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Item 7. Management’s Discussion and Analysis

2023-02-27 compared with 2022-02-28 · 106 added, 134 removed, 251 unchanged (49% of the section changed)

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The following discussion of our financial condition and results of operations covers fiscal 2023 and 2022 items and year-over-year comparisons between fiscal 2023 and 2022.

Discussions of fiscal 2020 items and year-over-year comparisons between fiscal 2021 and 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2021, that was filed with the SEC on March 2, 2021.

Discussions of fiscal 2021 items and year-over-year comparisons between fiscal 2022 and 2021 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2022, that was filed with the SEC on February 28, 2022.

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

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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.

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 targeted local markets, increasing our sales organization and marketing programs, 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.

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

For example, we acquired Peakon, Zimit, and VNDLY in fiscal 2022, and Scout in fiscal 2020.

For example, in fiscal 2022, we acquired Peakon, 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.

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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.

We believe our investment in professional services, as well as partners building consulting practices around Workday and helping to deliver additional innovation and solutions, 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.

Table of Conten t s

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;

required most of our employees to work remotely;

implemented travel restrictions;

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

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, we began to reopen our offices in fiscal 2022 and are allowing employees to return to the office on a voluntary basis with enhanced safety protocols in place.

Despite the continuing uncertainty associated with the COVID-19 pandemic, we continue to achieve solid new subscription bookings as demand for our products remains strong, and 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.

Our operating margin in fiscal 2022 and 2021 was favorably impacted by the moderation of operating expenses in response to the COVID-19 pandemic.

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

Impact of Current Economic Conditions

Recent macroeconomic events including higher inflation, the U.S.

Federal Reserve raising interest rates, the COVID-19 pandemic, and the Russian invasion of Ukraine have negatively impacted the global economy, disrupted global supply chains, and created significant uncertainty, volatility, and disruption of financial markets.

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 HR and finance digital transformation journeys.

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

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.

We have experienced, 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.

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 I, Item 1A of this report.

For further discussion of the potential impacts of recent macroeconomic events on our business, financial condition, and operating results, see “Risk Factors” included in Part I, 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):

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

As of and for the Years Ended January 31,

2022 2021 $ Change % Change

2023 2022 Change

Total revenues $ 6,215,818 $ 5,138,798 21 %

Subscription services revenues $ 5,567,206 $ 4,546,313 22 %

Total subscription revenue backlog $ 12,806,855 $ 10,088,634 $ 2,718,221 27 %

24-month subscription revenue backlog $ 7,975,554 $ 6,526,074 $ 1,449,480 22 %

GAAP operating income (loss) $ (222,200) $ (116,450) 91 %

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$ 1,209,636 $ 1,149,704 5 %

GAAP operating margin (2.3) % (5.8) % 4 %

GAAP operating margin (3.6) % (2.3) % (130 bps)

Non-GAAP operating margin (1)

22.4 % 20.1 % 2 %

19.5 % 22.4 % (290 bps)

Operating cash flows $ 1,657,195 $ 1,650,704 0 %

Total subscription revenue backlog $ 16,448,155 $ 12,806,855 28 %

24-month subscription revenue backlog $ 9,677,373 $ 7,975,554 21 %

Cash, cash equivalents, and marketable securities $ 6,121,394 $ 3,644,161 68 %

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

Table of Conten t s

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 during fiscal 2022, and represented 96% of our total unearned revenue as of January 31, 2022.

Subscription services revenues accounted for approximately 90% of our total revenues during fiscal 2023, and represented 96% of our total unearned revenue as of January 31, 2023.

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.

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

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

Pricing for our applications varies based on many factors, including the complexity and maturity of the application and its acceptance in the marketplace.

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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 continue to decline over time.

Subscription Revenue Backlog

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

Product development .

Product development expenses consist primarily of employee-related expenses.

We continue to focus our product development efforts on adding new features and applications, increasing functionality, and enhancing the ease of use of our cloud applications.

Sales and marketing.

