proceeds of $20 million from sales of marketable securities.

Cash used in investing activities for the three months ended October 31, 2021, was $167 million, which primarily resulted from cash consideration for the acquisition of Zimit, net of cash acquired, of $61 million, a cash outflow from the timing of purchases and maturities of marketable securities of $48 million, capital expenditures for data center and office space projects of $33 million, and purchases of non-marketable equity and other investments of $27 million.

Cash used in investing activities for the nine months ended October 31, 2022, was $2.1 billion, which primarily resulted from purchases of marketable securities, net of maturities, of $1.9 billion using the proceeds from the Senior Notes offering, capital expenditures for data center and office space projects of $286 million, and purchases of non-marketable equity and other investments of $20 million.

These payments were partially offset by proceeds of $53 million from sales of marketable securities and $12 million from sales and maturities of non-marketable securities.

Cash used in investing activities for the six months ended July 31, 2021, was $1.0 billion, which primarily resulted from 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 $158 million, and purchases of non-marketable equity and other investments of $58 million.

These payments were partially offset by a cash inflow due to the timing of purchases and maturities of marketable securities of $34 million and proceeds of $27 million from sales of marketable securities.

Cash used in investing activities for the nine months ended October 31, 2021, was $1.2 billion, which primarily resulted from cash consideration for the acquisition of Peakon and Zimit, net of cash acquired, of $740 million, capital expenditures primarily for data center projects of $191 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, purchases of non-marketable equity and other investments of $85 million, and a cash outflow from the timing of purchases and maturities of marketable securities of $14 million.

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

We expect capital expenditures will be approximately $375 million in fiscal 2023.

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Financing Activities

Cash provided by financing activities was $83 million for the three months ended July 31, 2022, which was primarily due to proceeds of $83 million from the issuance of common stock from employee equity plans.

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 under the 2020 Credit Agreement.

Cash provided by financing activities was $2.4 billion for the six months ended July 31, 2022, which was primarily due to proceeds of $3.0 billion from borrowings on the Senior Notes, net of debt discount of $22 million, and $84 million from the issuance of common stock from employee equity plans, 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 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 payments of $19 million on the term loan under the 2020 Credit Agreement.

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

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.

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

Cash used in financing activities was $1.1 billion for the three months ended October 31, 2022, which was primarily due to the principal payment of $1.1 billion in connection with the conversion of our 2022 Notes.

Cash used in financing activities was $8 million for the three months ended October 31, 2021, which was primarily due to a payment of $9 million on the term loan under the 2020 Credit Agreement, partially offset by proceeds of $2 million from the issuance of common stock from employee equity plans.

Cash provided by financing activities was $1.2 billion for the nine months ended October 31, 2022, which was primarily due to proceeds of $3.0 billion from borrowings on the Senior Notes, net of debt discount of $22 million, and $85 million from the issuance of common stock from employee equity plans, offset by the principal payment of $1.1 billion in connection with the conversion of our 2022 Notes, repayment of the term loan under the 2020 Credit Agreement of $694 million, and payments for debt issuance costs associated with our Senior Notes of $7 million.

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 under the 2020 Credit Agreement.

Contractual Obligations

Except for the April 2022 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.

Except for the fiscal 2023 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, the extinguishment of the term loan under the 2020 Credit Agreement, and the conversion of the 2022 Notes, 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

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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 six months ended July 31, 2022.

There were no significant changes to our critical accounting policies and estimates during the nine months ended October 31, 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