Product development expenses .

Product development expenses consist primarily of employee-related expenses associated with our efforts to add new features and applications, increase functionality, and enhance the ease of use of our cloud applications.

Sales and marketing expenses .

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

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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 .

General and administrative expenses consist of employee-related expenses for finance and accounting, legal, human resources, information systems personnel, professional fees, and other corporate expenses.

Table of Conten t s

General and administrative expenses .

General and administrative expenses consist of employee-related expenses for finance and accounting, legal, HR, information systems personnel, professional fees, and other corporate expenses.

Results of Operations

Our total revenues were as follows (in thousands):

Our total revenues for fiscal 2023, 2022, and 2021, were as follows (in thousands):

Year Ended January 31,

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Total revenues $ 6,215,818 $ 5,138,798 $ 4,317,996

Total revenues were $5.1 billion for fiscal 2022, compared to $4.3 billion for fiscal 2021, an increase of $821 million, or 19%.

Subscription services revenues were $4.5 billion for fiscal 2022, compared to $3.8 billion for fiscal 2021, an increase of $758 million, or 20%.

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%.

Total revenues were $6.2 billion for fiscal 2023, compared to $5.1 billion for fiscal 2022, an increase of $1.1 billion, or 21%.

Subscription services revenues were $5.6 billion for fiscal 2023, compared to $4.5 billion for fiscal 2022, an increase of $1.0 billion, or 22%.

The increase in subscription services revenues was primarily due to an increased number of customer contracts and strong customer renewals, with gross and net retention rates over 95% and over 100%, respectively.

Professional services revenues were $649 million for fiscal 2023, compared to $592 million for fiscal 2022, an increase of $56 million, or 9%.

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

The increase in professional services revenues was primarily due to Workday performing deployment and integration services for higher valued contracts.

Subscription Revenue Backlog

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Operating Expenses

GAAP operating expenses were $5.3 billion for fiscal 2022, compared to $4.6 billion for fiscal 2021, an increase of $689 million, or 15%, which was primarily related to an increase of $517 million in employee-related expenses, including share-based compensation, due to higher average headcount.

The increase in employee-related expenses also included $32 million for a performance-based cash bonus program that was expanded to all employees in the fourth quarter of fiscal 2022.

Additionally, there were increases of $59 million related to marketing programs, $51 million in professional services and subcontractor expenses, $44 million in third-party expenses for hardware maintenance and data center capacity, and $37 million in depreciation expense related to equipment in our data centers, offset by a decrease of $79 million related to a one-time cash bonus that had been paid in fiscal 2021 to non-executive employees to help accommodate unforeseen costs brought on by the COVID-19 pandemic (“COVID-19 one-time employee bonus”).

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.

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.

GAAP operating expenses were $6.4 billion for fiscal 2023, compared to $5.3 billion for fiscal 2022, an increase of $1.2 billion, or 23%.

The increase in GAAP operating expenses was primarily due to an increase of $845 million in employee-related expenses, including share-based compensation.

The main driver for the increase in employee-related expenses was higher headcount.

We also recognized $40 million of expense from the workforce realignment announced in the fourth quarter of fiscal 2023.

Additionally, we incurred costs related to our performance-based cash bonus program that we introduced in the fourth quarter of fiscal 2022 for all employees not covered under an existing cash incentive plan (“performance-based cash bonus program”).

This program replaced our performance based restricted stock unit (“PRSU”) bonus program, resulting in a net increase of $36 million.

Further, we changed the vesting dates of all unvested restricted stock units (“RSU”) from the 15th to the 5th of each month which resulted in an acceleration of share-based compensation expense of $28 million in the fourth quarter of fiscal 2023.

Additional increases within GAAP operating expenses included $94 million in facilities and IT-related expenses partly driven by our employees returning to our offices, $75 million in third-party expenses for hardware maintenance and data center capacity reflecting our continued investment in our technical operations infrastructure, and $54 million in travel expenses and $51 million related to marketing programs partly driven by a return to in-person events.

Non-GAAP operating expenses were $5.0 billion for fiscal 2023, compared to $4.0 billion for fiscal 2022, an increase of $1.0 billion, or 25%.

The increase in non-GAAP operating expenses included $686 million in employee-related expenses primarily due to higher headcount, of which $102 million was related to the new performance-based cash bonus program, and $34 million was related to the workforce realignment.

Additionally, there were increases of $94 million in facilities and IT-related expenses partly driven by our employees returning to our offices, $75 million in third-party expenses for hardware maintenance and data center capacity reflecting our continued investment in our technical operations infrastructure, and $54 million in travel expenses and $51 million related to marketing programs partly driven by a return to in-person events.

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 $4.0 billion for fiscal 2022, compared to $3.5 billion for fiscal 2021, an increase of $538 million, or 16%, which was primarily related to an increase of $385 million in employee-related expenses due to higher average headcount.

The increase in employee-related expenses also included $32 million for a performance-based cash bonus program that was expanded to all employees in the fourth quarter of fiscal 2022.

Table of Conten t s

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

Year Ended January 31, 2023

GAAP Operating Expenses Share-Based

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

Non-GAAP Operating Expenses (2)

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Year Ended January 31, 2022

GAAP Operating Expenses Share-Based

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

Non-GAAP Operating Expenses (2)

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Year Ended January 31, 2021

GAAP Operating Expenses Share-Based

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

Non-GAAP Operating Expenses (2)

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Costs of Subscription Services

GAAP operating expenses in costs of subscription services were $796 million for fiscal 2022, compared to $612 million for fiscal 2021, an increase of $184 million, or 30%.

The increase in costs of subscription services included increases of $91 million in employee-related expenses, including share-based compensation, due to higher average headcount, $37 million in depreciation expense related to equipment in our data centers, and $28 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 $1.0 billion for fiscal 2023, compared to $796 million for fiscal 2022, an increase of $216 million, or 27%.

The increase in costs of subscription services included increases of $100 million in employee-related expenses, including share-based compensation, primarily due to higher headcount, $60 million in third-party expenses for hardware maintenance and data center capacity, and $23 million in facilities and IT-related expenses.

Non-GAAP operating expenses in costs of subscription services were $846 million for fiscal 2023, compared to $656 million for fiscal 2022, an increase of $190 million, or 29%.

The increase in costs of subscription services included increases of $66 million in employee-related expenses due to higher average headcount, $37 million in depreciation expense related to equipment in our data centers, and $28 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.

The increase in costs of subscription services included increases of $81 million in employee-related expenses primarily due to higher headcount, $60 million in third-party expenses for hardware maintenance and data center capacity, and $23 million in facilities and IT-related expenses.

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

Table of Conten t s

Costs of Professional Services

GAAP operating expenses in costs of professional services were $704 million for fiscal 2023, compared to $632 million for fiscal 2022, an increase of $71 million, or 11%.

The increase in costs of professional services was primarily due to an increase of $54 million in employee-related expenses, including share-based compensation, due to higher average headcount, offset by a decrease of $12 million related to the COVID-19 one-time employee bonus.

The increase in costs of professional services included an increase of $48 million in employee-related expenses, including share-based compensation, primarily due to higher headcount.

Non-GAAP operating expenses in costs of professional services were $587 million for fiscal 2023, compared to $508 million for fiscal 2022, an increase of $79 million, or 16%.

The increase in costs of professional services was primarily due to an increase of $38 million in employee-related expenses due to higher average headcount, offset by a decrease of $12 million related to the COVID-19 one-time employee bonus.

The increase in costs of professional services included an increase of $56 million in employee-related expenses primarily due to higher headcount.

We expect GAAP and non-GAAP costs of professional services as a percentage of total revenues to continue to decline as we continue to rely on our service partners to deploy our applications and as the number of our customers continues to grow.

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GAAP operating expenses in product development were $2.3 billion for fiscal 2023, compared to $1.9 billion for fiscal 2022, an increase of $391 million, or 21%.

The increase in product development expenses was primarily due to an increase of $169 million in employee-related expenses, including share-based compensation, due to higher average headcount, offset by a decrease of $31 million related to the COVID-19 one-time employee bonus.

The increase in product development expenses included increases of $346 million in employee-related expenses, including share-based compensation, primarily due to higher headcount and $32 million in facilities and IT-related expenses.

Non-GAAP operating expenses in product development were $1.6 billion for fiscal 2023, compared to $1.3 billion for fiscal 2022, an increase of $325 million, or 25%.

The increase in product development expenses was primarily due to an increase of $122 million in employee-related expenses due to higher average headcount, offset by a decrease of $31 million related to the COVID-19 one-time employee bonus.

The increase in product development expenses included increases of $279 million in employee-related expenses primarily due to higher headcount, of which $62 million was related to the new performance-based cash bonus program, and $32 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.

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GAAP operating expenses in sales and marketing were $1.8 billion for fiscal 2023, compared to $1.5 billion for fiscal 2022, an increase of $386 million, or 26%.

The increase in sales and marketing expenses included increases of $149 million in employee-related expenses, including share-based compensation, due to higher average headcount, 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 $1.2 billion for fiscal 2022, compared to $995 million for fiscal 2021, an increase of $204 million, or 21%.

The increase in sales and marketing expenses included increases of $130 million in employee-related expenses due to higher average headcount and $59 million related to marketing programs, offset by decrease of $25 million related to the COVID-19 one-time employee bonus.

The increase in sales and marketing expenses included increases of $255 million in employee-related expenses, including share-based compensation, primarily due to higher headcount and $48 million related to marketing programs and $33 million in travel expenses partly driven by a return to in-person events.

Non-GAAP operating expenses in sales and marketing were $1.6 billion for fiscal 2023, compared to $1.2 billion for fiscal 2022, an increase of $358 million, or 30%.

The increase in sales and marketing expenses included increases of $227 million in employee-related expenses primarily due to higher headcount and $48 million related to marketing programs and $33 million in travel expenses partly driven by a return to in-person events.

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

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GAAP operating expenses in general and administrative were $604 million for fiscal 2023, compared to $486 million for fiscal 2022, an increase of $118 million, or 24%.

The increase in general and administrative expenses included increases of $54 million in employee-related expenses, including share-based compensation, due to higher average headcount, and $22 million in professional services expenses, offset by a decrease of $6 million related to the COVID-19 one-time employee bonus.

The increase in general and administrative expenses included an increase of $96 million in employee-related expenses, including share-based compensation, primarily due to higher headcount.

Non-GAAP operating expenses in general and administrative were $389 million for fiscal 2023, compared to $324 million for fiscal 2022, an increase of $65 million, or 20%.

The increase in general and administrative expenses included increases of $30 million in employee-related expenses due to higher average headcount and $22 million in professional services expenses, offset by a decrease of $6 million related to the COVID-19 one-time employee bonus.

The increase in general and administrative expenses included an increase of $43 million in employee-related expenses primarily due to higher headcount.

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.

Table of Conten t s

Operating Margin

GAAP operating margin improved from (5.8)% for fiscal 2021 to (2.3)% for fiscal 2022.

Our GAAP operating margin for fiscal 2022 was favorably impacted by our revenue growth outpacing average headcount growth, moderation of operating expenses in response to the COVID-19 pandemic, and the absence of the COVID-19 one-time employee bonus paid in the prior fiscal year.

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.

GAAP operating margin declined from (2.3)% for fiscal 2022 to (3.6)% for fiscal 2023, primarily related to increases in expenses due to higher headcount, a return to travel and in-person events, the workforce realignment, the rollout of the performance-based cash bonus program, an acceleration of share-based compensation expense caused by modifying the vesting dates of all unvested RSUs from the 15th to the 5th of each month, and other growth investments made across the business.

These increases were offset in part by higher revenues.

Non-GAAP operating margin declined from 22.4% for fiscal 2022 to 19.5% for fiscal 2023, 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, the workforce realignment, and other growth investments made across the business, offset in part by higher revenues.

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 improved from 20.1% for fiscal 2021 to 22.4% for fiscal 2022.

Our non-GAAP operating margin for fiscal 2022 was favorably impacted by our revenue growth outpacing average headcount growth, moderation of operating expenses in response to the COVID-19 pandemic, and the absence of the COVID-19 one-time employee bonus paid in the prior fiscal year.

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

Year Ended January 31, 2023

GAAP Share-Based

Expenses Other

Expenses Non-GAAP (1)

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

Operating income (loss) $ (222,200) $ 1,294,622 $ 137,214 $ 1,209,636

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Year Ended January 31, 2022

GAAP Share-Based

Expenses Other

Expenses Non-GAAP (1)

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

Operating income (loss) $ (116,450) $ 1,112,405 $ 153,749 $ 1,149,704

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Year Ended January 31, 2021

GAAP Share-Based

Expenses Other

Expenses Non-GAAP (1)

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

Operating income (loss) $ (248,599) $ 1,004,854 $ 110,986 $ 867,241

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We had other income (expense), net of $(38) million, $133 million, and $(27) million during fiscal 2023, 2022, and 2021, respectively.

The increase in other income, net for fiscal 2022 compared to fiscal 2021 was primarily related to net gains of $124 million recognized on our equity investments, of which $83 million was due to an equity investment that completed its IPO during fiscal 2022.

Additionally, there was a decrease in interest expense for our convertible senior notes of $52 million from the adoption of Accounting Standard Update (“ASU”) No.

2020-06 and the conversion of our 1.50% convertible senior notes (“2020 Notes”) in fiscal 2021, offset by a decrease of $13 million in interest income on marketable securities resulting from lower prevailing interest rates.

Table of Conten t s

Other expense, net in fiscal 2023 was primarily due to interest expense of $102 million on our debt primarily related to the Senior Notes and losses of $27 million on our equity investments.

Expenses were offset by interest income of $98 million on our marketable securities from higher investment balances and rising interest rates.

Other income, net in fiscal 2022 was primarily due to gains of $144 million on our equity investments, the majority of which related to an equity investment that completed its IPO during the period, offset by interest expense of $17 million on our debt.

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, non-GAAP operating income (loss), and non-GAAP operating margin meet the definition of a non-GAAP financial measure.

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

We use the non-GAAP financial measures of non-GAAP operating expenses, non-GAAP operating income (loss), and 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 these non-GAAP measures reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business.

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 the 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.

For the reasons set forth below, we believe 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.

Although share-based compensation is an important aspect of the compensation of our employees and executives, management believes it is useful to exclude share-based compensation expenses to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies.

Although share-based compensation is an important aspect of the compensation of our employees and executives, we believe it is useful to exclude share-based compensation expenses to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies.

Share-based compensation expenses are determined using a number of factors, including our stock price, volatility, and forfeiture rates that are beyond our control and generally unrelated to operational decisions and performance in any particular period.

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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.

Although we exclude the amortization of acquisition-related intangible assets from these non-GAAP measures, we believe 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

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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 fiscal 2022, 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 of GAAP operating expenses, GAAP operating income (loss), and GAAP operating margin, to the non-GAAP financial measures of non-GAAP operating expenses, non-GAAP operating income (loss), and non-GAAP operating margin, for fiscal 2023, 2022, and 2021.

Liquidity and Capital Resources

As of January 31, 2023, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $6.1 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, commercial paper, U.S.

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

agency obligations, and marketable equity investments.

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

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.

Table of Conten t s

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 Consolidated Balance Sheets, and, if necessary, our borrowing capacity under our Revolving Credit Facility that provides for $750 million 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 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.

Our cash flows were as follows (in thousands):

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 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.

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

As part of our strategy, we may choose to seek additional debt or equity financing.

Our cash flows fiscal 2023, 2022, and 2021 were as follows (in thousands):

Year Ended January 31,

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Operating Activities

Cash provided by operating activities was $1.7 billion and $1.3 billion for fiscal 2022 and 2021, respectively.

The improvement in cash flows provided by operating activities during fiscal 2022, compared to the prior fiscal year, 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 $1.7 billion for both fiscal 2023 and 2022.

In fiscal 2023, increased sales and related cash collections were offset by cash outlays related to higher headcount, return to travel and in-person events, a one-time intellectual property transfer tax payment, an interest payment on our Senior Notes, and other growth investments across the business.

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 recent macroeconomic events 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 fiscal 2023 was $2.5 billion, which primarily resulted from purchases of marketable securities, net of maturities, of $2.2 billion using the proceeds from the Senior Notes offering, capital expenditures for data center and office space projects of $360 million, and purchases of non-marketable equity and other investments of $23 million.

These payments were partially offset by proceeds of $116 million from sales of marketable and non-marketable securities.

Cash used in investing activities for fiscal 2022 was $1.6 billion, which was primarily related to cash consideration for the acquisitions of VNDLY, Zimit, and Peakon, net of cash acquired, of $1.2 billion.

Cash used in investing activities also included capital expenditures of $264 million mainly for data center projects, the purchase of office space within our corporate headquarters of $171 million, purchases of non-marketable equity and other investments of $123 million, and the timing of purchases and maturities of marketable securities.

Cash used in investing activities also included capital expenditures of $264 million mainly for data center projects, 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 $123 million, and a cash outflow from the timing of purchases and maturities of marketable securities of $55 million.

These payments were partially offset by proceeds of $199 million from sales of marketable securities.

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

We expect capital expenditures will be approximately $340 million in fiscal 2024.

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Financing Activities

For fiscal 2022, cash provided by financing activities was $110 million, which was primarily due to proceeds of $148 million from the issuance of common stock from employee equity plans, offset by payments of $38 million on the Term Loan.

For fiscal 2021, cash provided by financing activities was $625 million, which was primarily due to net proceeds of $748 million from borrowing on the Term Loan and $149 million from the issuance of common stock from employee equity plans, partially offset by the principal payment of $250 million in connection with the conversion of the 2020 Notes.

Table of Conten t s

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

For further information, see Note 11, Debt , of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.

For fiscal 2023, cash provided by financing activities was $1.2 billion, which was primarily due to proceeds of $3.0 billion from borrowings on the Senior Notes, net of debt discount of $22 million, and $152 million from the issuance of common stock from employee equity plans, offset by the principal payment of $1.15 billion in connection with the conversion of our 0.25% convertible senior notes (“2022 Notes”), repayment of the term loan under the credit agreement entered into in April 2020 (“2020 Credit Agreement”) of $694 million, and repurchases of common stock under the Share Repurchase Program of $75 million.

Share Repurchase Program

In November 2022, our Board of Directors authorized the repurchase of up to $500 million of our outstanding shares of Class A common stock.

The Share Repurchase Program will have a term of 18 months, may be suspended or discontinued at any time, and does not obligate us to acquire any amount of Class A common stock.

During fiscal 2023, we repurchased approximately 0.5 million shares of Class A common stock for approximately $75 million at an average price per share of $165.75.

All repurchases were made in open market transactions.

As of January 31, 2023, we were authorized to purchase a remaining $425 million of our outstanding shares of Class A common stock under the Share Repurchase Program.

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, agreements for third-party hosted infrastructure platforms for business operations, and other purchase obligations entered into in the ordinary course of business.

Our contractual obligations primarily consist of borrowings under our Senior Notes, leases for office space and co-location facilities for data center capacity, agreements for third-party hosted infrastructure platforms for business operations, and other purchase obligations entered into in the ordinary course of business.

The table below includes our material contractual obligations, excluding imputed interest, as of January 31, 2023 (in thousands).

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Total Short-term Long-term Reference

Term Loan (1)

$ 716,489 $ 83,589 $ 632,900 Note 11

2022 Notes (1)

Senior Notes (1)

$ 3,752,375 $ 110,250 $ 3,642,125 Note 11

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$ 4,973,095 $ 363,023 $ 4,610,072

(1) Consists of principal and interest payments on the Term Loan and 2022 Notes.

The interest obligation on the Term Loan included in the table above assumes interest rates consistent with those in effect for our Term Loan as of January 31, 2022.

(1) Consists of principal and interest payments on the Senior Notes.

Critical Accounting Policies and Estimates

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

Table of Conten t s

We believe the areas we apply the most critical judgements when determining revenue recognition relate to the identification of distinct performance obligations and the assessment of the standalone selling price (“SSP”) for each performance obligation identified.

Determination of Performance Obligations

We believe the area we apply the most critical judgement when determining revenue recognition relates to the identification of distinct performance obligations.

Identification of Performance Obligations

A performance obligation is a promise in a contract with a customer to transfer products or services that are distinct.

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or the services promised in the contracts are a single performance obligation.

For contracts that contain multiple performance obligations, we assess each promise separately and allocate the transaction price on a relative standalone selling price basis.

For contracts that contain multiple performance obligations, we assess each promise separately and allocate the transaction price on a relative standalone selling price (“SSP”) basis.

We apply significant judgment in identifying and evaluating any terms and conditions in contracts which may impact revenue recognition.

Standalone Selling Price Assessment

We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the cloud applications sold, customer demographics, geographic locations, and the number and types of users within our contracts.

We use a range of amounts to estimate SSP for both subscription and professional services sold together in a contract to determine whether there is a discount to be allocated based on the relative SSP of the performance obligations.

Judgement is required to determine the SSP for each distinct performance obligation.

Our SSP ranges are reassessed on a periodic basis or when facts and circumstances change.

Changes in SSP for our services can evolve over time due to changes in our pricing practices that are influenced by market competition, changes in demand for our services, and other economic factors.

As our go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes to SSP and may therefore impact revenue recognized in our consolidated financial statements.

Deferred Commissions

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There was no change to the period of benefit during the periods presented.

Table of Conten t s

Business Combinations, Goodwill, and Acquisition-Related Intangible Assets

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Non-marketable equity investments include investments in privately held companies without readily determinable fair values in which we do not own a controlling interest or exercise significant influence.

We adjust the carrying values of non-marketable equity investments based on observable price changes from orderly transactions for identical or similar investments of the same issuer.

Non-marketable equity investments are valued using significant unobservable inputs or data in an inactive market.

We adjust the carrying values of non-marketable equity investments based on both observable and unobservable inputs or data in an inactive market.

Valuations of non-marketable equity investments are inherently complex due to the lack of readily available market data, and require our judgment due to the absence of market prices and an inherent lack of liquidity.

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If impairment indicators are identified, we will assess the severity and duration of the impairment.

Change in Accounting Estimate

In February 2023, we completed an assessment of the useful lives of our data center equipment, including servers, network equipment, and integrated complete server and network racks.

Due to advances in technology, as well as investments in software that increased efficiencies in how we operate our data center equipment, we determined we should increase the estimated useful lives of data center equipment from 3 years to 5 years.

This change in accounting estimate will be effective beginning fiscal 2024.

Based on the carrying amount of data center equipment that were in-service as of January 31, 2023, it is estimated this change will decrease our fiscal 2024 depreciation expense by approximately $93 million.

Inclusive of our forecasted capital expenditures in fiscal 2024, it is estimated the change will decrease fiscal 2024 depreciation expense by an additional $7 million, or approximately $100 million in total.

Recent Accounting Pronouncements

See Note 2, Accounting Standards and Significant Accounting Policies , of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for a full description of recent accounting pronouncements.

Table of Conten t s

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis